<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION NO. 333-3536
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENTREMED, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8071 58-1959440
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of incorporation) classification code number) identification
number)
</TABLE>
9610 MEDICAL CENTER DRIVE, SUITE 200
ROCKVILLE, MARYLAND 20850
(301) 217-9858
(Address and telephone number of Registrant's principal executive offices)
JOHN W. HOLADAY, PH.D.
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
ENTREMED, INC.
9610 MEDICAL CENTER DRIVE, SUITE 200
ROCKVILLE, MARYLAND 20850
(301) 217-9858
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
JILL COHEN, ESQ. ROBERT H. WERBEL, ESQ.
Bachner, Tally, Polevoy & Misher LLP Werbel McMillin & Carnelutti,
380 Madison Avenue A Professional Corporation
New York, New York 10017 711 Fifth Avenue
(212) 687-7000 New York, New York 10022
(212) 832-8300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Shares of Common Stock, $.01 par value...... 4,025,000 $16.00 $64,400,000 $22,207(3)
</TABLE>
(1) Includes 480,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee.
(3) Previously paid.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ENTREMED, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus............................ Outside Front Cover page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Front and Outside Back Cover Pages
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors; Financial
Statements
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Risk Factors; Underwriting
6. Dilution............................................. Risk Factors; Dilution
7. Selling Security Holders............................. *
8. Plan of Distribution................................. Outside Front Cover Page; Underwriting
9. Description of Securities to be Registered........... Outside Front Cover Page; Description of Capital
Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information With Respect to the Registrant........... Prospectus Summary; Risk Factors; The Company;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal
Stockholders; Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
</TABLE>
- ------------------------
* Not applicable.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 7, 1996
PROSPECTUS
3,200,000 SHARES
[LOGO]
COMMON STOCK
----------------
All of the shares of Common Stock, par value $.01 per share ("Common
Stock"), offered hereby are being sold by EntreMed, Inc. (the "Company" or
"EntreMed"). Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently anticipated that the initial public
offering price will be between $14.00 and $16.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Common Stock has been approved for listing on the
Nasdaq National Market under the symbol "ENMD."
Bristol-Myers Squibb Company, a party to a collaboration with the Company,
has agreed to purchase from the Company in a private placement on the closing of
this offering $5,000,000 of Common Stock at the initial public offering price
(333,333 shares, assuming an initial public offering price of $15.00 per share)
(the "BMS Shares").
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 6.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total (3)................................... $ $ $
</TABLE>
(1) The Company has agreed to reimburse the Representatives of the Underwriters
for certain expenses incurred in connection with the offering and to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $ , including reimbursement of expenses of the Underwriters of up
to $200,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
480,000 additional shares of Common Stock on the same terms and conditions
as set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the certificates representing such shares of Common
Stock will be made on or about , 1996 at the offices of Allen &
Company Incorporated, 711 Fifth Avenue, New York, New York 10022.
------------------------
ALLEN & COMPANY
INCORPORATED
DILLON, READ & CO. INC.
VOLPE, WELTY & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
ANGIOGENESIS AND CANCER
[PHOTO] [PHOTO]
TUMOR
ANGIOGENESIS
BLOOD VESSEL
Angiogenesis is the fundamental process by which new blood vessels are
formed. In these illustrations, cancer cells stimulate angiogenesis, which
provides the blood supply that nourishes the tumor and supports its growth.
EntreMed believes that antiangiogenic products, which inhibit the abnormal
growth of blood vessels, may have significant advantages over traditional
therapies for cancer. The Company is currently developing several angiogenesis
inhibitors.
All of the Company's product candidates are in the development stage and
require further research, development, testing and regulatory clearances.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements audited by its independent certified
public accountants.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE, THE INFORMATION IN
THIS PROSPECTUS (I) DOES NOT GIVE EFFECT TO THE EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND (II) GIVES RETROACTIVE EFFECT TO A TWO-FOR-THREE
REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED IN APRIL 1996 AND THE AUTOMATIC
CONVERSION OF THE 3,000,000 OUTSTANDING SHARES OF THE COMPANY'S PREFERRED STOCK
INTO 2,000,000 SHARES OF COMMON STOCK EFFECTIVE ON THE DATE OF THIS PROSPECTUS.
SEE "CAPITALIZATION," "DESCRIPTION OF CAPITAL STOCK" AND NOTE 13 OF NOTES TO
FINANCIAL STATEMENTS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE HEADING "RISK FACTORS."
THE COMPANY
EntreMed is engaged primarily in the research and development of
biopharmaceutical products that address the role of blood and blood vessels in
the prevention and treatment of a broad range of diseases. The Company's core
technologies include (i) an antiangiogenesis program focused on the development
of proprietary products intended to inhibit the abnormal growth of new blood
vessels associated with cancer and certain causes of blindness and (ii) a blood
cell permeation device designed to enhance the ability of red blood cells to
deliver oxygen to organs and tissues and which may also be used to deliver
drugs, genes or other therapeutic agents that otherwise would not readily
diffuse through blood cell membranes.
Angiogenesis is the fundamental process by which new blood vessels are
formed and primarily occurs during the first three months of embryonic
development. Except for wound healing and certain reproductive processes in
women, angiogenesis is otherwise generally associated with several diseases,
including cancer and certain causes of blindness. The Company believes that
antiangiogenic products, which inhibit the abnormal growth of blood vessels, may
have significant advantages over traditional therapies for these diseases. The
Company is currently developing several angiogenesis inhibitors, including
thalidomide and its chemical analogs and Angiostatin-TM-, a protein produced by
the body. The Company is also applying its expertise in the role of blood
function to the development of a blood cell permeation device designed to
enhance the oxygen releasing capabilities of red blood cells. Organs and tissues
in the body require oxygen to function properly and oxygen deficiency may lead
to tissue damage or death.
In December 1995, the Company and Bristol-Myers Squibb Company
("Bristol-Myers") entered into a collaboration to develop and commercialize
certain antiangiogenesis therapeutics. This collaboration provides for
Bristol-Myers to fund Company research, provide milestone payments to the
Company and pay the Company royalties on net sales of any products developed
under the collaboration. In addition, Bristol-Myers made a $6,500,000 equity
investment in the Company and agreed to make an additional $5,000,000 equity
investment at the closing of this offering. In return, the Company granted
Bristol-Myers exclusive worldwide rights to antiangiogenic applications of
thalidomide, thalidomide analogs and Angiostatin-TM- protein.
The Company's product candidates have been developed primarily through
sponsored research collaborations and licensing agreements. The principal
antiangiogenesis therapeutics currently under development by the Company were
licensed from Children's Hospital at Harvard Medical School where the Company
sponsors research under the direction of Dr. M. Judah Folkman. The flow
electroporation technology used in the cell permeation device was licensed from
the Center for Blood Research Laboratories at Harvard Medical School. The
Company's sponsored research programs are augmented by its internal capabilities
in the fields of the vasculature system, blood vessel growth and blood function.
3
<PAGE>
To date, the Company and its collaborators have:
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of breast cancer, prostate
cancer and Kaposi's sarcoma.
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of age-related macular
degeneration, a major cause of blindness.
-Isolated, identified, sequenced, cloned and recombinantly expressed
Angiostatin-TM- protein. In preclinical studies, Angiostatin-TM- protein
appeared to inhibit vascularization and growth of primary and metastatic
tumors.
-Constructed a prototype device designed to introduce inositol hexaphosphate
("IHP") molecules into red blood cells, which may enhance the delivery of
oxygen to organs and tissues in the body.
The Company's strategy is to accelerate development of its antiangiogenesis
and cell permeation technologies as well as other promising technologies which
the Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to broaden its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development with
its in-house research and development capabilities and (iv) to leverage its
resources through corporate partnerships in order to minimize the cost to the
Company of late-stage clinical trials and to accelerate effective product
commercialization. All of the Company's product candidates are in the
development stage and require further research, development, testing and
regulatory clearances.
The Company was incorporated in Delaware in September 1991. The Company's
executive offices are located at 9610 Medical Center Drive, Suite 200,
Rockville, Maryland 20850 and its telephone number is (301) 217-9858.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby.................. 3,200,000 shares
Common Stock to be outstanding after the
offering.................................... 11,993,912 shares (1)
Use of Proceeds.............................. For research and development, working capital
and general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... ENMD
Risk Factors................................. The Common Stock offered hereby involves a
high degree of risk. See "Risk Factors."
</TABLE>
- ------------------------
(1) Includes (i) 333,333 shares (assuming an initial public offering price of
$15.00 per share) to be sold to Bristol-Myers in a private placement on the
closing of this offering at the initial public offering price and (ii)
2,000,000 shares of Common Stock issuable upon the automatic conversion of
all outstanding shares of Preferred Stock, $1.00 par value (the "Preferred
Stock") on the date of this Prospectus. Excludes (i) 2,381,688 shares of
Common Stock issuable upon exercise of outstanding options and warrants at a
weighted average exercise price of $4.92 per share and 444,444 shares of
Common Stock issuable upon exercise of warrants issued to Bristol-Myers
exercisable at $22.50 per share (assuming an initial public offering price
of $15.00 per share) and (ii) an additional 642,969 shares reserved for
issuance under the Company's stock option plans. See "Capitalization,"
"Business -- Collaborations and License Agreements," "Management -- Stock
Options" and "Description of Capital Stock."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
SEPTEMBER 18, 31,
1991 (DATE OF YEAR ENDED DECEMBER 31, (UNAUDITED)
INCEPTION) TO -------------------------------------------------- ------------------------
DECEMBER 31, 1991 1992 1993 1994 1995 1995 1996
----------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues (1):
Grant revenues............ $ -- $ -- $ -- $ 90,185 $ 347,001 $ -- $ --
Collaborative research and
development.............. -- -- -- -- 347,501 -- 1,042,500
License fees.............. -- -- -- -- 16,667 -- 50,000
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.............. -- -- -- 90,185 711,169 -- 1,092,500
Expenses:
Research and development.. -- 645,752 4,772,652 3,673,929 5,939,512 1,596,677 2,063,270
General and
administrative........... 23,873 812,198 1,552,143 1,549,705 2,458,976 455,342 771,411
Interest expense.......... -- -- -- -- 65,754 -- 9,547
Interest income........... -- (56,383) (85,939) (18,993) (44,854) (5,559) (76,321)
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss.................... $ (23,873) $(1,401,567) $(6,238,856) $(5,114,456) $(7,708,219) $(2,046,460) $(1,675,407)
----------------- ----------- ----------- ----------- ----------- ----------- -----------
----------------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net loss per share
(2)........................ $ (0.83) $ (0.18)
----------- -----------
----------- -----------
Pro forma weighted average
number of shares
outstanding (2)............ 9,271,943 9,312,035
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------
ACTUAL AS ADJUSTED (3)
--------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................................... $ 7,600,058 $ 56,000,058
Working capital................................................................ 3,727,118 52,127,118
Total assets................................................................... 8,606,849 57,006,849
Deferred revenue, less current portion......................................... 2,566,667 2,566,667
Accumulated deficit............................................................ (22,162,378) (22,162,378)
Total stockholders' equity..................................................... 2,051,853 50,451,853
</TABLE>
- ------------------------
(1) With the exception of license fees and research funding under the
Bristol-Myers collaboration and research grants, the Company has not derived
any revenues from operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Pro forma net loss per share and weighted average shares outstanding for the
year ended December 31, 1995 and the three month period ended March 31, 1996
give effect to the automatic conversion of 3,000,000 outstanding shares of
Preferred Stock into 2,000,000 shares of Common Stock upon the date of this
Prospectus.
(3) Adjusted to give effect to the sale at an assumed initial public offering
price of $15.00 of (i) the Common Stock offered hereby and (ii) 333,333
shares of Common Stock by the Company to Bristol-Myers in a private
placement at the closing of this offering, and the receipt of the estimated
net proceeds therefrom.
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT THE STATEMENTS IN THIS PROSPECTUS THAT
ARE NOT DESCRIPTIONS OF HISTORICAL FACTS MAY BE FORWARD LOOKING STATEMENTS THAT
ARE SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED DUE TO A NUMBER OF FACTORS, INCLUDING THOSE
IDENTIFIED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
HISTORY OF LOSSES; ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES. To
date, the Company has been engaged primarily in research and development
activities and, with the exception of license fees and research and development
funding under the collaboration with Bristol-Myers (the "Bristol-Myers
Collaboration") and research grants, has not derived any revenues from
operations. At March 31, 1996, the Company had an accumulated deficit of
approximately $22,162,000 and significant losses are expected to continue for
the foreseeable future. The Company will be required to conduct substantial
research and development and clinical testing activities for all of its proposed
products, which activities are expected to result in operating losses for the
foreseeable future, particularly due to the extended time period before the
Company expects to commercialize any products, if ever. In addition, to the
extent the Company relies upon others for development and commercialization
activities, the Company's ability to achieve profitability will be dependent
upon the success of such third parties. There can be no assurance that the
Company will be able to generate revenues from operations or achieve
profitability on a sustained basis, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
EARLY STAGE AND UNCERTAINTY OF PRODUCT DEVELOPMENT. The Company's proposed
products and research programs are in the early developmental stage and require
significant time-consuming and costly research and development, testing and
regulatory clearances. Accordingly, the Company does not expect any of its
product candidates to be commercially available for several years, if ever. The
successful development of any product is subject to the risks of failure
inherent in the development of products or therapeutic procedures based on
innovative technologies. These risks include the possibilities that any or all
of these proposed products or procedures are found to be ineffective or toxic,
or otherwise fail to receive necessary regulatory clearances; that the proposed
products or procedures are uneconomical to manufacture or market or do not
achieve broad market acceptance; that third parties hold proprietary rights that
preclude the Company from marketing them; or that third parties market a
superior or equivalent product. The failure of the Company's research and
development activities to result in any commercially viable products would
materially adversely affect the Company's future prospects.
UNCERTAINTIES RELATED TO CLINICAL TRIALS. The Company has limited
experience in conducting clinical trials and intends to rely primarily on
Bristol-Myers or other pharmaceutical companies with which it may collaborate in
the future for clinical development and regulatory approval of its product
candidates. Before obtaining regulatory approvals for the commercial sale of its
products, the Company or its collaborative partners will be required to
demonstrate through preclinical studies and clinical trials that the proposed
products are safe and effective for use in each target indication. The results
from preclinical studies and early clinical trials may not be predictive of
results that will be obtained in large-scale testing, and there can be no
assurance that the clinical trials conducted by the Company or its partners will
demonstrate sufficient safety and efficacy to obtain the required regulatory
approvals or will result in marketable products. One of the Company's potential
products, thalidomide, is believed to have caused severe birth defects in
children during the late 1950s and early 1960s. Although the Company believes
that the characteristics of thalidomide that may have affected fetal development
and caused birth defects by blocking new blood vessel growth may make
6
<PAGE>
thalidomide useful in the prevention and treatment of angiogenic disorders,
there can be no assurance that clinical trials with the drug will demonstrate
its safety and efficacy or that the drug will not be associated with other
characteristics that prevent or limit its commercial use.
In addition, clinical trials are often conducted with patients having the
most advanced stages of disease. During the course of treatment, these patients
can die or suffer other adverse medical effects for reasons that may not be
related to the pharmaceutical agent being tested, but which can nevertheless
affect clinical trial results. Various companies in the pharmaceutical industry
have suffered significant setbacks in advanced clinical trials, even after
attaining promising results in earlier trials. Clinical trials for the product
candidates being developed by the Company and its collaborators may be delayed
by many factors. Any delays in, or termination of, the clinical trials of any of
the Company's product candidates, or the failure of any clinical trials to meet
applicable regulatory standards, could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON BRISTOL-MYERS AND OTHER COLLABORATIVE PARTNERS AND
LICENSEES. The Company does not intend to conduct late-stage clinical trials,
or manufacture or market any of its product candidates in the foreseeable
future. The Company has granted Bristol-Myers the right to conduct development,
manufacturing, commercialization and marketing activities relating to certain of
the Company's antiangiogenesis technologies. Accordingly, the Company is
substantially dependent on Bristol-Myers for the development, funding and
commercial success of any of these product candidates. In addition, payments
from Bristol-Myers may constitute a substantial portion of the Company's
revenues for the next several years. The Bristol-Myers Collaboration may be
terminated for any reason by Bristol-Myers on six months' notice, in which event
Bristol-Myers would have no further funding obligation to the Company. In the
event Bristol-Myers were to terminate its agreement with the Company or
otherwise fail to conduct its collaborative activities successfully and in a
timely manner, the preclinical and clinical development or commercialization of
the licensed antiangiogenesis product candidates would be delayed or terminated.
Any such delay or termination could have a material adverse effect on the
Company's business, financial condition and results of operations. The success
of the Bristol-Myers Collaboration will depend in part upon Bristol-Myers' own
competitive, marketing and strategic considerations, including the relative
advantages of alternative products being developed and marketed by Bristol-Myers
and its competitors. In addition, if Bristol-Myers is unsuccessful in
commercializing any product candidates, the Company's business, financial
condition and results of operations would be materially adversely affected.
Bristol-Myers has agreed, as soon as reasonably practicable, to sublicense to a
third party ophthalmological applications of thalidomide and its analogs, unless
Bristol-Myers reasonably believes that the dosage or method of administration
will not be significantly different from oncological indications. Any failure or
delay by Bristol-Myers to enter into such a sublicense may substantially limit
or preclude the commercial development of these applications.
The Company intends to enter into additional corporate alliances to develop
and commercialize products based upon its cell permeation technology and any
other technologies that may be acquired or developed by the Company. The Company
expects to grant to its collaborative partners rights to commercialize any
products developed under these collaborative agreements, and the Company may
rely on its collaborative partners to conduct research and development efforts
and clinical trials on, obtain regulatory approvals for, and manufacture and
market any products licensed to these partners. The amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. Because the Company generally expects to retain only a
royalty interest in sales or a percentage of profits of products licensed to
third parties, its revenues may be less than if it retained all
commercialization rights and marketed products directly. In addition, there can
be no assurance that the corporate partners will not pursue alternative
technologies or develop competitive products as a means for developing
treatments for the diseases targeted by the Company's programs.
7
<PAGE>
There can be no assurance that the Company will be successful in
establishing any additional collaborative arrangements, that products will be
successfully commercialized under any collaborative arrangement or that the
Company will derive any revenues from such arrangements. In addition, the
Company's strategy involves entering into multiple, concurrent strategic
alliances to pursue commercialization of its core technologies. There can be no
assurance that the Company will be able to manage simultaneous programs
successfully. With respect to existing and potential future strategic alliances
and collaborative arrangements, the Company will be dependent upon the expertise
and dedication of sufficient resources by these outside parties to develop,
manufacture or market products. Should a strategic alliance or collaborative
partner fail to develop or commercialize a product to which it has rights, the
Company's business, financial condition and results of operations could be
materially and adversely affected.
FUTURE CAPITAL NEEDS AND COMMITMENTS; UNCERTAINTY OF ADDITIONAL
FUNDING. The Company has incurred negative cash flows since inception and has
expended, and expects to continue to expend, substantial funds to continue its
research and development programs. The Company anticipates that its existing
resources, together with the net proceeds of this offering and the proceeds from
the sale of the BMS Shares and committed funding from Bristol-Myers, will be
sufficient to fund the Company's operating expenses and capital requirements for
approximately 24 months from the date of this Prospectus, although there can be
no assurance that the Company will not require additional funds prior to such
time. There can be no assurance that the results of research and development
activities, progress of preclinical studies or clinical trials, changes in or
terminations of relationships with strategic partners, changes in the focus,
direction or costs of the Company's research and development programs,
competitive and technological advances, the regulatory approval process or other
factors will not result in the expenditure of the Company's resources before
such time. The Company will require substantial funds in addition to the
proceeds of this offering to conduct research and development activities,
preclinical studies and clinical trials, apply for regulatory approvals and
commercialize any potential products, to the extent the Company engages directly
in such activities.
The Company is a party to sponsored research agreements requiring it to fund
an aggregate of approximately $6,492,000 through 1999 (including $6,000,000 to
Children's Hospital at Harvard Medical School ("Children's Hospital")) and has
recently agreed to preliminary terms regarding a proposed transaction that, if
consummated, would require the Company to fund additional sponsored research and
an equity investment in the approximate aggregate amount of $1,850,000 over the
next two years. Pursuant to the terms of certain license agreements, the Company
is also obligated to exercise diligence in bringing potential products to market
and to make certain milestone payments that, in some instances, are substantial.
The Company's failure to make any required sponsored research or milestone
payment could result in the termination of the relevant sponsored research or
license agreement, which could have a material adverse effect on the Company.
The Company may seek additional funding through collaborative arrangements
and public or private financings, including equity financings. There can be no
assurance that such collaborative arrangements or that additional financing will
be available on acceptable terms or at all. If additional funds are raised by
issuing equity securities, further dilution to stockholders may result. If
adequate funds are not available, the Company may be required to delay, reduce
the scope of or eliminate one or more of its research and development programs
or forfeit its rights to future technologies; to obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products that the Company would otherwise seek to develop or commercialize
itself; or to license the rights to such products on terms that are not
favorable to the Company. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Collaborations and License Agreements."
8
<PAGE>
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS; LENGTHY APPROVAL
PROCESS. The Company's research, development, preclinical and clinical trials,
manufacturing and marketing of most of its product candidates are subject to an
extensive regulatory approval process by the United States Food and Drug
Administration (the "FDA") and other regulatory agencies in the United States
and abroad. The process of obtaining FDA and other required regulatory approvals
for drug and biologic products, including required preclinical and clinical
testing, is lengthy, expensive and uncertain. There can be no assurance that,
even after such time and expenditures, the Company will be able to obtain
necessary regulatory approvals for clinical testing or for the manufacturing or
marketing of any products. The Company or its collaborators may encounter
significant delays or excessive costs in their efforts to secure necessary
approvals or licenses. Even if regulatory clearance is obtained, a marketed
product is subject to continual review, and later discovery of previously
unknown defects or failure to comply with the applicable regulatory requirements
may result in restrictions on a product's marketing or withdrawal of the product
from the market as well as possible civil or criminal sanctions. See "Business
- -- Government Regulation."
COMPETITION; RISK OF TECHNOLOGICAL OBSOLESCENCE. The pharmaceutical,
biotechnology and bio-
pharmaceutical industries are intensely competitive and competition from other
companies and other research and academic institutions is expected to increase.
Many of these companies have substantially greater financial and other resources
and research and development capabilities than the Company and have
substantially greater experience in undertaking preclinical and clinical testing
of products, obtaining regulatory approvals and manufacturing and marketing
pharmaceutical products. The Company is aware of other companies engaged in the
development of thalidomide for various disease indications, including Celgene
Corporation and Andrulis Pharmaceuticals, and a number of other companies and
academic institutions are pursuing angiogenesis research and are testing other
angiogenesis inhibitors. The Company's blood oxygen enhancement product
candidate will also compete for certain applications with numerous other
available therapeutics and with blood and blood substitute products in
development by others. In addition to competing with universities and other
research institutions in the development of products, technologies and
processes, the Company may compete with other companies in acquiring rights to
products or technologies from universities.
Moreover, the pharmaceutical, biotechnology and biopharmaceutical industries
are rapidly evolving fields in which developments are expected to continue at a
rapid pace. There can be no assurance that the Company will develop products
that are more effective or achieve greater market acceptance than competitive
products, or that the Company's competitors will not succeed in developing
products and technologies that are more effective than those being developed by
the Company or that would render the Company's products and technologies less
competitive or obsolete. See "Business -- Competition."
DEPENDENCE ON PATENTS AND OTHER PROPRIETARY RIGHTS; UNCERTAINTY OF PATENT
POSITION AND PROPRIETARY RIGHTS. The Company's success will depend in part on
its ability to obtain patent protection for its products, both in the United
States and abroad. The patent position of biotechnology and pharmaceutical
companies in general is highly uncertain and involves complex legal and factual
questions. Although the Company has filed a number of patent applications
related to the Company's technologies in the United States, and foreign
counterparts of certain of these patent applications have been filed in other
countries, no patents have been granted to date. There can be no assurance that
any patents will be granted or that patents issued to the Company will not be
challenged, invalidated or circumvented, or that the rights granted thereunder
will provide proprietary protection to the Company. Furthermore, there can be no
assurance that others will not independently develop similar products or, if
patents are issued to the Company or its collaborators, will not design around
such patents.
9
<PAGE>
Furthermore, the enactment of the legislation implementing the General
Agreement on Trade and Tariffs has resulted in certain changes to United States
patent laws that became effective on June 8, 1995. Most notably, the term of
patent protection for patent applications filed on or after June 8, 1995 is no
longer a period of seventeen years from the date of grant. The new term of a
United States patent will commence on the date of issuance and terminate twenty
years from the earliest effective filing date of the application. Because the
time from filing to issuance of biotechnology patent application is often more
than three years, a twenty-year term from the effective date of filing may
result in a substantially shortened term of patent protection, which may
adversely impact the Company's patent position. If this change results in a
shorter period of patent coverage, the Company's business could be adversely
affected to the extent that the duration and level of the royalties it is
entitled to receive from a collaborative partner is based on the existence of a
valid patent.
The Company's potential products may conflict with patents which have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more patents are issued, the risk increases that the
Company's potential products may give rise to claims that they infringe the
patents of others. Such other persons could bring legal actions against the
Company claiming damages and seeking to enjoin clinical testing, manufacturing
and marketing of the affected products. Any such litigation could result in
substantial cost to the Company and diversion of effort by the Company's
management and technical personnel. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license in order to continue to manufacture or market the affected
products. There can be no assurance that the Company would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms, if at all. Failure to obtain needed patents,
licenses or proprietary information held by others may have a material adverse
effect on the Company's business. In addition, if the Company becomes involved
in litigation, it could consume a substantial portion of the Company's time and
resources.
Composition of matter patent protection is not available for thalidomide.
The Company is aware of at least two other issued patents covering certain
non-antiangiogenic uses of thalidomide. Although the Company believes that the
claims in such patents will not interfere with the Company's proposed use of
thalidomide, there can be no assurance that the holders of such patents will not
be able to exclude the Company from using thalidomide for other
non-antiangiogenic uses of thalidomide.
The Company also relies on trade secret protection for its confidential and
proprietary information. However, trade secrets are difficult to protect and
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to unpatented trade secrets. The
Company requires its employees, consultants and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. The agreements generally provide that all trade
secrets and inventions conceived by the individual and all confidential
information developed or made known to the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information.
To the extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to the
Company's proposed projects, disputes may arise as to the proprietary rights to
such information which may not be resolved in favor of the Company. Certain of
the Company's consultants are employed by or have consulting agreements with
third parties and any inventions discovered by such individuals generally will
not become property of the Company. See "Business -- Patents and Proprietary
Rights."
10
<PAGE>
DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS. The Company is dependent on
certain of its executive officers and scientific personnel, including John W.
Holaday, Ph.D., the Company's Chairman, President and Chief Executive Officer,
and Carol Nacy, Ph.D., the Company's Executive Vice President. The Company has
obtained and is the beneficiary of key person life insurance policies in the
face amount of $1,000,000 on each of the lives of Drs. Holaday and Nacy and, in
April 1996 effective January 1, 1996, entered into a three-year employment
agreement with Dr. Holaday. Competition for qualified employees among
pharmaceutical and biotechnology companies is intense, and the loss of certain
of such persons, or an inability to attract, retain and motivate additional
highly skilled scientific, technical and management personnel, could materially
adversely affect the Company's business and prospects. There can be no assurance
that the Company will be able to retain its existing personnel or attract and
retain additional qualified employees.
The Company may also be dependent, in part, upon the continued contributions
of the lead investigators of the Company's sponsored research programs. The
Company's scientific consultants and collaborators may have commitments to or
consulting or advisory agreements with other entities that may affect their
ability to contribute to the Company or may be competitive with the Company.
Inventions or processes discovered by such persons will not necessarily become
the property of the Company, but may remain the property of such persons or of
such persons' full-time employers. See "Management."
RISK OF PRODUCT LIABILITY; AVAILABILITY OF INSURANCE. The use of the
Company's potential products in clinical trials and the marketing of any
pharmaceutical products may expose the Company to product liability claims. The
Company has obtained a level of liability insurance coverage that it deems
appropriate for its current stage of development. However, there can be no
assurance that the Company's present insurance coverage is adequate. Such
existing coverage will not be adequate as the Company further develops products,
and no assurance can be given that in the future adequate insurance coverage or
indemnification by collaborative partners will be available in sufficient
amounts or at a reasonable cost. A successful product liability claim could have
a material adverse effect on the business and financial condition of the
Company.
UNCERTAINTY RELATED TO HEALTH CARE REIMBURSEMENT AND REFORM MEASURES. The
Company's success may depend, in part, on the extent to which reimbursement for
the costs of therapeutic products and related treatments will be available from
third-party payors such as government health administration authorities, private
health insurers, managed care programs and other organizations. Over the past
decade, the cost of health care has risen significantly, and there have been
numerous proposals by legislators, regulators and third-party health care payors
to curb these costs. Some of these proposals have involved limitations on the
amount of reimbursement for certain products. There can be no assurance that
similar federal or state health care legislation will not be adopted in the
future or that any products sought to be commercialized by the Company or its
collaborators will be considered cost-effective or that adequate third-party
insurance coverage will be available for the Company to establish and maintain
price levels sufficient for realization of an appropriate return on its
investment in product development. Moreover, the existence or threat of cost
control measures could have an adverse effect on the willingness or ability of
Bristol-Myers or other potential collaborators to pursue research and
development programs related to the Company's product candidates.
HAZARDOUS MATERIALS. The Company's research and development involves the
controlled use of hazardous, controlled and radioactive materials. The Company
is subject to federal, state and local laws and regulations governing the use,
manufacture, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by such
laws and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated.
11
<PAGE>
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could have a material adverse effect
on of the Company. See "Business -- Government Regulation."
NO MANUFACTURING OR MARKETING CAPACITY. The Company does not generally
expect to engage directly in manufacturing or marketing of products in the near
term, but may elect to do so in certain cases. The Company does not currently
have the capacity to manufacture or market products or any experience in such
activities. If the Company elects to perform these functions, the Company will
be required to either develop these capacities, or contract with others to
perform some or all of these tasks. The Company may be dependent to a
significant extent on corporate partners, licensees or other entities for
manufacturing and marketing of products. If the Company engages directly in
manufacturing or marketing, the Company will require substantial additional
funds and personnel and will be required to comply with extensive regulations
applicable to such a facility. There can be no assurance that the Company will
be able to develop or contract for these capacities when required in connection
with the Company's business. See "Business -- Manufacturing and Marketing."
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to this offering, there has been no public market for the Common Stock, and
there is no assurance that an active market will develop or be sustained after
this offering. The initial public offering price will be determined by
negotiation between the Company and the Representatives of the Underwriters and
may bear no relationship to the price at which the Common Stock will trade after
completion of this offering. See "Underwriting" for factors to be considered in
determining such offering price. The market price of the shares of Common Stock,
like that of the common stock of many other early-stage biopharmaceutical
companies, is likely to be highly volatile. Factors such as the results of
preclinical studies and clinical trials by the Company or its competitors, other
evidence of the safety or efficacy of product candidates of the Company or its
competitors, announcements of technological innovations or new commercial
therapeutic products by the Company or its competitors, governmental regulation,
changes in reimbursement policies, healthcare legislation, developments in
patent or other proprietary rights, developments in the Company's relationships
with future collaborative partners, if any, public concern as to the safety and
efficacy of drugs developed by the Company, fluctuations in the Company's
operating results, and general market conditions may have a significant impact
on the market price of the Common Stock.
FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS. Future sales of shares
of Common Stock by existing stockholders pursuant to Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), through the exercise
of outstanding registration rights or through the sale of shares of Common Stock
issuable upon exercise of options, warrants or otherwise, could have an adverse
effect on the price of the Company's Common Stock. In addition to the 3,200,000
shares of Common Stock offered hereby, approximately 3,424,290 shares of Common
Stock will be eligible for immediate resale in the public market and, subject to
compliance with Rule 144 under the Securities Act, approximately 2,925,714
shares of Common Stock will be eligible for sale in the public market beginning
90 days from the date of this Prospectus. An additional 855,930 shares of Common
Stock issuable upon the exercise of vested options and warrants will also become
eligible for sale in the public market pursuant to Rule 701 and Rule 144 under
the Securities Act beginning 90 days from the date of this Prospectus. The
Securities and Exchange Commission has recently proposed an amendment to the
holding period requirements of Rule 144 to permit resales of restricted
securities after a one-year holding period rather than a two-year holding
period, and to permit unrestricted resales by non-affiliates after a two-year
holding period rather than a three-year holding period. At the request of the
Underwriters, the Company and the holders of approximately 96.5% of the
outstanding shares of Common Stock, including each stockholder holding in excess
of 1% of the outstanding shares and each executive officer and director of the
Company, have agreed not to sell or transfer any of their shares for a period of
180 days from the date of this Prospectus without the prior written consent of
Allen & Company
12
<PAGE>
Incorporated, on behalf of the Underwriters. Additionally, beginning one year
from the date of this Prospectus, Bristol-Myers is entitled to certain
registration rights with respect to 874,999 shares of Common Stock and warrants
to purchase 444,444 shares of Common Stock (which amounts include 333,333 shares
to be purchased upon the closing of this offering and assume an initial public
offering price of $15.00 per share) and, beginning 13 months from the date of
this Prospectus, holders of 1,157,344 shares of Common Stock and 211,315
warrants to purchase Common Stock will have registration rights with respect to
shares owned by them. In addition, the Company intends to file a Form S-8 to
register an aggregate of 1,750,000 shares subject to outstanding options or
reserved for issuance pursuant to the Company's stock option plans. See
"Description of Capital Stock -- Registration Rights" and "Shares Eligible for
Future Sale."
DILUTION. Investors purchasing shares of Common Stock in this offering will
incur immediate and substantial net tangible book value dilution of
approximately $10.80 per share, or 72%, assuming an initial public offering
price of $15.00 per share. This dilution will be increased to the extent that
holders of outstanding options and warrants to purchase Common Stock at prices
below the initial public offering price exercise such securities. See
"Dilution."
CONTROL OF COMPANY; POTENTIAL ANTI-TAKEOVER PROVISIONS. Upon the completion
of this offering and the sale of the BMS Shares by the Company, the officers and
directors of the Company will own or control approximately 26% of the
outstanding shares of Common Stock of the Company (25% if the Underwriters'
over-allotment option is exercised in full). As a result, such individuals will
generally be able to influence significantly the outcome of corporate
transactions or other matters submitted for stockholder approval. Such influence
by principal stockholders could preclude any unsolicited acquisition of the
Company and consequently adversely affect the market price of the Common Stock.
In addition, the Company's Board of Directors is authorized to issue from time
to time, without stockholder authorization, additional shares of preferred stock
with such terms and conditions as the Board of Directors may determine in its
sole discretion. The Company is also subject to a Delaware statute regulating
business combinations. Any of these provisions could discourage, hinder or
preclude an unsolicited acquisition of the Company and could make it less likely
that stockholders receive a premium for their shares as a result of any such
attempt. See "Management," "Principal Stockholders" and "Description of Capital
Stock."
OUTSTANDING OPTIONS AND WARRANTS. The Company has outstanding options and
warrants to purchase an aggregate of 2,381,688 shares of Common Stock at a
weighted average exercise price of $4.92 per share and warrants issued to
Bristol-Myers to purchase an additional 444,444 shares of Common Stock
exercisable at $22.50 per share (assuming an initial public offering price of
$15.00 per share). Holders of such options and warrants are likely to exercise
them when, in all likelihood, the Company could obtain additional capital on
terms more favorable than those provided by the options and warrants. In
addition, the exercise of such options and warrants will result in dilution to
the interests of the stockholders of the Company to the extent that the exercise
price is less than the fair market value of the Common Stock. See "Management --
Stock Options" and "Description of Capital Stock."
ABSENCE OF DIVIDENDS. The Company has never paid any cash dividends on its
Common Stock and does not intend to pay cash dividends in the foreseeable
future. The Company currently intends to retain all earnings, if any, for the
development of its business.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,200,000 shares of
Common Stock offered hereby, at an assumed initial public offering price of
$15.00 per share and after deducting the estimated underwriting discounts and
expenses payable by the Company, are estimated to be approximately $43,400,000
($50,060,000 if the Underwriters' over-allotment option is exercised in full).
In addition, the net proceeds to the Company from the sale of the BMS Shares by
the Company will be $5,000,000.
The Company currently intends to use approximately $34,000,000 of the net
proceeds of this offering and the sale of the BMS Shares for research and
development activities, of which approximately $16,000,000 is expected to be
allocated to its antiangiogenesis program, including funding sponsored and
internal early-stage research, approximately $11,000,000 is expected to be
allocated to its cell permeation technology, including the evaluation of the
technology for a variety of disease indications and therapeutic agents, and
approximately $7,000,000 is expected to be allocated to other research and
development programs, of which approximately $2,000,000 is expected to be
allocated to sponsored research on cellular immunity (in connection with a
proposed acquisition) and approximately $5,000,000 is expected to be allocated
to sponsored research or acquisitions of new technologies, businesses or product
candidates. Although the Company in the ordinary course of its business
investigates, evaluates and discusses with others such potential acquisitions,
except as described herein, the Company has no agreements or arrangements with
respect to such acquisitions. The remainder of the net proceeds of this offering
and the sale of the BMS Shares is expected to be used for working capital and
general corporate purposes, a portion of which may be used to establish a new
facility. However, the Company has not yet identified any potential new facility
for lease or site for building, and expects to seek debt financing to fund a
portion of such cost if it determines to build a facility.
The amounts, timing and allocation of such expenditures may vary
significantly depending upon numerous factors, including the progress of the
Company's research and development programs (which may vary as product
candidates are added or abandoned), preclinical testing and clinical trials,
achievement of regulatory milestones, the Company's corporate partners
fulfilling their obligations to the Company, the timing and cost of seeking
regulatory approvals, the level of resources that the Company devotes to the
development of manufacturing, marketing and sales capabilities, if any,
technological advances, the status of competitors, the ability of the Company to
maintain existing and establish new collaborative arrangements with other
companies to provide funding to the Company to support these activities and
other factors.
Pending such uses, the net proceeds from this offering and the sale of the
BMS Shares will be temporarily invested by the Company in short-term, interest
bearing, investment grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
intend to pay cash dividends in the foreseeable future. The Company currently
intends to retain all earnings, if any, for the development of its business.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1996 (a) the actual
capitalization of the Company (after giving retroactive effect to a
two-for-three reverse stock split of the Common Stock effected in April 1996);
(b) the pro forma capitalization of the Company after giving effect to the
automatic conversion of 3,000,000 outstanding shares of Preferred Stock into
2,000,000 shares of Common Stock on the date of this Prospectus; and (c) the
capitalization as adjusted to reflect the sale by the Company of the 3,200,000
shares of Common Stock offered hereby and the sale of the BMS Shares at an
assumed initial public offering price of $15.00 per share and the receipt of the
estimated net proceeds therefrom. This table should be read in conjunction with
the Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA AS ADJUSTED
--------------- --------------- ---------------
<S> <C> <C> <C>
Stockholders' Equity (1):
Preferred Stock, $1.00 par value; 8,000,000 shares
authorized; 3,000,000 shares issued and outstanding actual,
no shares issued and outstanding pro forma and as
adjusted................................................... 3,000,000 -- --
Common Stock, $.01 par value; 27,000,000 shares authorized;
6,460,579 shares issued and outstanding actual; 8,460,579
shares issued and outstanding pro forma; and 11,993,912
shares issued and outstanding as adjusted.................. 64,606 84,606 119,939
Additional paid-in capital.................................. 21,149,625 24,129,625 72,494,292
Accumulated deficit......................................... (22,162,378) (22,162,378) (22,162,378)
--------------- --------------- ---------------
Total stockholders' equity................................ 2,051,853 2,051,853 50,451,853
--------------- --------------- ---------------
Total capitalization.......................................... $ 2,051,853 $ 2,051,853 $ 50,451,853
--------------- --------------- ---------------
--------------- --------------- ---------------
</TABLE>
- ------------------------
(1) Does not include (i) 2,381,688 shares of Common Stock issuable upon exercise
of outstanding options and warrants at a weighted average exercise price of
$4.92 per share and 444,444 shares of Common Stock issuable upon exercise of
warrants issued to Bristol-Myers exercisable at $22.50 per share (assuming
an initial public offering price of $15.00 per share) and (ii) an additional
642,969 shares reserved for issuance under the Company's stock option plans.
See "Management -- Stock Options" and "Description of Capital Stock."
15
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at March 31, 1996,
after giving effect to the conversion of the Preferred Stock on the date of this
Prospectus, was $2,005,755, or approximately $0.24 per share. Net tangible book
value per share is equal to the Company's total tangible assets less its total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale of the 3,200,000 shares of Common Stock in this
offering and the sale of the BMS Shares at an assumed initial public offering
price of $15.00 per share and receipt of the estimated net proceeds therefrom,
the pro forma net tangible book value at March 31, 1996 would have been
$50,405,755 or $4.20 per share. This represents an immediate increase in such
net tangible book value of $3.96 per share to existing stockholders and an
immediate dilution in net tangible book value of $10.80 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $ 15.00
Pro forma net tangible book value per share at December 31,
1995............................................................. $ 0.24
Increase per share attributable to new investors.................. 3.96
---------
Pro forma net tangible book value per share after this offering and
the sale of the BMS Shares......................................... 4.20
---------
Dilution per share to new investors................................. $ 10.80
---------
---------
</TABLE>
If the Underwriters' over-allotment option were exercised in full, the
adjusted pro forma net tangible book value after the offering would be
$57,105,755, resulting in immediate dilution to new investors of $10.42 per
share.
The following table summarizes on a pro forma basis at March 31, 1996 the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders since inception and by new investors in this offering
(assuming an initial public offering price of $15.00 per share and before
deducting the estimated underwriting discounts and offering expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
-------------------------- --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders.................. 8,460,579 70.5% $ 23,592,231 30.8% $ 2.79
New Investors (1)...................... 3,533,333 29.5 53,000,000 69.2 $ 15.00
------------- ----- -------------- -----
Total.............................. 11,993,912 100.0% $ 76,592,231 100.0%
------------- ----- -------------- -----
------------- ----- -------------- -----
</TABLE>
- ------------------------
(1) Includes the BMS Shares, which are being purchased from the Company upon the
closing of this offering at the initial public offering price pursuant to a
private placement. Bristol-Myers also is an existing stockholder of the
Company. See "Principal Stockholders."
The foregoing tables do not give effect to any exercise of (i) 2,381,666
shares of Common Stock issuable upon exercise of outstanding options and
warrants at a weighted average exercise price of $4.92 per share and (ii)
444,444 shares of Common Stock issuable upon exercise of outstanding warrants
issued to Bristol-Myers of Common Stock exercisable at $22.50 per share
(assuming an initial public offering price of $15.00 per share). To the extent
that such options and warrants are exercised, there will be additional dilution
to new investors. See "Management -- Stock Options."
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1991, 1992, 1993,
1994 and 1995 and for the period from September 18, 1991 (date of inception) to
December 31, 1991 and the years ended December 31, 1992, 1993, 1994 and 1995 are
derived from the financial statements of EntreMed, Inc., which have been audited
by Ernst & Young LLP, independent auditors. The data should be read in
conjunction with the financial statements, related notes and other financial
information included herein. The selected financial data as of March 31, 1996
and for the three months ended March 31, 1995 and 1996 are derived from the
unaudited financial statements of the Company which are also included herein. In
the opinion of management, the unaudited financial statements have been prepared
on a basis consistent with the audited financial statements and include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the financial position and results of operations for these
periods. The operating results for the three months ended March 31, 1996 are not
necessarily indicative of results that may be expected for the entire fiscal
year.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
SEPTEMBER 18, 31,
1991 (DATE OF YEAR ENDED DECEMBER 31, (UNAUDITED)
INCEPTION) TO -------------------------------------------------- -----------
DECEMBER 31, 1991 1992 1993 1994 1995 1995
----------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues (1):
Grant revenues............................. $ -- $ -- $ -- $ 90,185 $ 347,001 $ --
Collaborative research and development..... -- -- -- -- 347,501 --
License fees............................... -- -- -- -- 16,667 --
----------------- ----------- ----------- ----------- ----------- -----------
Total revenues........................... -- -- -- 90,185 711,169 --
Expenses:
Research and development................... -- 645,752 4,772,652 3,673,929 5,939,512 1,596,677
General and administrative................. 23,873 812,198 1,552,143 1,549,705 2,458,976 455,342
Interest expense........................... -- -- -- -- 65,754 --
Interest income............................ -- (56,383) (85,939) (18,993) (44,854) (5,559)
----------------- ----------- ----------- ----------- ----------- -----------
Net loss..................................... $ (23,873) $(1,401,567) $(6,238,856) $(5,114,456) $(7,708,219) $(2,046,460)
----------------- ----------- ----------- ----------- ----------- -----------
----------------- ----------- ----------- ----------- ----------- -----------
Pro forma net loss per share (2)............. $ (0.83)
-----------
-----------
Pro forma weighted average number of shares
outstanding (2)............................. 9,271,943
-----------
-----------
<CAPTION>
1996
-----------
<S> <C>
Statement of Operations Data:
Revenues (1):
Grant revenues............................. $ --
Collaborative research and development..... 1,042,500
License fees............................... 50,000
-----------
Total revenues........................... 1,092,500
Expenses:
Research and development................... 2,063,270
General and administrative................. 771,411
Interest expense........................... 9,547
Interest income............................ (76,321)
-----------
Net loss..................................... $(1,675,407)
-----------
-----------
Pro forma net loss per share (2)............. $ (0.18)
-----------
-----------
Pro forma weighted average number of shares
outstanding (2)............................. 9,312,035
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1991 1992 1993 1994 1995
--------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 2,342 $ 1,399,072 $ 2,188,665 $ 218,619 $ 6,885,099
Working capital (deficit)............................. (18,671) 1,356,666 2,112,738 (332,427) 5,689,810
Total assets.......................................... 23,640 1,586,691 3,258,995 843,742 10,146,383
Deferred revenue, less current portion................ -- -- -- -- 2,741,666
Long-term debt........................................ -- -- -- -- 104,152
Accumulated deficit................................... (23,873) (1,401,567) (7,280,210) (12,778,752) (20,486,971)
Total stockholders' equity (deficit).................. (2,627) 1,524,235 3,183,068 292,696 3,601,260
<CAPTION>
MARCH 31, 1996
--------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 7,600,058
Working capital (deficit)............................. 3,727,118
Total assets.......................................... 8,606,849
Deferred revenue, less current portion................ 2,566,667
Long-term debt........................................ --
Accumulated deficit................................... (22,162,378)
Total stockholders' equity (deficit).................. 2,051,853
</TABLE>
- ------------------------
(1) With the exception of license fees and research funding under the
Bristol-Myers Collaboration and research grants, the Company has not derived
any revenues from operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) Pro forma net loss per share and weighted average shares outstanding for the
year ended December 31, 1995 and the three month period ended March 31, 1996
give effect to the automatic conversion of 3,000,000 outstanding shares of
Preferred Stock into 2,000,000 shares of Common Stock on the date of this
Prospectus.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in September 1991, the Company has devoted substantially
all of its efforts and resources to sponsoring and conducting research and
development on its own behalf and through collaborations with corporate partners
and academic research and clinical institutions, and establishing its facilities
and hiring personnel. Prior to 1994, the primary focus of the Company's research
and development efforts and expenditures was the development of vaccines. The
Company has substantially reduced its vaccine related development activity,
reflecting in part its desire to prioritize its limited financial resources and
the perceived greater proprietary and commercial potential of its
antiangiogenesis and blood cell permeation technology programs.
With the exception of license fees and research and development funding from
Bristol-Myers and certain research grants, the Company has not generated any
revenue from operations. For the period from inception to March 31, 1996, the
Company incurred a cumulative net loss of approximately $22,162,000 and expects
to incur additional operating losses for the foreseeable future. In December
1995, the Company entered into the Bristol-Myers Collaboration and, through
March 31, 1996, had received $5,700,000 in license and research and development
fees and expense reimbursements and a $6,500,000 equity investment pursuant to
this alliance. The Company expects that its revenue sources for at least the
next several years will be limited to research grants and future collaboration
payments from Bristol-Myers and from other collaborators under arrangements that
may be entered into in the future. The timing and amounts of such revenues, if
any, will likely fluctuate sharply and depend upon the achievement of specified
milestones, and results of operations for any period may be unrelated to the
results of operations for any other period. See "Business -- Collaborations and
License Agreements."
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenues under collaborative research and development agreements were
$1,092,500 for the three months ended March 31, 1996 as compared to no revenues
for the three months ended March 31, 1995. The collaborative research and
development fees relate to the amortization over five years of a one-time
payment of $2,500,000 and the amortization over six months of semi-annual
payments of $1,835,000 under the Bristol-Myers Collaboration. The license fees
represent the amortization over five years of a one-time $1,000,000 license fee
under the Bristol-Myers Collaboration, a portion of which was paid to Children's
Hospital. Three month's amortization of these amounts is included in the three
month period ended March 31, 1996, as the Bristol-Myers Collaboration was
entered into in December 1995.
Research and development expenses increased by 29% from approximately
$1,597,000 in the three months ended March 31, 1995 to approximately $2,063,000
in the three months ended March 31, 1996. Research and development expenditures
related to sponsored research payments increased by 53% from $1,052,000 for the
three months ended March 31, 1995 to $1,605,000 in the corresponding period in
1996, reflecting increased efforts in the Company's sponsored research and
product development programs related to its angiogenesis and cell permeation
technologies.
General and administrative expenses increased by 69% in the three months
ended March 31, 1996 to approximately $771,000 from approximately $455,000 in
the three months ended March 31, 1995, reflecting the Company's expanded
operations and a one-time charge of $233,000 related to the future payments
under a termination agreement with Steve Gorlin, a founder and former director
of the Company. Mr. Gorlin ceased providing services to the Company during the
three months ended March 31, 1996. See "Certain Transactions." Interest expense
increased from zero in the three
18
<PAGE>
months ended March 31, 1995 to $10,000 in the three months ended March 31, 1996
as a result of the completion, subsequent to March 31, 1995, of a sale-leaseback
agreement. Interest income increased to $76,000 in the three months ended March
31, 1996 from $6,000 in the corresponding period in 1995, as a result of the
additional capital available to invest following the execution of the
Bristol-Myers Collaboration.
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues under collaborative research and development agreements were
approximately $348,000 and license fees were approximately $17,000 in the year
ended December 31, 1995. The collaborative research and development fees relate
to the amortization over five years of a one-time payment of $2,500,000 and the
amortization over six months of a semi-annual payments of $1,835,000 under the
Bristol-Myers Collaboration. The license fees represent the amortization over
five years of a one-time $1,000,000 license fee under the Bristol-Myers
Collaboration, a portion of which was paid to Children's Hospital. Approximately
one month's amortization of these amounts is included in 1995 as the
Bristol-Myers Collaboration was entered into in December 1995. The Company had
no collaboration revenues in 1993 or 1994. In addition, revenues during 1994 and
1995 included grant revenues from World Health Organization and SBIR grants of
$90,000 and $347,000, respectively.
Research and development expenses decreased by 23% from approximately
$4,773,000 in 1993 to $3,674,000 in 1994, reflecting the reduction in expenses
relating to the Company's decreased emphasis on vaccine development, and
increased by 62% to approximately $5,940,000 in 1995, due primarily to increased
efforts in the Company's internal and sponsored research and product development
programs related to its antiangiogenesis and blood cell permeation technologies.
Research and development expenditures included sponsored research payments of
approximately $3,054,000, $1,369,000 and $2,570,000 and internal research and
development expenses of approximately $1,719,000, $2,305,000 and $3,370,000 in
1993, 1994 and 1995, respectively.
General and administrative expenses remained relatively constant in 1993 and
1994 and increased by 59% in 1995 to $2,459,000 from $1,550,000 in 1994 as a
result of increases in the number of Company personnel. Interest income
decreased from $86,000 in 1993 to $19,000 in 1994 and increased to $45,000 in
1995, reflecting the lower average cash balance during 1994, which increased
during 1995. During 1995, the Company had interest expense of approximately
$66,000 as a result of capital lease obligations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1996, the Company financed its operations
from (i) the net proceeds of private placements of equity securities which
raised approximately $17,000,000, (ii) payments from Bristol-Myers, including
$9,700,000 received in December 1995 (of which $6,500,000 was an equity
investment) and $2,500,000 received in March 1996, (iii) various grants from the
World Health Organization and Small Business Innovation Research ("SBIR") grants
totalling approximately $437,000 and (iv) proceeds of approximately $654,000
under capital leases.
Bristol-Myers is obligated to make additional semi-annual payments to the
Company of $1,835,000 in each of June and December through June 2000 and
$365,000 in December 1996 as well as additional payments in the event certain
mostly late-stage regulatory milestones are achieved. Bristol-Myers may
terminate the collaboration agreement and return the licensed technology to the
Company at any time upon six months' notice, in which event it would have no
further funding obligation to the Company. See "Business -- Collaborations and
License Agreements."
At March 31, 1996, the Company had working capital of approximately
$3,727,000. The Company's cash resources have been used to finance research and
development, including sponsored research, capital expenditures, including
leasehold improvements to the Company's laboratory facility, and general and
administrative expenses. Over the next several years, the Company expects to
19
<PAGE>
incur substantial additional research and development costs, including costs
related to early-stage research in areas not reimbursed by Bristol-Myers,
preclinical and clinical trials, increased administrative expenses to support
its research and development operations and increased capital expenditures for
pilot manufacturing capacity, various equipment needs and facility improvements.
At March 31, 1996, the Company was a party to sponsored research agreements
requiring it to fund an aggregate of approximately $6,492,000 through 1999
(including $6,000,000 to Children's Hospital) and license agreements requiring
milestone payments of up to $2,360,000 and additional payments upon attainment
of regulatory milestones. In addition, the Company has recently agreed to
preliminary terms regarding a proposed transaction that, if consummated, would
require the Company to fund additional sponsored research and an equity
investment in the approximate aggregate amount of $1,850,000 over the next two
years. The Company is also a party to an office lease expiring in 2003 with
total future minimum lease payments of $1,620,300. See Note 4 of Notes to
Financial Statements. See "Business -- Collaborations and License Agreements."
At December 31, 1995, the Company had available net operating loss
carryforwards of $17,100,000 to offset any future taxable income for federal tax
purposes. The utilization of the loss carryforwards to reduce future income
taxes will depend on the Company's ability to generate sufficient taxable income
prior to the expiration of the net operating loss carryforwards. The
carryforwards begin to expire in the year 2006. However, the Tax Reform Act of
1986 limits the maximum annual use of net operating loss and tax credit
carryforwards in certain situations where changes occur in the stock ownership
of a corporation. For financial reporting purposes, a valuation allowance has
been recognized to reduce the net deferred tax assets to zero due to
uncertainties with respect to the Company's ability to generate taxable income
in the future sufficient to realize the benefit of deferred income tax assets.
See Note 8 of Notes to Financial Statements.
The Company believes that the net proceeds from this offering and from the
sale of the BMS Shares by the Company, together with its existing resources and
committed funding from Bristol-Myers, will be sufficient to meet its capital
needs for approximately 24 months, although there can be no assurance the
Company will not require additional funds prior to such date. However, the
Company's working capital requirements will depend upon numerous factors,
including the progress of the Company's research and development programs (which
may vary as product candidates are added or abandoned), preclinical testing and
clinical trials, achievement of regulatory milestones, the Company's corporate
partners fulfilling their obligations to the Company, the timing and cost of
seeking regulatory approvals, the level of resources that the Company devotes to
the development of manufacturing, marketing and sales capabilities, if any,
technological advances, the status of competitors, the ability of the Company to
maintain existing and establish new collaborative arrangements with other
companies to provide funding to the Company to support these activities and
other factors. In any event, the Company will require substantial funds in
addition to the proceeds of this offering to develop any of its product
candidates and otherwise to meet its business objectives. The Company has no
commitments to obtain any additional funds and there can be no assurance such
funds will be available on acceptable terms, or at all.
20
<PAGE>
BUSINESS
GENERAL
EntreMed is engaged primarily in the research and development of
biopharmaceutical products that address the role of blood and blood vessels in
the prevention and treatment of a broad range of diseases. The Company's core
technologies include (i) an antiangiogenesis program focused on the development
of proprietary products intended to inhibit the abnormal growth of new blood
vessels associated with cancer and certain causes of blindness and (ii) a blood
cell permeation device designed to enhance the ability of red blood cells to
deliver oxygen to organs and tissues and which may also be used to deliver
drugs, genes or other therapeutic agents that otherwise would not readily
diffuse through blood cell membranes.
Angiogenesis is the fundamental process by which new blood vessels are
formed and primarily occurs during the first three months of embryonic
development. Except for wound healing and certain reproductive processes in
women, angiogenesis is otherwise generally associated with several diseases,
including cancer and certain causes of blindness. The Company believes that
antiangiogenic products, which inhibit the abnormal growth of blood vessels, may
have significant advantages over traditional therapies for these diseases. The
Company is currently developing several angiogenesis inhibitors, including
thalidomide and its chemical analogs and Angiostatin-TM-, a protein produced by
the body. The Company is also applying its expertise in the role of blood
function to the development of a blood cell permeation device designed to
enhance the oxygen releasing capabilities of red blood cells. Organs and tissues
in the body require oxygen to function properly and oxygen deficiency may lead
to tissue damage or death.
In December 1995, the Company and Bristol-Myers Squibb Company
("Bristol-Myers") entered into a collaboration (the "Bristol-Myers
Collaboration") to develop and commercialize certain antiangiogenesis
therapeutics. This collaboration provides for Bristol-Myers to fund Company
research, provide milestone payments to the Company and pay the Company
royalties on net sales of any products developed under the collaboration. In
addition, Bristol-Myers made a $6,500,000 equity investment in the Company and
agreed to make an additional $5,000,000 equity investment upon the closing of
this offering. In return, the Company granted Bristol-Myers exclusive worldwide
rights to antiangiogenic applications of thalidomide, thalidomide analogs and
Angiostatin-TM- protein.
The Company's product candidates have been developed primarily through
sponsored research collaborations and licensing agreements. The principal
antiangiogenesis therapeutics currently under development by the Company were
licensed from Children's Hospital at Harvard Medical School ("Children's
Hospital") where the Company sponsors research under the direction of Dr. M.
Judah Folkman. The flow electroporation technology used in the cell permeation
device was licensed from the Center for Blood Research Laboratories at Harvard
Medical School ("CBRL"). The Company's sponsored research programs are augmented
by its internal capabilities in the fields of the vasculature system, blood
vessel growth and blood function.
To date, the Company and its collaborators have:
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of breast cancer, prostate
cancer and Kaposi's sarcoma.
-Initiated Phase II clinical trials to evaluate the antiangiogenic effects
of thalidomide in inhibiting the progression of age-related macular
degeneration, a major cause of blindness.
-Isolated, identified, sequenced, cloned and recombinantly expressed
Angiostatin-TM- protein. In preclinical studies, Angiostatin-TM- protein
appeared to inhibit vascularization and growth of primary and metastatic
tumors.
-Constructed a prototype device designed to introduce inositol hexaphosphate
("IHP") molecules into red blood cells, which may enhance the delivery of
oxygen to organs and tissues in the body.
21
<PAGE>
CORPORATE STRATEGY
The Company's strategy is to accelerate development of its antiangiogenesis
and cell permeation technologies as well as other promising technologies which
the Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to broaden its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development with
its in-house research and development capabilities
and (iv) to leverage its resources through corporate partnerships in order to
minimize the cost to the Company of late-stage clinical trials and to accelerate
effective product commercialization.
ANGIOGENESIS
OVERVIEW
Within the human body, a network of arteries, capillaries and veins, known
as the vasculature, functions to transport blood throughout the body. The basic
network of the vasculature is developed through angiogenesis, a fundamental
process by which new blood vessels are formed. The primary angiogenic period in
humans takes place during the first three months of embryonic development.
During this period, cytokines and growth factors, which are normally suppressed,
are activated to stimulate the growth of new blood vessels. Once the general
network of the blood vessels is complete, these angiogenic stimulators are
inhibited and blood vessels grow longer and larger in diameter until adulthood
through a different process termed vasculogenesis. Although angiogenesis occurs
in embryonic development, wound healing and in certain reproductive processes in
women, angiogenesis is otherwise generally associated with several diseases,
including cancer and diabetic retinopathy and macular degeneration, both of
which are major causes of blindness.
ANGIOGENESIS AND CANCER
The term cancer includes many different types of uncontrolled cellular
growth. Clusters of cancer cells, referred to as tumors, may destroy surrounding
organs, impair physiological function and often lead to death. In order to
survive, cancer cells require oxygen and nutrients which they receive from the
body's blood supply. In order to access this blood supply, cancer cells initiate
a biochemical mechanism that stimulates angiogenesis, which provides the blood
supply that nourishes the tumor. As cancer cells grow and metastasize (spread
from primary sites to secondary sites) they require continuous angiogenesis.
Antiangiogenic substances are intended to inhibit the growth of blood vessels
and may be effective in treating certain cancers, with fewer adverse side
effects than traditional therapies. Cancer is the second leading cause of death
in the United States and it is estimated that approximately 1,360,000 new cases
of cancer will be diagnosed in 1996.
Existing cancer treatments include surgery, radiation therapy and
chemotherapy. Surgery requires invasive procedures to remove cancerous cells.
Often, cancer tumors located in sites that are difficult to access or tumors
that have metastasized to vital organs cannot be treated surgically. Radiation
therapy produces ionized molecules within the body that attack cancer cells but
which may also damage healthy cells. Chemotherapy involves the administration of
toxic substances designed to kill cancer cells and usually produces severe side
effects. In addition, resistance to chemotherapy occurs over time. The Company
believes that its antiangiogenesis technologies may have significant advantages
over traditional cancer therapies, including reduced toxicity, and may be
administered in conjunction with such other therapies.
ANGIOGENESIS AND BLINDNESS
Angiogenesis within the eye, a condition often associated with diabetes and
age-related macular degeneration, is a major cause of blindness. Macular
degeneration, which is age-related, and diabetic retinopathy, a secondary effect
of diabetes, both involve the formation of new blood vessels in front of or
behind the retina. The blood vessels that grow in front of the retina occlude
vision and the blood vessels that grow behind the retina often hemorrhage or
cause the detachment of the retina, in each case resulting in blindness. It is
estimated that approximately 8,000,000 people experience diabetic
22
<PAGE>
retinopathy, and that 25,000 new cases of blindness develop each year. It is
estimated that approximately 13,000,000 people suffer from macular degeneration,
and that 1,700,000 develop vision impairment, of which 100,000 new cases of
blindness develop each year. Current treatments for diabetic retinopathy and, to
a more limited extent, macular degeneration involve laser-based photocoagulation
treatments, which often cause unintended damage to the retina and surrounding
cells.
ANGIOGENESIS AND OTHER DISEASE INDICATIONS
A variety of other disease indications may be associated with angiogenesis,
including rheumatoid arthritis, cardiovascular disease (atherosclerosis),
psoriasis and Crohn's disease. The Company believes that its antiangiogenesis
technologies may be applicable to these other diseases. To date, the Company has
not pursued research for applications of antiangiogenesis to diseases outside of
cancer or macular degeneration. There can be no assurance that the Company will
pursue research outside these indications, that product candidates will result
from any research undertaken or that any products for these diseases will ever
be commercialized.
ENTREMED'S ANTIANGIOGENESIS PROGRAM
The Company believes that certain drugs or proteins that exhibit
antiangiogenic effects may be used as effective, safe therapeutics for diseases
involving angiogenesis. The Company currently focuses on angiogenesis inhibition
as a treatment for cancer, macular degeneration and diabetic retinopathy.
Product candidates under development include: (i) thalidomide and several of its
chemical analogs which focus the therapeutic activity of thalidomide
specifically on angiogenesis and (ii) Angiostatin-TM- protein, a newly
discovered angiogenesis inhibitor naturally produced by the body. The Company's
evaluation of thalidomide and its chemical analogs as antiangiogenic
therapeutics will also enable the Company to generate clinical and marketing
data on the general utility of angiogenesis inhibitors. These data can then be
applied in the development of Angiostatin-TM- protein, which the Company
believes may have greater efficacy as an antiangiogenic therapeutic. The Company
believes that, if successfully developed, these products could be used alone or
in combination with each other to treat certain angiogenic diseases.
PRODUCT CANDIDATES
ORAL ANTIANGIOGENESIS DRUG. The Company is evaluating the antiangiogenic
properties of the drug thalidomide and its chemical analogs. Thalidomide, which
was widely prescribed as a sedative in Europe in the late 1950s and early 1960s,
is believed to have caused severe birth defects in children. The Company
believes that thalidomide may have affected fetal development and caused birth
defects by blocking new blood vessel growth, a characteristic that may make
thalidomide useful in the prevention and treatment of angiogenic disorders. In
preclinical animal studies conducted at Children's Hospital, thalidomide has
been shown to block angiogenesis. Because of the negative precedent associated
with thalidomide, as well as patent and competitive issues, the Company also
intends to screen for and conduct research on chemical analogs of thalidomide
having substantially similar mechanisms of action as thalidomide but which may
focus the therapeutic activity of this drug specifically on angiogenesis. The
Company proposes to develop thalidomide or a thalidomide analog as a long-term
patient administered oral therapeutic to inhibit the progression of certain
angiogenic diseases, including cancer and certain causes of blindness.
The Company, Bristol-Myers and the National Cancer Institute recently
initiated Phase II clinical trials to evaluate the antiangiogenic effects of
thalidomide in inhibiting the progression of breast cancer, prostate cancer and
Kaposi's sarcoma. The Company and its collaborators intend to conduct similar
studies regarding brain cancer in the near future. Based on results of these
studies, as well as development activities relating to thalidomide analogs, the
Company will determine, together with Bristol-Myers, whether to pursue the
commercialization of thalidomide by expanding these trials or by initiating a
Phase III trial, or to develop an analog of thalidomide, or both. In animal
studies performed at Children's Hospital, thalidomide was shown to inhibit the
abnormal formation of blood vessels in the eye, a major cause of blindness. The
Company is currently conducting Phase II clinical
23
<PAGE>
trials at the Scheie Eye Institute at the University of Pennsylvania School of
Medicine and with the Retina Associates of Cleveland to evaluate the
antiangiogenic effects of thalidomide in blindness due to age-related macular
degeneration.
Although not approved for sale in the United States, thalidomide has been
used as an investigational agent to treat a limited number of patients for
leprosy and other diseases and is being developed by other companies for various
disease indications. See "-- Government Regulation."
ANGIOSTATIN-TM- PROTEIN. The Company is developing Angiostatin-TM- protein
as a potential long-term cancer therapeutic to prevent metastatic disease and as
a therapy for primary tumors. Metastatic tumor growth is attributed to the
implantation and growth of tumor cells at secondary sites. These tumor cells are
released by a primary tumor, or are released into circulation during surgical
removal of the primary tumor. Although surgeons generally remove significant
amounts of healthy tissue surrounding the tumor, in many cases "seed cells" have
already escaped the primary tumor and are circulated through the body until they
become embedded elsewhere. It has been observed that in certain cases, these
seed cells, or metastases, do not vascularize and grow while the primary tumor
is in place. However, after the primary tumor is removed, secondary metastatic
tumors often grow rapidly.
In Company-sponsored research at Children's Hospital, a substance associated
with primary tumors was identified which appears to prevent vascularization and
growth of metastatic tumors. Based upon such research, the Company believes that
the primary tumor secretes an enzyme that cleaves plasminogen, a known protein
associated with blood clotting, into a smaller, previously undiscovered protein.
The Children's Hospital team isolated and identified the protein, which the
Company named Angiostatin-TM- protein, and the Company has cloned and expressed
the gene that codes for Angiostatin-TM- protein. In preclinical studies,
including the murine Lewis Lung Carcinoma metastatic model, it has been
demonstrated that Angiostatin-TM- protein inhibits the growth of metastatic
tumors derived from carcinomas and sarcomas. In addition, Angiostatin-TM-
protein was shown to reduce the size of primary murine carcinomas and sarcomas
as well as human prostate, breast and colon cancers grown in immunodeficient
mice. The Company and Bristol-Myers are addressing additional required
preclinical studies, while manufacturing Angiostatin-TM- protein in limited
quantities.
The Company currently anticipates that Angiostatin-TM- protein, as an
endogenous angiogenesis inhibitor, would be administered as an adjunct therapy
after diagnosis and sustained thereafter. The Company believes that
Angiostatin-TM-protein may also be effective in inhibiting other angiogenic
diseases such as diabetic retinopathy and macular degeneration, although the
Company has not conducted any research to date in these areas. The Company has
obtained an exclusive license from Children's Hospital to this technology,
including rights to patent applications filed on Angiostatin-TM- protein and
related technology.
OTHER ANTIANGIOGENESIS RESEARCH
The Company maintains an internal discovery and development program and also
continues to sponsor and support research at Children's Hospital on angiogenesis
technologies with the aim of developing antiangiogenesis products in addition to
Angiostatin-TM- protein, thalidomide and thalidomide analogs. To the extent that
additional antiangiogenesis therapeutics are developed at Children's Hospital
and licensed by the Company, Bristol-Myers has a right of first refusal to
sublicense from the Company such technologies. See "-- Collaborations and
License Agreements." The Company's research in these areas is currently early
stage, although the Company and Children's Hospital have identified several
endogenous proteins and compounds with angiogenic or antiangiogenic properties
that may be candidates for further development. The Company intends to use a
portion of the proceeds of this offering to fund early-stage internal and
sponsored research on angiogenesis technologies. See "Use of Proceeds."
24
<PAGE>
ENTREMED'S CELL PERMEATION TECHNOLOGY
OVERVIEW
The Company is applying its expertise in the role of blood function to the
development of a cell permeation technology that may facilitate the delivery
into blood cells of drugs, genes or other therapeutic agents that otherwise
would not readily diffuse through the cell membrane. To date, the Company has
focused its cell permeation research on a method of enhancing the oxygen
delivery capabilities of blood.
Human blood is comprised of four components: red blood cells, white blood
cells, plasma and platelets. The principal functions of human blood are to
transport oxygen and nutrients to tissues, carry waste products away from
tissues and defend the body against infection. Hemoglobin, a protein-iron
molecule contained within red blood cells, is responsible for carrying oxygen
from the lungs to tissues throughout the body. Tissues and organs in the body
require oxygen to function properly, and oxygen deficiency may lead to tissue
damage or death. In human blood, each hemoglobin molecule carries four molecules
of oxygen, but releases only one. It has been proposed that IHP, a naturally
occurring plant chemical, may enhance the oxygen releasing capabilities of
hemoglobin by allowing the release of three oxygen molecules. The theory that
IHP could enhance the oxygen releasing capacity of hemoglobin has been proposed
for several years. Scientists have observed that a molecule similar to IHP found
in the hemoglobin of birds is more efficient at releasing oxygen than a
corresponding molecule (2,3 diphosphoglycerate, or 2,3 DPG) found in human
hemoglobin. However, IHP does not readily diffuse through the cell membrane of
human red blood cells and previous techniques used to introduce IHP into such
red blood cells have experienced significant problems and have resulted in
substantial cell damage.
The Company's research has led to the development of a prototype device
designed to introduce IHP into red blood cells without significant cell damage.
The Company intends to develop this application as a therapeutic in such chronic
and acute diseases as angina, congestive heart failure, heart attacks, stroke
and other diseases involving inadequate circulation or respiratory functions.
Existing methods of treatment for these diseases, including surgical remedies,
drug therapies and non-surgical devices, treat such diseases by seeking to
increase blood flow, rather than increasing the blood's oxygen releasing
capacity. In addition, unlike blood that is stored in blood banks, which loses
its capacity to deliver oxygen for approximately 12 to 24 hours following a
transfusion, blood treated with IHP may be able to release oxygen to tissues
more rapidly following transfusion. The Company intends to investigate the
application of IHP-treated blood for storage in blood banks. Because IHP-treated
blood may release more oxygen to tissues than untreated human blood, it may also
be possible that a smaller amount of IHP-treated blood can be transfused to
obtain equivalent tissue oxygenation.
With the exception of IHP-treated blood, the Company has not yet explored
any other applications of its cell permeation technology. Potential therapeutic
candidates will be selected based on an analysis of various disease indications
and related market potential, the likely time and expense required for
development and adaptation of the core technology for the specific application
and the interest of potential strategic partners. Potential product candidates
may be reformulations of existing compounds approved by the FDA where
enhancement of delivery through blood cell membranes is believed to have
increased clinical value compared to existing methods. The Company intends to
use a portion of the proceeds of this offering to investigate potential
applications of this technology. See "Use of Proceeds."
DEVICE FOR OXYGEN ENHANCED BLOOD DELIVERY
The Company has constructed a prototype device designed to introduce IHP
molecules into red blood cells, which may enhance the delivery of oxygen to
tissues and organs. The device permits red blood cells drawn from patients to be
separated from plasma and treated with IHP in a disposable flow electroporation
chamber. The flow electroporation chamber combines the separated red blood cells
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with IHP and, through an electrical charge, renders the red blood cell membrane
permeable, permitting IHP to pass through the cell membrane and combine with
hemoglobin. IHP-treated blood is then ready for infusion into the patient or for
storage for later infusion.
The Company is sponsoring contract research and development on IHP-treated
blood. An initial prototype flow electroporation device has been constructed and
the accompanying reagents have been developed, although design activities are
ongoing and there can be no assurance that a clinically acceptable device will
be completed. Following completion of a clinically acceptable prototype, the
Company intends to conduct preclinical toxicology studies required to
demonstrate the safety and efficacy of IHP-treated red blood cells in enhancing
the delivery of oxygen to tissues in relevant disease states.
The Company's flow electroporation technology is based on Company sponsored
research conducted at the CBRL. In November 1992, the Company obtained an
exclusive worldwide license to this technology from the CBRL and a United States
patent application for the device and method for introducing IHP into red blood
cells was filed in March 1993. Device and disposable component engineering and
development has been and continues to be conducted by a contract manufacturer,
which is also expected to provide pilot manufacturing capabilities.
The Company is in discussions with several major pharmaceutical companies
and is seeking to enter into collaborative arrangements with corporate partners
to develop and commercialize the Company's cell permeation technology, which may
cover specific product candidates or disease indications. However, there can be
no assurance that any such agreements will be entered into with any of these
companies or any potential partner or that the terms of any agreement will be
favorable to the Company. See "-- Manufacturing and Marketing."
COLLABORATIONS AND LICENSE AGREEMENTS
GENERAL. The Company intends to continue to develop in-licensed products
and sponsored research programs and to enter into collaborations and licensing
agreements with corporate partners for product development, manufacturing and
marketing. The Company believes that it will be necessary to enter into
collaborative arrangements with other companies in the future to develop,
commercialize, manufacture and market its cell permeation technology, as well as
any additional products or technologies it may acquire or develop.
BRISTOL-MYERS COLLABORATION. In December 1995, the Company entered into the
Bristol-Myers Collaboration for the development of certain antiangiogenesis
products. The Bristol-Myers Collaboration provides for a five year research
program, the grant to Bristol-Myers of an exclusive license to the Company's
thalidomide, thalidomide analogs and Angiostatin-TM- protein technologies and an
equity investment in the Company by Bristol-Myers.
During the five year research term, the Company has agreed to conduct
research and Bristol-Myers has agreed to support and fund such research.
Bristol-Myers has agreed to provide funding of $18,350,000, payable in ten
semi-annual payments of $1,835,000. In addition, Bristol-Myers has agreed to pay
an additional $730,000 to reimburse the Company for ongoing thalidomide clinical
studies, one-half of which has been paid and the remainder is payable in
December 1996. Bristol-Myers also paid to the Company $1,000,000 in license
fees, a portion of which was paid to Children's Hospital, and $2,500,000 in
consideration of know-how and research and development performed by the Company.
The Company granted Bristol-Myers an exclusive worldwide royalty-bearing
license to make, use and sell products that are based upon the Company's
Angiostatin-TM- protein, thalidomide and thalidomide analog technologies.
Bristol-Myers has a right to sublicense, and has undertaken to secure a
sublicense to develop thalidomide-related products for ophthalmological
indications, unless Bristol-Myers reasonably believes that the dosage or method
of administration will not be significantly different from oncological
indications. Any failure or delay by Bristol-Myers to enter into such a
sublicense may substantially limit or preclude the commercial development of
these applications.
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Bristol-Myers also received a five year right of first refusal with respect to
the development of any technology licensed or to be licensed by the Company from
Children's Hospital in the field of antiangiogenic therapeutics.
The Bristol-Myers Collaboration also provides for royalties to the Company
based on the net sales price of products sold by Bristol-Myers. With respect to
any product that is derived from Angiostatin-TM- protein, the royalty shall be
15% of net sales, subject to a reduction to no less than 10% based on
manufacturing costs. With respect to any product derived from thalidomide, the
royalty shall be 8% and, with respect to thalidomide analogs, the royalty shall
range from 8% to 12.5% based on sales volume. In the case of thalidomide, the
royalties shall be subject to reduction based on competitive factors.
In addition, the Company may be entitled to receive additional payments for
each product category based upon the achievement of defined and primarily
late-stage clinical development and regulatory filing milestones. While there
can be no assurance that these milestones will be reached, these additional
payments could total $32,000,000. Up to $9,000,000 of the milestone payments for
products related to thalidomide and thalidomide analogs and up to $4,000,000 of
the milestones for products related to Angiostatin-TM- protein will be
creditable against any royalties that may become payable by Bristol-Myers to the
Company, although the cumulative amount of credits in any year may not exceed
50% of the aggregate royalties otherwise payable. The Company retained certain
co-promotion rights if Bristol-Myers elects to seek a co-promotion partner with
respect to any products covered by the collaboration. The Bristol-Myers
Collaboration may be terminated by Bristol-Myers for any reason upon six months
notice without any further liability for future payments.
Upon execution of the Bristol-Myers Collaboration, Bristol-Myers purchased
541,666 shares of the Company's Common Stock for $12.00 per share and agreed to
purchase an additional $5,000,000 of Common Stock at the closing of this
offering in a private placement at the initial public offering price per share.
The Company also issued to Bristol-Myers a warrant, exercisable for one-year
from the date of this Prospectus, to purchase up to $10,000,000 of Common Stock
at an exercise price per share equal to 150% of the initial public offering
price per share. The Company has granted to Bristol-Myers certain registration
rights with respect to all of these shares. See "Description of Capital Stock --
Registration Rights."
ACADEMIC COLLABORATIONS. In addition to its in-house research program, the
Company collaborates with several academic institutions to support research in
areas of the Company's product development interests. Usually, research
supported at outside academic institutions is performed in conjunction with
additional in-house research. Often, the faculty members responsible for
supervision of the research performed at the academic institution will
participate further as consultants to the Company's in-house effort.
Typically under these arrangements, the Company agrees to fund the research
it has chosen to support with a specified budget over a specified time period,
usually one to three years. In return, the Company usually obtains an exclusive
license, with the right to grant sublicenses, and the right to further develop
and market products that arise out of the technology being supported. Under
several of these licenses, the Company is required to meet specified milestones
or diligence requirements in order to retain its license of such technologies.
There can be no assurance that the Company will satisfy these milestones and
diligence requirements and be able to retain such licenses. In addition to
providing research support, the Company usually is required to pay royalties to
the academic institution on sales, if any, of any licensed products resulting
from such research. The Company in most instances files and prosecutes patent
applications on behalf of the institutions.
The Company's primary academic collaboration is with Children's Hospital. In
September 1993, the Company entered into a sponsored research agreement with
Children's Hospital to support research conducted under the direction of Dr. M.
Judah Folkman on the role of angiogenesis in pathological conditions. Under the
agreement, as amended in August 1995, the Company agreed to pay to Children's
Hospital $11,000,000, of which $5,000,000 was paid through April 1996,
$1,000,000
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is due on October 1, 1996 and the remainder is due in equal semi-annual payments
of $1,000,000 until April 1, 1999. The Company also granted to Children's
Hospital options to acquire 83,334 shares of Common Stock at an exercise price
of $6.00 per share and additional options to acquire 50,000 shares at an
exercise price of $6.375 per share. The Company obtained an exclusive option to
negotiate an exclusive, worldwide, royalty-bearing license to any technology
resulting from the research at Children's Hospital in areas covered by the
agreement. The Company received a right to sublicense the licensed technologies,
although the Company agreed to pay to Children's Hospital a portion of all
sublicensing payments, which do not include payments to support research and
development by the Company or equity investments in the Company. The Company has
also received certain rights of first refusal to certain additional research
projects and any new project opportunities arising from Dr. Folkman's core
laboratory activities.
The Company exercised its option in May 1994 to obtain exclusive worldwide
licenses to certain oral antiangiogenesis technology (thalidomide and its
analogs), cancer diagnostic and prognostic technology, and endogenous
antiangiogenesis technology (Angiostatin-TM- protein). These license agreements
provide for certain milestone payments by the Company to Children's Hospital as
well as royalties based on sales, if any, of any products developed from the
licensed technologies. The milestone payments aggregate $2,650,000, of which
$290,000 has been paid through March 31, 1996, and are based upon license fees
and the achievement of regulatory approvals. See "-- Angiogenesis Program."
OTHER COLLABORATIVE ARRANGEMENTS. The Company is sponsoring research at
Innovative Therapeutics, Inc. ("ITI"), a company that is performing early-stage
research on methods to treat disease by stimulating cellular immunity. The
methods under development pursuant to this sponsored research program are
designed to target specific diseases by the administration of synthetic peptides
or recombinant proteins that mimic proteins which occur naturally during that
particular disease. These therapeutic agents are designed to initiate cellular
immune responses exclusively, without affecting humoral immunity. Through March
31, 1996, the Company has paid ITI approximately $682,500 pursuant to this
collaboration.
The Company and ITI have agreed to preliminary terms regarding a proposed
transaction whereby a subsidiary to be formed by the Company ("Newco") would
acquire substantially all of the assets of ITI in exchange for 15% of the equity
of Newco and a research funding commitment by the Company. The terms contemplate
an equity investment by the Company in Newco of $250,000 and research funding
for this 85% owned subsidiary of an aggregate of $1,600,000 during the first two
years, with an additional $1,500,000 to be provided at the sole option of the
Company during the third year. The acquisition is subject to the execution of
definitive agreements, and there can be no assurance that the proposed
transaction will be completed on the terms set forth above or at all.
The Company intends to continue to support and fund research at other
companies or academic or other institutions in selected areas in exchange for
rights to technologies and products derived from such sponsored research or
equity positions in such companies. The Company expects to focus on sponsored
research in areas in which it has existing expertise or where a strong market
opportunity is perceived. The Company may establish subsidiaries to develop and
commercialize promising technologies or products generated from this research,
which may create opportunities for separately financing and managing new
development programs. The Company may use a portion of the proceeds of this
offering to fund sponsored research by other organizations. See "Use of
Proceeds."
COMPETITION
Competition in the pharmaceutical, biotechnology and biopharmaceutical
industries is intense and based significantly on scientific and technological
factors, the availability of patent and other protection for technology and
products, the ability and length of time required to obtain governmental
approval for testing, manufacturing and marketing and the ability to
commercialize products in a timely fashion. Moreover, the biopharmaceutical
industry is characterized by rapidly evolving technology that could result in
the technological obsolescence of any products developed by the Company. The
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Company competes with many specialized biopharmaceutical firms, as well as a
growing number of large pharmaceutical companies that are applying biotechnology
to their operations. Many biopharmaceutical companies have focused their
development efforts in the human therapeutics area, and many major
pharmaceutical companies have developed or acquired internal biotechnology
capabilities or made commercial arrangements with other biopharmaceutical
companies. These companies, as well as academic institutions, governmental
agencies and private research organizations, also compete with the Company in
recruiting and retaining highly qualified scientific personnel and consultants.
The Company's competition will be determined in part by the potential
indications for which the Company's compounds may be developed and ultimately
approved by regulatory authorities. The Company is relying on Bristol-Myers to
commercialize the licensed antiangiogenesis products and, accordingly, the
success of these products in the target indications of cancer and blindness will
depend in significant part on Bristol-Myers' efforts and ability to compete in
these markets. The success of the Bristol-Myers Collaboration will depend in
part upon Bristol-Myers' own competitive, marketing and strategic
considerations, including the relative advantages of alternative products being
developed and marketed by Bristol-Myers and its competitors. For example,
Bristol-Myers currently markets cancer therapeutics, which would be competitive
with any antiangiogenic products developed under the Bristol-Myers Collaboration
to treat cancer. Bristol-Myers has a right to sublicense, and has undertaken to
secure a sublicense to develop thalidomide-related products for ophthalmological
indications, unless Bristol-Myers reasonably believes that the dosage or method
of administration will not be significantly different from oncological
indications. Any failure or delay by Bristol-Myers to enter into such a
sublicense may substantially limit or preclude the commercial development of
these applications. See "-- Collaborations and License Agreements."
The Company is aware of companies and research institutions investigating
the role of angiogenesis generally and specifically as it may be useful in
developing therapeutics to treat various diseases associated with abnormal blood
vessel growth. In studies available to date, these angiogenetic inhibitors have
shown varying effectiveness in inhibiting angiogenesis and differing degrees of
bioavailability and toxicity. Significant further preclinical and clinical
development of these products is needed prior to an assessment of the more
significant competitive product candidates in the antiangiogenesis disease
indications targeted by the Company.
The Company is aware of other companies developing thalidomide and certain
of its chemical analogs for various disease indications, including Celgene
Corporation, for the treatment of AIDS-related cachexia (or wasting) and mouth
ulcers, and Andrulis Pharmaceuticals, for diabetes. Although the Company
believes that its patent rights, if granted, would preclude another company from
marketing thalidomide for antiangiogenic indications, there can be no assurance
that any patent will issue or afford meaningful protection.
A substantial number of companies utilize or are developing cell permeation
or drug delivery technologies and competition for the development of drug
delivery products is intense, although the Company's focus is on blood cell
permeation. The Company is aware of at least one other company, Allos
Therapeutics, Inc., that is engaged in early-stage research regarding a method
to acutely increase the oxygen-releasing capacity of hemoglobin for treating
cancer. The Company also anticipates that IHP-treated blood (which is not
technically a blood replacement), will compete for use in blood transfusions
with readily available products, including whole human blood or packed red blood
cells, and products under development, such as blood substitutes.
Many of the Company's existing or potential competitors have substantially
greater financial, technical and human resources than the Company and may be
better equipped to develop, manufacture and market products. In addition, many
of these competitors have extensive experience in preclinical testing and human
clinical trials and in obtaining regulatory approvals. The existence of
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competitive products, including products or treatments of which the Company is
not aware, or products or treatments that may be developed in the future, may
adversely affect the marketability of products which may be developed by the
Company.
MANUFACTURING AND MARKETING
The Company's strategy is to enter into collaborative arrangements with
pharmaceutical and other companies for the development, manufacturing and
marketing of products requiring broad marketing capabilities and for overseas
marketing. These collaborators are generally expected to be responsible for
funding or reimbursing all or a portion of the development costs, including the
costs of clinical testing necessary to obtain regulatory clearances and for
commercial scale manufacturing, in exchange for exclusive or semi-exclusive
rights to market specific products in particular geographic territories. To
date, the Company has entered into one collaboration agreement, with
Bristol-Myers, relating to certain of its antiangiogenesis technologies.
However, the Company may, in the future, consider manufacturing or marketing
certain products directly and to co-promote certain products if it believes it
is appropriate under the circumstances. The Company has no experience in
manufacturing or marketing products on a commercial scale and does not have the
resources to manufacture or market by itself on a commercial scale any of its
product candidates. In the event the Company decides to establish a
manufacturing facility, the Company will require substantial additional funds,
and will be required to hire and train significant additional personnel and
comply with the extensive "good manufacturing practice" regulations applicable
to such a facility.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to obtain patent
protection for its products, both in the United States and abroad. The patent
position of biotechnology and pharmaceutical companies in general is highly
uncertain and involves complex legal and factual questions. The Company has
filed eight U.S. patent applications covering Angiostatin-TM- protein, DNA
coding for the Angiostatin-TM- protein, the use of Angiostatin-TM- protein as a
therapeutic agent and the use of Angiostatin-TM- protein as a diagnostic agent.
The Company also has filed three U.S. patent applications covering the use of
the thalidomide molecule and thalidomide analogs as an antiangiogenic agent for
the treatment of a wide variety of diseases that are caused by uncontrolled
angiogenesis. These patent applications also include composition of matter
coverage for certain thalidomide analogs. The Company has also filed four U.S.
patent applications covering the device and method for introducing substances
into cells by flow electroporation. These patent applications cover the
electroporation chamber in the device, the overall electroporation device and
the treatment of a wide variety of diseases using cells that have been treated
in the electroporation device. Patent applications corresponding to the U.S.
patent applications have been filed in Europe, Japan, Canada and other selected
countries. The Company has also filed intent-to-use trademark applications in
the U.S. Patent and Trademark Office for the marks "Angiostatin-TM-" and
"EntreMed."
There can be no assurance that any patents will be granted or that patents
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide proprietary protection to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products or, if patents are issued to the Company
or its collaborators, will not design around such patents.
Furthermore, the enactment of the legislation implementing the General
Agreement on Trade and Tariffs has resulted in certain changes to United States
patent laws that became effective on June 8, 1995. Most notably, the term of
patent protection for patent applications filed on or after June 8, 1995 is no
longer a period of seventeen years from the date of grant. The new term of a
United States patent will commence on the date of issuance and terminate twenty
years from the earliest effective filing date of the application. Because the
time from filing to issuance of biotechnology patent application is often more
than three years, a twenty-year term from the effective date of filing may
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result in a substantially shortened term of patent protection, which may
adversely impact the Company's patent position. If this change results in a
shorter period of patent coverage, the Company's business could be adversely
affected to the extent that the duration and level of the royalties it is
entitled to receive from a collaborative partner is based on the existence of a
valid patent.
The Company's potential products may conflict with patents which have been
or may be granted to competitors, universities or others. As the biotechnology
industry expands and more patents are issued, the risk increases that the
Company's potential products may give rise to claims that they infringe the
patents of others. Such other persons could bring legal actions against the
Company claiming damages and seeking to enjoin clinical testing, manufacturing
and marketing of the affected products. If any such actions are successful, in
addition to any potential liability for damages, the Company could be required
to obtain a license in order to continue to manufacture or market the affected
products. There can be no assurance that the Company would prevail in any such
action or that any license required under any such patent would be made
available on acceptable terms, if at all. If the Company becomes involved in
litigation, it could consume a substantial portion of the Company's time and
resources.
Composition of matter patent protection is not available for thalidomide.
The Company is aware of at least two other issued patents covering certain
non-antiangiogenic uses of thalidomide. Although the Company believes that the
claims in such patents will not interfere with the Company's proposed use of
thalidomide, there can be no assurance that the holders of such patents will not
be able to exclude the Company from using thalidomide for other
non-antiangiogenic uses of thalidomide.
The Company also relies on trade secret protection for its confidential and
proprietary information. However, trade secrets are difficult to protect and
there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology, or that
the Company can meaningfully protect its rights to unpatented trade secrets.
The Company requires its employees, consultants and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. The agreements generally provide that trade
secrets and all inventions conceived by the individual and all confidential
information developed or made known to the individual during the term of the
relationship shall be the exclusive property of the Company and shall be kept
confidential and not disclosed to third parties except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's proprietary information in the
event of unauthorized use or disclosure of such information.
GOVERNMENT REGULATION
The Company's development, manufacture and potential sale of therapeutics is
subject to extensive regulation by United States and foreign governmental
authorities.
REGULATION OF PHARMACEUTICAL PRODUCTS. Products being developed by the
Company may be regulated by the FDA as drugs or biologics or, in some cases, as
medical devices. 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. The Company believes that drug products developed by it or its
collaborators will be regulated either as biological products or as new drugs.
Both statutes and the regulations promulgated thereunder govern, among other
things, the testing, manufacturing, safety, efficacy, labeling, storage, record
keeping, advertising and other promotional practices involving biologics or new
drugs, as the case may be. FDA approval or other clearances must be obtained
before clinical testing, and before manufacturing and marketing, of biologics
and drugs.
Obtaining FDA approval has historically been a costly and time consuming
process. Generally, in order to gain FDA pre-market approval, a developer first
must conduct pre-clinical studies in the
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laboratory and in animal model systems to gain preliminary information on an
agent's efficacy and to identify any safety problems. The results of these
studies are submitted as a part of an investigational new drug ("IND")
application, which the FDA must review before human clinical trials of an
investigational drug can start. The IND application includes a detailed
description of the clinical investigations to be undertaken.
In order to commercialize any products, the Company or its collaborator must
sponsor and file an IND and be responsible for initiating and overseeing the
clinical studies to demonstrate the safety, efficacy and potency that are
necessary to obtain FDA approval of any such products. For Company or
collaborator-sponsored INDs, the Company or its collaborator will be required to
select qualified investigators (usually physicians within medical institutions)
to supervise the administration of the products, and ensure that the
investigations are conducted and monitored in accordance with FDA regulations,
including the general investigational plan and protocols contained in the IND.
Clinical trials are normally done in three phases, although the phases may
overlap. Phase I trials are concerned primarily with the safety and preliminary
effectiveness of the drug, involve fewer than 100 subjects, and may take from
six months to over one year. Phase II trials normally involve a few hundred
patients and are designed primarily to demonstrate effectiveness in treating or
diagnosing the disease or condition for which the drug is intended, although
short-term side effects and risks in people whose health is impaired may also be
examined. Phase III trials are expanded clinical trials with larger numbers of
patients which are intended to evaluate the overall benefit-risk relationship of
the drug and to gather additional information for proper dosage and labeling of
the drug. Clinical trials generally take two to five years to complete, but may
take longer. 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 it concludes that an unwarranted risk is presented to
patients.
If clinical trials of a new product are completed successfully, the sponsor
of the product may seek FDA marketing approval. If the product is regulated as a
biologic, the FDA will require the submission and approval of both a Product
License Application ("PLA") and an Establishment License Application before
commercial marketing of the biologic. If the product is classified as a new
drug, the Company must file a New Drug Application ("NDA") with the FDA and
receive approval before commercial marketing of the drug. The NDA or PLA must
include detailed information about the drug and its manufacture and the 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 take, on average, two to five years to receive
approval. If questions arise during the FDA review process, approval can take
more than five years. 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 deny approval or require additional clinical studies.
In addition, the FDA may condition marketing approval on the conduct of specific
post-marketing studies to further evaluate safety and effectiveness. Even if FDA
regulatory clearances are obtained, a marketed product is 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.
Thalidomide is regulated by the FDA's Center for Drug Evaluation and
Research. Although not approved for sale in the U.S., thalidomide has been used
as an investigational agent to treat thousands of patients for leprosy and other
diseases. EntreMed has filed an IND application and started Phase II trials in
macular degeneration, a leading cause of blindness, and expects that the
analysis of these results could determine whether Phase III trials may be
attempted. The National Cancer Institute in collaboration with EntreMed and
Bristol-Myers has begun Phase II trials in breast cancer, prostate cancer and
Kaposi's sarcoma. It is expected that future cancer trials may be dependent on
the results of these studies. Thalidomide must meet the standard regulatory
requirements of any new drug, and successful Phase III clinical trials will be
necessary to form the basis of an NDA.
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Analogs of thalidomide may be regulated as new chemical entities by the
FDA's Center for Drug Evaluation and Research. Although these compounds are in
the discovery phase of research, it is expected that as new chemical entities
are discovered complete preclinical toxicology studies will be required prior to
studies in humans. The remainder of the developmental and regulatory
requirements will be similar to that of any new drug.
Angiostatin-TM- protein, a naturally occurring substance, is considered a
biologic and will be regulated by the FDA's Center for Biologics Evaluation and
Research. As a genetically engineered and endogenous protein, Angiostatin-TM-
protein will face unique and specific regulation hurdles, such as those related
to the manufacture of the product and the behavior of the product in the body.
The regulatory requirements for recombinant proteins have been developed for
other endogenous molecules (e.g., Epogen, Neupogen and Interferons) and
Angiostatin-TM-protein is expected to follow these established guidelines.
Successful preclinical studies and Phase I, II and III trials will be necessary
to form the basis for a PLA.
The cell permeation technology, and specifically IHP-treated red blood
cells, will likely be regulated by the FDA's Center for Biologics Evaluation and
Research. The Company anticipates that the FDA will view the IHP-treated red
blood cells (rather than IHP itself) as the regulated product. In addition, the
device used to insert IHP into the red blood cells may be regulated by the
Center for Biologics Evaluation and Research under the medical device provisions
of the Federal Food, Drug and Cosmetic Act (described below). It would be
expected that the preclinical and clinical trials necessary for approval of a
PLA would also be relevant to the approval of the device. Historically, the
FDA's Office of Blood Research and Review has had the most expertise and
experience in regulating blood, apheresis equipment and disposables associated
with the processing of human blood. Further development for IHP-treated blood is
expected to follow a similar path to that of any therapeutic biologic, with
successful completion of Phase I, Phase II and Phase III trials required to
precede the filing of a PLA. Because the cell permeation technology requires the
use of red blood cells produced from humans, the Company will be required to
comply with, or to contract with suppliers that comply with, stringent
regulation of blood component collection. That regulation is designed to protect
both donors and recipients of blood products and involves significant
recordkeeping and other burdens.
REGULATION OF DEVICES. Any device products which may be developed by the
Company are likely to be regulated by the FDA as medical devices rather than
drugs. In addition, as noted, the device used to insert IHP in blood cells may
be regulated as a medical device. The nature of the FDA requirements applicable
to such products depends on their classification by the FDA. A device developed
by the Company would be automatically classified as a Class III device,
requiring pre-market approval, unless the Company could demonstrate to the FDA,
in the required pre-market notification procedure, that the device was
substantially equivalent to an existing device that has been classified in Class
I or Class II or to a pre-1976 device that has not yet been classified. If the
Company were unable to demonstrate such substantial equivalence, it would be
required to undertake the costly and time-consuming process, comparable to that
for new drugs, of conducting preclinical studies, obtaining an investigational
device exemption to conduct clinical tests, filing a premarket approval
application, and obtaining FDA approval.
If the Company could demonstrate substantial equivalence to a Class I
product, the "general controls" of the Federal Food, Drug, and Cosmetic Act --
chiefly adulteration, misbranding, and good manufacturing practice requirements
- -- would nevertheless apply. If substantial equivalence to a Class II device
could be shown, the general controls plus "special controls" -- such as
performance standards, guidelines for safety and effectiveness, and post-market
surveillance -- would apply. While demonstrating substantial equivalence to a
Class I or Class II product is not as costly or time-consuming as the pre-market
approval process for Class III devices, it can in some cases also involve
conducting clinical tests to demonstrate that any differences between the new
device and devices already on the market do not affect safety or effectiveness.
If substantial equivalence to a pre-1976
33
<PAGE>
device that has not yet been classified has been shown, it is possible that the
FDA would subsequently classify the device as a Class III device and call for
the filing of premarket approval applications at that time. If the FDA took that
step, then filing an application acceptable to the FDA would be a prerequisite
to remaining on the market.
If the FDA chooses to regulate the device (the electroporation device and
disposable flow chamber) used to insert IHP in blood cells as a medical device,
it is likely that the review process will nevertheless occur in the Center for
Biologics Evaluation and Research. It is possible, however, that such Center
would consult with relevant officials in the FDA's Center for Devices and
Radiological Health. Such a consultation might further delay approval of the
device and thus of this technology.
OTHER. In addition to the foregoing, the Company's business is and will be
subject to regulation under various state and federal environmental laws,
including the Occupational Safety and Health Act, the Resource Conservation and
Recovery Act and the Toxic Substance Control Act. These and other laws govern
the Company's use, handling and disposal of various biological, chemical and
radioactive substances used in and wastes generated by its operations. The
Company believes that it is in material compliance with applicable environmental
laws and that its continued compliance therewith will not have a material
adverse effect on its business. The Company cannot predict, however, whether new
regulatory restrictions on the marketing of biotechnology products will be
imposed by state or federal regulators and agencies.
EMPLOYEES
As of May 15, 1996, the Company had 27 full-time employees, of which 19 were
in research and development and eight were in management and administration. The
Company intends to hire additional personnel. The Company also utilizes
part-time or temporary consultants on an as-needed basis. None of the Company's
employees is represented by a labor union and the Company believes its relations
with its employees are satisfactory.
PROPERTIES
The Company currently occupies an aggregate of approximately 11,600 square
feet of office space (approximately 8,250 square feet of which is laboratory
space) in Rockville, Maryland pursuant to a lease expiring in April 2003. The
lease provides for annual rent of approximately $215,000 during 1996, subject to
specified annual increases. See Note 4 of Notes to Financial Statements. The
Company anticipates that its current facilities will be sufficient through 1996,
at which time it is likely to require additional or larger space. The Company
has not yet determined whether to lease additional space or build a new
facility, but expects to use proceeds of this offering to fund a portion of the
costs relating to any such expansion. See "Use of Proceeds."
LEGAL PROCEEDINGS
The Company is a party to certain litigation initiated in August 1995 in the
United States District Court for the Eastern District of Tennessee by Bolling,
McCool & Twist, a consulting firm. The suit relates to a claim for services
rendered in the approximate amount of $50,000 and seeks a finder's fee in an
unspecified amount in connection with the Bristol-Myers Collaboration. In April
1996, the Company filed a motion to compel discovery. Due to the lack of
discovery and early stage of the proceedings, the Company is unable to predict
with certainty the eventual outcome of the lawsuit. The Company intends to
contest the action vigorously and believes that this proceeding will not have a
material adverse effect on the Company or on its financial statements, although
there can be no assurance that this will be the case.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -----------------------------------------------
<S> <C> <C>
John W. Holaday, Ph.D. (1)....... 50 Chairman of the Board, President, Chief
Executive Officer and Director
Carol A. Nacy, Ph.D. ............ 48 Executive Vice President
Edward R. Gubish, Ph.D. ......... 47 Vice President -- Regulatory and Clinical
Development
Leo Einck, Ph.D. ................ 45 Vice President -- Extramural Programs
John C. Thomas, Jr. ............. 42 Treasurer and Chief Financial Officer
Carl Alving, M.D. ............... 56 Director
Donald S. Brooks (2)(3).......... 60 Director
Bart Chernow, M.D. .............. 48 Director
Samuel R. Dunlap, Jr. (1)(2)..... 46 Executive Advisor and Director
Mark C.M. Randall (3)............ 33 Director
Leon E. Rosenberg, M.D. ......... 63 Director
Wendell M. Starke (1)(2)......... 54 Director
</TABLE>
- ------------------------
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
JOHN W. HOLADAY, PH.D. is a co-founder of the Company and has served as its
President and Chief Executive Officer and a director since August 1992 and its
Chairman of the Board since November 1995. Prior thereto, from May 1989 to
August 1992, he was a co-founder of Medicis Pharmaceutical Corp. where he served
as Scientific Director, Senior Vice President for Research and Development and
director. From 1968 to 1989, he served at the Walter Reed Army Institute of
Research, where he founded the Neuropharmacology Branch in 1980. He serves as an
officer and fellow in several biomedical societies and has authored and edited
numerous scientific articles in journals and books. His current academic
positions include Associate Professor of Anesthesiology and Critical Care
Medicine and Senior Lecturer in Medicine at The Johns Hopkins University of
Medicine, Baltimore, Maryland; Adjunct Professor of Pharmacology and Psychiatry
at the Uniformed Services University School of Medicine, Bethesda, Maryland; and
Clinical Assistant Professor of Surgery at the University of Connecticut Health
Center, Farmington, Connecticut.
CAROL A. NACY, PH.D. joined the Company as Senior Vice President of Research
in December 1992 and became Executive Vice President in November 1995. From 1978
until December 1992, Dr. Nacy was employed by the Walter Reed Army Institute of
Research, where she served in various capacities, including Project Director of
Immunotherapy and Infectious Diseases and Assistant Chief of the Department of
Cellular Immunology since 1988. Dr. Nacy currently serves as the President of
the American Society of Microbiology. Her current academic appointments include
Catholic University and Howard University in Washington, D.C. Dr. Nacy serves as
an officer of international scientific societies and as editor of several
scientific journals.
35
<PAGE>
EDWARD R. GUBISH, PH.D. has served as Vice President - Regulatory and
Clinical Development of the Company since November 1995 and has been employed by
the Company since October 1993. From 1990 to September 1993, Dr. Gubish served
as senior director of Regulatory Affairs for Baker Norton Pharmaceuticals (IVAX)
and Fujisawa Pharmaceuticals. From 1986 to 1990, Dr. Gubish served as Chief of
regulatory affairs for the AIDS Division at the National Institutes of Health
and as a scientific and administrative contact for sponsors of new biological
products and IND submissions for the, Center for Drugs and Biologics at the FDA.
LEO EINCK, PH.D. has served as Vice President -- Extramural Programs of the
Company since November 1995. From 1985 to September 1993, Dr. Einck was the
Director of Operations for HEM Pharmaceuticals, a company engaged in the
development of biopharmaceutical agents. From 1980 to 1985, Dr. Einck was a
researcher in molecular biology at the National Institutes of Health.
JOHN C. THOMAS, JR. has served part-time as Chief Financial Officer of the
Company since its inception in September 1991. Mr. Thomas has also served as the
Chief Financial Officer of several other companies, including Credit Depot
Corporation, a public company engaged in loan financing (from August 1990 to
March 1993 and from January 1995 until April 1996), Tapistron International,
Inc., a public company engaged in the development of technology for the textile
industry (from August 1991 until July 1995), and Sealite Sciences, a private
biotechnology company (from June 1991 to March 1993). Mr. Thomas is a certified
public accountant.
CARL ALVING, M.D. is a co-founder of the Company and has been a director of
the Company since August 1992. He has been Chief of the Department of Membrane
Biochemistry at the Walter Reed Army Institute of Research since 1978. Dr.
Alving has been the inventor of a number of patented technologies in the fields
of drug delivery and immunology.
DONALD S. BROOKS has been a director of the Company since April 1996. Since
July 1993, Mr. Brooks has been a practicing attorney with the law firm Carella
Byrne Bain Gilfillan Cecchi Stewart & Olstein, Roseland, New Jersey, which
represents the Company on certain matters. Prior thereto, Mr. Brooks was
employed by Merck & Co., Inc. for 27 years, most recently, from 1986 to 1993, as
Senior Counsel. From 1980 to 1985, Mr. Brooks served as a U.S. employer delegate
to the Chemical Industries Committee International Labor Organization in Geneva,
Switzerland.
BART CHERNOW, M.D. is a co-founder of the Company and has been a director
since the Company's inception. Dr. Chernow has served as Physician-in-Chief at
Sinai Hospital of Baltimore since 1990 and as a Professor of Medicine,
Anesthesiology and Critical Care at The Johns Hopkins University School of
Medicine part-time since 1990. Dr. Chernow is the Editor-in-Chief of the Journal
of CRITICAL CARE MEDICINE. From 1987 to 1990 Dr. Chernow was the Director of the
Henry K. Beecher Memorial Research Laboratories and Attending Physician of
Critical Care (anesthesia) at the Massachusetts General Hospital, Harvard
Medical School, where he also served as an Associate Professor.
SAMUEL R. DUNLAP, JR. has served as an Executive Advisor and a director to
the Company since August 1992. Mr. Dunlap also has (i) served as Chairman of
Dunlap & Partners, Ltd., a financial consulting firm in Atlanta, Georgia, since
October 1988, (ii) served as an Executive Advisor and is currently a director to
First Pacific Networks, Inc., a publicly-held telecommunications company, (iii)
served as a director of Credit Depot Corporation, of which he was a founder,
since December 1986, (iv) served as a director and a consultant of Golf Training
Systems, Inc., a public company, from August 1994 until December 1995 and (v)
served as a director from July 1991 until February 1994 and an Executive Advisor
from July 1991 until November 1994 of Tapistron International, Inc. From April
1986 until December 1988, Mr. Dunlap served as Executive Vice President and
director of CytRx Corporation, a publicly-held pharmaceutical company ("CytRx")
of which he was a founder. Mr. Dunlap also served as Executive Vice President of
Elan Pharmaceutical Research Corp., a publicly-held company, from August 1982 to
December 1983 and President and a director of such entity from January 1984 to
January 1985.
36
<PAGE>
MARK C.M. RANDALL has been a director of the Company since April 1996. Since
1985, Mr. Randall has been associated with Sarasin International Securities
Limited, London, England, a wholly-owned subsidiary of Bank Sarasin & Cie, a
private bank based in Switzerland, where he has been Director since 1994.
LEON E. ROSENBERG, M.D. has been a director of the Company since January
1996. Since September 1991 Dr. Rosenberg has served as the President of
Bristol-Myers Squibb Pharmaceutical Research Institute. From 1984 to September
1991, Dr. Rosenberg served as the dean of the Yale University School of
Medicine. Dr. Rosenberg is a member of the National Academy of Sciences and
serves on the Board of Directors of the Whitehead Institute for Biomedical
Research.
WENDELL M. STARKE has been a director of the Company since April 1994. Mr.
Starke is a Chartered Financial Analyst and a Chartered Investment Counselor.
Mr. Starke was President of INVESCO Capital Management, Inc. from 1979 to 1991
and has been its Chairman since 1991. In 1992, he became Chairman of INVESCO,
Inc., the parent company of INVESCO Capital Management and other INVESCO money
management subsidiaries with 1995 year-end assets of over $75 billion under
management in the United States. Mr. Starke also serves as a member of the
Board, Global Chief Investment Officer and Chairman of the Global Asset
Allocation Committee of INVESCO, PLC, the London-based parent company of the
worldwide INVESCO organization.
The Board of Directors currently consists of eight members. Successors to
those directors whose terms have expired are required to be elected by
stockholder vote; vacancies in unexpired terms and any additional positions
created by board action are filled by action of the existing Board of Directors.
Officers are elected to serve, subject to the discretion of the Board of
Directors, until their successors are appointed.
The Executive Committee currently consists of three members. The Executive
Committee acts as a liaison between management and the Board of Directors and is
responsible for all matters that arise between regular meetings of the Board of
Directors, to the extent permitted by Delaware law.
The Audit Committee currently consists of two directors. The Audit Committee
reviews, with the Company's independent accountants, the scope and timing of
their audit services and any other services they are asked to perform, their
report on the Company's financial statements following completion of their audit
and the Company's policies and procedures with respect to internal accounting
and financial controls. In addition, the Audit Committee makes annual
recommendations to the Board of Directors for the appointment of independent
public accountants for the ensuing year.
The Compensation Committee consists of three directors. This Committee
reviews and recommends to the Board of Directors the compensation and benefits
of all officers of the Company, reviews general policy matters relating to
compensation and benefits of employees of the Company and administers the
Company's stock option plans.
37
<PAGE>
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to each of the most highly compensated executive officers whose annual
compensation exceeded $100,000 for the fiscal year ended December 31, 1995
(collectively, the "named executive officers") for services during the fiscal
year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------- AWARDS ALL OTHER
NAME AND PRINCIPAL POSITION ANNUAL SALARY($) BONUS ($) OPTIONS (NO.) COMPENSATION ($)
- ------------------------------------- ---------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
John W. Holaday, Ph.D. .............. 200,000 100,000 270,001 12,551(1)
Chairman, President and Chief
Executive Officer
Carol A. Nacy, Ph. D. ............... 175,000 60,750 166,667 --
Executive Vice President
Edward R. Gubish, Ph.D. ............. 126,600 10,750(2) 70,000 --
Vice President -- Regulatory and
Clinical Development
Leo Einck, Ph.D. .................... 91,000 10,750(2) 70,000 --
Vice President -- Extramural
Programs
</TABLE>
- ------------------------
(1) Represents the premiums paid by the Company with respect to a split-dollar
life insurance policy on the life of Dr. Holaday. Premiums paid by the
Company on such policy are treated as non-interest bearing advances to the
insured for the policy. The initial proceeds of any death benefit are
required to be used to repay the indebtedness, and the balance of the
insurance proceeds are payable as designated by the insured. See "--
Employment Agreements."
(2) Includes $10,000 accrued in 1995 and paid in 1996.
The following table sets forth certain information with respect to
individual grants of stock options and warrants made during the fiscal year
ended December 31, 1995 to each of the named executive officers.
OPTION AND WARRANT GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK PRICE
OPTIONS/SARS APPRECIATION FOR OPTION
OPTIONS/ GRANTED TO EXERCISE TERM (1)
SARS EMPLOYEES OR BASE EXPIRATION ------------------------
NAME GRANTED (#) IN FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10% ($)
- ----------------------------------------- ----------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
John W. Holaday, Ph.D. .................. 270,001 22.6% $ 6.444 11/1/2005 4,875,678 8,783,403
Carol A. Nacy, Ph.D. .................... 166,667 13.9% $ 6.330 11/1/2005 3,009,673 5,421,844
Edward R. Gubish, Ph.D. ................. 70,000 5.8% $ 6.375 11/1/2005 1,264,060 2,277,170
Leo Einck, Ph.D. ........................ 70,000 5.8% $ 6.375 11/1/2005 1,264,060 2,277,170
</TABLE>
- ------------------------
(1) Assumes an initial public offering price of $15.00. The 5% and 10% assumed
annual rates of appreciation are mandated by the rules and regulations of
the Securities and Exchange Commission and do not reflect the Company's
estimates or projections of future Common Stock prices. There can be no
assurance that the rates of return reflected in the table will be achieved.
38
<PAGE>
The following table sets forth information concerning all option holdings
for the fiscal year ended December 31, 1995 for each of the named executive
officers:
AGGREGATED OPTION/EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/VALUE
<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-
AT FY-END (#) MONEY OPTIONS AT FY-
SHARES ACQUIRED VALUE EXERCISABLE/ END ($)(1)
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------------- --------------- ----------- ------------------- ----------------------------
<S> <C> <C> <C> <C>
John W. Holaday, Ph.D. ............... -- -- 176,669/200,000 $ 1,993,767/$1,725,000
Carol A. Nacy, Ph.D. ................. -- -- 170,000/146,667 $ 2,205,000/$1,265,003
Edward R. Gubish, Ph.D. .............. -- -- 30,000/80,000 $ 270,000/$693,750
Leo Einck, Ph.D. ..................... -- -- 10,667/72,667 $ 96,003/$627,753
</TABLE>
- ------------------------
(1) Assumes that the fair market of the common stock equalled the assumed
initial public offering price of $15.00.
EMPLOYMENT AGREEMENTS
In April 1996, effective as of January 1, 1996, the Company entered into a
three-year employment agreement with John W. Holaday, Ph.D., Chairman and Chief
Executive Officer of the Company. The agreement provides for an annual base
salary of $250,000 per year. The Company may terminate the agreement without
cause and, upon such termination, Dr. Holaday will be entitled to receive his
base salary through the end of the initial term of the agreement (subject to an
offset for salary received from subsequent employment). The agreement contains
confidentiality and non-competition provisions.
The Company is the beneficiary of a $1,000,000 key person life insurance
policy on the life of Dr. Holaday. In addition, the Company maintains a
$2,000,000 split-dollar life insurance policy on the life of Dr. Holaday at an
annual cost of approximately $12,500. Premiums paid by the Company on such
policy are treated as non-interest bearing advances to the insured for the
policy. The initial proceeds of any death benefit are required to be used to
repay the indebtedness, and the balance of the insurance proceeds are payable as
designated by the insured.
Each of the Company's employees has entered into a Proprietary Information
and Invention Assignment Agreement providing, among other things, that such
employee will not disclose any confidential information or trade secrets in any
unauthorized manner and that all inventions of such officer relating to the
Company's current or anticipated business during the term of employment become
the Company's property.
DIRECTOR COMPENSATION
Directors are entitled to compensation of $2,000 for each Board of Directors
meeting attended and are reimbursed for expenses actually incurred in connection
with attending such meetings. Directors are also awarded initial grants of
non-qualified stock options to purchase 15,000 shares of Common Stock upon
joining the Board of Directors and annual grants of non-qualified stock options
to purchase 5,000 shares of Common Stock. In addition, each member of a
committee of the Board of Directors will receive certain additional grants of
non-qualified stock options. All options are granted at the then fair market
value. See "-- Stock Options" and "Certain Transactions."
LIMITATION ON LIABILITY; INDEMNIFICATION AGREEMENTS
The General Corporation Law of Delaware permits a corporation through its
Certificate of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director, with certain
39
<PAGE>
exceptions. The exceptions include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or
knowing violation of law, improper declarations of dividends, and transactions
from which the directors derived an improper personal benefit. The Company's
Certificate of Incorporation exonerates its directors from monetary liability to
the fullest extent permitted by this statutory provision but does not restrict
the availability of non-monetary and other equitable relief.
The Company intends to enter into Indemnification Agreements with each of
its directors and executive officers. Each such Indemnification Agreement will
provide that the Company will indemnify the indemnitee against expenses,
including reasonable attorney's fees, judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any civil or criminal action or administrative proceeding arising out of the
performance of his duties as an officer, director, employee or agent of the
Company. Such indemnification is available if the acts of the indemnitee were in
good faith, if the indemnitee acted in a manner he reasonably believed to be in
or not opposed to the best interests of the Company and, with respect to any
criminal proceeding, the indemnitee had no reasonable cause to believe his
conduct was unlawful.
STOCK OPTIONS
GENERAL. In December 1992, the Company adopted the 1992 Stock Incentive
Plan (the "1992 Plan"), which provides for the grant by the Company of options
to purchase up to an aggregate of 1,233,333 shares of the Company's authorized
but unissued Common Stock and in March 1996, the Company adopted the 1996 Stock
Option Plan, which was amended and restated in April 1996 (the "1996 Plan" and,
together with the 1992 Plan, the "Plans"), which provide for the grant by the
Company of options to purchase up to an aggregate of 516,667 shares of the
Company's authorized but unissued Common Stock (in each case subject to
adjustment in certain cases including stock splits, recapitalizations and
reorganizations) to officers, directors, employees, consultants and independent
contractors of the Company. The purposes of the Plans are to ensure the
retention of existing executive personnel, key employees, directors and
consultants of the Company, to attract and retain competent new executive
personnel, key employees, directors and consultants and to provide additional
incentive to all such persons by permitting them to participate in the ownership
of the Company. The 1992 Plan terminates in December 2002 and the 1996 Plan
terminates in March 2006.
The Plans will be administered by the Board of Directors or a committee of
the Board of Directors, provided, however, that with respect to "officers" and
"directors," as such terms are defined for the purposes of Rule 16b-3 ("Rule
16b-3") promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), such committee shall consist of "disinterested" directors as defined in
Rule 16b-3, but only if at least two directors meet the criteria of
"disinterested" directors as defined in Rule 16b-3. The 1996 Plan provides for
automatic grants of options to certain directors in the manner set forth below
under "Directors' Options."
Options granted under the Plans may be either incentive options or
non-qualified options. Incentive options granted under the Plans are exercisable
for a period of up to 10 years from the date of grant at an exercise price which
is not less than the fair market value of the Common Stock on the date of the
grant, except that the term of an incentive option granted under the Plans to a
stockholder owning more than 10% of the outstanding voting power may not exceed
five years and its exercise price may not be less than 110% of the fair market
value of the Common Stock on the date of the grant. To the extent that the
aggregate fair market value, as of the date of grant, of the shares for which
incentive options become exercisable for the first time by an optionee during
the calendar year exceeds $100,000, the portion of such option which is in
excess of the $100,000 limitation will be treated as a non-qualified option.
Additionally, the aggregate number of shares of Common Stock that may be subject
to options granted to any person in a calendar year shall not exceed 25% of the
maximum number of shares of Common Stock which may be issued from time to time
under the Plans. Options
40
<PAGE>
granted under the Plans to officers, directors or employees of the Company may
be exercised only while the optionee is employed or retained by the Company or
within 90 days of the date of termination of the employment relationship or
directorship. However, options which are exercisable at the time of termination
by reason of death or permanent disability of the optionee may be exercised
within 12 months of the date of termination of the employment relationship or
directorship. Upon the exercise of an option, payment may be made by cash or by
any other means that the Board of Directors or the committee determines.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. As of March 31,
1996, the number of employees, officers and directors of the Company eligible to
receive grants under the Plans was approximately 35 persons. The number of
consultants and advisors to the Company eligible to receive grants under the
Plans is not determinable. An optionee may be granted more than one option under
the Plans. The Board of Directors or the committee will, in its discretion,
determine (subject to the terms of the Plans) who will be granted options, the
time or times at which options shall be granted, the number of shares subject to
each option and whether the options are incentive options or non-qualified
options. In making such determination, consideration may be given to the value
of the services rendered by the respective individuals, their present and
potential contributions to the success of the Company and its subsidiaries and
such other factors deemed relevant in accomplishing the purpose of the Plans.
Under the Plans, the optionee has none of the rights of a stockholder with
respect to the shares issuable upon the exercise of the option until such shares
shall be issued upon such exercise. No adjustment shall be made for dividends or
distributions or other rights for which the record date is prior to the date of
exercise, except as provided in the Plans. During the lifetime of the optionee,
an option shall be exercisable only by the optionee. No option may be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of decent and distribution.
The Board of Directors may amend or terminate the Plans except that
stockholder approval is required to effect a change so as to increase the
aggregate number of shares that may be issued under the Plans (unless adjusted
to reflect such changes as a result of a stock dividend, stock split,
recapitalization, merger or consolidation of the Company), to modify the
requirements as to eligibility to receive options, to increase materially the
benefits accruing to participants or as otherwise may be required by Rule 16b-3
or Section 422 of the Code. No action taken by the Board may materially and
adversely affect any outstanding option grant without the consent of the
optionee.
Under current tax law, there are no Federal income tax consequences to
either the employee or the Company on the grant of non-qualified options if
granted under the terms set forth in the Plans. Upon exercise of a non-qualified
option, the excess of the fair market value of the shares subject to the option
over the option price (the "Spread") at the date of exercise is taxable as
ordinary income to the optionee in the year it is exercised and is deductible by
the Company as compensation for Federal income tax purposes, if Federal income
tax is withheld on the Spread. However, if the shares are subject to vesting
restrictions conditioned on future employment or the holder is subject to the
short-swing profits liability restrictions of Section 16(b) of the Exchange Act
of (i.e., is an executive officer, director or 10% stockholder of the Company)
then taxation and measurement of the Spread is deferred until such restrictions
lapse, unless a special election is made under Section 83(b) of the Code to
report such income currently without regard to such restrictions. The optionee's
basis in the shares will be equal to the fair market value on the date taxation
is imposed and the holding period commences on such date.
41
<PAGE>
Incentive option holders incur no regular Federal income tax liability at
the time of grant or upon exercise of such option, assuming that the optionee
was an employee of the Company from the date the option was granted until 90
days before such exercise. However, upon exercise, the Spread must be added to
regular Federal taxable income in computing the optionee's "alternative minimum
tax" liability. An optionee's basis in the shares received on exercise of an
incentive stock option will be the option price of such shares for regular
income tax purposes. No deduction is allowable to the Company for Federal income
tax purposes in connection with the grant or exercise of such option.
If the holder of shares acquired through exercise of an incentive option
sells such shares within two years of the date of grant of such option or within
one year from the date of exercise of such option (a "Disqualifying
Disposition"), the optionee will realize income taxable at ordinary rates.
Ordinary income is reportable during the year of such sale equal to the
difference between the option price and the fair market value of the shares at
the date the option is exercised, but the amount includable as ordinary income
shall not exceed the excess, if any, of the proceeds of such sale over the
option price. In addition to ordinary income, a Disqualifying Disposition may
result in taxable income subject to capital gains treatment if the sales
proceeds exceed the optionee's basis in the shares (i.e., the option price plus
the amount includable as ordinary income). The amount of the optionee's taxable
ordinary income will be deductible by the Company in the year of the
Disqualifying Disposition.
At the time of sale of shares received upon exercise of an option (other
than a Disqualifying Disposition of shares received upon the exercise of an
incentive option), any gain or loss is long-term or short-term capital gain or
loss, depending upon the holding period. The holding period for long-term
capital gain or loss treatment is more than one year.
The foregoing is not intended to be an exhaustive analysis of the tax
consequences relating to stock options issued under the Plans. For instance, the
treatment of options under state and local tax laws, which is not described
above, may differ from the treatment for Federal income tax purposes.
As of March 31, 1996, there were outstanding under the 1992 Plan options to
purchase 1,107,031 shares of Common Stock at exercise prices ranging from $1.50
to $15.00 per share and no options were outstanding under the 1996 Plan. In
addition, the Company had outstanding at March 31, 1996 133,334 options granted
outside of the Plans at exercise prices ranging from $6.00 to $6.375 per share.
The exercise price of all options was at least equal to the fair market value on
the date of grant.
DIRECTORS' OPTIONS. The provisions of the 1996 Plan provide for the
automatic grant of non-qualified stock options to purchase shares of Common
Stock ("Director Options") to directors of the Company ("Eligible Directors").
Eligible Directors of the Company elected after the date hereof will be granted
a Director Option to purchase 15,000 shares of Common Stock on the date such
person is first elected or appointed a director (an "Initial Director Option").
Further, commencing on the day immediately following the date of the annual
meeting of stockholders for the Company's fiscal year ending December 31, 1996,
(i) each Eligible Director will be granted a Director Option to purchase 5,000
shares of Common Stock, (ii) each member of the Audit Committee and the
Compensation Committee will be granted a Director Option to purchase 1,000
shares of Common Stock and (iii) each member of the Executive Committee will be
granted a Director Option to purchase 5,000 shares of Common Stock (each, an
"Automatic Grant") on the day immediately following the date of each annual
meeting of stockholders, as long as such director is a member of the Board of
Directors or such committee, as the case may be. The exercise price for each
share subject to a Director Option shall be equal to the fair market value of
the Common Stock on the date of grant, except for directors who receive
incentive options and who own more than 10% of the voting power, in which case
the exercise price shall be not less than 110% of the fair market value on the
date of grant. Director Options are exercisable in three equal annual
installments, commencing on the date of grant. Director Options will expire the
earlier of 10 years after the date of grant or 90 days after the termination of
the director's service on the Board of Directors.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company has established a Compensation
Committee which, during fiscal 1995, consisted of Samuel R. Dunlap, Jr., Wendell
M. Starke and Bart Chernow, M.D.
In November 1995, the Company issued to Mr. Dunlap options to purchase
166,667 shares of Common Stock at an exercise price of $6.375 per share. The
Company has in the past maintained a consulting arrangement with Mr. Dunlap and
in January 1996 entered into a new three year consulting agreement with Mr.
Dunlap that provides for annual payments of $90,000. In November 1995, the
Company granted Mr. Dunlap warrants to purchase 166,667 shares, exercisable
66,667 immediately and the remainder in three equal annual installments at an
exercise price of $6.375 per share.
In April 1993, a trust of which Wendell M. Starke is the trustee and
beneficiary (the "Starke Trust") purchased 50,000 shares of Common Stock from
the Company at a purchase price of $6.00 per share. In July 1994, the Starke
Trust loaned the Company $300,000, which loan was evidenced by a convertible
promissory note payable on demand bearing interest at 8% per annum. In September
1994, the principal amount of such note was converted into 47,066 shares of
Common Stock (a conversion price of $6.375 per share). In October 1994, the
Starke Trust purchased 84,633 shares of Common Stock from the Company at a
purchase price of $6.375 per share. In February 1995, the Starke Trust purchased
33,333 shares of Common Stock from the Company at a purchase price of $6.375 per
share. In June 1995, Mr. Starke loaned the Company an aggregate of $162,916 in
exchange for a promissory note due and paid in December 1995, together with
interest at the rate of 9% per annum, and warrants to purchase 10,648 shares at
$6.375 per share. See "Certain Transactions."
CERTAIN TRANSACTIONS
In October 1991, the Company issued 333,333 shares of Common Stock to each
of Steve Gorlin, John W. Holaday, Ph.D. and Bart Chernow, M.D., co-founders of
the Company, at a purchase price of $.015 per share.
In June 1992, the Company issued an aggregate of 1,545,000 shares of Common
Stock at a purchase price of $.015 per share, including 433,333 shares to each
of Drs. Holaday and Chernow, 133,333 shares to Mark Rogers, M.D., 50,000 shares
to Steve Gorlin and 33,333 shares to each of Stephen Ayres, M.D., David Evans
and Richard Franco. Each of Messrs. Rogers, Gorlin, Ayres, Evans and Franco was
a director of the Company at the time of the transaction. In addition, in June
1992, the Company sold 1,500,000 shares of Preferred Stock to each of Steve
Gorlin and to D.H. Blair Investment Banking Corp. at a purchase price of $1.00
per share. Mr. Gorlin paid for a portion of his shares of Preferred Stock by
executing a promissory note in the principal amount of $350,000. The note was
payable with interest at 8% per annum and was paid in full in December 1993,
partially through the offset of $220,000 of amounts due Mr. Gorlin from the
Company for use of his aircraft for Company business, as noted below.
In June 1992, the Company and Carl Alving, M.D. entered into a Stock and
Asset Exchange Agreement pursuant to which Dr. Alving assigned to the Company
his rights to various vaccine technologies. In return, the Company issued
766,666 shares of Common Stock to Dr. Alving, paid Dr. Alving an initial royalty
of $40,000 and agreed to pay annual royalties of $40,000 through June 1996. See
"Management -- Director Compensation."
From the inception of the Company through December 31, 1993, the Company
utilized aircraft owned by Steve Gorlin or entities controlled by Steve Gorlin
at a cost of approximately $220,000, which amount was determined by the
Company's Board of Directors to be the fair market value based on costs charged
by other chartered service operators. Such amounts were paid by the Company
through offset against the $350,000 note payable by Mr. Gorlin described above.
In May 1992, the
43
<PAGE>
Company extended an interest-free loan of approximately $24,000 to Mr. Gorlin,
which amount was repaid in August 1992. From inception until August 1, 1992, the
Company operated out of the offices of Mr. Gorlin at no cost to the Company.
In April 1993, the Starke Trust purchased 50,000 shares of Common Stock from
the Company at a purchase price of $6.00 per share. In July 1994, the Starke
Trust loaned the Company $300,000, which loan was evidenced by a convertible
promissory note payable on demand bearing interest at 8% per annum. In September
1994, the principal amount of such note was converted into 47,066 shares of
Common Stock (a conversion price of $6.375 per share). In October 1994, the
Starke Trust purchased 84,633 shares of Common Stock from the Company at a
purchase price of $6.375 per share. In February 1995, the Starke Trust purchased
33,333 shares of Common Stock from the Company at a purchase price of $6.375 per
share. In June 1995, Mr. Starke loaned the Company an aggregate of $162,916 in
exchange for a promissory note due and paid in December 1995, together with
interest at the rate of 9% per annum, and warrants to purchase 10,648 shares at
$6.375 per share. In November 1995, the Company granted Mr. Dunlap warrants to
purchase 166,667 shares, exercisable 66,667 immediately and the remainder in
three equal annual installments at an exercise price of $6.375 per share.
The Company and Mr. Gorlin, Dr. Holaday, Dr. Alving, Dr. Chernow, D.H. Blair
Investment Banking Corp. and Kinder Investments, L.P. are parties to a
Shareholder Agreement, dated June 4, 1992, as amended and restated on December
10, 1993 (the "Shareholder Agreement"). The Shareholder Agreement grants to Dr.
Alving the right, in connection with an initial public offering of the Company's
securities, to request the registration of shares of Common Stock held by him
having a value of $250,000. Mr. Gorlin agreed to purchase such shares from Dr.
Alving in the event that such shares are not so registered following a request
by Dr. Alving. Dr. Alving has waived his right to request such registration.
Pursuant to a consulting arrangement, the Company paid Mr. Dunlap fees of
$54,000 in each of 1993, 1994 and 1995 and a $100,000 bonus in 1995. The Company
entered into a three year consulting agreement with Mr. Dunlap commencing
January 1, 1996 that provides for annual payments of $90,000. See "Management --
Director Compensation." In May 1996 effective August 1995, the Company entered
into a termination agreement with Steve Gorlin, a co-founder and former director
of the Company, superseding a previous consulting agreement with Mr. Gorlin,
that provides for annual payments of $90,000 per year for a three year period.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the ownership
of Common Stock for (i) each person known by the Company to own beneficially
more than five percent of the outstanding voting stock, (ii) each director and
named executive officer of the Company and (iii) all executive officers and
directors of the Company as a group, prior to this offering and as adjusted to
give effect to the sale of the Common Stock offered hereby and the sale of the
BMS Shares.
<TABLE>
<CAPTION>
SHARES TO BE
PURCHASED IN
NUMBER OF SHARES PERCENTAGE CONCURRENT PERCENTAGE
NAME AND ADDRESS OF BENEFICIALLY OWNED OWNED BEFORE PRIVATE OWNED AFTER
BENEFICIAL OWNER (1) BEFORE OFFERING OFFERING PLACEMENT OFFERING
- ----------------------------------------------- ------------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
John W. Holaday, Ph.D.......................... 886,901(2) 10.27% 7.29%
Carl R. Alving, M.D............................ 778,235(3) 9.19 6.48
Donald S. Brooks............................... 40,001(4) * *
Bart Chernow, M.D.............................. 714,917(3) 8.44 5.96
Samuel R. Dunlap, Jr........................... 394,237(5) 4.50 3.21
Leo Einck, Ph.D................................ 11,667(6) * *
Edward R. Gubish, Ph.D......................... 31,000(7) * *
Carol A. Nacy, Ph.D............................ 170,000(8) 1.97 1.40
Mark C.M. Randall.............................. 40,001(4) * *
Leon E. Rosenberg, M.D......................... --(9) -- --
Wendell M. Starke.............................. 318,097(10) 3.72 2.63
Bristol-Myers Squibb Company .................. 986,110(11) 11.07 333,333(12) 10.61
P.O. Box 4000
Princeton, New Jersey 08543
D.H. Blair Investment Banking Corp. . 1,000,000(13) 11.82 8.36
44 Wall Street
New York, New York 10005
Steve Gorlin................................... 706,709(14) 8.25 5.84
All executive officers and directors of the
Company as a group (12 persons)............... 3,405,223(15) 37.12 26.24
</TABLE>
- ------------------------
* Less than 1%
(1)Unless otherwise indicated, the address is c/o EntreMed, Inc., 9610 Medical
Center Drive, Suite 200, Rockville, MD 20850. Except as otherwise indicated,
each of the parties listed above has sole voting and investment power over
the shares owned.
(2)Includes 176,669 shares issuable upon exercise of options which are
currently exercisable. Does not include 200,000 shares issuable upon
exercise of options not exercisable within 60 days.
(3)Includes 10,002 shares issuable upon exercise of options which are currently
exercisable.
(4)Includes 40,001 shares issuable upon exercise of options which are currently
exercisable.
(5)Includes 293,336 shares issuable upon exercise of options which are
currently exercisable. Does not include 100,000 shares issuable upon
exercise of options not exercisable within 60 days.
(6)Includes 10,667 shares issuable upon exercise of options which are currently
exercisable. Does not include 72,667 shares issuable upon exercise of
options not exercisable within 60 days.
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<PAGE>
(7)Includes 30,000 shares issuable upon exercise of options which are currently
exercisable. Does not include 80,000 shares issuable upon exercise of
options not exercisable within 60 days.
(8)Includes 170,000 shares issuable upon exercise of options which are
currently exercisable. Does not include 146,667 shares issuable upon
exercise of options not exercisable within 60 days.
(9)Does not include shares owned by Bristol-Myers Squibb Company. Dr. Rosenberg
is the President of Bristol-Myers Squibb Pharmaceutical Research Institute,
an entity affiliated with Bristol-Myers, and he disclaims beneficial
ownership of any shares held by Bristol-Myers.
(10)Includes (i) 83,984 shares issuable upon exercise of options and warrants
which are currently exercisable and (ii) 40,561 shares owned by various
family members of Mr. Starke, as to which Mr. Starke disclaims beneficial
ownership.
(11)Includes 444,444 shares (assuming an initial public offering price of $15.00
per share) issuable upon exercise of warrants which are exercisable for one
year commencing on the date of this Prospectus.
(12)Represents shares which Bristol-Myers has agreed to purchase on the date of
this Prospectus.
(13)Excludes (i) 375,666 shares owned by the adult children and grandchildren of
J. Morton Davis, the sole stockholder of D.H. Blair Investment Banking Corp.
("Blair") and (ii) 18,000 shares owned by the Vice Chairman of Blair and his
children, as to all of which shares Blair disclaims beneficial ownership.
Also excludes an aggregate of 1,061,563 shares owned by Steve Gorlin and
June Gorlin, Mr. Gorlin's former wife, which are subject to the Gorlin
Pledge (as defined below).
(14)Includes (i) 110,002 shares issuable upon exercise of options which are
currently exercisable and (ii) 15,134 shares owned by Mr. Gorlin's children,
as to which Mr. Gorlin disclaims beneficial ownership. All of the shares
owned by Mr. Gorlin are pledged to Blair and J. Morton Davis to secure
obligations owed by Mr. Gorlin to Blair (the "Gorlin Pledge"). Such shares
may be voted by Mr. Gorlin until such time as a default occurs under the
Gorlin Pledge or the underlying obligation. Does not include 381,192 shares
owned by June Gorlin, as to which Mr. Gorlin disclaims beneficial ownership.
Includes 30,000 shares that Mr. Gorlin has agreed to distribute to his
former wife. See footnote 13 above.
(15)Includes 982,997 shares issuable upon exercise of options which are
currently exercisable. Does not include 599,334 shares issuable upon
exercise of options not exercisable within 60 days.
Each of Steve Gorlin and Drs. Holaday, Alving and Chernow may be deemed a
"founder" of the Company, as that term is defined under the Securities Act.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Set forth below is a summary of the terms of the capital stock of the
Company. Such summary is qualified in its entirety by reference to the Company's
Restated Certificate of Incorporation, attached as an exhibit hereto, and gives
effect to the filing of a Certificate of Amendment thereto, the form of which is
attached as an exhibit hereto.
The Company's authorized capital stock currently consists of 27,000,000
shares of Common Stock, $.01 par value, and 8,000,000 shares of Preferred Stock,
$1.00 par value.
COMMON STOCK
Immediately prior to the date hereof, there were 8,460,579 shares of Common
Stock outstanding (including 2,000,000 shares issuable upon conversion of the
3,000,000 outstanding shares of Preferred Stock) held by approximately 260
shareholders of record. Holders of shares of Common Stock are entitled to one
vote at all meetings of shareholders for each share held by them and are not
entitled to cumulative voting. Holders of Common Stock have no preemptive rights
and have no other rights to subscribe for additional shares of the Company nor
does the Common Stock have any conversion rights or rights of redemption, either
of which rights have not been waived. Holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board of Directors out
of funds legally available therefor. See "Dividend Policy." Upon liquidation,
all holders of Common Stock are entitled to participate pro rata in the assets
of the Company available for distribution, subject to the rights of any class of
preferred stock then outstanding. All of the outstanding shares of Common Stock
are, and the shares to be issued pursuant to this offering will be, when issued,
fully paid and nonassessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue up to 5,000,000 shares of Preferred Stock. The Board of Directors will
have the authority to issue this Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series of the designation of such series, without further vote
or action by the stockholders. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Common Stock, including the loss of voting
control to others. Prior to the date hereof, there were 3,000,000 shares of
Preferred Stock outstanding held by 19 shareholders of record, which shares will
be automatically converted into 2,000,000 shares of Common Stock on the date of
this Prospectus, and the shares of Preferred Stock will be cancelled and
retired.
REGISTRATION RIGHTS
Beginning one year from the date of this Prospectus, Bristol-Myers is
entitled to certain registration rights with respect to 874,999 shares of Common
Stock (including 333,333 shares to be purchased in a private placement upon the
closing of this offering) and 444,444 shares issuable upon exercise of warrants
(which amounts assume an initial public offering price of $15.00 per share) and,
beginning 13 months from the date of this Prospectus, certain holders of
1,157,344 shares of Common Stock and the holders of 211,315 warrants are
entitled to certain registration rights with respect to such shares and the
Common Stock issuable upon exercise of the warrants. Under the agreements
between the Company and these holders, the holders may request that the Company
file a registration statement under the Securities Act and, upon such request
and subject to certain minimum size conditions, the Company generally will be
required to use its best efforts to effect any such registration. In addition,
if the Company proposes to register any of its Common Stock, either for its own
account or for the account of other stockholders, the Company is required, with
certain exceptions, to notify the holders
47
<PAGE>
described above and, subject to certain limitations, to include in such
registration all of the shares of Common Stock requested to be included by such
holders. The Company is generally obligated to bear the expenses, other than
underwriting discounts and sales commissions, of all of these registrations.
Any exercise of such registration rights may hinder efforts by the Company
to arrange future financings of the Company and/or have an adverse effect on the
market price of the Company's shares.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company, New York, New York, will act as
transfer agent and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and the sale of the BMS Shares by the
Company, the Company will have 11,993,912 shares of Common Stock outstanding,
assuming that the Underwriters' over-allotment option and other outstanding
options and warrants are not exercised. Of these shares, the 3,200,000 shares
offered hereby will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The remaining 8,793,912 shares outstanding upon
completion of this offering are "restricted securities" as that term is defined
under Rule 144 (the "Restricted Shares") and may not be sold publicly unless
they are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration. Approximately 3,424,290 of the Restricted
Shares will become eligible for sale immediately following the date of the
Prospectus and, subject to compliance with Rule 144 under the Securities Act,
approximately 2,925,714 of the Restricted Shares will be eligible for sale in
the public market beginning 90 days from the date of this Prospectus. The
remaining Restricted Shares will become eligible for sale pursuant to the Rule
144 between June 1996 and June 1998. In addition, the Company intends to file a
Form S-8 to register an aggregate of 1,750,000 shares subject to outstanding
options or reserved for issuance pursuant to the Company's stock option plans.
Beginning 90 days after the date of this Prospectus, certain shares issuable
upon exercise of options granted by the Company prior to the date of this
Prospectus will also be eligible for sale in the public market pursuant to Rule
701 under the Securities Act. In general, Rule 701 permits resales of shares
issued pursuant to certain compensatory benefit plans and contracts commencing
90 days after the issuer becomes subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, in reliance upon Rule 144 but
without compliance with certain restrictions, including the holding period
requirements, contained in Rule 144. If all the requirements of Rule 701 are
met, as of March 31, 1996, an aggregate of approximately 855,930 shares of
Common Stock issuable upon exercise of currently outstanding options will be
eligible for sale pursuant to such rule.
Notwithstanding the foregoing, at the request of the Underwriters, the
Company and the holders of approximately 96.5% of the outstanding shares of
Common Stock, including each stockholder holding in excess of 1% of the
outstanding shares and each executive officer and director of the Company, have
agreed not to sell or otherwise dispose of any shares of the Company's Common
Stock without the prior written consent of Allen & Company Incorporated, on
behalf of the Underwriters, for a period of 180 days after the date hereof. See
"Underwriting."
In general under Rule 144, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years, including
persons who may be deemed to be "affiliates" of the Company, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) one percent of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume in the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements as to the manner of
48
<PAGE>
sale, notice and the availability of current public information about the
Company. In addition, a person who is not deemed to have been an affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned for at least three years the shares proposed to be sold,
would be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. Moreover, the Securities and Exchange Commission
has recently proposed an amendment to the holding period requirements of Rule
144 to permit resales of restricted securities after a one-year holding period
rather than a two-year holding period, and to permit unrestricted resales by
non-affiliates pursuant to Rule 144(k) after a two-year holding period rather
than a three-year holding period. In the event that such proposal is adopted,
the dates upon which certain of the Restricted Shares will become eligible for
sale pursuant to Rule 144 will be accelerated.
Certain holders of Common Stock and warrants to purchase Common Stock have
certain demand and piggy-back registration rights. See "Description of Capital
Stock -- Registration Rights."
Prior to this offering, there has been no market for the Common Stock of the
Company, and the Company cannot predict what effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the ability of the Company to
raise equity capital in the future.
49
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Allen & Company Incorporated, Dillon,
Read & Co. Inc. and Volpe, Welty & Company are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the
aggregate number of shares of Common Stock set forth below opposite their
respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Allen & Company Incorporated.........................................................................
Dillon, Read & Co. Inc...............................................................................
Volpe, Welty & Company...............................................................................
-----------
Total............................................................................................ 3,200,000
-----------
-----------
</TABLE>
Pursuant to the Underwriting Agreement, the several Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
of the shares of Common Stock offered hereby (other than shares that may be
purchased under the over-allotment option) if any are purchased. The
Underwriters propose initially to offer the shares to the public at the price
set forth on the cover page of this Prospectus. The Underwriters may allow a
selling concession not exceeding $ per share of Common Stock to certain
dealers. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to other dealers. The public offering price and
concessions may be changed by the Representatives after the initial public
offering.
The Company has agreed to reimburse the Representatives amounts up to an
aggregate of $200,000 toward their out-of-pocket expenses incurred in connection
with this offering.
The Company has granted to the Underwriters an option expiring 30 days after
the date of the Underwriting Agreement, to purchase up to an additional 480,000
shares of Common Stock at the public offering price, less underwriting discounts
and commissions, all as set forth on the cover page of this Prospectus. The
Underwriters may exercise the option only to cover over-allotments, if any, in
the sale of shares of Common Stock in this offering. To the extent that the
Underwriters exercise their option, each Underwriter will be committed, subject
to certain conditions, to purchase a number of such additional shares
proportionate to such Underwriter's initial commitment.
Bristol-Myers has agreed to purchase from the Company in a private placement
on the closing of this offering $5,000,000 of Common Stock at the initial public
offering price (333,333 shares, assuming an initial public offering price of
$15.00 per share). Bristol-Myers, which is an existing stockholder of the
Company, has agreed not to sell, offer for sale, contract to sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exercisable for shares of Common Stock or any rights to acquire Common Stock for
a period of 180 days after the date this Prospectus, without the prior written
consent of Allen & Company Incorporated, on behalf of the Underwriters.
At the request of the Underwriters, the Company and the holders of
approximately 96.5% of the outstanding shares of Common Stock, including each
stockholder holding in excess of 1% of the outstanding shares and each executive
officer and director of the Company, have agreed not to sell, offer for sale,
contract to sell or otherwise dispose of any shares of Common Stock or any
securities
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<PAGE>
convertible into or exercisable for shares of Common Stock or any rights to
acquire Common Stock for a period of 180 days after the date this Prospectus,
without the prior written consent of Allen & Company Incorporated, on behalf of
the Underwriters.
The Company and the Underwriters have agreed to indemnify one another
against certain liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price will be negotiated between the Company
and the Representatives. Among the factors to be considered in determining the
initial public offering price of the Common Stock, in addition to the prevailing
market conditions, will be the Company's historical performance, capital
structure, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and consideration of the
above factors in relation to market values of the companies in related
businesses. The Representatives have informed the Company that the Underwriters
do not intend to confirm sales to accounts over which they exercise
discretionary authority.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York. The
statements in this Prospectus under the captions "Risk Factors -- Dependence on
Patents and Other Proprietary Rights; Uncertainty of Patent Position and
Proprietary Rights" and "Business -- Patents and Proprietary Rights" and other
references herein to patent matters have been reviewed and will be passed on by
Jones & Askew, Atlanta, Georgia, patent counsel to the Company. As a condition
to consummation of this offering, Arnold & Porter, Washington, D.C., will render
to the Underwriters its opinion that, without having verified any factual
statements in this Prospectus and subject to certain assumptions and other
qualifications stated in such opinion, the statements in this Prospectus under
the caption "Risk Factors -- Uncertainty of Government Regulatory Requirements;
Lengthy Approval Process" and "Business -- Government Regulation" to the extent
they reflect legal matters arising under federal laws administered by the U.S.
Food and Drug Administration fairly summarize the material legal and regulatory
requirements of such laws currently applicable to the Company's products as they
are described in this Prospectus. Certain legal matters will be passed upon for
the Underwriters by Werbel McMillin & Carnelutti, A Professional Corporation,
New York, New York.
EXPERTS
The financial statements of EntreMed, Inc. at December 31, 1994 and 1995 and
for each of the three years in the period ended December 31, 1995 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form S-1 under the
Securities Act with the Securities and Exchange Commission (the "Commission") in
Washington, D.C. with respect to the shares of Common Stock offered hereby. This
Prospectus, which is part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to the Registration
Statement and such exhibits and schedules, which may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Reports and other information filed by the Company with the Commission
can be inspected and copied at the public reference facilities maintained by the
Commission at the
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<PAGE>
following addresses: New York Regional Office, Seven World Trade Center, New
York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Statements contained
in this Prospectus as to the contents of any contract or other document referred
to are not necessarily complete and in each instance reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
52
<PAGE>
ENTREMED, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
Report of Independent Auditors........................................................ F-2
<S> <C>
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996.................... F-3
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for
the three months ended March 31, 1995 and 1996....................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and
1995 and for the three months ended March 31, 1995 and 1996.......................... F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for
the three months ended March 31, 1995 and 1996....................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EntreMed, Inc.
We have audited the accompanying balance sheets of EntreMed, Inc. as of
December 31, 1994 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 EntreMed, Inc. at December
31, 1994 and 1995 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Atlanta, Georgia
January 25, 1996,
except for Note 13, as to which the date is
March 29, 1996
F-2
<PAGE>
ENTREMED, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31, 1996
DECEMBER 31, --------------------------
-------------------------- PRO FORMA
1994 1995 ACTUAL (NOTE 1)
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 218,619 $ 6,885,099 $ 7,600,058 $ 7,600,058
Account receivable..................... -- 2,500,000 100,000 100,000
Interest receivable.................... -- 4,016 15,389 15,389
------------ ------------ ------------ ------------
Total current assets..................... 218,619 9,389,115 7,715,447 7,715,447
Furniture and equipment, net............. 605,006 754,399 744,410 744,410
Other assets:
Deposits............................... 894 894 894 894
Other.................................. 19,223 1,975 146,098 146,098
------------ ------------ ------------ ------------
Total other assets....................... 20,117 2,869 146,992 146,992
------------ ------------ ------------ ------------
Total assets............................. $ 843,742 $ 10,146,383 $ 8,606,849 $ 8,606,849
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable............................ $ 551,046 $ 367,250 $ 1,405,643 $ 1,405,643
Accrued liabilities......................... -- 341,776 501,788 501,788
Capital lease obligations................... -- 396,113 404,233 404,233
Deferred revenue............................ -- 2,594,166 1,676,665 1,676,665
------------- ------------- ------------- -------------
Total current liabilities................... 551,046 3,699,305 3,988,329 3,988,329
Capital lease obligations, less current
portion...................................... -- 104,152 -- --
Deferred revenue, less current portion........ -- 2,741,666 2,566,667 2,566,667
Stockholders' equity:
Convertible preferred stock, $1.00 par value
and $1.50 liquidation value:
5,000,000 shares authorized, 3,000,000
shares issued and outstanding; 8,000,000
shares authorized, 3,000,000 shares
issued and outstanding as of March 31,
1996 (unaudited)......................... 3,000,000 3,000,000 3,000,000 --
Common stock, $0.01 par value:
20,000,000 shares authorized, 5,064,101
and 6,376,588 shares issued and
outstanding at December 31, 1994 and
1995, respectively; 27,000,000 shares
authorized, 6,460,579 shares issued and
outstanding as of March 31, 1996
(unaudited).............................. 50,641 63,766 64,606 84,606
Additional paid-in capital.................. 10,020,807 21,024,465 21,149,625 24,129,625
Accumulated deficit......................... (12,778,752) (20,486,971) (22,162,378) (22,162,378)
------------- ------------- ------------- -------------
Total stockholders' equity.................... 292,696 3,601,260 2,051,853 2,051,853
------------- ------------- ------------- -------------
Total liabilities and stockholders' equity.... $ 843,742 $ 10,146,383 $ 8,606,849 $ 8,606,849
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ENTREMED, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Grant revenues.......................... $ -- $ 90,185 $ 347,001 $ -- $ --
Collaborative research and
development............................ -- -- 347,501 -- 1,042,500
License fees............................ -- -- 16,667 -- 50,000
-------------- -------------- -------------- -------------- --------------
-- 90,185 711,169 -- 1,092,500
Expenses:
Research and development................ 4,772,652 3,673,929 5,939,512 1,596,677 2,063,270
General and administrative.............. 1,552,143 1,549,705 2,458,976 455,342 771,411
-------------- -------------- -------------- -------------- --------------
6,324,795 5,223,634 8,398,488 2,052,019 2,834,681
Interest expense.......................... -- -- (65,754) -- (9,547)
Interest income........................... 85,939 18,993 44,854 5,559 76,321
-------------- -------------- -------------- -------------- --------------
Net loss.................................. $ (6,238,856) $ (5,114,456) $ (7,708,219) $ (2,046,460) $ (1,675,407)
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
Pro forma net loss per share.............. $ (0.83) $ (0.18)
-------------- --------------
-------------- --------------
Pro forma weighted average number of
shares outstanding....................... 9,271,943 9,312,035
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ENTREMED, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL STOCK
--------------------- ------------------------ PAID-IN SUBSCRIPTION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
---------- --------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993........ 3,311,600 $ 33,115 3,000,000 $ 3,000,000 $ 16,560 $ (100,000) $ (1,425,440)
Issuance of common stock at
$.015 per share ($6.00 fair
value) for research and
development costs.............. 66,666 667 -- -- 399,333 -- --
Sale of common stock at $6.00
per share, net of offering
costs of approximately
$89,000........................ 1,183,696 11,837 -- -- 7,001,766 -- --
Payment of stock subscription... -- -- -- -- -- 100,000 --
Net loss........................ -- -- -- -- -- -- (6,238,856)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at December 31, 1993...... 4,561,962 45,619 3,000,000 3,000,000 7,417,659 -- (7,664,296)
Issuance of common stock for
options exercised at $1.50 per
share.......................... 33,331 333 -- -- 49,667 -- --
Issuance of common stock for
compensation to employees at
$6.00 per share................ 15,660 157 -- -- 93,843 -- --
Issuance of common stock for
consulting services at $6.00
per share...................... 6,666 67 -- -- 39,933 -- --
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$422,000....................... 446,482 4,465 -- -- 2,419,705 -- --
Net loss........................ -- -- -- -- -- -- (5,114,456)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at December 31, 1994...... 5,064,101 50,641 3,000,000 3,000,000 10,020,807 -- (12,778,752)
Issuance of common stock for
options exercised at $1.50 per
share.......................... 42,663 427 -- -- 63,573 -- --
Issuance of common stock for
compensation to directors at
$6.38 per share................ 12,150 121 -- -- 77,379 -- --
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$180,000....................... 710,862 7,109 -- -- 4,306,382 -- --
Sale of common stock in
connection with research
agreement at $12.00 per share.. 541,666 5,417 -- -- 6,494,583 -- --
Sale of common stock at $12.00
per share...................... 5,146 51 -- -- 61,741 -- --
Net loss........................ -- -- -- -- -- -- (7,708,219)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at December 31, 1995...... 6,376,588 $ 63,766 3,000,000 $ 3,000,000 $ 21,024,465 $ -- $ (20,486,971)
---------- --------- ----------- ----------- ------------ ------------ -------------
Issuance of common stock for
option exercised at $1.50 per
share (unaudited)................ 83,991 840 -- -- 125,160 -- --
Net loss (unaudited).............. -- -- -- -- -- -- (1,675,407)
---------- --------- ----------- ----------- ------------ ------------ -------------
Balance at March 31, 1996
(unaudited)...................... 6,460,579 $ 64,606 3,000,000 $ 3,000,000 21,149,625 $ -- $ (22,162,378)
---------- --------- ----------- ----------- ------------ ------------ -------------
---------- --------- ----------- ----------- ------------ ------------ -------------
<CAPTION>
TOTAL
------------
<S> <C>
Balance at January 1, 1993........ $ 1,524,235
Issuance of common stock at
$.015 per share ($6.00 fair
value) for research and
development costs.............. 400,000
Sale of common stock at $6.00
per share, net of offering
costs of approximately
$89,000........................ 7,013,603
Payment of stock subscription... 100,000
Net loss........................ (6,238,856)
------------
Balance at December 31, 1993...... 2,798,982
Issuance of common stock for
options exercised at $1.50 per
share.......................... 50,000
Issuance of common stock for
compensation to employees at
$6.00 per share................ 94,000
Issuance of common stock for
consulting services at $6.00
per share...................... 40,000
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$422,000....................... 2,424,170
Net loss........................ (5,114,456)
------------
Balance at December 31, 1994...... 292,696
Issuance of common stock for
options exercised at $1.50 per
share.......................... 64,000
Issuance of common stock for
compensation to directors at
$6.38 per share................ 77,500
Sale of common stock at $6.38
per share, net of offering
costs of approximately
$180,000....................... 4,313,491
Sale of common stock in
connection with research
agreement at $12.00 per share.. 6,500,000
Sale of common stock at $12.00
per share...................... 61,792
Net loss........................ (7,708,219)
------------
Balance at December 31, 1995...... $ 3,601,260
------------
Issuance of common stock for
option exercised at $1.50 per
share (unaudited)................ 126,000
Net loss (unaudited).............. (1,675,407)
------------
Balance at March 31, 1996
(unaudited)...................... $ 2,051,853
------------
------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ENTREMED, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (6,238,856) $ (5,114,456) $ (7,708,219) $ (2,046,460) $ (1,675,408)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization................. 83,270 153,015 201,593 48,457 48,124
Stock issued for compensation and consulting
expense...................................... 399,000 134,000 77,500 -- --
Deferred revenue.............................. -- -- 5,335,832 -- (1,092,500)
Changes in assets and liabilities:
Account receivable.......................... -- -- (2,500,000) -- 2,400,000
Other assets................................ 12,346 -- -- 13,120 (44,665)
Accounts payable............................ 13,471 475,119 (183,796) 78,553 1,198,405
Accrued liabilities......................... -- -- 341,776 -- --
Deposits.................................... 75,659 -- -- -- --
Interest receivable......................... 20,050 -- (4,016) -- (11,373)
------------ ------------ ------------ ------------ ------------
Net cash used by operating activities........... (5,635,060) (4,352,322) (4,439,330) (1,906,330) 822,583
CASH FLOWS FROM INVESTING ACTIVITIES
Investments..................................... -- -- -- -- (100,000)
Purchases of furniture and equipment............ (689,950) (91,894) (210,829) (34,386) (37,592)
------------ ------------ ------------ ------------ ------------
Net cash used by investing activities........... (689,950) (91,894) (210,829) (34,386) (137,592)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale lease-back................... -- -- 654,020 -- --
Payment of lease obligation..................... -- -- (276,664) -- (96,032)
Sales of common stock........................... 7,014,603 2,474,170 10,939,283 1,783,227 126,000
Repayment of note payable....................... -- -- (510,000) -- --
Proceeds from note payable...................... -- -- 510,000 -- --
Sales of preferred stock........................ 100,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities....... 7,114,603 2,474,170 11,316,639 1,783,227 29,968
Net increase (decrease) in cash and cash
equivalents.................................... 789,593 (1,970,046) 6,666,480 (157,489) 714,959
Cash and cash equivalents at beginning of
period......................................... 1,399,072 2,188,665 218,619 218,619 6,885,099
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period...... $ 2,188,665 $ 218,619 $ 6,885,099 $ 61,130 $ 7,600,058
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
AND NONCASH INVESTMENT AND FINANCING ACTIVITIES
Interest paid................................... $ -- $ -- $ 65,754 $ -- $ 9,547
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Equipment purchased under capital lease......... $ -- $ -- $ 122,909 $ -- $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
EntreMed, Inc. (the "Company") is engaged primarily in the research and
development of biopharmaceutical products that address the role of blood and
blood vessels in the prevention and treatment of a broad range of diseases. The
Company's core technologies include (i) an antiangiogenesis program focused on
the development of proprietary products intended to inhibit the abnormal growth
the new blood vessels associated with cancer and certain causes of blindness and
(ii) a blood cell permeation device designed to enhance the ability of red blood
cells to deliver oxygen to organs and tissues and which may also be used to
deliver drugs, genes or other therapeutic agents that otherwise would not
readily diffuse through blood cell membranes.
The Company's strategy is to accelerate development of its antiangiogenesis
and cell permeation technologies as well as other promising technologies which
the Company perceives to have clinical and commercial potential. The principal
elements of the Company's strategy are (i) to focus its resources on current
core technologies, (ii) to broaden its product and technology portfolio through
sponsored research collaborations with academic institutions, government
organizations and private enterprises, (iii) to augment product development with
its in-house research and development capabilities and (iv) to leverage its
resources through corporate partnerships in order to minimize the cost to the
Company of late-stage clinical trials and to accelerate effective product
commercialization. All of the Company's product candidiates are in the
development stage and require further research, development, testing and
regulatory clearances.
The Company was organized in September 1991 as a Delaware corporation and
from inception through December 1995 was in the development stage. In December
1995, the Company and Bristol-Myers Squibb Company ("Bristol-Myers") entered
into a collaboration to develop and commercialize certain antiangiogenesis
therapeutics (see Note 6). The Company received approximately 50% of its
revenues from Bristol-Myers in 1995 and expects this concentration to increase
in future years.
RESEARCH AND DEVELOPMENT
Research and development expenses consist of independent proprietary
research and development costs, the costs associated with work performed under
collaborative research agreements and the Company's sponsored funding of
research programs performed by others. Research and development costs are
expensed as incurred.
PATENT COSTS
Costs incurred in filing, prosecuting and maintaining patents are expensed
as incurred. Such costs aggregated approximately $356,400, $455,800 and $454,600
in 1993, 1994 and 1995, respectively, and $100,555 (unaudited) and $109,834
(unaudited) for the three months ended March 31, 1995 and 1996, respectively.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost and are depreciated over their
expected useful lives of five years. Depreciation is provided on a straight-line
basis. Amortization associated with capital leases is included in depreciation
expense.
CASH EQUIVALENTS
Cash equivalents include cash and short-term investments with original
maturities of less than 90 days.
F-7
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, ACCOUNTING FOR INCOME TAXES.
REVENUE RECOGNITION
Revenues related to grants received for specific project proposals are
recognized in revenue as earned in accordance with specified provisions,
including performance requirements, in the contracts. Revenue from the
collaborative research and development agreement mentioned in Note 6 is recorded
when earned as defined under the terms of the agreement. Nonrefundable fees
received upon contract signing are recorded as deferred revenue and recognized
over the term of the agreement. Other periodic research funding payments
received which are related to future performance are deferred and recognized as
income when earned.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of March 31, 1996 and for
the three month periods ended March 31, 1995 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, such financial statements do not include all of the
information and disclosures required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
PRO FORMA BALANCE SHEET (UNAUDITED)
The March 31, 1996 unaudited pro forma balance sheet reflects the automatic
conversion of 3,000,000 outstanding shares of preferred stock into 2,000,000
shares of common stock upon the effective date of a public offering of the
Company's common stock.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share and weighted average shares outstanding for the
year ended December 31, 1995 and the three month period ended March 31, 1996
give effect to the automatic conversion of 3,000,000 outstanding shares of
preferred stock into 2,000,000 shares of common stock upon the effective date of
a public offering of the Company's common stock. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common and convertible
preferred stock issued for consideration below the assumed initial public
offering price of $15.00 and stock options and warrants issued with exercise
prices below the assumed initial public offering price during the twelve-month
period preceding the initial filing of the registration statement, have been
included in the calculation of common shares, using the treasury stock method,
as if they were outstanding for all periods prior to the effective date of the
initial public offering.
F-8
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HISTORICAL NET LOSS PER SHARE
The historical net loss per share amounts as required by generally accepted
accounting principles, which do not give effect to the pro forma conversion of
preferred stock described above, are as follows:
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net loss per share.................................... $(1.04) $(0.76) $(1.06) $(0.29) $(0.23)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average common and common equivalent shares
outstanding during the period........................ 5,982,052 6,713,929 7,271,943 7,152,183 7,312,035
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
STOCK BASED COMPENSATION
The Company accounts for stock options in accordance with APB Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under APB No. 25, no compensation
expense is recognized for stock or stock options issued at fair market value.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION ("SFAS 123"), which provides an
alternative to APB No. 25 in accounting for stock based compensation issued to
employees. SFAS 123 provides for a fair value based method of accounting for
employee stock options and similar equity instruments. However, for companies
that continue to account for stock based compensation arrangements under APB No.
25, SFAS 123 requires disclosure of the pro forma effect on net income and
earnings per share as if the fair value based method prescribed by SFAS 123 had
been applied. The disclosure requirements are effective for fiscal years
beginning after December 31, 1995, or upon initial adoption of the statement, if
earlier. The Company plans to continue to account for stock based compensation
arrangements under APB No. 25 and plans to adopt the pro forma disclosure
requirements of SFAS 123 in 1996.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
2. RELATED PARTY TRANSACTIONS
During 1995, the Company borrowed approximately $510,000 from related
parties, of which $162,916 was borrowed from a director of the Company, and
issued its notes payable at 9% interest. Upon receipt of proceeds from the
collaborative research and development agreement mentioned in Note 6, the
Company paid the notes and accrued interest.
F-9
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
3. FURNITURE AND EQUIPMENT
Furniture and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Furniture and equipment........................................ $ 840,369 $ 941,226
Less: accumulated depreciation................................. (235,363) (186,827)
------------ ------------
$ 605,006 $ 754,399
------------ ------------
------------ ------------
</TABLE>
4. OPERATING LEASE
The Company leases its primary facilities through March 31, 2003. The lease
agreement provides for escalation of the lease payments over the term of the
lease, however, rent expense is recognized under the straight-line method. The
future minimum payments under the lease as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 215,400
1997........................................................... 221,100
1998........................................................... 227,000
1999........................................................... 233,200
Thereafter..................................................... 723,600
----------
Total minimum payments..................................... $1,620,300
----------
----------
</TABLE>
Rental expense for the years ended December 31, 1993, 1994 and 1995 was
$158,000, $187,000, and $210,000, respectively.
5. SPONSORED RESEARCH PROGRAM AGREEMENTS
During 1994 and 1995, the Company entered into several agreements to sponsor
external research programs. The Company's primary external research program
agreement was entered into in September 1993 with the Children's Hospital in
Boston, Massachusetts, an entity affiliated with Harvard Medical School
("Children's Hospital"). Under this sponsored research agreement the Company
agreed to pay Children's Hospital $11,000,000 to support research on the role of
angiogenesis in pathological conditions. In accordance with the terms of this
sponsored research agreement, $4,000,000 has been paid as of December 31, 1995,
$1,000,000 is due on April 1, 1996 and the remainder is due in equal semi-annual
payments until April 1, 1999. This sponsored research agreement gives the
Company an exclusive option to negotiate an exclusive, worldwide,
royalty-bearing license to any technology resulting from the research at
Children's Hospital in areas covered by the agreement. Amounts due under the
sponsored research agreement with Children's Hospital, which is cancelable by
the Company upon six months' notice, are paid in advance each six months and are
expensed as incurred as research and development costs. As of December 31, 1995,
the Company's total commitments for external research programs are as follows:
<TABLE>
<S> <C>
1996........................................................... $2,304,000
1997........................................................... 2,188,000
1998........................................................... 2,000,000
1999........................................................... 1,000,000
----------
Total commitments.......................................... $7,492,000
----------
----------
</TABLE>
F-10
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
6. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT
In December 1995, the Company and Bristol-Myers entered into a collaboration
to develop and commercialize certain antiangiogenesis therapeutics. This
collaboration provides for Bristol-Myers to fund Company research, provide
milestone payments to the Company, and pay the Company royalties on net sales of
any products developed under the collaboration. In return, the Company granted
Bristol-Myers exclusive worldwide rights to antiangiogenic applications of
thalidomide, thalidomide analogs and Angiostatin protein.
Bristol-Myers is obligated under the Bristol-Myers collaboration to fund
$18.35 million in ten semi-annual payments of $1.835 million over five years for
costs to be incurred by the Company related to specified research and
development. The Company may receive an additional $32 million if the Company
attains certain late-stage clinical development and regulatory filing milestones
under the Bristol-Myers collaboration, a portion of which will be credited
against royalties. In addition to this funding, Bristol-Myers has committed to
fund $730,000 for clinical studies and ophthalmological trials. Bristol-Myers
may terminate this collaboration for any reason with six months notice, in which
event Bristol-Myers would have no further funding obligation to the Company. In
the event Bristol-Myers were to terminate the Bristol-Myers collaboration or
otherwise fail to conduct its collaborative activities successfully and in a
timely manner, the preclinical and clinical development or commercialization of
the Company's licensed antiangiogenesis product candidates would be delayed or
terminated.
The Company received a non-refundable, non-creditable licensing fee of $1
million in 1995 under the Bristol-Myers collaboration and an additional $2.5
million on March 31, 1996 in recognition of certain research and development
efforts of the Company. These amounts were recorded as deferred revenue and are
being recognized over five years, the initial term of the collaboration
agreement.
Concurrent with the signing of the Bristol-Myers collaboration, the Company
issued Bristol-Myers 541,666 shares of common stock for aggregate cash proceeds
of $6,500,000. Bristol-Myers also agreed to purchase $5,000,000 (333,333 shares,
assuming an initial public offering price of $15.00 per share) of additional
common stock of the Company at the initial public offering price if and when the
Company completes an initial public offering in the future and was granted the
right to purchase an additional $10,000,000 of Company common stock at 150% of
the initial public offering price (444,444 shares, assuming an initial public
offering price of $15.00 per share) from the Company at any time up to one year
from the effective date of the initial public offering.
During 1995, the Company recognized approximately $347,000 in revenue and
incurred costs of approximately $500,000 related to the above described
collaborative research and development agreement. For the three month period
ended March 31, 1996, the Company recognized $1,092,500 (unaudited) in revenue
and incurred costs of $1,351,930 (unaudited) under this agreement.
7. SALE-LEASEBACK AGREEMENT
During 1995, the Company entered into a sale-leaseback agreement which is
accounted for as a capital lease. The lessor agreed to purchase the Company's
equipment and also assumed and exercised the Company's purchase option on other
leased equipment. The Company agreed to lease-back the equipment over an initial
term of two years with annual renewal options in years three and four. The
Company has the option to purchase the equipment at fair market value at the end
of years two and
F-11
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
7. SALE-LEASEBACK AGREEMENT (CONTINUED)
three. If the option is not exercised the Company must purchase all equipment at
fair market value at the end of year four. In connection with the agreement, the
Company granted the lessor warrants for 33,334 shares of common stock at an
exercise price of $6.38 per share.
Capitalized leased furniture and equipment with a cost of $776,929 is
included in furniture and equipment (see Note 3).
Future minimum payments under this lease agreement as of December 31, 1995
are as follows:
<TABLE>
<S> <C>
1996............................................................. $ 422,314
1997............................................................. 105,570
---------
Total minimum lease payments..................................... 527,884
Less amount representing interest................................ 27,619
---------
Present value of net minimum lease payments...................... $ 500,265
---------
---------
</TABLE>
8. INCOME TAXES
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $17,100,000 for income tax purposes that expire in years 2006
through 2010. The Company also has research and development tax credit
carryforwards of approximately $1,239,000 that expire in years 2007 through
2010. The utilization of the net operating loss and research and development
carryforwards may be limited in future years due to changes in ownership of the
Company pursuant to Internal Revenue Code Section 382. For financial reporting
purposes, a valuation allowance has been recognized to reduce the net deferred
tax assets to zero due to uncertainties with respect to the Company's ability to
generate taxable income in the future sufficient to realize the benefit of
deferred income tax assets.
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities as of December 31, 1994
and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Deferred income tax assets (liability):
Research and development credit carryforwards............ $ 1,119,000 $ 1,239,000
Net operating loss carryforwards......................... 4,337,000 5,819,000
Deferred revenues........................................ -- 976,000
Other.................................................... 11,000 160,000
Depreciation............................................. (27,000) (24,000)
Valuation allowance for deferred income tax assets....... (5,440,000) (8,170,000)
-------------- --------------
Net deferred income taxes.............................. $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
F-12
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
8. INCOME TAXES (CONTINUED)
A reconciliation of the provision for income taxes to the federal statutory
rate is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Tax at statutory rate......................... $ (2,121,000) $ (1,739,000) $ (2,621,000)
Tax credits................................... (791,000) (287,000) (120,000)
Other......................................... 2,000 2,000 11,000
Valuation allowance........................... 2,910,000 2,024,000 2,730,000
-------------- -------------- --------------
$ -- $ -- $ --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
The preferred stock has certain preferential rights in the event of
liquidation or dissolution of the Company but does not have any preferences in
regard to voting rights or dividend distributions. The preferred stock is
convertible into the Company's common stock at the option of the preferred
stockholder. Upon the effective date of a public offering of the Company's
common stock, the preferred stock will automatically be converted into common
stock. See Note 13.
10. STOCK OPTIONS AND WARRANTS
The Company adopted an incentive and nonqualified stock option plan on
December 2, 1992, whereby 1,233,333 shares of the Company's common stock were
reserved for grants to various executive, scientific and administrative
personnel of the Company as well as outside directors and consultants. These
options vest over periods varying from vesting immediately through four years
and generally expire 10 years from the date of grant. Stock option activity is
as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
OPTIONS PER SHARE
----------- ------------------
<S> <C> <C>
Outstanding at December 31, 1992......................... 333,337 $1.50
Granted................................................ 207,343 $1.50 - $ 6.00
-----------
Outstanding at December 31, 1993......................... 540,680 $1.50 - $ 6.00
Granted................................................ 63,340 $6.00 - $ 6.38
-----------
Outstanding at December 31, 1994......................... 604,020 $1.50 - $ 6.38
Granted................................................ 436,343 $6.00 - $12.00
-----------
Outstanding at December 31, 1995......................... 1,040,363 $1.50 - $12.00
-----------
-----------
Exercisable at December 31, 1995......................... 684,559
-----------
-----------
</TABLE>
The Company also granted 83,334 and 50,000 options to purchase common stock
at $6.00 and $6.38 per share during 1993 and 1995, respectively, to Children's
Hospital in connection with a sponsored research agreement (see Note 5). These
options are not covered by the incentive and nonqualified stock option plan and
are included in the table below.
F-13
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
10. STOCK OPTIONS AND WARRANTS (CONTINUED)
The Company also has granted warrants to various executive, scientific and
administrative personnel of the Company as well as outside directors,
consultants, and certain third parties. Warrants granted generally expire after
10 years from the date of grant. Stock warrant activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
WARRANTS PER SHARE
----------- -----------------
<S> <C> <C>
Outstanding at December 31, 1992.......................... 600,000 $1.50
Granted................................................. 83,334 $6.00
-----------
Outstanding at December 31, 1993.......................... 683,334 $1.50 - $6.00
Exercised............................................... (33,331) $1.50
Granted................................................. 44,648 $7.65
-----------
Outstanding at December 31, 1994.......................... 694,651 $1.50 - $7.65
Exercised............................................... (42,663) $1.50
Granted................................................. 706,669 $6.38
-----------
Outstanding at December 31, 1995.......................... 1,358,657 $1.50 - $7.65
-----------
-----------
Exercisable at December 31, 1995.......................... 980,879
-----------
-----------
</TABLE>
The Company also granted warrants to Bristol-Myers in connection with the
Bristol-Myers collaboration described in Note 6.
F-14
<PAGE>
ENTREMED, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
11. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and account receivable.
The Company maintains cash and cash equivalents with various financial
institutions. The Company's policy is to limit exposure to any one institution.
The account receivable is due from Bristol-Myers.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates their fair values.
ACCOUNT RECEIVABLE AND ACCOUNTS PAYABLE: The carrying amounts reported
in the balance sheet for the account receivable and accounts payable
approximate their fair values.
CAPITAL LEASE PAYABLE: The fair value of the Company's capital lease is
estimated using discounted cash flow analysis, based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amount reported in the balance sheet for the
capital lease payable approximates its fair value.
12. COMMITMENTS AND CONTINGENCIES
The Company is a party to certain litigation initiated in August 1995 in the
United States District Court for the Eastern District of Tennessee by Bolling,
McCool & Twist, a consulting firm. The suit relates to a claim for services
rendered in the approximate amount of $50,000 and seek a finder's fee in an
unspecified amount in connection with the Bristol-Myers collaboration. Due to
the lack of discovery and early stage of the proceedings, the Company is unable
to predict with certainty the eventual outcome of the lawsuit. The Company
intends to contest the action vigorously and believes that this proceeding will
not have a material adverse effect on the Company or on its financial
statements.
The Company is obligated to make annual license agreement payments of
$40,000 to a director of the Company for certain rights to technologies. The
payments began on June 4, 1992 and conclude on June 4, 1996.
In May 1994, the Company entered into a license agreement, which was amended
in 1995, whereby the Company gained the rights to make, use, lease and sell
licensed products developed by Children's Hospital. In consideration for
receiving the rights, the Company must pay a royalty on any sublicensing fees,
as defined in the agreement, to Children's Hospital. The Company is also
required to pay certain amounts upon the attainment of certain milestones. The
milestone payments aggregate $2,650,000, of which $290,000 has been paid to
date, and are based upon license fees and achievement of regulatory approvals.
In addition, the license agreement requires the Company to pay Children's
Hospital a specified percentage of the royalty income received on the first $100
million in net sales of the licensed products, and an increased percentage
thereafter, with a minimum payment based on a percentage of net sales of the
licensed products by any sublicensees.
13. SUBSEQUENT EVENT
On March 29, 1996, the Company's Board of Directors declared a two-for-three
reverse stock split of the common stock to be effective, subject to stockholder
approval, retroactively to the date of inception (September 18, 1991). Upon such
effectiveness, the conversion ratio of the convertible preferred stock,
previously one-for-one, will be adjusted to reflect the reverse stock split. All
common stock, option information, weighted average shares and earnings per share
information has been retroactively restated to reflect the reverse stock split.
F-15
<PAGE>
IHP-TREATED RED BLOOD CELLS
Organs and tissues in the body require oxygen to function properly. Inositol
hexophosphate (IHP), a naturally occurring plant chemical, may enhance the
oxygen releasing capabilities of red blood cells. This schematic illustrates
IHP-treated red blood cells. EntreMed is developing a cell permeation
technology to deliver IHP into red blood cells and which may also be used to
deliver drugs, genes or other therapeutic agents that otherwise would not
readily diffuse through blood cell membranes.
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 21
Management..................................... 35
Certain Transactions........................... 43
Principal Stockholders......................... 45
Description of Capital Stock................... 47
Shares Eligible for Future Sale................ 48
Underwriting................................... 50
Legal Matters.................................. 51
Experts........................................ 51
Additional Information......................... 51
Index to Financial Statements.................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
3,200,000 SHARES
[LOGO]
COMMON STOCK
---------------------
P R O S P E C T U S
---------------------
ALLEN & COMPANY
INCORPORATED
DILLON, READ & CO. INC.
VOLPE, WELTY & COMPANY
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions) are as follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
SEC Registration Fee............................................................. $ 22,207
NASD Filing Fee.................................................................. 6,940
Nasdaq Listing Fee............................................................... 47,500
Reimbursement of Underwriters' Expenses.......................................... 200,000
Printing and Engraving Expenses.................................................. 130,000
Accounting Fees and Expenses..................................................... 90,000
Legal Fees and Expenses.......................................................... 310,000
Blue Sky Fees and Expenses....................................................... 40,000
Transfer Agent's Fees and Expenses............................................... 10,000
Travel and Miscellaneous Expenses................................................ 143,353
-----------
Total........................................................................ 1,000,000
-----------
-----------
</TABLE>
- ------------------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation and By-Laws of the Registrant provides that
the Company shall indemnify any person to the full extent permitted by the
Delaware General Corporation Law (the "GCL"). Section 145 of the GCL, relating
to indemnification, is hereby incorporated herein by reference.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Company pursuant
to the Company's By-laws and the Delaware General Corporation Law, the Company
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company's Restated Certificate of Incorporation includes certain
provisions permitted pursuant to Delaware law whereby officers and directors of
the Company are to be indemnified against certain liabilities. The Company's
Restated Certificate of Incorporation also limits, to the fullest extent
permitted by Delaware law, a director's liability for monetary damages for
breach of fiduciary duty, including gross negligence, except liability for (i)
breach of the director's duty of loyalty, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the law,
(iii) the unlawful payment of a dividend or unlawful stock purchase or
redemption and (iv) any transaction from which the director derives an improper
personal benefit. Delaware law does not eliminate a director's duty of care and
this provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
In accordance with Section 102(a)(7) of the GCL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director with certain limited exceptions set forth in Section
102(a)(7).
II-1
<PAGE>
The Registrant also intends to enter into indemnification agreements with
each of its executive officers and directors, the form of which is filed as
Exhibit 10.16 hereto and reference is hereby made to such form.
Reference is made to Section 6 of the Underwriting Agreement (Exhibit 1.1)
which provides for indemnification by the Underwriters of the Registrant, its
officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following discussion gives retroactive effect to the two-for-three
reverse stock split effected in April 1996. Since March 1993, the Registrant has
sold and issued the following unregistered securities:
In March through October 1993, the Registrant issued an aggregate of
1,183,696 shares of Common Stock to 77 accredited investors for a purchase price
of $6.00 per share. The shares were issued pursuant to an exemption from
registration provided by Regulation D promulgated under Section 4(2) of the
Securities Act.
In April 1994, the Registrant issued 33,331 shares of Common Stock to Samuel
R. Dunlap, Jr., a director of the Registrant, upon the exercise of options
exercisable at $1.50 per share.
In May 1994, the Registrant issued 15,660 shares of Common Stock valued at
$6.00 per share to 18 employees in consideration for services rendered.
In May 1994, the Registrant issued 6,666 shares of Common Stock valued at
$6.00 per share to Bolling, McCool & Twist, an independent consultant, in
consideration for consulting services rendered.
In September through November 1994, the Registrant issued an aggregate of
446,482 shares of Common Stock to 35 accredited investors for a purchase price
of $6.375 per share. The shares were issued pursuant to an exemption from
registration provided by Regulation D promulgated under Section 4(2) of the
Securities Act. Josephthal Lyon and Ross Incorporated acted as the Registrant's
placement agent in connection with this private placement. In connection
therewith, the Registrant paid sales commissions in the amount of approximately
$228,000 and a non-accountable expense allowance in the aggregate amount of
approximately $31,000.
In May through November 1995, the Registrant issued an aggregate of 42,663
shares of Common Stock to Samuel R. Dunlap, Jr., a director of the Registrant,
upon the exercise of options exercisable at $1.50 per share.
In May and November 1995, the Registrant issued 12,150 shares of Common
Stock valued at $6.375 per share to ten directors of the Registrant in
consideration for services rendered.
In December 1994 through September 1995, the Registrant issued an aggregate
of 710,862 shares of Common Stock to 34 accredited investors for a purchase
price of $6.375 per share. The shares were issued pursuant to an exemption from
registration provided by Regulation D promulgated under Section 4(2) of the
Securities Act. In connection therewith, the Registrant paid an aggregate of
approximately $175,000 in sales commissions.
In December 1995, the Registrant issued to Bristol-Myers Squibb Company
541,666 shares of Common Stock at a purchase price of $12.00 per share and a
warrant to purchase 444,444 shares of Common Stock at an exercise price of
$22.50 (assuming an initial public offering price of $15.00 per share).
In December 1995, the Registrant issued 5,149 shares of Common Stock valued
at $12.00 per share to eight accredited investors.
II-2
<PAGE>
In January through March 1996, the Registrant issued an aggregate of 84,000
shares of Common Stock to Samuel R. Dunlap, Jr., a director of the Registrant,
upon the exercise of stock options exercisable at $1.50 per share.
Except as otherwise noted above, (i) the above transactions were private
transactions not involving a public offering and were exempt from the
registration provisions of the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof, (ii) the sale of securities was without the use of an
underwriter and (iii) the certificates evidencing the shares bear a restrictive
legend permitting the transfer thereof only upon registration of the shares or
an exemption under the Securities Act of 1933, as amended.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. Except as otherwise
indicated, the sale of securities was without the use of an underwriter, and the
certificates evidencing the shares bear a restrictive legend permitting the
transfer thereof only upon registration of the shares or an exemption under the
Securities Act of 1933, as amended.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1. Revised Form of Underwriting Agreement
3.1.* Amended and Restated Certificate of Incorporation of the Registrant
3.2* Form of Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Registrant
3.3* By-laws of the Registrant
5.1 Opinion of Bachner, Tally, Polevoy & Misher LLP
10.1* Research Collaboration and License Agreement, dated December 7, 1995, between the
Registrant and Bristol-Myers Squibb Company ("BMS")
10.2* Restricted Stock Purchase Agreement, dated December 7, 1995, between the
Registrant and BMS
10.3* Warrant to Purchase Common Stock, dated December 7, 1995, issued by the Registrant
to BMS
10.4* Registration Rights Agreement, dated December 7, 1995, between the Registrant and
BMS
10.5* Research Agreement, dated September 29, 1993, between the Registrant and
Children's Hospital
10.6*+ Amendment to Research Agreement, dated August 23, 1995, between the Registrant and
Children's Hospital
10.7*+ License Agreement, dated May 26, 1994, between Children's Medical Center
Corporation ("CMCC") and the Registrant
10.8*+ Amendment to License Agreement, dated August 23, 1995, between CMCC and the
Registrant
10.9*+ License Agreement, dated May 26, 1994, between CMCC and the Registrant
10.10*+ Amendment to License Agreement, dated August 23, 1995, between CMCC and the
Registrant
10.11* Sponsored Research Agreement, dated November 5, 1992, between the Registrant and
CBR Laboratories, Inc. ("CBRL")
10.12*+ Licensing Agreement, dated November 5, 1992, between the Registrant and CBRL
10.13* Employment Agreement, dated as of January 1, 1996, between the Registrant and John
W. Holaday, Ph.D.
10.14* 1992 Stock Incentive Plan
10.15* Amended and Restated 1996 Stock Option Plan
10.16* Form of Stock Option Agreement
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.17* Consulting Agreement between the Registrant and Samuel R. Dunlap, Jr.
10.18* Consulting Agreement between the Registrant and Steve Gorlin (superseded by
Exhibit 10.18a)
10.18(a)* Termination Agreement dated May 15, 1996 effective August 1, 1996, between the
Registrant and Steve Gorlin
10.19* Master Equipment Lease Agreement, dated April 10, 1995, between the Registrant and
MMC/GATX Partnership No. 1
10.20* Lease between the Registrant and Red Gate III Limited Partnership
10.21* Form of Indemnification Agreement
10.22* Research and License Agreement, dated August 1993, between the Registrant and
Innovative Therapeutics, Inc.
11.1 Computation of per share data
23.1 Consent of Bachner, Tally, Polevoy & Misher LLP (Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
23.3* Consent of Jones & Askew
23.4* Consent of Arnold & Porter
24.1* Power of Attorney
</TABLE>
- ------------------------
* Previously filed.
+ Confidential treatment has been requested.
ITEM 17. UNDERTAKINGS
UNDERTAKINGS REQUIRED BY REGULATION S-K, ITEM 512(F).
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
UNDERTAKING REQUIRED BY REGULATION S-K, ITEM 512(H).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UNDERTAKINGS REQUIRED BY REGULATION S-K, ITEM 512(I).
The undersigned registrant hereby undertakes that:
(1)For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497 (h) under the Securities Act shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2)For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rockville,
State of Maryland on the 6th day of June, 1996.
ENTREMED, INC.
By: /s/ JOHN W. HOLADAY, PH.D.
-----------------------------------
John W. Holaday, Ph.D., Chairman of
the
Board and Chief Executive Officer
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amendment
to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURE TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
/s/ JOHN W. HOLADAY, PH.D. Chairman of the Board and Chief
------------------------------------------- Executive Officer (principal June 6, 1996
John W. Holaday, Ph.D. executive officer)
/s/ JOHN C. THOMAS
------------------------------------------- Chief Financial Officer (principal June 6, 1996
John C. Thomas accounting and financial officer)
/s/ CARL ALVING, M.D.
------------------------------------------- Director June 6, 1996
Carl Alving, M.D.
/s/ DONALD S. BROOKS
------------------------------------------- Director June 6, 1996
Donald S. Brooks
/s/ BART CHERNOW, M.D.
------------------------------------------- Director June 6, 1996
Bart Chernow, M.D.
------------------------------------------- Executive Advisor and Director , 1996
Samuel R. Dunlap, Jr.
/s/ MARK C.M. RANDALL
------------------------------------------- Director June 6, 1996
Mark C.M. Randall
/s/ LEON E. ROSENBERG, M.D.
------------------------------------------- Director June 6, 1996
Leon E. Rosenberg, M.D.
/s/ WENDELL M. STARKE
------------------------------------------- Director June 6, 1996
Wendell M. Starke
</TABLE>
II-5
<PAGE>
EXHIBIT 11.1
ENTREMED, INC.
COMPUTATION OF EARNINGS PER SHARE (1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1995
-------------- THREE MONTH
PERIOD ENDED
MARCH 31,
--------------
1996
--------------
(UNAUDITED)
<S> <C> <C>
Weighted average common and common equivalent shares outstanding during the
period..................................................................... 5,485,763 6,438,017
Effect of common stock issued and stock options and warrants granted
subsequent to April 12, 1995 computed in accordance with the treasury stock
method as required by the SEC (2).......................................... 1,786,180 874,018
Conversion of preferred stock (3)........................................... 2,000,000 2,000,000
-------------- --------------
Pro forma weighted average number of shares outstanding (3)................. 9,271,943 9,312,035
-------------- --------------
-------------- --------------
Pro forma net loss per share (3)............................................ $ (0.83) $ (0.18)
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------------
(1) All share information has been adjusted to reflect a two-for-three reverse
stock split.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common and Preferred Stock issued and stock options and warrants
grants at prices below the assumed initial public offering price of $15.00
per share during the 12-month period immediately preceding the initial
filing date of the Company's Registration Statement for its initial public
offering have been included as outstanding for all periods presented using
the treasury stock method.
(3) Pro forma net loss per share and weighted average shares outstanding for
the year ended December 31, 1995 and the three month period ended March 31,
1996 give effect to the automatic conversion of 3,000,000 outstanding
shares of Preferred Stock into 2,000,000 shares of Common Stock on the date
of this Prospectus.
<PAGE>
EXHIBIT 1.1
DRAFT OF 6/6/96
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,200,000 SHARES
ENTREMED, INC.
COMMON STOCK
------------------
UNDERWRITING AGREEMENT
SELECTED DEALER AGREEMENT
------------------
JUNE , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
3,200,000 SHARES
ENTREMED, INC.
COMMON STOCK
--------------------------------
UNDERWRITING AGREEMENT
-----------------------------
June , 1996
ALLEN & COMPANY INCORPORATED
DILLON, READ & CO. INC.
VOLPE, WELTY & COMPANY
As Representatives of the Several Underwriters
c/o Allen & Company Incorporated
711 Fifth Avenue
New York, New York 10022
Dear Sirs:
EntreMed, Inc., a Delaware corporation (the "Company"), hereby confirms its
agreement with the several Underwriters named in schedule A hereto (the
"Underwriters"), for which you are acting as representatives (the
"Representatives"), as follows:
1. DESCRIPTION OF SECURITIES. The Company has authorized by appropriate
corporate action and proposes to issue and sell to the Underwriters its shares
of Common Stock, $.01 par value. As further described in Section 3 hereof,
3,200,000 of such shares (the "Purchased Shares") are being sold by the Company
to the Underwriters and the Company is granting to the Underwriters an option to
purchase up to 480,000 additional shares (the "Option Shares"). The Purchased
Shares and Option Shares are herein collectively referred to as the "Shares".
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The Company
represents and warrants to and agrees with each Underwriter that:
(a)
A registration statement on Form S-1 (File No. 333-3536) with respect to
the Shares, including a preliminary form of prospectus, copies of which
have heretofore been delivered to you, has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Act, and has
been filed with the Commission under the Act; such amendment or amendments to
such registration statement, copies of which have heretofore been delivered to
you, as may have been made prior to the date of this Agreement have been so
prepared and filed; and the Company has so prepared and proposes so to file in a
timely manner after the effective date of such registration statement the final
form of prospectus. Such registration statement (including all exhibits
thereto), as finally amended and revised as of the time the Underwriters first
offer the Shares for sale to the public together with information, if any, which
is permitted to be, and is, subsequently filed pursuant to Rule 430A of the
Rules and Regulations, is herein referred to as the "Registration Statement".
Such prospectus in the form filed pursuant to Rule 424(b) of the Rules and
Regulations, or, if no final prospectus is filed with the Commission pursuant to
Rule 424(b), in such form as such final prospectus is included in the
Registration Statement, is herein referred to as the "Prospectus". Each
preliminary form of prospectus is herein referred to as a "Preliminary
Prospectus".
(b)
The Commission has not issued any order preventing or suspending the use
of any Preliminary Prospectus. At the time of filing of each Preliminary
Prospectus, such prospectus did not include
<PAGE>
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. When the Registration Statement was
declared effective and at all times subsequent thereto up to and at each Closing
Date (hereinafter defined) (i) the Registration Statement did and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and (ii) the Registration Statement did not or will not include as
of its date any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading. When the
Prospectus or any amendment or supplement thereto is filed with the Commission
pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement
is not required to be so filed, when the Registration Statement or the amendment
thereto containing such amendment or supplement to the Prospectus was or is
declared effective), on the date when the Prospectus is otherwise amended or
supplemented and on each Closing Date (as hereinafter defined), the Prospectus,
as amended or supplemented at any such time, (i) complied or will comply in all
material respects with the requirements of the Act and the Rules and Regulations
and (ii) did not or will not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The foregoing representations and warranties shall not apply to
information contained in or omitted from the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter for use in the preparation thereof.
(c)
Except as described in or contemplated by the Prospectus (including the
disclosure contained therein regarding the Company's continued incurrence
of losses and working capital decreases), subsequent to the respective dates as
of which information is given in the Registration Statement and the Prospectus,
the Company has not incurred any direct or, to the best of the Company's
knowledge, contingent material liabilities or material obligations, or entered
into any material transactions or contracts not in the ordinary course of
business, and there has not been any material change in its capital shares,
options or warrants, nor any material increase or decrease in the amount thereof
outstanding or in any of its long-term debt outstanding, except pursuant to the
terms of the instruments governing the same, or any material adverse change in
the condition (financial or otherwise), results of operations, business or
prospects of the Company.
(d)
Except as set forth in the Prospectus, there is not now pending or, to
the knowledge of the Company, threatened, any action, suit or proceeding
to which the Company is a party before any court or governmental or regulatory
agency or body which could reasonably be expected to result in any material
adverse change in the condition (financial or otherwise), results of operations,
business or prospects of the Company, or could reasonably be expected to
materially and adversely affect the properties, assets or ability to do business
as contemplated in the Prospectus of the Company; and there are no contracts or
documents required to be filed as exhibits to the Registration Statement by the
Act or by the Rules and Regulations which have not been filed as exhibits to the
Registration Statement.
(e)
This Agreement has been duly authorized, executed and delivered on behalf
of the Company and constitutes a valid and binding agreement of the
Company, enforceable in accordance with its terms, except (1) that such
enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium
or other similar laws now or hereafter in effect relating to creditors' rights
and (2) as rights to indemnity or contribution hereunder may be limited by
federal or state securities laws; the execution, delivery and performance of
this Agreement and the consummation of the transactions herein contemplated will
not result in a breach or violation of any term or provision of, or constitute a
default under, (i) any currently existing statute, any indenture, mortgage, deed
of trust, note agreement or other agreement or instrument filed as an exhibit to
the Registration Statement or any other material indenture, mortgage, deed of
trust, note or agreement or other agreement or instrument to
2
<PAGE>
which the Company is a party or by which it or its property is bound; (ii) the
charter or by-laws of the Company; or (iii) any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company or
over its properties, which breach, violation or default of any such order, rule
or regulation could reasonably be expected to result in any material adverse
change in the condition (financial or otherwise), results of operations or
business of the Company; no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation by the
Company of the transactions on its part herein contemplated, except such as have
been obtained or such as may be required under the Act or as may be required
under state or other securities or blue sky laws in connection with the purchase
and distribution of the Shares by the Underwriters; and the Company is not in
material default, and no event has occurred which with the giving of notice or
lapse of time or both would be a default, under any contract, agreement,
indenture, mortgage or other undertaking to which the Company is a party and
which is material to the condition (financial or otherwise), results of
operations, business or prospects of the Company.
(f)
The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority, corporate or otherwise, to own its
properties and conduct its business as described and contemplated in the
Registration Statement, and is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions where its operations or
ownership of property requires such qualifications, except where failure so to
qualify would not have a material effect on the Company.
(g)
The Company has the authorized and outstanding capital stock set forth in
the Prospectus; the outstanding capital stock of the Company conforms,
and the Shares when issued and sold as herein contemplated will conform, in all
material respects, to all statements in relation thereto contained in the
Registration Statement and the Prospectus and all such stock has been duly
authorized and the outstanding capital stock has been and the Shares, when
issued and delivered against payment therefor as provided herein, will be
validly issued, fully-paid and nonassessable; except as stated in the
Prospectus, the stockholders of the Company have no preemptive rights with
respect to the Shares and there are no outstanding rights, options or warrants
to acquire any securities of the Company; to the extent that any rights, options
or warrants to acquire any securities of the Company are outstanding, except as
otherwise set forth in the Prospectus, the issuance of the Shares as described
in the Prospectus will not result in an adjustment of the exercise price or
number of shares issuable upon the exercise in respect of any such rights,
options or warrants; and, except as otherwise set forth in the Prospectus, the
Company does not own (directly or indirectly) any shares of capital stock of any
subsidiaries.
(h)
Except as otherwise set forth in the Prospectus, the Company owns,
possesses or has rights to, or can acquire on reasonable terms, adequate
patents, patent applications, patent licenses, trademarks, service marks and
trade names necessary to carry on its business as presently conducted, and
except as set forth in the Prospectus, the Company has not received any notice
of infringement of or conflict with asserted rights of others with respect to
any patents, patent licenses, trademarks, service marks or trade names which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, could materially and adversely affect the condition (financial or
otherwise), earnings, affairs, business or prospects of the Company.
(i)
Except as set forth in the Prospectus, the Company holds in good standing
or has applied for all licenses, permits, authorizations, franchises,
consents and orders of all federal, state, local, and foreign governmental
bodies that are material to the conduct of its business as presently conducted
as described in the Prospectus; except as stated in the Prospectus, the Company
has good and marketable title in fee simple to all real property, if any, and
good and marketable title to all personal property owned by it, in each case
free and clear of all liens, encumbrances and defects with such exceptions as
are not material to the Company taken as a whole; and the real property and
personal property referred to in the Prospectus as held under lease by the
Company is held by it under valid, subsisting
3
<PAGE>
and enforceable leases with only such exceptions as are referred to in the
Prospectus or as in the aggregate are not material to the conduct of its
business as presently conducted as described in the Prospectus.
(j)
The Company is conducting and proposes to conduct its business so as to
comply in all material respects with all material applicable federal,
state, local and foreign governmental statutes, rules and regulations; and
except as set forth in the Prospectus, the Company is not charged with, or to
the Company's knowledge, is under investigation with respect to, any violation
of any of such statutes, rules or regulations.
(k)
The Company is insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and
customary in the business in which it is engaged; and, the Company does not have
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the business or financial condition of
the Company, except as described or contemplated in the Prospectus.
(l)
Ernst & Young LLP, which has examined and expressed its opinion on
certain of the financial statements of the Company filed with the
Commission as a part of the Registration Statement, are, to the Company's best
knowledge, independent accountants with respect to the Company within the
meaning of the Act and the Rules and Regulations; the financial statements,
together with the related notes, forming part of the Registration Statement and
Prospectus fairly present the financial condition of the Company and its results
of operations as of the dates and for the periods described in such opinion in
the Prospectus; and such financial statements have been prepared in accordance
with the Rules and Regulations of the Commission.
(m)
The Company maintains a system of internal accounting controls sufficient
to provide reasonable assurances that transactions are executed in
accordance with management's general or specific authorizations and are recorded
as necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles.
(n)
Except as stated in the Prospectus, the Company knows of no outstanding
claims for services, either in the nature of a finder's fee or
origination fee, with respect to the transactions contemplated hereby, and the
Company agrees to indemnify and hold the Underwriters harmless from any such
claim for any such services of such nature arising from the act of any person
other than any Underwriter or person acting on behalf of any Underwriter.
(o)
No person holds a right to require or participate in the registration
under the Act of the Common Stock of the Company to be effected by the
Registration Statement, which right has not been effectively waived by the
holder thereof as of the date hereof.
(p)
The Company has obtained from each of its officers and directors, and
from each of its shareholders owning an aggregate of shares of
the Company's Common Stock outstanding immediately prior to the offering
contemplated hereby, an executed agreement in form and substance satisfactory to
the Representatives that they will not, without the prior written consent of
Allen & Company Incorporated on behalf of the Underwriters, sell, offer for
sale, contract to sell or otherwise dispose of any shares of the Company's
Common Stock or any securities exercisable for or convertible into its Common
Stock or any rights to acquire Common Stock for a period of 180 days from the
date of the final Prospectus.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company
4
<PAGE>
agrees to sell to each Underwriter and each Underwriter agrees, severally and
not jointly, to purchase from the Company, at a purchase price of $ per
Share, the number of Shares set forth opposite the name of such Underwriter in
Schedule A hereto.
The Company will deliver the Purchased Shares to you for the accounts of the
several Underwriters at the office of Allen & Company Incorporated, 711 Fifth
Avenue, New York, New York, against payment of the purchase price therefor by
certified or official bank check or checks in New York Clearing House funds,
payable to the order of EntreMed, Inc., at 10:00 A.M., New York Time, on
, 1996 or at such other time and date not later than five full
business days thereafter as you and the Company may determine, such time and
date of delivery and payment being herein called the "First Closing Date". The
certificates for the Purchased Shares to be so delivered will be made available
to you at such office for checking at least one full business day prior to such
Closing Date and will be in such names and denominations as you may request in
writing not less than two full business days prior to such Closing Date.
On the basis of the representations, warranties and agreements herein
contained, but subject to the terms and conditions herein set forth, the Company
grants to the Underwriters an option to purchase up to 480,000 Option Shares at
the same price per share as the Underwriters shall pay for the Purchased Shares.
Such option may be exercised only to cover over-allotments arising in connection
with the sale of Purchased Shares by the Underwriters, such exercise to be upon
written notice by you to the Company within 30 days of the date hereof setting
forth the number of Options Shares as to which the Underwriters are exercising
the option, the denominations and names in which certificates for such Shares
should be registered and the time and place at which such certificates are to be
delivered. Such time and place (unless such time is the First Closing Date),
herein referred to as the "Second Closing Date", shall be determined by you but
shall not be earlier than the First Closing Date, nor earlier than three full
business days or later than ten full business days after the exercise of such
option. The Company will deliver Option Shares to you for the accounts of the
several Underwriters against payment of the purchase price therefor by certified
or official bank check or checks in New York Clearing House funds payable to the
order of EntreMed, Inc. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the aggregate number of Option
Shares purchased as the number of Purchased Shares set forth opposite the name
of such Underwriter in Schedule A hereto bears to 3,200,000.
It is understood that you, individually and not as the Representatives of
the several Underwriters, may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several Underwriters
propose to offer the Shares to the public as set forth in the Prospectus.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
several Underwriters that:
(a)
The Company will use its best efforts to cause the Registration Statement
and any subsequent amendment thereto to become effective as promptly as
possible; it will notify you, promptly after it shall receive notice thereof, of
the time when the Registration Statement or any subsequent amendment to the
Registration Statement has become effective or any supplement to the Prospectus
has been filed; it will notify you promptly of any request by the Commission for
the amending or supplementing of the Registration Statement or Prospectus or for
additional information; it will prepare and file with the Commission any
amendments or supplements to the Registration Statement or Prospectus which, in
your reasonable opinion or the reasonable opinion of the Company or its counsel,
may be necessary in connection with the distribution of the Shares by the
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any
5
<PAGE>
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus would include an
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; in case any Underwriter is required to deliver a
prospectus after the nine-month period referred to in Section 10(a)(3) of the
Act in connection with sales of the Shares purchased by the Underwriters from
the Company pursuant to Section 3 or otherwise acquired by the Underwriters
during the distribution of the Shares in connection with stabilization or
otherwise, the Company will prepare and file with the Commission promptly upon
request of, but at the expense of, such Underwriter, any amendments or
supplements to the Registration Statement or Prospectus as may be necessary, in
such Underwriter's reasonable opinion, to permit the sale of such Shares in the
manner determined by such Underwriter, in compliance with the requirements of
the Act, including Section 10(a)(3) thereunder; and it will file no amendment or
supplement to the Registration Statement or Prospectus that shall not previously
have been submitted to you in writing a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, except as may
be required by law.
(b)
The Company will advise you, promptly after it shall receive notice or
obtain knowledge thereof, of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of any order
suspending trading in the Shares or other of the Company's securities or of the
initiation or threat of any proceeding for that purpose; and it will use
promptly its best efforts to prevent the issuance of any stop order or to obtain
its withdrawal if such a stop order should be issued.
(c)
The Company will use its best efforts to qualify the Shares for sale
under the blue sky or securities laws of such jurisdictions as you may
reasonably designate and to continue such qualifications in effect for so long
as may be required for purposes of the distribution of the Shares, except that
the Company shall not be required in connection therewith or as a condition
thereof to qualify as a foreign corporation or to execute a general consent to
service of process in any state.
(d)
The Company will furnish to you, as soon as available, copies of the
Registration Statement (one of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and any amendments or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request.
(e)
The Company will make generally available to its security holders as soon
as practicable, an earnings statement (which will be in reasonable detail
but need not be audited) covering a 12-month period beginning after the
effective date of the Registration Statement which shall satisfy the provisions
of Section 11(a) of the Act.
(f)
The Company agrees, during each fiscal year for a period of five years
from the date hereof, to furnish to its stockholders as promptly as may
be practicable an annual report (including financial statements audited by
independent public accountants) and to publish quarterly financial statements
(which need not be audited) for each of the first three quarters of each fiscal
year, and to furnish, upon request, to each Underwriter hereunder (i) as soon as
practicable after the end of each of the first three quarters of each fiscal
year, the Company's quarterly report on Form 10-Q; (ii) as soon as practicable
after the end of each fiscal year, financial statements of the Company as at the
end of such fiscal year, including statements of operations, retained earnings
and changes in cash flow of the Company for such fiscal year, all in reasonable
detail and accompanied by a copy of the report thereon of independent public
accountants or the Company's annual report on Form 10-K; and (iii) as soon as
they are available, copies of all reports and financial statements filed with
the Commission. During
6
<PAGE>
such period, if and so long as the Company shall have active subsidiaries, the
foregoing financial statements shall be on a combined or consolidated basis to
the extent that the accounts of the Company and its subsidiaries are combined or
consolidated.
(g)
The Company covenants and agrees with the several Underwriters that the
Company will pay or cause to be paid the following: (i) the fees,
disbursements, and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act; (ii) all other
expenses in connection with the preparation, printing, and filing of the
Registration Statement, each Preliminary Prospectus, and the Prospectus and
amendments and supplements thereto, and the mailing and delivering of copies
thereof to the Underwriters and dealers; (iii) the cost of printing this
Agreement, the Selected Dealer Agreement, the Blue Sky Memorandum, and any other
documents in connection with the offering, purchase, sale and delivery of the
Shares; (iv) all costs and expenses in connection with the issuance and delivery
of the Shares hereunder to the Underwriters, including related transfer taxes,
if any; (v) all expenses in connection with the qualification of the Shares for
offering and sale under the securities laws of various jurisdictions, including
the fees and disbursements of counsel for the Underwriters in connection with
such qualification and in connection with the Blue Sky Survey; (vi) the filing
fees incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Shares; (vii) the costs
of preparing stock certificates; (viii) the cost and charges of any transfer
agent or registrar; and (ix) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section 4. In addition to the foregoing, the Company shall
reimburse the Underwriters, upon request from time to time, for their reasonable
itemized out-of-pocket expenses up to a maximum of $200,000, including their
reasonable legal fees and disbursements and travel, roadshow and syndicate
expenses, upon the presentation of reasonable documentation thereof. If the
Company determines not to proceed with the offering for any reason, other than
the Underwriters' unwillingness to proceed on the terms and conditions set forth
in this Agreement, or if the Representatives exercise their right to terminate
this Agreement pursuant to Section 10(b)(i) hereof, the Company shall reimburse
the Underwriters for all reasonable out-of-pocket expenses including reasonable
legal fees and disbursements and travel, roadshow and syndicate expenses
actually incurred by the Underwriters, upon the presentation of reasonable
documentation thereof, up to a maximum of $300,000. The Company shall not in any
event be liable to any of the Underwriters for the loss of anticipated profits
from the transactions covered by this Agreement.
(h)
The Company agrees that it will not, without the prior written consent of
the Allen & Company Incorporated on behalf of the Underwriters, sell,
offer for sale, contract to sell or otherwise dispose of any shares of its
Common Stock or any securities exercisable for or convertible into shares of its
Common Stock or any rights to acquire Common Stock, for a period of 180 days
after the date of the final Prospectus, otherwise than in accordance with this
Agreement or as contemplated in the Prospectus; PROVIDED, that the Company may
issue Common Stock, or options, rights or warrants with respect thereto, (i)
upon the exercise of stock options and warrants outstanding on the date hereof,
(ii) pursuant to stock option plans of the Company existing on the date hereof,
to persons who have received, or who are eligible to receive, grants of such
options and (iii) not to exceed, in the aggregate, 10% of the outstanding shares
of Common Stock as of the First Closing Date, in connection with any new bona
fide research, licensing or corporate partnering relationships and equipment
lease transactions.
5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several
Underwriters to purchase and pay for the Purchased Shares on the First Closing
Date and the Option Shares on the Second Closing Date, as provided herein shall
be subject to the accuracy, as of the date hereof and such Closing Date (as if
made on and as of such Closing Date), of the representations and warranties of
the Company herein, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
7
<PAGE>
(a)
The Registration Statement shall have become effective not later than
5:30 P.M., New York City Time, on the date of this Agreement, or such
later date as shall be consented to in writing by you; if required, the
Prospectus and any amendment or supplement thereto shall have been filed with
the Commission in the manner and within the time period required by Rule 424(b)
under the Act; and no stop order suspending the effectiveness thereof shall have
been issued and no proceedings for that purpose shall have been initiated or, to
the knowledge of the Company or any Underwriter, threatened by the Commission,
and any request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) shall have been
complied with to your reasonable satisfaction.
(b)
Prior to such Closing Date, except as contemplated in the Prospectus,
there shall not have been any change in the capital shares, nor the
issuance of any rights, options, or warrants to purchase any capital shares, nor
any material increase or decrease in any long-term debt of the Company or any
material adverse change in the condition (financial or otherwise), results of
operations, business or prospects of the Company which in your reasonable
judgment renders it inadvisable to proceed with the offering and sale of the
Shares.
(c)
You shall have received the opinion of Bachner, Tally, Polevoy & Misher
LLP, counsel for the Company, in form and substance satisfactory to you
and dated such Closing Date, to the effect that:
(i) the Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware
with full corporate power and authority to own its properties and to conduct
its business as described in the Registration Statement and is duly
qualified to do business as a foreign corporation in Maryland and in each
state or jurisdiction where its operations and the ownership of its
properties requires such qualification, except where the failure to so
qualify will not have a material adverse effect on the business of the
Company;
(ii)the Company has authorized capital stock as set forth in the
Prospectus; all shares of Common Stock, including the Shares, conform
as to legal matters in all material respects to the appropriate descriptions
thereof under the heading "Description of Capital Stock" in the Prospectus;
all outstanding shares of Company capital stock have been duly authorized
and are validly issued, fully paid and non-assessable; and the issuance of
the Shares has been duly authorized and, when issued, delivered and paid for
in accordance with this Agreement, the Shares will be validly issued, fully
paid and non-assessable;
(iii)
this Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding agreement of the
Company, enforceable in accordance with its terms, except that (1) such
enforcement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
creditors' rights and (2) rights to indemnity or contribution hereunder may
be limited by federal or state securities laws and (3) except as
enforceability may be limited by equitable principles affecting the
availability of remedies; the sale of the Shares under this Agreement and
the consummation of the transactions herein contemplated do not result in a
breach or violation of any material terms or provisions of, or constitute a
material default under, any applicable statute, or any indenture, mortgage,
deed of trust, note agreement or other agreement or instrument filed as an
exhibit to the Registration Statement or otherwise known to counsel to which
the Company is a party or by which it or its properties are bound or
affected, or to which any of the material property or assets of the Company
is subject, the Company's certificate of incorporation and by-laws, or, to
the best of such counsel's knowledge, any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the Company or
its properties;
(iv)no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the
Company of the transactions contemplated by this
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Agreement that has not been obtained, except such as may be required under
the Act or as may be required under state securities or blue sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters;
(v) the Registration Statement has become effective under the Act and, to
the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(vi)except as set forth in the Prospectus and for such matters referred
to in the paragraph next following subclause (xi) below, to the best
of such counsel's knowledge, the Company holds in good standing all material
licenses, permits, authorizations, franchises, consents and orders, of
Federal, State or local, and foreign governmental bodies necessary to carry
on its business as reflected in the Registration Statement;
(vii)
the summaries of the agreements or documents to which the Company is
a party included under the headings "Business -- Collaboration and
License Agreements," "Management -- Employment Agreements," "Certain
Transactions" and "Description of Capital Stock -- Registration Rights" in
the Prospectus fairly summarize and present in all material respects the
information required to be presented therein;
(viii)
to the best of such counsel's knowledge after due inquiry (it being
understood that for purposes of this opinion, due inquiry does not
include any search of court or administrative records), there is no legal or
governmental proceeding pending or threatened to which the Company is a
party or to which any properties of the Company are subject which is
required to be described in the Registration Statement or the Prospectus and
is not so described;
(ix)the Registration Statement and the Prospectus, and each amendment or
supplement thereto, as of their respective effective or issue dates,
comply as to form in all material respects with the requirements of the Act
and the Rules and Regulations (except that such counsel need express no
opinion as to the financial statements, notes to financial statements,
related schedules or other financial data contained in or omitted from the
Registration Statement or the Prospectus);
(x) to the best of such counsel's knowledge after due inquiry, all
contracts and documents pertaining to the Company required to be
filed as Exhibits to the Registration Statement have been filed as required
and, to the best of such counsel's knowledge, all contracts and documents
required to be described in the Prospectus have been accurately described
therein in all material respects;
(xi)Such counsel shall also state that it has participated in conferences
with officers and other representatives of the Company,
representatives of the independent public accountants for the Company and
the representatives of the Underwriters, at which the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although such counsel did not independently verify, and is not passing
upon and does not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Registration Statement and
the Prospectus, on the basis of the foregoing (relying as to materiality to
a large extent upon the opinions of officers and other representatives of
the Company), no facts have come to such counsel's attention which lead such
counsel to believe that the Registration Statement (except with respect to
the financial statements and schedules thereto and other financial or
statistical data, as to which such counsel need not make any statement) at
the time it became effective contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus (except with respect to the financial statements and schedules
thereto and other
9
<PAGE>
financial or other statistical data, as to which such counsel need not make
any statement) on the date thereof or on the Closing Date contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances in which they were made, not misleading.
Such counsel need express no opinion as to the statements made in the
Prospectus relating to patents or proprietary rights, including under the
captions "Risk Factors -- Dependence on Patents and Other Proprietary Rights;
Uncertainty of Patent Position and Proprietary Rights" and "Business -- Patents
and Proprietary Rights" or statements made in the Prospectus relating to
government regulatory matters concerning the development, manufacture and
potential sale of the Company's potential products, including under the captions
"Risk Factors -- Uncertainty of Government Regulatory Requirements; Lengthy
Approval Process" and "Business -- Government Regulation."
In rendering the foregoing opinions, such counsel may rely as to factual
matters on certificates of officers and representatives of the Company and of
public officials, and will not be required to independently verify the accuracy
or completeness of information or documents furnished to it in respect to the
Registration Statement or the Prospectus. To the extent that such counsel's
opinion relates to the laws of jurisdictions other than New York or Delaware,
such counsel shall be permitted to rely on the opinion of local counsel
reasonably satisfactory to counsel for the several Underwriters.
(d)
You shall have received from Jones & Askew, patent counsel to the
Company, an opinion, dated such Closing Date, in form and substance
satisfactory to you, to the effect that the statements in the Prospectus under
the captions "Risk Factors -- Dependence on Patents and Other Proprietary
Rights; Uncertainty of Patent Position and Proprietary Rights" and "Business --
Patents and Proprietary Rights", insofar as they pertain to legal matters,
fairly present in all material respects the information presented therein.
(e)
You shall have received from Arnold & Porter, regulatory counsel to the
Company, an opinion, dated such Closing Date, in form and substance
satisfactory to you, to the effect that the statements in the Prospectus under
the captions "Risk Factors -- Uncertainty of Government Regulatory Requirements;
Lengthy Approval Process" and "Business -- Government Regulation", insofar as
they pertain to legal matters, fairly present in all material respects the
information presented therein.
(f)
You shall have received from Werbel McMillin & Carnelutti, A Professional
Corporation, counsel for the several Underwriters, an opinion or
opinions, dated such Closing Date, in form and substance satisfactory to you,
with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have reasonably requested for the
purpose of enabling them to pass upon such matters.
(g)
You shall have received, at the time of execution of this Agreement and
on such Closing Date from Ernst & Young LLP, independent public
accountants, a letter or letters, dated the date of delivery thereof,
substantially in the form and substance heretofore approved by you.
(h)
You shall have received a certificate, dated such Closing Date, of each
of the President and Chief Executive Officer and the Chief Financial
Officer of the Company, delivered on behalf of the Company, to the effect that:
(i) the representations and warranties of the Company in this Agreement
are true and correct as if made on and as of such Closing Date; and
the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to such
Closing Date;
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(ii)no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have
been instituted or, to their knowledge, are contemplated by the Commission;
and
(iii)
except as contemplated in the Prospectus, the Company has not
incurred any direct or, to the best of the Company's knowledge,
contingent material liabilities or obligations, or entered into any material
transactions or contracts not in the ordinary course of business, and there
has not been any change in the capital shares of the Company, nor the
issuance of any rights, options, or warrants to purchase any capital shares,
nor any material increase or decrease in any thereof or in any long-term
debt or any material adverse change in the condition (financial or
otherwise) results of operations, business or prospects of the Company.
(i)
You shall have received a certificate, dated such Closing Date, of the
Chief Financial Officer of the Company, delivered on behalf of the
Company, to the effect that, except as described in the Prospectus, the issuance
of the Shares as described in the Prospectus will not result in any adjustment
of the exercise price or number of shares issuable upon exercise in respect of
any outstanding options or warrants of the Company;
(j)
The Company shall have furnished to you such certificates, in addition to
those specifically mentioned herein, as you may have reasonably
requested, as to the accuracy and completeness at such Closing Date of any
statement in the Registration Statement or Prospectus, as to the accuracy at
such Closing Date of the representations and warranties of the Company herein,
as to the performance by the Company of its obligations hereunder, and as to the
fulfillment of the conditions concurrent and precedent to the obligations of the
Underwriters hereunder.
(k)
The Company shall have furnished to you the agreements described in
Section 2(p) of this Agreement.
(l)
The Company shall have effected a two-for-three reverse stock split of
its Common Stock and all issued and outstanding shares of its Preferred
Stock shall have been automatically converted into Common Stock, each
transaction occurring as described in the Prospectus.
6. INDEMNIFICATION. (a) The Company will indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act, against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter or such controlling person may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and, subject
to Section 6(c), will reimburse each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating or defending against
any such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus, the Prospectus or such
amendment or such supplement in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter for use
therein; and provided further, that the foregoing indemnity with respect to
Preliminary Prospectuses shall not inure to the benefit of any Underwriter (or
to the benefit of any person controlling such Underwriter) if such untrue
statement or omission or alleged untrue statement or omission made in any
Preliminary Prospectus is eliminated or remedied in the Prospectus and a copy of
the Prospectus has not been furnished to the person asserting any such losses,
claims, damages, or liabilities at or prior to the written confirmation of the
sale of such Shares
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<PAGE>
to such person. Such indemnity obligation will be in addition to any liability
which the Company may otherwise have. The indemnity agreement of the Company
contained in this paragraph (a) and the representations and warranties of the
Company contained in Section 2 hereof shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
(b)
Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities, joint or several, to which the Company or any such director,
officer or controlling person may become subject, under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter for use
therein; and, subject to Section 6(c), will reimburse any legal or other
expenses reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending against any
such loss, claim, damage, liability or action. Such indemnity obligation will be
in addition to any liability which such Underwriter may otherwise have. The
indemnity agreement of each Underwriter contained in this paragraph (b) shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the delivery of
and payment for the Shares.
(c)
Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against the indemnifying party under
this Section, notify the indemnifying party of the commencement thereof.
Indemnification shall not be available to any party who shall fail so to give
notice, if the party to whom notice was required to be given was unaware of the
action, suit, investigation, inquiry or proceeding to which the notice would
have related, to the extent that such party was prejudiced by the failure to
give notice; but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
otherwise than under this Section. In case any such action is brought against
any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel chosen by
such indemnifying party which is reasonably satisfactory to such indemnified
party, and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that (i) if the indemnified party reasonably determines that there may be a
conflict between the positions of the indemnifying party and of the indemnified
party in conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there may be legal defenses available to such indemnified
party different from or in addition to those available to the indemnifying
party, then counsel for the indemnified party shall be entitled to conduct the
defense to the extent reasonably determined by such counsel to be necessary to
protect the interests of the indemnified party and (ii) in any event, the
indemnified party (at its own expense) shall be entitled to have counsel chosen
by such indemnified party participate in, but not conduct, the defense (it being
understood, however, that in either such case, the indemnifying party shall not,
in connection with any one such action or separate but substantially similar or
related actions arising out of the same general allegations or circumstances,
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<PAGE>
be liable for the reasonable fees and expenses of more than one separate firm of
attorneys for the indemnified parties). No indemnifying party shall be liable to
any indemnified party in respect to any settlement effected without its prior
written consent, which consent shall not be unreasonably withheld. In addition,
the indemnifying party will not, without the prior written consent of an
indemnified party, which shall not be unreasonably withheld, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not such indemnified party is a party to such
claim, action or suit or proceeding), unless such settlement, compromise or
consent includes an unconditional release of such indemnified party from all
liability arising out of such claim, action, suit or proceeding.
7. CONTRIBUTION. In order to provide for contribution in circumstances in
which the indemnification provided for in Section 6(a) or 6(b) hereof is for any
reason, other than the first proviso to Section 6(a), held to be unavailable,
the Company and the Underwriters shall contribute to the aggregate losses,
claims, damages and liabilities of the nature contemplated by such
indemnification provisions (including any investigation, legal and other
expenses incurred in connection with, any amount paid in settlement of, any
action, suit or proceeding or any claims asserted, but after deducting any
contribution received by the Company from persons other than the Underwriters,
such as persons who control the Company within the meaning of Section 15 of the
Act, officers of the Company who signed the Registration Statement and directors
of the Company, who may also be liable for contribution) to which the Company
and one or more of the Underwriters may be subject, in such proportions so that
the Underwriters are responsible for that portion in each case represented by
the percentage that the respective underwriting discounts appearing on the cover
page of the Prospectus bear to the public offering price of the Shares, and the
Company is responsible for the remaining portion; provided, however, that (i)
except as may be provided in its Master Agreement Among Underwriters provided to
Allen & Company Incorporated, in no case shall any Underwriter be responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 7, each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act shall have
the same rights to contribution as such Underwriter, and each person, if any,
who controls the Company within the meaning of Section 15 of the Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same right to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 7. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section 7, notify such party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any other
obligation it or they may have hereunder or otherwise than under this Section 7.
No party shall be liable for contribution with respect to any action or claim
settled without its consent, which consent shall not be unreasonably withheld.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties and agreements of the Company or of the Underwriters
herein or in certificates delivered pursuant hereto shall remain operative and
in full force and effect regardless of any investigation made by or on behalf of
any Underwriter or any controlling person, the Company, or any of its officers,
directors, or controlling persons, and shall survive delivery of the Shares to
the several Underwriters hereunder.
9. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall
fail to take up and pay for the number of Shares to be purchased by such
Underwriter or Underwriters hereunder upon tender of such Shares in accordance
with the terms hereof, and if the aggregate number of Shares
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<PAGE>
which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Shares, the remaining Underwriters shall be
obligated severally in proportion to their respective commitments hereunder to
take up and pay for the Shares of such defaulting Underwriter or Underwriters.
If one or more of the Underwriters shall fail or refuse (other than for a reason
sufficient to justify the termination of this Agreement) to purchase on any
Closing Date the aggregate number of Shares agreed to be purchased by such
Underwriter or Underwriters and the aggregate number of Shares agreed to be
purchased by such Underwriter or Underwriters shall exceed 10% of the aggregate
number of Shares to be sold on any Closing Date hereunder by the Company to the
Underwriters, then the other Underwriters shall have the right to purchase or
procure one or more other underwriters to purchase, in such proportions as they
may agree upon and upon the terms herein set forth, the Shares which such
defaulting Underwriter or Underwriters agreed to purchase, and this Agreement
shall be carried out accordingly. If such other Underwriters do not exercise
such right within thirty-six hours after receiving notice of any such default,
which notice the Representatives shall have also promptly delivered to the
Company, then the Company shall have the right to procure another party or
parties reasonably satisfactory to the Representatives to purchase or agree to
purchase such Shares on the terms herein set forth. If the Company is unable to
procure another such party, the Company may notify the Representatives that the
non-defaulting Underwriters are, by the giving of such notice, released from
their obligations to purchase such number of Shares being sold hereunder by the
Company as are indicated in such notice as, when subtracted from the total
number of Shares originally agreed to be purchased by all of the Underwriters
hereunder, shall leave a reduced number of Shares to be purchased by the
non-defaulting Underwriters not in excess of 110% of the aggregate number of
Shares originally contracted to be purchased hereunder by the non-defaulting
Underwriters, and each of them, in which event such non-defaulting Underwriters
shall purchase such reduced number of Shares. In any such case, either the
Representatives or the Company shall have the right to postpone any Closing Date
for a period of not more than seven business days in order that necessary
changes and arrangements may be effected by the Representatives and the Company.
If neither the non-defaulting Underwriters nor the Company shall make
arrangements within the period stated for the purchase of the Shares which such
defaulting Underwriter or Underwriters agreed to purchase, including such
arrangements for the purchase of a reduced number of Shares as are provided for
in this Section 9, then this Agreement shall terminate without liability on the
part of any non-defaulting Underwriters to the Company and without liability on
the part of the Company to the Underwriters, provided that this Agreement shall
not terminate if such events relate to the sale of Option Shares at a Second
Closing Date.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this Section, the Company shall not be under any liability to any
Underwriter (except as provided in Section 4(g) and 6 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Shares to
be purchased by such Underwriter hereunder, which Underwriter shall remain
liable to the Company and the other Underwriters for damages resulting from such
default) be under any liability to the Company (except as provided in Section 6
hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 9.
10. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement
shall become effective at such time after the declaration by the Commission of
the effectiveness of the Registration Statement as you in your discretion shall
first release the Shares for sale to the public. For the purposes of this
Section the Shares shall be deemed to have been released for sale to the public
upon release by you for publication of a newspaper advertisement relating to the
Shares or upon release by you of letters or telegrams offering the Shares for
sale to securities dealers, whichever shall first occur. By giving notice as
hereinafter specified before the time this Agreement becomes effective, you, as
Representatives of
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the several Underwriters, or the Company may prevent this Agreement from
becoming effective without liability on the part of the Company to any
Underwriter or of any Underwriter to the Company, other than as provided in
Sections 4(g) and 6 hereof.
(b)
You, as Representatives of the several Underwriters, shall have the right
to terminate this Agreement by giving notice as hereinafter specified at
any time at or prior to the First Closing Date if (i) the Company shall have
failed, refused or been unable, at or prior to the First Closing Date, to
perform any material agreement on its part to be performed, or because any other
material condition of the Underwriters' obligations hereunder required to be
fulfilled by the Company is not fulfilled; (ii) trading on the New York Stock
Exchange shall have been suspended, or minimum or maximum prices for trading
shall have been fixed, or maximum ranges for prices for securities shall have
been required, on the New York Stock Exchange by the New York Stock Exchange or
by order of the Commission or any other governmental authority having
jurisdiction, since the execution of this Agreement; (iii) a banking moratorium
shall have been declared by Federal or New York authorities since the execution
of this Agreement; or (iv) an outbreak of major hostilities or other national
calamity shall have occurred. Any such termination shall be without liability on
the part of the Company to any Underwriter or of any Underwriter to the Company
other than as provided in Sections 4(g) and 6 hereof.
(c)
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section, the Company shall
be notified promptly by you by telephone or telegram, confirmed by letter. If
the Company shall elect to prevent this Agreement from becoming effective, you
shall be notified promptly by the Company by telephone or telegram, confirmed by
letter.
11. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered or telecopied and confirmed to you c/o Allen & Company
Incorporated, 711 Fifth Avenue, New York, New York 10022, with copy to Werbel
McMillin & Carnelutti, a Professional Corporation, 711 Fifth Avenue, New York,
New York 10022, Attention: Robert H. Werbel, Esq. or if sent to the Company
shall be mailed, delivered or telecopied and confirmed to the Company at 9610
Medical Center Drive, Suite 200, Rockville, Maryland 20850, Attention: Dr. John
W. Holaday with a copy to Bachner, Tally, Polevoy & Misher LLP, Attention: Jill
Cohen, Esq. Notice to any Underwriter pursuant to Section 6 shall be mailed,
delivered or telecopied and confirmed to such Underwriter's address as set forth
in its Master Agreement Among Underwriters furnished to Allen & Company
Incorporated.
12. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective successors
and assigns. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person or corporation, other than the parties
hereto and their respective successors and assigns and the controlling persons,
officers and directors referred to in Section 6, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained; this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective successors and assigns and said controlling persons
and said officers and directors, and for the benefit of no other person or
corporation. No purchaser of any of the Shares from any Underwriter shall be
construed a successor or assign merely by reason of such purchase.
In all dealings with the Company under this Agreement, you shall be and are
authorized to act on behalf of each of the several Underwriters, and the Company
shall be entitled to act and rely upon any statement request, notice or
agreement on behalf of each of the several Underwriters if the same shall have
been made or given in writing by you.
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13. APPLICABLE LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York applicable to
agreements made, and to be fully performed, therein.
14. COUNTERPARTS. This Agreement may be executed in several counterparts
and all documents so executed shall constitute one agreement, binding on all of
the parties hereto, notwithstanding that all of the parties did not sign the
original or the same counterparts.
If the foregoing correctly sets forth the understanding between the Company
and the several Underwriters, please so indicate in the space provided below for
that purpose whereupon this letter shall constitute a binding agreement between
the Company and the several Underwriters.
Very truly yours,
ENTREMED, INC.
By: __________________________________
President
Accepted as of the date
first above written:
ALLEN & COMPANY INCORPORATED
DILLON, READ & CO. INC.
VOLPE, WELTY & COMPANY
By: ALLEN & COMPANY INCORPORATED
By: ____________________________________________________________________________
On behalf of each of the several
Underwriters named in Schedule A hereto.
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EXHIBIT 5.1
June 6, 1996
EntreMed, Inc.
9610 Medical Center Drive
Suite 200
Rockville, MD 20850
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have acted as counsel for EntreMed, Inc., a Delaware corporation (the
"Company"), in connection with its registration statement on Form S-1 (File No.
333-3536) (the "Registration Statement") filed under the Securities Act of 1933,
as amended (the "Act"), relating to the public offering of up to 3,680,000
shares of the Company's Common Stock, $.01 par value (the "Common Stock"), which
includes 480,000 shares subject to an option granted to the underwriters to
cover over-allotments in connection with the offering.
We have examined the Amended and Restated Certificate of Incorporation and
By-Laws of the Company, the minutes of the various meetings and consents of the
Board of Directors of the Company, drafts of the Underwriting Agreement relating
to the offering of the shares, draft forms of certificates representing the
Common Stock, originals or copies of all such records of the Company,
agreements, certificates of public officials, certificates of officers and
representatives of the Company and others, and such other documents and records
as we have deemed necessary to form the basis of the opinion expressed below. In
such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
originals of all documents submitted to us as copies thereof. As to various
questions of fact material to such opinion, we have relied upon statements and
certificates of officers and representatives of the Company and others.
Based upon the foregoing, we are of the opinion that the maximum of
3,680,000 shares have been duly authorized and, when issued and sold in
accordance with the terms described in the Prospectus forming a part of the
Registration Statement (the "Prospectus"), will be validly issued, fully paid
and nonassessable.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement, and to the use of our name under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
BACHNER, TALLY, POLEVOY
& MISHER LLP
<PAGE>
EXHIBIT 11.1
ENTREMED, INC.
COMPUTATION OF EARNINGS PER SHARE (1)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1995
-------------- THREE MONTH
PERIOD ENDED
MARCH 31,
--------------
1996
--------------
(UNAUDITED)
<S> <C> <C>
Weighted average common and common equivalent shares outstanding during the
period..................................................................... 5,485,763 6,438,017
Effect of common stock issued and stock options and warrants granted
subsequent to April 12, 1995 computed in accordance with the treasury stock
method as required by the SEC (2).......................................... 1,786,180 874,018
Conversion of preferred stock (3)........................................... 2,000,000 2,000,000
-------------- --------------
Pro forma weighted average number of shares outstanding (3)................. 9,271,943 9,312,035
-------------- --------------
-------------- --------------
Pro forma net loss per share (3)............................................ $ (0.83) $ (0.18)
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------------
(1) All share information has been adjusted to reflect a two-for-three reverse
stock split.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, Common and Preferred Stock issued and stock options and warrants
grants at prices below the assumed initial public offering price of $15.00
per share during the 12-month period immediately preceding the initial
filing date of the Company's Registration Statement for its initial public
offering have been included as outstanding for all periods presented using
the treasury stock method.
(3) Pro forma net loss per share and weighted average shares outstanding for
the year ended December 31, 1995 and the three month period ended March 31,
1996 give effect to the automatic conversion of 3,000,000 outstanding
shares of Preferred Stock into 2,000,000 shares of Common Stock on the date
of this Prospectus.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 25,
1996 (except for Note 13, as to which the date is March 29, 1996) in the
Registration Statement on Form S-1 and related Prospectus of EntreMed Inc. for
the registration of 4,025,000 shares of its Common Stock.
ERNST & YOUNG LLP
Atlanta, Georgia,
June 6, 1996
