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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996 Commission File Number: 0-20138
PHARMAGENICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 22-3072524
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Four Pearl Court, Allendale, New Jersey 07401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 818-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Series B Convertible Preferred Stock, par value $.01 per share
(Title of Class)
Warrants to purchase shares of Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the registrant's voting stock (including the
registrant's Common Stock, Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock) held by
nonaffiliates was approximately $9,300,000. Such computation was based, in
the absence of public trading prices or published market quotations within
the 60 days prior to the date of this report, upon the Company's internal
estimate of the market value of such stock, which is based on the facts and
circumstances of such valuation and which the Company believes is reasonable
under the circumstances.
As of March 31, 1997, there were 455,108 shares of Common Stock, par value
$.01 per share, 2,458,420 shares of Series A Convertible Preferred Stock, par
value $.01, 2,227,263 shares of Series B Convertible Preferred Stock, par
value $.01, and 4,717,700 shares of Series C Convertible Preferred Stock, par
value $.01, outstanding.
The Index to Exhibits begins on page 41.
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PART I
ITEM 1. BUSINESS
GENERAL
PharmaGenics, Inc. (the "Company") is an integrated drug discovery
company engaged in the research and development of pharmaceuticals for the
treatment of cancer as well as other human diseases. The Company's research
programs in cancer center upon certain key genes, called "tumor suppressor
genes", that are responsible for the production of proteins that generally
function to prevent the unregulated growth of cells. The Company employs
proprietary technologies to identify and target tumor suppressor genes and
related genes in search of desirable therapeutics against cancer and other
diseases.
The Company was incorporated under the laws of the State of Delaware in
August 1989 and commenced operations in July 1990. The Company's principal
executive offices are located at Four Pearl Court, Allendale, New Jersey
07401, and its telephone number is (201) 818-1000.
RECENT DEVELOPMENTS--PROPOSED MERGER WITH GENZYME CORPORATION
To fund its operations since inception, the Company has obtained capital
through several private placements of equity, raising approximately $26.5
million. These funds have enabled the Company to pursue internal research,
fund and obtain technology rights from academic institutions and pursue
research and development collaborations with other companies. As a result of
these efforts, the Company has been able to generate license/royalty and
research funding revenues of approximately $6.6 million (including research
and development funding from PaineWebber R&D Partners III, L.P.) since
inception.
Although the Company has been successful in generating funding to
maintain its operations, in order to optimize the development of and exploit
its technologies, management of the Company has always been aware that the
Company would either have to raise large amounts of capital through equity
offerings or search for alternative sources of capital. One way the Company
attempted to obtain additional funding was to establish collaborative
relationships in which funding would be provided to the Company in exchange
for sharing of rights to the technology that might be developed from the
research supported by such funding. In particular, the Company has recently
attempted to raise funds by providing SAGE technology services to other
companies on a fee basis, but, to date, has not generated significant SAGE
service revenues.
Throughout its history, the Company has contacted many companies to
determine their interest in a collaboration. The Company held preliminary
discussions with several of these companies, but few of these discussions
gave rise to a definitive proposal or agreement with respect to a
transaction, and the financial proceeds from the collaborations that have
been established (see "Principal Collaborative Agreements") have not been
sufficient to sustain the Company's operations. As the exploration of
alternatives continued, it became apparent to the Company that gaining access
to equity capital on reasonable terms was becoming more and more difficult,
particularly since the Company had been operating for several years yet still
lacked clinical-stage therapeutics.
In early May 1996, representatives of the Company and Genzyme Corporation
("Genzyme") met to discuss opportunities for potential collaborations
relating to use of the SAGE technology in conjunction with Genzyme's cancer
gene therapy programs. These discussions evolved into preliminary merger
discussions, which resulted in the Company and Genzyme entering into a letter
of intent, dated October 29, 1996, reflecting an agreement in principle for
Genzyme to acquire the Company. Throughout the remainder of 1996 and early
1997, Genzyme and the Company negotiated the definitive terms of the
acquisition.
On February 3, 1997, the Company and Genzyme announced that they had
entered into an Agreement and Plan of Merger, dated as of January 31, 1997,
(the "Merger Agreement") pursuant to which the Company, on the
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terms and conditions set forth in the Merger Agreement, is to be merged
with and into Genzyme (the "Proposed Merger"). As consideration for the
Proposed Merger, Genzyme is to issue approximately 4,000,000 shares (subject
to certain adjustments set forth in the Merger Agreement) of a new Genzyme
security (the "GMO Stock"), representing 40% of the initial equity interest
in a new division of Genzyme, to be known as the Genzyme Molecular Oncology
division (the "GMO Division"), and to be formed within Genzyme through the
combination of the business of the Company with several of Genzyme's oncology
programs. An additional 6,000,000 shares (subject to adjustment) of GMO Stock
will be issued for the benefit of the General Division of Genzyme or its
stockholders. The GMO Stock will be "tracking stock," which is Genzyme common
stock that is intended to reflect the value, and track the performance, of
the GMO Division.
Because the Certificate of Incorporation of the Company requires that, in
a transaction such as the Proposed Merger, an aggregate merger preference be
provided to holders of the outstanding shares of Preferred Stock before any
amounts can be provided to holders of outstanding shares of Common Stock, and
because such aggregate merger preference exceeds the aggregate value of the
4,000,000 shares of GMO Stock to be issued in the Proposed Merger (based on
the valuation given the GMO Stock under the Merger Agreement), no shares of
GMO Stock are available for allocation to holders of the outstanding shares
of Common Stock. The applicable share exchange ratio to be used to convert
the outstanding shares of Preferred Stock into GMO Stock, upon effectiveness
of the Proposed Merger, is set forth in the Merger Agreement and, as also set
forth in the Merger Agreement, upon effectiveness of the Proposed Merger, the
outstanding shares of Common Stock will be cancelled. The Proposed Merger
currently is expected to be completed in May 1997, subject to approval by the
stockholders of the Company and Genzyme, and certain other conditions. As
required by the Merger Agreement, directors, officers and certain other
stockholders of the Company have entered into stockholder agreements with
Genzyme pursuant to which they have agreed to vote in favor of the Proposed
Merger. The number of shares subject to such agreements is sufficient for
approval of the Proposed Merger by the stockholders of PharmaGenics.
The Company's decision to enter into the Merger Agreement was
substantially influenced by the Company's belief that the Company's
precarious financial condition (see "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations: Financial
Condition, Liquidity and Capital Resources" and the paragraph below
concerning the report of the Company's independent accountants) and the
absence of viable alternatives to raising additional capital made it unlikely
that the Company could fulfill its business objectives as an independent
company.
As a result of the Company's continued operating losses and lack of
available capital resources, the report of the Company's independent
accountants on the financial statements included elsewhere herein includes an
explanatory paragraph that such conditions raise substantial doubt as to the
Company's ability to continue as a going concern. In the event the Proposed
Merger is not completed, the absence of other viable strategic alternatives
and the present precarious financial condition of the Company raise
substantial doubt as to the ability of the Company to continue its operations
for more than several months. As a result, in the event the Merger is not
completed, the Company will need to obtain additional financing to continue
its operations, and there can be no assurance that financing would be
available. The Company may need to obtain funds through arrangements with
collaboration partners or others that may require the Company to relinquish
rights to certain of its technologies. If additional funding is not obtained,
the Company would be required to significantly curtail its research
activities and eventually cease operations altogether. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto.
SCIENTIFIC BACKGROUND
CANCER OVERVIEW
Cancer is a disease characterized by uncontrolled cell division resulting
in the development of an abnormal mass of cells, commonly known as a tumor.
The information that controls cellular activities, including cell division,
is contained within the nucleus of the cell, in chromosomal structures known
as genes. Genes are comprised of
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DNA; copies of each gene's DNA, called mRNA, are produced in one or more cell
types of an organism (a process called "gene expression") and provide the
information necessary to generate a protein corresponding to that gene.
At least two types of genes are involved in cell division. One type,
oncogenes, produces growth-promoting proteins; the other type, tumor
suppressor genes, produces proteins that suppress growth. The relevant
proteins act at locations within the cell, on the cell surface or outside the
cell after being secreted. In normal cells, the control of cell division,
among other events, appears to depend upon a carefully balanced interplay
between oncogenes and tumor suppressor genes. Cancer results from the
overproduction or improperly regulated function of proteins encoded by
oncogenes and/or the inability to produce sufficient quantities of active
proteins encoded by tumor suppressor genes.
Although important strides have been made in cancer treatment, there
remains a clear need for the development of new therapies that are more
potent against tumor cells and less toxic to normal cells. As genomics
facilitates a more thorough survey of therapeutically-relevant regulatory
genes that function either through negative or positive controls, the Company
believes that new targets and sophisticated technologies for the development
of novel and specific therapies should result in more effective therapeutic
approaches to cancer. Equally importantly, this approach to identifying and
targeting negatively and positively controlling genes in cancer can be used
similarly in other therapeutic areas.
Evidence has been presented to indicate that the transition of cells from
the normal to the malignant state is usually not abrupt but is rather a
progression of steps, each involving the dysfunction of one or more
cancer-related genes. Furthermore, some of the specific genes involved are
likely to differ depending upon cancer type or tissue of origin. A number of
the relevant genes are tumor suppressor genes. Some of the known tumor
suppressor genes appear to be specific to certain types of cancer, whereas
other tumor suppressor genes appear to have a much broader spectrum of
involvement in the initiation of, and progression to, malignancy. Tumor
suppressor genes encode proteins that are found in various locations in the
cell, including in the nucleus, in the cytoplasm and on the cell surface.
While certain functions of tumor suppressor genes remain to be elucidated,
the distribution of their encoded proteins suggest that they function at
several levels to regulate cell division.
Loss of function of one tumor suppressor gene, called p53, has emerged as
one of the most universal molecular events in cancer. For example, mutations
in p53 are associated with the development of over 50% of all tumors,
including approximately 70% of colorectal, 55% of lung, and 25% of breast
cancers. Furthermore, p53 status is a good prognostic indicator of tumor
aggressiveness in a range of cancers including colon, lung, cervix, bladder,
prostate, breast and skin. In these cancers, defective p53 is correlated with
metastasis and poor five-year survival rates. In addition, in numerous tumor
types, there is evidence that even if p53 protein is not mutated, it can be
functionally impaired by virtue of its interaction with other proteins. The
central role of p53 in the biology of cancer suggests, and recent discoveries
have verified, that genes in a molecular pathway controlled by p53, or other
genes with functions similar to that of p53, also play a key role in the
biology of normal and aberrant cell growth.
Many normal cell types (e.g., cells of the skin, immune system and
digestive tract) must retain the ability to divide, albeit in a controlled
fashion, in order to ensure good health for an individual. Whereas tumor
suppressor genes have a negative effect on cell growth, a large group of
genes encodes proteins that are involved in promoting cell division. The
process of cell division is initiated by proteins encoded by a subgroup of
these genes; these proteins are called growth factors. Growth factors are
generally secreted proteins that promote cell division by docking onto cell
surface receptors.
Following the interaction of a growth factor with its receptor, the complex
can move into the cell and initiate a complex series of events that ultimately
result in cell division. This series of events is considered to follow along a
signal transduction pathway. Different cell types possess a variety of receptors
that allow growth factors to selectively activate cell division; however, many
growth factors and their receptors fall into families whose members share
structural and functional similarities. Although it is not yet clear just how
varied signal transduction
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factors are, it appears that members of signal transduction pathways share
common structural and functional characteristics; it is also apparent that
signal transduction pathways can be used to trigger several processes of
cellular behavior, not just growth. This creates the puzzle of how signaling
processes are correctly translated into appropriate cellular responses.
Abnormal cell growth can be triggered by overproduction of growth factors
or their receptors. In such instances, the overproducing genes are often
recognized as "transforming" oncogenes and are associated with malignancy.
Receptors can also be mutated into transforming oncogenes; for example, they
can initiate the signal to trigger cell division even when they are not in
contact with their cognate growth factor. Many growth factors, or their
receptors, have been implicated in animal cancers, but a small number of such
proteins appear to have a widespread role in human disease. It is notable
that some growth factors that might be relevant as human oncogenes need not
directly stimulate proliferation of tumor cells, but might do so indirectly,
for example, by promoting growth of blood vessel cells (blood vessels are
required to provide nutrients to the growing tumor mass).
Just as growth factors and their receptors can act as oncogenes when
their concentration or function is unbalanced, so too can members of signal
transduction pathways acquire such oncogenic properties. One such oncogene,
ras, appears to be implicated in about one-third of human cancers. Finally,
although tumor suppressor genes and oncogenes normally regulate each other in
a harmonious fashion, at least some genes, such as MDM2, act as oncogenes
when they are overproduced, apparently by being excessively efficient in
neutralizing the effect of tumor suppressor genes such as p53.
In recent years, Drs. Bert Vogelstein and Kenneth Kinzler of The Johns
Hopkins University School of Medicine ("JHU") and others have provided
evidence that the progression of cells from their normal state, to a benign
tumor and finally to a fully developed cancer is the result of a progressive
alteration of genetic information caused by mutations that can result in:
loss of a tumor suppressor gene; decrease in the amount of protein product of
a tumor suppressor gene; increase in the amount of protein product of an
oncogene; or production of a functionally altered oncogene protein or tumor
suppressor gene protein. Although cancer appears to result from multiple
mutational events, experiments by several investigators, including Drs.
Vogelstein and Kinzler, suggest that inactivation of a single abnormal
oncogene of a cancer cell or restoration to a cancer cell of a single tumor
suppressor gene can prevent the growth of, or even cause the death of, the
cancer cell. Accordingly, the Company believes that through specific
molecular targeting, a single drug or a combination of a few drugs capable of
bringing about such a result might effectively control cancer.
A combination of diagnostic and therapeutic strategies based upon
cancer-related genes could have a profound impact upon the management of
cancer. Diagnostic tests are already available, or can be readily developed,
for several of the cancer-related genes currently being targeted by the
Company. As drugs become available to treat cancers resulting from the
malfunction of specific genes, the oncologist will be able to match the
appropriate therapeutic approach to the patient's specific gene defect,
significantly improving the likelihood of treatment benefit. High response
rates should, in turn, ensure a strong market for cancer-gene-based
diagnostics and therapeutics. This "pharmacogenetic" approach is an important
trend for a variety of genetically-determined diseases.
CANCER THERAPIES
Treatment of human cancer currently involves surgery, radiation therapy,
chemotherapy or, in many cases, some combination of these methods. Surgery is
a common method of treatment when the tumor remains localized to the site of
its origin. Chemotherapy and radiation are general methods of treatment when
the disease begins to spread throughout the body by a process known as
metastasis. These agents are sometimes helpful in treating cancer but in many
other instances either fail to reverse tumor growth or do so only on a
transient basis.
Recent studies suggest that the therapeutic effects of chemotherapy or
radiation therapy can depend upon the ability of cancer cells to trigger a set
of events leading to programmed cell death (apoptosis). It has been
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proposed that relatively low doses of radiation or chemotherapeutic agents
will kill tumor cells provided that an appropriate apoptotic pathway is
intact. On the other hand, if the apoptotic pathway either fails to be
activated or is defective, much higher doses are generally administered.
These high doses typically cause severe side effects by killing normal cells,
such as those of the immune system and the digestive tract, thereby limiting
the utility of such anti-cancer treatments. The p53 tumor suppressor protein
appears to be responsible for activating an apoptotic pathway in response to
treatment with radiation or chemotherapy. Consistent with this observation is
the finding that cells lacking p53 tend to be more resistant to treatment
than cells possessing normal p53 function.
GENE THERAPY
One strategy under consideration by the Company for restoring lost tumor
suppressor gene function is gene therapy. Gene therapy is an emerging
approach to the treatment of disease in which a gene is inserted into a
patient's cells to induce these cells to produce a therapeutic protein. Gene
therapy could therefore be used to treat certain diseases, including cancer,
by producing a missing functional protein through the replacement of the
missing or defective gene. Gene therapy can employ certain viruses, capable
of introducing genes into cells, that are genetically manipulated to replace
certain viral genes with the desired genes, such as those that express
therapeutic proteins. These viral vectors, once inserted into cells, cannot
reproduce and infect other cells. Other means of introducing genes into cells
include the use of chemical carriers called "liposomes."
PATHWAYS TO DRUG DISCOVERY
Drugs are chemical agents that generally derive their therapeutic effect
by interacting with a molecular target to alter the target's activity.
Typically, the molecular target is one of the thousands of proteins involved
in carrying out the physiological functions of humans or infectious
organisms. The interaction between a drug and a molecular target is primarily
determined by their structural fit; an ideal drug binds selectively and
tightly to its molecular target. A drug that binds selectively to its target
is less likely to interact with non-targeted molecules, thereby reducing the
likelihood of undesirable side effects. A drug that binds tightly to its
molecular target will often require lower doses to achieve a therapeutic
effect than another drug that binds less tightly to the same target.
The procedure leading to drug discovery can involve rational drug design,
high-throughput screening or a combination of the two. Although
high-throughput screening has historically been successful, it is
labor-intensive and expensive. In addition, since such approach depends in
large part upon chance, there is no assurance of success.
The Company's scientists have been designing an integrated approach to
drug discovery that involves "SAGE", a system for the identification of
differentially-expressed genes through efficient, high-speed comparative
analysis, "CADENCE", a high-throughput assay design and implementation
process to enhance compound evaluation, and "COMPILE", a combinational
chemistry procedure to identify lead compounds from among very large and
diverse chemical libraries.
SAGE. A key challenge in the drug discovery process is to identify and
characterize targets that are therapeutically relevant to disease. Targets of
obvious interest are genes that are differentially expressed in normal versus
diseased cells or tissues, since genes that are equivalently functional in
normal and diseased tissue are unlikely to cause disease. Several approaches
have been devised for determination of differential expression, among them
subtractive hybridization, differential display and differential transcript
imaging. Whereas the first two of these technologies depend upon experimental
manipulation to determine whether a gene is expressed in one mRNA transcript
population but not in another, the third is, in effect, an electronic
subtraction procedure. Differentially-expressed genes can be, and have been,
successfully identified by the above approaches, but all of them have
technical limitations.
Transcript imaging involves computerized comparisons of the presence or
absence of ESTs (Expressed Sequence Tags) between two transcript libraries to
generate differential expression information. It is then necessary
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to determine the association or non-association of ESTs with a particular
transcript (this effort is complicated by the fact that transcripts are often
represented by multiple ESTs). Transcript imaging is limited by a restriction
on the number of ESTs that can be analyzed.
SAGE (Serial Analysis of Gene Expression) was designed and developed by
Drs. Kinzler and Vogelstein and their colleagues at JHU, and the relevant
technology and filed patents have been licensed exclusively to the Company.
SAGE represents a combination of three independent inventions that, when
combined, offer significant advantages, including increased information and
improved efficiency, over other differential expression technologies. The
first innovation allows the assignment to each different transcript of a
virtually unique tag that is considerably smaller than an EST. In the second
innovation, these tags are then randomly paired to form "ditags" to eliminate
quantitative bias. The third invention involves stringing ditags together
like pearls in a necklace, "punctuated" to indicate where one ditag ends and
the next one begins, prior to cloning and sequencing.
In this method, SAGE tags are prepared, paired as ditags, combined,
cloned and sequenced. SAGE software then extracts quantitative and
qualitative sequence information about the tags and matches tags with
transcripts, genes or ESTs based upon information available in public
databases. If there is interest concerning a tag that does not correspond to
a known transcript or gene, the cDNA representing the appropriate transcript
can generally be obtained within days by using materials already generated
during the SAGE procedure. The Company believes that SAGE is more thorough,
rapid, efficient and cost-effective than other existing technologies. SAGE is
being implemented in a cooperative manner by scientists at the Company and
JHU to characterize genes that are differentially expressed when normal
tissues become cancerous. Although the technology was not implemented at the
Company and at JHU until late in 1995, more than one million SAGE tags have
already been sequenced and cataloged. There can be no assurance, however,
that the program will result in the development of commercial products.
CADENCE. When devising strategies for treating or diagnosing disease, it
is helpful to understand the differences between molecular cause and effect.
Useful therapies and diagnostic tests can be developed by targeting the
manifestations or symptoms of a disease, or by targeting the cause of the
disease and preventing the onset of symptoms, with the latter being
preferable. Although cancer is widely characterized by the uncontrolled
growth of cells, it is only recently that scientists have begun to understand
what causes this uncontrolled growth. Thus, faced with recognition of the
result of the disease (uncontrolled growth) without a clear understanding of
the causes, scientists for years have been attempting to develop treatments
to hinder or slow the growth of cancer cells. However, since they are in
large part designed to kill rapidly-dividing cells, the value of most of
these treatments is limited by undesirable side effects on cells such as
those of the immune and digestive systems, which normally divide rapidly and
depend upon this property for normal function.
Although symptoms of a disease are generally recognizable, and sometimes
treatable, it is not always straightforward to pinpoint cause, particularly
at the molecular level. As noted above, a difference between the expression
of a gene in a normal versus a diseased tissue makes that gene a potential
suspect. The same is true for a gene that has been mutated in a diseased
tissue. However, a differentially-expressed or mutated gene is not
necessarily responsible for a disease, nor will it necessarily be an optimal
therapeutic and/or diagnostic target, unless it can be causally implicated.
Thus, once a candidate gene has been identified, via SAGE or any other
approach, a detailed series of experimental steps is usually necessary in
order to develop a drug candidate. CADENCE (Customized Assay Design for
ENhancing Compound Evaluation) does not describe a set protocol for producing
a drug candidate but rather reflects a customized procedure that must
generally be pursued with a target gene to design and implement a drug
discovery effort based upon knowledge of the function and dysfunction of that
gene. Briefly, the procedure involves (a) establishing causal associations
between altered gene function and disease; (b) producing gene products and
other relevant reagents, including cultured cells, for targeting; and (c)
designing and implementing appropriate assays for evaluation of therapeutic
candidates, including in vitro and animal models.
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COMPILE. Conventional drug discovery methodologies have
characteristically relied upon screening of natural product extracts and
collections of small organic molecules from previous syntheses to produce
lead candidates. Despite the advent of automated screening technology, this
process remains time-consuming and expensive and the rate of lead discovery
is low.
One way to address the limitations of conventional screening
methodologies is through the use of combinatorial chemistry technology.
Combinatorial chemistry-based drug screening is a rapid and efficient
procedure by which vast and highly diverse libraries of candidate compounds
can be synthesized in the laboratory, often in an automated fashion, and then
tested for activity against therapeutically-relevant targets. Once an active
compound has been identified, or if structural information about the target
is available, specialized libraries can be generated to optimize or speed
lead selection.
Combinatorial libraries were originally comprised of well-known polymeric
molecules such as peptides or oligonucleotides (small pieces of genetic
material). In the case of the Company's early efforts, oligonucleotides were
used. It was determined that relatively active oligonucleotides could be
found against several targets, but these oligonucleotides were large (which
restricts their distribution through the body and ease of cell penetration)
and susceptible to enzymatic degradation. More recently, the Company has
focused its combinational chemistry efforts on libraries containing smaller,
more drug-like, molecules.
Company scientists have been developing COMPILE (COMbinatorial Procedure
for Indirect Ligand Elucidation), an integrated and systematic approach to
combinatorial chemistry and the Company has filed patents relating to this
technology. COMPILE is being designed to include a prescreen to identify the
most suitable libraries for use against a chosen target; a procedure that is
broadly applicable to virtually any type of combinatorial chemistry library
for selecting and identifying compounds that bind best to a target; and
automated techniques for rapid production of diverse chemical libraries. The
Company has assembled COMPILE master libraries containing, in the aggregate,
millions of compounds of relatively low molecular weight and extensive
chemical diversity, raising the possibility that selected compounds will be
novel and have attractive pharmacological properties, including in many cases
ease of cell permeability and oral availability. The compounds in some of
these libraries are potentially suitable as lead products against certain
targets because they are relatively small, chemically diverse and are not
expected to be readily susceptible to enzymatic degradation. The Company
believes that, once fully implemented, its integrated, combinatorial
chemistry-based drug discovery strategy will constitute a highly efficient
and effective mass screening technology. There can be no assurance, however,
that such strategy will result in the development of commercially-usable
products.
BUSINESS STRATEGY
PRODUCT DEVELOPMENT STRATEGY
The Company is focusing on the research and development of cancer
therapeutics. Through its collaboration with Drs. Vogelstein and Kinzler and
its past and present agreements with JHU, the Company has gained access to
filed and issued patents, proprietary information, technology, reagents and
test systems relevant to tumor suppressor genes and other cancer-related
genes. One such gene in particular, p53, is believed to play a central role
in the onset and progression of a wide variety of cancers. Accordingly, the
Company has initiated a program to develop therapeutics based upon p53
technology.
The Company is seeking in the first instance to improve approaches to
cancer therapy by generating treatments that would selectively and directly
block the growth or spread of certain types of cancer by restoring the
activity of the p53 tumor suppressor gene. Such treatments might either be
effective on their own or might increase susceptibility of cancer cells to
conventional chemotherapy or radiation therapy regimens. The Company is
exploring two primary therapeutic approaches involving p53 and other tumor
suppressor genes: small molecule-based restoration of gene function and gene
therapy. The Company has conceived of drug-mediated approaches to restore
lost tumor suppressor gene function and has developed assays to screen for
compounds that restore p53 function.
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These assays and/or reagents used therein are the subjects of patents
licensed to the Company that have been issued by the U.S. Patent and
Trademark Office (the "PTO"). The Company has established collaborations with
Xenova Limited ("Xenova") and Boehringer-Mannheim GmbH ("Boehringer") to
screen their small molecules and/or natural extracts for activity in these
assays, and a first generation of lead compounds has been discovered.
By placing a properly functioning tumor suppressor gene into cancer
cells, the Company believes that lost tumor suppressor gene function can be
restored. Currently, a major challenge of gene therapy in cancer is the
development of procedures for ensuring that the therapeutic gene penetrates
the vast majority of tumor cells. In addition, generation of
clinically-relevant animal model systems is highly desirable so that the
likelihood of success of gene therapy approaches can be evaluated prior to
the commencement of clinical trials. The Company has entered into a
collaboration with Genetic Therapy, Inc. ("GTI") to evaluate
commercialization feasibility of p53 gene therapy. The Company and GTI and
their respective collaborators have been carrying out pivotal preclinical p53
gene therapy experiments to provide insight into the likelihood of the
clinical success of p53 gene therapy. The Company has completed its studies
and is awaiting completion of the GTI studies, at which time GTI will make a
decision regarding clinical evaluation.
The Company has been using its broadly-enabling combinatorial chemistry
technologies in efforts to discover specific lead compounds that block the
function of targets relevant to cancer as well as other diseases. Through
this approach, oligonucleotide-based libraries were initially used and
compounds have been identified that interact specifically with selected
target proteins to affect the activity of such targets. Although lead
compounds were found, they presented marked difficulties in efforts to
optimize these compounds for clinical suitability. Accordingly, the Company
has shifted its strategy to evaluating libraries of more amenable compounds
and is currently addressing technical issues that will allow effective
surveillance of such libraries.
PRODUCT DISCOVERY STRATEGY
In addition to its product development activities, the Company is
strategically positioned to benefit from its integrated drug discovery
capabilities. With capabilities in genomics, high-throughput assay design and
implementation and combinatorial chemistry, the Company is attempting to
expand its discovery collaborations with other pharmaceutical and
biotechnology companies. Such collaborations could focus on particular
aspects of the discovery process or the entire continuum. The Company
believes that its capabilities can be utilized in these collaborations to
generate revenues which can be used to further the Company's product
development activities. There can be no assurance, however, that the Company
will be able to expand its discovery collaborations to generate revenues.
Successes in the biotechnology industry have characteristically favored
companies with novel skills and efficient operations despite the competitive
advantages of pharmaceutical companies which are typically larger and have
substantially greater financial resources and broader research capabilities.
At the extremes, biotechnology companies have attempted to follow one of two
models of success: (a) companies that develop successful products in-house
more rapidly and cost-effectively than pharmaceutical companies and other
biotechnology companies; and (b) companies that offer innovative technical
services to major pharmaceutical companies and other biotechnology companies,
creating value through collaborative payments and royalties. The former model
offers the opportunity to provide a significant return on investment if the
therapeutic strategy is correct, but becomes progressively more risk-oriented
as less predictable strategic targets remain to be pursued. In the latter
model, the technology base of the Company reduces the risk of failure, but
involves slower financial growth due to smaller profit margins. The Company
believes that its dual-objective strategy enables the Company to seek a
balance between these two models. There can be no assurance, however, that
the Company's dual-objective strategy will lead to commercial success.
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RESEARCH AND DEVELOPMENT PROGRAMS
The following table summarizes the Company's principal research and
development programs relating to its current compounds and targets:
<TABLE>
<CAPTION>
PROGRAM APPROACH DISEASE STATUS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
p53 Gene therapy Cancer Preclinical development
- -------------------------------------------------------------------------------------------------------------
p53 Restoration of function Cancer Discovery
- -------------------------------------------------------------------------------------------------------------
MDM2 Inhibition Cancer Lead compound
- -------------------------------------------------------------------------------------------------------------
WAF1 Substitution of function Cancer Discovery
- -------------------------------------------------------------------------------------------------------------
New p53-regulated Gene therapy/ Cancer Discovery
genes Substitution of function
- -------------------------------------------------------------------------------------------------------------
</TABLE>
In the above table, "preclinical development" includes testing of lead
compounds for activity in preclinical in vitro, ex vivo and in vivo disease
models. Additional assessments must generally be undertaken to optimize
certain biological criteria for therapeutic utility prior to the commencement
of human clinical trials. "Lead compound" refers to a compound or series of
compounds that have met predetermined activity criteria in preliminary in
vitro models. More extensive evaluation of lead compounds must generally be
undertaken to determine if they have the requisite properties to enter
preclinical development. "Discovery" activities include the development of
screening assays, the testing of compounds in such assays and the detection
of active compounds. Any of the Company's research and development programs
may be discontinued, replaced or supplemented, depending upon results of
testing and analysis.
p53
The p53 gene was discovered in 1979 and was originally believed to be an
oncogene. In 1989, Dr. Vogelstein and his colleagues discovered that p53 was
subtly mutated in numerous tumors. Dr. Vogelstein and others also provided
evidence that the normal version of the gene might actually prevent tumor
onset and growth of tumor cells. As a result, the p53 gene is now understood
to be a tumor suppressor gene. Currently, p53 is thought to be among the most
commonly mutated genes in human cancer. Researchers have found p53 mutations
in tumors of almost every variety including cancers of the colon, lung, skin,
prostate, ovaries, cervix, breast, brain, bone, blood cells and bladder. Dr.
Vogelstein and others have estimated that p53 mutations occur in at least 50%
of all cancers.
Normally, when cells are damaged, their division can be slowed or stopped
at specific "checkpoints" so as to reduce the incidence of gene mutation. One
such checkpoint exists just prior to DNA synthesis. The p53 protein is
believed to be a critical component of this checkpoint: when cells are
exposed to conditions that might lead to DNA damage, the p53 protein triggers
a series of events that appears to slow or stop cell division. Under extreme
conditions of environmental insult and in certain cells, including certain
cancer cells, p53 protein appears to trigger a pathway that leads to
apoptosis.
The p53 gene expresses a protein that, when functional, binds to and
thereby triggers expression of a number of genes, the products of which are
important in the control of cell division. In tumors with mutated p53
function, the p53 gene expresses an altered form of the protein that fails to
bind to the appropriate genes. As a result, certain regulatory genes are not
turned on and an important pathway for controlling cell division is
unavailable.
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RESTORATION OF FUNCTION. The Company has developed high-throughput
screening assays to identify small molecules that can restore mutated p53
protein to an active form. The Company has initiated use of these assays in
collaborative efforts to identify compounds with the potential for restoring
p53 function.
GENE THERAPY. By placing a functional p53 gene into cancer cells, the
Company believes that lost p53 function can be restored and unregulated cell
division can be curtailed. The Company has entered into a license agreement
with GTI, in which the Company has sublicensed to GTI its rights to gene
therapy applications for p53. The Company and GTI have been evaluating in
animal model systems different approaches to delivering p53 genes to cancer
cells and determining the effects of such treatments upon tumor growth, and
the Company expects GTI to make a decision in 1997 concerning the initiation
of clinical trials.
MDM2
The MDM2 oncogene encodes a protein that binds to the p53 protein,
preventing it from activating genes that can control cell division.
Accordingly, elevated levels of MDM2 protein might inactivate p53 protein by
preventing it from carrying out its normal functions. Drs. Vogelstein and
Kinzler and their colleagues have discovered elevated levels of MDM2 protein
in cancers known as sarcomas. Other investigators have since found evidence
for overexpression of MDM2 in cells of other cancers, including neural,
bladder, renal and breast cancers, as well as leukemias. The Company and its
collaborators have been using a high-throughput assay to identify small
molecules that block the undesirable interaction between normal p53 protein
and excessive levels of MDM2 protein in cancer cells. In addition, the
Company is using combinatorial chemistry approaches to identify compounds
that block the MDM2/p53 interaction. The Company on its own, and a
collaborator, have identified compounds in initial screens that appear to
block the interaction between MDM2 and p53. Some of these compounds are now
being tested in cell-based systems. An inhibitor that blocks the undesirable
interaction between MDM2 and p53 could be useful in the treatment of patients
who would not benefit from drugs targeting mutant p53.
WAF1
WAF1 is a gene that is activated by p53 protein. The protein encoded by
the WAF1 gene appears to interfere with the activity of a group of enzymes
called cyclin-dependent kinases. Cyclin-dependent kinases, in turn, interact
with a group of proteins, called cyclins, that play a direct role in cell
division. This particular mechanism for controlling cell division appears to
be initiated only if normal p53-gene activity is present. This cell division
pathway thus provides the Company with a number of alternative targets for
cancer treatment. The Company is developing high-throughput assays to
identify small molecules that block this cell division pathway.
ADDITIONAL CANCER-RELATED TARGETS
Investigators at the Company have discovered a number of genes that are
under the control of p53. Some of these genes have not been publicly
identified, while others are known genes not previously reported to be
regulated by p53. Certain of these genes, when transferred into human
colorectal cancer cells under particular culture conditions, have
demonstrated the ability to block the cells from dividing and/or to promote
apoptosis. As a result, the Company considers these genes to be therapeutic
targets and/ or possible candidates for gene therapy.
The discoveries of other cancer-related genes referred to by Drs.
Vogelstein and Kinzler as DCC, APC, MCC and MSH2, and the respective filed
and/or issued patents covering such genes, have provided the Company with
additional opportunities for developing cancer therapeutics. Although such
development programs are not currently being pursued, the Company continually
evaluates these genes as targets for therapy as additional knowledge is
gained about the role of these genes in cancer.
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PRINCIPAL COLLABORATIVE AGREEMENTS
Agreements with JHU, Roche and Dr. Vogelstein
In March 1991, the Company entered into a Research Agreement (the
"Research Agreement"), with JHU and Hoffmann-La Roche Inc. ("Roche"), and in
February 1992 entered into a License Agreement (the "License Agreement") with
JHU and Roche (collectively, the "JHU Agreements"), pursuant to which the
Company made unrestricted research grants to the Basic Cancer Research
Foundation and JHU of approximately $818,000 to fund research conducted at
JHU by Dr. Vogelstein. Dr. Vogelstein has had the sole discretion to
determine research activities within the specified research areas, which
include cancer and virology. In return for these payments, JHU granted to the
Company and Roche a worldwide, exclusive, royalty-bearing license to all
technology developed within the specified research areas pursuant to the JHU
Agreements. In February 1995, the Research Agreement terminated, with certain
provisions remaining in effect through August 1995. Certain rights granted to
Roche and the Company by JHU, and certain of the obligations of Roche and the
Company to JHU (such as maintaining confidentiality of information, not using
JHU's name without their consent, not bringing suit against JHU in disputes
between Roche and the Company and reimbursement of JHU for costs of any such
dispute), survived the termination of the Research Agreement. The License
Agreement continues, subject to scheduled royalty payments, until the
expiration of the patents licensed thereunder.
The Company and Roche also entered into supplementary agreements (the
"Roche Agreements") regarding the development and commercialization of any
technology developed by Dr. Vogelstein in the research areas specified in the
JHU Agreements. Pursuant to an initial agreement with Roche, Roche obtained
the first option to license from JHU any diagnostic applications, the Company
obtained a license from JHU to any oligonucleotide-based therapeutic
applications and the Company and Roche jointly obtained a license from JHU to
any therapeutic applications that are not oligonucleotide-based. Roche has
agreed to pay the Company royalties at varying rates on sales of any products
developed by Roche stemming from Dr. Vogelstein's research. Additionally,
Roche obtained first option rights (the "First Option Rights") to act as the
Company's partner for research and development programs relating to Dr.
Vogelstein's technology. At Roche's option, Roche could choose to pay the
Company to provide mutually agreed upon research and development services for
diagnostic products. In May 1996, Roche decided not to develop certain
inventions licensed from JHU and the Company exercised its option, which did
not require any additional payment, to assume the rights to all of those
inventions. In October 1996, Roche and the Company signed a term sheet under
which the Company will be provided a sublicense to any and all diagnostic
products and applications to which Roche retains rights under the License
Agreement, and the Company was granted the exclusive right to sublicense
Roche's rights to diagnostic products and applications, exclusive of those
rights to certain antibody-based diagnostics that Roche has assigned to a
third party, under the License Agreement. The term sheet also provides for
royalties to Roche and sharing of revenues between the Company and Roche.
In March 1994, in consideration of 16,666 shares of the Company's Common
Stock and warrants to acquire 50,000 shares of Common Stock, Roche waived the
First Option Rights so that the Company may freely seek partners for its
Vogelstein-related research and development programs. One-third of the
warrants were exercisable at a price of $10.50 per share until March 1995,
one-third of the warrants were exercisable at a price of $15.00 per share
until March 1996, and the last third of the warrants were exercisable at a
price of $24.00 per share until March 22, 1997. None of the warrants were
exercised.
Agreements with JHU and Drs. Vogelstein and Kinzler
Effective September 1995, the Company entered into a license agreement
(the "SAGE Agreement") with JHU and Drs. Vogelstein and Kinzler relating to
the SAGE technology. To retain an exclusive license, the Company was
obligated to pay substantial license fees and milestone payments in 1996 and
has continuing license and milestone obligations. The SAGE Agreement provides
for certain additional payments to be made by the Company to JHU in the event
the Company sublicenses SAGE technology to third parties or performs
SAGE-related
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services on behalf of third parties. In contemplation of the Proposed Merger
with Genzyme, the SAGE Agreement was amended to waive any possible right JHU
may have to a payment of $5 million resulting from a change of control in
exchange for the issuance of 43,200 shares of Series B Convertible Preferred
Stock.
The Company is currently in discussions with JHU regarding a license to
other present and future discoveries of Dr. Kinzler, some of which were, or
may be, created in collaboration with Dr. Vogelstein. However, there can be
no assurance that such license will be available to the Company or can be
obtained on terms acceptable to the Company.
Effective April 1991, the Company entered into a consulting agreement
with Dr. Vogelstein pursuant to which Dr. Vogelstein acts as a consultant to
the Company in his area of expertise and has agreed to serve on the Company's
Scientific Advisory Board. Dr. Vogelstein became Chairman of the Company's
Scientific Advisory Board in April 1993. This consulting agreement is
renewable at the Company's option annually and can be terminated by either
party on 30 days' notice. The consulting agreement with Dr. Vogelstein has
been renewed through April 2000. In addition, effective October 1991, the
Company entered into a consulting agreement with Dr. Kinzler, pursuant to
which Dr. Kinzler acts as a consultant to the Company in his area of
expertise and has agreed to serve on the Company's Scientific Advisory Board.
This consulting agreement renews automatically on an annual basis unless the
Company gives cancellation notice 60 days prior to the annual termination
date. This consulting agreement currently expires in October 1997.
Agreements with PaineWebber R&D Partners III, L.P.
In May 1994, the Company entered into a series of agreements (the "R&D
Agreements") with PaineWebber R&D Partners, III, L.P. (the "Partnership")
(see "Item 13. Certain Relationships and Related Transactions"), pursuant to
which the Partnership paid a $250,000 license fee and agreed to pay the
Company up to $5,750,000 to conduct research and development on the
Partnership's behalf on targets identified by the Company pursuant to a
development plan originally projected to extend through March 1996, but which
continued through January 1997. In consideration of such payments, the
Partnership obtained rights to the results of such research, and the Company
granted the Partnership an exclusive, royalty-free license to use certain
patent rights, know-how and technical information owned or licensed by the
Company. Under the R&D Agreements, upon the occurrence of certain events of
default (such as failure to perform its obligations, default on indebtedness,
insolvency, cessation of operations and others), the Company would be
obligated to make certain payments to the Partnership. In March 1995, the R&D
Agreements were modified to expand the area of research under the development
plan and to accelerate an additional $750,000 of research funding under the
R&D Agreements into 1995. Under the R&D Agreements, the Company also received
an option to purchase at any time certain or all of the rights owned by the
Partnership as a result of the R&D Agreements ("Partnership Rights") at an
option price ranging from $9.4 million up to $19.2 million, depending upon
the date of the purchase and the rights purchased. The R&D Agreements
provided that in the event the Company commenced Phase II clinical trials on
an agent developed under the R&D Agreements, the Company would be obligated
to exercise the purchase option. To date, the Company has not commenced any
Phase II clinical trials. In consideration for this purchase option, the
Company issued to the Partnership warrants to purchase up to 1,000,000 shares
of the Company's common stock (the "Core Warrant") and up to 666,667 shares
of the Company's common stock (the "Purchase Option Warrant"). The Core
Warrant is exercisable for a period of five years which commenced July 1,
1996, and the Purchase Option Warrant would have been exercisable for a
period of four years following termination of the Company's purchase option
(as described above). With the modification of the R&D Agreements in March
1995, the exercise price on the Core Warrant and the Purchase Option Warrant
was fixed at $2.15 per share, subject to antidilution provisions and other
adjustments. In June 1995, the Company executed and delivered a convertible
note (the "Note") to the Partnership under which the Company borrowed
$1,000,000 at an interest rate of prime plus two percentage points. In lieu
of repayment in cash, the Note and accrued interest were converted to 480,242
shares of Series C Convertible Preferred Stock of the Company as of September
30, 1995, which thereby reduced by $1,000,000 research funding from the
Partnership under the R&D Agreements. In January 1997, in connection with the
Proposed Merger, the Partnership exercised its right under the R&D Agreements
to exchange the Partnership Rights for shares of the Company's preferred
stock. This right
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became exercisable by the Partnership upon the Company signing the Merger
Agreement, which constituted a change of control under the R&D Agreements.
Under the R&D Agreements, a change of control is defined to include generally
PharmaGenics agreeing to or completing a consolidation or merger, agreeing to
be or being acquired, agreeing to or completing the sale or other disposal of
all or substantially all of its assets or the acquisition of, or tender for,
50% or more of the outstanding voting securities of PharmaGenics. As a result
of such exchange, the Company issued to the Partnership 298,420 shares of
Series A Convertible Preferred Stock, 88,864 shares of Series B Convertible
Preferred Stock and 1,641,144 shares of Series C Convertible Preferred Stock
(with an aggregate liquidation preference of $4,750,000). Upon the exercise
of such right by the Partnership, the Purchase Option Warrant and the R&D
Agreements terminated. In addition, upon the completion of the Proposed
Merger, the Core Warrant will be cancelled.
Agreements with Genetic Therapy, Inc.
In January 1993, the Company entered into a license agreement with GTI
under which the Company granted to GTI an exclusive, royalty-bearing license
to the Company's p53 and DCC tumor suppressor gene technology for use in gene
therapy. The Company has retained the rights to co-promote any products
covered by the agreement within North America. GTI has paid the Company
$500,000 under the agreement and has agreed to make additional payments upon
the achievement of particular milestones. The Company and GTI have also
entered into an agreement under which GTI has made payments to the Company
for the performance of research and development. In June 1994, GTI and the
Company agreed to suspend certain of GTI's performance requirements pending
results of animal model experiments by the Company. Such experiments were
completed by the Company in 1996. The Company's agreement with GTI continued
without interruption or modification after the acquisition of GTI by Novartis
(formerly Sandoz, Inc.) In January 1996, GTI returned to the Company rights
to the DCC tumor suppressor gene. The Company has received notification from
GTI of its intention to resume activities with the p53 gene under the
original performance requirements.
Agreement with Boehringer--Mannheim, Gmbh
In December 1994, the Company and Boehringer entered into a collaborative
agreement to discover and develop novel drugs that restore the normal
function of the p53 gene. The agreement stipulated that the Company and
Boehringer would utilize proprietary assays developed by the Company to
screen Boehringer's libraries of compounds and biological extracts.
Boehringer has been obligated under the agreements to make certain payments
to the Company. Following screening of several thousand compounds by
Boehringer, the term of the collaborative agreement expired without
negotiation of an extended collaboration.
AGREEMENT WITH XENOVA LIMITED
The Company has entered into a collaboration with Xenova to search for
compounds that can restore lost p53 function. Each party has agreed to pay
the costs of its own activities. Some of those costs have been, and will
continue to be, offset by a grant from the National Cancer Institute to the
Company, Xenova and Memorial Sloan Kettering of an award of approximately
$877,000 in the first two years (which commenced in September 1995), with
approximately $1.4 million anticipated to be awarded over an additional three
years, subject to funding availability and satisfactory progress of the
research project. The Company will have exclusive rights to any products in
the Western Hemisphere and Xenova will have the same rights in the Eastern
Hemisphere.
Agreement with Genome Therapeutics Corp.
In September 1996, the Company and Genome Therapeutics Corp. ("Genome")
executed a term sheet for the Company to prepare a limited number of
libraries using SAGE technology in order for Genome to determine whether to
enter into a further commercial relationship with the Company.
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Agreement with Incyte Pharmaceuticals, Inc.
In February 1997, the Company entered into an agreement with Incyte
Pharmaceuticals, Inc. ("Incyte"). Under the agreement, the Company has agreed
to prepare at specified prices SAGE tag libraries using SAGE technology at
the request of Incyte. The agreement is for a term of three years and does
not include any order requirements by Incyte. In addition, there is no
assurance Incyte will place any orders under the collaboration. The agreement
does not grant Incyte any rights to the SAGE technology and does not grant
the Company any rights to the libraries that might be prepared by the Company
for Incyte.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company's policy is to protect its technology by, among other things,
filing patent applications for technology it considers important in its
business. In addition to filing patent applications in the United States, the
Company has filed, and intends to file, patent applications in foreign
countries on a selective basis. The Company also relies on trade secrets,
unpatented know-how and technological innovation to develop and maintain its
competitive position.
To date, 17 patent applications have been filed in the United States on
which Company scientists are listed as inventors or co-inventors, none of
which have yet issued, and the Company has licensed 16 patents from JHU, of
which five have issued and two have received a notice of allowance. Several
continuations and divisionals of these patents have been filed. The Company
has an exclusive license to certain of the JHU patents. The Company has
co-exclusive licenses with Roche and/or other third parties to the remaining
JHU patents regarding cancer-related genes pursuant to the JHU Agreements.
Under the license agreement with JHU, the Company has an exclusive license to
filed SAGE patents, including one SAGE patent for which the PTO has issued to
JHU a Notice of Allowance.
The patent position of biotechnology firms generally is highly uncertain
and involves complex legal and factual questions. To date, no consistent
policy has emerged from the U.S. Patent and Trademark Office regarding the
breadth of claims allowed in biotechnology patents. Accordingly, there can be
no assurance that patent applications owned or licensed by the Company will
result in patents being issued or that, if issued, the patents will afford
protection against competitors with similar technology.
The Company is aware of patent applications and issued patents of
competitors and it is uncertain whether any of these, or patent applications
filed of which the Company may not have any knowledge, will require the
Company to alter its potential products or processes, pay licensing fees or
cease certain activities. The Company is also aware of patent applications
that have been filed by third parties directed to p53 gene therapy, as well
as to general methods for delivering genes therapeutically, including for the
treatment of cancer (the "Additional Gene Therapy Patents"). The Company
believes that the PTO will declare a patent interference between the
Additional Gene Therapy Patents and the p53 patent application that the
Company has licensed from JHU. The outcome of any such interference
proceeding, if declared, cannot be predicted, and there can be no assurance
that the outcome of such proceeding will be favorable to the Company. The
issuance of patents based on such technology, if licenses are not obtained by
the Company, could adversely affect the ability of GTI and/or the Company to
market and sell gene therapy products for cancer.
The Company also relies on unpatented technology, trade secrets and
information, and no assurance can be given that others will not independently
develop substantively equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology,
trade secrets and information. The Company requires each of its employees,
consultants and advisors to execute a confidentiality agreement at the
commencement of an employment or consulting relationship with the Company.
The agreements generally provide that all inventions conceived by the
individual in the course of employment or in the providing of services to the
Company and all confidential information developed by, or made known to, the
individual during the term of the relationship shall be the
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exclusive property of the Company and shall be kept confidential and not
disclosed to third parties except in limited specified circumstances. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company in the event of unauthorized use or disclosure of
such confidential information.
COMPETITION
Cancer is currently treated with therapies that have demonstrated varying
degrees of success. To the extent that the Company develops chemical or
genetic therapeutics to treat cancer (or any other diseases), the Company
will be competing with existing therapies. The Company is aware of other
companies actively engaged in research to develop gene therapy approaches
using the p53 gene and other tumor suppressor genes as well as several other
companies that have initiated various research and development programs with
regard to tumor suppressor genes and other cancer-related genes that are
being targeted by the Company. In addition, a number of companies are
pursuing the development of genomics technology and combinatorial chemistry
approaches that could lead to the development of pharmaceuticals that would
directly compete with therapeutics which might be developed by the Company.
These companies include specialized biotechnology companies and large
pharmaceutical companies, acting either independently or together.
Furthermore, academic institutions, government agencies and other public and
private organizations conducting research may seek patent protection and
might establish collaborative arrangements with others for development and
commercialization of products that are discovered. Any of these competitive
efforts, if successful, could adversely affect the Company and its programs.
Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the
Company and might be better equipped to develop, manufacture and
commercialize products. In addition, many of these companies have extensive
experience in preclinical testing, human clinical trials and the regulatory
approval process. These companies might develop and introduce products and
processes competitive with or superior to those of the Company.
Under the JHU Agreements, Roche has co-exclusive licenses with the
Company to certain of the technology developed by Dr. Vogelstein.
Accordingly, Roche, which has substantially greater financial and other
resources than the Company, may commence development activities based on Dr.
Vogelstein's technology to develop products that might compete with certain
potential products of the Company.
The Company's competition also will be determined in part by the
potential indications for which the Company's compounds are developed. For
certain of the Company's potential products, an important competitive factor
may be the timing of market introduction of its own or competitive products.
Accordingly, the relative speed with which the Company can develop products,
complete the clinical trials and regulatory approval processes and supply
commercial quantities of the products to the market are expected to be
important competitive factors. The Company expects that competition among
products approved for sale will be based on, among other things, product
efficacy, safety, reliability, availability, price and patent position.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain and enforce patent protection
or otherwise develop proprietary products or processes and secure sufficient
capital resources for the often lengthy period between technological
conception and commercial sales.
GOVERNMENT REGULATION
Any products developed by the Company will require regulatory clearances,
including the approval of the United States Food and Drug Administration
("FDA"), prior to initiation of clinical trials, manufacturing and
commercialization. The Company has no experience in obtaining any such
regulatory approvals. New drugs are subject to regulation under the Federal
Food, Drug and Cosmetic Act, and biological products, in addition to being
subject to certain provisions of that Act, are regulated under the Public
Health Service Act. Both statutes and the regulations promulgated thereunder
govern, among other things, the testing, manufacturing, safety, efficacy,
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labeling, storage, record-keeping, advertising and other promotional
practices involving biologics or new drugs, as the case may be.
Obtaining FDA approval is a costly and time-consuming process. Generally,
in order to gain FDA approval to commence clinical trials, a developer first
must conduct preclinical studies in the laboratory and in animal model
systems to gain preliminary information on an agent's efficacy and to
identify any major safety problems. The results of these studies are
submitted as a part of an investigative new drug application ("IND") that the
FDA must approve before human clinical trials of the agent can begin. The IND
application includes a detailed description of the clinical investigations to
be undertaken.
Upon approval of the IND, the Company will be responsible for initiating
and overseeing the demonstration of the safety, efficacy and potency that are
necessary to obtain FDA approval of any such products. The Company will be
required to select qualified investigators (usually physicians within medical
institutions) to supervise the administration of the agent in clinical
trials, ensure proper monitoring of the investigations and ensure that the
investigations are conducted in accordance with the general investigational
plan and protocols contained in the IND. Clinical trials are normally done in
three phases. Phase I clinical trials are concerned primarily with the safety
and preliminary effectiveness of the agent and may take from six months to
over a year. Phase II clinical trials are designed primarily to demonstrate
effectiveness in treating or diagnosing the disease or condition for which
the agent is intended, although short-term effects and risks in people whose
health is impaired may also be examined. Phase III clinical trials are
expanded, multi-center clinical trials with large numbers of patients. Such
trials are designed to gather the additional information on safety and
effectiveness needed to clarify the agent's benefit-risk relationship,
discover less common side effects and adverse reactions and generate
information for proper dosage and labeling of the agent. Clinical trials
generally take two to five years, but may take longer, to complete.
The FDA receives reports on the progress of each phase of clinical
testing, and it may require the modification, suspension or termination of
clinical trials if an unwarranted risk is presented to patients. Certain
agents that may be developed by the Company might fall into a new category of
therapeutics, and there can be no assurance as to the length of the clinical
trial period or the number of patients the FDA will require to be enrolled in
the clinical trials in order to establish the safety, efficacy and potency of
such products.
After completion of clinical trials of a new product, FDA marketing
approval must be obtained. If the product is regulated as a biologic, it will
require the submission and approval of a Product License Application ("PLA")
before marketing may commence. If the product is classified as a drug, the
Company must file a New Drug Application ("NDA") and receive approval before
marketing may commence. The NDA or PLA must include results of product
development, preclinical studies and clinical trials. The testing and
approval processes require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all.
NDAs and PLAs submitted to the FDA can generally take two to five years or
more to receive approval. Notwithstanding the submission of relevant data,
the FDA may ultimately decide that the NDA or PLA does not satisfy its
regulatory criteria for approval and require additional clinical studies.
Even if FDA regulatory clearances are obtained, a marketed product may be
subject to continual review, and later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market, as well as possible civil or criminal sanctions.
MANUFACTURING AND MARKETING
The Company has no experience in manufacturing or marketing products. The
Company does not now have the resources to manufacture or market on a
commercial scale any products that it may develop. The Company's long-term
objective is to manufacture and market certain therapeutics through its own
capabilities. In the short-term, however, the Company may rely on corporate
partners or others to manufacture or market any such therapeutics it
develops, although no specific arrangements have been made. The Company
cannot predict whether the Company will be able to establish manufacturing
arrangements with a third party on acceptable terms. While the Company
intends to select manufacturers which comply with FDA-mandated current good
manufacturing
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practices ("GMP") and other regulatory standards, there can be no assurance
that these manufacturers will comply with such standards, that they will give
the Company's orders the highest priority or that the Company would be able
to find substitute manufacturers, if necessary. In order for the Company to
establish a manufacturing facility, the Company will require substantial
additional funds and will be required to hire and retain significant
additional personnel and comply with the extensive GMP regulations applicable
to such a facility.
HUMAN RESOURCES
As of December 31, 1996, the Company had 37 employees, 32 of whom were
engaged directly in research and development activities and 5 of whom were in
executive and administrative positions.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Some of the information presented in this report constitutes forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, in particular, discussions regarding the Company's
expectations of completion of the Proposed Merger, research and collaborative
agreements, operating expenses, working capital financing, lease financing
and access to capital. Although the Company believes that its expectations
are based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will
not vary materially from its expectations. Meaningful factors that could
cause actual results to differ from expectations include, among others,
uncertainties relating to the Proposed Merger with Genzyme and the Credit
Facility; uncertainties relating to whether patents will issue and whether
patents that issue will provide the Company with adequate protection from
other products or competitors; dependence on key individuals for achievement
of these expectations, particularly the contributions of Michael I. Sherman,
the Company's President and Chief Executive Officer; continued collaboration
between the Company and Drs. Vogelstein and Kinzler of JHU; continued
collaboration between the Company and its other corporate, governmental and
academic collaborators; establishment of additional collaborations with
academia or corporations; uncertainty whether the Company's research and
development activities will result in the development of commercially usable
products and processes; competition from alternative products or processes;
uncertainties related to technological improvements and advances; the impact
of research and product development activities of competitors of the Company,
many of whom have greater financial or other resources than those of the
Company; the ability to obtain adequate additional financing necessary to
fund operations and product development and the terms on which such financing
might be available; the ability to obtain lease financing for capital
equipment; uncertainties related to possible legal proceedings; uncertainties
related to clinical trials; uncertainties of obtaining required regulatory
approvals; advances in cancer research, in general; the ability of the
Company to arrange for the manufacture and marketing of any new products; and
uncertainties of future profitability. For additional information concerning
these and other important factors which may cause the Company's actual
results to differ materially from expectations, reference is also made to the
Company's Quarterly Reports on Form 10-Q and other reports filed by the
Company with the Securities and Exchange Commission.
ITEM 2. PROPERTIES
The Company leases and occupies approximately 20,500 square feet of space
in Allendale, New Jersey, including approximately 16,500 square feet devoted
to research and development, pursuant to a five-year lease expiring on
December 31, 1999, with two additional three-year renewal options. The lease
provides rental payments of approximately $211,000 annually, exclusive of
taxes, maintenance and management fees, which were approximately $63,000 in
1996 and $57,000 in 1995. The Company believes that its existing facilities
will be adequate for its current needs.
ITEM 3. LEGAL PROCEEDINGS
On July 19, 1996, LBC Capital Resources, Inc. ("LBC") brought an action
against the Company in the Superior Court of New Jersey in Bergen County
alleging breach of contract and related causes of action arising out
18
<PAGE>
of an agreement between the Company and LBC that obligated LBC to assist the
Company in finding new sources of capital. LBC asserted in such action that
the Company improperly declined to pay LBC a commission in accordance with
the agreement and sought damages in excess of $150,000. The Company and LBC
settled the action with the Company's payment to LBC of $62,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
No class of the Company's securities is traded on any public trading
market, and the Company cannot predict whether any public trading market
might be established in the immediate future.
As of March 31, 1997, the Company had 20 holders of record of its Common
Stock, four holders of record of Series A Convertible Preferred Stock, 1,150
holders of record of Series B Convertible Preferred Stock, 480 holders of
record of Series C Convertible Preferred Stock, and one holder of record of a
warrant to purchase shares of Series A Convertible Preferred Stock. The
outstanding shares of Series B Convertible Preferred Stock and certain
warrants to purchase shares of Common Stock (which expired on November 14,
1996), all of which were issued in connection with a private placement in
1991, have been registered under Section 12(g) of the Securities Exchange Act
of 1934.
No cash dividends have ever been paid on the Company's Common Stock and
the Company does not intend to declare any such dividends in the foreseeable
future.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations and balance sheets for the fiscal year ended
December 31, 1992 are derived from the financial statements that have been
audited by Richard A. Eisner & Company, LLP, independent public accountants,
which financial statements are not included in this filing. The other
Statement of Operations Data and Balance Sheet Data set forth below are
derived from the financial statements that have been audited by Arthur
Andersen, LLP, independent public accountants, which financial statements as
of December 31, 1995 and 1996, and for the three years in the period ended
December 31, 1996, are included elsewhere in this filing. The data set forth
below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Financial
Statements and the notes related thereto included elsewhere in this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
Statement of Operations Data:
Revenues.................................................... $ 2 $ 661 $ 1,818 $ 2,920 $ 1,418
--------- --------- --------- --------- ---------
Expenses:
Research and development.................................. 3,624 4,287 5,822 4,608 4,499
General and administrative................................ 1,043 1,224 1,447 1,388 1,756
--------- --------- --------- --------- ---------
Total expenses............................................ 4,667 5,511 7,269 5,996 6,255
--------- --------- --------- --------- ---------
Loss from operations........................................ (4,665) (4,850) (5,451) (3,076) (4,837)
Interest income/(expense), net.............................. 407 240 (37) (304) 84
--------- --------- --------- --------- ---------
Net loss.................................................... $ (4,258) $ (4,610) $ (5,488) $ (3,380) $ (4,753)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loss per share.......................................... $ (9.26) $ (10.55) $ (12.28) $ (7.49) $ (10.49)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding.................. 459,604 436,812 446,933 451,406 452,970
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance Sheet Data:
Cash and investments........................................ $ 9,610 $ 4,542 $ 753 $ 1,639 $ 486
Working capital (deficit)................................... 5,929 3,905 (534) (641) (1,352)
Total assets................................................ 10,750 6,503 2,180 2,694 1,533
Long-term obligations....................................... 204 533 361 39 25
Accumulated deficit......................................... (8,463) (13,072) (18,560) (21,940) (26,692)
Stockholders' equity (deficit).............................. 9,864 5,253 483 352 (554)
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the Financial
Statements, and notes thereto, included elsewhere in this report.
Some of the information presented in this report constitutes forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes that its expectations are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results of the
Company's research and development activities and its results of operations
will not differ materially from its expectations. See "ITEM 1 -
BUSINESS--Important Factors Regarding Forward-Looking Statements."
RECENT DEVELOPMENTS--PROPOSED MERGER WITH GENZYME CORPORATION
To fund its operations since inception, the Company has obtained capital
through several private placements of equity, raising approximately $26.5
million. These funds have enabled the Company to pursue internal research,
fund and obtain technology rights from academic institutions and pursue
research and development collaborations with other companies. As a result of
these efforts, the Company has been able to generate license/royalty and
research funding revenues of approximately $6.6 million (including research
and development funding from PaineWebber R&D Partners III, L.P.) since
inception.
Although the Company has been successful in generating funding to
maintain its operations, in order to optimize the development of and exploit
its technologies, management of the Company has always been aware that the
Company would either have to raise large amounts of capital through equity
offerings or search for alternative sources of capital. One way the Company
attempted to obtain additional funding was to establish collaborative
relationships in which funding would be provided to the Company in exchange
for sharing of rights to the technology that might be developed from the
research supported by such funding. In particular, the Company has recently
attempted to raise funds by providing SAGE technology services to other
companies on a fee basis, but, to date, has not generated significant SAGE
service revenues.
Throughout its history, the Company has contacted many companies to
determine their interest in a collaboration. The Company held preliminary
discussions with several of these companies, but few of these discussions
gave rise to a definitive proposal or agreement with respect to a
transaction, and the financial proceeds from the collaborations that have
been established (see "Principal Collaborative Agreements") have not been
sufficient to sustain the Company's operations. As the exploration of
alternatives continued, it became apparent to the Company that gaining access
to equity capital on reasonable terms was becoming more and more difficult,
particularly since the Company had been operating for several years yet still
lacked clinical-stage therapeutics.
In early May 1996, representatives of the Company and Genzyme Corporation
("Genzyme") met to discuss opportunities for potential collaborations
relating to use of the SAGE technology in conjunction with Genzyme's cancer
gene therapy programs. These discussions evolved into preliminary merger
discussions, which resulted in the Company and Genzyme entering into a letter
of intent, dated October 29, 1996, reflecting an agreement in principle for
Genzyme to acquire the Company. Throughout the remainder of 1996 and early
1997, Genzyme and the Company negotiated the definitive terms of the
acquisition.
On February 3, 1997, the Company and Genzyme announced that they had entered
into an Agreement and Plan of Merger, dated as of January 31, 1997, (the "Merger
Agreement") pursuant to which the Company, on the terms and conditions set forth
in the Merger Agreement, is to be merged with and into Genzyme (the "Proposed
Merger"). As consideration for the Proposed Merger, Genzyme is to issue
approximately 4,000,000 shares (subject
21
<PAGE>
to certain adjustments set forth in the Merger Agreement) of a new Genzyme
security (the "GMO Stock"), representing 40% of the initial equity interest
in a new division of Genzyme, to be known as the Genzyme Molecular Oncology
division (the "GMO Division"), and to be formed within Genzyme through the
combination of the business of the Company with several of Genzyme's oncology
programs. An additional 6,000,000 shares (subject to adjustment) of GMO Stock
will be issued for the benefit of the General Division of Genzyme or its
stockholders. The GMO Stock will be "tracking stock," which is Genzyme common
stock that is intended to reflect the value, and track the performance, of
the GMO Division.
Because the Certificate of Incorporation of the Company requires that, in
a transaction such as the Proposed Merger, an aggregate merger preference be
provided to holders of the outstanding shares of Preferred Stock before any
amounts can be provided to holders of outstanding shares of Common Stock, and
because such aggregate merger preference exceeds the aggregate value of the
4,000,000 shares of GMO Stock to be issued in the Proposed Merger (based on
the valuation given the GMO Stock under the Merger Agreement), no shares of
GMO Stock are available for allocation to holders of the outstanding shares
of Common Stock. The applicable share exchange ratio to be used to convert
the outstanding shares of Preferred Stock into GMO Stock, upon effectiveness
of the Proposed Merger, is set forth in the Merger Agreement and, as also set
forth in the Merger Agreement, upon effectiveness of the Proposed Merger, the
outstanding shares of Common Stock will be cancelled. The Proposed Merger
currently is expected to be completed in May 1997, subject to approval by the
stockholders of the Company and Genzyme and certain other conditions. As
required by the Merger Agreement, directors, officers and certain other
stockholders of the Company have entered into stockholder agreements with
Genzyme pursuant to which they have agreed to vote in favor of the Proposed
Merger. The number of shares subject to such agreements is sufficient for
approval of the Proposed Merger by the stockholders of PharmaGenics.
The Company's decision to enter into the Merger Agreement was
substantially influenced by the Company's belief that the Company's
precarious financial condition and the absence of viable alternatives to
raising additional capital made it unlikely that the Company could fulfill
its business objectives as an independent company.
As a result of the Company's continued operating losses and lack of
available capital resources, the report of the Company's independent
accountants on the financial statements included elsewhere herein includes an
explanatory paragraph that such conditions raise substantial doubt as to the
Company's ability to continue as a going concern. In the event the Proposed
Merger is not completed, the absence of other viable strategic alternatives
and the present precarious financial condition of the Company raise
substantial doubt as to the ability of the Company to continue its operations
for more than several months. As a result, in the event the Merger is not
completed, the Company will need to obtain additional financing to continue
its operations, and there can be no assurance that financing would be
available. The Company may need to obtain funds through arrangements with
collaboration partners or others that may require the Company to relinquish
rights to certain of its technologies. If additional funding is not obtained,
the Company would be required to significantly curtail its research
activities and eventually cease operations altogether.
22
<PAGE>
RESULTS OF OPERATIONS
The Company has not been profitable since inception and, if the Proposed
Merger is not completed, expects to incur substantial operating losses in the
future, subject to the Company securing additional collaborative agreements.
The Company's results of operations and resulting financial condition might
vary significantly due to the timing of license fees and contract revenue and
the pace of research and development expenditures. The Company's independent
public accountant's opinion on the Company's fiscal 1996 audited financial
statements includes an explanatory paragraph stating that the Company's
financial condition raised substantial doubt as to the ability of the Company
to continue as a going concern.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues were $1.4 million in 1996 and $2.9 million in 1995. Research
contracts represented 80% and 95% of revenues for the periods, respectively,
and account for the decrease.
For 1996, revenues from research contracts included $723,200 earned under
the R&D Agreements, approximately $289,500 earned under a collaboration with
Boehringer and $100,000 from Genome in connection with entering into an
agreement regarding SAGE, with the balance derived from a research agreement
with GTI. All funding pursuant to the research agreement with GTI had been
received and earned as of March 31, 1996. As of December 31, 1996, the
Company had not yet earned $315,200 received in 1995 under the R&D
Agreements, and such amount is recorded as deferred revenue. See Note 2 of
Notes to Financial Statements. For 1995, revenues from research contracts
included $2.3 million earned under the R&D Agreements, $371,600 from
Boehringer and $100,000 from GTI. Grant revenues in 1996 were earned under a
five-year U.S. National Cancer Institute ("NCI") award in the form of a
Cooperative Grant in September of 1995. Grant revenues in 1995 included
$100,300 earned under this Cooperative Grant, with the balance earned under
an NCI Small Business Innovative Research grant that was awarded in May 1994
and concluded in 1995.
Research and development expenses were $4.5 million for 1996 as compared
to $4.6 million for 1995, a decrease of approximately 2.4%. Research expenses
for licenses from and to support programs at collaborators, in the aggregate,
decreased by approximately $208,000 in 1996 compared to 1995. In addition,
compensation expense decreased by approximately $23,000, or 1%, in 1996
compared to 1995, reflecting the impact of fewer staff and staff replacements
at lower salaries. Although research staffing totalled 32 at December 31,
1996 and at December 31, 1995, staffing was at lower levels during most of
the first half of 1996 than at December 31, 1996 and during 1995.
Applications for patents resulted in $64,000 more in expenses in 1996
compared to 1995. The Company incurred an increase of approximately $22,000
in 1996 compared to 1995 in payments for scientific advisors mainly due to
increases in consulting fees and the timing of meetings of the Company's
Scientific Advisory Board. In addition, equipment rental and maintenance
expenses increased by $23,000 in 1996, reflecting rental of certain research
equipment on a month-to-month basis under the terms of an existing lease (see
Note 7 of Notes to Financial Statements).
General and administrative expenses were $1.8 million for 1996 and $1.4
million for 1995, an increase of approximately 26.5% compared to 1995.
Professional fees increased by approximately $294,000 in 1996, compared to
1995, primarily attributed to counsel in connection with the Proposed Merger,
the Company's efforts to obtain additional financing through, among other
strategies, corporate collaborations, to secure and protect patents and to
respond to litigation brought against the Company earlier in the year. See
"Legal Proceedings." In addition, the Company accrued $62,000 for the
settlement payment as a general and administrative expense in 1996.
Compensation expense increased by approximately $33,000, or 4.5%, in 1996,
compared to 1995, reflecting the addition of a chief counsel near mid-year as
well as the impact of merit increases awarded earlier in 1996.
23
<PAGE>
The Company's interest expense decreased to approximately $36,300 for 1996
from nearly $348,000 for 1995, primarily reflecting borrowings of $1,000,000
under loan agreements in February 1995 and the related issuance of warrants and
borrowing of $1,000,000 upon the issuance to the Partnership of a convertible
note in June 1995. The principal and accrued interest under the loan agreements
and the convertible note were converted into Series C convertible preferred
stock as of September 30, 1995. See Note 8 of Notes to Financial Statements.
Interest income increased in 1996 due to higher cash and cash equivalent
balances as a result of proceeds from the sale of shares of Series C convertible
preferred stock in February 1996. See Note 9 of Notes to Financial Statements.
Net losses were approximately $4.8 million for 1996 compared to $3.4 million
for 1995. Decreases in revenue earned under research contracts account for most
of the increase in net losses.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues from operations were $2.9 million in 1995 and $1.8 million in
1994, with the primary component of revenues in both years consisting of
research contracts. Revenues in 1995 included $2.3 million of research
payments earned under the R&D Agreements, $371,600 of contract revenue from
Boehringer, and $100,300 of grant revenue earned under a five-year National
Cancer Institute grant awarded in September 1995. In 1994, revenues included
a one-time license fee of $250,000 and $1.4 million of research payments
earned under the R&D Agreements.
Total operating expenses were $6.0 million in 1995, a decrease of
approximately $1.3 million compared to $7.3 million of operating expenses in
1994. Research and development expenses were $4.6 million in 1995 and $5.8
million in 1994. The decrease primarily reflects lower personnel costs resulting
from a planned reduction in staffing during the fourth quarter of 1994 in
anticipation of limited capital resources, and lower depreciation and
amortization expense for equipment and leasehold improvements as a result of
such assets nearing full depreciation. Research staffing decreased to 32 at
December 31, 1995 from 37 at December 31, 1994. In addition, research staffing
was at higher levels during most of 1994 than the level at December 31, 1994,
while staffing during most of 1995 approximated the level at December 31, 1995.
General and administrative expenses, which consisted primarily of compensation
expenses for management and administrative personnel, occupancy expense and
professional fees, were approximately $1.4 million in each of 1994 and 1995.
The Company's interest expense increased to approximately $348,000 in 1995
compared to $126,000 in 1994. The increase in interest expense reflects
borrowings of $1,000,000 under loan agreements in February 1995 and the related
issuance of warrants and borrowing of $1,000,000 upon the issuance to the
Partnership of a convertible note in June 1995. See "Financial Condition,
Liquidity and Capital Resources" and Note 8 of Notes to Financial Statements.
Interest income decreased to $44,000 in 1995 from $89,000 in 1994 due to lower
cash and cash equivalent balances.
Net losses were approximately $3.4 million in 1995 and $5.5 million in 1994.
The decrease was primarily due to increased contract research revenues and
decreased research and development expenses.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of
approximately $486,000, a decrease of nearly $1.2 million compared to December
31, 1995. In February 1996, the Company held a closing on the sale of 1,719,964
shares of Series C convertible preferred stock for proceeds to the Company of
approximately $3,698,000 in a private placement offering that commenced in
December 1995. The offering was
24
<PAGE>
made directly by the Company to the holders of the Company's other preferred
stock and to new investors. Including an initial closing in December 1995,
total shares sold in the private placement were 2,099,522 and proceeds to the
Company were approximately $4,514,000.
Cash used in operating activities was $4.5 million during 1996 compared to
$1.7 million during 1995, primarily due to a reduction during 1996 in funding
under research agreements. As of December 31, 1995, all funding pursuant to the
R&D Agreements had been received by the Company. In addition, with the receipt
of $25,000 in the first quarter of 1996, all research funding pursuant to the
research agreement with GTI has been received by the Company. The Company had
received approximately $289,500 of contract research payments from Boehringer in
1996 compared to $371,600 received in 1995. Funding required for operating
activities during 1996 was primarily provided by the use of cash reserves and
proceeds received from the sale of shares of Series C convertible preferred
stock in the private placement offering. Funding required for operating
activities during the same period of 1995 was provided by the use of cash
reserves, research contract revenues and funding received under loan agreements.
The loans were converted into shares of Series C convertible preferred stock as
of September 30, 1995. See Note 8 of Notes to Financial Statements.
The Company expects to continue to finance its anticipated operating losses
and its capital expenditures into May 1997 from existing cash reserves,
approximately $200,000 of grant funding from NCI (including the receivable at
December 31, 1996; see Note 4 of Notes to Financial Statements) for the second
budget year as the Company's share under the Cooperative Grant award received in
September 1995, and the Credit Facility made available to the Company in the
fourth quarter of 1996 from Genzyme. In addition, the Company has a commitment
from a leasing company for up to $700,000 in equipment lease financing available
into June 1997.
The Company may draw monthly against the Credit Facility an amount equal to
its documented operating costs, up to a maximum amount each month as set forth
below:
<TABLE>
<CAPTION>
MONTH MAXIMUM DRAW
----- ------------
<S> <C>
December 1996....... $ 250,000
January 1997........ $ 750,000
February 1997....... $ 650,000
March 1997.......... $ 450,000
April 1997.......... $ 550,000
May 1997............ $ 550,000
</TABLE>
Amounts not drawn by the Company in a designated month are available to
cover documented expenses in any later month (subject to the limitations
described below), provided, however, that if such draws involve individual
expenditures in excess of $25,000, such expenditures require Genzyme's
consent. The maximum amount of monthly draws will be reduced by 60% of gross
revenues received by the Company in the prior month. If the Company's gross
revenues in any month beginning with November 1996 exceed the product of
1.6667 and the maximum draw for the succeeding month, the amount of such
excess will be applied first against the maximum amount which may be drawn in
the succeeding month, any remaining excess will then be applied against
amounts which may be drawn that may be carried forwarded from previous months
and then any remaining excess will be carried forward and reduce the maximum
amount available in subsequent months. An additional draw of $250,000 may be
made under the Credit Facility if the SAGE patent licensed by the Company
from JHU issues while the Credit Facility is in effect, provided that such
draw must be utilized by the Company to fulfill its obligations to JHU. If
Genzyme terminates the Merger Agreement under certain circumstances, Genzyme
will adjust the amount that may be drawn under the Credit Facility to an
additional $1,500,000 over amounts previously drawn and expended, with draws
to occur over a period of three months. Amounts advanced under the Credit
Facility are evidenced by a Subordinated Convertible Promissory Note (the
"Promissory Note"). The Promissory Note bears interest from the date of each
advance at a rate of 8.25% per annum and matures on February 10, 2002 (the
"Maturity Date"). To date, the Company has made $1,650,000 in monthly draws
under the Credit Facility, with the initial draw of
25
<PAGE>
$1,000,000 occurring in February 1997, after the signing of the Merger
Agreement and a second draw occurring in March 1997.
If the Proposed Merger is not completed, the Company expects to incur
substantial additional costs before it would be able to begin to generate
revenue from product sales, including costs related to ongoing research and
development activities, preclinical studies and regulatory compliance, and
for hiring additional management, manufacturing, scientific, sales and
administrative personnel. The Company believes that its current cash
resources and the aforementioned sources of funding, including the Credit
Facility, are sufficient to fund operations into the middle of 1997 even if
the Proposed Merger is not completed. The Company will require additional
financing to continue its operations beyond such time and there can be no
assurance that sources currently in place would continue to be available
beyond the second quarter of 1997. The Company may need to obtain funds
through arrangements with collaberation partners or others that may require
the Company to relinquish rights to certain of its technologies or product
candidates. If additional funding is not obtained, the Company would be
required to significantly curtail its research activities and eventually
cease operations altogether.
The Company's independent public accountant's opinion on the Company's
fiscal 1996 audited financial statements includes an explanatory paragraph
stating that the Company's financial condition raises substantial doubt as to
the ability of the Company to continue as a going concern.
ITEM 8. FINANCIAL STATEMENTS
The Financial Statements for the Company appear elsewhere in this document,
following Item 14, beginning on page F-1.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael I. Sherman, Ph.D. 52 President, Chief Executive Officer
and Director
A. Steven Franchak 39 Vice President, Chief Financial Officer,
Treasurer and Director
Arthur H. Bertelsen, Ph.D. 45 Senior Vice President, Research
Alan F. Cook, Ph.D. 57 Vice President, Chemistry and Secretary
Jack L. Bowman(1) 64 Director
Stelios Papadopoulos, Ph.D.(2) 48 Director
Anders P. Wiklund(2) 56 Director
James I. Wyer(1) 73 Director
</TABLE>
- --------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Michael I. Sherman, Ph.D., has been President and Chief Executive Officer of
the Company since July 1990. From 1986 to 1990, he was affiliated with the Roche
Research Center. With his appointment as Senior Director, Cell Biology in 1988,
he was responsible for drug discovery programs in cancer, viral diseases and
immune dysfunction. From 1971 to 1986, he was a member of the Department of Cell
Biology of the Roche Institute of Molecular Biology. Dr. Sherman also held a
joint appointment in the Department of Genetics and Development at the College
of Physicians and Surgeons of Columbia University from 1980 to 1987. Dr. Sherman
was a member until January 1996 of the Scientific Advisory Board of HealthCare
Investment Corporation ("HIC"), a venture capital management company, and serves
on the Board of Trustees of the Biotechnology Council of New Jersey. Dr. Sherman
holds a Ph.D. in Molecular Biology from the State University of New York at
Stony Brook. Dr. Sherman has authored more than 120 papers and articles in the
general areas of biochemistry, molecular biology and cell biology.
A. Steven Franchak has been Vice President, Chief Financial Officer and
Treasurer since June 1995, and a Director of the Company since July 1995. From
1984 to May 1995, Mr. Franchak was employed by American Cyanamid Company and
held various financial management positions, most recently as Director of
Budgets and Business Planning for the Medical Group from January 1994 to May
1995. From 1989 to 1994, Mr. Franchak had responsibility for managing the
finance function of the Lederle Laboratories Division and through a progression
of positions became Director of Budgets and Business Planning for the Lederle
Laboratories Division in 1991. From 1987 to 1989, Mr. Franchak was Financial
Analyst in American Cyanamid Company's Corporate Budget Department, and from
1984 to 1987 he was Audit Supervisor in the corporate Operations Audit
Department. From 1979 to 1984, Mr. Franchak was an auditor and subsequently a
senior tax accountant with Price Waterhouse. Mr.
27
<PAGE>
Franchak holds a B.S. in Business Administration from Shippensburg University
and is a Certified Public Accountant.
Arthur H. Bertelsen, Ph.D., joined the Company in June 1991 as Director of
Molecular and Cell Biology, was appointed Vice President effective January 1994,
and effective January 1996 has been Senior Vice President of Research. Prior
thereto, Dr. Bertelsen served for ten years in various research positions at
Unigene Laboratories, Inc., including Group Leader--Molecular Biology from 1985
until joining the Company. Dr. Bertelsen holds an M.S. in Biochemistry and a
Ph.D. in Cellular and Molecular Biology from New York University and has
published over 25 scientific papers and articles. Dr. Bertelsen has had
extensive experience in recombinant DNA technology and in several other aspects
of biotechnology research.
Alan F. Cook, Ph.D., joined the Company as Director of Chemistry in
September 1990, was elected Secretary in December 1990 and was appointed Vice
President, Chemistry in November 1992. Dr. Cook has 30 years of
pharmaceutical and biotechnology industry experience and is an expert in
nucleotide and oligonucleotide chemistry. From 1989 to 1990, Dr. Cook was
Director of Core Technology--Lifecodes, Inc., a biotechnology company, and he
served as Director of Nucleic Acid Chemistry at Lifecodes, Inc. from 1987 to
1989. From 1985 to 1987, Dr. Cook was a Chemistry Group Leader at Enzo
Biochem Inc. From 1967 to 1985, Dr. Cook served in increasing positions of
responsibility at Roche. Dr. Cook holds a doctorate in chemistry from
Birkbeck College of the University of London and has published over 40 papers
and articles in the field of nucleotide and oligonucleotide chemistry.
Jack L. Bowman has been a Director of the Company since March 1994. From
1987 until 1994, Mr. Bowman was a company group chairman at Johnson & Johnson,
having primary responsibility for a group of companies in the diagnostic, blood
glucose monitoring and prescription and over-the-counter pharmaceutical
businesses. From 1980 to 1987, Mr. Bowman held various positions at American
Cyanamid Company, most recently as Executive Vice President. From 1969 to 1980,
Mr. Bowman was employed by CIBA-GEIGY Pharmaceutical Division, most recently as
Executive Vice President. Mr. Bowman serves on the Board of Directors of CytRx
Corporation, NeoRx Corporation, Cellegy Pharmaceuticals, Inc. and Cell
Therapeutics, Inc.
Stelios Papadopoulos, Ph.D., was elected a Director of the Company in 1991.
Dr. Papadopoulos is a Managing Director and Head of the Health Care Investment
Banking Group at PaineWebber Incorporated, which is engaged in investment
banking and securities brokerage. PaineWebber Incorporated served as Sales Agent
in connection with the Company's 1991 private placement of Series B Preferred
Stock and warrants to purchase Common Stock. From 1986 until joining PaineWebber
Incorporated in April 1987, Dr. Papadopoulos was a Vice President in equity
research at Drexel Burnham Lambert Incorporated, an investment banking firm.
From 1985 to 1986, Dr. Papadopoulos was a biomedical technology analyst at
Donaldson, Lufkin and Jenrette Securities Corporation. Prior to that, Dr.
Papadopoulos was a member of the faculty of the Department of Cell Biology at
New York University Medical Center. Dr. Papadopoulos holds a Ph.D. in Biophysics
and an M.B.A. in Finance, both from New York University. Dr. Papadopoulos serves
on the Board of Directors of Diacrin, Inc. and Exelixis Pharmaceuticals, Inc.
Anders P. Wiklund was elected a Director of the Company effective January 1,
1996. Since January 1997, Mr. Wiklund has been an independent advisor to the
pharmaceutical industry. He has also served as President of Biacore, Inc., a
supplier of analytical instruments to the life sciences industry, since March
1997 and Senior Vice President of Biacore Holding, Inc., its parent corporation,
since January 1997. From January 1996 until December 1996, Mr. Wiklund was Vice
President, Corporate Business Development for Pharmacia & Upjohn, Inc. From
January 1995 until December 1995, he was Executive Vice President of Pharmacia
(U.S. Inc.). From August 1993 to December 1994, he was President and a Director
of Pharmacia Development Corporation, having various responsibilities relating
to Pharmacia's U.S. investments in biotechnology. From 1984 to 1993, he was
Chief Executive Officer, President and a Director of Kabi Vitrum Inc. and Kabi
Pharmacia Inc. Mr. Wiklund is on the Board of Directors of InSite Vision, Inc.,
Vascular Therapeutics, Inc. and Ribozyme Pharmaceuticals Inc.
28
<PAGE>
James I. Wyer has been a Director of the Company since March 1994. Mr. Wyer
has been Of Counsel to the law firm of St. John & Wayne (and its predecessor
firms) since 1987. From 1973 until 1986, Mr. Wyer was Vice President and General
Counsel of American Cyanamid Company. Mr. Wyer is also a director of TherMold,
Inc., a company engaged in the manufacture and sale of instrumentation for
thermal analysis and development of vibrational molding technology, and William
Penn Life Insurance Company of New York. Mr. Wyer graduated from Yale Law School
in 1949.
All Directors hold office until the next annual meeting of stockholders and
until their successors are duly elected and qualified. Officers are elected to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed. The Company has agreed until the completion of an
initial public offering to designate for election to the Board of Directors one
designee of PaineWebber Incorporated and two designees of HCV II. Currently,
Stelios Papadopoulos is the designee of PaineWebber Incorporated. Since the
resignation of William W. Crouse in September 1996, HCV II has not notified the
Company of any designees for election to the Board of Directors. See "ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Regulations adopted by the Securities and Exchange Commission require the
Company to identify persons who failed to file or filed late reports required
under Section 16(a) of the Securities Exchange Act of 1934. Generally,
directors and officers are required to report changes in their ownership of
the Company's stock. Based upon available information, the Company believes
that all required reports were filed on a timely basis.
SCIENTIFIC ADVISORY BOARD AND CONSULTANTS
The Company's Scientific Advisory Board currently consists of six
individuals having extensive experience in the fields of chemistry, oncology,
virology, rheumatology, molecular genetics or molecular biology. At the
Company's request, the scientific advisors review and evaluate the Company's
research programs and advise the Company with respect to technical matters in
fields in which the Company is involved. The Company's Scientific Advisory Board
meets either as a group or certain members meet in smaller groups or
individually with the Company to review and discuss the Company's progress in
research and development.
The following table sets forth the name and principal position of each
scientific advisor:
<TABLE>
<CAPTION>
NAME PRINCIPAL POSITION
- ---- ------------------
<S> <C>
Bert Vogelstein, M.D., Chairman Howard Hughes Investigator, The Johns Hopkins
University School of Medicine
Kenneth W. Kinzler, Ph.D. Associate Professor of Oncology, The Johns
Hopkins University School of Medicine
Kevin Struhl, Ph.D. David Wesley Gaiser Professor, Department of
Biological Chemistry, Harvard Medical School
Arthur M. Krieg, M.D. Carver Clinician Scientist and Assistant
Professor of Rheumatology, Department of
Internal Medicine, The University of Iowa
College of Medicine
Roger A. Jones, Ph.D. Professor of Chemistry, Rutgers University
Gary D. Glick, Ph.D. Associate Professor of Chemistry and
Associate Scientist of Biophysics Research
Division, University of Michigan
</TABLE>
29
<PAGE>
Bert Vogelstein, M.D., has been a professor of Oncology since 1989 at The
Johns Hopkins University School of Medicine, where he received his M.D. Dr.
Vogelstein is a prominent oncologist and molecular biologist who has won major
awards for his research in the area of tumor suppressor genes and oncogenes,
including the American Cancer Society Medal of Honor, the Gairdner Award, the
Lounsberg Award of the National Academy of Sciences for Biology and Medicine,
the National Cancer Institute MERIT Award, the American Association for Cancer
Research Inc. Rhoads Memorial Award, the Milken Family Medical Foundation Cancer
Research Award, the Bristol-Myers Squibb Award for Distinguished Achievement in
Cancer Research, the Anne and Jason Farber Award for Brain Tumor Research and
the Ernst Schering Prize. In 1992, Dr. Vogelstein was elected to the National
Academy of Sciences, and in 1995, he became a Howard Hughes Investigator. Dr.
Vogelstein is widely published in the area of genetics as it relates to cancer
and he has served on the editorial Boards of Science, The New England Journal of
Medicine and Genes, Chromosomes, and Cancer. Dr. Vogelstein is also an advisor
on an ad hoc basis to the National Institutes of Health Scientific Review
Groups.
All of the scientific advisors are employed by other entities and some
have consulting agreements with entities other than the Company, some of
which entities may in the future compete with the Company. The scientific
advisors are expected to devote only a small portion of their time to the
Company and are not expected to participate actively in the day-to-day
affairs of the Company. Certain of the institutions with which the scientific
advisors are affiliated may adopt new regulations or policies that limit the
ability of the scientific advisors to consult with the Company.
It is possible that any inventions or processes discovered by the scientific
advisors will remain the property of such persons or of such persons' employers.
In addition, the institutions with which the scientific advisors are affiliated
may make available the research services of their personnel, including the
scientific advisors, to competitors of the Company pursuant to sponsored
research agreements.
Each scientific advisor has entered into a consulting agreement with the
Company. The agreements provide for cash compensation of an aggregate of
$107,000 annually. The Company's agreement with Dr. Vogelstein provides for
payments to be made to Dr. Vogelstein or to a non-profit research foundation, at
Dr. Vogelstein's option and direction.
30
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during each of the last three fiscal years to the Company's Chief Executive
Officer and the Company's other executive officers whose annual compensation for
fiscal 1996 exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Name and Annual Compensation Stock All Other
Principal Position Year Salary Bonus Options(#) Compensation(1)
- ------------------ ---- -------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Michael I. Sherman, Ph.D. 1996 $242,650 $20,000 108,445 $385(2)
President and Chief 1995 236,325 30,000 50,000 385(2)
Executive Officer 1994 230,000 20,000 46,667(3) 385(2)
A. Steven Franchak 1996 123,600 12,000 5,500 10,172(4)
Vice President, Chief Financial 1995 66,818(5) 5,000 22,000 155
Officer and Treasurer
Alan F. Cook, Ph.D. 1996 150,280 8,000 11,000 492
Vice President, 1995 142,250 -- 3,000 492
Chemistry and Secretary 1994 140,000 -- 26,000(3) 492
Arthur H. Bertelsen, Ph.D. 1996 160,000 12,000 18,000 241
Senior Vice President, 1995 133,250 -- 10,000 241
Research(6) 1994 130,000 -- 35,835(3) 241
</TABLE>
- --------------
(1) Represents life insurance premiums paid by the Company.
(2) Does not include amounts paid to Dr. Sherman as an automobile allowance,
which are not required to be reported hereunder.
(3) Includes options that were issued in connection with a 1994 repricing.
(4) Includes $10,000 of moving expense reimbursement.
(5) Mr. Franchak commenced employment with the Company in June 1995.
(6) Effective January 1996, Dr. Bertelsen was appointed Senior Vice President,
Research.
STOCK OPTIONS
The following table sets forth certain information with respect to
individual grants of stock options made during fiscal 1996 to each of the
executive officers included in the Summary Compensation Table above.
31
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Number of Percent Value at Assumed
Securities of total Annual Rates of
underlying Options/SARs Stock Price
Options/ Granted to Exercise Appreciation for
SARs Employees or Base Option Term
Granted in fiscal Price Expiration ------------------------
Name (#)(1) Year ($/sh) Date 5%(2)(3) 10%(2)(3)
- ---- ---------- ------------ -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael I. Sherman, Ph.D....... 108,445 45.2% $2.30 6/27/06 $157,245 $397,993
A. Steven Franchak............. 5,500 2.3% $2.30 3/18/06 $ 7,975 $ 20,185
Alan F. Cook, Ph.D............. 11,000 4.6% $2.30 3/18/06 $ 15,950 $ 40,370
Arthur H. Bertelsen, Ph.D...... 18,000 7.5% $2.30 3/18/06 $ 26,100 $ 66,060
</TABLE>
- --------------
(1) The options indicated vest at a rate of 25% per year, and are subject to
option provisions regarding termination of the option following termination
of employment and nontransferability requirements.
(2) The information in these columns illustrates the value that might be
realized upon exercise of the options assuming the specified compound rates
of appreciation of the Company's Common Stock over the term of the options.
The potential realizable value columns are based on the total amount of
options granted. However, the total amount may not become exercisable (see
Note 3). In addition, the amounts reflected do not take into account amounts
required to be paid for federal or state income taxes or option provisions
regarding termination of the option following termination of employment and
nontransferability requirements. These amounts were calculated based on
requirements of the Securities and Exchange Commission and do not
necessarily reflect the Company's estimate of future stock price growth.
(3) Pursuant to the terms of the Merger Agreement and in accordance with the
terms of the Company's stock option plans, upon consummation of the Proposed
Merger, the vesting of the options indicated will be accelerated and any of
such options not exercised prior to the consummation of the Proposed Merger
will be terminated. If any of the options indicated are exercised for the
purchase of shares of the Company's Common Stock, such shares will be
treated alike with the other outstanding shares of Common Stock for purposes
of the Proposed Merger. Pursuant to the terms of the Merger Agreement, all
shares of Common Stock outstanding at the effective time of the Proposed
Merger will be cancelled without any payment or consideration in respect
thereof.
32
<PAGE>
The following table provides information relating to the value of
unexercised options held by the executive officers included in the Summary
Compensation Table at the end of fiscal 1996. No options were exercised by such
executive officers in fiscal 1996.
Unexercised Stock Options at Fiscal Year End
<TABLE>
<CAPTION>
Value of Unexercised
Total Number In-The-Money
of Unexercised Options(#) Options At Year End(1)
------------------------- ----------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C>
Michael I. Sherman, Ph.D....... 117,100/150,112 $171,890/$6,250
A. Steven Franchak............. 14,250/13,250 $20,700/$7,350
Alan F. Cook, Ph.D............. 27,480/16,000 $39,810/$750
Arthur H. Bertelsen, Ph.D...... 33,742/29,459 $42,619/$1,719
</TABLE>
- --------------
(1) No public market exists for the Company's securities. The amounts shown for
the value of unexercised in-the-money options are based on a Common Stock
price of $2.30 per share. This price was the last estimate of the
Compensation Committee of the Board of Directors of the fair market value of
the Common Stock made prior to the end of fiscal 1996 for the purpose of
granting stock options to employees. Pursuant to the terms of the Merger
Agreement and in accordance with the terms of the Company's stock option
plans, upon consummation of the Proposed Merger, the vesting of the options
indicated will be accelerated and any of such options not exercised prior to
the consummation of the Proposed Merger will be terminated. If any of the
options indicated are exercised for the purchase of shares of the Company's
Common Stock, such shares will be treated alike with the other outstanding
shares of Common Stock for purposes of the Proposed Merger. Pursuant to the
terms of the Merger Agreement, all shares of Common Stock outstanding at the
effective time of the Proposed Merger will be cancelled without any payment
or consideration in respect thereof.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
In June 1993, Dr. Sherman entered into an employment agreement with the
Company, for a term of three years, providing for an annual base salary of
$230,000, subject to adjustment on an annual basis, and an annual bonus of at
least $20,000. In June 1996, the Company and Dr. Sherman entered into a new
employment agreement with an initial term of three years ending on June 30,
1999, with automatic one-year renewals thereafter, unless earlier terminated by
either party upon 60 days notice prior to the end of the then current term. The
agreement contains inventions assignment, non-competition and confidentiality
provisions in favor of the Company. The new agreement provides for an annual
base salary of $242,650, subject to adjustment on an annual basis, and an annual
bonus of at least $20,000. The new agreement further provides that in the event
that prior to March 31, 1997, the Company had a change in control or received
commitments for additional financing of at least $3,000,000 in the aggregate,
Dr. Sherman's annual base salary would be increased from $242,650 to $260,000,
retroactive to July 1, 1996. The Company believes that the Credit Facility
satisfied this requirement, and accordingly, effective February 1997, Dr.
Sherman's annual base salary was raised to $260,000, retroactive to July 1,
1996. If Dr. Sherman's employment is terminated other than for cause, he will be
entitled to salary continuation for a period of twelve months.
In June 1995, Mr. Franchak entered into an at-will employment arrangement
with the Company providing for a monthly base salary of $10,000 and a one-time
signing bonus of $5,000. Pursuant to
33
<PAGE>
such arrangement, Mr. Franchak was paid $10,000 in 1996 for reimbursement of
moving expenses for relocating his residence to a location closer to the
Company's facility. This reimbursement payment is subject to a 50% payback if
Mr. Franchak voluntarily terminates his employment within one year of
relocating under certain circumstances. Pursuant to such arrangement, if Mr.
Franchak's employment is terminated by the Company without cause, he is
entitled to a severance payment equal to three months salary.
In November 1994, the Company entered into an agreement with Dr. Cook which
provides for a severance payment equal to three months salary if his employment
is terminated by the Company without cause. In May 1991, Dr. Bertelsen entered
into an at-will employment arrangement with the Company that entitles him to a
severance payment equal to three months salary if his employment is terminated
by the Company without cause.
Each of the Company's executive officers has entered into confidentiality
and patent assignment agreements with the Company.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no additional
compensation for their service as directors or as members of Committees of the
Board. Commencing in March 1994, the Company has paid its independent Directors
$1,000 for each Board of Directors meeting they attend, and $500 for each
Committee meeting they attend, for their services in such capacities.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Crouse, a Director of the Company until his resignation as of September
30, 1996, is a General Partner of HealthCare Partners II ("HCP II"). HCP II,
HealthCare Partners III ("HCP III") and HealthCare Partners IV ("HCP IV") are
limited partnerships which serve as the general partners of HealthCare Ventures
II ("HCV II"), HealthCare Ventures III ("HCV III") and HealthCare Ventures IV
("HCV IV"), respectively. HCV II is a principal stockholder of the Company. Mr.
Crouse is also an officer of HealthCare Investment Corporation, which is the
management company for HCV II, HCV III and HCV IV. For a discussion of the
relationship between the Company and HCV II, HCV III and HCV IV see "ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Dr. Papadopoulos, a Director of the Company, is a managing director and
head of the Health Care Investment Banking Group at PaineWebber, Incorporated
("PaineWebber"). PaineWebber Development Corporation, an affiliate of
PaineWebber, is the general partner of PaineWebber R&D Partners III, L.P. (the
"Partnership"). For a discussion of the relationship between the Company and the
Partnership, see "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
ITEM 12. PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 23, 1997 (assuming
conversion of all shares of Preferred Stock held into shares of Common Stock),
by (i) each person known to the Company to be the beneficial owner of more than
5% of the capital stock of the Company, (ii) the executive officers included in
the
34
<PAGE>
Summary Compensation Table above, (iii) each of the current Directors of the
Company and (iv) all current Directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
Number of Percentage
Shares of
Name and Address Benefically Outstanding
of Beneficial Owner(1) Owned(2) Shares
- ---------------------- ----------- -----------
<S> <C> <C>
PaineWebber R&D Partners III, L.P............ 3,508,670(3) 32.31%
HealthCare Ventures II, L.P.................. 2,135,052(4) 21.66%
Michael I. Sherman, Ph.D..................... 408,293(5) 4.09%
Alan F. Cook, Ph.D........................... 72,730(6) *
Arthur H. Bertelsen, Ph.D.................... 67,117(7) *
A. Steven Franchak........................... 22,875(8) *
Anders P. Wiklund............................ 12,500(9) *
Jack L. Bowman............................... 17,916(10) *
James I. Wyer................................ 17,916(10) *
Stelios Papadopoulos, Ph.D................... 50,000(11) *
All current Directors and executive.......... 669,347 6.62%
officers as a group(11)(12)
(8 persons)
</TABLE>
- --------------
* Less than 1%
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
PharmaGenics, Inc., Four Pearl Court, Allendale, New Jersey 07401.
(2) Except as otherwise indicated, each of the parties listed above has sole
voting and investment power over the shares owned.
(3) The address for the Partnership is c/o PaineWebber Development Corporation,
1285 Avenue of the Americas, New York, New York 10019. Includes 298,420
shares of Series A Preferred Stock, 88,864 shares of Series B Preferred
Stock, and 2,121,386 shares of Series C Preferred Stock and warrants to
purchase 1,000,000 shares of Common Stock.
(4) The address for HealthCare Ventures II, L.P. is Twin Towers at Metro Park,
379 Thornall Street, Edison, New Jersey 08837. Includes 1,795,500 shares of
Series A Preferred Stock and 106,994 shares of Series B Preferred Stock and
232,558 shares of Series C Preferred Stock. Does not include warrants to
purchase 403,988 shares of Common Stock held by HCV II which are not
exercisable within 60 days of March 23, 1997. Does not include 247,202
shares of Series
35
<PAGE>
C Preferred Stock and warrants to purchase 49,747 shares of Common Stock,
exercisable within 60 days of March 23, 1997, held by HCV III, or 72,593
shares of Series C Preferred Stock and warrants to purchase 14,608 shares
of Common Stock, exercisable within 60 days of March 23, 1997, held by
HCV IV.
(5) Includes 12,000 shares of Series C Preferred Stock and options to acquire
121,267 shares of Common Stock exercisable within 60 days of March 23,
1997. Does not include options to purchase 145,945 shares of Common Stock
not exercisable within 60 days of March 23, 1997.
(6) Includes options to acquire 32,230 shares of Common Stock exercisable
within 60 days of March 23, 1997. Does not include options to purchase
11,250 shares of Common Stock not exercisable within 60 days of March
23, 1997.
(7) Includes options to acquire 40,117 shares of Common Stock exercisable
within 60 days of March 23, 1997. Does not include options to acquire
23,084 shares of Common Stock which are not exercisable within 60 days of
March 23, 1997.
(8) Includes 6,000 shares of Series C Preferred Stock and options to acquire
16,875 shares of Common Stock exercisable within 60 days of March 23, 1997.
Does not include options to acquire 10,625 shares of Common Stock which are
not exercisable within 60 days of March 23, 1997.
(9) Incudes 10,000 shares of Series C Preferred Stock and options to acquire
2,500 shares of Common Stock exercisable within 60 days of March 23, 1997.
Does not include options to purchase 7,500 shares of Common Stock not
exercisable within 60 days of March 23, 1997.
(10) Includes options to acquire 17,916 shares of Common Stock granted to each
of Messrs. Bowman and Wyer, exercisable within 60 days of March 23, 1997.
Does not include options to acquire 17,084 shares of Common Stock granted
to each of Messrs. Bowman and Wyer, not exercisable within 60 days of
March 23, 1997.
(11) Includes 50,000 shares of Series C Preferred Stock. Excludes shares of
Preferred Stock held by the Partnership (see Note 3). PaineWebber
Development Corporation, an affiliate of PaineWebber, is general partner
of the Partnership. Dr. Papadopoulos is a Managing Director of PaineWebber
Incorporated.
(12) Includes 78,000 shares of Series C Preferred Stock and options to acquire
248,821 shares of Common Stock exercisable within 60 days of March 23,
1997. Does not include options to purchase 232,572 shares of Common Stock
not exercisable within 60 days of March 23, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTIES
HCV II is a principal stockholder of the Company. HealthCare Ventures II
("HCV II"), HealthCare Ventures III ("HCV III") and HealthCare Ventures IV
("HCV IV") are limited partnerships with investments in the health care
field. HealthCare Partners II ("HCP II") is a limited partnership which
serves as the general partner of HCV II. Mr. Crouse, a former Director of the
Company from August 1995 through September 1996, is a General Partner of HCP
II. Wallace Steinberg, a former Director of the Company from September 1990
until July 1995, was a General Partner of HCP II until his death in July
1995. In addition, Mr. Crouse is a General Partner of each of HealthCare
Partners III ("HCP III") and HealthCare Partners IV ("HCP IV"), the general
partner of HCV III and HCV IV, respectively.
36
<PAGE>
Everest Trust, a principal stockholder of the Company, holds approximately
24% of the outstanding limited partnership interest in HCV II, and is the sole
limited partner of HCV IV. An affiliate of Everest Trust is a limited partner of
HCP II.
The Company borrowed an aggregate of $1,000,000 (the "Loans") in February
1995 from a group of lenders principally consisting of HCV III, HCV IV and
Everest Trust (the "Lenders"). The Loans were at an interest rate of prime plus
two percentage points, with principal and accrued interest due on December 31,
1995. As of September 30, 1995, the principal and accrued interest on the Loans
were converted into 496,792 shares of Series C Preferred Stock. In connection
with the Loans, the Company granted the Lenders warrants to purchase an
aggregate of 100,000 shares of Common Stock at an exercise price of $0.50 per
share for a term of up to ten years from issuance.
HIC is the management company for HCV II, HCV III and HCV IV. Mr. Crouse is
an officer of HIC. Dr. Sherman, the President and Chief Executive Officer and a
Director of the Company, was a member of the Scientific Advisory Board of HIC
until January 1996.
Dr. Stelios Papadopoulos, who was elected a Director in November 1991, is a
Managing Director of PaineWebber Incorporated. PaineWebber Incorporated acted as
Sales Agent and received compensation (including warrants to purchase 194,400
shares of Common Stock at an exercise price of $7.50 per share, which expired in
November 1996) in connection with the private placement of securities conducted
by the Company in November 1991 (the "1991 Private Placement").
Dr. Papadopoulos was a director of Xenova from February 1993 until 1996.
The Company has entered into a collaboration with Xenova to search for
compounds that can restore lost p53 function. Each party is required to pay
the costs of its own activities. Some of those costs have been, and will
continue to be, offset by a grant from the National Cancer Institute to the
Company, Xenova and Memorial Sloan-Kettering of an award of approximately
$877,000 in the first two years (which commenced in September 1995), with
approximately $1.4 million anticipated to be awarded over an additional three
years, subject to funding availability and satisfactory progress of the
research project. The Company will have exclusive rights to any products in
the Western Hemisphere and Xenova will have the same rights in the Eastern
Hemisphere.
In May 1994, the Company entered into the R&D Agreements with the
Partnership, pursuant to which the Partnership paid a $250,000 license fee
and agreed to pay the Company up to $5,750,000 to conduct research and
development on the Partnership's behalf on targets identified by the Company
pursuant to a development plan originally projected to extend through March
1996, but which continued through January 1997. In consideration of such
payments, the Partnership obtained rights to the results of such research,
and the Company granted the Partnership an exclusive, royalty-free license to
use certain patent rights, know-how and technical information owned or
licensed by the Company. Under the R&D Agreements, upon the occurrence of
certain events of default (such as failure to perform its obligations,
default on indebtedness, insolvency, cessation of operations and others), the
Company would be obligated to make certain payments to the Partnership. In
March 1995, the R&D Agreements were modified to expand the area of research
under the development plan, and to accelerate $750,000 of research funding
under the R&D Agreements into 1995. Under the R&D Agreements, the Company
also received an option to purchase at any time certain or all of the rights
owned by the Partnership as a result of the R&D Agreements ("Partnership
Rights") at an option price ranging from $9.4 million up to $19.2 million,
depending upon the date of the purchase and the rights purchased. The R&D
Agreements provided that in the event the Company commenced Phase II clinical
trials on an agent developed under
37
<PAGE>
the R&D Agreements, the Company would be obligated to exercise the purchase
option. To date, the Company has not commenced any Phase II clinical trials.
In consideration for this purchase option, the Company issued to the
Partnership warrants to purchase up to 1,000,000 shares of the Company's
common stock (the "Core Warrant") and up to 666,667 shares of the Company's
common stock (the "Purchase Option Warrant"). The Core Warrant is exercisable
for a period of five years which commenced July 1, 1996, and the Purchase
Option Warrant would have been exercisable for a period of four years
following termination of the Company's purchase option (as described above).
With the modification of the R&D Agreements in March 1995, the exercise price
on the Core Warrant and the Purchase Option Warrant was fixed at $2.15 per
share, subject to antidilution provisions and other adjustments. In June
1995, the Company executed and delivered a convertible note (the "Note") to
the Partnership under which the Company borrowed $1,000,000 at an interest
rate of prime plus two percentage points. In lieu of repayment in cash, the
Note and accrued interest were converted to 480,242 shares of Series C
Convertible Preferred Stock of the Company as of September 30, 1995, which
thereby reduced by $1,000,000 research funding from the Partnership under the
R&D Agreements. In January 1997, in connection with the Proposed Merger, the
Partnership exercised its right under the R&D Agreements to exchange the
Partnership Rights for shares of the Company's preferred stock. This right
became exercisable by the Partnership upon the Company signing the Merger
Agreement, which constituted a change of control under the R&D Agreements.
Under the R&D Agreements, a change of control is defined to include generally
PharmaGenics agreeing to or completing a consolidation or merger, agreeing to
be or being acquired, agreeing to or completing the sale or other disposal of
all or substantially all of its assets or the acquisition of, or tender for,
50% or more of the outstanding voting securities of PharmaGenics. As a result
of such exchange, the Company issued to the Partnership 298,420 shares of
Series A Convertible Preferred Stock, 88,864 shares of Series B Convertible
Preferred Stock and 1,641,144 shares of Series C Convertible Preferred Stock
(with an aggregate liquidation preference of $4,750,000). Upon the exercise
of such right by the Partnership, the Purchase Option Warrant and the R&D
Agreements terminated. In addition, upon the completion of the Proposed
Merger, the Core Warrant will be cancelled.
In January 1993, the Company entered into a license agreement with GTI
under which the Company granted to GTI an exclusive, royalty-bearing license
to the use of the Company's p53 and DCC tumor suppressor gene technology for
use in gene therapy. The Company has retained the rights to co-promote any
products covered by the agreement within North America. GTI has paid the
Company $500,000 under the agreement and has agreed to make additional
payments upon the achievement of particular milestones. The Company and GTI
have also entered into an agreement under which GTI has made payments of
$75,000, $100,000, $100,000 and $25,000 in 1993, 1994, 1995 and 1996,
respectively, to the Company for the performance of research and development.
In June 1994, GTI and the Company agreed to suspend certain of GTI's
performance requirements pending results of animal model experiments by the
Company, which were completed in 1996. The Company's agreement with GTI
continued without interruption or modification after the acquisition of GTI
by Novartis (formerly Sandoz, Inc.). In January 1996, GTI returned to the
Company rights to the DCC tumor suppressor gene. GTI has notified the Company
of its desire to resume activities with the p53 gene under the original
performance requirements. HCV II, a principal stockholder of the Company, was
a principal stockholder of GTI prior to the acquisition of GTI by Novartis
(formerly Sandoz, Inc.).
38
<PAGE>
FINANCINGS
The Company was initially capitalized through a series of loans from October
1990 to April 1991 from HCV II, aggregating $2 million. Interest accrued on all
notes at 10%. All such indebtedness was repaid by the Company in April 1991.
In April 1991, the Company entered into a convertible preferred stock and
warrant purchase agreement (the "Preferred Stock Agreement") with HCV II and
Everest Trust, whereby the Company sold an aggregate of 2,160,000 shares of
redeemable Series A Preferred Stock for aggregate gross proceeds of
approximately $4 million. The redemption provisions relating to the Series A
Preferred Stock were deleted upon the filing of the Company's Restated
Certificate of Incorporation immediately prior to the closing of the 1991
Private Placement. In connection with the issuance of the Series A Preferred
Stock, the Company issued warrants to purchase an aggregate of 486,000 shares of
Common Stock at an exercise price of $.462 per share. These warrants are
exercisable during the period commencing 180 days after the effective date of an
initial public offering by the Company (or upon the occurrence of certain
events) and ending ten years from their issuance. In connection with the
execution of the Preferred Stock Agreement, the Company entered into a
stockholders' agreement (the "Stockholders' Agreement") with HCV II and Everest
Trust, granting certain demand and piggyback registration rights with respect to
shares of Common Stock issuable upon conversion of all outstanding shares of
Series A Preferred Stock. The Stockholders' Agreement, which was amended
effective as of the closing of the 1991 Private Placement, provides that any
holder of more than 10% of the outstanding Series A Preferred Stock and Series B
Preferred Stock is entitled to certain preemptive rights, which preemptive
rights expire after the closing of an initial public offering in which the
Company sells stock at a price of at least $7.50 per share and receives gross
proceeds of the least $10,000,000.
In April 1991, the Company sold 206,270 shares of Common Stock to Dr.
Sherman for an effective purchase price of $.019 per share. Such sale was made
pursuant to a Restricted Stock Purchase Agreement, which granted the Company
certain rights to repurchase such stock for the original purchase price upon the
occurrence of certain events within specified periods of time.
In September 1991, HCV II agreed to make advances to the Company of up to
$2.5 million for working capital until the earlier of the closing of the 1991
Private Placement or September 1992. The loans were to be evidenced by a
promissory note bearing interest at the prime rate plus two percent per annum.
No amounts were advanced by HCV II to the Company.
In November 1991, HCV II and Everest Trust acquired from the Company for
$7.50 per share, 106,994 and 77,405 shares of Series B Preferred Stock,
respectively, and warrants to acquire 7,430 and 5,375 shares of Common Stock,
respectively, at an exercise price of $7.50 per share, in conjunction with the
closing of the 1991 Private Placement.
In February 1995, the Company borrowed the Loans from the Lenders. The Loans
plus accrued interest at prime plus two percentage points, due December 31,
1995, were converted into 496,792 shares of Series C Preferred Stock as of
September 30, 1995. In connection with the Loans, the Company granted the
Lenders warrants to purchase an aggregate of 100,000 shares of common stock at
$0.50 per share for a term up to 10 years from the date of issuance.
In June 1995, the Company executed and delivered the Note to the Partnership
under which the Company borrowed $1,000,000 at an interest rate of prime plus
two percentage points. In lieu of
39
<PAGE>
repayment in cash, the Note and accrued interest were converted into 480,242
shares of Series C Preferred Stock of the Company as of September 30, 1995,
on the same terms as those accorded to the Lenders, thereby reducing by
$1,000,000 research funding from the Partnership under the R&D Agreements.
In December 1995, the Company commenced a private placement offering of a
minimum of 325,000 shares and a maximum of 3,740,644 shares of Series C
Preferred Stock, par value $.01 per share, at a price of $2.15 per share. The
offering was made directly by the Company to the holders of the Company's other
preferred stock and to new investors. In December 1995, the Company held an
initial closing on 232,558 shares, 65,000 shares and 50,000 shares purchased by
HCV II, Everest Trust and Dr. Papadopoulos, respectively. The final closing for
the offering was held in February 1996, with 12,000 shares, 10,000 shares and
6,000 shares purchased by Dr. Sherman, Mr. Wiklund and Mr. Franchak,
respectively. Total shares sold in the private placement were 2,099,522 and
proceeds to the Company were approximately $4,514,000.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C>
(a)(1) The response to this portion of Item 14 is submitted as
a separate section of this report commencing on page F-1.
(a)(2) The Financial Statement Schedules are omitted because
they are not applicable or are not required, or because
the required information is immaterial or is included in
the financial statements or notes thereto.
(a)(3) Exhibits. The Exhibits are listed in the Exhibit Index
appearing below.
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K, dated
October 10, 1996, to report, with respect to Item 5
thereof, the resignation of a director who had
determined that he did not wish to stand for re-election
at the Company's next annual meeting of stockholders.
(c) Exhibits (numbered in accordance with Item 601 of
Regulation S-K). Certain sequential item numbers have
been intentionally omitted for presentation and
incorporation by reference purposes.
</TABLE>
<TABLE>
<CAPTION>
Exhibit # Description and method of filing
- --------- --------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of January 31, 1997,
by and between Genzyme Corporation and the Company.(1)
3.1. Third Restated Certificate of Incorporation.(2)
3.1(a) Amendment to Third Restated Certificate of Incorporation.(3)
3.1(b) Certificate of Designation of Series C Convertible Preferred
Stock.(4)
3.2. By-laws, as amended.(5)
4.1. Warrant Agreement dated November 14, 1991 by and between the Company
and American Stock Transfer & Trust Company, as Warrant Agent.(5)
4.2. Form of Warrant Certificate.(5)
4.3. Form of Common Stock Certificate and Series B Preferred Stock
Certificate.(5)
10.1. Lease dated November 20, 1990, as amended, between AETNA Life
Insurance Company and the Company.(5)
10.1(a) Third Amendment to Exhibit 10.1.(6)
10.1(b) Fourth Amendment to Exhibit 10.1.(3)
10.2. Letter Agreement dated June 8, 1990 between the Company and
Michael I. Sherman.(5)
10.3. Non-Transferable, Non-Qualified Stock Option Agreement dated
March 27, 1991 between the Company and Michael I. Sherman.(5)
10.4. Restricted Stock Purchase Agreement dated April 24, 1991 between
the Company and Michael I. Sherman.(5)
10.5. Incentive Stock Option Agreement dated September 27, 1991 between
the Company and Michael I. Sherman.(5)
10.9. Letter Agreement dated July 27, 1990 between the Company and
Alan F. Cook.(6)
10.9(a) Letter Agreement dated November 17, 1994 between the Company
and Alan F. Cook.(6)
10.10. Convertible Preferred Stock and Warrant Purchase Agreement dated
April 24, 1991 among the Company and HealthCare Ventures II, L.P.
and Everest Trust.(5)
10.11. Non-Transferable, Non-Qualified Stock Option Agreement dated
March 27, 1991 between the Company and Alan F. Cook.(6)
10.11(a) Incentive Stock Option Agreement dated September 27, 1991 between
the Company and Alan F. Cook.(6)
41
<PAGE>
10.12. Stockholders' Agreement dated April 24, 1991 among the Company and
HealthCare Ventures II, L.P. and Everest Trust.(5)
10.12(a) Amendment to Stockholders' Agreement.(7)
10.12(b) Amendment to Stockholders' Agreement.(2)
10.13. Warrant to Purchase Shares of Common Stock dated September 27, 1991
issued to HealthCare Ventures II, L.P.(5)
10.14. Warrant to Purchase Shares of Common Stock dated September 27, 1991
issued to Everest Trust.(5)
10.15. Consent and Agreement to Amend dated September 27, 1991.(5)
10.15(a) Amendment to Exhibit 10.15.(6)
10.16. Sales Agency Agreement dated as of October 7, 1991, as amended
November 13, 1991, between the Company and PaineWebber
Incorporated.(5)
10.17. Subscription Agreement dated November 14, 1991 among the Company
and HealthCare Ventures II, L.P., Everest Trust and Norna Sarofim.(5)
10.18. Registration Agreement dated November 14, 1991.(5)
10.19. Registration Agreement dated November 14, 1991.(5)
10.20. Warrant to purchase Common Stock dated November 14, 1991 issued to
PaineWebber Incorporated.(5)
10.21. 1991 Stock Option Plan, as amended.(2)
10.22. Equipment Lease Agreement, including Warrant Agreement, as amended,
between the Company and Comdisco, Inc.(5)
10.23.+ Research Agreement dated March 1, 1989 among The Johns Hopkins
University, Hoffmann-La Roche Inc. and the Company.(8)
10.24.+ License Agreement dated February 5, 1992 among The Johns Hopkins
University, Hoffmann-La Roche Inc. and the Company.(8)
10.25.+ Agreement dated April 30, 1991 between Hoffmann-La Roche Inc. and
the Company.(8)
10.26.+ Agreement dated April 1, 1990 between Georgetown University and the
Company.(5)
10.26(a) Letter Agreement dated January 25, 1993 modifying Exhibit 10.26.(6)
10.27.+ Agreement dated November 1, 1990 between Georgetown University and
the Company.(5)
10.28. Consulting Agreement dated November 24, 1990 between the Company and
Richard Schlegel.(5)
10.29. Consulting Agreement dated April 3, 1991 between the Company and Bert
Vogelstein.(5)
10.30.+ License Agreement dated January 15, 1993 between the Company and
Genetic Therapy, Inc.(6)
10.31. Incentive Stock Option Agreement dated February 17, 1993, between the
Company and Michael I. Sherman.(6)
10.33. Incentive Stock Option Agreement dated February 17, 1993, between the
Company and Alan F. Cook.(6)
10.33(a) Incentive Stock Option Agreement dated March 7, 1994, between the
Company and Alan F. Cook.(6)
10.34.+ Research Agreement effective April 1, 1993 between the Company and
Genetic Therapy, Inc.(6)
10.35. Form of Indemnification Agreement.(6)
10.36. 1993 Stock Option Plan, as amended.(2)
10.37. Letter Agreement dated June 15, 1993, between the Company and Michael
I. Sherman.(9)
10.38. Master Equipment Lease Agreement, including Warrant Agreement, dated
September 10, 1993, between the Company and MMC/GATX Partnership
No. 1.(9)
10.39. 1994 Independent Directors Stock Option Plan, as amended.(2)
10.41(a) Letter Agreement dated May 10, 1991, between the Company and Arthur
H. Bertelsen.(7)
10.41(b) Incentive Stock Option Agreements dated September 27, 1991, February
17, 1993, November 22, 1993 and March 7, 1994, between the Company
and Arthur H. Bertelsen.(7)
10.41(c) Non-transferable Non-Qualified Stock Option Agreement dated June 17,
1991 between the Company and Arthur H. Bertelsen.(7)
10.42. Amendment dated March 23, 1994, to Agreement of April 30, 1991
between Hoffmann-La Roche Inc. and the Company including Stock
Purchase Agreement and Warrants to purchase an aggregate of 150,000
shares of Common Stock.(7)
10.43.+ Program Agreement dated as of April 1, 1994 between the Company and
PaineWebber R&D Partners III, L.P. (the "Partnership").(10)
42
<PAGE>
10.43(a)+ First Amendment to Program Agreement, including Amended and Restated Glossary.(8)
10.44.+ Development Agreement dated as of April 1, 1994 between the Company and the Partnership.(10)
10.44(a)+ Amended and Restated Development Agreement.(8)
10.45.+ Purchase Option Agreement dated as of April 1, 1994 between the Company and the Partnership.(10)
10.45(a)+ Amended and Restated Purchase Option Agreement.(8)
10.46. Technology Agreement dated as of April 1, 1994 between the Company and the Partnership.(10)
10.46(a) Amended and Restated Technology Agreement.(8)
10.47.+ Core Warrant dated as of April 1, 1994 issued by the Company to the Fund.(10)
10.47(a) Amended and Restated Core Warrant.(8)
10.48.+ Purchase Option Warrant dated as of April 1, 1994 issued by the Company to the Partnership.(10)
10.48(a)+ Amended and Restated Purchase Option Warrant.(8)
10.49.+ Stock Purchase Agreement dated as of March 15, 1995 between the Company and the Partnership.(8)
10.50.+ Loan Agreement dated as of February 13, 1995 among the Company, HealthCare Ventures III, L.P.,
HealthCare Ventures IV, L.P., Everest Trust and Larry Abrams.(8)
10.50(a) Amendment No. 1 to Exhibit 10.50(3)
10.51.+ Letter Agreement dated September 13, 1994 between the Company and Boehringer Mannheim GmbH, as
supplemented December 7, 1994.(8)
10.52.+ License Agreement dated as of September 1, 1995 between the Company and The Johns Hopkins
University.(3)
10.52(a) Amendment No. 1 to License Agreement.(11)
10.53 Letter Agreement dated June 8, 1995 between the Company and A. Steven Franchak.(3)
10.54 Non-Qualified Stock Option Agreement dated July 6, 1995 between the Company and A. Steven
Franchak.(3)
10.54(a) Incentive Stock Option Agreement dated September 1, 1995 between the Company and A. Steven
Franchak.(12)
10.55 Convertible Note dated June 8, 1995 between the Company and the
Partnership.(3)
10.56 Registration Rights Agreement dated February 13, 1996.(12)
10.57 Incentive Stock Option Agreements dated September 25, 1995 and March
18, 1996 between the Company and A. Steven Franchak.(12)
10.58 Incentive Stock Option Agreements dated September 25, 1995 and March 18,
1996 between the Company and Arthur H. Bertelsen.(12)
10.59 Incentive Stock Option Agreements dated September 25, 1995 and March 18,
1996 between the Company and Alan F. Cook.(12)
10.62 Letter Agreement dated June 27, 1996 between the Company and Michael I.
Sherman.(12)
10.63 Incentive Stock Option Agreements dated September 25, 1995 and June 27,
1996, between the Company and Michael I. Sherman.(12)
10.64 Letter Agreement, dated September 1, 1994 between the Company and
PaineWebber Incorporated.(12)
10.65 Indemnification Agreement, dated August 15, 1996, between the Company
and PaineWebber Incorporated.(12)
10.66 Letter Agreement, dated January 10, 1997, between the Company and
PaineWebber Incorporated.(11)
10.67 Subordinated Convertible Promissory Note, dated February 10, 1997
payable to Genzyme Corporation.(11)
10.68 Amendment and Agreement dated as of January 31, 1997 between the Company
and PaineWebber R&D Partners III, L.P. (amending Exhibit 10.49).(11)
27 Financial Data Schedule.(11)
</TABLE>
- --------------
+ Confidential treatment has been granted by the Commission. The copy filed as
an exhibit omits the information subject to the Grant of Confidential
Treatment.
43
<PAGE>
(1) Incorporated by reference to the corresponding Exhibit number of
Registrant's Current Report on Form 8-K dated February 18, 1997.
(2) Incorporated by reference to the corresponding Exhibit number of
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994.
(3) Incorporated by reference to the corresponding Exhibit number of
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1995.
(4) Incorporated by reference to the corresponding Exhibit number of
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995.
(5) Incorporated by reference to the corresponding Exhibit number of
Registrant's Registration Statement on Form 10, No. 0-20138.
(6) Incorporated by reference to the corresponding Exhibit number of
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992.
(7) Incorporated by reference to the corresponding Exhibit number of
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993.
(8) Incorporated by reference to the corresponding Exhibit number of
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994.
(9) Incorporated by reference to the corresponding Exhibit number of
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993.
(10) Incorporated by reference to the corresponding Exhibit number of
Registrant's Quarterly Report on Form 10-Q or 10-Q/A for the quarter ended
March 31, 1994.
(11) Filed herewith.
(12) Incorporated by reference to the corresponding Exhibit number of
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PharmaGenics, Inc.:
We have audited the accompanying balance sheets of PharmaGenics, Inc. as
of December 31, 1995 and 1996, and the related statements of operations,
changes in stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PharmaGenics, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
incurred significant losses from operations since its inception, has a
stockholder's deficit and requires substantial additional capital to fund its
operations. In addition, the Company has a significant operating lease
commitment. As discussed in Notes 1 and 14, as of January 31, 1997, the Company
entered into an agreement and plan of merger with Genzyme Corporation, which is
subject to approval of the stockholders of each company. If the merger is not
consummated, management will be required to consider other alternatives,
including the liquidation of the Company's remaining assets and the payment of
its liabilities and commitments. Management's plans in regard to these matters
are described in Note 1. The financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
ROSELAND, NEW JERSEY
March 3, 1997
F-1
<PAGE>
PHARMAGENICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
<S> <C> <C>
ASSETS 1995 1996
---------------------- -------------------
Current assets:
Cash and cash equivalents......... $1,639,182 $486,109
Accounts receivable............... - 185,972
Prepaid expenses.................. 22,970 38,183
---------------------- -------------------
Total current assets.............. 1,662,152 710,264
Property and equipment, net of
$1,705,980 and $2,073,642 of
accumulated depreciation........ 996,048 782,638
Other assets...................... 35,425 40,425
---------------------- -------------------
Total assets...................... $2,693,625 $1,533,327
---------------------- -------------------
---------------------- -------------------
LIABILITIES
Current liabilities:
Accounts payable and accrued
expenses........................ $942,736 $1,599,987
Deferred revenue.................. 1,038,400 315,200
Current obligations under capital
leases.......................... 321,650 147,102
---------------------- -------------------
Total current liabilities......... 2,302,786 2,062,289
Long-term obligations under
capital leases.................. 39,280 25,177
---------------------- --------------------
Total liabilities................. 2,342,066 2,087,466
---------------------- --------------------
Commitments and contingencies
(Notes 3, 7, 8, 9 and 11)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock--$.01 par value,
10,000,000 shares authorized:
Series A convertible preferred
stock, 2,500,000 shares designated,
2,160,000 shares issued and
outstanding at December 31, 1995
and 1996, liquidation preference
4,017,600 21,600 21,600
Series B convertible preferred
2,500,000 shares designated,
2,138,399 shares issued and
outstanding at December 31, 1995 and 1996,
liquidation preference 16,038,000 21,384 21,384
Series C convertible preferred stock,
4,717,700 shares designated, 1,356,592
and 3,076,556 shares issued and outstanding at
December 31, 1995 and 1996, respectively,
liquidation preference $2,916,673 and
$6,614,595 at December 31, 1995 and 1996,
respectively 13,566 30,765
Common stock--$.01 par value, 15,000,000
shares authorized, 451,608 and 455,108
shares issued and outstanding at
December 31, 1995 and 1996, respectively 4,516 4,551
Additional paid-in capital 22,394,917 26,066,218
Accumulated deficit (21,939,837) (26,692,470)
Deferred compensation (164,587) (6,187)
------------ -----------
Total stockholders' equity (deficit) 351,559 (554,139)
------------ -----------
Total liabilities and stockholders'
equity (deficit) $2,693,625 $1,533,327
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
PHARMAGENICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------- ------------- -------------
Revenues:
Research contracts................................................... $ 1,529,595 $ 2,783,233 $ 1,137,671
License fees and royalties........................................... 250,614 766 4,553
Grants............................................................... 38,000 136,672 276,221
------------- ------------- -------------
Total revenues....................................................... 1,818,209 2,920,671 1,418,445
------------- ------------- -------------
Costs and expenses:
Research and development............................................. 5,821,540 4,608,271 4,498,839
General and administrative........................................... 1,447,501 1,388,095 1,756,164
------------- ------------- -------------
Total costs and expenses............................................. 7,269,041 5,996,366 6,255,003
------------- ------------- -------------
Loss from operations................................................. (5,450,832) (3,075,695) (4,836,558)
Interest expense..................................................... (125,801) (347,897) (36,349)
Interest income...................................................... 88,817 44,045 120,274
------------- ------------- -------------
NET LOSS............................................................. $ (5,487,816) $ (3,379,547) $ (4,752,633)
------------- ------------- -------------
------------- ------------- -------------
Net loss per common share............................................ $ (12.28) $ (7.49) $ (10.49)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common shares outstanding........................... 446,933 451,406 452,970
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
PHARMAGENICS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE CONVERTIBLE CONVERTIBLE ADDITIONAL
PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED DEFERRED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT COMPENSATION
------------ ------------- ---------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $ 21,600 $ 21,384 $ -- $ 4,338 $ 18,278,515 $(13,072,474) $ --
Issuance of warrants and shares
of common stock to acquire
technology rights -- -- -- 167 716,833 -- --
Issuance of shares of common
stock upon exercise of stock
options -- -- -- 7 510 -- --
Issuance of stock options at
below fair market value -- -- -- -- 394,500 -- (394,500)
Net loss -- -- -- -- -- (5,487,816) --
----------------------------------------------------------------------------------------------
Balance, December 31, 1994 21,600 21,384 -- 4,512 19,390,358 (18,560,290) (394,500)
Conversion of debt into Series C
Convertible Preferred Stock -- -- 9,770 -- 2,090,853 -- --
Issuance of Series C
Convertible Preferred Stock -- -- 3,796 -- 812,254 -- --
Issuance of warrants at below
fair market value -- -- -- -- 165,000 -- --
Issuance of shares of common
stock upon exercise of stock
options -- -- -- 4 334 -- --
Issuance of stock options at
below fair market value -- -- -- -- 33,000 -- (33,000)
Cancellation of stock options
upon employment termination -- -- -- -- (96,882) -- 96,882
Amortization of deferred
compensation -- -- -- -- -- -- 166,031
Net loss -- -- -- -- -- (3,379,547) --
----------------------------------------------------------------------------------------------
Balance, December 31, 1995 21,600 21,384 13,566 4,516 22,394,917 (21,939,837) (164,587)
Issuance of Series C
Convertible Preferred Stock -- -- 17,199 -- 3,680,723 -- --
Issuance of shares of common
stock upon exercise of stock
options -- -- -- 35 1,715 -- --
Cancellation of stock options
upon employment termination -- -- -- -- (11,137) -- 11,137
Amortization of deferred
compensation -- -- -- -- -- -- 147,263
Net loss -- -- -- -- -- (4,752,633) --
----------------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 21,600 $ 21,384 $ 30,765 $ 4,551 $ 26,066,218 $ (26,692,470) $ (6,187)
--------- --------- --------- --------- ------------- ------------- --------
--------- --------- --------- --------- ------------- ------------- --------
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDERS'
EQUITY (DEFICIT)
-----------------
<S> <C>
Balance, January 1, 1994 $ 5,253,363
Issuance of warrants and shares
of common stock to acquire
technology rights 717,000
Issuance of shares of common
stock upon exercise of stock
options 517
Issuance of stock options at
below fair market value --
Net loss (5,487,816)
-----------
Balance, December 31, 1994 483,064
Conversion of debt into Series C
Convertible Preferred Stock 2,100,623
Issuance of Series C
Convertible Preferred Stock 816,050
Issuance of warrants at below
fair market value 165,000
Issuance of shares of common
stock upon exercise of stock
options 338
Issuance of stock options at
below fair market value --
Cancellation of stock options
upon employment termination --
Amortization of deferred
compensation 166,031
Net loss (3,379,547)
-------------
Balance, December 31, 1995 351,559
Issuance of Series C
Convertible Preferred Stock 3,697,922
Issuance of shares of common
stock upon exercise of stock
options 1,750
Cancellation of stock options
upon employment termination --
Amortization of deferred
compensation 147,263
Net loss (4,752,633)
---------
Balance, December 31, 1996 $ (554,139)
----------
----------
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE>
PHARMAGENICS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------- ------------- -------------
Operating Activities:
Net loss $ (5,487,816) $ (3,379,547) $ (4,752,633)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 698,757 365,305 368,762
Technology rights acquired for common stock and warrants 717,000 -- --
Amortization of deferred compensation expense -- 166,031 147,263
Expense incurred with the issuance of warrants below fair market value -- 165,000 --
Interest on loans converted into Series C Convertible Preferred Stock -- 100,623 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable -- -- (185,972)
(Increase) decrease in prepaid expenses 30,403 26,007 (15,213)
(Increase) decrease in other assets 2,758 15,841 (5,000)
Increase (decrease) in accounts payable and accrued expenses 57,543 543,848 657,251
Increase (decrease) in deferred revenue 701,633 336,767 (723,200)
------------ ------------ ------------
Net cash used in operating activities (3,279,722) (1,660,125) (4,508,742)
------------ ------------ ------------
Investing Activities:
(Increase) decrease in investments 2,041,875 -- --
Capital expenditures (129,026) (34,290) (155,352)
------------ ------------ ------------
Net cash provided by (used in) investing activities 1,912,849 (34,290) (155,352)
------------ ------------ ------------
Financing Activities:
Payments on capital lease obligations (381,039) (235,829) (188,651)
Proceeds from issuance of common stock 517 338 1,750
Proceeds from loans converted into Series C Convertible Preferred Stock -- 2,000,000 --
Proceeds from the issuance of Series C Convertible Preferred Stock -- 816,050 3,697,922
------------ ------------ ------------
Net cash provided by (used in) financing activities (380,522) 2,580,559 3,511,021
------------ ------------ ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,747,395) 886,144 (1,153,073)
Cash and cash equivalents at beginning of year 2,500,433 753,038 1,639,182
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 753,038 $ 1,639,182 $ 486,109
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 125,801 $ 82,274 $ 36,349
------------ ------------ ------------
Property and equipment acquired under capital lease agreements $ 70,000 $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
PharmaGenics, Inc. (the "Company"), a Delaware corporation, was incorporated
on August 11, 1989. The Company is an integrated drug discovery company
principally engaged in the research and development of pharmaceuticals for
the treatment of cancer. The Company's research programs in cancer center
upon certain key genes, called "tumor suppressor genes," that are responsible
for the production of proteins that generally function to prevent the
unregulated growth of cells. The Company targets tumor suppressor genes and
other cancer-related genes in search of desirable therapeutics against cancer.
The Company is subject to a number of risks at this stage of development,
including, but not limited to, uncertainties relating to whether patents will
issue and whether patents that issue will provide the Company with adequate
protection from other products or competitors; dependence on key individuals
for achievement of the Company's expectations which the Company believes are
based on reasonable assumptions within the bounds of its knowledge of its
business and operations; continued collaboration between the Company and its
corporate, governmental and academic collaborators; establishment of
additional collaborations with academia or corporations; uncertainty whether
the Company's research and development activities will result in the
development of commercially usable products and processes; competition from
alternative products or processes; uncertainties related to technological
improvements and advances; the impact of research and product development
activities of competitors of the Company, many of whom have more substantial
financial or other resources than those of the Company; the need and ability
to obtain adequate additional financing necessary to fund continuing
operations and product development and the terms on which such financing
might be available; the ability to obtain lease financing for capital
equipment; uncertainties related to clinical trials; uncertainties of
obtaining required regulatory approvals; and uncertainties of future
profitability. The Company expects to incur substantial additional costs
before it can begin to generate revenue from product sales sufficient to fund
its operations, including costs related to ongoing research and development
activities, preclinical studies and regulatory compliance, and for hiring
additional management, scientific, manufacturing, sales and administrative
personnel.
The Company sold additional shares of Series C convertible preferred stock in
the first quarter of 1996 (Note 9) and, in connection with entering into an
Agreement and Plan of Merger as of January 31, 1997 (the "Merger Agreement")
with Genzyme Corporation ("Genzyme") (see below and Note 14), received a
stand-by credit facility (the "Credit Facility") (Note 8) under which the
Company made an initial draw of $1 million in February 1997. The Company
expects to make additional draws under the Credit Facility and believes that
the Credit Facility is sufficient to fund operations until the expected
closing of the proposed merger with Genzyme in May 1997. The Company will
require substantial additional funds should the proposed merger with Genzyme
not be consummated. Uncertainties relating to the proposed merger with
Genzyme and the Credit Facility are additional meaningful factors that could
cause actual results to differ from the Company's expectations.
Pursuant to the Merger Agreement and on the terms and conditions set forth
therein, subject to approval by the Company's stockholders and Genzyme's
stockholders and subject to certain other conditions, the Company is to be
merged with and into Genzyme (the "Proposed Merger") with Genzyme being the
surviving corporation. The business of the Company is to be combined with
several of Genzyme's oncology programs to form a new division of Genzyme to
be known as the Genzyme Molecular Oncology division (Note 14).
F-6
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments which
when purchased have a maturity of less than three months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets which
range from five to seven years. Leasehold improvements and equipment under
capital leases are amortized using the straight-line method over the shorter
of the lease term or the useful lives of the assets.
LONG-LIVED ASSETS
During 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets" ("SFAS 121"). SFAS 121 requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an
asset may not be fully recoverable. As a result of its review, the Company
does not believe that any impairment currently exists related to its
long-lived assets.
REVENUE RECOGNITION
License fees and royalties are recognized as revenue when earned. Revenues
under collaborative research and development agreements and grants are
recognized as earned over the term of the contracts and grants. Payments
received in advance under these agreements are recorded as deferred revenue
until earned.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
STOCK-BASED COMPENSATION
The Company adopted the disclosure requirement of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") for the year ended December 31, 1996 (Note 9). The Company
accounts for its stock options under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees."
F-7
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE
Net loss per common share was computed based on the weighted average number
of common shares outstanding during the year. Shares issuable upon conversion
of preferred stock or exercise of options and warrants were not considered,
as the effect would be antidilutive.
NOTE 2--COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Agreements with PaineWebber R&D Partners III, L.P.
In May 1994, the Company entered into a series of agreements (the "R&D
Agreements") with PaineWebber R&D Partners III, L.P. (the "Partnership"),
pursuant to which the Partnership paid a $250,000 license fee and agreed to
pay the Company up to $5,750,000 to conduct research and development on
behalf of the Partnership on targets identified by the Company pursuant to a
development plan originally projected to extend through March 1996, but which
continued through January, 1997. In consideration of such payments, the
Partnership obtained rights to the results of such research, and the Company
granted the Partnership an exclusive, royalty-free license to use certain
patent rights, know-how and technical information owned or licensed by the
Company. Under the R&D Agreements, upon the occurrence of certain events of
default (such as failure to perform its obligations, default on indebtedness,
insolvency, cessation of operations and others), the Company would be
obligated to make certain payments to the Partnership. In March 1995, the R&D
Agreements were modified to expand the area of research under the development
plan and to accelerate $750,000 of research funding under the R&D Agreements
into 1995. Under the R&D Agreements, the Company also received an option (the
"Purchase Option") to purchase at any time certain or all of the rights owned
by the Partnership as a result of the R&D Agreements (the "Partnership
Rights") at an option price ranging from $9.4 million up to $19.2 million,
depending upon the date of the purchase and the rights purchased. The R&D
Agreements provided that in the event the Company commenced Phase II clinical
trials on an agent developed under the R&D Agreements, the Company would be
obligated to exercise the purchase option. To date, the Company has not
commenced any Phase II clinical trials. In consideration for the Purchase
Option, the Company issued to the Partnership warrants to purchase up to
1,000,000 shares of the Company's common stock (the "Core Warrant") and up to
666,667 shares of the Company's common stock (the "Purchase Option Warrant").
The Core Warrant is exercisable for a period of five years which commenced
July 1, 1996, and the Purchase Option Warrant would have been exercisable for
a period of four years following termination of the Purchase Option. The
estimated fair value of $580,000 attributed to these warrants upon issuance
was charged to research and development expense in 1994. With the
modification of the R&D Agreements in March 1995, the exercise price on the
Core Warrant and the Purchase Option Warrant was fixed at $2.15 per share,
subject to antidilution provisions and other adjustments. In June 1995, the
Company executed and delivered a convertible note (the "Note") to the
Partnership under which the Company borrowed $1,000,000 at an interest rate
of prime plus two percentage points (Note 8). In lieu of repayment in cash,
the Note and accrued interest were converted into 480,242 shares of Series C
convertible preferred stock of the Company as of September 30, 1995, which
thereby reduced by $1,000,000 research funding from the Partnership under the
R&D Agreements.
In January 1997, in connection with the Proposed Merger (Note 14), the
Partnership exercised its option under the R&D Agreements to exchange the
Partnership Rights for additional shares of the Company's preferred stock.
This option became exercisable upon the signing of the Merger Agreement and
as a result of such exercise, the Company issued to the Partnership in
February 1997 298,420 shares of Series A convertible preferred stock, 88,864
shares of Series B convertible preferred stock and 1,641,144 shares of Series
C convertible preferred stock. The liquidation preference amount of these
preferred shares, $4,750,000, was charged to research and development expense
in the first quarter of 1997 because the acquired technology and other rights
relate to in-process research and development projects that have not yet
reached technological feasibility and the technology currently has no
alternative future uses. Upon the exercise of the exchange option by the
Partnership, the Purchase Option Warrant and the R&D Agreements terminated.
In addition, upon the completion of the Proposed Merger, the Core Warrant
will be
F-8
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2--Collaborative Research and Development Agreements (continued)
cancelled.
The Company recognized $1,650,000, $2,311,600 and $723,200 of revenues under
the R&D Agreements in 1994, 1995 and 1996, respectively. In addition, as of
December 31, 1995 and 1996, the Company had received $1,038,400 and $315,200,
respectively, of deferred revenue under the R&D Agreements, which relate to
research activities yet to be completed as of such dates. All funding
pursuant to the R&D Agreements had been received as of December 31, 1995.
OTHER AGREEMENTS
The Company has entered into other collaborative research and development
agreements, some of which provide for payments to the Company. The Company
earned $129,595 in 1994, $471,633 in 1995 and $414,471 in 1996 under these
agreements. (Note 10)
NOTE 3--RESEARCH AND LICENSE AGREEMENTS
AGREEMENTS WITH THE JOHNS HOPKINS UNIVERSITY
In March 1991, the Company entered into a Research Agreement (the "Research
Agreement") with The Johns Hopkins University School of Medicine ("JHU") and
Hoffmann-La Roche Inc. ("Roche"), and in February 1992, the Company entered
into a License Agreement (the "License Agreement") with JHU and Roche
(collectively, the "JHU Agreements"), pursuant to which the Company made
unrestricted research grants to the Basic Cancer Research Foundation and JHU
of approximately $818,000 to fund research conducted at JHU by Dr. Bert
Vogelstein. Dr. Vogelstein has had the sole discretion to determine research
activities within the specified research areas, which include cancer and
virology. In return for these payments, JHU granted to the Company and Roche
a worldwide, exclusive, royalty-bearing license to all technology developed
within the specified research area pursuant to the JHU Agreements. In
February 1995, the Research Agreement terminated, with certain provisions
remaining in effect through August 1995. Certain rights granted to Roche and
the Company by JHU, and certain of the obligations of Roche and the Company
to JHU (such as maintaining confidentiality of information, not using JHU's
name without their consent, not bringing suit against JHU as a result of any
dispute which arises between Roche and the Company and to reimburse JHU for
their costs in the event they are involved in such dispute), survived the
termination of the Research Agreement. The License Agreement continues,
subject to scheduled royalty payments, until the expiration of the patents
licensed thereunder.
The Company and Roche also entered into supplementary agreements (the "Roche
Agreements") regarding the development and commercialization of any
technology developed by Dr. Vogelstein in the research areas specified in the
JHU Agreements. Pursuant to an initial agreement with Roche, Roche obtained
the first option to license from JHU any diagnostic applications, the Company
obtained a license from JHU to any oligonucleotide-based therapeutic
applications and the Company and Roche jointly obtained a license from JHU to
any therapeutic applications that are not oligonucleotide-based. Roche has
agreed to pay the Company royalties at varying rates on sales of any products
developed by Roche stemming from Dr. Vogelstein's research. Additionally,
Roche obtained first option rights (the "First Option Rights") to act as the
Company's partner for research and development programs relating to Dr.
Vogelstein's technology. At Roche's option, Roche could choose to pay the
Company to provide mutually agreed upon research and development services for
diagnostic products. In May 1996, Roche decided not to develop certain
inventions licensed from JHU and the Company exercised its option, which did
not require any additional payment, to assume the rights to all of those
inventions. In October 1996, Roche and the Company signed a term sheet under
which the Company will be provided a sublicense to any and all diagnostic
products and
F-9
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3--Research and License Agreements (continued)
applications to which Roche retains rights under the License Agreement, and
the Company is granted the exclusive right to sublicense to third parties
Roche's rights to diagnostic products and applications under the License
Agreement, exclusive of those rights to certain antibody-based diagnostics
that Roche has assigned to a third party. The term sheet also provides for
royalties to Roche and sharing of revenues between the Company and Roche.
In March 1994, in consideration of 16,666 shares of the Company's common
stock and warrants to acquire 50,000 shares (of which one-third at an
exercise price of $10.50 per share expired in March 1995 and the second third
at an exercise price of $15.00 per share expired in March 1996 and the final
third at an exercise price of $24.00 per share expire in March 1997) of
common stock, Roche waived the First Option Rights so that the Company may
freely seek partners for its Vogelstein-related research and development
programs. The estimated fair value attributable to these shares and warrants
of $137,000 was charged to research and development expense in 1994.
Effective September 1995, the Company entered into a license agreement (the
"SAGE Agreement") with JHU and Drs. Bert Vogelstein and Kenneth Kinzler, both
of JHU, relating to the SAGE technology. In addition to substantial license
fees paid and milestone payments to be made by the Company to retain an
exclusive license, the agreement provides for certain additional payments to
be made by the Company to JHU in the event the Company sublicenses SAGE
technology to third parties or performs SAGE-related services on behalf of
third parties.
In January 1997, in contemplation of the Proposed Merger (Note 14), the SAGE
Agreement was amended to waive any possible right JHU may have to a potential
payment of $5 million resulting from the change of control which would arise
from the Proposed Merger in exchange for 43,200 shares of the Company's
Series B convertible preferred stock to be issued to JHU. If the Proposed
Merger is not consummated, the amendment to the SAGE Agreement shall become
null and void and the 43,200 shares of the Company's Series B convertible
preferred stock will not be issued to JHU. The Company is currently in
discussions with JHU regarding a license to other present and future
discoveries of Dr. Kinzler, some of which were, or may be, created in
collaboration with Dr. Vogelstein.
NOTE 4--Accounts Receivable
In the fourth quarter of 1996, the Company recognized $185,972 of revenue
earned under an award by the U.S. National Cancer Institute ("NCI") in the
form of a Cooperative Grant. The Company has received notice from NCI that
funding is authorized for the second budget year, which had begun in
September of 1996, of the grant but the Company has not yet obtained funds
available under the grant to settle this receivable.
NOTE 5--Property and Equipment
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1995 1996
------------ ------------
Laboratory and office............................................. $ 1,980,378 $ 2,134,630
Leasehold improvements............................................ 721,650 721,650
------------ ------------
2,702,028 2,856,280
Less: Accumulated depreciation.................................... (1,705,980) (2,073,642)
------------ ------------
$ 996,048 $ 782,638
------------ ------------
------------ ------------
</TABLE>
F-10
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
<S> <C> <C>
1995 1996
---------- ------------
Accounts payable.................................................... $ 94,912 $ 152,216
Vacation and other employee benefits................................ 84,379 95,139
Legal and professional fees......................................... 129,850 342,254
Collaborative arrangements.......................................... 550,000 845,870
Other accrued expenses.............................................. 83,595 164,508
---------- ------------
$ 942,736 $ 1,599,987
---------- ------------
---------- ------------
</TABLE>
The accrual for collaborative arrangements relates primarily to JHU for 1996
and solely to JHU for 1995 (Note 3). Other accrued expenses for 1996 includes
an accrual for settlement of a lawsuit (Note 14).
NOTE 7--LEASES
CAPITAL LEASE OBLIGATIONS
In April 1991, the Company entered into a master lease agreement and granted
the lessor a warrant to purchase 41,580 shares of the Company's Series A
convertible preferred stock at $1.85 per share for a term of ten years. In
September 1993, the Company entered into a master lease agreement and granted
the lessor a warrant to purchase 10,000 shares of the Company's common stock
at $7.50 per share for a term of up to ten years. These warrants contain
certain anti-dilution and/or registration rights.
The master lease agreement entered into in September 1993 provides the
Company the option, effective as of the expiration of the initial lease term,
to purchase the equipment at fair market value or to renew the lease at
market value for a minimum of twelve months and a maximum of thirty-six
months, whereby at the end of such renewal period the Company is obligated to
purchase the equipment at fair market value. The Company has not exercised
either of the foregoing options and, in accordance with the terms of the
lease, the lease has been renewed on a month-to-month basis at the monthly
payment in effect immediately prior to the expiration of the initial lease
term. The initial lease term expired in September 1996 on certain equipment
and in December 1996 on the remaining equipment. The Company has classified
approximately $133,000 as a current lease obligation reflecting the Company's
obligation to purchase the equipment and its current intention to exercise
its purchase option in 1997.
Leased equipment with a cost of $820,000 as of December 31, 1995 and 1996 is
included in property and equipment. Future minimum payments under capital
lease obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- -----------------------------------------------------------------------
<S> <C>
1997 $ 150,160
1998 17,160
1999 10,010
---------
177,330
Less amount representing interest 5,051
---------
172,279
Less current portion 147,102
---------
Long-term portion $ 25,177
---------
---------
</TABLE>
F-11
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - LEASES (CONTINUED)
OPERATING LEASE
The lease on the Company's office and research facilities expires on December
31, 1999 and contains two three-year renewal options. Monthly rent for the
remainder of the original lease term is approximately $17,600 basic rent plus
maintenance and other costs. Accordingly, as of December 31, 1996, the
minimum basic rent commitment for the remainder of the original lease term is
$633,600. Rent expense was approximately $297,768, $268,162 and $274,105 in
1994, 1995 and 1996, respectively.
NOTE 8--LOAN AGREEMENTS
In February 1995, the Company entered into a loan agreement (the "Loan") with
certain lenders, who were existing stockholders or affiliates of existing
stockholders at the time of entering into the Loan, under which the Company
borrowed an aggregate of $1 million at an interest rate of prime plus two
percentage points. In connection with the Loan, the Company granted the
lenders warrants to purchase an aggregate of 100,000 shares of common stock
at an exercise price of $0.50 per share for a term of up to ten years and
recorded an expense of $165,000 in 1995 relating to the warrants. The Loan
and accrued interest, totalling approximately $1,068,100 were converted into
496,792 shares of Series C convertible preferred stock of the Company as of
September 30, 1995.
In June 1995, the Company executed and delivered a convertible note (the
"Note") to the Partnership under which the Company borrowed $1 million at an
interest rate of prime plus two percentage points. In lieu of repayment in
cash, the Note and accrued interest, totalling approximately $1,032,500, were
converted into 480,242 shares of Series C convertible preferred stock of the
Company as of September 30, 1995 (Note 9), and thereby reduced by $1 million
research funding from the Partnership under the R&D Agreements (Note 2).
In October 1996, in anticipation of entering into the Merger Agreement,
Genzyme made available to the Company the Credit Facility under which the
Company may draw monthly an amount equal to its documented operating costs,
up to a specified maximum amount each month. Amounts not drawn by the Company
in a designated month are available to cover documented operating costs in a
later month, subject to certain limitations based on revenues. Amounts drawn
by the Company under the Credit Facility are evidenced by a Subordinated
Convertible Promissory Note (the "Promissory Note"). The Promissory Note
bears interest from the date of each draw at a rate of 8.25% per annum and
matures on February 10, 2002. The Company made an initial draw of $1 million
in February 1997, after the signing of the Merger Agreement. (Note 14)
NOTE 9--STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
During 1991, the Company issued 2,160,000 shares of Series A convertible
preferred stock ("Series A Stock") and warrants to purchase 486,000 shares of
common stock at $0.462 per share expiring in September 2001 for net proceeds
of approximately $3,958,000.
In November 1991, the Company issued 1,944,000 shares of Series B
convertible preferred stock ("Series B Stock") and warrants to purchase 121,285
shares of common stock pursuant to a private placement (the "Offering"). The
warrants, which were exercisable at $7.50 per share commencing 180 days after
the effective date of an initial public offering of the Company's common stock,
expired on November 14, 1996. The selling agent for the Offering received
warrants, which also expired on November 14, 1996, to purchase 194,400 shares of
common stock at $7.50 per share. Additionally,
F-12
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9-- Stockholders' Equity(continued)
the Company issued 194,399 shares of Series B Stock and warrants, which
expired on November 14, 1996, to purchase 13,500 shares of common stock at
$7.50 per share to an investor group consisting of HealthCare Ventures II,
L.P. ("HCV II"), the Company's principal stockholder, and limited partners of
HCV II. The net proceeds from these sales of Series B Stock and warrants were
approximately $14,356,000.
As of September 30, 1995, the Company converted the Loan (Note 8) and the
Note (Note 8) together with accrued interest into 977,034 shares of Series C
convertible preferred stock ("Series C Stock"). In December 1995, the Company
commenced a private placement offering of Series C Stock and held an initial
closing on 379,558 shares of Series C Stock for proceeds to the Company of
approximately $816,000 from this initial closing. In February 1996, the
Company held a final closing on the sale of 1,719,964 additional shares of
Series C Stock for proceeds to the Company of approximately $3,698,000. The
offering was made directly by the Company to the holders of the Company's
other preferred stock and to new investors. Total shares of Series C Stock
sold in the private placement were 2,099,522 and proceeds to the Company were
approximately $4,514,000.
The Series A Stock, Series B Stock and Series C Stock are convertible into
common shares on a one-to-one basis, subject to certain adjustments. The
holders of the Series A Stock, Series B Stock and Series C Stock have certain
dividend, liquidation and registration rights, as defined, and voting rights
equivalent to the voting rights of common stockholders based on the number of
common shares they would own pursuant to the conversion calculation. In the
event of a public offering of the Company's common stock at a price per share
of at least $7.50 and proceeds to the Company of at least $10 million, each
share of Series A Stock, Series B Stock and Series C Stock will be
automatically converted into one share of common stock, subject to adjustment
for stock dividends and splits.
For the effect of the Proposed Merger on the Company's preferred stock, see
Note 14.
COMMON STOCK
438,442 shares of common stock currently issued are subject to repurchase
and/or first refusal rights. For the effect of the Proposed Merger on the
Company's common stock, see Note 14.
WARRANTS
Warrants outstanding at December 31, 1996 include the following:
<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING STOCK WARRANT SHARES REFERENCE
- ------------------------------- ---------------------------- --------------
<S> <C> <C>
Series A Convertible Preferred 41,580 Note 7
--------------
--------------
Common 1,000,000 Note 2
Common 666,667 Note 2
Common 486,000 Note 9
Common 100,000 Note 8
Common 16,666 Note 3
Common 10,000 Note 7
--------------
2,279,333
--------------
--------------
</TABLE>
For the effect of the Proposed Merger on the warrants and underlying stock,
see Note 14.
F-13
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9-- Stockholders' Equity(continued)
STOCK OPTIONS
The Company has reserved 455,283, 483,333 and 133,333 shares of common stock
under the 1991 Stock Option Plan, as amended, the 1993 Stock Option Plan, as
amended, and the 1994 Independent Directors Stock Option Plan, as amended,
respectively, for the granting of either incentive stock options or
nonqualified stock options. In addition, the Board of Directors approved,
subject to stockholder approval, an increase of 416,667 shares authorized
under the 1993 Stock Option Plan. The exercise price of all incentive stock
options must be at least equal to the fair market value of such shares on the
date of the grant. The exercise price of the nonqualified stock options is to
be determined by the Board of Directors. Options vest over various periods
not exceeding four years and expire no later than ten years from grant date.
Option activity for the above plans is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE EXERCISE PRICE
- ------------------------------------------------------------------------ ------------- ----------------
<S> <C> <C> <C>
Balance, January 1, 1994 247,024
Granted 601,013 $ 0.50--$8.10
Exercised (694) $ 0.093--$6.75
Cancelled (249,291) $ 0.093--$8.10
-------------
Balance, December 31, 1994 598,052 $ 0.093--$8.10 $ 1.37
Granted 141,896 $ 0.50--$2.15 $ 1.92
Exercised (400) $ 0.50--$1.875 $ 0.84
Cancelled (137,158) $ 0.462--$2.15 $ 1.20
-------------
Balance, December 31, 1995 602,390 $ 0.093--$8.10 $ 1.55
Granted 249,890 $ 2.15--$2.30 $ 2.29
Exercised (3,500) $ 0.50 $ 0.50
Cancelled (88,501) $ 0.462--$2.30 $ 1.98
-------------
Balance, December 31, 1996 760,279 $ 0.093--$8.10 $ 1.75
</TABLE>
At December 31, 1996, options were exercisable for the purchase of 405,849
shares of common stock at a weighted-average exercise price of $1.23. Options
to purchase 33,747 shares of common stock were available for future grants
under the 1991 and 1993 stock option plans at December 31, 1996. Options to
purchase 93,333 shares of common stock were available for future grants under
the 1994 Independent Directors Stock Option Plan at December 31, 1996.
In September 1994, the Compensation Committee of the Board of Directors
approved the granting of new options with an exercise price of $2.15 per
share under the 1991 and 1993 Stock Option Plans in exchange for the
cancellation of certain older options at exercise prices ranging from $6.75
to $8.10 per share. Under this offer, the Company has exchanged options to
acquire 179,277 shares, including options to acquire 48,502 shares granted to
officers and directors of the Company.
The Company has recorded deferred compensation of $394,500 in 1994 and
$33,000 in 1995 for the deemed accounting value of certain nonqualified stock
option grants made to employees in December 1994 and to certain new employees
in 1995, respectively. No deferred compensation was recorded in 1996.
Deferred compensation is being amortized to compensation expense ratably over
the vesting period of the options. In 1995 and 1996, $166,031 and $147,263,
respectively, of deferred compensation was amortized to compensation expense.
F-14
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9-- Stockholders' Equity(continued)
The Company accounts for its stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation expense (except for those options granted at an excercise price
below the fair market value of the underlying stock on the date of grant) has
been recognized. Pro forma information regarding net loss and net loss per
share is required by SFAS 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS 123. The
fair value of the stock options was estimated at the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1995
and 1996, respectively: risk-free interest rates ranging from 5.84% to 6.12%
and 6.27% to 6.65%; dividend yield and common stock price volatility of zero;
and an expected life of the option of 6 years. The weighted-average fair
value of the options granted during 1995 and 1996 was $0.86 and $0.75,
respectively. For purposes of pro forma disclosures, the estimated fair value
of stock options is amortized to expense over the vesting period of the
options. The Company's pro forma net loss and net loss per share for 1995 do
not differ materially from the amounts reported. For 1996, the Company's pro
forma net loss and net loss per share was $4,775,933 and $10.54,
respectively. Because SFAS 123 has not been applied to stock options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not
be representative of the possible compensation cost in future years.
For the effect of the Proposed Merger on the stock options and underlying
stock, see Note 14.
NOTE 10--RELATED PARTY TRANSACTIONS
Research and development contract revenue earned under an agreement with
Genetic Therapy, Inc. ("GTI") was $100,000 in each of 1994 and 1995 and
$25,000 in 1996. HCV II, a principal stockholder of the Company, was a
principal stockholder of GTI prior to the acquisition of GTI by Novartis
(formerly Sandoz, Inc.). See Note 2 for additional related party activity.
NOTE 11--EMPLOYMENT AND CONSULTING AGREEMENTS
In June 1993, the Company entered into an employment agreement with Dr.
Sherman, its president and chief executive officer, for a term of three
years, providing for an annual base salary of $230,000, subject to adjustment
on an annual basis, and an annual bonus of at least $20,000. In June 1996,
the Company and Dr. Sherman entered into a new employment agreement with an
initial term of three years ending on June 30, 1999, with automatic one-year
renewals thereafter, unless earlier terminated by either party upon 60 days
notice prior to the end of the then current term. The new agreement provides
for an annual base salary of $242,650, subject to adjustment on an annual
basis, and an annual bonus of at least $20,000. The new agreement further
provides that in the event that prior to March 31, 1997 the Company had a
change in control or received commitments for additional financing of at
least $3,000,000 in the aggregate, Dr. Sherman's annual base salary would be
increased from $242,650 to $260,000, retroactive to July 1, 1996. The Company
believes that the Credit Facility (Note 8) satisfied this requirement, and
accordingly, effective February 1997, Dr. Sherman's annual base salary was
raised to $260,000, retroactive to July 1, 1996. If Dr. Sherman's employment
is terminated, other than for cause, he will be entitled to salary
continuation for a period of twelve months.
The Company has also entered into various other employment and consulting
agreements. In connection with certain of the agreements, the Company issued
restricted common stock and granted options to purchase shares of common
stock (Note 9). Each executive officer (other than Dr. Sherman) is entitled
to a severance payment equal to 3 months salary if his employment is
terminated without cause.
F-15
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12--SAVINGS PLAN
The Company maintains a savings plan under Section 401(k) of the Internal
Revenue Code which allows eligible employees to contribute a portion of their
annual salary to the savings plan. The Company may make discretionary
contributions. Through December 31, 1996, the Company has not made any
contributions to this plan.
NOTE 13--INCOME TAXES
At December 31, 1996, the Company had net operating loss ("NOL") tax
carryforwards aggregating approximately $23.1 million. The NOL carryforwards
expire in various years from 2005 through 2011. Pursuant to Federal income
tax regulations, the annual use of the Company's NOL carryforwards may be
limited if a cumulative change in ownership of more than fifty percent occurs
in a three year period. The Proposed Merger (Note 14) is expected to result
in a limit on the annual use of the Company's NOL carryforwards by Genzyme.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." A
valuation allowance was established as realization of the tax assets is
uncertain. The components of the deferred tax amounts, carryforwards and the
valuation allowance are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Start-up costs $ 800,000 $ 535,000
Other temporary differences 900,000 695,000
NOL carryforwards 6,950,000 9,250,000
----------- -------------
Total gross deferred tax assets 8,650,000 10,480,000
Valuation allowance (8,650,000) (10,480,000)
----------- -------------
Net deferred tax assets $ -- $ --
----------- -------------
----------- -------------
</TABLE>
NOTE 14--Events Subsequent to December 31, 1996
On January 24, 1997, the Company and LBC Captial Resources, Inc. ("LBC")
executed an agreement which settled an action brought by LBC on July 19, 1996
against the Company in the Superior Court of New Jersey in Bergen County
alleging breach of contract and related causes of action arising out of an
agreement between the Company and LBC that obligated LBC to assist the
Company in finding new sources of capital. LBC asserted in such action that
the Company improperly declined to pay LBC a commission in accordance with
the agreement and sought damages in excess of $150,000. The Company made a
settlement payment of $62,000 to LBC in January 1997. This amount was accrued
as a charge to general and administrative expense in 1996.
As of January 31, 1997, the Company and Genzyme entered into the Merger
Agreement pursuant to which the Company, on the terms and conditions set
forth in the Merger Agreement, is to be merged with and into Genzyme with
Genzyme being the surviving corporation. This Proposed Merger is intended to
be a tax-free reorganization within the meaning of the Internal Revenue Code.
As consideration for the Proposed Merger, the Company's stockholders are to
receive approximately 4 million shares (subject to certain adjustments set
forth in the Merger Agreement) of a new Genzyme security (the "GMO Stock"),
representing 40% of the initial equity interest in a new division of Genzyme,
to be known as the Genzyme Molecular Oncology division (the "GMO Division"),
to be formed within Genzyme through the combination of the business of the
Company with several of Genzyme's oncology programs. Because the Company's
Certificate of Incorporation requires that, in a transaction such as the
Proposed Merger, an aggregate merger preference be provided to holders
F-16
<PAGE>
PHARMAGENICS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14--Events Subsequent to December 31, 1996 (continued)
of the outstanding shares of the Company's preferred stock before any amounts
can be provided to holders of outstanding shares of the Company's common
stock, and because such aggregate merger preference exceeds the aggregate
value of the 4 million shares of GMO Stock to be received in the Proposed
Merger (based on the valuation given the GMO Stock under the Merger
Agreement), no shares of GMO Stock are available for allocation to holders of
the outstanding shares of the Company's common stock (including stock options
and warrants for common stock). The Proposed Merger currently is expected to
be completed in May 1997, subject to approval by the Company's stockholders
and Genzyme's stockholders and subject to certain other conditions. As
required by the Merger Agreement, directors, officers and certain other
stockholders of the Company have entered into stockholder agreements with
Genzyme pursuant to which they have agreed to vote in favor of the Proposed
Merger. The number of shares subject to such agreements is sufficient to
approve the Proposed Merger.
In January 1997, in contemplation of the Proposed Merger, the Company agreed
to issue to JHU 43,200 shares of the Company's Series B Stock immediately
prior to the consummation of the Proposed Merger in consideration of an
amendment dated as of January 31, 1997 (the "SAGE Amendment") to the SAGE
Agreement (Note 3). If the Proposed Merger is not consummated, the SAGE
Amendment shall become null and void and the foregoing 43,200 shares of the
Company's Series B Stock will not be issued to JHU.
In February 1997, in connection with the Proposed Merger, the Company issued
to the Partnership 298,420 shares of the Company's Series A Stock, 88,864
shares of the Company's Series B Stock and 1,641,144 shares of the Company's
Series C Stock pursuant to the Partnership's exercise of its option to
exchange all of its Partnership Rights for shares of the Company's preferred
stock. (Note 2)
In February 1997, the Company made an initial draw of $1 million under the
Credit Facility (Note 8).
F-17
<PAGE>
SIGNATURES
Pursuant to requirements of Section 13 of 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: April 2, 1997 PHARMAGENICS, INC.
BY: /S/ MICHAEL I. SHERMAN
-----------------------------------------
Michael I. Sherman, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
BY: /S/ A. STEVEN FRANCHAK
-----------------------------------------
A. Steven Franchak,
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons, which include at least a
majority of the Board of Directors on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- --------------
/s/ MICHAEL I. SHERMAN President, Chief Executive
- ------------------------------ Officer and Director April 2, 1997
Michael I. Sherman
/s/ A. STEVEN FRANCHAK Vice President, Chief
- ------------------------------ Financial Officer, April 2, 1997
A. Steven Franchak Treasurer and Director
/s/ JACK L. BOWMAN Director
- ------------------------------ April 2, 1997
Jack L. Bowman
/s/ STELIOS PAPADOPOULOS Director
- ------------------------------ April 2, 1997
Stelios Papadopoulos
/s/ ANDERS P. WIKLUND Director
- ------------------------------ April 2, 1997
Anders P. Wiklund
/s/ JAMES I. WYER Director
- ------------------------------ April 2, 1997
James I. Wyer
<PAGE>
Exhibit 10.52(a)
AMENDMENT TO LICENSE AGREEMENT
(Gene Sequencing)
AMENDMENT TO LICENSE AGREEMENT (Gene Sequencing), dated as of
January 31, 1997 (this "Agreement"), among THE JOHNS HOPKINS UNIVERSITY, a
Maryland corporation ("JHU"), and PHARMAGENICS, INC., a Delaware corporation
("PGI").
WITNESSETH
WHEREAS, JHU and PGI are parties to that certain License Agreement
(Gene Sequencing), dated as of September 1, 1995 (the "License Agreement")
(unless otherwise defined herein, terms defined in the License Agreement are
used herein as therein defined);
WHEREAS, Section 4.6 of the License Agreement provides, among other
things, that in the event PGI merges with an entity whose shares are publicly
traded on the New York Stock Exchange and/or the entity has a fair market
value of at least one billion dollars, PGI is required to pay to JHU the sum
of five million dollars (the "Payment");
WHEREAS, PGI has informed JHU that PGI is currently considering, and
expects to complete, a merger (the "Merger") with Genzyme Corporation
("Genzyme"), a Massachusetts corporation, the consummation of which might be
deemed to require the Payment pursuant to the terms of Section 4.6 of the
License Agreement; and
WHEREAS, JHU and PGI desire to amend the License Agreement, in
consideration of the issuance to JHU of shares of PGI preferred stock to
provide that the Payment shall not be required to be made with respect to the
Merger.
NOW, THEREFORE, in consideration of the foregoing and for other
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto, intending to be legally bound, hereby agree as follows:
1. Amendments.
(a) Section 4.6 of the License Agreement is hereby deleted in
its entirety and replaced with the following:
"4.6 (a) In the event PGI is acquired by or merges with an
entity whose shares are publicly traded on the New York Stock
Exchange and/or the entity has a fair market value of at least
one billion dollars, then PGI shall pay to UNIVERSITY five
million dollars as soon as practical after the acquisition or
merger.
<PAGE>
(b) Notwithstanding anything to the contrary herein, any
payments required under this Section 4.6 shall only be payable to
UNIVERSITY once regardless of the number of license agreements in
effect between the parties hereto which contain this provision.
(c) Notwithstanding anything to the contrary herein, no
payments shall be required under this Section 4.6 in respect of
the merger of PGI and Genzyme Corporation.
(d) From and after the completion of the merger of PGI and
Genzyme Corporation, the payment required under this Section 4.6
shall only be required to be made in the event that:
(i) the GMO Division assigns or transfers the
exclusive right to use the Serial Analysis of Gene Expression
("SAGE") technology licensed from JHU for third parties to either
(a) the General Division or any other division, subsidiary or
business unit of Genzyme or (b) an entity described in paragraph
(a); or
(ii) Genzyme and/or the GMO Division sells all or
substantially all of the assets of the GMO Division to an entity
whose shares are publicly traded on the New York Stock Exchange
and/or has a fair market value of at least one billion dollars."
(iii) any division, subsidiary or business unit of
Genzyme other than the GMO Division makes, uses and/or sells
LICENSED PRODUCTS and/or LICENSED SERVICES under the PATENT
RIGHTS and/or COMPUTER SOFTWARE without payment to UNIVERSITY
under Paragraphs 4.1, 4.2 or 4.4 hereof.
(e) The amount of license fees and running royalties paid
by the GMO Division to UNIVERSITY pursuant to Sections 4.1, 4.2
and 4.4 hereof to UNIVERSITY pursuant to Section 4.9 shall be
credited against any payment required to be made under this
Section 4.6.
(b) Section 4.9 of the License Agreement is hereby amended by
adding thereto the following provision:
2
<PAGE>
"With respect to the calculation of NET SERVICE REVENUE or NET
SALES with respect to any transaction between the GMO Division
and any other division, subsidiary or business unit of Genzyme
Corporation ("Genzyme"), such amounts will be based on the actual
cost to Genzyme of such transaction; provided, however, that all
such costs shall be determined by Genzyme on a consistent basis
with the calculation of similar costs between other divisions,
subsidiaries or business units of Genzyme. In addition, NET
SERVICE REVENUE and NET SALES shall include all sales of LICENSED
PRODUCTS and all LICENSED SERVICES performed by the GMO Division
or by Genzyme."
2. Issuance of PGI Stock. In consideration of entering into this
Agreement, PGI shall, immediately prior to the consummation of the Merger,
issue to JHU 43,200 shares of PGI Series B Convertible Preferred Stock (the
"Stock"). The certificates evidencing the Stock shall, prior to the
completion of the Merger, be held by PGI. As a result of the Merger, the
Stock will be converted into the right to receive approximately 40,000 shares
of "GMO Stock", as defined, and subject to adjustment as described, in the
Merger Agreement.
3. Sponsored Research Agreements. Following completion of the
Merger, and as a condition to this Agreement, the GMO Division shall enter
into a sponsored research agreement with the research lab operated by Dr.
Kenneth Kinzler at the UNIVERSITY and a 2nd Amendment to the License
Agreement substantially in the form of the draft agreements previously
furnished to PGI (drafts dated 1/21/97).
4. Representations and Warranties of JHU with Respect to PGI
Stock. JHU represents and warrants to, and agrees with, PGI that the Stock
is being acquired for JHU's own account, for investment purposes only, not
for the account of any other person, and not with a view to resale to others.
JHU will not sell, hypothecate or otherwise transfer any of the Stock
unless: (a) there is an effective registration statement under the Securities
Act of 1933, as amended (the "Act"), and applicable state securities laws
covering any such transaction involving such securities; or (b) in the
opinion of counsel, concurred in by counsel to PGI, an exemption from the
registration requirements of the Act and such state laws is available.
5. Termination of Waiver Agreement. If the Merger is not
consummated, all of the changes to the License Agreement set forth in this
Agreement shall terminate and become null and void and novated and the stock
of PGI issued pursuant to Section 2 of
3
<PAGE>
this Agreement shall be cancelled and returned to PGI and the License
Agreement, as originally executed, shall be reinstated and continue in full
force and effect as though this Agreement had never been executed.
6. Effect. Except as expressly provided herein, the License
Agreement shall continue to be, and shall remain, unaltered and in full force
and effect in accordance with its terms.
7. Miscellaneous.
(a) Governing law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Maryland.
(b) Successor and Assigns. The terms and provisions of this
Agreement shall be binding upon and shall inure to the benefit of JHU and PGI
and their respective successors and assigns.
(c) Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, and all
of which shall constitute one and the same instrument.
(d) Headings. The headings of any paragraph of this Agreement
are for convenience only and shall not be used to interpret any provision
hereof.
(e) Modifications. No modification hereof or any agreement
referred to herein shall be binding or enforceable unless in writing and
signed on behalf of the party against whom enforcement is sought.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers
as of the day and year first above written.
THE JOHN HOPKINS UNIVERSITY
/s/ N. Franklin Adkinson, Jr.
_________________________________________
By: N. Franklin Adkinson, Jr., M.D.
Title: Interim Vice Dean for Research
PHARMAGENICS, INC.
/s/ Michael I. Sherman
________________________________________
By: Michael I. Sherman, Ph.D.
Title: President and CEO
4
<PAGE>
Exhibit 10.66
[LETTERHEAD]
January 10, 1997
Confidential
PharmaGenics, Inc.
4 Pearl Court
Allendale, NJ 07401
Attention: Michael I. Sherman, Ph.D.
Gentlemen:
PaineWebber Incorporated ("PaineWebber") is pleased to act as exclusive
financial advisor to PharmaGenics, Inc. (the "Company") and its affiliates in
connection with any proposed sale transaction involving the Company and
another party (a "Purchaser"), including Genzyme Corporation or any of its
subsidiaries or affiliates ("Genzyme"). This Agreement supersedes in its
entirety the engagement letter dated August 15, 1996. This Agreement confirms
the terms of our engagement.
As used in this Agreement, the term "sale transaction" means, whether
effected in one transaction or a series of transactions: (a) any merger,
consolidation, reorganization or other business combination pursuant to which
the business of the Company is combined with that of a Purchaser or (b) the
acquisition, directly or indirectly, by a Purchaser of more than 35% of the
capital stock or assets of the Company by way of a negotiated purchase or
otherwise.
On the terms and subject to the conditions of this Agreement,
PaineWebber will assist the Company in identifying Purchasers and in
analyzing, structuring, negotiating and effecting proposed sale transactions.
If requested by the Company, PaineWebber will render an opinion (the
"Opinion") as to whether or not the consideration to be received in a
proposed sale transaction is fair, from a financial point of view, to the
Company. If an Opinion is requested, the Company will pay PaineWebber $50,000
in cash upon delivery of such Opinion.
If, (a) during this engagement, the Company enters into a definitive
agreement with Genzyme, or (b) within two years after the termination of this
engagement the Company enters into a definitive agreement which subsequently
results in a sale transaction with Genzyme, the Company will pay PaineWebber
a transaction fee in the amount of $500,000, such transaction fee to be paid
in cash no later than December 15, 1997. Any fee paid to PaineWebber pursuant
to the previous paragraph will be credited in full against this transaction
fee.
-1-
<PAGE>
If, (a) during this engagement, the Company enters into a definitive
agreement with a Purchaser other than Genzyme ("Non-Genzyme Purchaser"), or
(b) within two years after the termination of this engagement the Company
enters into a definitive agreement which subsequently results in a sale
transaction with a Non-Genzyme Purchaser which in the case of either clause
(a) or (b) above, (i) PaineWebber identified, or (ii) PaineWebber advised the
Company regarding a sale transaction, in any such case during the term of
this engagement, the Company will pay PaineWebber a transaction fee in an
amount based on the purchase price and calculated pursuant to the attached
Schedule I, payable at the Non-Genzyme Purchaser's option (i) in cash, (ii)
in shares of common stock of the Non-Genzyme Purchaser ("Shares") or (iii) in
a combination of cash and Shares, upon the closing of such sale transaction,
but in an amount not less than, in any circumstance, $500,000. If any portion
of the transaction fee is paid in Shares, such Shares will be duly authorized
and validly issued by the Non-Genzyme Purchaser and will be fully paid-up,
non assessable, not subject to preemptive rights or similar rights,
registered under the Securities Act of 1933, as amended, so as to be freely
tradable and the Non-Genzyme Purchaser shall deliver an opinion of counsel to
such effect, satisfactory to PaineWebber.
The term "purchase price" means the sum of the aggregate fair market
value of any securities issued, and any cash consideration paid, to the
Company or its security holders in connection with a sale transaction, plus
the amount of any indebtedness of the Company that is assumed, directly or
indirectly, by the Purchaser. The fair market value of any such securities
will be the value determined by the Company and PaineWebber upon the closing
of the sale transaction.
The Company shall have the sole and absolute discretion to engage or
refuse to engage in discussions with potential Purchasers, to accept or
reject any proposed sale transaction, or to consummate or refuse to
consummate any sale transaction.
In addition to any fees payable to PaineWebber, the Company will
reimburse PaineWebber, in cash, upon request made from time to time, for all
of its out-of-pocket expenses incurred in connection with this engagement,
including the fees, disbursements and other charges of its legal counsel,
such legal fees not to exceed $30,000, without the prior approval of the
Company and such approval not to be unreasonably withheld.
It is further understood that the Opinion, if rendered, will be prepared
solely for the confidential use of the Board of Directors of the Company and
will not be reproduced, summarized, described or referred to or given to any
other person or otherwise made public without PaineWebber's prior written
consent that shall not be unreasonably withheld to the extent the Company
desires to include the Opinion in the proxy statement. If the Opinion is
included in the proxy statement, the Opinion will be reproduced in full, and
any description of or reference to PaineWebber or summary of the Opinion will
be in a form acceptable to PaineWebber and its counsel.
The Company will furnish PaineWebber (and will request that each
prospective Purchaser with which the Company enters into negotiations furnish
PaineWebber) with such information as PaineWebber believes appropriate to its
assignment (all such information so furnished being the "Information"). The
Company recognizes and confirms that PaineWebber (a) will use and rely
-2-
<PAGE>
primarily on the Information and on information available from generally
recognized public sources in performing the services contemplated by this
Agreement and in rendering the Opinion without having independently verified
the same, (b) does not assume responsibility for the accuracy or completeness
of the Information and such other information and (c) will not make an
appraisal of any assets of the Company or any prospective Purchaser. To the
best of the Company's knowledge, the Information to be furnished by the
Company, when delivered, will be true and correct in all material respects
and will not contain any material misstatement of fact or omit to state any
material fact necessary to make the statements contained therein not
misleading. The Company will promptly notify PaineWebber if it learns of any
material inaccuracy or misstatement in, or material omission from, any
Information theretofore delivered to PaineWebber.
PaineWebber agrees to keep strictly confidential all non-public
information provided to it by or on behalf of the Company, a Purchaser or
in connection with its engagement hereunder and agrees not to disclose
(except to the extent required by applicable law) the fact or terms of this
engagement or any such non-public information to any third party, other than
such of its employees whom PaineWebber determines to have a need to know.
PaineWebber acknowledges the confidentiality and sensitivity of the
non-public information it will be receiving and agrees to use its reasonable
best efforts to protect such confidentiality and agrees to return, within ten
(10) days after a written request by the Company or a Purchaser, all
documents containing any such non-public information.
The term "Non-Public Information" does not include information which:
(i) is already in our possession and not bound by a confidentiality agreement
or (ii) is or becomes generally available to the public other than as a result
of a disclosure by PaineWebber in violation of this Agreement or (iii)
becomes available to PaineWebber on a non-confidential basis from a source
other than the Company, provided that such source is not known by PaineWebber
to be bound by a confidentiality agreement with or other obligations of
secrecy to the Company, (iv) is disclosed pursuant to subpoena or other legal
process or otherwise pursuant to any law, regulation or rule or (v) is
developed by PaineWebber, it directors, officers, employees, agents or
advisors separate and apart from any disclosures by the Company.
It is understood that PaineWebber is being engaged hereunder solely to
provide the services described above to the Board of Directors of the
Company, and that PaineWebber is not acting as an agent or fiduciary of, and
shall have no duties or liability to, the equity holders of the Company or
any other third party in connection with its engagement hereunder, all of
which are hereby expressly waived, to the extent permitted by law.
The Company agrees to the indemnification and other agreements set forth
in the Indemnification Agreement attached to the engagement letter dated
August 15, 1996 which is superseded by this Agreement, the provisions of
which are incorporated herein by reference and shall survive the termination,
expiration or supersession of this Agreement.
PaineWebber's engagement hereunder may be terminated by either the
Company or PaineWebber at any time upon written notice to that effect to the
other party, it being understood
-3-
<PAGE>
that the provisions relating to the payment of fees and expenses and
indemnification and contribution will survive any such termination.
THIS AGREEMENT WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY IN SUCH STATE.
EACH OF THE COMPANY AND PAINEWEBBER AGREES THAT ANY ACTION OR PROCEEDING
BASED HEREON, OR ARISING OUT OF PAINEWEBBER'S ENGAGEMENT HEREUNDER, SHALL BE
BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK
LOCATED IN THE CITY AND COUNTY OF NEW YORK OR IN THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. THE COMPANY AND PAINEWEBBER EACH
HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF
NEW YORK LOCATED IN THE CITY AND COUNTY OF NEW YORK AND OF THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY
SUCH ACTION OR PROCEEDING AS SET FORTH ABOVE AND IRREVOCABLY AGREE TO BE
BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH ACTION OR
PROCEEDING. EACH OF THE COMPANY AND PAINEWEBBER HEREBY IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR
HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION OR PROCEEDING
BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH
ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
The Company (for itself, anyone claiming through it or in its name, and
on behalf of its equity holders) and PaineWebber each hereby irrevocably
waives any right they may have to a trial by jury in respect of any claim
based upon or arising out of this Agreement or the transactions contemplated
hereby. This Agreement may not be assigned by either party without the prior
written consent of the other party.
This Agreement (including the Indemnification Agreement attached to the
engagement letter dated August 15, 1996 which is superseded by this
Agreement) embodies the entire agreement and understanding between the
parties hereto and supersedes all prior agreements and understandings
relating to the subject matter hereof, except that the provisions relating to
strategic alliance transactions into the agreement between PaineWebber and
the Company dated September 1, 1994 shall remain in effect for such
transactions. If any provision of this Agreement is determined to be invalid
or unenforceable in any respect, such determination will not affect such
provision in any other respect or any other provision of this Agreement,
which will remain in full force and effect. This Agreement may not be amended
or otherwise modified or waived except by an instrument in writing signed by
both PaineWebber and the Company.
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<PAGE>
Please confirm that the foregoing correctly sets forth our agreement
by signing and returning to PaineWebber the enclosed duplicate copy of this
Agreement.
Very truly yours,
PAINEWEBBER INCORPORATED
By /s/ Stelios Papadopoulos
_________________________
Accepted and Agreed to as of Stelios Papadopoulos
the date first written above: Managing Director
PHARMAGENICS, INC.
By /s/ Michael I. Sherman
_______________________
Michael I. Sherman
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<PAGE>
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
$4,950,000 Cambridge Massachusetts
February 10, 1997
FOR VALUE RECEIVED, PharmaGenics, Inc., a Delaware corporation (the
"Debtor"), hereby promises to pay to Genzyme Corporation, a Massachusetts
corporation ("Genzyme"), the principal sum of Four Million Nine Hundred Fifty
Thousand Dollars ($4,950,000) or such lesser amount as shall have been
advanced to the Debtor under the Merger Agreement referred to below, together
with interest on the unpaid principal balance of this Note from time to time
outstanding from the date of each advance at a rate of eight and a quarter
percent (8.25%) per annum (Bank of Boston Base Rate at date of first draw).
All outstanding principal and accrued interest hereunder shall be due and
payable in one lump sum on February 10, 2002 (the "Maturity Date"), unless
accelerated as provided below.
After the occurrence and during the continuance of an event of default,
upon notice thereof received from Genzyme, the Debtor shall pay interest at
the rate per annum equal to the rate set forth under the preceding paragraph
plus three percent (3%) per annum or, if lower, at the highest applicable
legal rate. All payments of principal, interest and other amounts payable on
or in respect of this Note shall be made to Genzyme at its office at One
Kendall Square, Cambridge, Massachusetts, or to such other place as Genzyme
may from time to time direct, in lawful money of the United States of
America, in funds immediately available. Interest shall be computed on the
basis of a 360-day year and a 30-day month.
1. Description of Note
This Note is issued pursuant to Sections 4.17 and 8.3 of the Agreement
and Plan of Merger dated as of January 31, 1997 (the "Merger Agreement")
between the Debtor and Genzyme and evidence the advances described therein.
Neither the foregoing reference to the Merger Agreement nor any provisions
thereof shall affect or impair the absolute and unconditional obligation of
the Debtor to pay the principal and interest on this Note as provided herein.
The date and amount of all advances made by Genzyme to the Debtor under
the Merger Agreement and each payment made on account of the principal
hereof, shall be recorded by Genzyme on its books and, prior to any transfer
of this Note, recorded by Genzyme on the schedule attached hereto or any
continuation thereof, provided that the failure of Genzyme to make any such
recordation shall not affect the obligations of the Debtor to make a payment
when due of any amount owing hereunder with respect to any advances made by
Genzyme. This Note is non-negotiable and may not be transferred in whole or
<PAGE>
in part, except in connection with a transfer of substantially all assets of
Genzyme's General Division.
2. Subordination
2.1. Subordination to Senior Indebtedness. The indebtedness evidenced by
this Note shall be subordinate and junior in right of payment, to the extent
and in the manner specified below, to all Senior indebtedness outstanding on
the date of this Note. "Senior Indebtedness" means all indebtedness for
borrowed money owing from the Debtor to commercial or institutional lenders
having no equity participation in the Debtor or indebtedness under
capitalized lease arrangements, including all extensions, renewals or
refunding thereof, and however evidenced, whether for principal, interest,
fees, indemnities, costs, expenses or advances, but not including any
indebtedness which by its terms is subordinated to any other indebtedness of
the Debtor. Notwithstanding the foregoing, Senior Indebtedness shall not
include: (i) indebtedness evidenced by this Note; (ii) indebtedness
consisting of trade payables or other current liabilities; (iii) indebtedness
for amounts owed by the Debtor to employees or stockholders; (iv) any
liability for federal, state, local and other taxes owed or owing by the
Debtor; and (v) any obligation that by operation of law is subordinate to any
general unsecured obligation of the Debtor.
2.2. No Payment if Default on Senior Indebtedness. No payment of
principal or interest shall be made upon, or accepted with respect to, this
Note and Genzyme shall not initiate any action to seek collection if at the
time of such payment or immediately after giving effect thereto there shall
exist or, with the passage of time or giving of notice, would exist any
Default in respect of any Senior Indebtedness or under any agreement pursuant
to which such Senior Indebtedness was issued; provided, however, that in the
case of any default other than a Default in the payment of principal or
interest on or with respect to Senior indebtedness, the foregoing restriction
shall cease to apply with respect to such Default at the expiration of 90
days after notice of the occurrence of such Default has been given by the
Debtor or any holders of Senior Indebtedness if no holder of Senior
Indebtedness shall have commenced any action, suit or other legal proceeding
against the Debtor or its property based upon such Default. Upon the maturity
of any Senior Indebtedness by lapse of time, acceleration or otherwise, or upon
the maturity of this Note by acceleration resulting from the occurrence of any
event of Default, all principal and interest on all such Senior Indebtedness
shall first be paid in full, or such payment shall have been provided for to
the satisfaction of the holders of Senior Indebtedness, before any payment on
account of principal or interest shall be made upon this Note.
2.3. Payment upon Dissolution, Etc.
(a) In the event of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to the Debtor or to the dissolution or other
winding up of the Debtor whether or not
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<PAGE>
involving insolvency or bankruptcy proceedings, all principal and interest on
the Senior Indebtedness shall first be paid in full before any payment on
account of principal or interests is made on this Note, and in any such
proceedings, any payment or distribution of any kind of character, whether in
cash, property or securities, that may be payable or deliverable in respect
of this Note shall be paid or delivered to the holders of the Senior
Indebtedness or their representatives, unless and until the principal of and
interest on all such Senior Indebtedness shall have been paid and satisfied
in full; provided, however, that in the event that payment or delivery of
such cash, property or securities to any holder of this Note is authorized3d by
an order or decree made by a court of competent jurisdiction in a
reorganization preceding under any applicable law pursuant to a plan of
reorganization reflecting the rights conferred hereby upon Senior
Indebtedness, no payment or delivery of such cash, property or securities
shall be required hereby to be made to the holders of the Senior Indebtedness
or their representative, and no such delivery shall be required hereby to be
made of securities which are issued by the Debtor as reorganized, or by the
corporation, trust, association or other entity succeeding to the Debtor or
acquiring its property and assets, pursuant to a plan of reorganization or
upon the dissolution or liquidation of the Debtor, which are subordinate (at
least to the extent provided herein) to the payment of all Senior
Indebtedness (or securities substituted therefor) then outstanding.
(b) Notwithstanding the foregoing, in the event that any such
payment or distribution of assets of the Debtor shall be received by any
holder of this Note in violation of the subordination provision hereof,
before all Senior Indebtedness is paid in full, or effective provision is
made for its payment, such payment or distribution shall be received and held
in trust for and shall be paid over to the holders of all Senior Indebtedness
remaining unpaid, or their representatives, until such Senior Indebtedness
shall have been paid in full, after giving effect to any concurrent payment
or distribution or provision thereof to the holders of such Senior
Indebtedness.
2.4. Subrogation. Subject to the prior payment in full of all Senior
Indebtedness, the holder of this Note shall be subrogated to the rights of
the holders of Senior Indebtedness to receive payments or distribution of
assets of the Debtor applicable to the Senior Indebtedness until this Note
has been paid in full.
2.5. Holders of Senior Indebtedness
(a) Each holder of this Note irrevocably authorizes and empowers
(without imposing any obligation on) each holder of Senior Indebtedness or
such holder's representatives t demand, sue for, collect, receive and receipt
for such holder's ratable share of all payments and distributions in respect
of this Note that are required to be paid or delivered to the holders of
Senior Indebtedness and to file and prove all such claims and take all such
other action in the name of the holder of this Note as such holder of Senior
Indebtedness or such holder's representative may determine to be necessary to
appropriate and will execute and deliver to each holder of Senior
Indebtedness or such holder's representatives such other instruments confirming
such authorization and such powers of attorney, proofs of claim, assignments
3
<PAGE>
of claim and other instrument, and will take all such other action, as may be
requested by such holder or such holder's representatives in order to enable
such holder to enforce such holder's ratable share of all such payments and
distributions in respect of this Note. The subordination provisions of this
Note may be enforced by the holders of Senior Indebtedness notwithstanding
any extension, amendment, modification, waiver, compromise, release or
consent with respect to Senior Indebtedness, excluding8ing any amendment or
modification that increases the principal amount of any Senior Indebtedness.
(b) The Debtor and each holder of this Note, for themselves and
their executors, administrators, heirs, successors and assigns, covenant to
execute and deliver to the holders of Senior Indebtedness, such further
instruments and to take such further action as the holders of Senior
Indebtedness may at any time or times reasonably request in order to carry
out the provisions hereof.
2.6. Continuing Offer. This Section 2 shall constitute a continuing
offer to all persons who, in reliance on such provisions, become holders of,
or continue to hold, Senior Indebtedness, and such provisions of this Section
2 are made for the benefit of such holders.
2.7. Rights of Holders Unimpaired. The foregoing provision as to
subordination are solely for the purpose of defining the relative rieghts of
the holders of the Senior Indebtedness on the one hand and holders of this
Note on the other hand. None of such provisions shall impair, as between the
Debtor and the holder of this Note, the obligation of the Debtor, which is
unconditional and absolute, to pay to the holder of this Note the amounts due
on this Note in accordance with the terms hereof and of the Merger Agreement,
not shall any such provisions prevent any holder of this note from exercising
all remedies otherwise permitted by law.
3. Acceleration of Maturity Date and Conversion
3.1. Acceleration of Maturity Date. The Maturity Date shall be
accelerated, without any further act of the Debtor or Genzyme, upon the
closing of one or more financing transactions resulting in aggregate gross
proceeds to the Debtor of $10,000,000 or more.
3.2. Right to Convert Following Merger. Upon consummation of the merger
of the Debtor into Genzyme pursuant to the Merger Agreement (the "Merger"),
this Note shall become a liability allocated to the Molecular Oncology
Division of Genzyme ("GMO"), and any outstanding principal amount and accrued
interest hereunder shall be treated as an intracompany loan by the General
Division of Genzyme to GMO, due on the Maturity Date and convertible at any
time prior thereto, at Genzyme's option, into GMO Designated Shares (as
defined in the amendment to Genzyme articles of organization filed in
connection with the Merger (the "Genzyme Charter")). The number of GMO
Designated Shares resulting from any conversion of this Note will be
determined by dividing the principal and interest
4
<PAGE>
being converted by the conversion price (the "GMO Conversion Price")in effect
on the date of conversion. The initial GMO Conversion Price will be
determined upon the closing of the first public offering of GMO securities in
which the aggregate gross proceeds to GMO equal or exceed $10 million (the
"Offering"), and shall be equal to (i) the per share price of the Molecular
Oncology Division Common Stock (the "GMO Stock") sold in the Offering or,
(ii) if GMO Stock is not sold in the Offering, the initial conversion price
of any security convertible into GMO Stock that is sold in the Offering,
provided that if any portion of this Note is converted prior to any Offering,
the initial Conversion Price will be $7.00. The GMO Conversion Price shall
be subject to adjustment as set forth in Section 3.5 below.
3.3 Right to Convert Following Termination of Merger Agreement. If the
Merger Agreement terminates prior to the closing of the Merger any
outstanding principal amount and accrued interest hereunder, or any portion
thereof, at any time and at Genzyme's option, shall be (a) convertible into
fully paid and nonassessable shares of preferred stock of the Debtor having
rights that are pari passu with the other then outstanding series of
preferred stock of the Debtor (the "Preferred Stock") and having a
liquidation preference equal to the initial PGI Conversion Price (as defined
below); (b) redeemable for Serial Analysis of Gene Expression ("SAGE")
services or commercially reasonable terms; or (c) applicable against payment
of all or any portion of a license fee for a license to the SAGE technology
on terms no less favorable than those offered by the Debtor to unaffiliated
third party licensees. As soon as practicable following such a termination
of the Merger Agreement, but in any event within 120 days thereafter, the
Debtor shall, if required by applicable law or the Certificate of
Incorporation of Debtor, cause to be submitted to its stockholders a
proposal to amend its Certificate of Incorporation to authorize the issuance
of shares of Preferred Stock as provided in clause (a) above. The number of
shares of Preferred Stock issuable upon any conversion of this Note pursuant
to this Section 3.3 will be determined by dividing the principal and interest
being converted by the conversion price (the "PGI Conversion Price") in
effect on the date of conversion. The initial PGI Conversion Price will be
$2.15 and will be subject to adjustment as set forth in Section 3.5 below.
3.4. Surrender of Note and Delivery of Certificates
(a) Upon surrender of this Note for conversion into GMO Designated
Shares, appropriate record shall be made on the books of Genzyme to reflect
the increase in the number of GMO Designated Shares into which this Note, or
any portion hereof, has been converted, in accordance with the provisions
hereof and of the Genzyme Charter. Such conversion shall be deemed to have
been made at the time this Note shall have been surrendered for conversion
(the "GMO Conversion Date"). If less than the entire outstanding principal
amount of this Note is being converted, appropriate record shall be made on
the books of Genzyme to reflect the remaining outstanding principal balance
of this Note.
5
<PAGE>
(b) When surrendered for conversion into shares of Preferred Stock,
this Note shall, unless the shares of Preferred Stock issuable on conversion
are to be issued in the same name as the name in which this Note is then
registered, be duly endorsed by, or accompanied by instruments of transfer in
form satisfactory to the Debtor duly executed by, the holder or his or its
duly authorized attorney. As promptly as practicable after the surrender of
this Note for conversion, the Debtor shall deliver or cause to be delivered
at its principal executive office to the holder, or on the holder's written
order, a certificate or certificates for the number of full shares of
Preferred Stock issuable upon the conversion of this Note, or portion hereof,
in accordance with the provisions hereof. Such conversion shall be deemed to
have been made at the time this Note shall have been surrendered for
conversion (the "PGI Conversion Date"), and the holder in whose name any
certificate or certificates for shares of Preferred Stock shall be issuable
upon such conversion shall be deemed to have become on the PGI Conversion
Date the holder or record of the shares of Preferred Stock represented
thereby. If less than the entire outstanding principal amount of this Note
is being converted, a new Note shall promptly be delivered to the holder for
the unconverted principal balance and shall be of like tenor as to all terms
as the Note surrendered. To the extent such shares are to be issued to any
person other than Genzyme, the Debtor may require reasonable representations
from any such recipient to assure compliance with federal and state
securities laws.
3.5. Adjustment of Conversion Price
(a) In the event of any:
(i) declaration of a stock dividend on the Preferred
Stock or, if the Merger has been consummated, GMO Stock,
as the case may be (in either case, the "Shares"),
(ii) subdivision of outstanding Shares into a larger
number of Shares by reclassification, stock split or
otherwise, or
(iii) combination of outstanding Shares into a smaller
number of Shares by reclassification or otherwise,
the GMO Conversion Price or the PGI Conversion Price, as the case may be (in
either case, the "Conversion Price"), in effect immediately prior to any such
event shall be adjusted proportionately so that thereafter the holder of this
Note shall be entitled to receive upon conversion of this Note the number of
Shares or other securities which such holder would have owned after the
happening of any of the events described above had this Note been converted
immediately prior to the happening of such event, provided that the
Conversion Price shall in no event be reduced to less than the par value of
the Shares issuable upon conversion. An adjustment made pursuant to this
Section 3.5(a) shall become effective immediately after the record date in the
case of a dividend and shall become effective immediately after the effective
date in the case of a subdivision or combination.
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<PAGE>
(b) If, prior to maturity of this Note, the Debtor shall at any
time consolidate or merge with another corporation (other than the Merger or
a merger or consolidation in which the Debtor is the surviving corporation),
the registered holder of this Note will thereafter be entitled to receive,
upon the conversion hereof, the securities or property to which a holder of
the number of Shares then deliverable upon the conversion hereof would have
been entitled upon such consolidation or merger, and the Debtor shall take
such steps in connection with such consolidation or merger as may be
necessary to ensure that the provisions hereof shall thereafter be
applicable, as nearly as reasonably may be, in relation to any securities or
property thereafter deliverable upon the conversion of this Note.
3.6. Notice. In case the Debtor proposes to take any action referred
to in Section 3.5 above, or to effect the liquidation, dissolution or winding
up of the Debtor, then the Debtor shall cause notice thereof to be mailed to
the registered holder of this Note, at least twenty (20) days prior to the
date on which the transfer books of the Debtor shall close or a record be
taken for such stock dividend or the date when such reclassification,
liquidation, dissolution or winding up shall be effective, as the case may be.
3.7. Statement of Adjustment. Whenever the Conversion Price shall be
adjusted as provided in Section 3.5 above, the Debtor shall cause a notice
setting forth any such adjustment to be sent by mail, first class, postage
prepaid, to each record holder of this Note. Where appropriate, such notice
may be given in advance and may be included as part of a notice required to
be mailed under the provisions of Section 3.6 hereof. Such notice shall be
conclusive and binding absent manifest error.
3.8. Fractional Shares. No fractional Shares shall be issuable upon
conversion of this Note, but a payment in cash will be made in respect of any
fraction of a Share which would otherwise be issuable upon the surrender of
this Note, or portion hereof, for conversion. Such payment shall be based on
the then applicable Conversion Price at the time of conversion of this Note.
4. Prepayment of Principal
The Debtor may, at its option, prepay from time to time all or any part of
this Note without premium or penalty but together with interest on the
principal amount so prepaid accrued to the date of prepayment.
5. Events of Default
This Note shall become immediately due and payable upon the occurrence
of any of the following events of default;
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<PAGE>
(a) the Debtor shall fail to pay the principal of or interest
on the Note when due, whether by acceleration or otherwise, within ten (10)
business days of its due date;
(b) a proceeding shall have been instituted in a court having
jurisdiction in the premises seeking a decree or order for relief in respect
of Debtor in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or for the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of Debtor, or for any substantial part of its property, or
for the winding-up or liquidation of its affairs, and such proceeding shall
remain undismissed or unstayed and in effect for a period of sixty (60) days
or such court shall enter a decree or order granting the relief sought in
such proceeding; or
(c) the Debtor shall voluntarily suspend transaction of its
business, shall dissolve or be liquidated, shall commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, shall consent to the entry of an order for relief in an
involuntary case under any such law, or shall consent to the appointment of
or taking possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or other similar official) of Debtor, as the case may be, or
for any substantial part of its property, or shall make a general assignment
for the benefit of creditors.
6. Waiver
No delay or omission on the part of Genzyme in exercising any right
under this Note shall operate as a waiver of such right or of any other right
of Genzyme, nor shall any delay, omission or waiver on any one occasion be
deemed a bar to or waiver of the same or any other right on any future
occasion. The Debtor, by executing this Note, and any other makers, sureties,
guarantor or endorsers, by endorsing this Note or by entering into or
executing any agreement to pay any of the indebtedness evidenced hereby,
waives (to the fullest extent allowed by law) all requirements of diligence
in collection, demand, presentment, notice of non-payment, protest, notice of
protest, suit and all other conditions precedent in connection with the
collection and enforcement of this Note or any security for this Note or any
guarantee of the indebtedness evidenced hereby (other than demand for payment
if expressly required by this Note). This Note shall be binding upon the
successors and assigns of Debtor.
7. General
7.1 Governing Law. This Note shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts.
7.2 Saturdays, Sundays, Holidays. If any date that may at any time be
specified in this Note as a date for the making of any payment on this Note
shall fall on Saturday, Sunday or on a day which in the Commonwealth of
Massachusetts shall be a legal holiday,
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then the date for the making of that payment shall be the next subsequent day
which is not a Saturday, Sunday or legal holiday.
IN WITNESS WHEREOF, the undersigned has executed this Note as an
instrument under seal as of the date first above written.
PHARMAGENICS, INC.
By/s/ A. Steven Franchak
-----------------------
Name: A. STEVEN FRANCHAK
Title: Treasurer
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SCHEDULE OF LOANS
This Note evidences loans made on the dates and in the principal amounts
set forth below, subject to the payments, prepayments or conversions set forth
below:
- ------------------------------------------------------------------------------
Principal Amount Paid, Unpaid
Amount of Prepaid or Principal Notation
Date Made Loan Converted Amount Made By
- ------------------------------------------------------------------------------
2/10/97 $1,000,000 $0 $1,000,000
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- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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10
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Exhibit 10.68
AMENDMENT AND AGREEMENT, dated as of the 31st day of January, 1997
(this "Amendment"), by and among PharmaGenics, Inc., a Delaware corporation
(the "Company"), and PaineWebber R&D Partners III, L.P., a Delaware limited
partnership (the "Fund").
BACKGROUND
A. The Company and the Fund are parties to a Stock Purchase
Agreement, dated as of March 15, 1995 (the "Stock Purchase Agreement"), along
with the Program Agreement, dated as of April 1, 1994, as amended on March
15, 1995 (the "Program Agreement"), the Related Agreements and the Warrants,
as amended and restated (unless otherwise defined herein, terms used herein
shall have the meanings set forth in the Program Agreement, and the Amended
and Restated Glossary thereto).
B. The Company has entered into a merger agreement dated as of
January 31, 1997, in substantially the form attached hereto as Exhibit A (the
"Merger Agreement"), with Genzyme Corporation, a Massachusetts corporation
("Genzyme"), pursuant to which the Company will be merged with and into
Genzyme (the "Merger"), with Genzyme surviving the Merger.
C. As a result of the Merger, (i) all shares of the Company's
Series A Convertible Preferred Stock ("Series A Stock"), Series B Convertible
Preferred Stock ("Series B Stock"), and Series C Convertible Preferred Stock
("Series C Stock") (the Series A Stock, Series B Stock and Series C Stock
shall collectively be referred to as the "Preferred Stock") outstanding
immediately prior to the effective time of the Merger (other than shares held
by the Company as treasury stock, dissenting shares and shares owned by
Genzyme) will be converted into shares of Genzyme Molecular Oncology Division
Common Stock to be allocated among the holders of the Preferred Stock in
accordance with the Merger Agreement and (ii) all shares of the Company's
common stock will be cancelled.
D. In contemplation of the Merger and as a result of the Company
not having a sufficient number of shares of Series C Stock in order to
deliver the additional Securities contemplated by Section 3.2 of Article I of
the Stock Purchase Agreement, the parties desire to amend the Stock Purchase
Agreement to provide that, upon the exercise of the Fund's conversion right
thereunder, the Company will issue to the Fund shares of Preferred Stock as
set forth herein.
In consideration of the mutual covenants expressed herein and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company and the Fund hereby agree to amend the Stock
Purchase Agreement as set forth below.
<PAGE>
ARTICLE I
SECTION 1. Section 3.1(b) of Article I of the Stock Purchase
Agreement is hereby amended and restated as follows:
(b) If the Fund exercises its option pursuant to Section 3.1(a), the
Fund shall execute such proper assignments and instruments as are
reasonably necessary or advisable to accomplish and record such transfer
and assignment and to establish the ownership of the Company in and to the
Fund Technology, Background Technology, Targets and related Products and
Abandoned Targets and related Products.
SECTION 2. Section 3.2 of Article I of the Stock Purchase
Agreement is hereby amended and restated as follows:
3.2 Securities to be Issued; Number of Shares. Notwithstanding
anything to the contrary herein, in lieu of the additional Securities
described in Section 3.1(a), upon exercise of its option pursuant to
Section 3.1(a), the Company shall issue to the Fund 298,420 shares of
Series A Stock, 88,864 shares of Series B Stock and 1,641,144 shares of
Series C Stock.
ARTICLE II
SECTION 1. Effect of Amendment. Except as amended hereby, the
provisions of the Stock Purchase Agreement, Program Agreement, Related
Agreements and Warrants shall remain in full force and effect, as so amended.
SECTION 2. Counterparts. This Amendment may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties.
SECTION 3. Entire Agreement; No Third-Party Beneficiaries.
Other than the Stock Purchase Agreement (and subject to Section 6.4 thereof),
the Program Agreement, the Related Agreements and the Warrants, this
Amendment (a) constitutes the entire agreement, and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter of this Amendment and (b) is not intended to
confer upon any person other than the parties hereto any rights or remedies.
SECTION 4. Choice of Law. This Amendment shall be construed and
enforced in accordance with the laws of the State of Delaware, without regard
to the conflicts of law rules of such state.
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SECTION 5. Assignment. This Amendment may not be assigned,
delegated, transferred or sold, in whole or in part, by either of the parties
hereto.
SECTION 6. Severability. If any provision of this Amendment is,
becomes or is deemed invalid, illegal or unenforceable in any jurisdiction,
such provision shall be stricken and the remainder of the Amendment shall
remain in full force and effect.
SECTION 7. Headings. Article and Section headings contained in
this Amendment are included for convenience only and are not to be used in
construing or interpreting this Amendment.
[The remainder of this page is intentionally left blank.]
3
<PAGE>
IN WITNESS WHEREOF, the Company and the Fund have executed this
Amendment as of the date and year first above written.
PAINEWEBBER R&D PARTNERS III, L.P.
By: PAINEWEBBER DEVELOPMENT
CORPORATION, General Partner
By: /s/ Dhananjay Pai
________________________________________
Name: Dhananjay Pai
Title: President
PHARMAGENICS, INC.
By: /s/ Michael I. Sherman
_________________________________________
Name: Michael I. Sherman
Title: President
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE AUDITED BALANCE SHEET AT DECEMBER 31, 1996 AND THE AUDITED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 486,109
<SECURITIES> 0
<RECEIVABLES> 185,972
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 710,264
<PP&E> 2,856,280
<DEPRECIATION> 2,073,642
<TOTAL-ASSETS> 1,533,327
<CURRENT-LIABILITIES> 2,062,289
<BONDS> 25,177
0
73,749
<COMMON> 4,551
<OTHER-SE> (632,439)
<TOTAL-LIABILITY-AND-EQUITY> 1,533,327
<SALES> 0
<TOTAL-REVENUES> 1,418,445
<CGS> 0
<TOTAL-COSTS> 6,255,003
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (36,349)
<INCOME-PRETAX> (4,752,633)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,752,633)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,752,633)
<EPS-PRIMARY> (10.49)
<EPS-DILUTED> 0
</TABLE>
