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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NO. 0-26034
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ORAVAX, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
38 SIDNEY STREET, CAMBRIDGE, MASSACHUSETTS
(Address of Principal Executive Offices)
04-3085209
(I.R.S. Employer
Identification No.)
02139
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 494-1339
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
TITLE OF EACH CLASS
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. Yes [ ]
The aggregate market value of voting Common Stock held by nonaffiliates of
the registrant was $10,651,988, based on the last reported sale price of the
Common Stock on the Nasdaq Bulletin Board on March 12, 1999.
Number of shares outstanding of the registrant's class of Common Stock as
of March 12, 1999: 22,113,040, including 2,193,537 shares held by Peptide
Therapeutics Group plc, which will be canceled at the consummation of the
merger.
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PART I
ITEM 1. BUSINESS
OraVax, Inc. ("OraVax" or the "Company") was incorporated in Delaware in
1990 and has its principal offices and laboratories at 38 Sidney Street,
Cambridge, Massachusetts (telephone: 617-494-1339).
On November 10, 1998, the Company entered into an agreement to merge with
Peptide Therapeutics Group plc ("Peptide") in a transaction now expected to
close during the second quarter of 1999. See next section entitled "Proposed
Merger with Peptide Therapeutics Group plc."
OraVax is engaged in the discovery, development and commercialization of
vaccine and antibody products for the prevention and treatment of human
infectious diseases. The Company's products are vaccines that stimulate the
body's own immunity to provide long term protection against disease, as well as
antibody products that provide immediate passive immunity to treat existing
infections or to protect against an acute disease risk. The Company's focus has
been on diseases of the mucosal surfaces and has been broadened to include a
series of arboviral (insect borne) diseases addressable by single-dose live
viral vaccines.
The Company is currently pursuing five proprietary product development
programs. The diseases targeted by these programs include:
- peptic ulcers and gastritis;
- yellow fever;
- a group of viral diseases related to yellow fever, including Japanese
encephalitis, dengue, tick borne encephalitis and hepatitis C;
- antibiotic-associated colitis; and
- viral pneumonia in children;
The Company's product candidates are designed to generate either mucosal or
systematic immunity, as appropriate to each specific disease target. The Company
has also developed a portfolio of biologic production technologies.
The Company's product candidates include the following:
<TABLE>
<CAPTION>
PRODUCT CANDIDATE INDICATION TECHNOLOGY STATUS
----------------- ---------- ---------- ------
<S> <C> <C> <C>
Helicobacter pylori Prevention and Recombinant protein Phase II trials
(H. pylori)vaccines treatment of peptic vaccine ongoing
ulcers and gastritis
HNK 20 antibody Prevention of Monoclonal IgA on hold pending third
pneumonia caused by antibody nosedrop party funding of Phase
respiratory syncytial III trials
virus in high risk
children
CdVax vaccine and CdIG Prevention/treatment Toxoid vaccine and Toxoid IND filed in
immune-globulin of hyper-immune gloublin September 1998; Phase
antibiotic-associated I trial initiated
colitis first quarter of 1999
ChimeriVax(TM) Prevention of Chimeric live IND expected to be
Japanese encephalitis infection by the attenuated viral filed in 1999
(follow on products Japanese encephalitis vaccine
include dengue, virus and other
hepatitis C, TBE) flaviviruses
Arilvax(R) YF vaccine Prevention of Single-dose live OraVax to facilitate
(a product of Medeva infection by the attenuated viral US registration
Pharma Limited) yellow fever virus vaccine (already marketed in
the UK and Europe);
Medeva to fund Phase
III trials scheduled
for 1999
</TABLE>
To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues until late 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva Pharma Limited
("Medeva").
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The Company's losses incurred since inception have resulted principally from
expenditures under its research and development programs, and the Company
expects to incur significant operating losses for the foreseeable future due
primarily to research and development efforts, preclinical testing and clinical
trials of its product candidates, the acquisition of additional technologies,
and the performance of commercialization activities.
PROPOSED MERGER WITH PEPTIDE THERAPEUTICS GROUP PLC
On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide for stock of Peptide and cash totaling
approximately $15 million, which was subsequently increased to $20 million.
Peptide is a biopharmaceutical company engaged in the research and development
of novel drugs and vaccines, and is listed on the London Stock Exchange, under
the symbol PTE. Peptide currently has four products in clinical development with
several pre-clinical and research programs. The Company and its joint venture
partner PMC are already collaborating with Peptide in using Peptide's
proprietary platform technology to create oral vaccines for the treatment of H.
pylori. The merger will create a larger biopharmaceutical company involved in
the development of novel drugs, vaccines and antibody products that control
significant human diseases. The merged company will have a total of ten products
in development, eight of which are currently in clinical trials, with the other
two scheduled to go into clinical trials in the next twelve months, and multiple
corporate partnerships including those with Pasteur Merieux Connaught ("PMC"),
Medeva and SmithKline Beecham. This new business combination will result in a
broader portfolio of product programs, and greater market presence and potential
for expanded corporate partnerships.
The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. A condition to the
merger is that Peptide shall have completed a financing that results in Peptide
receiving net cash proceeds which, together with existing financing available to
Peptide, is sufficient for the present working capital requirements of the
combined entity in accordance with the rules of the London Stock Exchange. This
condition was satisfied by Peptide raising approximately 20.6 million pounds
sterling (net of expenses) in March 1999. In addition the merger is contingent
upon approval by the shareholders of each company. In February 1999, Peptide's
shareholders approved the merger. The merger is now anticipated to be completed
during the second quarter of 1999.
On November 10, 1998, simultaneous with the execution of the Merger
Agreement with Peptide, Peptide purchased 2,584 shares, approximately 95%, of
the Company's then outstanding Convertible Preferred Stock for an aggregate
price of approximately $2.95 million. Under the Merger Agreement, at the
effective time, outstanding shares of the Convertible Preferred Stock owned by
Peptide will be canceled and outstanding shares of the Convertible Preferred
Stock owned by third parties will be automatically converted into the right to
receive $1,090 per share plus accrued but unpaid dividends. These third parties
have contractually agreed to redeem their shares for cash.
On November 20, 1998, the Company issued 950,000 shares of Common Stock and
six shares of Convertible Preferred Stock to repurchase warrants for 630 shares
of Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
On December 30, 1998, the Company received a letter from PMC indicating
that PMC was considering making a proposal that could result in the maximum
value to the Company's shareholders. The Company sent a copy of PMC's letter to
Peptide, as required under the Merger Agreement. In response to PMC's letter,
members of Peptide's management met independently with PMC and negotiated a
series of agreements, including a standstill agreement under which PMC agreed
not to make an offer to acquire the Company and an agreement by PMC to make a $3
million equity investment in Peptide ordinary shares in connection with and
conditioned upon consummation of the merger. PMC and Peptide also agreed that
the Company's technology relating to vaccines for Japanese encephalitis and
tick-borne encephalitis would be licensed to PMC and that the joint venture with
PMC would be granted licenses to the Company's technology for the development of
vaccines against hepatitis C contingent on the merger being consummated. In
addition, the
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Company's short-term loan agreement, in the amount of $3 million, with PMC was
amended to extend the repayment terms to be the earlier of consummation of the
merger or July 31, 1999. (See section entitled "PMC: Short-term Bridge Loan." in
Management's Discussion and Analysis of Financial Condition and Results of
Operations)
On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
Since the merger was announced, the Company has received increased interest
from prospective purchasers of the Company's leasehold interests, leasehold
improvements and equipment in its Canton, Massachusetts, manufacturing facility.
Based upon these indications of interest, the Company has explored the sale of
its related interests in this facility.
On January 28, 1999, the Merger Agreement was amended to increase Peptide's
acquisition price from $15 million to $20 million based on the further
developments in partnership discussions with PMC and the Canton facility, which
indicated increased value for OraVax's assets. The additional $5 million of
consideration will be in the form of Peptide ordinary shares.
The Merger Agreement provides that, at the effective time of the merger,
each share of the Company's common stock outstanding immediately prior to the
effective time (except for shares owned by the Company, Peptide or their
subsidiaries) will be converted into the right to receive a pro rata share of
$20 million less the sum of (A) amounts paid to purchase outstanding shares of
the Convertible Preferred Stock and (B) the intrinsic value of the Company's
outstanding common stock options and warrants. Peptide and the Company estimate
that approximately $2.95 million will be used to acquire shares of Convertible
Preferred Stock and Convertible Preferred Stock warrants, and that the intrinsic
value of the Company's options will be less than $50,000. Using these estimates,
holders of outstanding shares of the Company's common stock will receive
approximately $17 million in merger consideration. The Company estimates that at
the effective time approximately 20 million shares of common stock will be
outstanding. Assuming that merger consideration equal to $17 million is split
among 20 million shares, each share of the Company's common stock would convert
into $0.85 worth of the merger consideration. The figures used in this paragraph
are estimates. Actual amounts will depend on the cost to purchase the Company's
Convertible Preferred Stock, warrants and options to purchase the Company's
Common Stock and the number of shares of the Company's common stock outstanding
immediately prior to the effective time.
Holders of the Company's common stock will receive Peptide ordinary shares.
These Peptide ordinary shares will be valued between $1.49 and $2.24 by
reference to the average of the closing prices for Peptide ordinary shares
during the ten trading days ending on the third trading day prior to the closing
date of the merger, as reported by the London Stock Exchange, with each closing
price converted into U.S. dollars based on the midpoint of the dollar/pound
sterling exchange rate for such day, as reported by The Financial Times. If this
calculation indicates a market value for Peptide ordinary shares of less than
$1.49, the market value will be deemed to be $1.49, and if the calculation
indicates a market value for Peptide ordinary shares of more than $2.24, the
market value will be deemed to be $2.24. On March 12, 1999, the per share
closing price for a Peptide share was 107.8 pence and the midpoint of the
dollar/pound sterling exchange rate was 1.63, yielding a dollar value of $1.76.
BUSINESS STRATEGY
Developing OraVax's Technology Platform. The Company has recruited a staff
of experienced scientists, technicians and managers representing the range of
skills the Company believes will be necessary to identify, evaluate and develop
commercial technologies and product opportunities. In addition, the Company has
developed collaborations and contracts with universities, government
institutions and corporations to complement and extend its internal resources
and assist in product development. The Company continues to build upon its
understanding of the human immune system, passive antibody preparations and
vaccine formulations, and to pursue product candidates that leverage the
Company's technology and know-how.
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Identifying Medically and Economically Important Disease Targets. The
Company focuses its development efforts on diseases that are preventable or
treatable by either active (vaccine) or passive (antibody) immunity, have
near-term commercialization potential and present large market opportunities.
The Company's focus has been on diseases of the mucosal surfaces and has been
broadened to include a series of arboviral (insect borne) diseases addressable
by single-dose live viral vaccines. The Company considers medical need, product
differentiation, market research and the potential for pharmaco-economic
advantages during product selection and throughout development.
Commercializing Products Efficiently. The Company evaluates and selects
product commercialization strategies on a product-by-product basis. The Company
also seeks regional partners for the manufacture and sale of vaccines in
countries where the corresponding diseases are endemic.
In March 1995, the Company entered into a collaboration (the "Joint
Venture") with PMC for the development, manufacturing, marketing and sale of
immuno-therapeutic and preventive vaccines against H. pylori infections in
humans, and to acquire complementary technology, marketing and distribution
expertise. The Company and PMC will share equally in profits from the sales of
H. pylori vaccines and in all future research, development and commercialization
costs. Any marketing activities of the Joint Venture will be managed by the
Joint Venture's Marketing Committee, which is controlled by PMC.
In June 1996, the Company appointed CSL Limited as exclusive distributor of
the Company's monoclonal IgA antibody against viral pneumonia in children, in
Australia and selected other Southern Hemisphere countries. The Company is
currently seeking corporate partnerships to fund additional Phase III clinical
trials and to assist in commercialization of HNK20 in the U.S. and Europe.
In November 1997, the Company acquired exclusive U.S. sales, marketing and
distribution rights to the Arilvax(R) yellow fever vaccine from Medeva. Under
the terms of the agreement, the Company will conduct clinical studies necessary
for U.S. registration of the vaccine and will market and distribute the product
to both civilian and military groups in the U.S. Arilvax(R) is currently
marketed by Medeva in Europe and selected Asian markets. Medeva will fund all
costs associated with the agreed-upon clinical trials and with securing
regulatory approval in the U.S. The Company believes it can market this product
effectively, with a small sales force, since the market is currently restricted
to the U.S. military and to physicians and travel medicine clinics approved by
State Health Departments.
During 1998, the Company completed manufacture of its CdVax vaccine (for
the prevention of antibiotic-associated diarrhea and colitis) at the Center for
Applied Microbiology Research in England. The Company filed an orphan drug
application for the colitis indication and filed an IND with the U.S. FDA in
September 1998. A Phase I clinical trial, which is fully funded by the National
Institute for Health (NIH), was initiated in February 1999. The Company is
currently seeking corporate partnerships for use of the vaccine in patients at
risk of disease and/or for production of a hyper-immune globulin.
The Company's strategy for commercialization of vaccines based upon its
Chimerivax(TM) platform technology, including Japanese encephalitis (JE),
dengue, hepatitis C and Tick-borne encephalitis (TBE), is to form partnerships
with U.S. or European multinational pharmaceutical companies for their use in
the traveler and military markets. In November 1998, the Company entered into a
partnership with PMC for commercialization of the Chimerivax(TM) dengue vaccine.
(See section entitled "PMC: Dengue License Agreement and Sponsorship of Japanese
Encephalitis" in Management's Discussion and Analysis of Financial Condition and
Results of Operations).
Manufacturing Strategy. The Company's strategy is to share manufacturing
rights with its partners on a regional basis. The Company has retained the
rights to manufacture H. pylori vaccines in the U.S., and its partner, PMC is
expected to manufacture the vaccines for Europe at its facilities in Lyon,
France. Depending on the future circumstances of this product development
program, The Company may expand its manufacturing capacity, subcontract
manufacturing to third parties or source product through its partner.
In January 1996, the Company leased an approximately 47,000 square foot,
good manufacturing practices ("GMP"), manufacturing facility in Canton,
Massachusetts and acquired related equipment and leasehold improvements from the
former tenant. This facility was specifically designed and equipped by the
former
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tenant for the manufacture of biological products. The Company's strategy was to
develop its manufacturing facilities for producing both pilot-scale and
commercial quantities of its products. The facility would also accommodate
production development activities for OraVax's proprietary products depending on
the outcome of product development. The Company is currently assessing its
options relating to the facility, including the sale of its related interests.
SCIENTIFIC BACKGROUND
The human immune system is comprised of two systems: systemic and mucosal,
each including immunity mediated directly by the cells of the immune system,
"cell mediated immunity" and immunity mediated by antibody proteins, "humoral
immunity." Immunologically reactive cells react directly with the target
antigens on viruses or bacteria to inactivate them and also have direct
cytotoxic effects on virally infected cells. The systemic humoral immune system,
which protects the blood and deep tissues of the body, relies on antibodies
composed principally of IgG and IgM immunoglobulins. The mucosal immune system,
which protects mucosal surfaces, such as the digestive, respiratory and
genitourinary tracts and the surface of the eye, relies on antibodies composed
principally of the IgA class of immunoglobulins. Historically, vaccine or
antibody development has been focused on the systemic immune system, with the
objective of increasing IgG antibodies in the blood by injecting vaccines or
specific preformed immunoglobulins.
Conventional vaccines and antibody preparations are designed to provide
systemic, as opposed to mucosal immunity and are administered by injection. Such
products include:
- routine childhood vaccines such as diphtheria, tetanus, pertussis,
hepatitis B, measles, mumps and rubella;
- adult vaccines such as influenza and hepatitis B; and
- immune globulins such as rabies and cytomegalovirus.
These products provide immunity to infection only after the infecting
organisms have entered the bloodstream or deep tissues of the body. In contrast,
mucosal vaccines and antibody products are not injected but rather are applied
to mucosal surfaces (e.g., orally or intranasally). Mucosal vaccines are
designed to prevent infection at the point of entry into the body, prior to deep
tissue penetration. Mucosal vaccine and antibody products may prevent or treat
infections that are not susceptible to a systemic immunity approach and can also
complement the effectiveness of systemic immunity.
PRODUCTS UNDER DEVELOPMENT
Vaccines against H. pylori
Market Opportunity. The Company is developing vaccines designed to prevent
and treat peptic ulcers and chronic gastritis caused by H. pylori. According to
an NIH consensus statement dated February 1994, H. pylori has been associated
with virtually all duodenal ulcer cases and more than 80% of gastric ulcer
cases. It is estimated that at least five million people suffer from active
peptic ulcers each year and approximately 350,000 to 500,000 new cases are
diagnosed annually in the United States. Approximately 600,000 patients are
hospitalized each year in the United States with peptic ulcers. Additionally, H.
pylori has been classified as a Class I carcinogen which has been associated
with the majority of stomach cancers.
OraVax Approach. The Company is developing vaccines to treat existing H.
pylori infections, to prevent reinfection in previously-infected persons and to
stimulate immunity in uninfected persons. The Company believes that vaccines
directed against H. pylori, if successfully developed, would eventually be
considered for routine administration as treatment for peptic ulcer disease and
chronic gastritis and as a preventive for the full spectrum of H. pylori-caused
diseases.
The Company is evaluating antigens derived from H. pylori bacteria, as well
as several formulation technologies for use in vaccines designed to combat
existing infections (treatment of chronic gastritis or recurrent peptic ulcer)
and/or to prevent primary infection or reinfection. Pre-clinical and clinical
studies have confirmed the activity of the Company's leading, proprietary
vaccine candidate antigen, the urease
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protein. Pre-clinical studies indicated that, when given by the mucosal route or
by injection, urease has both prophylactic and therapeutic activity.
The Company is conducting Phase II clinical trials with its leading
candidate vaccine called UreAB. The vaccine is based on urease. Urease is
present in all strains of H. pylori and is exposed on the surface of the
bacteria as a target for an antibody.
In October 1996, the Company announced results of a Phase II safety and
immunogenicity study of recombinant urease, formulated with a mucosal adjuvant.
While the study involved a small population, it provided evidence that the
vaccine could have therapeutic activity in humans naturally infected with H.
pylori. These results are consistent with earlier results in animal models.
Based on the results indicating therapeutic activity of UreAB, efforts are
being directed toward optimizing the vaccine formulation. In October 1997, the
Company initiated a second Phase II safety andimmunogenicity clinical study at
the Beth Israel-Deaconess Medical Center, Boston, the objective of which is to
optimize the formulation of UreAB. The study is in progress.
The Company is also undertaking three other clinical studies, with the
objective of identifying populations in which vaccine efficacy can be measured.
In January 1997, the Company initiated a study in Mexico City in which up to 200
H. pylori-infected children and adults are being followed after antibiotic cure
to determine the incidence of reinfection. A similar study in Lima, Peru was
initiated in January 1998. The results of these studies, which are expected to
take 18-24 months, could provide a basis for Phase II and III trials of the
ability of immunization to prevent reinfection. In a third study, initiated in
October 1997 at the Veterans Administration Medical Center and Baylor
University, Houston, Texas, healthy uninfected volunteers are being challenged
with H. pylori. This study will provide a human challenge model in which the
prophylactic activity of UreAB can be determined. Results are expected in 1999.
Collaboration for H. pylori Product with PMC. In March 1995, the Company
entered into a collaboration (the "Joint Venture") with Pasteur Merieux Serums &
Vaccins S.A., now Pasteur Merieux Connaught ("PMC"), for the development,
manufacturing, marketing and sale of immuno-therapeutic and preventive vaccines
against H. pylori infections in humans. The Company and PMC will share equally
in profits from the sale of the H. pylori vaccines and in all future research,
development, clinical and commercialization costs. The Company and PMC estimate
that research, development and clinical costs will exceed $50.0 million. PMC is
providing technical expertise and will also provide marketing expertise to the
Joint Venture. PMC made an initial payment of $3.2 million directly to the
Company which included $0.6 million to recognize the value of research and
development conducted by the Company in the first quarter of 1995 prior to the
formation of the Joint Venture, and a milestone payment of $2.6 million to
recognize the value of technology previously developed by the Company and made
available to the Joint Venture. In addition, PMC purchased $2.5 million of the
Company's preferred stock. Subsequently, PMC purchased an additional $1.0
million of common stock in the Company's initial public offering. In addition,
PMC agreed to pay the Company directly up to $12.0 million during the
development period, subject to the achievement of certain clinical and
regulatory milestones, of which $0.6 million was paid to the Company in December
1995. However, the Company cannot guarantee that any milestones which trigger
such future payments will be achieved.
Beginning in the second quarter of 1995, research, development and
commercialization activities of the Joint Venture were conducted through two
equally controlled partnerships which have contracted with the Company to
perform the research, development and clinical trial activities. The Company
earned $6.6 million, $7.6 million and $7.7 million under these contracts during
1996, 1997 and 1998, respectively. In addition, during 1996, the Joint Venture
entered into research and development contracts with PMC and third parties. The
research and development budgets of the two partnerships comprising the Joint
Venture are established by joint committees in which each of the parties has an
equal participation and control. The venturers will pay approximately equal
shares of the agreed budgets. The Company will receive revenue from the
partnerships for the research and development work which is requested to be
performed by the Company and funded by the partnerships. The Company cannot
guarantee, however, that it will be selected to perform such work. The Company
and PMC each licensed to the Joint Venture upon its formation the right to use
all of their
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respective existing proprietary technologies relating to vaccines for the
treatment or prevention of H. pylori, except for so-called naked DNA technology
(for an injectable vaccine) which is the subject of a separate collaboration
between PMC and a third party. Additional technology in the H. pylori field
acquired by either party since the formation of the Joint Venture is required to
be offered to the Joint Venture. The Joint Venture itself has also obtained
licenses to relevant technology from third parties, including a license in
November 1996 of the complete genome sequence of H. pylori from MedImmune and
Human Genome Sciences.
Any marketing activities of the Joint Venture will be managed by the Joint
Venture's Marketing Committee which is controlled by PMC.
The Company and PMC each have a contractual right to withdraw from the
Joint Venture only in the event that there is a failure to efficiently and
effectively carry out the research and development program or a failure both of
urease, and of any other antigen or combination of antigens or formulations to
work and irreconcilable differences on how to proceed, in either case subject to
arbitration. In the event of termination, in all cases except breach, both
parties can commercialize the target products upon payment of cross-royalties.
HNK20 Intranasal IgA Antibody Against RSV
Market Opportunity. The Company is developing HNK20, a monoclonal IgA
antibody product designed to prevent viral pneumonia in children caused by
respiratory syncytial virus or RSV. In the United States, approximately 250,000
children annually have moderate to severe underlying medical problems that put
them at risk of contracting viral pneumonia from RSV infection.
OraVax Approach. The Company is developing its HNK20, a monoclonal IgA
antibody, designed for administration by nose drop. Based on the results of
primate studies, the Company's product candidate appears to be safe and provide
protection with small doses of antibody administered daily by nose drop. Studies
in several species, including nonhuman primates, indicate that HNK20 is
effective when administered once daily. The Company expects that its product, if
successfully developed, would be used to protect those children at risk from RSV
infection, particularly during the winter season when RSV infection is most
prevalent.
The Company received approval from the FDA to initiate clinical trials of
HNK20 under an Investigational New Drug Application ("IND") filed in March 1994.
Safety of HNK20 was initially demonstrated in Phase I/II clinical studies in
adults. A Phase I safety trial in children was completed in July 1995. A Phase
II safety and pharmacology trial in premature infants and infants with
bronchopulmonary dysplasia at high risk of contracting RSV viral pneumonia was
completed in April 1996. Results of the studies indicated that HNK20 was well
tolerated in the target population; however, significant differences were not
demonstrated between the HNK20 group and the placebo group related to the
incidence of RSV infections, pneumonia or hospitalization.
In May 1996, the Company initiated a Phase III study designed to determine
the prophylactic effectiveness of intranasal administration of HNK20 in
premature infants and infants with bronchopulmonary dysplasia at high risk of
contracting RSV viral pneumonia. The results, announced in March 1997, failed to
demonstrate a statistically-significant reduction in hospitalization. However,
the results indicated that infants treated with HNK20 experienced a 24%
reduction in lower respiratory tract infection and an 11.4% reduction in the
frequency of hospitalization relative to infants receiving placebo, with a
greater reduction observed in younger infants.
The Company believes that an additional Phase III study could be conducted
in the Northern Hemisphere to test the efficacy of HNK20, at an elevated dose
level, in infants under four months of age at study entry. The Company will need
to secure additional partnerships or other sources of funding in order to
conduct such a study.
CdVax and CdIG Against Antibiotic-associated Colitis
Market Opportunity. The Company is developing CdVax, a vaccine designed to
prevent antibiotic-associated colitis caused by Clostridium difficile (C.
difficile). Antibiotic treatment results in a decrease in the
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number of non-disease causing bacteria in the intestine, a condition allowing
the rapid growth of the antibiotic-resistant C. difficile. The C. difficile
bacteria produce two toxins known as A and B toxins that cause intestinal
inflammation and fluid secretion.
OraVax Approach. The Company has developed CdVax, containing chemically
inactivated A and B toxins which could be administered prior to exposure to the
C. difficile bacteria. Preclinical trials in animal models with CdVax have
provided preliminary indications that CdVax is effective in prevention of C.
difficile induced disease. A potential use for the vaccine is to stimulate
high-level antitoxin antibodies in plasma donors. These plasma donations will be
used to prepare an immune globulin product (CdIG) for use in the short-term
prophylaxis and therapy of C. difficile infections.
In October 1997, the Company was awarded a Phase II Small Business
Innovation Research or SBIR grant totaling $690,000 from the National Institutes
of Health ("NIH") in support of CdVax and CdIG development. The Company has
filed an orphan drug application for the colitis indication and filed an IND
with the U.S. FDA in 1998. Clinical trials were initiated in February 1999 and
are fully funded by the NIH.
ChimeriVax(TM) Platform Technology
The Company has developed a platform technology for the construction of
vaccines against a number of viral infections caused by members of the family
Flaviviridae (Flaviviruses). The underlying technology was developed jointly by
St. Louis University and an exclusive worldwide license was granted to the
Company on September 8, 1997. Flavivirus infections of medical significance
include hepatitis C, dengue, Japanese encephalitis, tick-borne encephalitis, St.
Louis encephalitis, and yellow fever. The Company has developed vaccine
candidates against two disease targets, Japanese encephalitis and dengue, and
has initiated research and development on a product candidate addressing
hepatitis C.
Arilvax(R) Vaccine Against Yellow Fever
In November 1997, the Company acquired exclusive U.S. sales, marketing and
distribution rights to the Arilvax(R) yellow fever vaccine from Medeva. The
Company also agreed to work with Medeva to introduce the vaccine into other
international markets.
Under the terms of the agreement, the Company will conduct clinical studies
necessary for U.S. registration of the vaccine and will market and distribute
the product to both civilian and military groups in the U.S. Arilvax(R) is
currently marketed by Medeva in Europe and selected Asian markets. Medeva will
fund all costs associated with the agreed-upon clinical trials and with securing
regulatory approval in the U.S. Based on the established performance of
Arilvax(R) in other markets and discussions with the U.S. FDA, Medeva
anticipates submitting a U.S. product license application (PLA) in 2000. The
Company does not anticipate incurring any material net expenditures under this
agreement until 2000 at which time, assuming a U.S. PLA is filed, it would
expect to incur premarketing and predistribution costs. The Company believes it
can market Arilvax(R) effectively, with a small sales force, since the market is
currently restricted to the U.S. military and to physicians and travel medicine
clinics approved by state health departments.
JE Vaccine Against Infection by the Japanese Encephalitis Virus
The Company is developing a vaccine for prevention of Japanese encephalitis
(JE) viral infections. JE is a potentially fatal neurotropic viral infection
common in Asia, including Japan, Korea, Taiwan, China, India and Thailand. The
World Health Organization has identified a high priority for the development of
safer and less expensive vaccines against JE, which would ensure its use in
endemic regions. In addition, a safer vaccine that requires only a single dose
for immunization would better meet the needs of travelers and military. The
Company has demonstrated safety and preclinical efficacy of its JE vaccine based
on the ChimeriVax(TM) technology in animal models, including nonhuman primates.
The Company is currently in pilot production under the FDA's good manufacturing
practices, and expects to file an IND and initiate clinical trials during 1999.
In November 1998, the Company entered into a partnership with PMC for
sponsorship of the Chimerivax(TM) Japanese encephalitis vaccine.
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Dengue Fever
Dengue is a mosquito-borne viral infection. The disease is characterized by
two distinct clinical syndromes: (1) dengue fever, a debilitating acute disease
characterized by fever, rash and muscle and joint pain and (2) dengue
hemorrhagic fever (DHF) characterized by prostration, bleeding and shock. Dengue
occurs throughout the tropical regions of the world, and is intermittently
introduced into the United States, Australia and Europe, with ensuing outbreaks.
To the Company's knowledge, currently there is no specific treatment and no
vaccine is available for prevention of the infection.
There are four distinct viruses that cause dengue fever (dengue types 1-4).
The Company has developed a candidate ChimeriVax(TM) vaccine against dengue type
2 which is in preclinical development. The Company's objective is to develop a
vaccine containing all four dengue serotypes. In November 1998, the Company
entered into a partnership with PMC for commercialization of the ChimeriVax(TM)
dengue vaccine.
Hepatitis C
Hepatitis C virus causes an estimated 20% of all cases of viral hepatitis,
and is the agent responsible for 80-90% of all cases of "nonA-nonB viral
hepatitis." The Company believes that its ChimeriVax(TM) technology could be
used in developing a vaccine that would stimulate both humoral and cellular
immunity against hepatitis C. As with dengue, a multivalent vaccine is required,
with simultaneous immunization against two or three different hepatitis C types
representing the majority of types causing human illness.
Tick-borne Encephalitis
Tick-borne encephalitis or TBE, which can cause severe illness or death,
afflicts individuals in eastern Europe and the former USSR. OraVax believes its
ChimeriVax(TM) technology could be used in developing a TBE vaccine that would
have significant advantages over existing vaccines including, single dose, life
long immunity, safety and low cost.
Other OraVax Technologies
In addition to the Company's three principal product development programs,
the Company has rights to certain other technologies which may have the
potential to be developed into products. These technologies also build on the
Company's knowledge of the mucosal immune system and immunology.
IgA Antibody Technology. The Company's IgA antibody technology includes
methods for stimulating IgA antibody production, producing recombinant secretory
component and linking IgA antibody to secretory component. The Company's current
efforts in these areas are focused on the development of the HNK20 monoclonal
IgA antibodies against RSV. The Company holds a U.S. patent relating to the
HNK20 monoclonal IgA antibody and has filed patent applications in Europe and
Japan. In addition, the Company has filed a U.S. patent application claiming the
DNA encoding the RSV-recognition site. The Company also has an exclusive
worldwide license from Harvard University to a patent application covering
complexes of antibody and secretory component and methods for producing such
complexes, including methods for the production of recombinant secretory
component and for linking IgA antibodies to secretory component.
Viricle Technology. The bluetongue virus (BTV) afflicts sheep and cattle
in livestock raising regions, including the western United States, Australia and
South Africa, causing still births. Genetically engineered virus-like particles
known as Viricles(TM) were developed as a vaccine against BTV in sheep and
against african horse sickness. The Company has incorporated a portion of the C.
difficile gene into these virus-like particles and has shown that the resulting
Viricle(TM) vaccine stimulates antibody against both BTV and C. difficile.
Shigella Live Vector Oral Vaccine Technology. Infection by Shigella
bacteria is the leading cause of bacillary dysentery. Bacillary dysentery is a
worldwide problem, with the highest incidence among children in developing
countries. While certain antimicrobial drugs may provide protection against
Shigella, the widespread use of such drugs has not been recommended because of
their side effects and the possibility of inducing the development of drug
resistant strains of bacteria.
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Copolymer Microsphere Technology. The Company has a non-exclusive license
to a patent application covering the use of copolymer microsphere technology in
the development of oral vaccines directed against five specific disease targets,
including H. pylori and C. difficile. However, this technology is not currently
used in formulating any of the Company's product candidates. The Company has a
non-exclusive license to an issued U.S. patent relating to the use of copolymer
microspheres in injected vaccines. The Company is aware of an additional issued
U.S. patent relating to selective release of active ingredients through the use
of copolymer microspheres.
Hydroxyapatite. The Company has an exclusive license from Harvard
University to a patent covering the use of hydroxyapatite crystals as a
particulate carrier for antigens used as oral vaccines. The patent titled
"Hydroxyapatite-Antigen Conjugates and Methods for Generating a Poly-Ig Immune
Response", was issued in August of 1995, US patent #5,443,832.
License of CagA. In September 1996, the Company entered into a licensing
agreement with BioMerieux Vitek, Inc. granting BioMerieux exclusive rights to
develop automated human diagnostic products incorporating a proprietary OraVax
antigen. The antigen, called CagA, is a component of H. pylori. Strains of H.
pylori producing CagA are thought to be among the most virulent. Under the terms
of the agreement, BioMerieux receives an exclusive, royalty-bearing sublicense
to manufacture, use, sell, lease, and otherwise distribute any licensed products
for use in the field of in vitro diagnostic tests using instruments that perform
automatic, multiparametric immunoanalysis. This sublicense is worldwide, except
in Japan, where coexclusive rights were granted. Additionally, in March of 1998,
the Company entered into a separate licensing agreement with Biomerica, Inc. for
the diagnostic use of CagA in in-office diagnostic tests. Under the terms of the
agreement, Biomerica receives an exclusive, royalty-bearing, worldwide,
sublicense to manufacture, use, sell, lease, and otherwise distribute any
licensed products for use as a single diagnostic test, or a component of a
diagnostic test that incorporates the CagA antigen and is intended for single
use. The Company retains all rights to the use of CagA for vaccines to treat or
prevent diseases caused by H. pylori infection. CagA was originally identified
by Martin J. Blaser, M.D., Timothy Cover, M.D. and Murali Tummuru, Ph.D. of
Vanderbilt University School of Medicine. In 1993, the Company acquired
worldwide exclusive rights to CagA patented by Vanderbilt University.
MANUFACTURING
At present, the Company's ability to manufacture its products is limited to
clinical trial quantities. The Company does not have the capability to
manufacture commercial quantities of products.
UreAB Oral Vaccine
The UreAB vaccine product used in the Phase I clinical trials is
manufactured in the biological production facility of the Walter Reed Army
Institute of Research in Forest Glen Section, Silver Spring, Maryland under a
cooperative research and development agreement with the United States Army. The
Company anticipates the continued use of this facility to support Phase II and
at least the initial portion of any Phase III trials. The Company's partner,
PMC, has initiated manufacturing based on the FDA's good manufacturing practices
at its facilities in Marcy l'Etoile (Lyon) France, and should be able to provide
vaccine for Phase III trials.
HNK20 lntranasal Antibody
Manufacturing of HNK20 for Phase I and Phase II clinical trials has been
performed by the Company at its primary facility in Cambridge, Massachusetts and
by third parties under contract to the Company. The product used in the Phase
III clinical trials conducted in the Southern Hemisphere which commenced at the
end of the second quarter of 1996 was manufactured by a contract manufacturer.
The Company had previously anticipated using product from inventory produced by
this contract manufacturer to conduct a second Phase III trial in North America
during the winter of 1997-1998. However, during an audit conducted by the
Company in October 1997 of an additional contract manufacturer, the Company
discovered that improper handling of the product by the latter manufacturer
during a step which is not part of the current
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process, precluded the clinical use of this supply of HNK20. The conduct of the
trial will require additional funding and the Company continues to seek
potential corporate partners for such funding.
CdAB Vaccine
Product for early clinical trials has been manufactured by third parties
under contract to the Company and under a cooperative research and development
agreement with the Walter Reed Army Institute of Research. The Company, however,
may elect to manufacture product for further clinical trials in its own
facilities in Cambridge or Canton, Massachusetts.
MARKETING STRATEGY
The Company's products fall into one or more of three market segments:
travelers and military from the developed country markets, the developed country
general pharmaceutical markets and what is broadly characterized as the rest of
the world (ROW). The Company has developed a preferred approach to each of these
market segments.
<TABLE>
<CAPTION>
MARKET SEGMENT PRODUCT
-------------- -------
<S> <C>
Developed country general pharmaceutical................ Helicobacter pylori vaccines
Clostridium difficile hyperimmune globulin
HNK20 nosedrop
hepatitis C vaccine (tick borne
encephalitis --
regional Central European)
Travelers and military.................................. yellow fever vaccine
dengue vaccine
Japanese encephalitis virus vaccine
Tick-borne encephalitis vaccine
hepatitis C vaccine
ROW..................................................... Helicobacter pylori
yellow fever vaccine
dengue vaccine
Japanese encephalitis virus vaccine
hepatitis C vaccine
</TABLE>
For sales in the distributed general pharmaceutical markets of the
developed countries, the Company plans to establish marketing arrangements with
pharmaceutical companies with large distribution systems for non-bulk
distribution of its products and does not expect to establish a direct sales
capability for non-bulk distribution in this segment for several years. To
market in the future any of its products directly for non-bulk distribution, the
Company will need to develop a marketing and sales force with technical
expertise and distribution capability. There can be no assurance that the
Company will be able to establish relationships with third parties for any of
its products or successful in-house sales and distribution capabilities. To the
extent that the Company enters into marketing or distribution arrangements, any
revenues received by the Company will depend upon the efforts of third parties
and there can be no assurance that such efforts will be successful. The Company
currently intends to retain the right to market some of its products directly to
bulk purchasers of vaccines and antibodies, including the United States military
and the U.S. Center for Disease Control.
The Company plans to market products directly to the travelers and military
markets, particularly in the U.S. and through partners in other countries. The
Company has acquired the U.S. sales and marketing rights to an existing product,
already being sold to the travelers and military markets in Europe and selected
Asian countries as an early entry into this market segment. In November 1997,
the Company acquired exclusive U.S. sales, marketing and distribution rights to
the Arilvax(R) yellow fever vaccine from Medeva. The Company believes it can
market the product effectively, with a small sales force, since the market is
currently restricted to the U.S. military and to physicians and travel medicine
clinics approved by the State Health Departments. Several of the Company's other
products are targeted for the same market.
The Company's current strategy for commercialization of vaccines with a
large market in countries where the diseases are endemic (e.g. China, South
America, Africa and others) is to form partnerships with local
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companies or government institutes. In these cases the Company may choose to
license the production technology to local companies for regional manufacture,
to supply bulk product for local fill and finish or to supply finished product.
PATENTS AND PROPRIETARY RIGHTS; TECHNOLOGY AGREEMENTS
The following sets forth the Company's proprietary position with respect to
its principal product development programs.
RSV Product Development Program
The Company's patent application, filed worldwide, describing the HNK20
monoclonal IgA antibody issued in the United States in 1996. The Company has
filed a United States patent application claiming the DNA encoding the
RSV-recognition site. The Company is not aware of any other patents or patent
applications describing this antibody.
H. pylori Product Development Program
In addition to its own inventions, the Company has worldwide rights to
inventions made by six groups of researchers in the field of H. pylori:
During 1997 the Company and its Joint Venture partner, PMC, also acquired a
worldwide exclusive license to the Vibrovec live-vector vaccine delivery system
from Virus Research Institute in Cambridge, Massachusetts for antigens being
evaluated by the partners. The Joint Venture partners also completed option
agreements with Aquila covering the QS21 adjuvant. Separately, the Company
secured an exclusive option agreement with IOMAI for their transdermal vaccine
delivery system.
Human Genome Sciences/MedImmune. In November 1996, the Company and PMC
entered into a research and licensing agreement with Human Genome Sciences,
Inc., or HGS and MedImmune, licensing the complete genome sequence of H. pylori
for the development of vaccines. Under this agreement, the Company and PMC have
control and responsibility for filing patents on new molecular discoveries for
use in the development of vaccines against H. pylori infection. Financial terms
of the agreement call for the Company and PMC to make license payments to
HGS/MedImmune beginning with execution of the agreement and upon issuance of the
first U.S. patent. In addition to royalties on any future sales, future
milestone payments will be paid to HGS/MedImmune to reflect attainment of
certain product development and revenue goals. During 1997, the Company and PMC
filed several additional patent applications covering new molecules identified
using the genome sequence information.
Case Western Reserve University. In October 1993, the Company entered into
an assignment agreement with its collaborators at Case Western Reserve
University or CWRU and a research agreement with these collaborators and CWRU.
Pursuant to the agreement, the Company has been assigned preexisting patent
rights claiming oral immunization using H. pylori antigens. One patent was
issued in the U.S. in 1996. The research agreement provides for sponsorship by
PM-O of the continuing development work of the collaborators in the field of H.
pylori, including the development of:
- monoclonal antibodies against urease and other antigens;
- adjuvants to be used in conjunction with an oral vaccine directed against
H. pylori; and
- animal models for the testing of oral vaccines directed against H.
pylori.
Under the terms of the research agreement, the Company will be granted a
worldwide exclusive license to inventions made in the course of sponsored
research.
Centre Hospitalier Universitaire Vaudois (CHUV); Max-Planck Institute. In
April 1992, the Company entered into a research and development agreement with
the Foundation Pour La Recherche Des Maladies GastroIntestinales (Gastrofonds)
in Lausanne, Switzerland pursuant to which the Company is sponsoring research in
the field of H. pylori at the CHUV in Lausanne, Switzerland, and at the
Max-Planck Institute in
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Tubingen, Germany. Pursuant to this agreement, Gastrofonds, who represents
collaborating inventors at the CHUV and the Max-Planck Institute, have assigned
to the Company title to two patent applications covering urease as a vaccine for
prevention and treatment of H. pylori infection. Also pursuant to this
agreement, Gastrofonds has granted the Company a worldwide exclusive license to
all patent rights and know-how developed during the course of the sponsored
research in the field of vaccine and secretory IgA products for prevention or
treatment of infections caused by H. pylori.
Institut Pasteur. The Company also has a co-exclusive license, with PMC,
to an issued patent and two patent applications owned by the Institut Pasteur
covering the H. pylori urease antigen, heat shock protein A (hspa) and other
antigens.
Saint Bartholomew's Hospital Medical College. In October 1992, the Company
entered into an agreement with The Medical College of Saint Bartholomew's
Hospital in London, England (St. Bart's) pursuant to which the Company
sponsored, from October 1992 through August 1995, research relating to the
development of vaccine candidates for use in an oral vaccine directed against H.
pylori. Under the agreement, the Company was granted a worldwide nonexclusive
license to preexisting patent rights and know-how in the field of H. pylori
developed by St. Bart's, and a worldwide exclusive license to all patent rights
and know-how developed during the course of the sponsored research.
Vanderbilt University. In September 1993, the Company entered into a
license agreement with Vanderbilt University ("Vanderbilt") pursuant to which
Vanderbilt has granted to the Company an exclusive worldwide license to patent
rights to a specific region of the gene for an H. pylori antigen, the Cag A
antigen, as a vaccine and diagnostic means and methods for detecting
predisposition to peptic ulceration, and to related know-how.
The Company anticipates that its H. pylori vaccine products will be used in
conjunction with mucosal adjuvants or mucosal antigen delivery systems. The
UreAB vaccine formulation tested in a Phase II clinical trial uses the native
heat-labile enterotoxin ("LT") produced by E. coli as a mucosal adjuvant. The
Company is aware of a patent application owned by a competitor claiming use of
LT combined with H. pylori antigens, including urease, against H. pylori
infection. Whether this application will issue in the U.S. or in other countries
is uncertain. The Company currently has a license to the U.S. Navy's patent
application covering the use of native LT as a mucosal adjuvant. The Company is
aware of a patent owned by the Kitasato Institute that also claims the use of
native LT. The Company is also conducting research on the polyphosphazene
mucosal adjuvant and the Vibrio cholerae live-vector delivery system under an
option from Virus Research Institute in Cambridge, Massachusetts. Other
formulation technologies being evaluated include mutants of LT that may have
advantages in greater safety or potency, the Shigella live-vector system
developed by the Company and technologies developed or controlled by PMC. It is
possible that the Joint Venture may need to obtain a license to the patent
rights owned by a third party covering a mucosal adjuvant or mucosal antigen
delivery system, and the Company does not know whether it will be able to obtain
any such license on favorable terms. See "Risk Factors -- Patents and
Proprietary Rights." See "Factors That May Affect Future Results -- Patents and
Proprietary Rights."
C. difficile Product Development Program
In March 1993, the Company entered into a collaborative development and
license agreement with Techlab, Inc. pursuant to which the Company is sponsoring
research and the development of vaccines for the prevention of diseases caused
by C. difficile. With respect to technology developed during the course of the
collaboration, the Company will have title to all patent rights and know-how
invented by the Company's employees or developed jointly by the Company and
Techlab employees, and Techlab will have title to all patent rights and know-how
developed solely by its employees. Techlab has granted to the Company a
worldwide exclusive license to technology owned solely by Techlab. The Company
has filed a patent application covering its C. difficile vaccine product
candidate and related technology. The Company owns this patent application and
any patents issued under the application.
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General
The Company's future success will depend, in part, upon its ability to
develop patentable products and technologies and obtain patent protection for
its products and technologies both in the U.S. and abroad. The Company cannot
guarantee that additional patent applications owned or licensed by the Company
will issue as patents or that patent protection will be secured for any
particular technology. Neither can the Company guarantee that patents which are
issued will be valid or that they will provide the Company with meaningful
protection against competitors or with a competitive advantage. The Company
cannot guarantee that patents will not be challenged or designed around by
others. The Company could incur substantial costs in proceedings before the U.S.
Patent and Trademark Office, including interference proceedings. These
proceedings could also result in adverse decisions as to the patentability of
the Company's licensed or assigned inventions. Further, the Company cannot
guarantee that it will not infringe upon existing or future patents owned by
others. Neither can the Company guarantee that it will not need to acquire
licenses under patents belonging to others for technology potentially useful, or
necessary to the Company, or that such licenses will be available to the
Company, if at all, on terms acceptable to the Company. Moreover, the Company
cannot guarantee that any patent issued to or licensed by the Company will not
be infringed by others. Also, the Company cannot guarantee that third parties
will not bring suit against the Company for patent infringement or for
declaratory judgment to have the patents owned or licensed by the Company
declared invalid. The Company also relies on trade secrets and other unpatented
proprietary technology. The Company cannot guarantee that it can meaningfully
protect its rights in such unpatented technology or that others will not
independently develop substantially equivalent products and processes or
otherwise gain access to the Company's technology.
The Company is engaged in research and development collaborations and
licensing arrangements with a number of academic, government and commercial
research groups. The Company has entered into these agreements to secure rights
to certain technologies, processes and compounds that it believes may be
important to the development of its products. In general, the research and
development agreements provide for the Company's sponsorship of research and
development in exchange for exclusive, royalty-bearing licenses or options to
the technology developed during the course of the sponsored research. Certain of
these agreements also include nonexclusive licenses to preexisting technology
rights. In general, the license agreements grant to the Company exclusive
licenses in exchange for varying combinations of license fees, milestone
payments, royalties and minimum royalties. In addition, the license agreements
typically place commercialization obligations on the Company which, if not
satisfied, may result in the licensor having the right to render the license
nonexclusive or to terminate the agreement. In certain instances, the Company
has obtained assignments of technology, although the Company's ownership, in
some cases, is subject to forfeiture for failure to commercialize. Typically,
the agreements are terminable by either party for breach. Further, the research
agreements are generally terminable in the discretion of either party and the
license agreements are generally terminable by the Company in its discretion.
COMPETITION
The biotechnology and pharmaceutical industries are subject to rapid and
significant technological change. Competitors of the Company in the United
States and abroad are numerous and include, among others, major pharmaceutical
and chemical companies, specialized biotechnology firms, universities and other
research institutions. There can be no assurance that the Company's competitors
will not succeed in developing technologies and products that are more effective
than any which are being developed by the Company or which would render the
Company's technology and products obsolete and noncompetitive. Many of these
competitors have substantially greater financial and technical resources and
production and marketing capabilities than the Company. In addition, some of the
Company's competitors have substantially greater experience than the Company in
preclinical testing and human clinical trials of pharmaceutical products and in
obtaining FDA and other regulatory approvals of products for use in healthcare.
Accordingly, the Company's competitors may succeed in obtaining FDA approval for
products more rapidly than the Company. There can be no assurance that the
Company's products under development will be able to compete successfully with
existing products or products under development by other companies, universities
and other institutions or that they will attain regulatory approval in the
United States or elsewhere. If the Company
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commences significant commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it has limited experience. A significant amount of research in
the field is also being carried out at academic and government institutions.
These institutions are becoming increasingly aware of the commercial value of
their findings and are becoming more aggressive in pursuing patent protection
and negotiating licensing arrangements to collect royalties for use of
technology that they have developed. These institutions may also market
competitive commercial products on their own or in collaboration with
competitors and will compete with the Company in recruiting highly qualified
scientific personnel.
The Company is aware of certain programs under development by competitors
that are targeted for the prevention or treatment of certain diseases that the
Company has identified as product development areas, including RSV and H.
pylori. Certain of the Company's competitors are developing antibody products
for the prevention of disease caused by RSV, and one such competitor has
recently received U.S. regulatory approval for marketing its intravenous IgG
(systemic) antibody product. The same company has developed a monoclonal IgG
antibody for administration by injection and submitted an application for
marketing approval to the U.S. FDA in late 1997. In addition, certain
competitors of the Company are engaged in H. pylori research. However, the
Company is not aware of any company that has initiated clinical trials of an H.
pylori vaccine product candidate. The existence of products developed by these
competitors, or other 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 developed by the Company.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and other countries will
be a significant factor in the manufacturing and marketing of any products that
may be developed by the Company. The nature and extent to which such regulation
may apply to the Company will vary depending on the nature of any such products.
All of the Company's products will require regulatory approval by governmental
agencies prior to commercialization. Human therapeutics, in particular, are
subject to rigorous preclinical and clinical testing and other approval
procedures by the FDA and similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
products.
The Immunization Practices Advisory Committee or ACIP of the CDC has a role
in setting the market for most, if not all, of the products the Company intends
to make. The ACIP meets quarterly to review developing data on licensed
vaccines, and those approaching license, as well as epidemiologic data on the
need for these products. The recommendations of ACIP on the appropriate use of
vaccines and related products are published in the Morbidity and Mortality
Weekly Report and reprinted in several journals. The CDC develops epidemiologic
data in support of the need for new vaccines and monitors vaccine usage and
changes in disease incidence. In addition CDC staff frequently act as key
advisors to the FDA in their review process.
The Company believes that both its vaccines and antibody products will be
classified by the FDA as "biologic products" as opposed to "drug products." New
biologic products must satisfy several requirements in order to receive
regulatory approval, including:
- preclinical laboratory and animal tests;
- submission by the Company of:
(1) an IND application to the FDA or to an individual physician, or
(2) a request for approval of intrastate trials to an institutional review
board of a research institution, one of which must become effective
before human clinical trials begin;
- the performance of well-controlled clinical trials; and
- product license application or PLA submitted to the FDA containing the
results of clinical and manufacturing information prior to commercial
sale or shipment of the product.
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During the approval process, the FDA must confirm that appropriate
standards were maintained during product testing and that the product meets
regulatory standards for safety and efficacy.
In addition to obtaining FDA approval for each PLA, an establishment
license application or ELA must be filed and approved by the FDA for the
manufacturing facilities for a biologic product before commercial marketing of
the biologic product is permitted. As a consequence of regulatory reforms
initiated in 1995, a formal ELA may not be needed for some of the Company's
product candidates. However, manufacturing practices will continue to be subject
to FDA regulations and review. The regulatory process may take many years and
requires the expenditure of substantial resources. Before testing of any agents
with potential therapeutic value in healthy human test subjects or patients may
begin, government requirements for preclinical data must be satisfied. These
data, obtained from studies in animals, as well as from laboratory studies, are
generally submitted in an IND application or its equivalent in countries outside
the United States where clinical studies are to be conducted. These preclinical
data must provide an adequate basis for evaluating both the safety and the
scientific rationale for the initial Phase I studies in human volunteers.
Phase I clinical studies are generally performed in healthy human subjects
or, occasionally, in selected patients with the targeted disease or disorder.
The goal of the Phase I study is to establish initial data about safety and
tolerance of the drug in humans. Also, the first data regarding the absorption,
distribution, metabolism and excretion of the drug in humans, or the immune
response to a vaccine, may be obtained. In Phase II human clinical studies,
evidence is sought about the desired therapeutic efficacy of a drug or antibody,
or the immune response to a vaccine, in limited studies with small numbers of
carefully selected subjects. Efforts are made to evaluate the effects of various
dosages and to establish an optimal dosage level and dosage schedule. Additional
safety data are also gathered from these studies. The Phase III clinical
development program consists of expanded, large scale, multicenter studies of
patients with the target disease or disorder, or in the case of a preventive
antibody or vaccine, who are susceptible to the disease. The goal of these
studies is to obtain definitive statistical evidence of the efficacy and safety
of the proposed product and dosage regimen.
At the same time that the human clinical program is being performed,
additional non-clinical (animal) studies may also be conducted. In addition,
expensive, long duration toxicity, teratogenicity (birth defects) and
carcinogenicity studies may be required to demonstrate the safety of drug
administration for the extended period of time required for effective therapy.
Also, a variety of laboratory, animal and initial human studies are performed to
establish manufacturing methods for the drug, as well as stable, effective
dosage forms. All data obtained from this comprehensive development program are
submitted as a PLA to the FDA and the corresponding agencies in other countries
for review and approval. FDA approval of the PLA and the associated
manufacturing documentation is required before marketing may begin in the United
States. Although the FDA's policy is to review priority applications within 180
days of their filing, in practice longer times may be required. The FDA
frequently requests that additional information be submitted requiring
significant additional review time. Essentially, all proposed products of the
Company will be subject to demanding and time-consuming PLA or similar approval
procedures in the countries where the Company intends to market its products.
These regulations define not only the form and content of the development of
safety and efficacy data regarding the proposed product, but also impose
specific requirements regarding manufacture of the product, quality assurance,
packaging, storage, documentation and record keeping, labeling and advertising,
and marketing procedures. Effective commercialization also requires inclusion of
the Company's products in national, state, provincial, or institutional
formularies or cost reimbursement systems.
In addition, the activities of the Company, and its potential partners and
licensees are subject to laws and regulations regarding, among other things:
- occupational safety;
- the use and handling of radioisotopes;
- environmental protection;
- laboratory and manufacturing working conditions;
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- handling and disposition of potentially hazardous materials; and
- use of laboratory animals.
Whether or not FDA approval has been obtained, approval of a product by
comparable regulatory authorities may be necessary in foreign countries prior to
the commencement of marketing of the product in such countries. The approval
procedure varies among countries, can involve additional testing, and the time
required may differ from that required for FDA approval. Although there is now a
centralized European Community approval mechanism in place, each European
country may nonetheless impose its own procedures and requirements, many of
which are time consuming and expensive. Thus, there can be substantial delays in
obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. The Company expects to
rely on corporate partners and licensees, along with the Company's expertise, to
obtain governmental approval in foreign countries of drug formulations utilizing
its compounds. See "Factors That May Affect Future Results -- Government
Regulation."
HEALTHCARE REIMBURSEMENT
In both domestic and foreign markets, sales of the Company's products, if
any, will depend, in part, on the availability of reimbursement from third-party
payers, such as government health administration authorities, private health
insurers and other organizations. Third-party payers are increasingly
challenging the price and cost-effectiveness of medical products. There can be
no assurance that the Company's products will be considered cost-effective or
that adequate third-party reimbursement will be available to enable the Company
to maintain price levels sufficient to realize an appropriate return on its
investment in product development. See "Factors That May Affect Future
Results -- Uncertainty of Third-Party Reimbursement."
PRODUCT LIABILITY
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
use of the Company's products or clinical trials may expose the Company to
product liability claims and possible adverse publicity. These risks also exist
with respect to the Company's products, if any, that receive regulatory approval
for commercial sale. The Company currently has limited product liability
coverage for the clinical research use of its products which management believes
is customary for a Company with products at this stage of clinical development.
The Company does not have product liability insurance for the commercial sale of
its products but intends to obtain such coverage if and when its products are
commercialized. However, such coverage is becoming increasingly expensive and
there can be no assurance that the Company will be able to maintain its existing
insurance coverage or obtain additional insurance coverage at acceptable costs,
if at all, or that a product liability claim would not materially adversely
affect the business or financial condition of the Company.
If and when the Company manufactures vaccines which are recommended for
routine administration to children, it is possible that the Company will be
required to participate in the National Vaccine Injury Compensation Program.
This program compensates children having adverse reactions to certain routine
childhood immunizations with funds collected through an excise tax from the
manufacturers of these vaccines.
EMPLOYEES
As of March 12, 1999, the Company employed a work force of 65 persons
including 61 persons employed full-time, of which 7 are temporary employees, and
4 persons employed part-time. Of this total work force, 51 persons are engaged
in research and development activities and 14 are devoted to facilities support
and administrative activities. Sixteen persons hold Ph.D. and/or M.D. degrees. A
significant number of the Company's management and professional employees have
had prior experience with pharmaceutical, biotechnology or medical products
companies. The Company believes that it has been successful in attracting
skilled and experienced scientific personnel; however, competition for such
personnel is intense. The Company believes that its relationships with its
employees are good.
17
<PAGE> 19
ACADEMIC CONSULTANTS
The Company has relationships with a number of academic consultants. These
persons are not employees of the Company. Accordingly, the Company has limited
control over their activities and can expect only limited amounts of their time
to be dedicated to the Company's activities. These persons may or may not enjoy
relationships with other commercial entities, some of which could compete with
the Company. Although the precise nature of each relationship varies, the
consultants generally sign agreements which provide for confidentiality of the
Company's proprietary information and results of studies but not for the
assignment of inventions. The Company cannot guarantee that it will be able to
maintain the confidentiality of its technology, the dissemination of which could
have a materially adverse effect on the Company's business. Further, the Company
cannot guarantee that it will be able to license inventions and technology
discovered by such consultants. See "Factors That May Affect Future
Results -- Patents and Proprietary Rights."
ITEM 2. PROPERTIES
The Company's administrative offices and research facilities consist of an
aggregate of approximately 53,000 square feet of leased space at 38 Sidney
Street in Cambridge, Massachusetts. In addition, the Company leases a 47,000
square foot manufacturing facility in Canton, Massachusetts, designed and
equipped for the commercial production of biologic products. The facility is not
currently in use. When it entered into this lease, the Company purchased
leasehold improvements and other related assets from the former tenant, payable
in installments through 1999. Since the merger was announced, the Company has
received increased interest from prospective purchasers of its leasehold
interests, leasehold improvements and equipment in the Canton facility. Based on
these indications of interest, the Company is exploring the sale of its
interests in the facility.
ITEM 3. LEGAL PROCEEDINGS
By letter dated September 8, 1998, the Securities and Exchange Commission
(the "SEC") requested the Company to furnish the SEC staff with documents for
use in connection with an SEC inquiry re: In the Matter of OraVax, Inc.
(MB-998). The requested documents generally pertain to statements made in SEC
filings by the Company regarding the Company's relationship with the U.S.
Department of Defense's Joint Vaccine Acquisition Program. The Company has
responded to the SEC's request and to date has received no further requests or
information concerning this matter.
On December 23, 1997, the Company sold 240,000 shares of Common Stock to an
institutional investor, at a purchase price of $1.9125 per share, in a private
placement which closed simultaneously with a private placement of 6,300 shares
of the Company's 6% Convertible Preferred Stock ("Preferred Stock"), at $1,000
per share. The institutional investor has expressed claims as follows: (i) that
the Company should issue additional shares of Common Stock to the investor under
a "most favored nations" clause in the Stock Purchase Agreement pursuant to
which the investor purchased its Common Stock and (ii) that the Company should
pay damages to the investor because the Company failed to afford the investor
"piggyback" registration rights in connection with the Company's registration of
the Preferred Stock on February 5, 1998.
The Company believes it has good defenses to these claims. It does not
believe that the issuance of the Preferred Stock (and the subsequent issuance of
Common Stock upon conversions of shares of the Preferred Stock) triggered the
"most favored nations" clause because the Preferred Stock was issued on the same
Closing Date as the Common Stock issued to the investor. As to the "piggyback"
registration rights, the Company believes that the investor had actual notice of
the registration of the Preferred Stock in February, 1998 and took no action to
invoke its rights at the time, did not exercise its demand registration rights
for almost three months after they became available on April 23, 1998, and still
has not sold any of its shares -- all of which the Company registered for resale
on August 6, 1998. To date, no litigation has been filed by the investor on
these claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1998.
18
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, $.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share. As of March 12, 1999, there were issued and
outstanding 22,113,040 shares of Common Stock held by approximately 192
stockholders of record and 2,590 shares of 6% Convertible Preferred Stock
("Convertible Preferred Stock") held by 4 stockholders of record.
COMMON STOCK
The Common Stock of the Company was traded on the Nasdaq National Market
under the symbol ORVX from June 7, 1995 through November 16, 1998. Prior to June
7, 1995, the Company's Common Stock was not publicly traded.
At June 30, 1998, the Company's net tangible assets (total assets minus
goodwill and liabilities) were $1.5 million. The minimum net tangible asset
requirement for continued listing by the Nasdaq National Market ("Nasdaq NM") is
$4.0 million. The Company received a notice of delisting from the Nasdaq Stock
Market, Inc. ("Nasdaq") indicating that because the Company was not in
compliance with the minimum net tangible asset requirement the Company's stock
would be delisted from trading on the Nasdaq NM. The Company was also notified
by Nasdaq of non-compliance with the minimum $1 per share bid price and minimum
requirement for the public market float of $5 million. The Company appealed the
delisting and a hearing was granted before an NASD panel concerning the
delisting issues. The Company presented its plans to the Panel and continued to
update Nasdaq on the progress of these plans. The Company was delisted from the
Nasdaq National Market, at the close of market, on November 16, 1998. The
Company began trading on the OTC Bulletin Board, under the symbol ORVX, on
November 17, 1998.
The following table sets forth the high and low sales prices per share of
the Company's Common Stock for the fiscal years 1996, 1997 and 1998. The prices
per share for the fiscal years 1996 and 1997, and the first, second and third
quarters of fiscal year 1998 are as reported by the Nasdaq National Market and
the prices per share for the fourth quarter of fiscal year 1998 are as reported
by the OTC Bulletin Board.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter.......................................... $ 2.375 $ 1.563
Second Quarter......................................... 2.063 0.969
Third Quarter.......................................... 1.250 0.188
Fourth Quarter......................................... 0.547 0.188
1997
First Quarter.......................................... $ 7.000 $ 2.375
Second Quarter......................................... 3.625 2.250
Third Quarter.......................................... 2.750 2.125
Fourth Quarter......................................... 4.250 1.750
1996
First Quarter.......................................... $15.000 $11.000
Second Quarter......................................... 14.500 7.250
Third Quarter.......................................... 9.250 6.500
Fourth Quarter......................................... 10.750 5.250
</TABLE>
On March 12, 1999, the closing price of the Company's Common Stock on the
OTC Bulletin Board was $0.50. The Company has never paid dividends on its Common
Stock. The Company currently intends to reinvest its earnings, if any, for use
in the business and does not expect to pay cash dividends in the foreseeable
future.
19
<PAGE> 21
6% CONVERTIBLE PREFERRED STOCK
In December 1997, the Company issued and sold in a private placement to
certain accredited investors for $1,000 per share an aggregate of 6,300 shares
of Convertible Preferred Stock, resulting in gross proceeds to the Company of
$6.3 million in the aggregate.
Each share of Convertible Preferred Stock is entitled to receive cumulative
dividends at the rate of $60.00 per share per annum, payable in shares of
Convertible Preferred Stock valued at $1,000 per share, when and as declared by
the Company's Board of Directors. Such dividends accrue from day to day whether
or not earned or declared. Each share of Convertible Preferred Stock is also
entitled to a liquidation preference of $1,000 per share, plus any accrued but
unpaid dividends, in preference to any other class or series of capital stock of
the Company. Except to determine whether such stock is entitled to its
liquidation preference under certain circumstances, and as provided by
applicable law, holders of shares of Convertible Preferred Stock have no voting
rights.
All of the Convertible Preferred shares became fully convertible, at the
option of the holder, effective March 31, 1998. On December 23, 2002, all
outstanding shares of Convertible Preferred Stock will automatically be
converted into Common Stock.
The number of shares of Common Stock issuable upon conversion of shares of
Convertible Preferred Stock will equal the liquidation preference of the shares
being converted divided by the then-effective conversion price applicable to the
Convertible Preferred Stock (the "Conversion Price"). The Conversion Price is
the lowest trading price of the Common Stock during the 22 consecutive trading
days immediately preceding the date of conversion reduced by the Applicable
Percentage described below. The "Applicable Percentage", which is dependent upon
the time elapsed after the date of issuance to the date of measurement, will be
5.000% starting on the first day of the fourth month after the date of issuance
and will increase in the subsequent 14 months to 6.125%, 7.250%, 8.375%, 9.500%,
10.625%, 11.750%, 12.875%, 14.000%, 15.125%, 16.250%, 17.375%, 18.500%, 19.750%
and 21.000%, respectively. At any date after the first day of the eighteenth
month after the date of issuance, the Conversion Price will be the lesser of (i)
79% of the average of the daily low trading prices of the Common Stock for the
eighteenth month, (ii) 79% of the average of the daily low trading prices of the
Common Stock for the twenty-fourth month, and (iii) 79% of the average of the
daily low trade prices of the Common Stock for the thirtieth month. The
Conversion Price is at all times also subject to customary anti-dilution
adjustment for events such as stock splits, stock dividends, reorganizations and
certain mergers affecting the Common Stock. No holder of Convertible Preferred
Stock will be entitled to convert any share of Convertible Preferred Stock into
shares of Common Stock if, following such conversion, the holder and its
affiliates (within the meaning of the Exchange Act) will be the beneficial
owners (as defined in Rule 13d-3 under the Exchange Act) of 10% or more of the
outstanding shares of Common Stock.
In November 1998, simultaneous with the execution of the Merger Agreement
with Peptide, Peptide purchased 2,584 shares, approximately 95%, of the
Company's then outstanding Convertible Preferred Stock for an aggregate price of
approximately $2.95 million. Under the Merger Agreement, at the effective time,
outstanding shares of the Convertible Preferred Stock owned by Peptide will be
canceled and outstanding shares of the Convertible Preferred Stock owned by
third parties will be automatically converted into the right to receive $1,090
per share plus accrued but unpaid dividends. These third parties have
contractually agreed to redeem these shares for cash.
In November 1998, the Company issued 950,000 shares of Common Stock and six
shares of Convertible Preferred Stock to repurchase warrants for 630 shares of
Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
During 1998, 3,716 shares of the Convertible Preferred Stock, including
applicable stock dividends, had been converted into 8,276,011 shares of Common
Stock.
On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
20
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is attached as APPENDIX A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is attached as APPENDIX B.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is attached as APPENDIX C.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosure
matters.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Lance K. Gordon, Ph.D..................... 51 President, Chief Executive Officer and Director
Thomas P. Monath, M.D..................... 58 Vice President, Research and Medical Affairs
Robert J. Gerety, M.D., Ph.D.............. 59 Vice President of Development and Regulatory
Brigid A. Makes........................... 43 Vice President of Finance, Chief Financial Officer
Douglas MacMaster(1)(2)................... 68 Chairman of the Board of Directors
Andre L. Lamotte, Sc.D.(2)................ 49 Director
Allen Misher, Ph.D.(2).................... 67 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
LANCE K. GORDON, PH.D. has served as the President and Chief Executive
Officer and a member of the Board of Directors of the Company since June 1990.
From January 1989 to June 1990, Dr. Gordon served as Senior Vice President of
North American Vaccine, Inc., a biopharmaceutical company. From April 1988 to
January 1989, he served as Chief Executive Officer of American Vaccine
Corporation and Selcore Laboratories, Inc., both of which are biopharmaceutical
companies. From 1987 to 1988, Dr. Gordon was Associate Director, Infectious &
Inflammatory Diseases, Clinical Pharmacology -- Drug Medical Affairs, of E.R.
Squibb & Sons, Inc., a pharmaceutical company. From 1981 to 1987, he was
Director, Immunobiology Research at Connaught Laboratories, Ltd., a
pharmaceutical company. During his seven years with Connaught Laboratories,
Ltd., Dr. Gordon was responsible for both bacterial and viral research and
development programs. He was the inventor and Project Director of the Connaught
Haemophilus influenzae type b conjugate vaccine, ProHibit(R). Dr. Gordon also
serves on the advisory boards of the not-for-profit Albert Sabin Foundation and
BioSciences Contract Production, a private biopharmaceutical services company.
Dr. Gordon received a B.A. from the University of California at Humboldt and a
Ph.D. in Biomedical Science from the University of Connecticut. Dr. Gordon
completed his postdoctoral fellowship at the Howard Hughes Medical Institute.
THOMAS P. MONATH, M.D. has served as Vice President, Research and Medical
Affairs of the Company since December 1993. From April 1992 to December 1993, he
served as Vice President, Research and Development of the Company and from
October 1991 to March 1992, he served as a consultant to the Company. From
November 1988 to October 1991, Dr. Monath was Chief, Virology Division of the
United States Army Medical Research Institute of Infectious Diseases, Fort
Detrick, Maryland. As Chief of the Virology Division, Dr. Monath directed the
development of conventional and genetically engineered viral vaccines and the
discovery, evaluation, preclinical testing and clinical development of antiviral
drugs. Dr. Monath currently serves as a member of the Steering Committee on
Dengue and Japanese Encephalitis of the Global Program for Vaccines and
Immunization of the World Health Organization. In 1997 Dr. Monath was named to
the National Vaccines Advisory Committee. Dr. Monath received a B.A. from
Harvard College and an M.D. from Harvard Medical School.
ROBERT J. GERETY, M.D., PH.D. has served as Vice President of Development
and Regulatory Affairs of the Company since April 1997. From July 1994 until he
resigned in December 1996, Dr. Gerety was President and Chief Executive Officer
of ImmuLogic Pharmaceutical Corporation ("ImmuLogic"), a biopharmaceutical
company that develops products with an emphasis on the treatment of allergies,
autoimmune diseases and drugs of abuse. From October 1993 to July 1994, he
served as ImmuLogic's Executive Vice President of Pharmaceutical Development.
Prior to October, 1993, Dr. Gerety was Vice President of Development Operations
at Biogen Inc., a biopharmaceutical company engaged in developing, manufacturing
and marketing drugs for human healthcare. From June 1985 through September 1989,
Dr. Gerety was an
22
<PAGE> 24
Executive Director of Merck & Co. and head of virus and cell biology at Merck &
Co. Dr. Gerety received a B.A. from Rutgers University, an M.D. from the George
Washington School of Medicine and M.A. and Ph.D. degrees from Stanford
University Medical School.
BRIGID A. MAKES has served as Vice President of Finance & Administration
and CFO of the Company since May 1998. From November 1995 to April 1998, Ms.
Makes served as Vice President of Finance and CFO of Haemonetics Corporation
("Haemonetics"), a global medical device manufacturer. From August 1992 until
November 1995, Ms. Makes was Treasurer and Director of Human Resources at
Haemonetics. From August 1986 to January 1992, Ms. Makes held numerous
managerial positions in Treasury and financial operations at Lotus Development
Corporation. From 1977 to 1986, Ms. Makes held numerous financial management
positions at General Electric Company. Ms. Makes received a Bachelor of Commerce
from McGill University in Montreal, Quebec, and a MBA from Bentley College. Ms.
Makes is affiliated with numerous professional groups, including FEI, TMA and
TMANE. She is currently a trustee of the Massachusetts Taxpayers' Foundation and
on the Board of Directors of the Massachusetts Hugh O'Brian Youth Leadership
Group.
DOUGLAS MACMASTER has served as a director of the Company since March 1993
and was elected Chairman of the Board of Directors in April 1994. From July 1988
until his retirement in January 1992, Mr. MacMaster served as a Senior Vice
President of Merck & Co., Inc. ("Merck"), a pharmaceutical company, with
responsibility for worldwide chemical and pharmaceutical manufacturing,
worldwide construction, the Agvet division and the Speciality Chemicals Group.
From October 1985 to July 1988, Mr. MacMaster was President of the Merck Sharp &
Dohme Division, with responsibility for the United States human healthcare
business. Mr. MacMaster was an employee of Merck for 30 years. He is currently
on the Board of Directors of American Precision Industries, Inc., Martek
Biosciences Corp., Neose Pharmaceuticals, Inc., Phyto Pharmaceuticals Inc. and
U.S. Bioscience, Inc. Mr. MacMaster received his A.B. degree from St. Francis
Xavier University (Canada) and his J.D. degree from Boston College Law School.
ANDRE L. LAMOTTE, SC.D. has served as a director of the Company since April
1990. Since April 1989, he has served as the Managing General Partner of Medical
Science Ventures, the General Partner of Medical Science Partners L.P., and as
Managing General Partner of Medical Science Ventures II, the General Partner of
Medical Science Partners II, L.P. and Medical Science II CoInvestment L.P. Dr.
Lamotte received a B.S. in General Engineering from Ecole Centrale Paris, an
M.S. in Chemical Engineering and an Sc.D. in Chemical Engineering from the
Massachusetts Institute of Technology, and a M.B.A. from the Harvard Graduate
School of Business Administration.
ALLEN MISHER, PH.D. has served as a director of the Company since January,
1996. He was elected by the Board of Directors to fill a vacancy created by the
resignation of Robert E. Curry as a Director. Dr. Misher is a consultant. From
1984 to 1994, he served as President of Philadelphia College of Pharmacy and
Science. From 1982 to 1984, he was a Senior Vice President of National Medical
Care, Inc. From 1964 to 1982 he was employed by SmithKline & French and
SmithKline Corp. in a variety of positions in pharmacology and research,
including President of SmithKline Medical Diagnostics Group from 1978 to 1982
and Group Vice President of SmithKline Corp. from 1978 to 1982. He is currently
on the Board of Directors of U.S. Bioscience and Cortech, Inc. Dr. Misher
received his B.Sc. from Philadelphia College of Pharmacy and Science and his
Ph.D. in Physiology from the University of Pennsylvania.
The Board of Directors is divided into three classes, each of whose members
serve for a staggered three-year term. The Board is comprised of two Class I
Directors (Mr. MacMaster and Dr. Lamotte), one Class II Director (Dr. Misher)
and one Class III Director (Dr. Gordon). At each annual meeting of stockholders,
a class of directors will be elected for a three-year term to succeed the
directors of the same class whose terms are then expiring. The terms of the
Class I Directors, Class II Director and Class III Director will expire upon the
election and qualification of successor directors at the annual meeting of
stockholders held during the calendar years 1999, 2000 and 2001, respectively.
The Board of Directors has a Compensation Committee comprised of Drs.
Lamotte and Misher, and Mr. MacMaster, which makes recommendations concerning
salaries and incentive compensation for employees of and consultants to the
Company, and an Audit Committee comprised of Mr. MacMaster, which reviews
23
<PAGE> 25
the results and scope of the audit and other services provided by the Company's
independent public accountants.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation. The following table sets forth certain information
with respect to the compensation paid by the Company during the fiscal years
ended December 31, 1996, 1997 and 1998 to the Company's Chief Executive Officer
and each of the Company's four other most highly compensated executive officers
whose cash compensation exceeded $100,000 in 1998 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION(1) ------------
--------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
YEAR SALARY BONUS(2) COMPENSATION(3) OPTIONS(#)
---- ------ -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Lance K. Gordon......................... 1998 $250,000 --(5) $11,044 --
President and Chief 1997 $250,000 $62,500 $ 8,522 100,000
Executive Officer 1996 $250,000 $56,250 $ 6,067 40,000
Thomas P. Monath........................ 1998 $190,000 --(5) $ 9,794 --
Vice President, Research 1997 $190,000 $52,500 $ 3,417 50,000
and Medical Affairs 1996 $190,000 $42,750 $ 2,250 --
Robert J. Gerety........................ 1998 $250,000 --(5) $36,948 --
Vice President of 1997 $188,815 $37,500 $43,855 125,000
Development and 1996 -- -- -- --
Regulatory Affairs
Brigid A. Makes(4)...................... 1998 $115,885 --(5) $ 905 90,000
Vice President Finance 1997 -- -- -- --
and Chief Financial Officer 1996 -- -- -- --
</TABLE>
- ---------------
(1) Includes amounts payable in a subsequent fiscal year for services rendered
by the Named Executive Officer in the fiscal year.
(2) Other compensation in the form of perquisites and other personal benefits
has been omitted because it constitutes less than the lesser of $50,000 or
ten percent of the total annual salary and bonus for the Named Executive
Officer.
(3) Includes term-life insurance premiums and financial planning expenses paid
by the Company to the Named Executive Officer.
(4) Ms. Makes commenced employment at the Company effective May 1, 1998.
(5) The Company's Board of Directors has not yet authorized bonuses for the
Company's executive officers for the year ended December 31, 1998. The
Company's Board of Directors may approve such bonuses subsequent to the
filing of this Form 10-K.
24
<PAGE> 26
Option Grant Table. The following table sets forth certain information
regarding options granted by the Company to the Named Executive Officers during
the fiscal year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF STOCK PRICE ANNUAL
SHARES OF TOTAL OPTIONS RATES OF
COMMON STOCK GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM(1)
OPTIONS IN FISCAL EXERCISE EXPIRATION ---------------------
NAME GRANTED(#) YEAR PRICE($/SH) DATE 5%($) 10%($)
---- ------------ ------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Brigid A. Makes(2)
and(3).................. 90,000(2),(3) 100% $1.00 5/01/08 $109,396 $131,769
</TABLE>
- ---------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. This table does not take into account any
appreciation in the price of the Common Stock to date. Actual gains, if any,
on stock option exercises will depend on the future performance of the
Common Stock and the date at which the options are exercised.
(2) Options granted upon commencement of employment with the Company.
(3) Option vests in four equal annual installments commencing on May 1, 1999.
Year-End Option Table. The following table sets forth certain information
regarding stock options exercised during the year ended December 31, 1998 and
stock options held as of December 31, 1998, by the Named Executive Officers:
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES
SHARES OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
COMMON STOCK VALUE OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED ON REALIZED FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(2)
NAME EXERCISE(#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Lance K. Gordon................ -- -- 210,971/98,255 $0/$0
Thomas P. Monath............... -- -- 157,931/39,128 $0/$0
Robert J. Gerety............... -- -- 31,250/93,750 $0/$0
Brigid A. Makes(3)............. -- -- --/90,000 $0/$0
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value on the date of exercise.
(2) Based on the fair value of the Common Stock on December 31, 1998 ($0.406),
less the option exercise price.
(3) Ms. Makes commenced employment with the Company effective May 1, 1998.
Director Compensation. Except as described below, the Company's directors
do not receive any cash compensation for service on the Board of Directors or
any committee thereof, but are reimbursed for actual expenses incurred in
connection with attending meetings of the Board and any committee thereof. The
Company pays reasonable travel and out-of-pocket expenses incurred by
non-employee Directors in connection with attendance at meetings to transact the
business of the Company or attendance at meetings of the Board of Directors or
any committee thereof. In April 1994, the Company entered into an agreement with
25
<PAGE> 27
Mr. MacMaster, Chairman of the Board of Directors, pursuant to which Mr.
MacMaster receives an annual retainer of $25,000 paid quarterly in advance, a
fee of $2,000 per day for attending meetings of the Board of Directors or other
meetings attended at the request of the Company's President or the Board of
Directors, including monthly advisory meetings, plus travel expenses. Mr.
MacMaster received an option effective February 6, 1995, to purchase 12,750
shares of Common Stock at an exercise price of $3.529 per share. The option
vests in five equal annual installments commencing one year after the date of
grant. In February 1996, the Company entered into an agreement with Dr. Misher
pursuant to which Dr. Misher receives an annual retainer of $5,000 and a fee of
$1,500 per meeting of the Board of Directors attended. In addition, on February
5, 1996, Dr. Misher received an option to purchase 10,000 shares of Common Stock
at an exercise price of $13.25 per share. The option vests in three equal annual
installments commencing one year after the date of grant.
EMPLOYMENT AGREEMENTS
Under the terms of an employment agreement dated July 19, 1990, Dr. Gordon
serves as President, Chief Executive Officer and a director of the Company and
is entitled to receive an annual base salary, as determined by the Board of
Directors, plus a bonus based upon the achievement of certain defined management
objectives. The employment agreement automatically renews for successive
12-month periods. Dr. Gordon's employment is terminable (i) by the Company or
Dr. Gordon at any time upon not less than six months' prior written notice or
(ii) by the Company, for "cause" (as defined in the employment agreement),
immediately upon written notice. In the event the Company elects not to extend
the employment agreement or terminates Dr. Gordon without "cause," the Company
must pay Dr. Gordon a one time severance payment equal to fifty percent (50%) of
his annual base salary in effect at the time. Dr. Gordon has agreed, for a
period of one year following termination of his employment, not to engage in any
business activity that directly or indirectly competes with the Company or to
provide any services to the Company's competition or its clients. Dr. Gordon
also has agreed not to disclose any of the Company's proprietary information to
third parties without the written approval of the Company either during or after
his employment. In connection with the execution of his employment agreement,
the Company agreed to sell, and Dr. Gordon agreed to buy, 70,834 shares of the
Company's Common Stock at a purchase price of $0.235 per share. See "Certain
Transactions."
Under the terms of an employment agreement dated October 18, 1991, Dr.
Monath serves as Vice President, Research and Development and is entitled to
receive an annual base salary as determined by the Board of Directors and to
participate in the bonus program for the Company's executive officers. Pursuant
to the employment agreement, the Company granted Dr. Monath an option to
purchase 39,006 shares of the Company's Common Stock at $0.706 per share,
vesting over a four-year period, and reimbursed Dr. Monath for expenses
associated with his relocation to the Boston, Massachusetts area.
Under the terms of an employment agreement dated April 3, 1997, Dr. Gerety
serves as Vice President of Development and Regulatory Affairs and is entitled
to receive an annual base salary as determined by the Board of Directors and to
participate in the bonus program for the Company's executive officers. Pursuant
to the employment agreement, the Company granted Dr. Gerety an option to
purchase 125,000 shares of the Company's Common Stock at $3.00 per share,
vesting over a four-year period.
Under the terms of an employment agreement dated May 1, 1998, Ms. Makes
serves as Vice President of Finance and Chief Financial Officer, and is entitled
to receive an annual base salary as determined by the Board of Directors and to
participate in the bonus program for the Company's executive officers. Pursuant
to the employment agreement, the Company granted Ms. Makes an option to purchase
90,000 shares of the Company's Common Stock at $1.00 per share, vesting over a
four-year period.
Each of the employment agreements with Drs. Monath and Gerety, and Ms.
Makes is for an initial period of three years and is thereafter automatically
renewable for successive twelve-month periods unless terminated by either party
by giving six-months' prior written notice to the other. The employment of Drs.
Monath and Gerety, and Ms. Makes is terminable by the Company, by giving prior
written notice, at any time, with or without "cause" (as defined in their
employment agreements). In the event the Company terminates Dr. Monath's, Dr.
Gerety's or Ms. Makes' employment without "cause," the terminated party is
entitled to
26
<PAGE> 28
receive his or her then current salary for a period of six months following such
termination. In addition, Drs. Monath and Gerety have agreed for a period of
three years and Ms. Makes has agreed for a period of one year not to engage in
any business activity that directly or indirectly competes with the Company or
to provide any services to the Company's competition. Drs. Monath and Gerety,
and Ms. Makes have also entered into Confidential Information and Invention
Assignment Agreements with the Company pursuant to which each of them has agreed
(i) not to disclose any of the Company's proprietary information to third
parties without the prior written approval of the Company either during or after
his employment and (ii) to assign to the Company his full right and title in and
to any inventions made during the course of his employment with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Drs. Lamotte and
Misher and Mr. MacMaster. No member of the Compensation Committee was at any
time during 1997, or formerly, an officer or employee of the Company or any
subsidiary of the Company, nor has any member of the Compensation Committee had
any relationship with the Company requiring disclosure under Item 404 of
Regulation S-K under the Securities Exchange Act of 1934.
During 1997, no executive officer of the Company has served as a director
or member of the Compensation Committee (or other committee serving an
equivalent function) of any other entity, one of whose executive officers served
as a director of or member of the Compensation Committee of the Company.
REPORT OF THE COMPENSATION COMMITTEE
The executive compensation program of the Company is administered by the
Compensation Committee, composed of Drs. Lamotte and Misher and Mr. MacMaster,
all of whom are non-employee directors.
The Company's executive compensation program is designed to retain and
reward executives who are capable of leading the Company in the achievement of
its business objectives. All decisions by the Compensation Committee relating to
the compensation of the Company's officers are reviewed by the full Board.
Compensation Philosophy
The objectives of the executive compensation program are (i) to align
compensation with business objectives and individual performance and (ii) to
attract, retain and reward executive officers who contribute to the long-term
success of the Company. The Company's executive compensation philosophy is based
on the principles of competitive and fair compensation and sustained
performance.
Competitive and Fair Compensation. The Company is committed to providing
an executive compensation program that helps attract and retain highly qualified
executives. To ensure that compensation is competitive, the Company compares its
compensation practices with those of other companies in the industry and sets
its compensation guidelines based on this review. The Company believes
compensation for its executive officers is within the range of compensation paid
to executives with comparable qualifications, experience and responsibilities in
companies with similar businesses and of comparable size and success. The
Company also strives to achieve equitable relationships both among the
compensation of individual officers and between the compensation of officers and
other employees throughout the organization.
Sustained Performance. Executive officers are rewarded based upon
corporate performance and individual performance. Corporate performance is
evaluated by reviewing the extent to which strategic and business plan goals are
met, including such factors as achievement of operating budgets, establishment
of strategic licensing and development alliances with third parties, timely
development of new processes and products, and performance relative to
competitors. Individual performance is evaluated by reviewing attainment of a
specified individual objectives and the degree to which teamwork and company
values are fostered.
27
<PAGE> 29
In evaluating each executive officer's performance, the Company generally
conforms to the following process:
- Company and individual goals and objectives generally will be set at
the beginning of the performance cycle.
- At the end of the performance cycle, the accomplishment of the
executive's goals and objectives and his contributions to the Company
will be evaluated.
- The executive's performance will then be compared with peers within
the Company and the results will be communicated to the executive.
- The comparative results, combined with comparative compensation
practices of other companies in the industry, will be then used to
determine salary and stock compensation levels.
Annual compensation for the Company's executives generally consists of
three elements -- salary, cash bonuses and stock options.
The salary for executives is generally set by reviewing compensation for
competitive positions in the market and the historical compensation levels of
the executives. Increases in annual salaries and payment of bonus awards will be
based on actual corporate and individual performance against targeted
performance and various objective performance criteria. Targeted performance
criteria vary for each executive are based on his area of responsibility, and
may include continued innovation and development of the Company's technology and
products, timely development of new products or processes, implementation of
financing strategies and establishment of strategic licensing and developmental
alliances with third parties. Subjective performance criteria include an
executive's ability to motivate others, develop the skills necessary to grow as
the Company matures, recognize and pursue new business opportunities and
initiate programs to enhance the Company's growth and success. The Committee
does not use a specific formula based on these targeted performance and
subjective criteria, but makes an evaluation of each executive officer's
contributions in light of all such criteria.
Compensation at the executive officer level also includes the long-term
incentives offered by stock options. The stock option program is designed to
promote the identity of long-term interests between the Company's employees and
its shareholders and assist in the retention of executives. The size of option
grants is generally intended to reflect the executive's position with the
Company and his contributions to the Company, including his success in achieving
the individual performance criteria described above. The option program
generally uses a five-year vesting period to encourage key employees to continue
in the employ of the Company.
Executive officers of the Company are also eligible to participate in the
Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase
Plan is available to all full-time employees of the Company and generally
permits participants to purchase shares at a discount of 15% of the fair market
value at the beginning or end of the applicable purchase period. At December 31,
1998, there were no shares of the Company's common stock reserved for future
issuances under the Purchase Plan, and as a result the Company's Purchase Plan
has been suspended until completion of the planned merger with Peptide.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"), enacted in 1993,
generally disallows a tax deduction to public companies for compensation over $1
million paid to the corporation's chief executive officer and four other most
highly compensated executive officers. Qualifying performance compensation will
not be subject to the deduction limit if certain requirements are met. The
Company intends to structure the performance-based portion of the compensation
of its executive officers in a manner that complies with the new statute to
mitigate any disallowance of deductions.
Dr. Gordon's 1998 Compensation. Dr. Gordon, President and Chief Executive
Officer of the Company, is eligible to participate in the same executive
compensation plans available to other executives. Dr. Gordon's salary for 1998
remained at $250,000. The Company's Board of Directors has not yet authorized a
bonus for Dr. Gordon, or the Company's other executive officers, for the year
ended December 31, 1998. The
28
<PAGE> 30
Company's Board of Directors may approve such bonuses subsequent to the
Company's filing of this Form
10-K. The Compensation Committee believes that Dr. Gordon's annual compensation
has been set at a level competitive with other companies in the industry.
COMPENSATION COMMITTEE
ANDRE L. LAMOTTE
ALLEN MISHER
DOUGLAS MACMASTER
COMPARATIVE STOCK PERFORMANCE
The comparative stock performance graph below compares the cumulative
stockholder return on the Common Stock of the Company for the period from June
8, 1995 (the effective date of the initial public offering of the Company's
Common Stock) through December 31, 1998 with the cumulative total return on (i)
the Biotechnology Index (BTK), and (ii) the Nasdaq Composite Index (IXIC)
(assuming the investment of $100 in the Company's Common Stock, the
Biotechnology Index and the Nasdaq Composite Index on June 8, 1995 and
reinvestment of all dividends). Measurement points are on June 8, 1995 and the
last trading day of the years ended December 31, 1995, 1996, 1997 and 1998.
Prior to June 8, 1995, the Company's Common Stock was not registered under the
Securities Exchange Act of 1934.
COMPARATIVE STOCK PERFORMANCE GRAPH
<TABLE>
<CAPTION>
NASDAQ COMPOSITE INDEX
ORAVAX, INC. BIOTECHNOLOGY INDEX (BTK) (IXIC)
------------ ------------------------- ----------------------
<S> <C> <C> <C>
'6/8/95' 100.00 100.00 100.00
'12/31/95' 117.50 163.80 118.70
12/31/96' 52.50 176.70 145.70
'21/31/97' 17.50 198.80 177.20
'12/31/98' 0.406 226.70 247.40
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 12, 1999,
with respect to the beneficial ownership of the Company's Common Stock by the
following persons:
- each person known by the Company to own beneficially more than 5% of
the outstanding shares of Common Stock;
- each director of the Company;
- each executive officer of the Company; and
- all directors and executive's officers of the Company as a group.
29
<PAGE> 31
As of March 12, 1999, no director or executive officer of the Company
beneficially owned any shares of Convertible Preferred Stock.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF PERCENTAGE OF TOTAL VOTING
COMMON STOCK COMMON STOCK CAPITAL STOCK
BENEFICIAL OWNER BENEFICIALLY OWNED OUTSTANDING OUTSTANDING
---------------- ------------------ ------------- -------------
<S> <C> <C> <C>
5% STOCKHOLDERS
Peptide Therapeutics Group plc(1).............. 2,193,537 9.9% 9.9%
DIRECTORS
C. Boyd Clarke(2).............................. 0 * *
Lance K. Gordon(3)............................. 306.694 1.4% 1.4%
Andre L. Lamotte(4)............................ 610,857 2.8% 2.8%
Douglas MacMaster(5)........................... 43,600 * *
Allen Misher(6)................................ 18,333 * *
OTHER EXECUTIVE OFFICERS
Robert J. Gerety(7)............................ 93,030 * *
Brigid A. Makes(8)............................. 27,500 * *
Thomas P. Monath(9)............................ 196,010 * *
All directors and executive officers as a group
(10)......................................... 1,296,024 5.9% 5.9%
</TABLE>
- ---------------
* Less than 1%.
(1) The information reported is based on a Schedule 13D filed with the
Securities and Exchange Commission on January 11, 1999. The address of this
entity is Peterhouse Technology Park, 100 Fulbourn Road, Cambridge, CB1
9PT, England. Peptide converted 633 shares of the Convertible Preferred
Stock into shares of common stock representing approximately 9.9% of the
outstanding shares of common stock. In addition, Peptide owns 1,951 shares
of the Convertible Preferred Stock. The terms of the preferred stock
prohibit conversion by a holder who following conversion, would own 10% or
more of the outstanding common stock.
(2) Dr. Clarke resigned from the board of directors effective November 30,
1998.
(3) Includes 225,221 shares of Common Stock which Dr. Gordon has the right to
acquire within 60 days after March 12, 1999 upon exercise of outstanding
stock options.
(4) Includes 424,993 shares held by Medical Science Partners, L.P. ("MSP"),
26,320 shares held by Medical Science II Co-Investment L.P. ("MSP II-Co")
and 149,544 shares held by Medical Science Partners II, L.P. ("MSP II").
Dr. Lamotte is the Managing General Partner of Medical Science Ventures,
the General Partner of MSP and is the Managing General Partner of Medical
Science Ventures II, the General Partner of MSP II and MSP II-Co, and may
be deemed to be the beneficial owner of the shares held by MSP, MSP II and
MSP II-Co although Dr. Lamotte disclaims beneficial ownership of such
shares. The address of Dr. Lamotte is c/o MSP, 161 Worcester Road,
Framingham, MA 01701. Includes 10,000 shares which Dr. Lamotte may acquire
upon the exercise of options within 60 days after March 12, 1999.
(5) Includes 23,600 shares which Mr. MacMaster may acquire upon the exercise of
options within 60 days after March 12, 1999.
(6) Includes 13,333 shares which Dr. Misher may acquire upon the exercise of
options within 60 days after March 12, 1999.
(7) Includes 31,250 shares which Dr. Gerety may acquire upon the exercise of
options within 60 days after March 12, 1999.
(8) Includes 22,500 shares which Ms. Makes may acquire upon the exercise of
options within 60 days after March 12, 1999.
30
<PAGE> 32
(9) Includes 161,056 shares which Dr. Monath may acquire upon the exercise of
options within 60 days after March 12, 1999.
(10) Includes 486,960 shares which all directors and executive officers as a
group may acquire upon the exercise of options within 60 days after March
12, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For a description of certain transactions between the Company and Mr.
MacMaster, a director of the Company, see "Management -- Director Compensation."
For a description of certain employment and other arrangements between the
Company and its executive officers, see "Management -- Executive Compensation"
and "Management -- Employment Agreements."
For a description of certain registration rights held by Dr. Gordon and
certain stockholders of the Company, see "Description of Capital Stock."
The Company believes that the securities issued in the transactions
described above were sold at their then fair market value and that the terms of
the transactions described above were no less favorable than the Company could
have obtained from unaffiliated third parties.
The Company has a policy that all material transactions between the Company
and its officers, directors and other affiliates must (i) be approved by a
majority of the members of the Company's Board of Directors and by a majority of
the disinterested members of the Company's Board of Directors and (ii) be on
terms no less favorable to the Company than could be obtained form unaffiliated
third parties. In addition, this policy requires that any loans by the Company
to its officers, directors or other affiliates be for bona fide business
purposes only.
31
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are included as part of this Annual Report on
Form 10-K.
1. The following financial statements (and related notes) of the Company
are included as APPENDIX C of this Report:
Report of Independent Accountants.
Consolidated Balance Sheets -- December 31, 1997 and 1998.
Consolidated Statements of Operations -- Fiscal years ended
December 31, 1996, 1997 and 1998.
Consolidated Statements of Stockholders' Equity
(Deficit) -- Fiscal years ended December 31, 1996, 1997 and 1998.
Consolidated Statements of Cash Flows -- Fiscal years ended
December 31, 1996, 1997 and 1998.
Notes to Consolidated Financial Statements.
2. Combined Financial Statements of OraVax Merieux Co. and Merieux
OraVax Co.
Report of Independent Accountants S-1
Combined Financial Statements S-2
Notes to Combined Financial
Statements S-6
All other schedules are omitted as the information required is
inapplicable or the information is presented in the financial
statements or the related notes.
3. The Exhibits listed in the Exhibit Index immediately preceding the
Exhibits are filed as a part of this Annual Report on Form 10-K.
(b) On November 19, 1998, the Company filed a Current Report on Form 8-K
dated as of November 10, 1998 relating to the Company entering into a Merger
Agreement with Peptide Therapeutics Group PLC ("Peptide") and Peach Acquisition
Corp. ("Merger Sub"), a wholly-owned subsidiary of Peptide. Pursuant to the
Merger Agreement, Merger Sub will merge with and into the Company and the
Company will become a wholly-owned subsidiary of Peptide, subject to completion
of an equity financing by Peptide and a number of customary closing conditions,
including approval by the shareholders of the Company and Peptide.
The following trademarks of the Company are mentioned in this Annual Report
on Form 10-K: OraVax, Viricle.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 31st day of
March, 1999.
ORAVAX, INC.
By: /s/ LANCE K. GORDON
----------------------------------
LANCE K. GORDON, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ LANCE K. GORDON President, Chief Executive March 31, 1999
- --------------------------------------------------- Officer and Director
LANCE K. GORDON
/s/ BRIGID A. MAKES Vice President of Finance and March 31, 1999
- --------------------------------------------------- Chief Financial Officer
BRIGID A. MAKES
/s/ DOUGLAS MACMASTER Director March 31, 1999
- ---------------------------------------------------
DOUGLAS MACMASTER
/s/ ANDRE L. LAMOTTE Director March 31, 1999
- ---------------------------------------------------
ANDRE L. LAMOTTE
/s/ ALLEN MISHER Director March 31, 1999
- ---------------------------------------------------
ALLEN MISHER
</TABLE>
33
<PAGE> 35
APPENDIX A
SELECTED FINANCIAL DATA
The following selected historical consolidated financial information for
OraVax for each of the fiscal years in the five-year period ended December 31,
1998 has been derived from OraVax's audited consolidated financial statements.
The consolidated financial statements for the years ended December 31, 1996,
1997 and 1998 are included elsewhere in this prospectus/proxy statement. The
following information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
OraVax's Audited Consolidated Financial Statements and the notes thereto
included elsewhere in this prospectus/proxy statement.
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Collaborative research and
development.................. $ -- $ 8,684 $ 6,595 $ 7,587 $ 9,841
Government grants and other.... 257 311 870 583 701
Interest....................... 51 1,080 1,280 683 258
-------- ---------- ---------- ----------- -----------
308 10,075 8,745 8,853 10,800
Expenses:
Research and development....... 8,406 12,450 21,009 14,589 13,017
General and administrative..... 2,580 3,299 3,750 3,422 4,072
Interest....................... 190 87 523 418 269
-------- ---------- ---------- ----------- -----------
11,176 15,836 25,282 18,429 17,358
Equity in joint venture............. (2,436) (5,085) (6,236) (5,844)
-------- ---------- ---------- ----------- -----------
Net loss............................ (10,868) (8,197) (21,622) (15,812) (12,402)
Net loss to common stockholders..... (10,968) (8,305) (21,622) (15,812) (13,825)
Basic and diluted loss per share.... $ (1.90) $ (2.46) $ (1.58) $ (.92)
Weighted average number of basic and
diluted shares outstanding........ 4,377,131 8,794,775 10,031,222 15,075,593
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and investments................ $ 3,706 $ 27,631 $ 22,125 $ 11,328 $ 2,538
Total assets........................ 5,195 29,833 28,744 16,497 4,850
Working capital..................... 1,400 23,109 14,694 6,596 (5,335)
Long term obligations............... 462 492 2,659 1,298 119
Convertible preferred stock......... 27,331 -- -- 3,137 2,022
Redeemable convertible preferred
stock............................. -- -- -- 2,464
Total stockholders'
equity(deficit)................... (25,038) 24,513 18,424 6,474 (3,233)
</TABLE>
<PAGE> 36
APPENDIX B
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OVERVIEW
On November 10, 1998, the Company entered into an agreement to merge with
Peptide Therapeutics Group plc ("Peptide") in a transaction now expected to
close during the second quarter of 1999. See next section entitled "Proposed
Merger with Peptide Therapeutics Group plc."
OraVax's mission is the discovery, development and commercialization of
vaccines and antibody products for the prevention or treatment of human
infectious diseases. OraVax's products are vaccines that stimulate the body's
own immunity to provide long term protection against disease, as well as
antibody products that provide immediate passive immunity to treat existing
infections or to protect against acute disease risk.
The ultimate success of the Company is dependent upon its ability to raise
capital through equity financings, direct financings, corporate partnerships,
sale of product and interest income on invested capital. The Company plans to
finance near term cash needs principally through its existing cash reserves,
together with interest earned thereon, revenues from the H. pylori Joint Venture
and dengue license agreement with Pasteur Merieux Connaught ("PMC"), sponsorship
of the Company's Japanese encephalitis program by PMC, and previously awarded
government grants. Additional capital will be required to ensure the on-going
viability of the Company. The Company believes, based upon its current operating
plan, that, in addition to its available cash balances and known revenues, it
will need additional financing in the second quarter of 1999 in order to fund
the Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company.
To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues until late 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva Pharma Limited
("Medeva"). Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's H. pylori Joint Venture and dengue license agreement with PMC,
sponsorship of the Company's Japanese encephalitis program by PMC, government
grants and interest income. Since inception, the Company's cash expenditures
have exceeded its revenues principally as a result from expenditures under its
research and development programs. The Company expects to continue to incur
operating losses over the next several years primarily due to expanded research
and development efforts, preclinical testing and clinical trials of its product
candidates, the acquisition of additional technologies, the establishment of
manufacturing capability and the performance of commercialization activities.
Results of operations may vary significantly from quarter to quarter depending
on, among other factors, the progress of the Company's research and development
efforts, the receipt, if any, of milestone payments, the timing of certain
expenses and the establishment of collaborative research agreements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
Under the terms of the Joint Venture agreement with PMC, ownership of the
Joint Venture is based upon the proportion of the working capital paid in by
OraVax versus PMC over the life of the Joint Venture. To date OraVax and PMC
have equally supported the budget and each has approximately 50% ownership. The
funding of the H. pylori program with PMC at 50% ownership has approximated $6.0
million to $6.5 million annually for OraVax to date, which is a substantial
portion of the Company's total expenditures. Under the agreement, a shortfall in
funding by OraVax does not constitute a default of the Joint Venture. If
OraVax's funding, since inception of the partnership, falls below 40% of the
total for greater than a six month period,
<PAGE> 37
PMC would get an additional seat on the board of directors, giving it effective
overall control of the Joint Venture.
PROPOSED MERGER WITH PEPTIDE THERAPEUTICS GROUP PLC
On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide for stock of Peptide and cash totaling
approximately $15 million, which was subsequently increased to $20 million.
Peptide is a biopharmaceutical company engaged in the research and development
of novel drugs and vaccines, and is listed on the London Stock Exchange, under
the symbol PTE. Peptide currently has four products in clinical development with
several pre-clinical and research programs. The Company and its joint venture
partner PMC are already collaborating with Peptide in using Peptide's
proprietary platform technology to create oral vaccines for the treatment of H.
pylori. The merger will create a larger biopharmaceutical company involved in
the development of novel drugs, vaccines and antibody products that control
significant human diseases. The merged company will have a total of ten products
in development, eight of which are currently in clinical trials, with the other
two scheduled to go into clinical trials in the next twelve months, and multiple
corporate partnerships including those with PMC, Medeva and SmithKline Beecham.
This new business combination will result in a broader portfolio of product
programs, and greater market presence and potential for expanded corporate
partnerships.
The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. A condition to the
merger is that Peptide shall have completed a financing that results in Peptide
receiving net cash proceeds which, together with existing financing available to
Peptide, is sufficient for the present working capital requirements of the
combined entity in accordance with the rules of the London Stock Exchange. This
condition was satisfied by Peptide raising approximately 20.6 million pounds
sterling (net of expenses) in March 1999. In addition the merger is contingent
upon approval by the shareholders of each company. In February 1999, Peptide's
shareholders approved the merger. The merger is now anticipated to be completed
during the second quarter of 1999.
On November 10, 1998, simultaneous with the execution of the Merger
Agreement with Peptide, Peptide purchased 2,584 shares, approximately 95%, of
the Company's then outstanding Convertible Preferred Stock for an aggregate
price of approximately $2.95 million. Under the Merger Agreement, at the
effective time, outstanding shares of the Convertible Preferred Stock owned by
Peptide will be canceled and outstanding shares of the Convertible Preferred
Stock owned by third parties will be automatically converted into the right to
receive $1,090 per share plus accrued but unpaid dividends. These third parties
have contractually agreed to redeem their shares for cash.
On November 20, 1998, the Company issued 950,000 shares of Common Stock and
six shares of Convertible Preferred Stock to repurchase warrants for 630 shares
of Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
On December 30, 1998, the Company received a letter from PMC indicating
that PMC was considering making a proposal that could result in the maximum
value to the Company's shareholders. The Company sent a copy of PMC's letter to
Peptide, as required under the Merger Agreement. In response to PMC's letter,
members of Peptide's management met independently with PMC and negotiated a
series of agreements, including a standstill agreement under which PMC agreed
not to make an offer to acquire the Company and an agreement by PMC to make a $3
million equity investment in Peptide ordinary shares in connection with and
conditioned upon consummation of the merger. PMC and Peptide also agreed that
the Company's technology relating to vaccines for Japanese encephalitis and
tick-borne encephalitis would be licensed to PMC and that the joint venture with
PMC would be granted licenses to the Company's technology for the development of
vaccines against hepatitis C contingent on the merger being consummated. In
addition, the Company's short-term loan agreement, in the amount of $3 million,
with PMC was amended to extend the
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repayment terms to be the earlier of consummation of the merger or July 31,
1999. (See section entitled "PMC: Short-term Bridge Loan.")
On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
Since the merger was announced, the Company has received increased interest
from prospective purchasers of the Company's leasehold interests, leasehold
improvements and equipment in its Canton, Massachusetts, manufacturing facility.
Based upon these indications of interest, the Company has explored the sale of
its related interests in this facility.
On January 28, 1999, the Merger Agreement was amended to increase Peptide's
acquisition price from $15 million to $20 million based on the further
developments in partnership discussions with PMC and the Canton facility, which
indicated increased value for OraVax's assets. The additional $5 million of
consideration will be in the form of Peptide ordinary shares.
The Merger Agreement provides that, at the effective time of the merger,
each share of the Company's common stock outstanding immediately prior to the
effective time (except for shares owned by the Company, Peptide or their
subsidiaries) will be converted into the right to receive a pro rata share of
$20 million less the sum of (A) amounts paid to purchase outstanding shares of
the Convertible Preferred Stock and (B) the intrinsic value of the Company's
outstanding common stock options and warrants. Peptide and the Company estimate
that approximately $2.95 million will be used to acquire shares of Convertible
Preferred Stock and Convertible Preferred Stock warrants, and that the intrinsic
value of the Company's options will be less than $50,000. Using these estimates,
holders of outstanding shares of the Company's common stock will receive
approximately $17 million in merger consideration. The Company estimates that at
the effective time approximately 20 million shares of common stock will be
outstanding. Assuming that merger consideration equal to $17 million is split
among 20 million shares, each share of the Company's common stock would convert
into $0.85 worth of the merger consideration. The figures used in this paragraph
are estimates. Actual amounts will depend on the cost to purchase the Company's
Convertible Preferred Stock, warrants and options to purchase the Company's
Common Stock and the number of shares of the Company's common stock outstanding
immediately prior to the effective time. See "Risk Factors -- Risks Relating to
the Merger -- Additional OraVax Stock Issuances May Dilute Merger
Consideration."
Holders of the Company's common stock will receive Peptide ordinary shares.
These Peptide ordinary shares will be valued between $1.49 and $2.24 by
reference to the average of the closing prices for Peptide ordinary shares
during the ten trading days ending on the third trading day prior to the closing
date of the merger, as reported by the London Stock Exchange, with each closing
price converted into U.S. dollars based on the midpoint of the dollar/pound
sterling exchange rate for such day, as reported by The Financial Times. If this
calculation indicates a market value for Peptide ordinary shares of less than
$1.49, the market value will be deemed to be $1.49, and if the calculation
indicates a market value for Peptide ordinary shares of more than $2.24, the
market value will be deemed to be $2.24. On March 12, 1999, the per share
closing price for a Peptide share was 107.8 pence and the midpoint of the
dollar/pound sterling exchange rate was 1.63, yielding a dollar value of $1.76.
PMC: DENGUE LICENSE AGREEMENT AND SPONSORSHIP OF JAPANESE ENCEPHALITIS
In November 1998, the Company entered into a license agreement, under its
dengue program, with PMC for the development of a vaccine against dengue fever,
based upon the Company's Chimerivax(TM) platform of technology. This technology
utilizes the yellow fever 17D vaccine virus as a vector for genes of related
viruses. Under the license agreement, the Company agreed to develop the vaccine
through completion of Phase I clinical trials. The Company granted PMC a
worldwide exclusive license to the dengue vaccines and PMC will address advanced
development, manufacturing, sales, marketing and distribution. In addition, PMC
agreed to fund 100% of the research, development and clinical costs through
Phase I clinical trials. As a term of the dengue agreement, PMC also has an
option to negotiate a separate agreement to license the Company's vaccine
against Japanese encephalitis ("JE"), also based on the Company's Chimerivax(TM)
platform of technology. In exchange for the option, PMC agreed to fund 100% of
the research, development and clinical costs through the completion of Phase I
clinical trials.
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The Company and PMC estimate the research, development and clinical costs
of both the dengue and JE vaccines through Phase I clinical trials to exceed
$11.0 million. PMC began funding, as of October 1, 1998, the research,
development and clinical costs under the dengue and JE programs, and paid the
Company $1.2 million in December 1998, of which $1.1 million was earned in the
current period. In addition, PMC agreed to pay the Company up to $12.2 million
during the dengue development period, subject to the achievement of certain
development, clinical and regulatory milestones, of which $1.0 million was paid
to the Company in November 1998 to recognize the value of research and
development conducted by the Company prior to the execution of the license
agreement. However, there can be no assurance that the milestones which trigger
such future payments will be achieved. Also, PMC agreed to pay the Company
royalties on future net sales of licensed dengue product. A Research and
Development Committee was formed to oversee the direction of the dengue and JE
programs, and consists of three members of both the Company and PMC. The
Research and Development Committee has approved funding of costs under both the
dengue and JE programs through December 1999. The license agreement provides for
a research and development term from October 1, 1998 through the completion of
Phase I clinical studies with respect to the JE and dengue programs. Upon
expiration of such term, the Company and PMC may in good faith discuss extending
their collaborative relationship to later stages of development of the JE and
dengue vaccines. In addition, the license agreement provides PMC certain rights
of termination, but, absent any breach, PMC may not terminate the license
agreement before the earlier of twelve months from execution of the license
agreement or the completion of Phase I clinical studies under the JE program.
PMC: SHORT-TERM BRIDGE LOAN
In November, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from PMC to support operations. The Company pledged 12%
ownership in the H. pylori Joint Venture as collateral. The Company granted PMC
a controlling vote, in the Joint Venture, regarding all marketing-related
decisions, thereby granting PMC overall direction of marketing-related matters.
The Company will retain equal voting authority in all non-marketing-related
decisions. In addition, the Company authorized PMC, or should PMC elect, PMC's
affiliates, to act as the principal marketing entity for any Joint Venture
products. The loan was to be repaid in two installments: $2 million on January
31, 1999 and $1 million on June 30, 1999, and bears interest at an annual rate
of 5.42% which is payable when each installment of principal is due. However,
the loan was subsequently amended to require repayment of $3 million upon the
earlier of consummation of the merger or July 31, 1999.
In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture to secure the loan,
increase its ownership interest in the Joint Venture to 62%, thereby obtaining
overall direction of all Joint Venture matters. The Company's share of future
research, development, clinical and commercialization costs, and of profits from
target product sales would then decrease from the present 50% to 38%.
NASDAQ DELISTING
At June 30, 1998, the Company's net tangible assets (total assets minus
goodwill and liabilities) were $1.5 million. The minimum net tangible asset
requirement for continued listing by the Nasdaq National Market ("Nasdaq NM") is
$4.0 million. The Company received a notice of delisting from the Nasdaq Stock
Market, Inc. ("Nasdaq") indicating that because the Company is not in compliance
with the minimum net tangible asset requirement the Company's stock would be
delisted from trading on the Nasdaq NM. The Company was also notified by Nasdaq
of non-compliance with the minimum $1 per share bid price and minimum
requirement for the public market float of $5 million. The Company appealed the
delisting and a hearing was granted before an NASD panel concerning the
delisting issues. The Company presented its plans to the Panel and has continued
to update Nasdaq on the progress of these plans. The Company was delisted from
the Nasdaq National Market, at the close of market, on November 16, 1998. The
Company began trading on the OTC Bulletin Board on November 17, 1998. Upon
closing of the proposed merger, holders of the Company's common stock will
receive ordinary shares of Peptide which are traded on the London Stock
Exchange.
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RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
The Company's total revenues increased to $10,800,000 in 1998 from
$8,853,000 in 1997. In 1998, the Company's revenues consisted of $7,682,000
earned under its collaboration (the "Joint Venture") with PMC, $2,159,000 earned
under its dengue license agreement with PMC, $701,000 from government grants and
other research revenues, and $258,000 in interest earned on invested funds. In
1997, the Company's revenues consisted of $7,587,000 earned under the Joint
Venture with PMC, $583,000 from government grants and other research revenues,
and $683,000 in interest earned on invested funds. The increase in revenue was
attributable principally to the Company's November 1998 license agreement, under
its dengue program, with PMC, and included a $1.0 million milestone payment upon
execution of the license agreement and the Company earned $1,159,000 under
sponsorship of research and development activities. In addition, the increase in
the Company's 1998 revenue was attributable to increases in research and
development activities of the Joint Venture with PMC, in grant revenue from the
October 1997 award of a C. difficile Phase II Small Business Innovation Research
(SBIR) grant from the National Institute of Health (NIH) and in-license revenue
earned in connection with the 1998 sub-license of its CagA antigen to BioMerica,
Inc. which were offset by a decrease in interest income as a result of declining
cash investments.
The Company's total costs and expenses decreased to $17,358,000 in 1998
from $18,429,000 in 1997. Research and development expenses decreased 11% to
$13,017,000 in 1998 from $14,589,000 in 1997. Significant contributors to the
Company's research and development expenditures in 1998 versus 1997 included the
conduct of four small-scale Phase II clinical studies under its H. pylori
program and advanced activities under its Japanese encephalitis program,
including the investment in other aspects of the ChimeriVax family of vaccine
opportunities. These expenditures were offset by a decrease in costs resulting
from expenses that were incurred in 1997, under the RSV program, that were not
incurred in 1998, and from aggressive cost control. General and administrative
expenses increased 19% to $4,072,000 in 1998 from $3,422,000 in 1997 principally
due to advanced H. pylori and ChimeriVax patent efforts, business development
costs as the Company continues to focus its efforts on obtaining strategic
collaborations, legal costs associated with the Company's pursuit of potential
equity financings and business combinations, and legal and investment banking
costs associated with the planned merger with Peptide offset by a decrease in
expenses associated with the Company's workforce reduction in the second quarter
of 1997. Interest expense decreased to $269,000 in 1998 from $418,000 in 1997,
principally due to the expiration of some equipment leases and in addition, the
Company did not enter into any new equipment leases during the period due to the
low volume of capital equipment expenditures.
The Company accounts for its investment in the Joint Venture Partnerships
under the equity method of accounting. Accordingly, the Company recorded its
$5,844,000 and $6,236,000 share of the Joint Venture Partnerships' losses in
1998 and 1997, respectively. The decreased loss is principally due to third
party obligations, incurred by the Joint Venture Partnerships in 1997 as
compared to 1998, which were offset by an increase in the 1998 budgeted research
and development activities of both OraVax and PMC.
The Company incurred a net loss from operations of $12,402,000 in 1998
compared to a net loss from operations of $15,812,000 in 1997.
In the first quarter of 1998, the Company began recognizing the annual
cumulative 6% dividend that accrues in stock and the amortization of the
conversion discount related to the December 1997 Convertible Preferred Stock
financing. At December 31, 1997, the value of the discount was $1,675,800, which
is being amortized over the eighteen month discount period by accreting
preferred stock dividends as a credit to additional paid-in capital and a charge
to retained earnings.
The Company incurred a net loss to common shareholders of $13,825,000 in
1998 compared to a net loss to common shareholders of $15,812,000 in 1997.
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<PAGE> 41
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
The Company's total revenues increased to $8,853,000 in 1997 from
$8,745,000 in 1996. In 1997, the Company's revenues consisted of $7,587,000
earned under its Joint Venture with PMC, which was entered into during 1995,
$583,000 from government grants and other research revenues, and $683,000 in
interest earned on invested funds. In 1996, the Company's revenues consisted of
$6,595,000 earned under the Joint Venture with PMC, $870,000 from government
grants and other research revenues, and $1,280,000 in interest earned on
invested funds. The increased revenue was attributable to increased budgeted
activities, for research and development, of the Joint Venture with PMC offset
by a decrease in interest income as a result of declining cash investments and a
decrease in grant revenue as a result of expired grants from the National
Institute of Health.
The Company's total costs and expenses decreased to $18,429,000 in 1997
from $25,282,000 in 1996. Research and development expenses decreased 31% to
$14,589,000 in 1997 from $21,009,000 in 1996, principally reflecting the 1996
conduct of both a Phase II clinical trial under its H. pylori program and a
Phase III clinical trial under its RSV program, and the 1996 production of
necessary supplies of clinical materials for its Phase III clinical trial. In
addition, the Company reduced its workforce by approximately 25% in early April
1997. General and administrative expenses decreased 9% to $3,422,000 in 1997
from $3,750,000 in 1996 as decreased expenses associated with the workforce
reduction in the second quarter of 1997 offset increases which the Company had
incurred in the first quarter of 1997 as compared to the same period in 1996.
Interest expense decreased to $418,000 in 1997 from $523,000 in 1996,
principally due to the expiration of some equipment leases.
The Company accounts for its investment in the Joint Venture Partnerships,
through which the Joint Venture began conducting its research beginning in the
second quarter of 1995, under the equity method of accounting. Accordingly, the
Company recorded its $5,085,000 and $6,236,000 share of the Joint Venture
Partnerships' losses during the years ended December 31, 1996 and 1997,
respectively. The increased loss was principally attributable to increased
budgeted activities, for research and development, of the Joint Venture in 1997
as compared with 1996.
The Company incurred a net loss of $15,812,000 in 1997 compared to a net
loss of $21,622,000 in 1996.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 on January 1,
2000, but does not expect such adoption to have a material impact on its
financial statements.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SoP 98-1, which is effective for the Company beginning January 1, 1999,
to have a material effect on its financial position or results of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities
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should be expensed as incurred. SoP 98-5 is effective for the Company beginning
January 1, 1999 and the Company does not expect its adoption to have a material
effect on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In March 1995, the Company entered into a Joint Venture with PMC for the
development, manufacturing, marketing and sale of immuno-therapeutic and
preventive vaccines against H. pylori infections in humans. OraVax and PMC will
share equally in profits from the sale of the H. pylori vaccines and in all
future research, development, clinical and commercialization costs. OraVax and
PMC estimate that research, development and clinical costs will exceed $50.0
million. PMC is providing technical expertise and will also provide marketing
expertise to the Joint Venture. PMC made an initial payment of $3.2 million
directly to OraVax which included $0.6 million to recognize the value of
research and development conducted by OraVax in the first quarter of 1995 prior
to the formation of the Joint Venture, and a milestone payment of $2.6 million
to recognize the value of technology previously developed by OraVax and made
available to the Joint Venture. In addition, PMC purchased $2.5 million of the
Company's Series Preferred Stock. Subsequently, PMC purchased an additional $1.0
million of common stock in the Company's initial public offering. In addition,
PMC agreed to pay the Company directly up to $12.0 million during the
development period, subject to the achievement of certain clinical and
regulatory milestones, of which $0.6 million was paid to OraVax in December
1995. However, there can be no assurance that the milestones which trigger such
future payments will be achieved. Beginning in the second quarter of 1995,
research, development and commercialization activities of the Joint Venture were
conducted through two equally controlled partnerships which have contracted with
OraVax to perform research and development and clinical trial activities. OraVax
earned $6.6 million, $7.6 million and $7.7 million under these contracts in
1996, 1997 and 1998, respectively. In addition, during 1996, 1997 and 1998, the
Joint Venture entered into research and development contracts with PMC and third
parties. The research and development budgets of the two partnerships comprising
the Joint Venture are established by joint committees in which each of the
venturers has an equal participation and role. The venturers will pay
approximately equal shares of the agreed budgets. OraVax will receive revenue
from the partnerships for the research and development work which is requested
to be performed by OraVax and funded by the Partnerships. There can be no
assurance, however, that OraVax will be selected to perform such work. The Joint
Venture provides for certain rights of termination, but, absent any breach,
either party may unilaterally terminate the Joint Venture. The venturers have
agreed to fund through the Joint Venture, on an annual basis, the research and
development, clinical and pharmaceutical development costs, and the Executive
Committee of the Joint Venture has currently approved funding of such costs
through December 1999.
In January 1996, the Company leased an approximately 47,000 square foot
GMP-compliant manufacturing facility in Canton, Massachusetts and acquired
related equipment and leasehold improvements from the former tenant. This
facility was specifically designed and equipped by the former tenant for the
manufacture of biological products. The Company's strategy was to develop its
manufacturing facilities for producing both pilot-scale and commercial
quantities of its products. This facility would also accommodate production
development activities for OraVax's proprietary products depending on the
outcome of product development. Existing building and capital equipment leases,
which include renewal and purchase options, were transferred to the Company. In
addition, the Company purchased leasehold improvements and other related assets
from the former tenant, payable in installments through 1999. The Company is
currently assessing its options relating to the facility, including the sale of
its related interests.
In June 1996, the Company sold 2,300,000 shares of its common stock for
$7.25 per share in a follow-on public offering, providing net proceeds of
approximately $15.2 million.
In December 1997, the Company sold 6,300 shares of its 6% Convertible
Preferred Stock, for $1,000 per share, in a private placement financing,
providing gross proceeds of $6.3 million, of which $4.9 million was received in
1997 and $1.4 million in January 1998. Net proceeds were approximately $5.6
million. In connection with the private placement financing, warrants for 630
shares of Convertible Preferred Stock, at a price of $1,000 per share, were
issued to the placement agents of the transaction. The warrants will expire on
December 23, 2002.
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In December 1997, the Company sold 240,000 shares of its common stock, for
$1.9125 per share, in a private placement financing, providing net proceeds of
$396,000. In connection with the private placement financing, warrants for
24,000 shares of common stock, at a price of $1.9125 per share, had been issued
to the placement agents of the transaction. The warrants will expire on December
23, 2002.
In November, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from PMC to support operations. The Company pledged 12%
ownership in the H. pylori Joint Venture as collateral. The Company granted PMC
a controlling vote, in the Joint Venture, regarding all marketing-related
decisions, thereby granting PMC overall direction of marketing-related matters.
The Company will retain equal voting authority in all non-marketing-related
decisions. In addition, the Company authorized PMC, or should PMC elect, PMC's
affiliates, to act as the principal marketing entity for any Joint Venture
products. The loan was to be repaid in two installments: $2 million on January
31, 1999 and $1 million on June 30, 1999, and bears interest at an annual rate
of 5.42% which is payable when each installment of principal is due. However,
the loan was subsequently amended to require repayment of $3 million upon the
earlier of consummation of the merger or July 31, 1999.
In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture to secure the loan,
increase its ownership interest in the Joint Venture to 62%, thereby obtaining
overall direction of all Joint Venture matters. The Company's share of future
research, development, clinical and commercialization costs, and of profits from
target product sales would then decrease from the present 50% to 38%.
The Company's aggregate cash and investments were $2,538,000 at December
31, 1998, a decrease of $8,790,000 since December 31, 1997. Cash used by
operations during the period, principally to support research and development,
was $5,455,000. The Company expended $52,000 for property and equipment, repaid
$1,257,000 of its capital lease obligations, and repaid $260,000 of its
installment debt, net of accrued interest, during the period. In addition, the
Company invested $6,232,000 in the joint venture during the year ended December
31, 1998. In early 1998, the Company received the $1,400,000 remainder of cash
proceeds from the December 1997 Convertible Preferred Stock financing. In the
fourth quarter of 1998, the Company received a $3 million short-term loan from
PMC to support continuing operations. Also, the Company received $66,000 in
proceeds from common stock issuances during the period.
In September, 1997 the Company was selected by Medeva, as the exclusive
marketer and distributor of Medeva's live-attenuated yellow fever vaccine,
Arilvax(R), in the United States. The Company also agreed to work with Medeva to
introduce the vaccine into other international markets. Under the terms of the
agreement, the Company will conduct clinical studies necessary for U.S.
registration of the vaccine and will market and distribute the product to both
civilian and military groups in the U.S. Arilvax(R) is currently marketed by
Medeva in Europe and selected Asian markets. Medeva will fund all costs
associated with the agreed-upon clinical trials and with securing regulatory
approval in the U.S. Based on the established performance of Arilvax(R) in other
markets and discussions with the FDA, Medeva anticipates submitting a U.S.
product license application (PLA) in 2000. The Company does not anticipate
incurring any material net expenditures under this agreement until 2000 at which
time, assuming a U.S. PLA is filed, it would expect to incur premarketing and
predistribution costs.
To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues until late 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva. Operations
have been funded principally through public and private placements of equity
securities, equipment lease financing, revenues from the Company's H. pylori
Joint Venture and dengue license agreement with PMC, sponsorship of the
Company's Japanese encephalitis program by PMC, government grants and interest
income. Since inception, the Company's cash expenditures have exceeded its
revenues principally as a result from expenditures under its research and
development programs. The Company expects to continue to incur operating losses
over the next several years primarily due to expanded research and development
efforts, preclinical testing and clinical trials of its product candidates, the
acquisition of additional technologies, the establishment of manufacturing
capability and the performance of commercialization activities. Results of
operations may vary significantly
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<PAGE> 44
from quarter to quarter depending on, among other factors, the progress of the
Company's research and development efforts, the receipt, if any, of milestone
payments, the timing of certain expenses and the establishment of collaborative
research agreements. These conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Pending completion of its merger with Peptide, the Company plans to finance
its cash needs in the near term principally through its existing cash reserves,
together with interest earned thereon, revenues from the H. pylori Joint Venture
and dengue license agreement with PMC, sponsorship of the Company's Japanese
encephalitis program by PMC, and previously awarded government grants.
Additional capital will be required to ensure the on-going viability of the
Company. The Company believes, based upon its current operating plan, that, in
addition to its available cash balances and known revenues, it will need
additional financing in the second quarter of 1999 in order to fund the
Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company. Changes in the Company's research
and development plans or other events affecting the Company's operations may
result in accelerated or unexpected expenditures. The Company is continuing to
review its burn rate and has implemented expenditure initiatives to conserve its
cash resources, including putting non-essential expenditures on hold. The
Company in the meantime continues to pursue corporate collaborations and the
award of new government grants. There can be no assurance, that additional
financing will be available from any of these sources, or if available, will be
available on satisfactory terms. The Company's inability to obtain needed
funding on satisfactory terms may require the Company to delay, scale back or
eliminate one or more of its planned product development programs, scale back
its planned manufacturing operations or enter into collaborative arrangements
that may require the Company to issue additional equity or relinquish rights to
certain technologies or product candidates that the Company would not otherwise
issue or relinquish.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results are difficult to predict and may be
affected by a number of factors, including the following, that could cause
actual results to differ materially from those indicated by the forward-looking
statements made herein and presented elsewhere by management from time to time.
Early Stage of Product Development. The products under development by the
Company will require significant additional research and development efforts,
including extensive clinical testing and regulatory approval, prior to
commercial use. The Company's potential products are subject to the risks of
failure inherent in the development of pharmaceutical products based on new
technologies. These risks include the possibilities that the Company's
therapeutic approach will not be successful, that any or all of the Company's
potential products will be found to be unsafe, ineffective, toxic or otherwise
fail to meet applicable regulatory standards or receive necessary regulatory
clearances, that the potential products, if safe and effective, will be
difficult to develop into commercially viable products, to manufacture on a
large scale or be uneconomical to market, that proprietary rights of competitors
or other parties will preclude the Company from marketing such products; or that
competitors or other parties will market superior or equivalent products.
Future Capital Needs. In addition, the Company will require substantial
additional funds in order to continue its research and development programs,
preclinical and clinical testing of its product candidates and to conduct full
scale manufacturing and marketing of any pharmaceutical products that may be
developed. The Company's capital requirements depend on numerous factors,
including but not limited to the progress of its research and development
programs, the progress of preclinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property
rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the development of commercialization
activities and arrangements, and the purchase of additional facilities and
capital equipment. Additional capital will be required to ensure the on-going
viability
9
<PAGE> 45
of the Company. The Company believes, based upon its current operating plan,
that, in addition to its available cash balances and known revenues, it will
need additional financing in the second quarter of 1999 in order to fund the
Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company. In addition, there can be no
assurance, that changes in the Company's research and development plans or other
events affecting the Company's operations will not result in accelerated or
unexpected expenditures. Thereafter, the Company will need to raise substantial
additional capital to fund its operations. There can be no assurance, however,
that additional financing will be available, or if available, will be available
on acceptable terms.
Manufacturing Limitations. At present, the Company's ability to
manufacture its products is limited to clinical trial quantities. At present,
the Company does not have the capability to manufacture commercial quantities of
products. The Company may enter into arrangements with contract manufacturing
companies to expand its own production capacity in order to meet requirements
for its product candidates. If the Company chooses to contract for manufacturing
services and encounters delays or difficulties in establishing relationships
with manufacturers to produce, package and distribute its finished
pharmaceutical or other medical products (if any), clinical trials, market
introduction and subsequent sales of such products would be adversely affected.
Moreover, contract manufacturers must operate in compliance with cGMP. The
Company's potential dependence upon third parties for the manufacture of its
products may adversely affect the Company's profit margins and its ability to
develop and deliver such products on a timely and competitive basis.
Risks Associated with Collaborative Arrangements. The Company's product
development strategy may require the Company to enter into various additional
arrangements with corporate, government and academic collaborators, licensors,
licensees and others. Therefore, the Company may be dependent upon the
subsequent success of these outside parties in performing their
responsibilities. There can be no assurance that the Company will be able to
establish additional collaborative arrangements or license agreements that the
Company deems necessary or acceptable to develop and commercialize its potential
pharmaceutical products or that such collaborative arrangements or license
agreements will be successful.
Patent and Proprietary Rights. The Company seeks to protect its trade
secrets and proprietary know-how, in part, through confidentiality agreements
with its employees, consultants, advisors and collaborators. There can be no
assurance that these agreements will not be violated by the other parties, that
OraVax will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors. Certain of the technology that may be used in the products of
OraVax is not covered by any patent or patent application. There can be no
assurance that any pending patent applications relating to the Company's product
candidates will result in patents being issued. Moreover, there can be no
assurance that any such patents will afford protection against competitors with
similar technology. There may be pending or issued third-party patents relating
to the product candidates of OraVax. OraVax may need to acquire licenses to, or
to contest validity of, any such third party patents. It is likely that
significant funds would be required to defend any claim that OraVax infringes a
third-party patent, and any such claim could adversely affect sales of the
challenged product of OraVax until the claim is resolved. There can be no
assurance that any license required under any such patent would be made
available.
Government Regulation. The rigorous preclinical and clinical testing
requirements and regulatory approval process of the FDA and of foreign
regulatory authorities can take a number of years and require the expenditure of
substantial resources. The Company has limited experience in conducting and
managing preclinical and clinical testing necessary to obtain government
approvals. There can be no assurance that the Company will be able to obtain the
necessary approvals for clinical testing or for the manufacturing and marketing
of any products that it develops. Additional government regulation may be
established that could prevent or delay regulatory approval of the Company's
product candidates. Delays in obtaining regulatory approvals would adversely
affect the marketing of any products developed by the Company and the
10
<PAGE> 46
Company's ability to receive product revenues or royalties. If regulatory
approval of a potential product is granted, such approval may include
significant limitations on the indications for which such product may be
marketed. Even if initial regulatory approvals for the Company's product
candidates are obtained, the Company, its products and its manufacturing
facilities are subject to continual review and periodic inspection. The
regulatory standards for manufacturing are applied stringently by the FDA.
Discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer or facility,
including warning letters, fines, suspensions of regulatory approvals, product
recalls, operating restrictions, delays in obtaining new product approvals,
withdrawal of the product from the market, and criminal prosecution. Other
violations of FDA requirements can result in similar penalties.
Uncertainty of Third-Party Reimbursement. Government and other third-party
payers are increasingly attempting to contain healthcare costs by limiting both
coverage and the level of reimbursement for new products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and reimbursement levels are not
provided by government and third party payers for uses of the Company's
products, the market acceptance of these products would be adversely affected.
Year 2000 Issues. The Year 2000 problem is the result of computer programs
having been written using two digits, rather than four, to define the applicable
year. Computer programs and embedded computer chips may be unable to distinguish
between the years 1900 and 2000. Any computer hardware, software, research and
development, manufacturing or administrative equipment, and operational
infrastructure systems used by the Company or by its external business partners
may recognize a year using "00", as the last two digits, as the year 1900 rather
than the year 2000.
During the second quarter of 1998, the Company implemented an internal Year
2000 compliance task force. The goal of the task force is to identify and
minimize disruptions to the Company's business that could result from the Year
2000 problem, and to minimize liabilities that the Company might incur in
connection with the Year 2000 problem. The task force consists of employees of
the Company and is representative of major business functions.
The Company has conducted a company-wide assessment of its computer systems
and operations infrastructure to identify computer hardware, software, research
and development equipment and process control systems that are not Year 2000
compliant. The Company intends to replace, upgrade or modify any of its
business-critical systems that are not Year 2000 compliant, or to develop
contingency plans. The Company anticipates to have these steps completed by the
end of the third quarter in 1999.
The Company has also identified and prioritized significant service
providers, vendors, suppliers, and worldwide research and development,
manufacturing and clinical trial related third parties that are critical to
business operations. The Company is in the process of communicating with these
external parties, through interviews and questionnaires, to ascertain their Year
2000 compliance. These evaluations will be followed by the development of
contingency plans, including identifying alternate service providers and
contractors, vendors and suppliers. The Company anticipates to have these steps
completed by the end of the third quarter in 1999. Going forward, the Company
will use its best efforts to ensure that new service providers and contractors,
vendors and suppliers are Year 2000 compliant before engaging in business with
them.
The Company's greatest risk is the failure of critical, worldwide research
and development, manufacturing or clinical trial related service contractors not
being Year 2000 compliant. Because of the significant number of these external
service contractors and the vast number of business systems used by these
parties, the Company may experience some disruption in its business operations.
The Company is unable to determine at this time whether the consequences of Year
2000 failures by these parties will have a material impact on the Company's
business operations. The Company believes that with the implementation of
contingency plans, including identifying alternate service contractors, the
possibility of material interruptions of normal operations should be reduced.
However, there is no assurance that the Company will be successful in finding
alternate service contractors. In the event that the Company is unable to
replace Year 2000 non-compliant service contractors, the Company's business
operations could be adversely affected.
11
<PAGE> 47
To date, the Company has not incurred nor identified any material costs
related to the assessment of its internal and external Year 2000 compliance. The
costs of the Company's Year 2000 compliance efforts have been minimal to date,
and the Company does not anticipate incurring any material costs to ensure
internal and external Year 2000 compliance.
The Company is using its reasonable best efforts to ensure internal and
external Year 2000 compliance. However, there can be no guarantee that the
Company's assessment and correction efforts will prove accurate. Key external
business partners may be unsuccessful in solving their Year 2000 issues and the
Company may be unsuccessful in identifying alternate critical service providers
and contractors, vendors and suppliers. As a result, Year 2000 problems may
adversely impact the Company's business operations. The Company's readiness
program is an ongoing process and the estimates of costs and completion dates
described above are subject to change.
Because of these and other factors, past financial performance should not
be an indicator of future performance. Investors should not use historical
trends to anticipate future results and should be aware that the trading price
of the Company's common stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, changes in the biotechnology
and pharmaceutical industries and recommendations by analysts or other events.
12
<PAGE> 48
APPENDIX C
ORAVAX, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Accountants........................... 2
Consolidated Balance Sheets as of December 31, 1997 and
1998...................................................... 3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998.......................... 4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998...... 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998.......................... 6
Notes to Consolidated Financial Statements.................. 7
</TABLE>
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of OraVax, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows present fairly, in all material respects, the financial position
of OraVax, Inc. at December 31, 1997 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has suffered recurring losses from operations
and will require additional funds to continue operations into the second quarter
of 1999, both of which raise substantial doubt about its ability to continue as
a going concern. Management's plans in regard to these matters are described in
Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note D, the Company has restated its 1997 balance sheet and
statement of stockholders' equity for the presentation of the Company's 6%
Convertible Preferred Stock and related conversion discount.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
Boston, Massachusetts
March 1, 1999
2
<PAGE> 50
ORAVAX, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $10,274 $ 2,538
Short-term investments...................................... 1,054 --
Prepaid and other current assets............................ 1,529 91
------- --------
Total current assets........................................ 12,857 2,629
Property and equipment, net................................. 3,524 1,859
Investment in and advances to (from) joint venture.......... (535) (147)
Restricted investments...................................... 394 398
Other assets................................................ 257 111
------- --------
Total assets................................................ $16,497 $ 4,850
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 935 $ 922
Accrued expenses............................................ 3,659 2,213
Obligation under capital leases............................. 1,316 327
Bridge loan -- related party................................ -- 3,000
Installment debt............................................ 260 1,019
Deferred revenue............................................ 91 483
------- --------
Total current liabilities................................... 6,261 7,964
Obligation under capital leases, excluding current
portion................................................... 416 119
Installment debt, excluding current portion................. 882 --
------- --------
Total liabilities........................................... 7,559 8,083
Mandatory redeemable convertible preferred stock, $.001 par
value; 2,772 shares issued and outstanding in 1997........ 2,464 --
Commitments and contingencies (Note J)
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 2,000,000 shares
authorized in 1997 and 1998; none issued or
outstanding........................................... -- --
Convertible preferred stock, $.001 par value; 9,000
shares authorized in 1997 and 1998; 3,528 and 2,590
shares issued and outstanding in 1997 and 1998
(liquidation preference $2,590)....................... 3,137 2,022
Common stock, $.001 par value; 25,000,000 and
50,000,000 shares authorized in 1997 and 1998;
10,371,543 and 19,919,503 shares issued and
outstanding in 1997 and 1998.......................... 10 20
Additional paid-in capital............................. 74,115 79,279
Deferred compensation.................................. (94) (35)
Accumulated deficit.................................... (70,694) (84,519)
------- --------
Total stockholders' equity (deficit)........................ 6,474 (3,233)
------- --------
Total liabilities and stockholders' equity (deficit)........ $16,497 $ 4,850
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 51
ORAVAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Collaborative research and development
-- related party................................ $ 6,595 $ 7,587 $ 9,841
Government grants and other..................... 870 583 701
Interest........................................ 1,280 683 258
---------- ----------- -----------
8,745 8,853 10,800
---------- ----------- -----------
Expenses:
Research and development........................ 21,009 14,589 13,017
General and administrative...................... 3,750 3,422 4,072
Interest........................................ 523 418 269
---------- ----------- -----------
25,282 18,429 17,358
---------- ----------- -----------
Loss from operations................................. (16,537) (9,576) (6,558)
Equity in operating loss of joint venture............ (5,085) (6,236) (5,844)
---------- ----------- -----------
Net loss............................................. (21,622) (15,812) (12,402)
Accretion to conversion discount of Convertible
Preferred Stock.................................... -- -- 1,207
Convertible Preferred Stock dividend................. -- -- 216
---------- ----------- -----------
Net loss to common stockholders...................... $ (21,622) $ (15,812) $ (13,825)
========== =========== ===========
Basic and diluted loss per share..................... $ (2.46) $ (1.58) $ (.92)
Weighted average number of basic and diluted shares
outstanding........................................ 8,794,775 10,031,222 15,075,593
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 52
ORAVAX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PAID- TOTAL
PREFERRED PREFERRED COMMON COMMON IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES STOCK SHARES STOCK CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
--------- --------- ---------- ------ ------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995.................... -- -- 7,615,865 $ 8 $58,061 $(296) $(33,260) $ 24,513
Issuance of common
stock................... 2,313,822 2 15,340 -- -- 15,342
Issuance of common
stock -- 401k .......... -- -- 18,509 -- 97 -- -- 97
Exercise of common stock
options................. -- -- 27,625 -- 21 -- -- 21
Amortization of deferred
compensation............ -- -- -- -- -- 73 -- 73
Net loss.................. -- -- -- -- -- -- (21,622) (21,622)
------ ------ ---------- --- ------- ----- -------- --------
Balance, December 31,
1996.................... 9,975,821 10 73,519 (223) (54,882) 18,424
Issuance of common
stock................... -- -- 276,146 -- 480 -- -- 480
Issuance of common
stock -- 401k .......... -- -- 50,723 -- 89 -- -- 89
Exercise of common stock
options................. -- -- 68,853 -- 51 -- -- 51
Issuance Convertible
Preferred............... 3,528 $3,137 -- -- -- -- -- 3,137
Stock Deferred financing
costs................... -- -- -- -- 847 -- -- 847
Amortization of deferred
compensation............ -- -- -- -- -- 66 -- 66
Reversal of deferred
compensation............ -- -- -- -- (63) 63 -- 0
Non-cash stock
compensation............ -- -- -- -- 39 -- -- 39
Net loss.................. -- -- -- -- -- -- (15,812) (15,812)
------ ------ ---------- --- ------- ----- -------- --------
Balance, December 31,
1997.................... 3,528 3,137 10,371,543 10 74,115 (94) (70,694) 6,474
Issuance of common
stock................... -- -- 159,634 -- 65 -- -- 65
Issuance of common
stock -- 401k .......... -- -- 160,000 -- 72 -- -- 72
Exercise of common stock
options................. -- -- 2,315 -- 1 -- -- 1
Issuance of common stock
warrants................ -- -- -- -- 32 -- -- 32
Common stockholder release
of mandatory redemption
feature................. 2,772 2,464 -- -- -- -- -- 2,464
Issuance of common
stock -- Preferred Stock
conversions............. (3,716) (3,795) 8,276,011 8 3,787 -- -- --
Preferred Stock
dividends............... -- 216 -- -- -- -- (216) --
Preferred Stock accretion
to conversion
discount................ -- -- -- -- 1,207 -- (1,207) --
Issuance of common stock
and Preferred Stock to
repurchase Preferred
Stock warrants.......... 6 -- 950,000 2 -- -- -- 2
Amortization of deferred
compensation............ -- -- -- -- -- 59 -- 59
Net loss.................. -- -- -- -- -- -- (12,402) (12,402)
------ ------ ---------- --- ------- ----- -------- --------
Balance, December 31,
1998.................... 2,590 $2,022 19,919,503 $20 $79,279 $ (35) $(84,519) $ (3,233)
====== ====== ========== === ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 53
ORAVAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss from operations.............................. $(21,622) $(15,812) $(12,402)
Adjustments to reconcile net loss from operations to
net cash used in operating activities:
Depreciation..................................... 2,028 2,183 1,784
Equity in operations of joint venture............ 5,085 6,236 5,844
Amortization of debt discount.................... -- 148 137
Non-cash compensation............................ 170 194 164
Changes in operating assets and liabilities:
Prepaid expenses and other current assets... 76 101 38
Other assets................................ (200) 59 47
Accounts payable............................ 74 (200) (13)
Accrued expenses............................ 1,301 6 (1,446)
Deferred revenue............................ 47 (855) 392
-------- -------- --------
Net cash used in operating activities...................... (13,041) (7,940) (5,455)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments................... (17,378) (5,422) --
Sales and maturities of short-term investments........ 25,918 11,183 1,054
Expenditures for property and equipment............... (1,361) (253) (52)
Proceeds from sale-leaseback of property and
equipment........................................... 775 -- --
Investment in and advances to joint venture........... (5,254) (5,082) (6,232)
-------- -------- --------
Net cash provided by (used in) investing activities........ 2,700 426 (5,230)
-------- -------- --------
Cash flows from financing activities:
Proceeds from common stock issuances, net............. 15,363 531 66
Proceeds from preferred stock issuances, net.......... -- 4,201 1,400
Proceeds from short-term bridge loan.................. -- -- 3,000
Principal payments under capital lease obligations.... (1,488) (1,530) (1,257)
Principal payments of installment debt, net........... (500) (330) (260)
-------- -------- --------
Net cash provided by financing activities.................. 13,375 2,872 2,949
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 3,034 (4,642) (7,736)
Cash and cash equivalents at beginning of period........... 11,882 14,916 10,274
-------- -------- --------
Cash and cash equivalents at end of period................. $ 14,916 $ 10,274 $ 2,538
======== ======== ========
Interest paid during the year.............................. $ 384 $ 418 $ 269
======== ======== ========
</TABLE>
Supplemental non-cash investing and financing activities:
Convertible Preferred Stock conversions as of December 31, 1998: 3,716 shares of
Convertible Preferred Stock, including applicable stock dividends, had been
converted into 8,276,011 shares of Common Stock.
Convertible Preferred Stock Warrants: In November 1998, the Company issued
950,000 shares of Common Stock and six shares of Convertible Preferred Stock to
repurchase warrants for 630 shares of Convertible Preferred Stock, which had
been issued to the placement agents in connection with the December 1997 private
placement financing.
Property and equipment: Expenditures for property and equipment, in the year
ended December 31, 1998, excluded $70,000 of equipment lease renewals.
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 54
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
On November 10, 1998, the Company entered into an agreement to merge with
Peptide Therapeutics Group plc ("Peptide") in a transaction now expected to
close during the second quarter of 1999. See next section entitled "Proposed
Merger with Peptide Therapeutics Group plc."
OraVax's mission is the discovery, development and commercialization of
vaccines and antibody products for the prevention or treatment of human
infectious diseases. OraVax's products are vaccines that stimulate the body's
own immunity to provide long term protection against disease, as well as
antibody products that provide immediate passive immunity to treat existing
infections or to protect against acute disease risk.
The ultimate success of the Company is dependent upon its ability to raise
capital through equity financings, direct financings, corporate partnerships,
sale of product and interest income on invested capital. The Company plans to
finance near term cash needs principally through its existing cash reserves,
together with interest earned thereon, revenues from the H. pylori Joint Venture
and dengue license agreement with Pasteur Merieux Connaught ("PMC"), sponsorship
of the Company's Japanese encephalitis program by PMC, and previously awarded
government grants. Additional capital will be required to ensure the on-going
viability of the Company. The Company believes, based upon its current operating
plan, that, in addition to its available cash balances and known revenues, it
will need additional financing in the second quarter of 1999 in order to fund
the Company's operations. Peptide has agreed to provide bridge financing on a
secured basis under certain circumstances. This bridge financing will be secured
with the intangible assets of the Company. In the event the merger with Peptide
is not approved by the shareholders of both companies, the Company would be
required to seek other sources of financing. While management believes that
additional capital may be available to fund operations if the merger is not
approved, there can be no assurance that additional funds will be available when
required, on terms acceptable to the Company.
To date, the Company has not received any revenues from the sale of
products and does not expect to receive any such revenues until late 2000, at
the earliest. The first product revenues are anticipated from sales of the
yellow fever vaccine, under the Company's partnership with Medeva Pharma Limited
("Medeva"). Operations have been funded principally through public and private
placements of equity securities, equipment lease financing, revenues from the
Company's H. pylori Joint Venture and dengue license agreement with PMC,
sponsorship of the Company's Japanese encephalitis program by PMC, government
grants and interest income. Since inception, the Company's cash expenditures
have exceeded its revenues principally as a result from expenditures under its
research and development programs. The Company expects to continue to incur
operating losses over the next several years primarily due to expanded research
and development efforts, preclinical testing and clinical trials of its product
candidates, the acquisition of additional technologies, the establishment of
manufacturing capability and the performance of commercialization activities.
Results of operations may vary significantly from quarter to quarter depending
on, among other factors, the progress of the Company's research and development
efforts, the receipt, if any, of milestone payments, the timing of certain
expenses and the establishment of collaborative research agreements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, manufacturing limitations, third party
reimbursements, collaborative arrangements, and compliance with government
regulations.
B. PROPOSED MERGER WITH PEPTIDE THERAPEUTICS GROUP PLC:
On November 10, 1998, the Company entered into an agreement to be merged
with Cambridge, England based Peptide for stock of Peptide and cash totaling
approximately $15 million, which was subsequently increased to $20 million.
Peptide is a biopharmaceutical company engaged in the research and development
of
7
<PAGE> 55
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
novel drugs and vaccines, and is listed on the London Stock Exchange, under the
symbol PTE. Peptide currently has four products in clinical development with
several pre-clinical and research programs. The Company and its Joint Venture
partner PMC are already collaborating with Peptide in using Peptide's
proprietary platform technology to create oral vaccines for the treatment of H.
pylori. The merger will create a larger biopharmaceutical company involved in
the development of novel drugs, vaccines and antibody products that control
significant human diseases. The merged company will have a total of ten products
in development, eight of which are currently in clinical trials, with the other
two scheduled to go into clinical trials in the next twelve months, and multiple
corporate partnerships including those with PMC, Medeva and SmithKline Beecham.
This new business combination will result in a broader portfolio of product
programs, and greater market presence and potential for expanded corporate
partnerships.
The transaction will take the form of a merger of the Company with a
subsidiary of Peptide, formed for the transaction, and the Company will become a
wholly owned subsidiary of Peptide following the merger. A condition to the
merger is that Peptide shall have completed a financing that results in Peptide
receiving net cash proceeds which, together with existing financing available to
Peptide, is sufficient for the present working capital requirements of the
combined entity in accordance with the rules of the London Stock Exchange. This
condition was satisfied by Peptide raising approximately 20.6 million pounds
sterling (net of expenses) in March 1999. In addition the merger is contingent
upon approval by the shareholders of each company. In February 1999, Peptide's
shareholders approved the merger. The merger is now anticipated to be completed
during the second quarter of 1999.
On November 10, 1998, simultaneous with the execution of the Merger
Agreement with Peptide, Peptide purchased 2,584 shares, approximately 95%, of
the Company's then outstanding Convertible Preferred Stock for an aggregate
price of approximately $2.95 million. Under the Merger Agreement, at the
effective time, outstanding shares of the Convertible Preferred Stock owned by
Peptide will be canceled and outstanding shares of the Convertible Preferred
Stock owned by third parties will be automatically converted into the right to
receive $1,090 per share plus accrued but unpaid dividends. These third parties
have contractually agreed to redeem their shares for cash.
On November 20, 1998, the Company issued 950,000 shares of Common Stock and
six shares of Convertible Preferred Stock to repurchase warrants for 630 shares
of Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
On December 30, 1998, the Company received a letter from PMC indicating
that PMC was considering making a proposal that could result in the maximum
value for the Company's shareholders. The Company sent a copy of PMC's letter to
Peptide, as required under the Merger Agreement. In response to PMC's letter,
members of Peptide's management met independently with PMC and negotiated a
series of agreements, including a standstill agreement under which PMC agreed
not to make an offer to acquire the Company and an agreement by PMC to make a $3
million equity investment in Peptide ordinary shares in connection with and
conditioned upon consummation of the merger. PMC and Peptide also agreed that
the Company's technology relating to vaccines for Japanese encephalitis and
tick-borne encephalitis would be licensed to PMC and that the joint venture with
PMC would be granted licenses to the Company's technology for the development of
vaccines against hepatitis C contingent on the merger being consummated. In
addition, the Company's short-term loan agreement, in the amount of $3 million,
with PMC was amended to extend the repayment terms to be the earlier of
consummation of the merger or July 31, 1999. (See Note M)
On January 4, 1999, Peptide converted 633 shares of the Convertible
Preferred Stock into 2,193,537 shares of Common Stock. The shares of Common
Stock owned by Peptide will be canceled in the merger.
8
<PAGE> 56
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Since the merger was announced, the Company has received increased interest
from prospective purchasers of the Company's leasehold interests, leasehold
improvements and equipment in its Canton, Massachusetts, manufacturing facility.
Based upon these indications of interest, the Company has explored the sale of
its related interests in this facility.
On January 28, 1999, the Merger Agreement was amended to increase Peptide's
acquisition price from $15 million to $20 million based on the further
developments in partnership discussions with PMC and the Canton facility, which
indicated increased value for OraVax's assets. The additional $5 million of
consideration will be in the form of Peptide ordinary shares.
C. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, OraVax JVM, Inc. and OraVax Securities Corp.,
which were incorporated in 1995. Intercompany transactions and balances have
been eliminated in consolidation.
Joint Venture
The Company accounts for its investment in its Joint Venture Partnerships
under the equity method of accounting. (Note M)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of temporary cash investments. The Company
restricts temporary cash investments to institutions with high credit standing.
Restricted Investments
At December 31, 1997 and 1998, the Company held investments of $394,000 and
$398,000, respectively, that are restricted as to their use by varying leasing
arrangements. These investments in US Government and Agency obligations are
available for sale, and are carried at amortized cost plus accrued interest,
which approximates fair market value.
Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the lesser of the lease term or
the estimated useful lives of the related assets, generally three to seven
years.
9
<PAGE> 57
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
When assets are retired or otherwise disposed of, the assets and related
accumulated depreciation and amortization are eliminated from the accounts and
any resulting gains and losses are included in operations in the period of
disposal.
Revenue Recognition
Revenue under the Company's collaborative research and development
agreement is recognized as related expenses are incurred. The Company recognizes
milestone payments as revenue when the milestones are achieved. (Note M).
The Company recognizes government grant revenue as the related expenses are
incurred.
The Company does not recognize as revenue amounts received which are
refundable or involve future obligations.
Research and Development Costs
Research and development costs are expensed as incurred.
Computation of Net Loss per Common Share
The Company follows Statement of Accounting Standards No. 128 ("SFAS 128"),
which requires the presentation of Basic and Dilutive earnings per share. Basic
net loss per share is computed using the weighted average number of common
shares outstanding during the period, plus the dilutive effect of common stock
equivalents. Common stock equivalent shares consist of stock options,
Convertible Preferred Stock and stock warrants. The dilutive computations do not
include common stock equivalents for stock options of 890,809, 1,175,242 and
1,185,534 for the years ended December 31, 1996, 1997 and 1998, respectively,
Convertible Preferred Stock convertible to 2,016,163 and 8,738,586 shares of
Common Stock for the years ended December 31, 1997 and 1998, respectively, and
warrants convertible to 24,000 and 84,086 shares of Common Stock for the years
ended December 31, 1997 and 1998, respectively, as inclusion would be
anti-dilutive.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial reporting
and tax bases of liabilities and assets using enacted tax rates in effect in the
years in which the differences are expected to reverse. Potential future income
tax benefits resulting from net operating losses, unused research and
experimentation credits, and other timing differences will be recognized as
taxable income becomes available to absorb them.
Accretion of Convertible Preferred Stock
In December 1997, in a private placement financing, the Company issued
6,300 shares of 6% Convertible Preferred Stock ("Convertible Preferred Stock"),
for $1,000 per share, providing cash proceeds of $5.6 million, net of $700,000
in deal costs. Holders of the Convertible Preferred Stock are entitled to a
conversion discount that starts at 5% in December 1997 and increases to a
maximum of 21% by June 1999. At December 31, 1997, the value of the discount was
$1,675,800, which is being amortized over the eighteen month discount period by
accreting preferred stock dividends as a credit to additional paid-in capital
and a charge to retained earnings. (See Note D.)
10
<PAGE> 58
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
Statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments, and unrealized gains and losses on
marketable securities classified as available-for-sale. For the twelve months
ended December 31, 1998 and 1997, comprehensive income was the same as net
income.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. The statement requires companies to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for changes in fair value, gains or
losses, depends on the intended use of the derivative and its resulting
designation. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 by January 1,
2000, but does not expect such adoption to have a material impact on its
financial statements.
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. The Company does not
expect SoP 98-1, which is effective for the Company beginning January 1, 1999,
to have a material effect on its financial position or results of operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a new
class of customer, commencing some new operation or organizing a new entity.
Under SoP 98-5, the cost of start-up activities should be expensed as incurred.
SoP 98-5 is effective for the Company beginning January 1, 1999 and the Company
does not expect its adoption to have a material effect on its financial position
or results of operations.
D. EFFECTS OF RESTATEMENTS:
As a result of discussions with the staff of the Securities and Exchange
Commission (the "Commission"), certain issues were raised regarding the
presentation of the Convertible Preferred Stock and the calculation of the
conversion discount attributable to the private placement financing that
occurred in December 1997 (See Note K).
The Company originally calculated the value of the discount at $846,788,
which was recorded as a deferred financing cost and an addition to paid-in
capital at December 31, 1997 and was to be amortized over the eighteen month
discount period. In the Second Quarter of 1998, the Company changed the
amortization period from eighteen to twelve months to reflect the volume of
conversions of the preferred stock to common stock. During fiscal 1999, after
consideration of the issues raised by the Commission staff and a re-examination
of the facts surrounding the assumptions used in the calculation, the Company
recalculated the amount of the discount as $1,675,800, eliminated the deferred
financing costs at December 31, 1997 and
11
<PAGE> 59
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revised its amortization schedule to recognize the discount as a return to
preferred shareholders over the original eighteen month discount period on which
the shareholders could realize the discount by accreting preferred dividends as
a credit to additional paid-in capital and a charge to retained earnings in each
reporting period. As a result, the amount of the discount recognized in the year
ended December 31, 1998 was $1,207,000.
The Company originally presented the Convertible Preferred Stock as a
component of stockholders' equity at December 31, 1997. Upon further review of
the Preferred Stock Purchase Agreement and based on discussions with the
Commission, the Company has determined that $2,464,186 of the total issuance has
mandatory redemption features and, therefore, should not be included in
stockholders' equity at December 31, 1997. The amount was determined based on
the number of common shares into which the preferred stock was convertible at
December 31, 1997 that were subject to shareholders' approval, which was voted
on March 10, 1998.
The restatements of the 1997 financial statements had no effect on the
Company's net loss applicable to common stockholders or basic and diluted loss
per share. Total assets and stockholders' equity, as previously reported and as
restated, are as follows (in thousands):
<TABLE>
<S> <C>
Total assets -- previously reported...................... $17,344
Adjustment related to recalculation of preferred stock
discount............................................... (847)
As adjusted.............................................. $16,497
Total stockholders' equity -- previously reported........ $ 9,785
Adjustment related to presentation of preferred stock
that is redeemable..................................... (2,464)
Adjustment related to recalculation of preferred stock
discount............................................... (847)
As adjusted.............................................. $ 6,474
</TABLE>
E. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1997 1998
------ ------
<S> <C> <C>
Furniture and equipment..................................... $ 493 $ 540
Computer hardware and software.............................. 197 203
Leasehold improvements...................................... 2,626 2,626
Equipment under capital lease............................... 4,353 3,979
------ ------
7,669 7,348
Less accumulated depreciation............................... 4,145 5,489
------ ------
Property and equipment, net................................. $3,524 $1,859
====== ======
</TABLE>
The net book value of equipment under capital lease was $1,579,000 and
$372,000 at December 31, 1997 and 1998, respectively.
12
<PAGE> 60
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
F. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1997 1998
------ ------
<S> <C> <C>
Research and development contracts.......................... $1,985 $ 974
License fees................................................ 63 155
Financing related deal costs................................ 751 --
Other....................................................... 860 1,084
------ ------
Total accrued expenses...................................... $3,659 $2,213
====== ======
</TABLE>
G. INCOME TAXES:
Deferred tax assets and deferred tax liabilities are recognized based on
temporary differences between the financial reporting and tax basis of assets
and liabilities using statutory rates. A valuation allowance is recorded against
deferred tax assets if it is more likely than not that some or all of the
deferred tax assets will not be realized.
The components of deferred taxes were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Capitalization of costs-principally research and
development............................................ $ 11,943 $ 11,472
Property, plant and equipment............................ 898 1,133
Capital leases........................................... -- 9
Accrued expenses......................................... 358 275
Net operating loss....................................... 13,459 18,267
Tax credits.............................................. 2,586 3,112
-------- --------
Gross deferred tax asset................................. 29,244 34,268
Valuation allowance...................................... (29,244) (34,268)
-------- --------
Net deferred tax asset................................... $ -- $ --
======== ========
</TABLE>
As of December 31, 1998, the Company had available federal net operating
loss carryforwards of approximately $45,795,000 and $2,131,000 of federal tax
credits, which may be used to offset future taxable income. These carryforwards
expire beginning in 2005. Due to the uncertainty surrounding the realization of
the net operating loss carryforwards in future tax returns, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased by $5,024,000 from December 31, 1997 to December 31, 1998.
The Company has experienced ownership changes as defined under Section 382
of the Internal Revenue Code. Ownership changes limit the future use of the net
operating loss and credit carryforwards created prior to the ownership change.
If the full amount of the limitation is not used in any year, the amount not
used increases the allowable limit in the subsequent year.
H. CAPITAL LEASES:
During the year ended December 31, 1998, the Company did not enter into any
new sale-leaseback or direct lease arrangements due to the low volume of capital
equipment expenditures. In addition, during the same period, the Company renewed
$70,000 of existing equipment leases. During 1996, an equipment lease
13
<PAGE> 61
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assumed by the Company in connection with its lease of a manufacturing facility
in Canton, Massachusetts, was capitalized in the amount of $2,773,000. Interest
paid on capital leases during the years ended December 31, 1996, 1997 and 1998
was $372,000, $270,000, and $105,000, respectively.
Minimum future payments under the Company's capital leases as of December
31, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1999................................................... $351
2000................................................... 124
----
475
Less amount representing interest...................... 29
----
446
Less current obligation................................ 327
----
Long-term obligation................................... $119
====
</TABLE>
I. INSTALLMENT DEBT:
In January 1996, the Company leased an approximately 47,000 square foot,
good manufacturing practices ("GMP"), manufacturing facility in Canton,
Massachusetts and acquired related equipment and leasehold improvements from the
former tenant. This facility was specifically designed and equipped by the
former tenant for the manufacture of biological products. The Company's strategy
was to develop its manufacturing facilities for producing both pilot-scale and
commercial quantities of its products. The facility would also accommodate
production development activities for OraVax's proprietary products depending on
the outcome of product development. Existing building and capital equipment
leases, which contain renewal and purchase options were transferred to the
Company. In addition, the Company purchased leasehold improvements and other
related assets from the former tenant, capitalized in the amount of $1,824,000,
with the related debt payable in installments through 1999 collateralized by a
leasehold mortgage and collateral assignment of OraVax's interest in the
building lease. The Company is currently assessing its options relating to the
facility, including the sale of its related interests.
Future minimum payments under the installment purchase are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1999................................................... $1,050
------
1,050
Less amount representing interest...................... 31
------
1,019
Less current obligation................................ 1,019
------
Long-term obligation................................... $ 0
======
</TABLE>
J. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company leases office and laboratory facilities in Cambridge,
Massachusetts under an operating lease which contains renewal options and
expires in March 2001. In addition, the Company has an operating lease for a
manufacturing facility in Canton, Massachusetts, containing renewal and purchase
options and
14
<PAGE> 62
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expiring in June 2002. The noncancelable future payments as of December 31, 1998
were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ------
<S> <C>
1999................................................... 1,430
2000................................................... 1,434
2001................................................... 511
2002................................................... 101
</TABLE>
Rent expense for leased facilities during the years ended December 31,
1996, 1997 and 1998 was $1,862,000, $2,051,000 and $2,159,000, respectively.
Agreements
The Company is party to various agreements, principally contracted research
and clinical trials, for which noncancelable minimum future payments as of
December 31, 1998 were $1,205,000 payable in the year ended December 31, 1999.
In addition, under certain of these and other agreements, the Company may
pay royalties on future sales of specified products.
Potential Litigation
On December 23, 1997, the Company sold 240,000 shares of Common Stock to an
institutional investor, at a purchase price of $1.9125 per share, in a private
placement which closed simultaneously with a private placement of 6,300 shares
of the Company's 6% Convertible Preferred Stock ("Preferred Stock"), at $1,000
per share. The institutional investor has expressed claims as follows: (i) that
the Company should issue additional shares of Common Stock to the investor under
a "most favored nations" clause in the Stock Purchase Agreement pursuant to
which the investor purchased its Common Stock and (ii) that the Company should
pay damages to the investor because the Company failed to afford the investor
"piggyback" registration rights in connection with the Company's registration of
the Preferred Stock on February 5, 1998.
The Company believes it has good defenses to these claims. It does not
believe that the issuance of the Preferred Stock (and the subsequent issuance of
Common Stock upon conversions of shares of the Preferred Stock) triggered the
"most favored nations" clause because the Preferred Stock was issued on the same
Closing Date as the Common Stock issued to the investor. As to the "piggyback"
registration rights, the Company believes that the investor had actual notice of
the registration of the Preferred Stock in February, 1998 and took no action to
invoke its rights at the time, did not exercise its demand registration rights
for almost three months after they became available on April 23, 1998, and still
has not sold any of its shares -- all of which the Company registered for resale
on August 6, 1998. To date, no litigation has been filed by the investor on
these claims.
K. PREFERRED STOCK:
The Company issued an aggregate of 964,803 shares of Series Redeemable
Convertible Preferred Stock for net cash proceeds of $27,231,000 (the "Series
Preferred Stock") at various dates since its inception through December 31,
1994.
In January and March 1995, the Company issued an aggregate of 216,237
shares of Series Preferred Stock for net cash proceeds of $9,232,000.
During 1994 and 1995, $100,000 and $108,000, respectively, to accrete the
redeemable convertible preferred stock to its redemption value on a
straight-line basis, was recorded in noncash transactions.
15
<PAGE> 63
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1995, all outstanding shares of Series Preferred Stock were
converted to 5,019,383 shares of common stock in connection with the closing of
the Company's initial public offering.
In December 1997, in a private placement financing, the Company issued
6,300 shares of 6% Convertible Preferred Stock ("Convertible Preferred Stock"),
for $1,000 per share, providing cash proceeds of $5.6 million, of which $4.2
million was received in 1997 and $1.4 million in 1998, net of $700,000 in deal
costs, to the Company. The holders of the Convertible Preferred Stock receive an
annual cumulative 6% dividend, which accrues in stock. All of the Convertible
Preferred shares are fully convertible into shares of the company's Common
Stock, at the option of the holder. The conversion price is the lowest trading
price of the Common Stock during the 22 consecutive trading days immediately
preceding the date of conversion reduced by a conversion discount that starts at
5% in December 1997 and increases to a maximum of 21% by June 1999. At December
31, 1997, the value of the discount was $1,675,800, which is being amortized
over the eighteen month discount period by accreting preferred dividends as a
credit to additional paid-in capital and a charge to retained earnings. At
December 31, 1997, $2,464,186 of the total issuance has mandatory redemption
features, based on the number of common shares into which the preferred stock
was convertible that were subject to shareholders' approval, and, therefore, was
not included in stockholders' equity. Upon approval by the common shareholders
on March 10, 1998 eliminating any restriction on convertibility, the mandatorily
redeemable portion of the Convertible Preferred Stock was transferred to
stockholders' equity (See Note D). The number of shares sold on any given date
is limited to the greater of 4,000 shares, 10% of the average daily trading
volume of the Common Stock for the 5 trading days immediately preceding such
sale, as reported by Nasdaq or such principal exchange, or 10% of the trading
volume of the Common Stock on the day of such sale, as reported by Nasdaq or
such principal exchange. The conversion price is at all times also subject to
customary anti-dilution adjustment for events such as stock splits, stock
dividends, reorganizations and certain mergers affecting the Company's Common
Stock. On December 23, 2002, all outstanding shares of the Convertible Preferred
Stock, including any accrued dividends thereon, will automatically be converted
into the Company's Common Stock at the conversion price on such date. Each share
of Convertible Preferred Stock is also entitled to a liquidation preference of
$1,000 per share, plus any accrued but unpaid dividends, in preference to any
other class or series of capital stock of the Company. Except to determine
whether such stock is entitled to its liquidation preference under certain
circumstances, and as provided by applicable law, holders of the Convertible
Preferred Stock have no voting rights. In February 1998, 7,294,737 shares were
registered for conversion. In connection with the private placement financing,
warrants for 630 shares of Convertible Preferred Stock, at a price of $1,000 per
share, were issued to the placement agents of the transaction. The warrants will
expire on December 23, 2002.
In November 1998, simultaneous with the execution of the Merger Agreement
with Peptide, Peptide purchased 2,584 shares, approximately 95%, of the
Company's then outstanding Convertible Preferred Stock for an aggregate price of
approximately $2.95 million. Under the Merger Agreement, at the effective time,
outstanding shares of the Convertible Preferred Stock owned by Peptide will be
canceled and outstanding shares of the Convertible Preferred Stock owned by
third parties will be automatically converted into the right to receive $1,090
per share plus accrued but unpaid dividends. These third parties have
contractually agreed to redeem these shares for cash. If the merger is
terminated because of a breach of the Merger Agreement by Peptide or a mutual
decision by both parties to terminate the Merger Agreement, OraVax has the right
to repurchase Peptide's Convertible Preferred Stock at the price Peptide paid
for it. In all other events of termination of the Merger Agreement, Peptide has
the right to sell the Convertible Preferred Stock to OraVax at the price Peptide
paid for it.
In November 1998, the Company issued 950,000 shares of Common Stock and six
shares of Convertible Preferred Stock to repurchase warrants for 630 shares of
Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
16
<PAGE> 64
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998, 3,716 shares of the Convertible Preferred Stock, including
applicable stock dividends, had been converted into 8,276,011 shares of Common
Stock.
L. STOCKHOLDERS' EQUITY:
Common Stock
During 1998, 3,716 shares of the Convertible Preferred Stock, including
applicable stock dividends, had been converted into 8,276,011 shares of Common
Stock.
In November 1998, the Company issued 950,000 shares of Common Stock and six
shares of Convertible Preferred Stock to repurchase warrants for 630 shares of
Convertible Preferred Stock, which had been issued to the placement agents in
connection with the December 1997 private placement financing.
In July 1998, the Company issued warrants for 60,086 shares of common
stock, at a price of $2.00 per share, to one of its investors, a principal of
which is a member of the Company's Board of Directors. The $32,000 estimated
fair value of these warrants was charged to general and administrative expense.
The warrants will expire on December 23, 2002.
In June 1998, the Company's stockholders approved an increase in the
authorized shares of common stock to 50,000,000 shares.
In December 1997, in a private placement financing, the Company sold
240,000 shares of its common stock, par value $.001 per share, for $1.9125 per
share, providing net proceeds of $396,000 to the Company. In connection with the
private placement financing, warrants for 24,000 shares of common stock, at a
price of $1.9125 per share, had been issued to the placement agents of the
transaction. The warrants will expire on December 23, 2002.
In June 1996, the Company sold 2,300,000 shares of its common stock, par
value $.001 per share, for $7.25 per share in a follow-on stock offering,
providing net proceeds of $15,215,000 to the Company.
In June 1995, the Company sold 2,300,000 shares of its common stock, par
value $.001 per share, for $10.00 per share in an initial public offering,
providing net proceeds of $20,676,000 to the Company. In connection with the
initial public offering, all outstanding shares of Series Preferred Stock were
converted to common stock.
In March 1995, the Company's stockholders approved an increase in the
authorized shares of common stock to 25,000,000 shares and authorized 2,000,000
shares of a new class of preferred stock, par value $.001 per share.
Stock Options
The Company follows FAS No. 123, "Accounting for Stock-Based Compensation."
FAS 123 established financial accounting and reporting standards for stock-based
employee compensation plans. The statement defines a new method of accounting
for employee stock compensation plans using a fair value based method, under
which compensation costs is measured and recognized in results of operations.
Alternatively, FAS 123 allows an entity to retain the accounting for employee
stock compensation plans defined under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company retained
the accounting defined in APB No. 25 under which no compensation expense is
recognized for fixed stock option grants to employees provided that the grant
price equals or is greater than fair market value. As required, the Company will
disclose the pro forma effects of stock-based compensation using the fair value
based method defined under FAS 123.
Incentive stock options granted under the Company's 1990 and 1995 stock
option plans (the "Plans") may not be granted at a price less than the fair
market value of the common stock on the date of grant (or less
17
<PAGE> 65
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
than 110% of fair market value in the case of employees or officers holding 10%
or more of the voting stock of the Company). Nonqualified stock options may be
granted at an exercise price established by the Board of Directors, which may be
less than, equal to or greater than the fair value of the common stock on the
date of grant. Options granted under the Plans generally vest over three- to
five-year periods, and expire not more than ten years from the date of grant, or
not more than five years from the date of grant in the case of incentive stock
options granted to an employee or officer holding 10% or more of the voting
stock of the Company.
The Company's 1996 Employee Stock Purchase Plan (the "ESPP") permits
employees to purchase common stock of the Company at the lesser of 85% of its
fair value at the beginning or end of related six month payroll withholding
periods. During 1996, 1997 and 1998, 13,822, 36,146 and 159,634 shares,
respectively, were sold to employees under the ESPP. At December 31, 1998, there
were no shares of common stock reserved for future issuances under the ESPP, and
as a result the Company's ESPP plan has been suspended until completion of the
planned merger with Peptide.
Had compensation cost for options issued under OraVax's stock option plan
and Employee Stock Purchase Plan been determined based on the fair value at the
grant dates consistent with the methods defined under FAS 123, OraVax's net loss
and loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net loss as reported (in thousands)............ $(21,622) $(15,812) $(13,825)
Pro forma (in thousands)....................... $(21,877) $(16,233) $(14,196)
Basic and diluted loss per share............... $ (2.46) $ (1.58) $ (.92)
Pro forma...................................... $ (2.49) $ (1.62) $ (.94)
</TABLE>
The fair value of each stock option granted is estimated on the grant date
using the Black-Scholes pricing model with the following weighted-average
assumptions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected Option Term............................... 5 years 5 years 5 years
Expected Option Volatility......................... 65% 70% 90%
Risk Free Interest Rate............................ 6.13% 6.54% 5.59%
Expected Dividend Yield............................ 0% 0% 0%
</TABLE>
The weighted average fair value of options granted under the plans during
each of the years ended December 31, 1996, 1997 and 1998, was $7.32, $1.66 and
$.78, respectively.
The fair value of each option granted under the Employee Stock Purchase
Plan is estimated on the grant date using the Black-Scholes pricing model with
the following weighted-average assumptions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Expected Option Term............................ 1/2 year 1/2 year 1/2 year
Expected Option Volatility...................... 65% 70% 90%
Risk Free Interest Rate......................... 5.32% 5.62% 5.46%
Expected Dividend Yield......................... 0% 0% 0%
</TABLE>
The weighted-average fair value of options granted under the Employee Stock
Purchase Plan during each of the years ended December 31, 1996, 1997 and 1998
was $3.11, $.97 and $.10, respectively. Because some
18
<PAGE> 66
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
options vest over several years and additional awards are generally made each
year, the pro forma amounts may not be representative of the effects on net
income in future years.
A summary of the status of OraVax's stock option plan for the years ended
December 31, 1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ ----------------
<S> <C> <C>
Outstanding at December 31, 1995................. 802,807 2.27
Granted..................................... 127,610 12.18
Exercised................................... (27,625) .78
Canceled.................................... (11,983) 5.21
--------- -----
Outstanding at December 31, 1996................. 890,809 3.70
Granted..................................... 498,683 2.63
Exercised................................... (68,853) .74
Canceled.................................... (145,367) 5.61
--------- -----
Outstanding at December 31, 1997................. 1,175,272 3.18
Granted..................................... 186,300 1.07
Exercised................................... (2,315) .49
Canceled.................................... (173,723) 3.47
--------- -----
Outstanding at December 31, 1998................. 1,185,534 2.89
========= =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------- OPTIONS EXERCISABLE
WTD. AVERAGE -----------------------------------------
REMAINING WTD. AVERAGE WTD. AVERAGE
RANGE OF #OUTSTANDING CONTRACTUAL EXERCISE #OPTIONS EXERCISE
EXERCISE PRICE AT 12/31/98 LIFE PRICE EXERCISABLE PRICE
- -------------- ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
$0.313-$ 0.344 26,000 9.63 $0.32 0 N/A
0.706- 1.059 280,499 6.37 0.88 174,371 $0.78
1.125- 1.125 3,800 9.49 1.13 0 N/A
1.875- 2.705 622,214 6.95 2.53 446,979 2.56
3.000- 3.625 170,586 7.70 3.14 58,648 3.25
6.625- 8.750 8,025 7.32 7.76 3,640 7.74
12.000- 14.750 74,410 7.17 13.32 40,096 13.31
--------- -------
$0.235-$14.750 1,185,534 7.01 $2.89 723,733 2.81
========= =======
</TABLE>
At December 31, 1998, options to purchase 717,337 shares of common stock
remained available for future grants under the plans. At December 31, 1998,
1,902,871 shares of common stock remained reserved to satisfy the issuance of
shares under outstanding and future grants under the plans.
In connection with certain stock option grants in 1995, the Company
recorded $141,000 of deferred compensation expense which is being amortized and
charged to operations over the five-year vesting period of the related options.
In addition, $250,000 of compensation expense was recorded in 1995 in connection
with the vesting of certain milestone-based stock options. In 1997, $39,000 of
compensation expense was recorded in connection with the vesting of certain
performance based options and the extension of the term of certain options.
19
<PAGE> 67
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. JOINT VENTURE AND PMC SHORT-TERM BRIDGE LOAN:
In March 1995, the Company entered into a collaboration (the "Joint
Venture") with PMC for the development, manufacturing, marketing and sale of
immuno-therapeutic and preventive vaccines against H. pylori infection in
humans. OraVax and PMC will share equally in profits from the sale of the H.
pylori vaccines and in all future research, development, clinical and
commercialization costs. PMC is providing technical expertise and will also
provide marketing to the Joint Venture. PMC made an initial payment of $3.2
million directly to OraVax which included $0.6 million to recognize the value of
research and development conducted by OraVax in the first quarter of 1995 prior
to forming the Joint Venture, and a milestone payment of $2.6 million to
recognize the value of technology previously developed by OraVax and made
available to the Joint Venture. In addition, PMC purchased $2.5 million of the
Company's Series Preferred Stock. Subsequently, PMC purchased an additional $1.0
million of common stock in the Company's initial public offering. In addition,
PMC agreed to pay the Company directly up to an additional $12.0 million during
the development period, subject to the achievement of certain clinical and
regulatory milestones, of which $0.6 million was paid to OraVax in December
1995. Beginning in the second quarter of 1995, research, development and
commercialization activities of the Joint Venture were conducted through two
equally controlled partnerships (the "Joint Venture Partnerships") which have
contracted with OraVax to perform the research, development and clinical trial
activities. OraVax earned $6,595,000, $7,587,000 and $7,682,000 under these
contracts during 1996, 1997 and 1998, respectively. In addition, during 1996,
1997 and 1998, the Joint Venture entered into research and development contracts
with PMC and third parties. The research and development budgets of the two
partnerships comprising the Joint Venture are established by joint committees in
which each of the venturers has an equal participation and role. The venturers
will pay approximately equal shares of the agreed upon budgets. OraVax will
receive revenue from the partnerships for research and development work which is
requested to be performed by OraVax and funded by the Partnerships.
OraVax and PMC each invested approximately $4.5 million, $5.8 million and
$6.2 million in 1996, 1997 and 1998, respectively, to fund the Joint Venture's
operations. OraVax accounts for its investments in the Joint Venture
Partnerships under the equity method of accounting and, accordingly, recorded
its $5,085,000, $6,236,000 and $5,844,000 share of the Joint Venture
Partnerships' net losses during 1996, 1997 and 1998, respectively. Following are
the Joint Venture Partnerships' summarized combined balance sheets as of
December 31, 1997 and 1998, and the summarized combined statement of operations
for the period March 31, 1995 (inception) through December 31, 1995, for the
years ended December 31, 1996, 1997 and 1998 and cumulative from inception
(March 31, 1995) through December 31, 1998.
OraVax and Merieux each licensed to the Joint Venture upon its formation
the right to use all of their respective existing proprietary technologies
relating to vaccines for the treatment of H. pylori, except for so-called naked
DNA technology (for an injectable vaccine) which is the subject of a separate
collaboration by Merieux with the third party. Additional technology in the H.
pylori field acquired by either party since the formation of the Joint Venture
is required to be offered to the Joint Venture. The Joint Venture itself has
also obtained licenses to relevant technology from third parties, including a
license in November, 1996 of the complete genome sequence of H. pylori from
MedImmune and Human Genome Sciences.
On November 2, 1998, the Company obtained a short-term bridge loan, in the
amount of $3 million, from PMC to support operations. The Company pledged 12%
ownership in the H. pylori Joint Venture as collateral. The Company granted PMC
a controlling vote, in the Joint Venture, regarding all marketing-related
decisions, thereby granting PMC overall direction of marketing-related matters.
The Company will retain equal voting authority in all non-marketing-related
decisions. In addition, the Company authorized PMC, or should PMC elect, PMC's
affiliates, to act as the principal marketing entity for any Joint Venture
products. The loan was to be repaid in two installments: $2 million on January
31, 1999 and $1 million on June 30, 1999, and bears interest at an annual rate
of 5.42% which is payable when each installment of principal is due.
20
<PAGE> 68
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
However, the loan was subsequently amended to require repayment of $3 million
upon the earlier of consummation of the merger or July 31, 1999.
In the event that the Company defaults on the loan, PMC would, by virtue of
the Company's pledge of 12% ownership in the Joint Venture to secure the loan,
increase its ownership interest in the Joint Venture to 62%, thereby obtaining
overall direction of all Joint Venture matters. The Company's share of future
research, development, clinical and commercialization costs, and of profits from
target product sales would then decrease from the present 50% to 38%.
JOINT VENTURE PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
ASSETS
Cash................................................... $ 625 $ 648
Prepaid expenses -- related party...................... 623 920
------ ------
$1,248 $1,568
------ ------
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable -- OraVax............................. $ 382 $ 183
Accounts payable -- PMC................................ 595 1,500
Accounts payable -- Other.............................. 1,240 79
Partners' capital:
OraVax............................................... (485) (97)
PMC.................................................. (484) (97)
------ ------
$1,248 $1,568
====== ======
</TABLE>
JOINT VENTURE PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Interest income........................................ $ 16 $ 22 $ 23
-------- -------- --------
Contract research expense -- OraVax.................... 6,595 7,587 7,682
Contract research expense -- PMC....................... 2,258 2,375 3,481
Contract research expense -- other..................... 1,139 2,508 539
Legal and administrative expenses...................... 85 15 --
-------- -------- --------
Total expenses......................................... 10,077 12,485 11,702
-------- -------- --------
Net loss............................................... $(10,061) $(12,463) $(11,679)
======== ======== ========
</TABLE>
21
<PAGE> 69
ORAVAX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. PMC: DENGUE LICENSE AGREEMENT AND SPONSORSHIP OF JAPANESE ENCEPHALITIS:
In November 1998, the Company entered into a license agreement, under its
dengue program, with PMC for the development of a vaccine against dengue fever,
based upon the Company's Chimerivax(TM) platform of technology. This technology
utilizes the yellow fever 17D vaccine virus as a vector for genes of related
viruses. Under the license agreement, the Company agreed to develop the vaccine
through completion of Phase I clinical trials. The Company granted PMC a
worldwide exclusive license to the dengue vaccines and PMC will address advanced
development, manufacturing, sales, marketing and distribution. In addition, PMC
agreed to fund 100% of the research, development and clinical costs through
Phase I clinical trials. As a term of the dengue agreement, PMC also has an
option to negotiate a separate agreement to license the Company's vaccine
against Japanese encephalitis ("JE"), also based on the Company's Chimerivax(TM)
platform of technology. In exchange for the option, PMC agreed to fund 100% of
the research, development and clinical costs through the completion of Phase I
clinical trials.
The Company and PMC estimate the research, development and clinical costs
of both the dengue and JE vaccines through Phase I clinical trials to exceed
$11.0 million. PMC began funding, as of October 1, 1998, the research,
development and clinical costs under the dengue and JE programs, and paid the
Company $1.2 million in December 1998, of which $1.1 million was earned in the
current period. In addition, PMC agreed to pay the Company up to $12.2 million
during the dengue development period, subject to the achievement of certain
development, clinical and regulatory milestones, of which $1.0 million was paid
to the Company in November 1998 to recognize the value of research and
development conducted by the Company prior to the execution of the license
agreement. However, there can be no assurance that the milestones which trigger
such future payments will be achieved. Also, PMC agreed to pay the Company
royalties on future net sales of licensed dengue product. A Research and
Development Committee was formed to oversee the direction of the dengue and JE
programs, and consists of three members of both the Company and PMC. The
Research and Development Committee has approved funding of costs under both the
dengue and JE programs through December 1999.
O. RELATED PARTIES:
The Company has a consulting agreement with the chairman of its Board of
Directors under which, and together with fees paid to him for his services as
chairman, he was paid $51,000, $39,000 and $43,000 during 1996, 1997 and 1998,
respectively. In 1996, the Company entered into a consulting agreement with
another member of its Board of Directors under which, and together with fees
paid to him for his services as a director, he was paid $8,000, $16,000 and
$8,000 during 1996, 1997 and 1998, respectively. In 1997, the Company entered
into a consulting agreement with a third member of its Board of Directors under
which, and together with fees paid to him for his services as a director, he was
paid $10,000 and $7,000 during 1997 and 1998, respectively.
In July 1998, the Company issued warrants for 60,086 shares of common
stock, at a price of $2.00 per share, to one of its investors, a principal of
which is a member of the Company's Board of Directors. The warrants will expire
on December 23, 2002. (See Note L).
P. EMPLOYEE BENEFITS:
The Company has a 401(k) retirement plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up
to 15% of their annual compensation to the plan, subject to statutory
limitations. For 1996, 1997 and 1998, the Company declared discretionary
matching aggregate contributions to the plan of $97,000, $89,000 and $72,000,
respectively, paid in 18,509, 50,723 and 160,000 shares of the Company's common
stock, respectively. At December 31, 1998, there were no available shares of
common stock reserved for future issuances under the plan.
22
<PAGE> 70
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Report of Independent Accountants........................... S-2
Combined Balance Sheets as of December 31, 1997 and 1998.... S-3
Combined Statements of Operations for the years ended
December 31, 1996, 1997 and 1998, and cumulative from
inception through the year ended December 31, 1998........ S-4
Combined Statements of Partners' Capital (Deficit) for the
period from inception (March 31, 1995) through December
31, 1995 and the years ended December 31, 1996, 1997 and
1998...................................................... S-5
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998, and cumulative from
inception through the year ended December 31, 1998........ S-6
Notes to Combined Financial Statements...................... S-7
</TABLE>
S-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of OraVax Merieux Co. and Merieux OraVax Co.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, partners' capital and cash flows present
fairly, in all material respects, the financial position of OraVax Merieux Co.
and Merieux OraVax Co. (both development stage enterprises) at December 31, 1997
and 1998, and the results of their operations and its cash flows for each of the
three years in the period ended December 31, 1998, and cumulative from inception
(March 31, 1995) through December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the partnerships' management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
--------------------------------------
Boston, Massachusetts
March 1, 1999
S-2
<PAGE> 72
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash........................................................ $ 625,055 $ 647,944
Prepaid expenses -- related parties......................... 623,164 920,341
---------- ----------
Total assets................................................ $1,248,219 $1,568,285
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Accounts payable -- OraVax.................................. $ 382,421 $ 183,118
Accounts payable -- PMC..................................... 595,096 1,500,022
Accounts payable -- other................................... 1,240,059 79,478
Commitments and contingencies (Note D)
Partners' capital (deficit):
OraVax.................................................... (485,164) (97,343)
PMC....................................................... (484,193) (96,990)
---------- ----------
Total liabilities and partners' capital (deficit)........... $1,248,219 $1,568,285
========== ==========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
S-3
<PAGE> 73
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
(INCEPTION
THROUGH
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 1998)
----------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenue
Interest Income.............. $ 16,393 $ 21,509 $ 22,889 $ 60,791
------------ ------------ ------------ ------------
Expenses:
Contract research
expense -- OraVax....... 6,595,003 7,587,421 7,681,788 26,732,011
Contract research
expense -- PMC.......... 2,257,985 2,375,000 3,480,856 8,113,841
Contract research
expense -- other........ 1,139,033 2,507,559 539,486 4,186,078
Legal and administrative
expenses................ 85,777 15,020 -- 100,797
------------ ------------ ------------ ------------
Total expenses................. 10,077,798 12,485,000 11,702,130 39,132,727
------------ ------------ ------------ ------------
Net loss....................... $(10,061,405) $(12,463,491) $(11,679,241) $(39,071,936)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
S-4
<PAGE> 74
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
COMBINED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE PERIOD FROM INCEPTION (MARCH 31, 1995) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
PASTEUR MERIEUX
ORAVAX MERIEUX AMERICA
JVM, INC. CONNAUGHT HOLDING, INC. TOTAL
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Capital contributions................... $ 2,885,851 $ 2,014,444 $ 866,793 $ 5,767,088
Net loss................................ (2,435,847) (1,700,322) (731,630) (4,867,799)
----------- ----------- ----------- ------------
Balance, December 31, 1995.............. 450,004 314,122 135,163 899,289
Capital contributions................... 4,503,600 3,143,700 1,352,700 9,000,000
Net loss................................ (5,034,754) (3,521,082) (1,505,569) (10,061,405)
----------- ----------- ----------- ------------
Balance, December 31, 1996.............. $ (81,150) $ (63,260) $ (17,706) $ (162,116)
=========== =========== =========== ============
Capital contributions................... 5,832,751 4,062,359 1,761,140 11,656,250
Net loss................................ (6,236,765) (4,361,714) (1,865,012) (12,463,491)
----------- ----------- ----------- ------------
Balance, December 31, 1997.............. $ (485,164) $ (362,615) $ (121,578) $ (969,357)
=========== =========== =========== ============
Capital contributions................... 6,232,113 4,350,278 1,871,874 12,454,265
Net loss................................ (5,844,292) (4,087,734) (1,747,215) (11,679,241)
----------- ----------- ----------- ------------
Balance, December 31, 1998.............. $ (97,343) $ (100,071) $ 3,081 $ (194,333)
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
S-5
<PAGE> 75
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (MARCH 31, 1995) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
CUMULATIVE
(INCEPTION
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1998)
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................... $(10,061,405) $(12,463,491) $(11,679,241) $(39,071,936)
Changes in operating
assets and liabilities:
Prepaid expenses....... (147,012) 423,137 (297,177) (920,341)
Accounts payable....... 1,335,862 881,714 (454,958) 1,762,618
------------ ------------ ------------ ------------
Net cash used by operating
activities.................. (8,872,555) (11,158,640) (12,431,376) (38,229,659)
Cash flows from financing
activities:
Capital contributions....... 9,000,000 11,656,250 12,454,265 38,877,603
------------ ------------ ------------ ------------
Net increase in cash and cash
equivalents................. 127,445 497,610 22,889 647,944
Cash and cash equivalents at
beginning of period......... -- 127,445 625,055 --
------------ ------------ ------------ ------------
Cash and cash equivalents at
end of period............... $ 127,445 $ 625,055 $ 647,944 $ 647,944
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
S-6
<PAGE> 76
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO COMBINED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS:
A collaboration between Pasteur Merieux Connaught ("PMC"), a societe
anonyme existing and organized under the laws of the Republic of France, and
OraVax, Inc. (OraVax), a corporation existing and organized under the laws of
the State of Delaware, was formed on March 31, 1995 (the "Collaboration").
In accordance with the Master Agreement of the Collaboration (the
"Agreement"), two partnerships, Merieux OraVax Co. and OraVax Merieux Co., both
development stage enterprises (the "Partnerships") were formed. The Partnerships
conduct all activities relative to the research, development, registration,
commercialization, manufacturing, marketing, sales and distribution of
immunotherapeutic and preventative vaccines against Helicobacter pylori
infections in humans which use the urease protein or any of its sub-units as an
antigen. The partnerships began operations on April 1, 1995. The two
collaborators, OraVax and PMC have established their intent to own the
partnerships equally on an aggregated basis, to share expenses equally, and to
share profits and losses equally. The capital contributions of each partner are
determined by budgets established annually by committees on which each of the
partners has equal representation and an equal vote. It is the intent of the
partners to share such additional capital contributions equally.
Merieux OraVax Co. is a French partnership whose partners are PMC and
OraVax JVM, Inc. ("OraVax JVM"), a wholly-owned subsidiary of OraVax. The term
of the partnership is ninety-nine years. The initial interest of each partner in
Merieux OraVax Co. is as follows:
<TABLE>
<S> <C>
PMsv........................................................ 49.9%
OraVax JVM.................................................. 50.1%
</TABLE>
The second partnership comprising the Collaboration is OraVax Merieux Co.,
a Massachusetts general partnership, whose partners are OraVax JVM and Merieux
American Holding, Inc. ("MAHI"), an affiliate of PMC. The initial interest of
each partner in OraVax Merieux Co. is as follows:
<TABLE>
<S> <C>
MAHI........................................................ 50.1%
OraVax JVM.................................................. 49.9%
</TABLE>
While the partnership interests of the partners in each partnership are
slightly different, the Collaboration has been structured with the intent of
having all costs, capital, profits and losses shared equally by PMC and OraVax
(through their respective affiliates). As a matter of partnership accounting,
the capital contributions shall be made equally, to be consistent with the
respective partnership interests for each partner as set forth above.
In the event of a default by a partner in the payment of capital
contributions to fund at least 80% of its share of the operating budget, the
Agreement calls for negotiation to resolve any disagreement. If the partners
fail to negotiate a resolution of the issue, the partner which has paid its
contribution shall take control of the partnership from the partner failing to
have contributed its share. Except for such a default, it is the intent of the
Collaboration that control remain equal between OraVax and PMC.
The partners of OraVax Merieux Co. and Merieux OraVax Co., both development
stage enterprises, have agreed to fund through the Partnerships the research and
development, clinical and pharmaceutical development costs of the Collaboration
as approved by its executive committee at least through December 1999.
The ultimate success of the Partnerships is dependent upon their ability to
raise capital through partners' contributions, equity and debt placement, sale
of product and interest income on invested capital. The Partnerships' capital
requirements may change depending upon numerous factors, including progress of
their research and development programs, time required to obtain regulatory
approvals, resources the Partnerships
S-7
<PAGE> 77
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
devote to self-funded projects, proprietary manufacturing methods and advanced
technologies and demand for the Partnerships' products, if and when approved.
While management believes that additional capital will be available to fund
operations, there can be no assurance that additional funds will be available
when required, on terms acceptable to the Partnerships.
The Partnerships are subject to risks common to entities in the
biotechnology industry including, but not limited to, development by the
Partnerships or their competitors of new technological innovations, dependence
on key personnel, protection of proprietary technology and compliance with
government regulations.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination
The combined financial statements include the accounts of OraVax Merieux
Co. and Merieux OraVax Co. Intercompany transactions and balances have been
eliminated in combination.
Research and Development Costs
Research and development costs are expensed as incurred.
Cash and Cash Equivalents
The Partnerships consider all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
Income Taxes
In conformity with the Internal Revenue Code and applicable state and local
tax statutes, taxable income or loss of the Partnerships is required to be
reported in the tax returns of the partners in accordance with the terms of the
partnership agreements and, accordingly, no provision has been made in the
accompanying financial statements for income taxes.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
C. RELATED PARTY TRANSACTIONS
The Partnerships entered into research and development contracts, with
OraVax, Inc., the parent company of OraVax JVM and with PMC, to perform contract
research and development for the Partnerships. Funds transferred to OraVax for
the period from inception through December 31, 1995 and the years ended December
31, 1996 1997 and 1998 were $6,642,015, $7,205,000 and $7,655,282, respectively.
Contract research and development performed by OraVax during the same periods
were $6,595,003, $7,587,421 and $7,681,788, respectively. Funds transferred to
PMC for the years ended December 31, 1996, 1997 and 1998 were $2,357,985,
$2,425,000 and $3,144,000, respectively. Contract research and development
performed by PMC during the same period was $2,257,985, $2,375,000 and
3,480,856, respectively.
S-8
<PAGE> 78
ORAVAX MERIEUX CO. AND
MERIEUX ORAVAX CO. PARTNERSHIPS
(DEVELOPMENT STAGE ENTERPRISES)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1998, prepaid expenses represented funds
transferred to OraVax and PMC in advance of performance under its research and
development contracts. At December 31, 1998, accounts payable included
liabilities to OraVax and PMC in the amounts of $183,118 and $1,500,022,
respectively.
D. COMMITMENTS AND CONTINGENCIES
The Partnerships are party to research and license agreements with third
parties for which non-cancelable minimum future payments as of December 31, 1998
were $750,000, payable in 1999. In addition, under these agreements, the Company
may pay milestones and/or royalties of future sales of specified products.
S-9
<PAGE> 79
ORAVAX, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS NUMBER
-------- ------
<S> <C>
License Agreement between the Company and Pasteur Merieux
Connaught, under the dengue program, dated October 1,
1998...................................................... 10.01
Amendment Agreement and Facility Letter between the Company
and Pasteur Merieux Connaught, for a short-term loan,
dated November 2, 1998.................................... 10.02
Loan Agreement between the Company and Peptide Therapeutics
Group plc, for future bridge financing, dated November 10,
1998...................................................... 10.03
First Amendment to the Facility Agreement between the
Company and Pasteur Merieux Connaught, for a short-term
loan, dated January 25, 1999.............................. 10.04
</TABLE>
<PAGE> 1
EXHIBIT 10.01
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is effective as of October 1,
1998 (the "Effective Date"), between OraVax, Inc., a corporation organized and
existing under the laws of the State of Delaware, as Licensor ("Licensor") and
Pasteur Merieux Serums & Vaccins S.A., a corporation organized under the laws of
France, as Licensee ("Licensee").
W I T N E S S E T H:
WHEREAS, Licensor possesses certain proprietary rights and know-how
relating to the creation of [**];
WHEREAS, Licensee desires to obtain from Licensor, and Licensor desires
to grant to Licensee, a license under Licensor's proprietary rights and know-how
to research, develop, manufacture, market, sell and distribute Licensed Products
(as defined below);
NOW THEREFORE, in consideration of the covenants, conditions, and
undertakings hereinafter set forth, it is agreed by and among the parties as
follows:
ARTICLE 1
DEFINITIONS
"Affiliate" shall mean, with respect to any Person, (i) any other Person of
which securities or other ownership interests representing fifty percent (50%)
or more of the voting interests of such other Person are, at the time such
determination is made, owned, Controlled or held directly or indirectly, by such
Person, or (ii) any other Person which, at the time such determination is being
made, is Controlling, Controlled by or under common Control with, such Person.
For the purposes hereof, "Control," whether used as a noun or verb, refers to
the possession directly or indirectly, of the power to direct, or cause the
direction of, the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agency" shall mean any supranational, national, regional, state or local
government regulatory authority in the Territory responsible for granting
approvals for the manufacture or sale of Licensed Products.
<PAGE> 2
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
"Development Costs" shall mean the costs incurred by Licensor in connection with
the performance of Development Work pursuant to the Research and Development
Program, as calculated in accordance with Appendix B hereto.
"Dengue Vaccine" shall mean a vaccine either therapeutically or prophylactically
active against dengue viruses that makes use of, or is based upon, the
Technology, as described in Appendix A.
"Development Work" shall mean the research and development activities to be
performed by Licensor pursuant to Appendix C hereto.
"Field of Use" shall mean the development and commercialization of Dengue
Vaccines.
"Improvements" shall mean any improvements to the Dengue Vaccine which are first
conceived, discovered or actually reduced to practice during and after the
performance of the Development Work under the Research and Development Program.
"Intellectual Property" shall mean, collectively, Inventions and Improvements.
"Inventions" shall mean any inventions, ideas, discoveries which are first
conceived, discovered or actually reduced to practice before, during and after
the performance of the Development Work under the Research and Development
Program and are related to the Dengue Vaccine.
"JEV Vaccine" shall mean a vaccine either therapeutically or prophylactically
active against Japanese encephalitis viruses that makes use of Licensor's
ChimeriVax(TM) technology for the creation of [**].
"Legal Requirements" shall mean all laws, statutes, ordinances, codes, rules,
regulations, published standards, permits, judgments, decrees, writs,
injunctions, rulings, orders and other requirements of all Public Authorities.
"Licensed Know-How" shall mean any biological materials, and any research and
development information, inventions, know-how, pre-clinical, clinical and other
technical data, in each case which are not generally known or available, which
are owned, licensed or otherwise held by Licensor with the right to license or
sublicense the same to Licensee as of the date hereof or at any time hereafter
and which are necessary or useful for the making, using or selling of Licensed
Products as provided in this Agreement.
2
<PAGE> 3
"Licensed Product(s)" shall mean any product within the Field of Use.
"Major EC Country" shall mean France, Germany, Italy or the United Kingdom.
"Net Sales" shall mean the gross invoice price to Third Parties of any Licensed
Product, less: (i) retroactive price reductions and rebates customary to the
trade or required by law, credits for returns and allowances, all to the extent
actually allowed, (ii) sales or other excise taxes or duties imposed upon and
paid by Licensee, or any of its Affiliates or Permitted Sublicensees with
respect to such sales, and (iii) transportation charges and insurance for
transportation to the extent separately invoiced or separately reported on the
invoice and paid by the Third Party. Notwithstanding the foregoing, Net Sales
shall not include sales between or among Affiliates for resale by an Affiliate.
"Patent Rights" shall mean:
(a) all patents and patent applications owned or controlled by
Licensor, or licensed to Licensor with rights to grant sublicenses thereunder,
anywhere in the world as of the date hereof or at any time hereafter relating to
the Field of Use and which are (i) listed on Schedule A, (ii) issued, assigned
or licensed to Licensor at any time hereafter and that are necessary or useful
for the making, using or selling of Licensed Products as provided in this
Agreement, or (iii) based on any Inventions that are necessary or useful for the
making, using or selling of Licensed Products as provided in this Agreement, and
(b) any improvement patents, reissues, confirmations, renewals,
extensions, counterparts, divisions, continuations, continuations-in-part or
patent-of-addition issued, assigned or licensed to Licensor of or relating to
the patents or patent applications described in clause (a) hereof.
"Permitted Sublicensee" shall mean any Affiliate of Licensee, and any other
Person approved in writing by Licensor prior to the granting of the applicable
sublicense.
"Person" shall mean any natural person, corporation, firm, business trust, joint
venture, association, organization, company, partnership or other business
entity, or any government, or any agency or political subdivision thereof.
"Public Authority" shall mean any supranational, national, regional, state or
local government, court, governmental agency, authority, board, bureau,
instrumentality or regulatory body.
"Research and Development Program" shall have the meaning set forth in Section
4.1(a).
3
<PAGE> 4
"Technology" shall mean the Patent Rights and Licensed Know-How.
"Territory" shall mean all countries of the world.
"Third Party" shall mean any Person which is not a party or an Affiliate of a
party hereto.
"Valid Claim" shall mean a claim of an issued and unexpired patent included
within the Patent Rights that has not been held unenforceable or invalid by a
court or other governmental agency of competent jurisdiction in a final
adjudication from which no appeal can be taken and that has not been
specifically admitted by the Licensor to be invalid or unenforceable through
statements or actions that legally bind the Licensor to such admission.
ARTICLE 2
GRANT OF RIGHTS
2.1 License. Subject to the terms and conditions of this Agreement,
Licensor hereby grants to Licensee a right and license, with the right to grant
sublicenses, under the Technology to research, have researched, make, have made,
use, sell, distribute, import and export Licensed Products in the Territory,
which right and license shall be exclusive even as to Licensor; provided that
Licensor shall retain the right to research, have researched, make, have made
and use Licensed Products for all purposes unrelated to the commercialization of
Licensed Products.
2.2 Exclusivity. In order to assure Licensee of the exclusive rights
under the Technology to commercialize Licensed Products granted in Section 2.1
hereof, Licensor shall not itself sell, distribute, import or export Licensed
Products in the Territory or grant to a Third Party any rights or licenses to
research, have researched, make, have made, use, sell, distribute, import or
export Licensed Products in the Territory, except as provided by this Agreement
and for so long as the rights and licenses granted in Section 2.1 remain in
force pursuant to this Agreement.
2.3 Sublicenses.
(a) The rights granted under Section 2.1 may be sublicensed by Licensee
(or any Permitted Sublicensee) to any Permitted Sublicensee. In the event that
Licensee (or any Permitted Sublicensee) desires to sublicense any rights granted
under Section 2.1 to any Third Party, Licensee shall furnish to Licensor for its
approval, which shall not be unreasonably withheld or delayed, a prior draft of
the proposed sublicense agreement, which shall be on substantially the same
terms (other than Section 3.3) as this Agreement and (y) provide Licensor with
an executed copy of any such approved sublicense agreement. In the event that
Licensee (or any Permitted
4
<PAGE> 5
Sublicensee) desires to amend any sublicense agreement theretofore approved by
Licensor, such amendment shall similarly require Licensor's prior approval,
which similarly shall not be unreasonably withheld or delayed.
(b) Each sublicense agreement concluded by Licensee hereunder shall
include a requirement that the Permitted Sublicensee maintain records and permit
inspection on terms similar to those set forth in Section 10.4 of this
Agreement. At Licensor's request and subject to the terms of the applicable
sublicense agreement, Licensee shall arrange for an independent public
accountant selected by Licensor to inspect the records of its Permitted
Sublicensee(s) for the purpose of verifying payments due to Licensor and shall
cause such accountant to report the results thereof to Licensor.
(c) Each sublicense agreement concluded by Licensee hereunder will
include indemnification provisions similar to those set forth in Section 8.3
hereof naming Licensee and Licensor (and their respective officers, directors,
employees and agents) as indemnified parties.
(d) All sublicenses granted hereunder shall terminate upon termination
of this Agreement; provided that upon expiration of the Term pursuant to Section
5.1 hereof (prior to any termination hereunder), Licensee (or the applicable
Permitted Sublicensee) shall have a fully paid-up, royalty-free, non-cancelable
license, subject (in the case of Licensee's Permitted Sublicensees) to the terms
of the applicable sublicense and the payment by Licensee of amounts accrued
prior to such expiration.
2.5 Disclosure of Technology. Upon the execution of this Agreement, and
periodically thereafter as such information becomes available to Licensor,
Licensor shall provide to Licensee copies of all information and materials in
tangible form related to the Technology that are reasonably necessary to or
useful in the researching, making, using, selling, distributing, importing or
exporting of Licensed Products. Without limiting the generality of the
foregoing, if at any time Licensee elects to manufacture a Licensed Product,
Licensor shall, upon notice from Licensee, transfer Licensed Know-How relating
to manufacturing of the Licensed Product to Licensee, together with seed stock
or other biological materials within the definition of Licensed Know-How.
2.6 JEV Vaccine. It is understood and anticipated by both parties that
the development of JEV Vaccine will precede the development of Dengue Vaccine,
and that due to certain similarities in these products, the regulatory strategy
employed by Licensor (or its sublicensees) for JEV Vaccine will impact the
regulatory strategy for Dengue Vaccine. Licensor therefore agrees for so long as
Licensee funds the Development Costs for the JEV Vaccine pursuant to this
Agreement to keep Licensee informed of its actions and strategies relating to
regulatory approval of JEV Vaccine through a Phase I clinical study in adults
and to provide, or cause to be provided, to
5
<PAGE> 6
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
Licensee an opportunity to comment upon such actions and strategies as they may
relate to the development of the technology underlying both JEV Vaccine and
Dengue Vaccine. Licensor shall keep Licensee informed of safety issues beyond
such Phase I clinical study in adults. Licensor and Licensee agree to enter into
good faith negotiations for a collaboration on the development of a JEV Vaccine.
In consideration of the agreement of Licensee to fund the Development Costs
relating to the development of JEV Vaccine, Licensor agrees not to negotiate or
enter into any agreement (whether or not binding) with a Third Party (other than
[**], with whom Licensor shall be free to negotiate and execute such an
agreement, provided that (i) any agreement so executed grants only rights that
are limited to the territory of Korea, (ii) if any entity established by
Licensor for the purpose of conducting the development work for JEV Vaccine in
Korea pursuant to any agreement so executed seeks a marketing partner for JEV
Vaccine in Korea, then such entity shall provide to Licensee an opportunity to
negotiate for such relationship commensurate with any such opportunity provided
to Third Parties and (iii) any agreement so executed provides that if Licensor's
Korean partners market JEV Vaccine outside of Korea, Licensee shall have a
remedy for such breach directly against Licensor) for the field of JEV Vaccine
[**] without the prior written consent of Licensee. This right of first
negotiation may be terminated by mutual agreement of Licensor and Licensee and
shall automatically terminate on [**].
ARTICLE 3
COMPENSATION
3.1 Compensation for Past Research and Development Expenses Relating to
Licensor's Dengue Vaccine Know-How. Licensee shall pay to Licensor compensation
of [**].
3.2 Milestone Fees. Licensee shall pay to Licensor the amounts
specified below within [**] following the accomplishment of the corresponding
events specified below (each, a "Milestone"):
(i) [**].
(ii) [**].
(iii) [**].
(iv) [**].
6
<PAGE> 7
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
(v) [**].
(vi) [**].
(vii) [**].
The foregoing amounts shall be paid by Licensee (on behalf of itself,
its Affiliates and Permitted Sublicensees) only once.
3.3 Royalties.
(a) Royalty Rates.
(i) Licensee shall pay Licensor a royalty of [**] (the "Patent
Royalty") on quarterly Net Sales of Licensed Product by Licensee, its
Affiliates and Permitted Sublicensees in countries where at least one
Valid Claim exists during all periods of such existence. Such royalty
shall be payable on a country-by-country basis until the expiration of
the last remaining Valid Claim in any such country.
(ii) In the case of countries in which the Patent Rights
consist solely of patent applications, Licensee shall pay Licensor the
Patent Royalty on quarterly Net Sales of Licensed Product by Licensee,
its Affiliates and Permitted Sublicensees in such countries until the
first to occur of [**], Licensee shall pay Licensor a royalty of [**]
(the "Know-How Royalty") on quarterly Net Sales of Licensed Product by
Licensee, its Affiliates and Permitted Sublicensees in such country for
[**]; provided, however, that upon issuance of a Valid Claim in such
country at any time thereafter, Licensee shall pay Licensor in
accordance with subsection (i) above.
(iii) Licensee shall pay Licensor the Know-How Royalty on
quarterly Net Sales of Licensed Product by Licensee, its Affiliates and
Permitted Sublicensees, in countries where no Patent Rights exist and
in countries where the only existing Patent Rights have, for a period
of [**] or longer, been patent applications, for a period of [**] from
the date of first commercial sale of Licensed Product in any such
country; provided, however, that if at any time thereafter Patent
Rights come to exist in any such country, Licensee shall pay royalties
to Licensor in accordance with subsection (i) or (ii) above as
appropriate. In no event shall the Know-How Royalty be payable in
respect of any Net Sales upon which the Patent Royalty is payable.
7
<PAGE> 8
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
(b) Reduction for Third Party Royalties. In the event that Licensee,
its Affiliate(s) or Permitted Sublicensee(s), in its reasonable judgment,
determines it to be necessary or desirable to license in Third Party patents or
technology relating to the Licensed Product and is required to pay royalties to
one or more Third Parties in respect of such patents or technology (that in the
absence of such royalty payments would be infringed by the researching, making,
using, selling, distributing, importing or exporting of Dengue Vaccines) in
order to enable Licensee, such Affiliate or such Permitted Sublicensee to
realize Net Sales, then the royalties otherwise payable to Licensor in respect
of such Net Sales shall be reduced by [**] the royalties paid to such Third
Parties; provided, however, that in no event shall such reduction exceed [**] of
the royalties on such Net Sales otherwise due to Licensor.
(c) Right to Cure Certain Third Party Obligations; Offset. Licensee
acknowledges that the patent applications set forth on Schedule A hereto are
co-owned by Licensor with St. Louis University, in accordance with the agreement
attached hereto as Schedule B. In the event that Licensor defaults on its
obligations under the agreement attached hereto as Schedule B, Licensor shall
promptly notify Licensee of such default and shall, at Licensee's request,
cooperate with Licensee to enable Licensee to cure such breach on behalf of
Licensor. Licensee shall be entitled to deduct from the royalties otherwise
payable to Licensor in respect of Net Sales hereunder all royalties and other
expenses incurred under this Section 3.3(c) that are reasonably necessary to
ensure that Licensee's rights under this Agreement are not compromised by such
default.
3.4 Funding of Research and Development Program. Licensee shall
reimburse Licensor for the Development Costs, including the development program
costs for the JEV Vaccine development program to be carried out by Licensor
through the completion of a Phase I clinical study in adults, in accordance with
Section 4.2 below.
3.5 Single Royalty; Non-Royalty Sales. It is understood that in no
event shall more than one royalty be payable under Section 3.3 with respect to a
particular unit of Licensed Product. No royalty shall be payable under this
Article 3 with respect to sales of Licensed Products among Licensee, its
Affiliates, Permitted Sublicensees and their Affiliates (provided that such
sales are for the purpose of facilitating resales to Third Parties), but a
royalty shall be due upon the subsequent sale of the Licensed Product to a Third
Party. No royalty shall be payable for (i) Licensed Product used in clinical
trials, or (ii) Licensed Product used by Licensee, its Affiliates or Permitted
Sublicensees for research, or (iii) customary quantities of Licensed Product
distributed as free samples.
8
<PAGE> 9
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
ARTICLE 4
RESEARCH AND DEVELOPMENT
4.1 Research and Development Program.
(a) General. Licensor agrees to perform or have performed for the
Licensee the Development Work set forth in the Research and Development Program
attached hereto as Appendix C (the "Research and Development Program"), and
Licensee hereby agrees to fund the Research and Development Program in
accordance with the terms and conditions set forth below.
(b) Subcontracting. Licensor may subcontract any or all of its
obligations under this Article 4, subject to obtaining the prior written consent
of Licensee, which consent shall not be unreasonably withheld. In the event that
Licensor desires to subcontract any material part of its obligations under this
Article 4 to any Third Party, Licensor shall (x) furnish to Licensee for its
approval a prior draft of the proposed subcontract agreement, which shall be in
form and substance satisfactory to Licensee, (y) provide Licensee with an
executed copy of any such approved subcontract agreement, and (z) keep Licensee
informed of the status of any such subcontracting arrangements. In the event
that Licensor desires to amend any subcontract agreement theretofore approved by
Licensee, such amendment shall similarly require Licensee's prior approval. No
such subcontract shall relieve Licensor of its obligations under this Agreement.
(c) Research and Development Committee, Principal Investigator. The
Development Work shall be performed under the supervision and direction of the
Principal Investigator who shall be an employee of Licensor (initially,
Licensor's Vice President of Research) and shall be chosen by the Research and
Development Committee. The Research and Development Committee shall consist of
three individuals nominated by Licensor and three individuals nominated by
Licensee. The Research and Development Committee shall review the progress of
the Development Work and will approve or reject material changes to the
Development Work plan. The Research and Development Committee can change its
number of members (maintaining equal representation of both Licensee and
Licensor) and its membership upon the decision of a majority of its members. The
Research and Development Committee shall survive the term of the Research and
Development Program in an advisory role until a time mutually agreeable to
Licensee and Licensor or, in the absence of mutual agreement, until [**]
following product licensure of a Dengue Vaccine in the United States or a Major
EC Country. The members of the Research and Development Committee shall be
senior executives from the various
9
<PAGE> 10
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
research and development disciplines of Licensor and Licensee. The initial
members of the Research and Development Committee are indicated in Appendix D
hereto.
(d) Replacement of Principal Investigator. In the event that the
Principal Investigator is unwilling or unable to perform his or her duties
hereunder, Licensor shall promptly appoint a successor mutually agreeable to the
parties.
(e) Reports. The Principal Investigator shall provide written progress
reports, summarizing in reasonable detail the current status and progress of the
Research and Development Program (i) within thirty (30) days after the end of
each calendar quarter and (ii) as soon as practicable whenever, in the Principal
Investigator's judgment, an Invention has been created or reduced to practice.
(f) Visitation. Duly authorized representatives of Licensee shall have
the right at reasonable times and upon reasonable notice to visit the facilities
where any Development Work is being performed in order to monitor progress of
the Development Work.
4.2 Funding.
(a) General. Licensor shall provide (or cause to be provided) to
Licensee, prior to the beginning of each quarter, an invoice setting forth the
projected Development Costs to be incurred for such quarter in accordance with
the Research and Development Program. Licensee shall pay such invoice within
[**] of receipt thereof to the extent that such Development Costs are included
in Appendix B hereto (as modified from time to time by the Research and
Development Committee). Licensor hereby covenants and agrees that any funding
provided to Licensor under this Section 4.2 shall be used as contemplated by the
Research and Development Program. Services provided by Licensor at Licensee's
request that are outside the scope of the Research and Development Program shall
be separately invoiced by Licensor and separately funded by Licensee on the
basis for determining costs set forth in Appendix B hereto.
(b) Reconciliation. Within [**] after the end of each quarter, Licensor
shall provide (or cause to be provided) to Licensee a statement reconciling the
projected Development Costs previously paid by Licensee for such quarter against
the actual Development Costs incurred by Licensor for such quarter. In the event
that such reconciliation demonstrates that such previous payment exceeded such
actual Development Costs, Licensee shall be entitled to recoup the excess from
Licensor. In the event that such reconciliation demonstrates that such actual
Development Costs exceeded such previous payment, Licensor shall be entitled to
reimbursement of the
10
<PAGE> 11
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
excess from Licensee. At the option of the party to whom any such adjustment is
owed, such excess shall be paid to such party by the other party within [**]
after such statement is provided or an appropriate adjustment shall be made to
the next invoice provided to Licensee setting forth projected Development Costs
(in which case such adjustment shall be subtracted from or added to actual
Development Costs, as appropriate, for purposes of the subsequent reconciliation
relating to the quarter to which such invoice relates).
(c) Cost of Components. Any component that, by mutual agreement of
Licensee and Licensor, is supplied by Licensee to Licensor in connection with
the Development Work to performed hereunder shall be supplied to Licensor at no
cost.
4.3 Sublicense and License.
(a) Licensee hereby grants to Licensor a fully paid, non-exclusive,
royalty-free sublicense, with the right to grant sublicenses (subject to Section
4.1(b) hereof), under the rights and licenses granted pursuant to Section 2.1
above to research, develop, make and have made the Licensed Products in the
Territory solely for the purposes of performing the Development Work pursuant to
the Research and Development Program.
(b) Licensee hereby grants to Licensor a fully paid, non-exclusive,
royalty-free license, with the right to grant sublicenses (subject to Section
4.1(b) hereof), under the Intellectual Property owned by Licensee as specified
in Sections 4.4(d) and 4.4(e) hereof to research, develop, make and have made
the Licensed Products in the Territory solely for the purposes of performing the
Development Work pursuant to the Research and Development Program.
4.4 Ownership of Inventions and Improvements.
(a) All Intellectual Property developed solely by Licensor pursuant to
the Research and Development Program shall be owned solely by Licensor, and such
Intellectual Property shall be deemed to be included in the Technology.
(b) All Intellectual Property developed jointly by Licensor and
Licensee pursuant to the Research and Development Program and solely relating to
Dengue Vaccine shall be owned jointly by the parties and Licensee shall have an
exclusive right and license to Licensor's interest in such Intellectual Property
pursuant to Section 2.1 above.
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CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
(c) All Intellectual Property developed jointly by Licensor and
Licensee pursuant to the Research and Development Program and not solely
relating to Dengue Vaccine shall be owned jointly by the parties and both
parties shall have the right to use and exploit such Intellectual Property
freely without accounting to one another for such use and exploitation.
(d) All Intellectual Property developed solely by Licensee pursuant to
the Research and Development Program and solely relating to Dengue Vaccine shall
be owned solely by Licensee.
(e) All Intellectual Property developed solely by Licensee and which is
not solely related to Dengue Vaccine shall be owned by Licensee. The parties
shall, at Licensor's request, enter into good faith negotiations for a grant of
licenses to such Intellectual Property from Licensee to Licensor for use outside
of the Field of Use.
(f) Licensor agrees to include provisions assuring Licensee's rights
under this Section 4.4 in every sublicense granted pursuant to Section 4.3
above.
4.5 Term of Research and Development Program. The term of the Research
and Development Program shall run from [**]. Upon expiration of such term, the
parties may in good faith discuss extending their collaborative relationship to
later stages of development of JEV Vaccine and Dengue Vaccine.
4.6 Dispute Resolution.
(a) The parties agree to use their best efforts to resolve amicably any
deadlock between the parties or their respective representatives, with respect
to any scientific matter and will not take any action inconsistent therewith.
The resolution of any deadlock pursuant to this Section 4.6 shall be binding on
the parties for all purposes.
(b) In the event that the parties or their respective representatives
are deadlocked concerning any scientific matter, the parties shall thereupon
consult with each other in good faith on a regular basis (including at least one
meeting between the Chief Scientific Officer of Licensor and the Chief
Scientific Officer of Licensee for their consideration and resolution, and if no
decision is then reached, at least one meeting between the Chief Executive
Officer of Licensor and the Chief Executive Officer of Licensee) to attempt to
resolve such matters as promptly as practicable and each party hereby agrees to
use its best efforts to schedule such meetings within sixty (60) days after the
occurrence of the deadlock.
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CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
(c) In the event that, following the aforementioned consultations, the
parties remain deadlocked regarding any scientific matter, such deadlock shall
be referred, at the election of either party and by notice in writing to the
other party, to a panel of scientific mediators as provided in this paragraph
(c) ("Scientific Mediation"). In any Scientific Mediation, there shall be three
scientific experts in the pharmaceuticals area (without regard to nationality)
who shall act as the mediators (the "Scientific Mediators"). The party
requesting Scientific Mediation shall appoint one individual to serve as one of
the Scientific Mediators, and shall notify the other party of such appointment
in the aforementioned notice. Within fifteen (15) days after receipt of such
notice, the other party shall appoint one individual to serve as a Scientific
Mediator, but if the other party shall fail to make such appointment within such
period, such party may request the Swedish Arbitration Committee of the ICC to
make such appointment. The two Scientific Mediators shall, within fifteen (15)
days of the appointment of the second Scientific Mediator appoint a third
individual to serve as a Scientific Mediator and chairperson of the mediation
board, but if the two Scientific Mediators shall fail to make such appointment
within such period, then such party or the other party may request the Swedish
Arbitration Committee of the ICC to make such appointment. No Confidential
Information shall be disclosed to such Scientific Mediators unless and until
each such Scientific Mediator has entered into a confidentiality agreement, in
form and substance satisfactory to both parties. The Scientific Mediators shall
be advised of the positions taken by each of the parties to such mediation and
shall work with them in an effort to resolve the scientific deadlock within
sixty (60) days after the appointment of the third Scientific Mediator. If the
scientific deadlock is not resolved within such period, there shall be no
further Scientific Mediation, but the Chief Executive Officer of Licensor and
the Chief Executive Officer of Licensee shall consult one more time in an effort
to resolve the deadlock.
ARTICLE 5
TERM AND TERMINATION
5.1 Term. This Agreement shall become effective as of the Effective
Date and, subject to the other provisions of this Article 5, shall continue in
full force and effect on a country-by-country basis until the later of [**] (the
"Term"). Upon the expiration of the Term on a country-by-country basis, Licensee
will have a fully paid, royalty-free, freely sublicensable license to make, have
made, use, sell, distribute, import and export Licensed Products in each such
country, and Licensee shall have no further payment obligation to Licensor,
other than for payments that accrue prior to such expiration, for milestone
payments that may accrue after such expiration and for Development Costs that
may be incurred after such expiration.
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CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
5.2 Termination for Breach. In the event of a material breach of this
Agreement (including the breach of a representation or warranty), which breach
is not cured within sixty (60) days after written notice is given by the
non-breaching party to the breaching party specifying the breach, the
non-breaching party, in addition to any other remedy which it may have, shall be
entitled to terminate this Agreement.
5.3 Optional Termination by Licensee. Licensee may terminate this
Agreement at any time by giving Licensor at least [**] prior written notice.
5.4 Termination Standstill. Notwithstanding anything to the contrary
contained herein, Licensee may not terminate this Agreement for any reason
before the earlier of [**].
5.5 Rights on Termination.
(a) In the event that this Agreement is terminated pursuant to Section
5.2 due to a material breach by Licensor, (i) the rights and licenses granted to
Licensee in Section 2.1 hereof shall remain in effect, subject to Licensee's
payment of [**] of the royalties and [**] of the milestone payments that that
would otherwise accrue after such termination, (ii) the rights and licenses
granted to Licensor in Section 4.3 shall terminate, (iii) subject to Article 7
hereof, any Confidential Information provided to Licensor in tangible form shall
be promptly returned to Licensee or destroyed, at Licensee's option and (iv)
Licensee shall have the rights set forth in Section 8.3 in respect of such
breach.
(b) In the event that this Agreement is terminated pursuant to Section
5.2 due to a material breach by Licensee, (i) all licenses granted hereunder,
except the license granted to Licensor pursuant to Section 4.3(b), shall
terminate, (ii) the license granted to Licensor pursuant to Section 4.3(b) shall
be [**], (iii) subject to Article 7 hereof, any Confidential Information and
Licensed Know-How provided to Licensee in tangible form shall be promptly
returned to Licensor or destroyed, at Licensor's option, and (iv) Licensor shall
have the rights set forth in Section 8.3 in respect of such breach.
(c) In the event that this Agreement is terminated pursuant to Section
5.3 at Licensee's option, (i) all licenses granted hereunder, except the license
granted to Licensor pursuant to Section 4.3(b), shall terminate, (ii) the
license granted to Licensor pursuant to Section 4.3(b) shall be [**], (iii)
subject to Article 7 hereof, any Confidential Information and Licensed Know-How
provided to Licensee in tangible
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CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
form shall be promptly returned to Licensor or destroyed, at Licensor's option,
and (iv) Licensor and Licensee shall negotiate in good faith a percentage
royalty to be paid by Licensor to Licensee, based upon the commercialization of
Dengue Vaccine subsequently undertaken by Licensor, that compensates Licensee
for Licensor's exploitation of Intellectual Property developed during the course
of the Research and Development Program using Licensee's funding at a level
commensurate with the level of royalties Licensor pays to Third Parties in
arm's-length transactions for licenses of intellectual property with similar
commercial value.
(d) In the event that the Research and Development Program is
terminated by Licensee prior to the completion of the term set forth in Section
4.5 above for any reason, Licensee shall, in addition to any other payments due
hereunder, make a payment equal to the [**]. Also in the event of such
termination, Licensor shall, and shall cause its employees, agents and
subcontractors (including, without limitation, the Principal Investigator)
performing any Development Work to, wind up as expeditiously as possible all
Development Work that is in progress at the date of such termination. Following
such termination and winding up, Licensor shall submit to Licensee a final
invoice setting forth the [**].
(e) In the event Licensee terminates this Agreement, all rights to
Intellectual Property owned jointly pursuant to Section 4.4(c) shall remain the
property of both Licensor and Licensee with divided control and the parties
shall enter into good faith negotiations for the grant of an exclusive right and
license to Licensee's interest in such Intellectual Property from Licensee to
Licensor. In the event of Licensee's termination of this Agreement, the parties
shall also enter into good faith negotiations for the grant of a license to
Intellectual Property owned by Licensee pursuant to Section 4.4(d) from Licensee
to Licensor.
(f) Articles 7 and 11, and Sections 2.3, 5.1, 5.5, 5.6, 8.3, 10.3 and
10.4, shall survive the expiration and any termination of this Agreement. Except
as otherwise provided in this Section 5.5(f), all rights and obligations of the
parties under this Agreement shall terminate upon the expiration or termination
of this Agreement.
(g) Termination of this Agreement for any reason shall not release
either party hereto from any liability which at the time of such termination has
already accrued to the other party.
5.6 In the event that Licensee terminates this Agreement for any
reason, and Licensee decides to continue the development of a dengue vaccine
other than the Dengue Vaccine, Licensee shall in good faith, but with no legal
obligation, consider maintaining a collaborative relationship with Licensor
relating to such development.
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5.7 Subject to applicable law to the contrary, Licensee or Licensor may
terminate this Agreement upon written notice to the other party if the other
party makes a general assignment for the benefit of creditors, is the subject of
proceedings in voluntary or involuntary bankruptcy or has a receiver or trustee
appointed for substantially all of its property; provided that in the case of an
involuntary bankruptcy proceeding such right to terminate shall only become
effective if the other party consents thereto or such proceeding is not
dismissed within sixty (60) days after the filing thereof. Each of the parties
hereto acknowledges and agrees, subject to applicable law to the contrary, that
this Agreement (i) constitutes a license of Intellectual Property (as such term
is defined in the United States Bankruptcy Code, as amended (the "Code")), and
(ii) is an executory contract, with significant obligations to be performed by
each party hereto. The parties agree that Licensee may fully exercise all of its
rights and elections under the Code, if any, including, without limitation,
those set forth in Section 365(n) of the Code. The parties further agree that,
in the event that Licensee retains its rights as a licensee under the Code
pursuant to such an exercise, Licensee shall be entitled to complete access to
any technology licensed to it hereunder and all embodiments of such technology.
Subject to applicable law to the contrary, such embodiments of the technology
shall be delivered to Licensee not later than (a) the commencement of bankruptcy
proceedings against Licensor, unless Licensor elects to perform its obligations
under this Agreement, or (b) if not delivered under (a) above, upon the
rejection of this Agreement by or on behalf of Licensor.
ARTICLE 6
PATENTS AND INFRINGEMENTS
6.1 Pursuit and Maintenance of Patent Rights. Licensor shall, at its
own expense, file, prosecute and maintain Patent Rights. Licensor agrees to keep
Licensee informed as to the status of the Patent Rights and shall provide
Licensee with copies of all filings and correspondence of a substantive nature
with respect to patents or patent applications relating to the Patent Rights to
be made or sent to the United States Patent and Trademark Office or its
counterpart in any country of the Territory and copies of all correspondence of
a substantive nature that Licensor receives from such Persons with respect to
the Patent Rights. In the event that Licensor chooses not to prosecute a patent
in the Territory in the case of certain Intellectual Property or chooses not to
prosecute a patent in a certain country in the Territory that is based upon the
same patentable subject matter upon which Patent Rights are based, then Licensee
shall be entitled to prosecute such patent and Licensor shall reasonably
cooperate with Licensee in such prosecution; provided however that the
prosecution by Licensee of any patent pursuant to this Section shall not create
any ownership interest in such Intellectual Property or in such patentable
subject matter by Licensee that Licensee would not otherwise have hereunder.
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6.2 Notice of Infringement. Each party shall promptly notify the other
of any conflicting use or any act of infringement or appropriation of any Patent
Right by unauthorized Persons which comes to its attention.
6.3 Enforcement and Defense. Upon becoming aware of a conflicting use
or an act of infringement, and communicating about the same pursuant to Section
6.2 above, Licensee shall discuss with Licensor the nature of and circumstances
surrounding such conflicting use or act of infringement. Subject to the consent
of Licensor, which consent shall not be unreasonably withheld, Licensee shall
thereafter, at its own expense, have the right but not the obligation to
initiate actions and take steps relating to such conflicting use or act of
infringement. Licensee may settle any dispute with a Third Party regarding such
conflicting use or act of infringement; provided that Licensee shall not have
the right to settle, compromise or take any action in any dispute which
diminishes, limits or inhibits the scope, validity or enforceability of the
Patent Rights without the express written consent of Licensor. In the event that
Licensee exercises its rights under this Section 6.3, Licensee agrees to keep
Licensor fully informed of all developments in connection with any settlements
and negotiations and to consult with Licensor prior to making any final
settlement, consent judgment or other voluntary disposition of the matter. If
Licensee chooses not to take or continue any action or step relating to such
conflicting use or act of infringement, Licensor shall have the right to engage
in negotiations and proceedings relating to such conflicting use or act of
infringement solely at its own expense; provided that it keeps Licensee fully
informed of the progress of such negotiations and proceedings and consults with
Licensee prior to making any final settlement, consent judgment or other
voluntary disposition of the matter. Each party agrees to cooperate with the
other to the fullest extent possible with respect to any negotiations or
proceedings under this Section 6.3.
6.4 Equitable Division of Recoveries by Licensee. In the event that
Licensee elects to initiate actions or take steps relating to a conflicting use
or act of infringement pursuant to Section 6.3 above, and Licensee is thereby
able to recover from a Third Party by settlement or otherwise any damages or
other compensation in respect of such conflicting use or act of infringement,
such damages and other compensation shall be divided equitably between Licensee
and Licensor in a manner commensurate with the division of economic benefits
relating to sales of Licensed Products contemplated by this Agreement.
ARTICLE 7
CONFIDENTIALITY
7.1 Except as expressly set forth in this Article 7, each party shall,
and shall cause its Affiliates and its and their respective officers, directors,
employees, agents
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and subcontractors (collectively, "Representatives") to, keep confidential any
and all technical, commercial, scientific and other proprietary data, processes,
documents or other information (whether in oral, written or electronic form) or
physical object (including, without limitation, intellectual property, marketing
data, agreements between any party and a Third Party, license applications, and
business plans and projections of any party) acquired from the other party, its
Affiliates or any of their respective Representatives in respect of the
transactions contemplated by this Agreement and which relate (in the case of a
party) to the other party or any of its Affiliates or their respective
businesses or products ("Confidential Information"), and each party shall not
disclose directly or indirectly, and shall cause its respective Affiliates and
Representatives not to disclose directly or indirectly, any Confidential
Information to anyone outside such Person, such Affiliates and their respective
Representatives, except that the foregoing restriction shall not apply to any
information disclosed hereunder to any Person if such Person (the "Receiving
Person") can demonstrate that such Confidential Information:
(a) is or hereafter becomes generally available to the trade or public
other than by reason of any breach hereof;
(b) was already known to the Receiving Person or such Affiliate or
Representative as shown by written records;
(c) is disclosed to the Receiving Person or such Affiliate or
Representative by a third party who has the right to disclose such information;
(d) is developed by or on behalf of the Receiving Person or any of its
Affiliates independently, without reliance on Confidential Information received
hereunder; or
(e) is, based on such Person's good faith judgment with the advice of
counsel, otherwise required to be disclosed in compliance with applicable Legal
Requirements by a Public Authority (and, in such case, such information shall
remain Confidential Information for all other purposes unless and until
subparagraphs (a) through (d) above otherwise apply).
7.2 Except in furtherance of their respective rights and obligations
hereunder, each party agrees that it shall not (and shall not permit any of its
Affiliates to) at any time use any Confidential Information in the conduct of
its businesses without the prior written consent of the other party. The
obligations set forth in this Article 7 shall extend to copies, if any, of
Confidential Information made by any of the Persons referred to in Section 7.1
and to documents prepared by such Persons which embody or contain Confidential
Information, and to any electronic data files containing Confidential
Information.
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CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
7.3 Each party shall deal with Confidential Information so as to
protect it from disclosure with a degree of care not less than that used by it
in dealing with its own information intended to remain exclusively within its
knowledge and shall take reasonable steps to minimize the risk of disclosure of
Confidential Information.
7.4 The obligations set forth in this Article 7 shall survive the
expiration, termination or assignment of this Agreement for a period of [**]
thereafter.
7.5 Within thirty (30) days after the termination of this Agreement,
any Receiving Person shall (and shall cause its Affiliates and Representatives
to), at the option of the person making disclosure (the "Disclosing Person"),
return to the Disclosing Person or destroy all Confidential Information in its
or their possession; provided, however, that the Receiving Person may, upon
notice to the Disclosing Person, retain in its legal files or in the office of
outside legal counsel one copy of any document solely for use in legal
proceedings to which such document relates and for archival purposes. Such
notice shall set forth, in reasonable detail, a list of the documents so
retained.
7.6 Licensor agrees to use reasonable efforts to protect the
confidentiality, if applicable, of Technology that it licenses outside the Field
of Use in a manner commensurate with the manner in which such confidentiality is
protected hereunder.
ARTICLE 8
REPRESENTATIONS, WARRANTIES AND COVENANTS
8.1 Representations and Warranties of Licensee.
(a) Licensee is a corporation duly incorporated and validly existing
and (to the extent applicable) in good standing under the laws of its
jurisdiction of organization, with the corporate power to own, lease and operate
its properties and to carry on its business as now conducted.
(b) Licensee has all necessary corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby.
(c) The execution, delivery and performance of this Agreement by
License does not conflict with or contravene the articles or certificate of
incorporation or by-laws, regulations or partnership agreement (or other
comparable governing instruments with different names) of Licensee, nor will the
execution, delivery or performance of this Agreement conflict with or result in
a breach of, or entitle any
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party thereto to terminate, any material agreement or instrument to which
Licensee is a party, or by which any of its assets or properties is bound.
(d) This Agreement has been duly authorized, executed and delivered by
Licensee and constitutes a legal, valid and binding agreement of Licensee,
enforceable against Licensee in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting creditors' rights generally.
8.2 Representations, Warranties and Covenants of Licensor.
(a) Licensor is a corporation duly incorporated and validly existing as
a corporation and in good standing under the laws of the State of Delaware, with
the corporate power to own, lease and operate its properties and to carry on its
business as now conducted.
(b) Licensor has all necessary corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated hereby.
(c) The execution, delivery and performance of this Agreement by
Licensor does not conflict with or contravene its articles or certificate of
incorporation or by-laws, nor will the execution, delivery or performance of
this Agreement conflict with or result in a breach of, or entitle any party
thereto to terminate, any material agreement or instrument to which Licensor is
a party, or by which any of its assets or properties is bound. To Licensor's
knowledge, no Third Party has any right, title or interest in or to any
Technology in the Field of Use.
(d) This Agreement has been duly authorized, executed and delivered by
Licensor and constitutes a legal, valid and binding agreement of Licensor,
enforceable against Licensor in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting creditors' rights generally.
(e) Licensor owns or has rights to use and exploit under licenses (and
to license or sublicense) all its rights under the Technology. There have been
no material claims made against Licensor asserting the invalidity or
unenforceability of, or with respect to the Patent Rights, the misuse of, the
Patent Rights or Licensed Know-How, nor is Licensor aware that any such claims
exist. Licensor has not received a notice of conflict of the Technology with the
asserted rights of others, or otherwise challenging its rights to use any of the
Technology. None of the rights of Licensor under the Patent Rights or Licensed
Know-How will be adversely affected by the execution, delivery or performance of
this Agreement, or the consummation of the transactions contemplated herein.
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CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
(f) Licensor has not filed for protection under the United States
Bankruptcy Code, as amended (the "Code"), nor does it have any intention of
doing so. No Third Party has filed or commenced, nor to the knowledge of
Licensor has any Third Party threatened to file or commence, a proceeding under
the Code against Licensor.
8.3 Indemnification.
(a) Indemnity by Licensee. Licensee hereby agrees to [**].
(b) Indemnity by Licensor. Licensor hereby agrees to [**].
(c) Indemnification Procedures.
(i) Any party entitled to indemnification under paragraph (a)
or (b) of this Section 8.3 (an "Indemnified Party") shall promptly
notify the party potentially responsible for such indemnification (the
"Indemnifying Party") upon becoming aware of any claim or claims
asserted or threatened against such Indemnified Party which could give
rise to a right of indemnification under this Agreement; provided,
however, that the failure to give such notice shall not relieve the
Indemnifying Party of its indemnity obligation hereunder except to the
extent that such failure prejudices its rights hereunder.
(ii) the Indemnifying Party shall have the right to defend, at
its sole cost and expense, such claim by all appropriate proceedings,
which proceedings shall be prosecuted diligently by the Indemnifying
Party to a final conclusion or settled at the discretion of the
Indemnifying Party; provided, however, that the Indemnifying Party may
not enter into any compromise or settlement unless (x) the Indemnified
Party consents thereto, which consent shall not be unreasonably
withheld, or (y) such compromise or settlement includes as an
unconditional term thereof the giving by each claimant or plaintiff to
the Indemnified Party of a release from all liability in respect of
such claim.
(iii) The Indemnified Party may participate in, but not
control, any defense or settlement of any claim by the Indemnifying
Party pursuant to this Section 8.3 and shall bear its own costs and
expenses with respect to such participation; provided, however, that
the Indemnifying Party shall bear such costs and expenses if counsel
for the Indemnifying Party shall have reasonably
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CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
determined that such counsel may not properly represent both the
Indemnifying Party and the Indemnified Party.
(iv) If the Indemnifying Party fails to notify the Indemnified
Party within twenty (20) days after receipt of notice of a claim in
accordance with Section 8.3(c)(i) hereof that it elects to defend the
Indemnified Party pursuant to this Section 8.3(c), or if the
Indemnifying Party elects to defend the Indemnified Party but fails to
prosecute or settle the claim diligently, then the Indemnified Party
shall have the right to defend, at the sole cost and expense of the
Indemnifying Party, the claim by all appropriate proceedings, which
proceedings shall be diligently prosecuted by the Indemnified Party to
a final conclusion or settled; provided, however, that in no event
shall the Indemnifying Party be required to indemnify the Indemnified
Party for any amount paid or payable by the Indemnified Party in the
settlement of any such claim agreed to without the consent of the
Indemnifying Party, which shall not be unreasonably withheld.
ARTICLE 9
DILIGENCE IN COMMERCIALIZING LICENSED PRODUCTS
9.1 General. Licensee shall use commercially reasonable efforts to
promptly and fully research, develop, register, market and sell and to continue
to market and sell Licensed Product in each country in which Licensee reasonably
determines that there is a market potential for such Licensed Product.
9.2 Notification. Licensee shall promptly notify Licensor in writing if
at any time Licensee ceases to promptly and fully research, develop and/or
obtain regulatory approval for and/or market and sell a Licensed Product in any
country.
9.3 Reversion of Rights to Licensor. If Licensee fails to use
commercially reasonable efforts to promptly and fully research, develop,
register, market and sell and to continue to market and sell Licensed Product in
any country, the rights and licenses granted to Licensee with respect to such
country shall terminate, upon [**] prior written notice to Licensee from
Licensor, subject to Licensee's right to reestablish in good faith its efforts
pursuant to Section 9.1 above with respect to such country within such [**].
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ARTICLE 10
ACCOUNTING AND RECORDS
10.1 Reports. Licensee agrees to make quarterly written reports to
Licensor within ninety (90) days after the end of each calendar quarter in which
royalties are due under this Agreement, stating in each such report with respect
to Licensed Products, the number, description, and aggregate Net Sales of
Licensed Products sold during the calendar quarter and upon which a royalty is
payable under Article 3 above.
10.2 Payment. Concurrently with the making of each such report of
Section 10.1, Licensee shall pay to Licensor the royalties at the rate specified
in Section 3.3, if any such royalties are due. All payments by Licensee to
Licensor hereunder shall be made in United States dollars. If any currency
conversion shall be required in connection with the calculation of royalties or
the payment of other compensation hereunder, such conversion shall be made by
using the rate of exchange published in The Wall Street Journal for the last
business day of the applicable calendar quarter.
10.3 Withholding Taxes. The payments referred to in Article 3 above
shall be net of all withholding taxes and other taxes that Licensee or any of
its Affiliates are required by law to withhold or pay; provided, however, that
if, in regard to any withholding tax paid by Licensee, Licensor is able to
realize a benefit in the form of a corresponding tax credit that it is actually
able to use to reduce its tax payments, then Licensor shall reimburse Licensee
for such withholding tax to the extent of such realized benefit. Licensor shall
furnish Licensee with appropriate documents supporting application of the most
favorable rate of withholding tax available under applicable tax treaties and
shall use commercially reasonable efforts to secure all tax credits in respect
of withholding taxes paid by Licensee hereunder available to it.
10.4 Records; Inspection.
(a) Licensee shall keep complete, true and accurate books of account
and records for the purpose of determining the amounts payable to Licensor under
this Agreement. Such books and records shall be kept at Licensee's principal
place of business for at least three (3) years following the end of the calendar
quarter to which they pertain, and will be open for inspection during such three
(3) year period by an independent public accountant not providing accounting
services to Licensor, Licensee or any of their respective Affiliates that is
reasonably acceptable to both parties, for the purpose of verifying Licensee's
quarterly written reports. Such inspections may be made no more than once each
calendar year, during normal business hours and upon thirty (30) days prior
notice. Any such information shall be considered to be Confidential Information
of Licensee.
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(b) Inspections conducted under this Section 10.4 shall be at the
expense of Licensor, unless an underpayment exceeding five percent (5%) of the
royalties paid during the period covered by the inspection is established in the
course of any such inspection, whereupon all costs relating thereto, as well as
any unpaid royalties due and owing to Licensor, shall be paid by Licensee within
thirty (30) days after the notification by Licensor to Licensee that an
underpayment has been discovered.
ARTICLE 11
MISCELLANEOUS
11.1 Publicity. Licensee and Licensor shall cooperate in the
preparation of a mutually-agreeable press release and other publicity disclosing
the existence of this Agreement and their business relationship. Except for the
information disclosed in such press release or publicity, neither Licensee nor
Licensor shall disclose the existence or any terms of this Agreement without the
prior written consent of the other party (which consent shall not be
unreasonably withheld), except for such limited disclosure as may be reasonably
necessary to either party's bankers, investors, attorneys or other professional
advisors, or in connection with a merger or acquisition, or as may be required
by law in the offering of securities or in securities or regulatory filings or
otherwise.
11.2 Waiver. It is agreed that no waiver by any party hereto of any
breach or default of any of the covenants or agreements herein set forth shall
be deemed a waiver as to any subsequent and/or similar breach or default.
11.3 Independent Contractors. The relationship of the parties hereto is
that of independent contractors. Neither Licensor nor Licensee hereto is an
agent, partner or joint venturer of the other for any purpose.
11.4 Compliance with Laws. In exercising their rights under this
Agreement, both parties shall fully comply with the requirements of any and all
applicable laws, regulations, rules and orders of any governmental body having
jurisdiction over the exercise of rights under this Agreement.
11.5 Notices. Any notice required or permitted to be given to the
parties hereto shall be deemed to have been properly given if delivered in
person or when received if mailed by first class certified mail or sent by
facsimile to the other party at the address or facsimile number, as applicable,
indicated below or to such other addresses or facsimile numbers as may be
designated in writing by the parties from time to time during the term of this
Agreement.
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Licensor: OraVax, Inc.
38 Sidney Street
Cambridge, MA 02139
Attention: Hitesh R. Bhagat, Ph.D.
Telephone: (617) 494-1339
Facsimile: (617) 577-1152
with a copy to: John M. Westcott, Jr., Esq.
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Telephone: (617) 526-6000
Facsimile: (617) 526-5000
Licensee: Pasteur Merieux Serums & Vaccins S.A.
58 Avenue Leclerc, 69007
Lyon, France
Attention: Senior Vice President, Corporate and Legal
Affairs, and General Counsel
Telephone: 011.33.4.72.73.77.84
Facsimile: 011.33.4.72.73.70.61
with a copy to: L. Kevin O'Mara, Jr.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, NY 10022
Telephone: (212) 872-1021
Facsimile: (212) 872-100211.6
11.6 Complete Agreement. It is understood and agreed among the parties
that this Agreement constitutes the entire agreement with respect to the subject
matter of this Agreement, both written and oral, among the parties, and that all
prior agreements respecting the subject matter hereof, either written or oral,
expressed or implied, shall be abrogated, canceled, and are null and void and of
no effect. No amendment or change hereof or addition hereto shall be effective
or binding on any of the parties hereto unless reduced to writing and executed
by the respective duly authorized representatives of each of the parties hereto.
11.7 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void,
25
<PAGE> 26
this Agreement shall continue in full force and effect without said provision
and the parties shall exert their best efforts to amend this Agreement to
include a provision which is valid, legal and enforceable and which carries out
the original intent of the parties.
11.8 Counterparts and Headings. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original and both together
shall be deemed to be one and the same agreement. All headings and any cover
page or table of contents are inserted for convenience of reference only and
shall not affect the Agreement's meaning or interpretation.
11.9 Governing Law. All matters affecting the interpretation, validity
and performance under this Agreement shall be governed by the internal laws of
the Commonwealth of Massachusetts, without regard for its conflict of laws
principles.
11.10 Force Majeure. No party shall be liable to the other, or be in
default under the terms of this Agreement, for its failure to fulfill its
obligations hereunder to the extent such failure arises for any reason beyond
its control including, without limitation, strikes, lockouts, labor disputes,
acts of God, acts of nature, acts of governments or their agencies, fire, flood,
storm, power shortages or power failure, war, sabotage, inability to obtain
sufficient labor, raw materials, fuel or utilities, or inability to obtain
transportation (each, an "Event of Force Majeure"); provided that the party
relying on the provisions of this Section 11.10 shall forthwith give to the
other notice of its inability to observe or perform the provisions of this
Agreement and the reasons therefor; and provided further that the suspension of
the obligations of the party so affected shall continue only for so long as such
Event of Force Majeure continues.
11.11 Assignment. This Agreement shall not be assignable by any party
without the prior written consent of the other (which consent shall not be
unreasonably withheld), except that any party may assign this Agreement to an
Affiliate or to a successor in interest or transferee of all or substantially
all of its assets.
11.12 Successors. Subject to the limitations on assignment herein, this
Agreement shall be binding upon and inure to the benefit of the successors in
interest and assigns of Licensor and Licensee. In order for such assignment to
be effective any such successor or assignee of a party's interest shall
expressly assume in writing the performance of all the terms and conditions of
this Agreement to be performed by said party and such assignment shall not
relieve the assignor of any of its obligations under this Agreement.
11.13 Expenses. Licensee and Licensor shall each bear its own expenses,
including, without limitation, the fees and disbursements of its respective
counsel and
26
<PAGE> 27
accountants, in connection with the negotiation and execution of this Agreement
and the consummation of the transactions contemplated hereby.
27
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in
one or more counterparts, on the day and year first above written.
ORAVAX, INC. PASTEUR MERIEUX SERUMS & VACCINS S.A.
By: /s/ Lance Gordon By: /s/ Herve Tainturier
--------------------------- ----------------------------------
Name: Lance Gordon Name: Herve Tainturier
Title: President & CEO Title: Senior Vice-President & General
Counsel
28
<PAGE> 29
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
APPENDIX A
[**]
1
<PAGE> 30
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
APPENDIX B
DEVELOPMENT COSTS
[**]
1
<PAGE> 31
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
APPENDIX C
RESEARCH & DEVELOPMENT PROGRAM
WORKSCOPE AND BUDGET FOR RESEARCH, DEVELOPMENT AND EVALUATION
OF TETRAVALENT DENGUE CHIMERIVAX(TM) THROUGH PHASE 1
CLINICAL TRIALS IN ADULTS.
[**]
1
<PAGE> 32
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
APPENDIX D
INITIAL MEMBERSHIP OF RESEARCH AND DEVELOPMENT COMMITTEE*
[**]
1
<PAGE> 33
CONFIDENTIAL MATERIALS OMITTED AND FILED SEPARATELY WITH THE SECURITIES
AND EXCHANGE COMMISSION. ASTERISKS DENOTE OMISSIONS.
SCHEDULE A
PATENT RIGHTS
[**]
1
<PAGE> 1
EXHIBIT 10.02
AMENDMENT AGREEMENT
This Amendment Agreement (the "Amendment Agreement") is entered into as
of this 2nd day of November, 1998 by and between:
1. PASTEUR MERIEUX Serums & Vaccins S.A., a societe anonyme existing
and organized under the laws of France, registered under number RCS LYON B 349
505 370, whose registered head office is located at 58, avenue Leclerc, 69007
Lyon, France (hereinafter referred to as "PMC");
and
2. ORAVAX, Inc., a corporation existing and organized under the laws of
the State of Delaware, having its principal place of business at 38 Sidney
Street, Cambridge, Massachusetts, United States of America (hereinafter referred
to as "OraVax").
Capitalized terms used but not defined herein shall have the same
meanings assigned to them in the Master Agreement dated March 31, 1995 (the
"Master Agreement").
WITNESSETH
WHEREAS, OraVax and PMC have entered into the Master Agreement with
respect to the development of products for the treatment and/or prevention of
Helicobacter pylori infections; and
WHEREAS, pursuant to the Master Agreement, OraVax directly or
indirectly holds a 49.9% ownership interest in the U.S. Partnership and a 50.1%
ownership interest in the SNC; and
WHEREAS, OraVax and PMC have entered into a Facility Agreement dated as
of the date hereof (the "Facility Agreement") pursuant to which PMC has granted
OraVax a loan in the amount of US$3,000,000 (the "Loan"); and
WHEREAS, in connection with entering into the Facility Agreement, the
parties desire to amend certain terms of the Master Agreement;
NOW, THEREFORE, in consideration of the mutual promises, conditions,
covenants and undertakings hereinafter set forth, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. Section 11.3 of the Master Agreement is hereby deleted and replaced
in its entirety with the following:
<PAGE> 2
"11.3 Marketing Committee
(a) The marketing activities of each of the Partnerships shall be
managed by a Marketing Committee comprised of a maximum of three (3)
representatives from each Party (the "Marketing Committee"). The purpose of the
Marketing Committees shall be to (a) consider and propose to their respective
Executive Committees a marketing plan, strategy and budget(s) for marketing of
Target Products (the "Marketing Plan"), (b) select and make recommendations to
their respective Executive Committees with respect to trademark(s) to be used in
connection with Target Products (in each case, based on the principle that there
shall be only one trademark for each Target Product on a worldwide basis unless
otherwise imposed by legal constraints) and (c) monitor prosecution of selected
trademark(s) and administrative expenses. PMC shall cast two votes on each of
the Marketing Committees and OraVax shall cast one vote (with two votes being
sufficient to direct all decisions of the Marketing Committee) on each of the
Marketing Committees and the chair of each Marketing Committee shall rotate
annually, and in any given year shall be occupied by a representative of the
Party not chairing the Executive Committees (with one Party chairing both
Marketing Committees in a single year). The Marketing Committees shall conduct
their respective proceedings in accordance with rules to be adopted by each
Committee.
(b) The Marketing Committees shall each form a sub-committee, the
"Joint Medical Legal Review Board," which in each case shall be comprised of an
equal number of representatives of each Party, subject to Section 11.4 hereof.
All marketing and promotional materials proposed for use in connection with
Target Products shall be submitted for medical and legal review to this Board.
In the event that such Board cannot reach agreement, or either Party objects to
a ruling of the Board as to the acceptability of any marketing or promotional
material, such marketing or promotional piece shall not be used."
2. Section 11.4 of the Master Agreement is hereby deleted and replaced
in its entirety with the following:
2
<PAGE> 3
"11.4 Change of Control and Reorganization of Committees
In the event that (i) PMC's percentage of ownership interest in either
the U.S. Partnership or the SNC shall be increased above the percentage of
ownership interest held by PMC on the date hereof due to a transfer, sale,
assignment, pledge (other than a pledge related to the Loan) or other
disposition of Oravax' interest in the U.S. Partnership or the SNC (and not due
to a failure of Oravax to make Capital Contributions) or (ii) a Change of
Control of OraVax (as set forth in Section 15.2 of the Master Agreement, other
than a Change of Control involving Peptide Therapeutics, Limited), then the
Executive Committees, Marketing Committees and Program Committees shall be
reorganized as follows: PMC shall thereafter cast two votes on each such
committee, while OraVax shall cast but a single vote, and two votes shall
suffice to direct all decisions of the committee. In addition, a representative
of PMC shall at all times preside over the deliberations of the committees and
PMC may elect at any time by notice to OraVax either (1) to reduce the
representation of OraVax on each such committee by one member or (2) to increase
its own representation on such committees by one member, and in all such cases,
PMC shall have control of the decisions of each committee. Notwithstanding the
foregoing, in respect of all matters that relate to or could affect the
marketing of Target Products, PMC shall at all times cast two votes on any
Committee before which such matter is presented for a vote, including, without
limitation, the Executive Committee, the Programming Committee and the Marketing
Committee, and OraVax shall cast one vote (and two votes shall suffice to direct
the decision of such Committees). OraVax hereby authorizes PMC, or should PMC so
elect, PMC's Affiliates, to act as the principal marketing entity for any Target
Products."
3. The parties hereto hereby agree that in the event OraVax repays the
Loan in full on or before June 30, 1999, the amendment set forth in Section 2
hereof shall no longer be of any force and effect and Section 11.4 of the Master
Agreement as previously in effect shall be restored.
4. Except as expressly amended hereby, the Master Agreement and all
rights and obligations of the parties thereunder, shall remain in full force and
effect. This Amendment Agreement shall not be deemed to be a consent to any
waiver or modification of any other terms or provisions of the Master Agreement.
3
<PAGE> 4
IN WITNESS WHEREOF, this Amendment Agreement has been executed by each
of the parties on the date first above written.
PASTEUR MERIEUX Serums & Vaccins S.A.
By: /s/ Herve Tainturier
-------------------------------
Name: Herve Tainturier
Title: Senior Vice-President and General Counsel
By:
Name:
Title:
ORAVAX, INC.
By: /s/ Brigid A. Makes
-------------------------------
Name: Brigid A. Makes
Title: Vice President, Finance
By: /s/ Robert J. Gerety
-------------------------------
Name: Robert J. Gerety
Title: Vice President, Development and Regulatory Affairs
<PAGE> 5
FACILITY LETTER
November 2, 1998
OraVax JVM, Inc.
38 Sidney Street
Cambridge, MA 02139
Re: OraVax JVM, Inc. - Committed Credit Facility
Ladies and Gentlemen:
The undersigned, Connaught Laboratories, Inc., a Delaware corporation (the
"Lender") is pleased to provide a secured committed credit facility (the
"Facility") to OraVax JVM, Inc., a Delaware corporation (the "Borrower") and a
wholly-owned subsidiary of OraVax, Inc., a Delaware corporation ("Parent"), in
an amount not to exceed U.S. $3,000,000.
The Lender's commitment to extend the Facility, which shall be deemed
effective as of the Effective Date (as defined below), is specifically subject
to the terms and conditions as stated herein (the "Agreement"). This Agreement,
together with the Note (as defined below), the Pledge Agreement (as defined
below) and any and all other agreements, instruments and documents related to
any of the foregoing, are collectively referred to herein as the "Facility
Documents".
1. FACILITIES AND EXTENSIONS OF CREDIT. The Facility will be in the maximum
principal amount of U.S. $3,000,000 (the "Committed Amount"). The Facility will
be a term loan facility and will be available in a single advance only (the
"Loan") and will be available to the Borrower, subject to the applicable
provisions of this Agreement, for the term specified in the following paragraph,
provided that once borrowed and repaid, amounts may not be reborrowed.
The Loan will be payable, including any interest accrued up to such date,
on the earlier to occur of (i) the dates provided in subclause (b) of the next
following sentence setting out the repayment schedule for the Loan or (ii) the
date on which such Facility is terminated in accordance with the provisions
hereof (such earlier date, the "Maturity Date"). Unless otherwise accelerated
pursuant to the terms hereof, the Loan shall be repaid by the Borrower according
to the following schedule: (a) on January 31, 1999, the Borrower shall repay the
original principal of the loan in an amount equal to $2,000,000 and (b) on June
30, 1999, the Borrower shall repay the entire remaining outstanding principal
balance of the Loan in full, and, in each case such repayment shall include
interest accrued up to the date of such repayment on the amount being repaid on
such date.
1
<PAGE> 6
When the Borrower desires to utilize the Facility, a duly authorized
officer or representative of the Borrower shall advise the Lender in writing or
by telephone confirmed in writing. Once all of the conditions precedent set
forth in Section 6 have been satisfied in the Lender's sole discretion, the
Lender is authorized to credit to the specified account of the Borrower the Loan
as requested by the Borrower (subject to the limitation of the aggregate
principal amount as above stated).
2. INTEREST AND MATURITY DATES OF LOANS. The Loan shall accrue interest
daily at the rate (the "Interest Rate") of five and 42 one hundredths of one
percent (5.42%) per annum on the principal amount of the Loan outstanding from
time to time hereunder from and including the date the Loan is advanced to, but
excluding the date the Loan is paid in full. Principal and accrued interest will
be paid as provided in Section 1 above (whether at the stated maturity or upon
earlier acceleration or otherwise) in immediately available funds and calculated
on the basis of the actual calendar days elapsed and a 365 day year.
Any amounts that have become due and payable in accordance with this
Agreement, any Facility Document or otherwise (whether at stated maturity, by
acceleration or otherwise) and remain unpaid by the Borrower shall accrue
interest thereafter until payment in full of such amounts (both before and after
judgment) at an interest rate per annum equal to 2% above the Interest Rate (the
"Default Rate"), and such interest shall be calculated on the basis of the
actual calendar days elapsed in a 365 day year and shall be payable upon the
Lender's demand therefor. Notwithstanding any provision of this Agreement or any
Facility Document to the contrary, the interest payable with respect to the Loan
shall in no event exceed the maximum amount of interest permitted from time to
time by applicable law.
3. NOTE. The Loan shall be evidenced by a promissory note (the "Note") in
the form of Exhibit A hereto. The Borrower hereby expressly authorizes the
Lender to record from time to time on the schedule attached to each relevant
Note the date and amount of the Loan, the Interest Rate, and the date and amount
of each payment or prepayment of principal thereon. All such notations shall
constitute prima facie evidence of the accuracy of the information so recorded
and shall be conclusive and binding upon the Borrower in the absence of manifest
error. Any failure to make any such notation, however, shall not limit or
otherwise affect the obligations of the Borrower in respect of the Loan or under
any Facility Document.
4. PAYMENTS. All borrowings, payments and repayments shall be made upon a
day on which the Lender is open for business. If any payment of principal or
interest in respect of the Loan or any other amount due in respect of the
Facility or the Facility Documents becomes due on a day that is not a Business
Day, such payment shall be made on the next succeeding Business Day, and such
extension of time shall be included in computing interest in connection with
such payment.
All payments to the Lender hereunder shall be made to such account as the
Lender shall direct in lawful money of the United States of America and in
immediately available funds.
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<PAGE> 7
5. PREPAYMENTS. The Loan may be prepaid, in whole or in part, prior to the
stated maturity thereof, except as otherwise provided herein.
6. CONDITIONS PRECEDENT TO THE LOAN. Prior to making the Loan to or for the
account of the Borrower hereunder, the Lender shall have received each of the
following in form and substance satisfactory to the Lender:
(a) executed originals of each of the Facility Documents, including,
without limitation, this Agreement, the Note, the Pledge Agreement,
together with all certificates evidencing the Collateral (as defined
in the Pledge Agreement) duly indorsed in blank or to the order of the
Lender and the UCC-1 financing statement referred to in Section 4.2 of
the Pledge Agreement (as defined below);
(b) executed originals of that certain amendment to the partnership
agreement of Merieux OraVax Co., a Delaware General Partnership
("Merieux"), relating to changes in the ownership of Merieux following
the date thereof in form and substance acceptable to the Lender;
(c) certified copies of the Borrower's articles of incorporation, bylaws,
partnership agreement or other organizational documents;
(d) a certified copy of resolutions of the Borrower's board of directors
or other governing body authorizing the entering into of the Facility
by the Borrower and the execution, delivery and performance by the
Borrower of the Facility Documents;
(e) a certified copy of an incumbency certificate of the Borrower
certifying that the officers or other representatives executing and
delivering the Facility Documents on behalf of the Borrower are duly
elected or appointed officers or representatives of the Borrower with
authority to bind the Borrower with respect to such Facility Documents
and the transactions contemplated thereby;
(f) all other resolutions, authorizations, approvals, powers, consents,
licenses and documents as may be necessary or otherwise required by
the Lender.
(g) at the time of making such Loan and after giving effect thereto, no
Event of Default (as defined below) or any event or circumstance
which, with the giving of notice or the lapse of time or both, would
constitute an Event of Default (a "Default") has occurred or is
continuing with respect to the Borrower under any of the Facility
Documents.
3
<PAGE> 8
7. COLLATERAL DOCUMENTS. All of the Borrower's obligations from time to
time outstanding in respect of the Facility, this Agreement and the other
Facility Documents (collectively, the "Obligations") at all times shall be
secured by the collateral arrangements set forth in the Pledge Agreement between
the Lender and the Borrower in form and substance acceptable to the Lender
pledging the Borrower's interest in Merieux and Merieux OraVax S.N.C., a societe
en nom collectif organized under the laws of France ("Merieux France" and
together with Merieux, the "Partnerships") substantially in the form of Exhibit
B hereto (the "Pledge Agreement").
8. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to
the Lender (which representations and warranties will be deemed to be repeated
by the Borrower on each day on which the Loan or other obligations of the
Borrower remain outstanding pursuant to this Agreement or any of the other
Facility Documents) that:
(a) It is a corporation duly organized, validly existing and in good
standing under the laws of Delaware;
(b) It is duly qualified, in good standing and authorized to do business
in each jurisdiction to the extent required by applicable law,
regulation or rule, except where the failure to do so does not in the
aggregate have a material adverse effect on the business or financial
condition of the Borrower and its subsidiaries taken as a whole;
(c) It has the power to enter into each Facility and to execute each of
the Facility Documents, to deliver each of the Facility Documents and
to perform its obligations under each of the Facility Documents, and
has taken all necessary action to authorize such execution, delivery
and performance;
(d) Each of the Facility Documents has been duly executed and delivered on
behalf of the Borrower;
(e) The execution, delivery and performance of each of the Facility
Documents by the Borrower do not and will not violate or conflict with
any law applicable to it, any provision of its organizational
documents, any order or judgment of any court or other agency of
government applicable to it or any of its assets or any contractual
restriction binding on or affecting it or any of its assets;
(f) All governmental and other consents, authorizations, approvals,
licenses and orders that are required to have been obtained by it with
respect to the Facility Documents and the transactions contemplated
thereby have been obtained and are in full force and effect and all
conditions of any such consents, authorizations, approvals, licenses
and orders have been complied with;
4
<PAGE> 9
(g) Neither the making of the Loan, nor the application of the proceeds of
the Loan will violate or be inconsistent with the provisions of
Regulations T, U or X of the Board of Governors of the Federal Reserve
System (the "Margin Regulations");
(h) Its obligations under each of the Facility Documents constitute its
legal, valid and binding obligations, enforceable in accordance with
their respective terms (subject to applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting
creditors' rights generally and subject, as to enforceability, to
equitable principles of general application (regardless of whether
enforcement is sought in a proceeding in equity or at law));
(i) No Event of Default or Default has occurred or is continuing, and no
such Event of Default or Default would occur as a result of its
entering into or performing its obligations under any of the Facility
Documents;
(j) There is not pending or, to its knowledge, threatened against it,
Parent or any of their respective subsidiaries any action, suit or
proceeding at law or in equity or before any court, tribunal,
governmental body, agency or official or any arbitrator that is likely
to affect (1) the legality, validity or enforceability against the
Borrower of any of the Facility Documents or its ability to perform
its obligations under any of the Facility Documents or (2) in a
materially adverse way, the operations, business, property or assets
or financial or other condition of the Borrower, Parent and their
respective subsidiaries, taken as a whole; and
(k) The Pledge Agreement constitutes a valid and binding agreement in
accordance with its respective terms; the liens and security interests
granted to the Lender pursuant to the Pledge Agreement to secure the
Obligations constitute a first perfected priority lien and security
interest on and in the Collateral subject thereto and all certificates
evidencing the Collateral have been delivered to the Lender pursuant
to the Pledge Agreement; all Collateral delivered or transferred to
the Lender in respect of the Pledge Agreement is owned, legally and
beneficially, solely by the Borrower, and such Collateral is not
subject to any prior or existing mortgage, lien, charge, security
interest, assignment or other encumbrance (other than in favor of the
Lender pursuant to the Pledge Agreement).
9. COVENANTS. The Borrower covenants to the Lender that, so long as the
Borrower has or may have any obligation under any of the Facility Documents:
(a) It will, and will cause each of its subsidiaries to, maintain in full
force and effect and comply with all consents, authorizations,
5
<PAGE> 10
approvals, licenses and orders of any governmental or other authority
that are required to be obtained by each of them with respect to any
of the Facility Documents or the transactions contemplated thereby and
will use all reasonable efforts to obtain any such consents,
authorizations, approvals, licenses and orders that may become
necessary in the future;
(b) It will, and will cause each of its subsidiaries to, comply in all
material respects with all applicable laws and orders to which it may
be subject if failure so to comply would materially adversely affect
their respective business, operations or prospects or impair the
Borrower's ability to perform its obligations under any of the
Facility Documents;
(c) It will notify the Lender immediately upon the occurrence of a Default
or an Event of Default;
(d) It will provide to the Lender its audited annual report and other
financial reports as are regularly published an publicly available or
filed with the Securities Exchange Commission and all quarterly
financial reports, as soon as such reports are made publicly
available; such reports shall be prepared in accordance with generally
accepted accounting principles, consistently applied, in the United
States of America;
(e) It will not use the proceeds of the Loan in any manner that would
cause such borrowing or the application of such proceeds to violate
the Margin Regulations or any other applicable law, rule or
regulation;
(f) It will not create or permit to subsist any mortgage, lien, charge,
security interest, assignment or other encumbrance whatsoever in or
over any of the Collateral delivered or transferred to the Lender from
time to time pursuant to this Agreement or the Pledge Agreement to
secure the Obligations; and
(g) It will not sell, transfer or otherwise dispose of any of its right,
title or interest in respect of any Collateral delivered or
transferred to the Lender from time to time pursuant to this Agreement
or the Pledge Agreement to secure the Obligations, except in
accordance with this Agreement and the Pledge Agreement nor will it
permit any of its subsidiaries to sell, transfer or otherwise dispose
of any of its assets or properties, except in accordance with this
Agreement and the Pledge Agreement.
6
<PAGE> 11
10. EVENTS OF DEFAULT AND REMEDIES. The occurrence of any of the following
events or conditions shall constitute an event of default (an "Event of
Default") with respect to the Borrower under this Agreement:
(a) Any amounts due under any of the Facility Documents are not paid when
due;
(b) (i) Any event of default occurs and is continuing with respect to any
of the Facility Documents other than this Agreement or (ii) the
failure or refusal of the Borrower to properly perform, observe or
comply with any condition, obligation, covenant or agreement (other
than an obligation specified in clause (a) or (h)) to be performed,
observed or complied with by the Borrower in any of the Facility
Documents, and such failure or refusal continues for a period of
thirty (30) days, or for such lesser period as stipulated in any of
such Facility Documents, after written notice thereof from the Lender;
(c) A representation made or repeated or deemed to have been made or
repeated by the Borrower in this Agreement or in any other Facility
Document proves to have been incorrect or misleading in any material
respect when made or repeated or deemed to have been made or repeated;
(d) The Borrower, Parent, either of the Partnerships or any of their
respective subsidiaries (i) is dissolved (other than pursuant to a
consolidation, amalgamation or merger); (ii) becomes insolvent or is
unable to pay its debts or fails or admits in writing its inability
generally to pay its debts as they become due; (iii) makes a general
assignment, arrangement or composition with or for the benefit of its
creditors; (iv) institutes or has instituted against it a proceeding
seeking a judgment of insolvency or bankruptcy or any other relief
under any bankruptcy or insolvency law or other similar law affecting
creditors' rights, or a petition is presented for its winding-up or
liquidation which is not dismissed, discharged, stayed or restrained
within thirty (30) days of the institution or presentation thereof;
(v) has a resolution passed for its winding-up, official management or
liquidation (other than pursuant to a consolidation, amalgamation or
merger); (vi) seeks or becomes subject to the appointment of an
administrator, provisional liquidator, conservator, receiver, trustee,
custodian or other similar official for it or for all or substantially
all its assets; (vii) has a distress, execution, attachment,
sequestration or other legal process levied, enforced or sued on
against all or substantially all its assets and such process is not
dismissed, discharged, stayed or restrained, in each case within
thirty (30) days thereafter; (viii) causes or is subject to any event
with respect to it which, under the applicable
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<PAGE> 12
laws of any jurisdiction, has an analogous effect to any of the events
specified in clauses (i) to (vii) (inclusive); or (ix) takes any
action in furtherance of, or indicating its consent to, approval of,
or acquiescence in, any of the foregoing acts;
(e) Any person shall beneficially own, directly or indirectly, 25% or more
of the common stock of the Borrower or Parent, or any Person shall
have the power, direct or indirect, to vote securities having 25% or
more of the ordinary voting power for the election of directors of the
Borrower or the Parent, or shall beneficially own, directly or
indirectly, securities having such power, or Borrower or Parent is a
party to any merger, amalgamation or consolidation with any other
entity which is consummated and following which the shareholders of
Borrower or Parent (as applicable) immediately prior to such merger,
amalgamation or consolidation cease to own beneficially, directly or
indirectly, greater than 75% of the surviving company in such merger,
amalgamation or consolidation following any such transaction;
(f) The Borrower or Parent defaults in the observance or performance of
any condition, obligation, covenant or agreement relating to any of
Borrower's or Parent's (which may, but not need be, owing to the
Lender) (and such default continues for a period sufficient to permit
the acceleration of the maturity thereof, whether or not such
acceleration occurs);
(g) The Borrower, Parent or either of the Partnerships is a party to any
merger, amalgamation or consolidation which is consummated or
transfers all or substantially all its assets to another person or
entity without the prior written consent of the Lender and, pursuant
to such merger, amalgamation, consolidation or transfer, the
creditworthiness of the resulting, surviving or transferee entity is
materially weaker than that of the Borrower, Parent or such
Partnership, respectively, immediately prior to such action;
(h) The failure or refusal of the Borrower to properly perform, observe or
comply with (i) any of its obligations, covenants and agreement in
connection with the amendment of the status of Merieux France
including the making of any filings or other obligations required by
the laws of any relevant jurisdictions to amend the status in a
manner in form and substance satisfactory to the Lender and (ii) any
of its obligations under the Pledge Agreement or otherwise to perfect
the Lender's security interest created by the Pledge Agreement under
the laws of France; and such failure or refusal continues for a period
of fifteen (15) days after notice thereof from the Lender.
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<PAGE> 13
(i) (i) The failure or refusal of the Borrower to properly perform,
observe or comply with any material condition, obligation, covenant or
agreement (other than an obligation specified in clause (a)) to be
complied with or performed or observed by it in accordance with the
Pledge Agreement if such failure is continuing after any applicable
grace period has elapsed; (ii) the expiration or termination of the
Pledge Agreement or the failing or ceasing of the Pledge Agreement to
be in full force and effect or for the liens created thereby to
constitute first priority perfected liens for the purpose of this
Agreement (in any case other than in accordance with its terms) prior
to the payment of all Obligations; or (iii) the Borrower disaffirms,
disclaims, repudiates or rejects, in whole or in part, or challenges
the validity of, the Pledge Agreement.
Upon the occurrence and during the continuance of an Event of Default, the
Lender will have the option, upon notice to the Borrower, of declaring the Loan,
together with unpaid accrued interest thereon, and any or all other amounts
payable to the Lender under the Facility Documents or otherwise to be
immediately due and payable and/or exercising its rights and remedies against
any Collateral or any other person or entity pursuant to the Pledge Agreement;
provided, however, that if an Event of Default specified in clause (d) shall
occur, no such notice need be given by the Lender to the Borrower.
11. TAXES AND EXPENSES. (a) All payments made by the Borrower in respect of
principal of, and interest on, the Loan and all other amounts payable in respect
of other the Facility Documents or otherwise will be made without set-off,
counterclaim or other defense and will be made free and clear of, and without
deduction or withholding for, any present or future taxes, levies, imposts,
duties, fees, assessments or other charges of whatever nature now or hereafter
imposed by any jurisdiction or by any political subdivision or taxing authority
thereof or therein and all interest, penalties or similar liabilities with
respect thereto (collectively, the "Taxes"). The Borrower shall pay on demand
all stamp, documentary and other similar duties and taxes, if any, to which any
Facility Document from time to time may be subject or give rise. If the Borrower
is required by applicable law to make any deduction or withholding on any
payment as described above in respect of Taxes or otherwise, the Borrower shall:
(i) promptly notify the Lender of such occurrence; (ii) pay to the relevant
taxation or other authorities the full amount of the deduction or withholding
within the time allowed; (iii) furnish to the Lender within thirty (30) days of
such payment, an official receipt from such authorities for all amounts so
deducted or withheld; and (iv) pay to the Lender an additional amount so that
the Lender receives on the due date of such payment the full amount the Lender
would have received had no such deduction or withholding taken place.
Subject to the Lender's compliance with its obligations to deliver certain
forms, certificates and documents as set forth in this paragraph, the Borrower
will indemnify and hold harmless the Lender, and reimburse the Lender upon its
written request, for the amount of any Taxes so levied or imposed and paid by
the Lender, other than Taxes imposed on or measured by the net income of the
Lender pursuant to the laws of the jurisdiction in which
9
<PAGE> 14
the principal office of the Lender is located or under the laws of any political
subdivision or taxing authority of any such jurisdiction. Upon demand by the
Borrower, the Lender shall, as soon as practicable, deliver to the Borrower or
to such government or taxing authority as the Borrower reasonably directs, any
form, certificate or document which the Lender is entitled as a matter of law to
deliver that may be requested in order to allow the Borrower to make payments in
respect of the Loans and all other amounts payable in respect of the Facility
Documents without any deduction or withholding for or on account of any Taxes or
with such deduction or withholding at a reduced rate.
(b) The Borrower agrees to pay on demand all of the Lender's
reasonable costs and expenses, including, without limitation, reasonable
attorneys' fees, in connection with the collection of any sums due to the Lender
and the enforcement, protection or perfection of its rights or interests
hereunder and under the Facility Documents.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS CONFLICT
OF LAW RULES.
13. JURISDICTION. With respect to any suit, action or proceeding relating
to this Agreement or any of the other Facility Documents, the Borrower
irrevocably (a) submits to the non-exclusive jurisdiction of the courts in the
State of New York and the United States District Court located in the Borough of
Manhattan in New York City; and (b) waives any objection which it may have at
any time to the laying of venue of any such suit, action or proceeding brought
in any such court, waives any claim that any such suit, action or proceeding has
been brought in an inconvenient forum and further waives the right to object
with respect to any such suit, action or proceeding that such court does not
have any jurisdiction over it.
Nothing contained in this Section 13 shall limit or impair the right of the
Lender to institute any suit, action, motion or proceeding in any other court of
competent jurisdiction, nor shall the taking of any suit, action or proceeding
in one or more jurisdictions preclude the taking of proceedings in any other
jurisdiction, whether concurrently or not.
14. SERVICE OF PROCESS. The Borrower irrevocably appoints the following
process agent to receive, for it and on its behalf, service of process in any
suit, action or proceeding relating to this Agreement or any of the other
Facility Documents to which it is a party: CT Corporation System, 1633 Broadway,
New York, New York 10019. If for any reason the Borrower's process agent is
unable to act as such, the Borrower will promptly notify the Lender and within
thirty (30) days appoint a substitute process agent acceptable to the Lender.
Nothing in this Agreement will affect the right of the Lender to serve process
in any other manner permitted by law.
15. WAIVER OF JURY TRIAL. THE BORROWER HEREBY IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY IN ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR ANY OF THE OTHER FACILITY DOCUMENTS.
10
<PAGE> 15
16. RIGHT OF SET-OFF. In addition to any rights or remedies now or
hereafter granted under applicable law or otherwise, the Lender, without any
notice whatsoever to the Borrower, may (but shall not be obliged to) set-off
against any obligation of the Borrower due and payable by the Borrower under any
of the Facility Documents any moneys held by the Lender for the account of the
Borrower and in any currency whether or not such monies are then due and
payable.
17. AMENDMENTS, MODIFICATIONS, WAIVERS, ETC. No amendment, modification or
waiver of any provision of this Agreement or any of the other Facility Documents
and no consent by the Lender to any departure therefrom shall be effective
unless such amendment, modification or waiver shall be in writing and signed by
a duly authorized officer of the Lender, and the same shall then be effective
only for the period and on the conditions and for the specified instances
specified in writing. No failure or delay by the Lender in exercising any right,
power, remedy or privilege hereunder or under any of the Facility Documents
shall operate as a waiver thereof; nor shall any single or partial exercise
thereof preclude any subsequent or further exercises thereof or the exercise of
any other right, power, remedy or privilege. The rights, powers, remedies and
privileges provided in this Agreement and the other Facility Documents to the
Lender are cumulative and not exclusive of any rights, powers, remedies and
privileges provided by law or otherwise.
18. NOTICES. All notifications, requests, demands and other communications
hereunder to either the Lender or the Borrower shall be in writing (unless
otherwise specified herein) and given to the address(es) or facsimile number(s)
set forth under the signatures of the parties hereto. Such notifications,
requests, demands and other communications shall be deemed effective (a) if sent
by mail five Business Days after having been deposited in the mails first class
postage prepaid (airmail if international) in an envelope addressed as
aforesaid, or (b) if sent to an officer of the recipient, at the time of
delivery to such officer, or (c) if sent by facsimile, when that transmission is
received by the recipient in legible form.
19. ENTIRE AGREEMENT. This Agreement and the other Facility Documents
constitute the entire agreement and understanding of the parties with respect to
the subject matter hereof and thereof and supersedes all oral communication and
prior writings with respect thereto.
20. COUNTERPARTS. This Agreement may be executed and delivered in
counterparts, each of which, when so executed and delivered, will be deemed an
original and all of which, taken together, shall constitute one instrument.
21. SUCCESSORS AND ASSIGNS. The Borrower may not assign any of its rights
or delegate any of its obligations under this Agreement or any of the other
Facility Documents (or any part thereof) without the prior written consent of
the Lender. Other than an assignment to an affiliate of the Lender, the Lender
may not assign its rights and obligations hereunder without the consent of the
Borrower. The Lender shall, without the consent of the Borrower, have the right
at any time to sell, assign or transfer all of its rights and obligations
hereunder to any affiliate of the Lender. The Lender shall, upon
11
<PAGE> 16
the effectiveness of such assignment, surrender the Note to the Borrower for
cancellation and thereupon a new Note shall be issued and executed by the
Borrower to the assignee substantially in the form of the Note.
22. EFFECTIVE DATE. This Agreement shall become effective as of November 2,
1998 (the "Effective Date"), if accepted by the Borrower as evidenced by its
signature below.
12
<PAGE> 17
Respectfully,
CONNAUGHT LABORATORIES, INC.
By: /s/ Herve Tainturier
-----------------------------
Print Name: Herve Tainturier
Title:
Lender's Address: Route 611
Swiftwater, PA 18370
Telephone: 717-839-5587
Facsimile: 717-839-4096
Attention: Vice President and General
Counsel
AGREED AND ACCEPTED
as of November 2, 1998:
ORAVAX JVM, INC.
By: /s/ Brigid A. Makes
----------------------------------------------
Print Name: Brigid A. Makes
Title: Treasurer
Borrower's Address: 38 Sidney Street, Cambridge, MA 02139
Telephone: 617-494-1339
Facsimile: 617-494-1741
Attention: Brigid A. Makes
<PAGE> 1
EXHIBIT 10.03
LOAN AGREEMENT
between
ORAVAX, INC.,
as Borrower
and
PEPTIDE THERAPEUTICS GROUP PLC
Dated as of November 10, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1 DEFINITIONS.....................................................................................1
1.1 Defined Terms...................................................................................1
1.2 Terms Generally.................................................................................7
SECTION 2 AMOUNT AND TERMS OF THE CREDIT..................................................................8
2.1 Loans...........................................................................................8
2.2 Requests for Loans..............................................................................8
2.3 The Note........................................................................................8
2.4 Interest........................................................................................9
2.5 Funding of Loans................................................................................9
2.6 Reduction or Termination of Commitment..........................................................9
2.7 Prepayment......................................................................................9
2.8 Security.......................................................................................11
2.9 Repayment of Loans.............................................................................11
2.10 Notations......................................................................................11
2.11 Use of Proceeds................................................................................11
2.12 Payments Generally.............................................................................12
SECTION 3 REPRESENTATIONS AND WARRANTIES.................................................................12
3.1 Organization, Standing, etc....................................................................12
3.2 Qualification..................................................................................13
3.3 Title to Properties; Liens.....................................................................13
3.4 Principal Executive Office; Other Locations....................................................13
3.5 Authorization; Compliance with Other Instruments...............................................13
3.6 Governmental Consent...........................................................................14
SECTION 4 CONDITIONS OF LENDING..........................................................................14
4.1 Effective Date.................................................................................14
4.2 Each Extension of Credit.......................................................................17
SECTION 5 AFFIRMATIVE COVENANTS..........................................................................18
5.1 Inspection and Examination of Books and Records................................................18
5.2 Insurance......................................................................................18
5.3 Payment of Taxes...............................................................................19
5.4 Payment of Other Indebtedness, etc.............................................................19
5.5 Further Assurances.............................................................................19
5.6 Existence; Conduct of Business.................................................................20
5.7 Compliance with Laws...........................................................................20
5.8 Notice of Defaults.............................................................................20
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 6 NEGATIVE COVENANTS.............................................................................20
6.1 Indebtedness...................................................................................21
6.2 Mortgages, Liens, etc..........................................................................21
6.3 Loans, Guarantees and Investments..............................................................21
6.4 Cash Expenditures..............................................................................21
6.5 Restricted Payments............................................................................22
6.6 Name and Location..............................................................................22
SECTION 7 DEFAULTS; REMEDIES.............................................................................22
7.1 Events of Default; Acceleration................................................................22
7.2 Remedies on Default, etc.......................................................................24
SECTION 8 MISCELLANEOUS..................................................................................25
8.1 Lender's Right of Setoff.......................................................................25
8.2 Expenses.......................................................................................25
8.3 Indemnification................................................................................25
8.4 Waivers........................................................................................26
8.5 Notices, etc...................................................................................27
8.6 Amendment, Modification and Waiver.............................................................28
8.7 Survival of Agreements, etc....................................................................28
8.8 Counterparts, etc..............................................................................28
8.9 Entire Agreement, etc..........................................................................28
8.10 Governing Law; Jurisdiction; Waiver of Jury Trial..............................................29
8.11 Successors and Assigns.........................................................................29
8.12 Assignments....................................................................................30
</TABLE>
ii
<PAGE> 4
LOAN AGREEMENT
LOAN AGREEMENT dated as of November 10, 1998, by and among
ORAVAX, INC., a Delaware corporation (the "Borrower") and PEPTIDE THERAPEUTICS
GROUP PLC, a public limited company organized under the laws of the United
Kingdom (the "Lender").
The parties hereto agree as follows:
SECTION 1
DEFINITIONS
1.1 DEFINED TERMS. As used herein the following terms have the meanings
specified below:
"Affiliate" means, as applied to any Person, a spouse or relative of
such Person, any member, director or officer of such Person, any corporation,
association, firm or other entity of which such Person is a member, director or
officer, and any other Person directly or indirectly controlling, controlled by
or under direct or indirect common control with such Person.
"Agreement" means this Agreement, as the same may be modified, amended,
supplemented or restated from time to time, together with all Exhibits and
Schedules hereto.
"Business Day" means any day that is not a Saturday, Sunday or other
day on which commercial banks in Boston, Massachusetts or London, England are
authorized or required by law to remain closed.
"Casualty Event" means, with respect to any Property of any Person, any
loss of or damage to, or any condemnation or other taking of, such Property for
which such Person or any of its Subsidiaries receives insurance proceeds, or
proceeds of a condemnation award or other compensation.
"Collateral" means (a) all accounts receivable, inventory, equipment,
general intangibles, fixtures, instruments, chattel paper, intellectual property
rights, bank accounts, cash, goodwill, insurance policies and other assets now
owned or hereafter acquired by the Borrower, (b) all the Borrower's rights to
its Leased Properties and (c) rights of the Borrower in, and to, certain patents
as set forth in the Patent Security Agreement.
"Commitment" means the agreement of the Lender to make Loans in an
aggregate amount not to exceed (1) in the event the Effective Date occurs as a
result of the satisfaction of the conditions set forth in Sections 4.1(j)(i) or
4.1(j)(ii) (and the
<PAGE> 5
other conditions set forth in Section 4.1 are satisfied), $3,000,000 or (2) in
the event the Effective Date occurs as a result of the satisfaction of the
conditions set forth in Section 4.1(j)(iii) (and the other conditions set forth
in Section 4.1 are satisfied), $5,000,000, in each case minus the sum of (a) the
amount of any fees payable by the Borrower to the Lender pursuant to Section 9.3
of the Merger Agreement and not so paid in accordance with Section 9.3(c) of the
Merger Agreement, (b) any Net Cash Payments received by the Borrower prior to
the Effective Date and (c) to the extent received by the Borrower in cash, the
amount of any funding of ongoing research and development costs of the Borrower
in respect of any collaboration or licensing agreement (other than amounts
agreed by the Borrower and the Lender as additions to the weekly cash
expenditures of the Borrower and its Subsidiaries permitted by Section 6.4.).
"Default" means any Event of Default or any event or condition which
with the passage of time, the giving of notice or both would become an Event of
Default.
"Disposition" means any sale, assignment, transfer, license or other
disposition of any property (including intellectual property) (whether now owned
or hereafter acquired) by the Borrower or any of its Subsidiaries to any other
Person excluding (a) the granting of Liens permitted by this Agreement and (b)
any sale, assignment, transfer or other disposition of any inventory or other
property sold or disposed of in the ordinary course of business and on ordinary
business terms.
"Disposition Investment" means, with respect to any Disposition, any
promissory notes or other evidences of Indebtedness or Investments received by
the Borrower or any of its Subsidiaries in connection with such Disposition.
"Effective Date" means the date on which the conditions specified in
Section 4.1 are satisfied.
"Equity Rights" means, with respect to any Person, any subscriptions,
options, warrants, commitments, preemptive rights or agreements of any kind
(including any stockholders or voting trust agreements) for the issuance or sale
of, or securities convertible into, any additional shares of capital stock of
any class, or partnership or other ownership interests of any type in, such
Person.
"Event of Default" has the meaning specified in Section 7.1.
"Expiration Date" means earlier to occur of (a) the date occurring 90
days after the Effective Date; provided, that if the Effective Date occurs upon
the satisfaction of the conditions set forth in Section 4.1(j)(iii) and the
other conditions set forth in Section 4.1, and thereafter either of the
conditions set forth in Sections 4.1(j)(i) or 4.1(j)(ii) is satisfied, the
Expiration Date shall be the date occurring 90 days after the date of the
earlier to occur of the conditions set forth of Sections 4.1(j)(i) or Section
2
<PAGE> 6
4.1(j)(ii); (b) the date of the Borrower's entering into an agreement with a
Third Party (as defined in the Merger Agreement) to consummate a Qualified
Acquisition Proposal (as defined in the Merger Agreement) as permitted by
Section 5.10(b) of the Merger Agreement; (c) the termination of the Merger
Agreement pursuant to Section 9.1(c)(i), 9.1(c)(ii) or 9.1(d)(iii); or (d) the
date of the consummation of the transactions contemplated by the Merger
Agreement.
"Exposure" means, at any time, the sum of the outstanding principal
amount of Loans at such time.
"GAAP" means generally accepted accounting principles in the United
States of America, consistently applied.
"Governmental Authority" means the government of the United States of
America, any other nation or any political subdivision thereof, whether state or
local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity exercising executive, legislative, judicial,
taxing, regulatory or administrative powers or functions of or pertaining to
government.
"Hazardous Material" means (a) any asbestos or other material composed
of or containing asbestos and (b) any petroleum product and any hazardous, toxic
or dangerous waste, substance or material defined as such in (or for purposes
of) the Comprehensive Environmental Response, Compensation and Liability Act,
any so-called "Superfund" or "Superlien" law, or any other applicable federal,
state, local or other statute, law, ordinance, code, rule, regulation, order or
decree regulating, relating to, or imposing liability or standards of conduct
concerning, any hazardous, toxic or dangerous waste, substance or material, as
now or at any time hereafter in effect.
"Indebtedness" means as applied to any Person, without duplication, all
items (except items of capital or surplus or of retained earnings) which in
accordance with GAAP would be included in determining total liabilities as shown
on the liability side of the balance sheet of such Person as of the date of
which Indebtedness is to be determined, including (i) any obligations under any
capital lease, (ii) all indebtedness secured by any mortgage, pledge, lien or
conditional sale or other title retention agreement to which any property or
asset owned or held by such Person is subject, whether or not the indebtedness
secured thereby shall have been assumed and (iii) all indebtedness of others
which such Person has directly or indirectly guaranteed, endorsed (otherwise
than for collection or deposit in the ordinary course of business), discounted
or sold with recourse or agreed (contingently or otherwise) to purchase or
repurchase or otherwise acquire, or in respect of which such Person has agreed
to supply or advance funds (whether by way of loan, stock purchase, capital
contributions or otherwise) or otherwise to become directly or indirectly
liable.
3
<PAGE> 7
"Investment" means, for any Person: (a) the acquisition (whether for
cash, property, services or securities or otherwise) of capital stock, bonds,
notes, debentures, partnership or other ownership interests or other securities
of any other Person or any agreement to make any such acquisition (including,
without limitation, any "short sale" or any sale of any securities at a time
when such securities are not owned by the Person entering into such short sale);
(b) the making of any deposit with, or advance, loan or other extension of
credit to, any other Person (including the purchase of property from another
Person subject to an understanding or agreement, contingent or otherwise, to
resell such property to such Person, but excluding any such advance, loan or
extension of credit representing the purchase price of inventory or supplies
sold by such Person in the ordinary course of business); or (c) the entering
into of any guarantee of, or other contingent obligation with respect to,
Indebtedness or other liability of any other Person and (without duplication)
any amount committed to be advanced, loaned or extended to such Person.
"Landlord Waiver" means, with respect to any of the Leased Properties,
a letter in the form of Exhibit D hereto or such other form as may be approved
by the Lender in its sole discretion.
"Leased Properties" has the meaning specified in Section 3.4.
"Leasehold Mortgages" has the meaning specified in Section 4.1(e).
"Lien" means, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (other
than an operating lease) (or any financing lease having substantially the same
economic effect as any of the foregoing) relating to such asset and (c) in the
case of securities, any purchase option, call or similar right of a third party
with respect to such securities.
"Loan or Loans" has the meaning specified in Section 2.1.
"Loan Documents" means this Agreement, the Note, the Security Documents
and any other instruments or documents delivered or to be delivered from time to
time pursuant to this Agreement.
"Material Adverse Effect" means a materially adverse effect on (a) the
business, assets (tangible or intangible), operations or condition, financial or
otherwise, of the Borrower or any of its Subsidiaries at any time, (b) the
ability of the Borrower to perform its obligations under the Agreement or the
other Loan Documents; or (c) the rights of or benefits available to the Lender
under the Loan Documents.
4
<PAGE> 8
"Maturity Date" means the earlier of (a) the date occurring 120 days
after the Effective Date; provided that if the Effective Date occurs upon
satisfaction of the conditions set forth in Section 4.1(j)(iii) (and the other
conditions of Section 4.1 are satisfied) and thereafter if either of the
conditions set forth in Section 4.1(j)(i) or 4.1(j)(ii) is satisfied, the
Maturity Date shall be the date occurring 120 days after the date of the earlier
to occur of the conditions set forth in Section 4.1(j)(i) or Section
4.1(j)(ii); (b) the termination of the Merger Agreement pursuant to 9.1(c)(i),
9.1(c)(ii) or 9.1(d)(iii), (c) the date of the Borrower's entering into an
agreement with a Third Party to consummate a Qualified Acquisition Proposal
permitted by Section 5.10(b) of the Merger Agreement or (d) the date of the
consummation of the transactions described in the Merger Agreement.
"Merger Agreement" means the Agreement and Plan of Merger dated as of
the date hereof among the Lender, Peach Acquisition Corp. and the Borrower.
"Net Cash Payments" means,
(i) with respect to any Casualty Event, the aggregate amount
of proceeds of insurance, condemnation awards and other
compensation received by the Borrower or any of its
Subsidiaries in respect of such Casualty Event net of (A)
reasonable expenses incurred by the Borrower or any its
Subsidiaries in connection therewith and (B) contractually
required repayments of Indebtedness to the extent secured by a
Lien on such property and any income and transfer taxes
payable by the Borrower or any its Subsidiaries in respect of
such Casualty Event;
(ii) with respect to any Disposition, the aggregate amount of
all cash payments received by the Borrower or any its
Subsidiaries directly or indirectly in connection with such
Disposition, whether at the time of such Disposition or after
such Disposition under deferred payment arrangements or
Investments entered into or received in connection with such
Disposition (including, without limitation, Disposition
Investments); provided that
(A) Net Cash Payments shall be net of (I) the amount
of any legal, title, transfer and recording tax
expenses, commissions and other fees and expenses
payable by the Borrower or any of its Subsidiaries in
connection with such Disposition and (II) any
Federal, state and local income or other taxes
estimated to be payable by the Borrower or any of its
Subsidiaries as a result of such Disposition, but
only to the extent that such estimated taxes are in
fact paid to the relevant Federal, state or local
governmental authority within six months of the date
of such Disposition; and
5
<PAGE> 9
(B) Net Cash Payments shall be net of any repayments
by the Borrower or any its of Subsidiaries of
Indebtedness to the extent that (I) such Indebtedness
is secured by a Lien on the property that is the
subject of such Disposition and (II) the transferee
of (or holder of a Lien on) such property requires
that such Indebtedness be repaid as a condition to
the purchase of such property; and
(iii) with respect to any offering of equity securities or any
incurrence of Indebtedness, the aggregate amount of all cash
proceeds received by the Borrower or any of its Subsidiaries
therefrom less all legal, underwriting and other fees and
expenses incurred in connection therewith.
"Note" has the meaning specified in Section 2.3.
"Patent Security Agreement" means the Patent Security Agreement dated
as of the date hereof between the Borrower and the Lender, substantially in the
form of Exhibit C annexed hereto, as such agreement may be amended, supplemented
or otherwise modified from time to time.
"Person" means a corporation, an association, a partnership, a limited
liability company, a joint venture, an organization, a business, an individual,
a government or political subdivision thereof or a governmental agency.
"PMC" means Pasteur Merieux Connaught, or any of its Affiliates,
including Connaught Laboratories, Inc. and Pasteur Merieux serums & vaccins S.A.
"PMC Loan Agreement" means the Facility Letter dated November 2. 1998
between OraVax JVM, Inc., a wholly-owned Subsidiary of the Borrower, and PMC
together with any promissory note issued in connection therewith, in each case
in the form delivered to the Lender on or prior to the date hereof.
"Real Estate" has the meaning specified in Section 3.4.
"Restricted Payment" means (a) any dividend, coupon payment or other
distribution (not including items accrued but not paid), direct or indirect, on
or on account of any shares of any class of stock or other interests of the
Borrower or any of its Subsidiaries now or hereafter outstanding, (b) any
redemption, purchase or other acquisition, direct or indirect, of any shares of
any class of stock now or hereafter outstanding of, or of any Equity Rights with
respect to, the Borrower or any of its Subsidiaries (including without
limitation the repurchase of any such stock or Equity Rights or any refund of
the purchase price thereof in connection with the exercise by the holder thereof
of any right of rescission or similar remedies with
6
<PAGE> 10
respect thereto), (c) any payment of principal or premium if any or interest on
or otherwise in respect of any Indebtedness subordinate in right of payment to
the Loans, and (d) any payment made to any Affiliate of the Borrower by the
Borrower in respect of management, consulting or other services.
"Security Agreement" means the Security Agreement executed and
delivered by the Borrower on the date hereof, substantially in the form of
Exhibit B hereto, as such agreement may be amended, supplemented or
otherwise modified from time to time.
"Security Document or Security Documents" means the Security Agreement
and the Leasehold Mortgages, as such mortgages may be amended, supplemented or
otherwise modified from time to time, and the Patent Security Agreement,
together with all Uniform Commercial Code financing statements and other
instruments and agreements heretofore or hereafter executed or delivered,
securing the Note and all other obligations of the Borrower hereunder, all in
form and substance acceptable to the Lender.
"Subsidiary" means any corporation, limited liability company,
partnership, association or other entity of which more than 50% of the
outstanding voting stock (other than director's qualifying shares) or more than
50% of the outstanding beneficial interests, as the case may be, are at the time
owned by the Borrower, or by one or more Subsidiaries of the Borrower, or by the
Borrower and one or more Subsidiaries of the Borrower.
1.2 TERMS GENERALLY. The definitions of terms herein shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (b) any reference
herein to any Person shall be construed to include such Person's successors and
assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar
import, shall be construed to refer to this Agreement in its entirety and not to
any particular provision hereof, (d) all references herein to Sections,
Sections, Exhibits and Schedules shall be construed to refer to Sections and
Sections of, and Exhibits and Schedules to, this Agreement and (e) the words
"asset" and "property" shall be construed to have the same meaning and effect
and to refer to any and all tangible and intangible assets and properties,
including cash, securities, accounts and contract rights.
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SECTION 2
AMOUNT AND TERMS OF THE CREDIT
2.1 LOANS. Subject to the terms and conditions hereof, and in reliance
upon the representations and warranties contained herein, the Lender hereby
agrees to make loans (each such Loan being herein called a "Loan", and
collectively the "Loans") to the Borrower from time to time, prior to the
Expiration Date, in an aggregate principal amount that will not result in the
Exposure exceeding the Commitment. The principal amount of the Loans which have
been repaid or prepaid may not be reborrowed. The Commitment in favor of the
Borrower shall expire on the Expiration Date, unless earlier terminated in
accordance with Sections 2.7 or 7.1.
2.2 REQUESTS FOR LOANS.
(a) To request a Loan, the Borrower shall deliver written
notice (a "Loan Request") of such request to the Lender not later than 11:00
a.m., London time, two (2) Business Days before the date of the proposed Loan
executed by the president or chief financial officer of the Borrower. Each such
Loan Request shall be revocable upon telephonic (confirmed by facsimile) or
written notice to the Lender.
(b) Each Loan Request shall specify the following information:
(i) the aggregate amount of such Loan;
(ii) the date of such Loan, which shall be a Business
Day;
(iii) the location and number of the Borrower's
account to which funds are to be disbursed.
(c) Until the occurrence of either of the events set forth in
Section 4.1(j)(i) or 4.1(j)(ii), the Lender shall be under no obligation
to fund Loans requested by the Borrower pursuant to this Section 2.2, if at the
time of the delivery of any Loan Request, the aggregate Exposure (including the
amount of any Loans to be funded pursuant to any Loan Request delivered to the
Lender) exceeds the aggregate amount of cash expenditures of the Borrower and
its Subsidiaries permitted pursuant to Section 6.4.
2.3 THE NOTE. The Loans made by the Lender pursuant to this Section 2
shall be evidenced by a promissory note of the Borrower in a principal amount
equal to the Commitment and in the form attached hereto as Exhibit A (the
"Note"). The Loans shall bear interest at the rate or rates, and shall be
payable on the dates, specified in Section 2.4.
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2.4 INTEREST.
(a) The Loans shall bear interest on the unpaid principal
amount thereof until paid in full at the rate or rates per annum determined (on
the basis of the actual number of days elapsed over a 360-day year) at the rate
of 9.0% per annum.
(b) Upon default or after maturity of, or after judgment has
been rendered on, the Note, or upon an Event of Default hereunder, the unpaid
principal of all Loans shall at the option of the Lender, bear interest at a per
annum rate or 12.0%.
2.5 FUNDING OF LOANS. The Lender shall make each Loan to be made by it
hereunder available to the Borrower by promptly crediting the amount of such
Loan to an account of the Borrower maintained with a commercial bank in Boston,
Massachusetts designated by the Borrower in the applicable Loan Request.
2.6 REDUCTION OR TERMINATION OF COMMITMENT.
(a) Unless previously terminated, the Commitment shall
terminate at the close of business on the Expiration Date.
(b) The Borrower may at any time, or from time to time,
voluntarily reduce the Commitment; provided that the Borrower shall not
terminate or reduce the Commitment if, after giving effect to any concurrent
prepayment of the Loans in accordance with Section 2.7, the Exposure would
exceed the Commitment. Any termination or reduction of Commitment shall be
permanent.
2.7 PREPAYMENT.
(a) Optional Prepayment. The Borrower may prepay the Loans at
any time without penalty or premium.
(b) Mandatory Prepayment.
(i) Excess Exposure. If at any time the
aggregate Exposure exceeds the Commitment,
the Borrower shall immediately prepay the
Note, without penalty or premium, in an
amount necessary to cause the aggregate
Exposure not to exceed the Commitment.
(ii) Casualty Events. Within one Business Day
following the receipt by the Borrower of the
proceeds of insurance,
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condemnation award or other compensation in
respect of any Casualty Event affecting any
property of the Borrower shall prepay the
Loans by an amount equal to 100% of the Net
Cash Payments from such Casualty Event.
(iii) Incurrence of Debt or Offering of Equity.
Without limiting the obligation of the
Borrower and its Subsidiaries to obtain the
consent of the Lender to any incurrence of
Indebtedness not otherwise permitted
hereunder, the Borrower shall, on or prior
to the closing of any such incurrence or any
sale of equity securities by the Borrower or
any of its Subsidiaries, deliver to the
Lender a statement certified by a financial
officer of the Borrower, in form and detail
reasonably satisfactory to the Lender, of
the estimated amount of the Net Cash
Payments from such sale that will (on the
date of such incurrence or sale) be received
by the Borrower or any of its Subsidiaries,
and the Borrower shall prepay the Loans
within one Business Day of the date of such
incurrence or sale, in an aggregate amount
equal to 100% of the amount of the Net Cash
Payments from any such incurrence of
Indebtedness or sale of equity securities.
(iv) Disposition of Assets. Without limiting the
obligation of the Borrower and its
Subsidiaries to obtain the consent of the
Lender to release any of its Liens on the
Collateral, the Borrower shall, on or prior
to the occurrence of any Disposition by the
Borrower or its Subsidiaries, deliver to the
Lender a statement certified by a financial
officer of the Borrower, in form and detail
reasonably satisfactory to the Lender, of
the estimated amount of the Net Cash
Payments of such Disposition that will (on
the date of such Disposition) be received by
the Borrower or any of its Subsidiaries in
cash and the Borrower shall prepay the Loans
as follows
(x) upon the date of such Disposition, in an
aggregate amount equal to 100% of such estimated
amount of the Net Cash Payments of such Disposition,
to the extent received by the Borrower in cash on the
date of such Disposition; and
(y) thereafter, to the extent the Borrower shall
receive Net Cash Payments in cash under deferred
payment arrangements or Disposition Investments
entered into or received in connection
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with any Disposition, an amount equal to (A) 100% of
the aggregate amount of such Net Cash Payments minus
(B) any transaction expenses associated with
Dispositions and not previously deducted in the
determination of Net Cash Payments plus (or minus, as
the case may be) (C) any other adjustment received or
paid by the Borrower pursuant to the respective
agreements giving rise to Dispositions and not
previously taken into account in the determination of
the Net Cash Payments.
2.8 SECURITY. All obligations of the Borrower to the Lender hereunder
shall be secured by a first priority security interest in the Collateral in
favor of the Lender, pursuant to the Security Documents. The Borrower hereby
confirms that whenever there is a reference in any Security Document to the
"Note" or to any agreement among the Borrower and the Lender, such reference
shall be deemed to refer to the Note, as defined herein, and this Agreement, as
such Note and Agreement may be amended and restated from time to time.
2.9 REPAYMENT OF LOANS.
(a) The Borrower hereby unconditionally promises to pay to the
Lender the then unpaid principal amount of the Loans and the Note together with
all accrued interest thereon on the Maturity Date.
(b) The Lender shall maintain accounts in which it shall
record (i) the amount of each Loan made hereunder and (ii) the amount of any sum
received by the Lender hereunder.
(c) The entries made in the accounts maintained pursuant to
paragraph (b) of this Section 2.9 shall be prima facie evidence of the existence
and amounts of the obligations recorded therein; provided that the failure of
the Lender to maintain such accounts or any error therein shall not in any
manner affect the obligation of the Borrower to repay the Loans in accordance
with the terms of this Agreement.
(d) Any and all payments by or on account of any obligation of
the Borrower hereunder shall be made free and clear of, and without deduction
for any taxes.
2.10 NOTATIONS. Upon payment in full of the principal of and interest
on the Note, such Note shall be canceled and returned to the Borrower.
2.11 USE OF PROCEEDS. The Borrower will use the proceeds of the Loans
(a) for working capital and (b) for general corporate purposes. The Borrower
will not use any part of such proceeds (i) for the purpose of making any
Restricted Payment
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which is prohibited by this Agreement or (ii) for any other purpose which would
violate any provision of any other applicable statute, regulation, order or
restriction unless the Lender and the Borrower have agreed by prior written
agreement to permit such payment. In addition, the Borrower may use the proceeds
of the Loans to pay PMC for any amounts payable under the PMC Loan Agreement;
provided, however, that if the Lender shall have, prior to January 31, 1999,
entered into an underwriting agreement satisfactory to the Lender, in its sole
discretion, such payment may only be made upon the prior written consent of the
Lender.
2.12 PAYMENTS GENERALLY.
(a) The Borrower shall make each payment required to be made
by it hereunder (whether of principal, interest, fees or otherwise) prior to
11:00 a.m., Boston, Massachusetts time, on the date when due, in immediately
available funds, without set-off or counterclaim. Any amounts received after
such time on any date may, in the discretion of the Lender, be deemed to have
been received on the next succeeding Business Day for purposes of calculating
interest thereon. All such payments shall be made to the Lender at such of its
offices in Cambridge, England as shall be notified to the relevant parties from
time to time, except that payments pursuant to Sections 8.2 and 8.3 shall be
made directly to the Persons entitled thereto. If any payment hereunder shall be
due on a day that is not a Business Day, the date for payment shall be extended
to the next succeeding Business Day, and, in the case of any payment accruing
interest, interest thereon shall be payable for the period of such extension.
All payments hereunder shall be made in U.S. dollars.
(b) If at any time insufficient funds are received by and
available to the Lender to pay fully all amounts of principal, interest and fees
then due hereunder, such funds shall be applied (i) first, to pay interest and
fees then due hereunder, and (ii) second, to pay principal then due hereunder.
SECTION 3
REPRESENTATIONS AND WARRANTIES
In order to induce the Lender to enter into this Agreement and to make the
Loans, the Borrower hereby makes the following representations and warranties,
which shall survive the execution and delivery hereof and of the Note:
3.1 ORGANIZATION, STANDING, ETC. Each of the Borrower and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated. The
Borrower and each of its Subsidiaries has all requisite corporate power and
authority to own and operate its properties, to carry on its business as now
conducted and proposed to be conducted, to enter into the Loan Documents to
which its is a party and all other documents to
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be executed by it in connection with the transactions contemplated hereby, to
issue or guaranty the Note, as applicable, and to carry out the terms hereof and
thereof.
3.2 QUALIFICATION. The Borrower and each of its Subsidiaries is duly
qualified or licensed and in good standing as a foreign corporation duly
authorized to do business in each jurisdiction in which the character of its
properties or the nature of its business makes such qualification or licensing
necessary, except where the failure to be so qualified or licensed would not
have a Material Adverse Effect.
3.3 TITLE TO PROPERTIES; LIENS. The Borrower has good and marketable
title to all of its properties and assets, and none of such properties or assets
is subject to any mortgage, pledge, lien, security interest, charge or
encumbrance except the existing mortgages and security interests referred to in
Schedule 3.3 attached hereto and mortgages and security interests in favor of
the Lender. The Borrower has the right to enjoy quiet possession under all
leases to which it is a party as lessee, and all of such leases are to
Borrower's knowledge valid, subsisting and in full force and effect. None of
such leases contains any provision creating a lien in favor of the landlord with
respect to the personal property or fixtures of the Borrower, restricting the
incurrence of indebtedness by the lessee or any unusual or burdensome provision
that would have a Material Adverse Effect.
3.4 PRINCIPAL EXECUTIVE OFFICE; OTHER LOCATIONS. The principal
executive offices and places of business of the Borrower and all other
Subsidiaries of the Borrower, and the locations where such entities maintain and
will maintain all of their business records, including, without limitation,
records relating to the Loans and the Collateral are located at the addresses
designated on Schedule 3.4 hereto, as amended from time to time. All
other offices and/or locations at which the Borrower keeps or proposes to keep
Collateral or conducts or proposed to conduct any business are listed in
Schedule 3.4 hereto. There are no locations which are "owned properties" of the
Borrower. The locations designated as "leased properties" (the "Leased
Properties" are leased by the Borrower. The Leased Properties constitute the
only real property necessary in connection with the conduct by the Borrower of
its businesses as of the date hereof. The Leased Properties are not subject to
any assignment (collateral or otherwise), sublease, pledge, mortgage, security
interest, encumbrance or other lien, whether arising by agreement or by
operation of law other than (i) in favor of the Lender as contemplated hereby
and (ii) the matters set forth on Schedule<-1- 95>3.4 hereto. The Leased
Properties and the operation of the Borrower's business at all such locations do
not to Borrower's knowledge violate any applicable zoning or use statute,
ordinance, building code, rule, regulation, covenant, easement or agreement in
any manner which, individually or in the aggregate, would have a Material
Adverse Effect.
3.5 AUTHORIZATION; COMPLIANCE WITH OTHER INSTRUMENTS. The execution,
delivery and performance of this Agreement and the Loan Documents have been
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duly authorized by all necessary corporate action on the part of the Borrower
and the Loan Documents and each other document executed in connection with the
transactions contemplated by this Agreement constitute the legal, valid and
binding obligations of the Borrower, enforceable against the Borrower, in
accordance with their terms, except as such enforceability may be limited by (a)
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and (b) general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law), will not result in any violation of or be in
conflict with or constitute a default under any term of the charter or by-laws
of the Borrower, or of any material agreement or instrument, or any judgment,
decree or order, or any material statute, rule or governmental regulation
applicable to the Borrower, or result in the creation of any Lien upon any of
the properties or assets of the Borrower pursuant to any such term (except
pursuant to the Security Documents). The Borrower is not in violation of any
term of its charter or by-laws, or of any material term of any agreement or
instrument to which it is a party, or of any judgment, decree or order, or in
any material respect, of any statute, rule or governmental regulation applicable
to it.
3.6 GOVERNMENTAL CONSENT. Neither the Borrower nor any of its
shareholders is required to obtain any order, consent, approval or authorization
of, or required to make any declaration or filing with, any Governmental
Authority in connection with the execution and delivery of this Agreement and
the issuance and delivery of the Note pursuant hereto, or in connection with the
execution and delivery of the Security Documents and the granting of the
security interests in the Collateral pursuant thereto (other than the filing of
appropriate Uniform Commercial Code financing statements to perfect the Lender's
security interest in the Collateral and the recording of the Mortgages to
perfect the Lender's security interest on the Leased Properties and the
recording of the Patent Security Agreement in the United States Patent of
Trademark Office).
SECTION 4
CONDITIONS OF LENDING
4.1 EFFECTIVE DATE. The obligations of the Lender to make the Loans
hereunder shall not become effective until the date on which each of the
following conditions is satisfied (or waived):
(a) Counterparts of Agreement. The Lender shall have received
a counterpart of this Agreement signed on behalf of the Borrower.
(b) Note. The Lender shall have received, a duly completed and
executed Note.
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(c) Corporate Matters. The Lender shall have received such
documents and certificates as the Lender or its counsel may reasonably request
relating to the organization, existence and good standing of the Borrower, the
authorization of the transactions contemplated hereby and any other legal
matters relating to the Borrower, the Loan Documents or such transactions, all
in form and substance reasonably satisfactory to the Lender and its counsel.
(d) Security Interests in Property. The Lender shall have
received evidence satisfactory to it that the Borrower shall have taken or
caused to be taken all such actions, executed and delivered or caused to be
executed and delivered all such agreements, documents and instruments, and made
or caused to be made all such filings and recordings (other than the filing or
recording of items described in clauses (iii), (iv) and (v) below) that may be
necessary or, in the reasonable opinion of the Lender, desirable in order to
create in favor of the Lender a valid and (upon such filing and recording)
perfected first priority security interest in the entire personal and mixed
property Collateral, subject only to Liens permitted by this Agreement.
Such actions shall include, without limitation, the following:
(i) Security Documents. Delivery to the Lender
of all the Security Documents (except that
the Leasehold Mortgages shall be delivered
pursuant to Section 4.1(e)), duly executed
by the Borrower, together with accurate and
complete schedules to all such Security
Documents;
(ii) Lien Searches and UCC Termination
Statements. Delivery to the Lender of (A)
the results of a recent search, by a Person
reasonably satisfactory to the Lender, of
all effective UCC financing statements and
fixture filings and all judgment and tax
lien filings which may have been made with
respect to any personal or mixed property of
the Borrower, together with copies of all
such filings disclosed by such search, and
(B) UCC termination statements duly executed
by all applicable Persons for filing in all
applicable jurisdictions as may be necessary
to terminate any effective UCC financing
statements or fixture filings disclosed in
such search (other than any such financing
statements or fixture filings in respect of
Liens permitted to remain outstanding
pursuant to the terms of this Agreement);
(iii) UCC Financing Statements and Fixture
Filings. Delivery to the Lender of UCC
financing statements and, where appropriate,
with respect to Leased Properties, fixture
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filings, duly executed by the Borrower as
applicable with respect to all personal and
mixed property Collateral of the Borrower,
for filing in all jurisdictions as may be
necessary or, in the reasonable opinion of
the Lender, desirable to perfect the
security interests created in such
Collateral pursuant to the Security
Documents; and
(iv) Perfection Certificate. Delivery to the
Lender of a perfection certificate dated the
date hereof substantially in the form of
Schedule I to the form of Security Agreement
attached hereto as Exhibit B duly executed
by a financial officer of the Borrower.
(e) Leasehold Mortgages; Etc. The Lender shall have received
from the Borrower:
(i) Mortgages. Fully executed and notarized
Leasehold Mortgages (each a "Leasehold
Mortgage" and, collectively, the "Leasehold
Mortgages"), in proper form for recording in
all appropriate places in all applicable
jurisdictions, encumbering each Leased
Property;
(ii) Landlord Waivers. For each Leased Property,
copies of all leases between the Borrower
and any landlord or tenant, and, except as
otherwise consented to by the Lender in its
sole discretion, a Landlord Waiver with
respect thereto;
(iii) Title Reports. For each Leased Property, a
title report issued by a title company
acceptable to the Lender with respect
thereto, dated not more than 30 days prior
to the date hereof and satisfactory in form
and substance to the Lender; and
(iv) Copies of Documents Relating to Title
Exceptions. Copies of all recorded documents
listed as exceptions to title or otherwise
referred to in the title reports delivered
pursuant to Section 4.1(e)(iii)
(f) Evidence of Insurance. The Lender shall have received a
certificate from the Borrower's insurance broker or other evidence satisfactory
to it that all insurance required to be maintained pursuant to this Agreement is
in full force and effect and that the Lender has been named as additional
insured and loss payee thereunder to the extent required by Section 5.2.
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(g) No Material Adverse Effect. There shall have occurred no
Material Adverse Effect on the Borrower since the last audited financial
statements of the Borrower delivered to the Lender prior to the date hereof
(excluding any Material Adverse Effect related to the failure of the Lender to
consummate the transactions contemplated by the Merger Agreement).
(h) Opinion of Counsel to the Borrower. The Lender shall have
received a favorable written opinion (addressed to the Lender and dated the date
hereof) of Hale and Dorr LLP, special counsel to the Borrower, covering such
matters relating to the Borrower, the Loan Documents or the transactions
contemplated hereby as the Lender shall request (and the Borrower hereby
requests such counsel to deliver such opinion).
(i) [RESERVED].
(j) Special Conditions. Any of the following events shall have
occurred:
(i) the Merger Agreement shall have been
terminated by the Borrower pursuant to
Sections 9.1(b)(i), 9.1(d)(i) or 9.1(d)(iv)
of the Merger Agreement, or
(ii) by January 31, 1999, the Lender shall have
failed to enter into an underwriting
agreement satisfactory to the Lender, in its
sole discretion, in respect of the
requirements of Section 6.5 of the Merger
Agreement; provided that the Merger
Agreement shall not have been terminated
prior to such date and the Borrower shall
not then be in material breach of any
representation, warranty, covenant or other
agreement contained in the Merger Agreement,
or
(iii) the Borrower shall have exhausted all
alternative sources of funding its cash
expenditures and shall not then be in
material breach of any representation,
warranty, covenant or other agreement
contained in the Merger Agreement or this
Agreement.
(k) Other Documents. The Lender shall have received such other
documents as the Lender or its counsel shall have reasonably requested.
4.2 EACH EXTENSION OF CREDIT. The obligation of the Lender to make a
Loan on the occasion of any Loan, is subject to the satisfaction of the
following conditions:
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(a) Representations and Warranties. The representations and
warranties of the Borrower set forth in the Loan Documents shall be true and
correct in all material respects on and as of the date of such Loan, both before
and after giving effect thereto and to the use of the proceeds thereof (or, if
any such representation or warranty is expressly stated to have been made as of
a specific date, such representation or warranty shall be or have been true and
correct as of such specific date).
(b) No Defaults. At the time of and immediately after giving
effect to such Loan, no Default shall have occurred and be continuing.
(c) Each Loan. The making of each Loan hereunder shall be
deemed to be a representation and warranty by the Borrower on the date of each
such requested Loan, as to the occurrence of the facts referred to in
Section 4.2(a) and (b).
(d) Collateral. The Lender shall be reasonably satisfied of
its ability to realize on the Collateral in such amounts sufficient to satisfy
the obligations of the Borrower under this Agreement and the Note.
SECTION 5
AFFIRMATIVE COVENANTS
So long as any of the Loans shall remain available to the Borrower, and
until the principal of and interest on the Note and all fees, if any, due
hereunder, if any, shall have been paid in full, the Borrower agrees that:
5.1 INSPECTION AND EXAMINATION OF BOOKS AND RECORDS. The Borrower and
its Subsidiaries shall keep proper books of record and account in which full,
true and correct entries are made of all dealings and transactions in relation
to their businesses and activities. The Borrower and its Subsidiaries will
permit any representatives designated by the Lender, upon reasonable prior
notice (except that no such notice shall be required following an Event of
Default), to visit and inspect their properties, to examine and make extracts
from their books and records, and to discuss their affairs, finances and
condition with their officers and independent accountants, all at such
reasonable times as reasonably requested.
5.2 INSURANCE. The Borrower and its Subsidiaries will maintain or cause
to be maintained on all insurable properties now or hereafter owned by the
Borrower and its Subsidiaries insurance against loss or damage by fire or other
casualty under the broad form of coverage with appropriate agreed amount
endorsement in such amounts as is customary with respect to like properties of
companies conducting similar businesses, and will maintain or cause to be
maintained product liability, public liability and worker's compensation
insurance insuring the Borrower and its Subsidiaries to the extent customary
with respect to companies conducting similar
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businesses and, upon request, will furnish to the Lender satisfactory evidence
of the same. Each liability policy shall name the Lender as an "additional
insured". Each insurance policy pertaining to any of the Collateral shall: (i)
name the Lender as an insured pursuant to a so-called "standard mortgagee
clause" and "loss payee clause"; and (ii) provide that the Lender shall be
notified of any proposed cancellation of such policy at least thirty (30) days
in advance of such proposed cancellation and will have sufficient time to
correct any deficiencies justifying such proposed cancellation. All such
policies shall be delivered to the Lender upon request. The Borrower and its
Subsidiaries shall direct all insurers under such policies of insurance to pay
all proceeds thereof directly to the Lender. The Borrower and its Subsidiaries
hereby appoint the Lender, and all officers, employees or Lenders designated by
the Lender, as the true and lawful attorney-in-fact of the Borrower and its
Subsidiaries effective upon the occurrence and during the continuance of an
Event of Default for the purpose of making, settling and adjusting claims under
all policies of insurance, endorsing the name of the Borrower and its
Subsidiaries on any check, draft, instrument or other item of payment received
by the Borrower or its Subsidiaries or the Lender pursuant to any such insurance
policy and for making all determinations and decisions with respect to such
policies.
5.3 PAYMENT OF TAXES. The Borrower will, and will cause each Subsidiary
to, pay and discharge promptly as they become due and payable all taxes,
assessments and other governmental charges or levies imposed upon their income
or upon any of their properties or assets, or upon any part thereof, as well as
all lawful claims of any kind (including claims for labor, materials and
supplies) which, if unpaid, might by law become a lien or a charge upon its
property; provided that neither the Borrower nor any Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim if the amount,
applicability or validity thereof shall currently be contested in good faith by
appropriate proceedings promptly initiated and diligently conducted and if
Borrower or such Subsidiary, as the case may be, shall have set aside on its
books such reserves, if any, with respect thereto as are required by GAAP and
deemed appropriate by the Borrower and its independent public accountants.
5.4 PAYMENT OF OTHER INDEBTEDNESS, ETC. Except as to matters being
contested in good faith and by appropriate proceedings and as to which adequate
reserves have been established, the Borrower, will, and will cause each of its
Subsidiaries to, pay promptly when due, or in conformance with customary trade
terms, all other Indebtedness and obligations incident to the conduct of their
business except that the Borrower will not make any payment due on the PMC Loan
Agreement unless the Lender has agreed to such payment in accordance with
Section 2.11(b)(iii).
5.5 FURTHER ASSURANCES. From time to time hereafter, the Borrower will
execute and deliver, or will cause to be executed and delivered, such additional
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instruments, certificates or documents, and will take all such actions, as the
Lender may reasonably request, for the purposes of implementing or effectuating
the provisions of the Loan Documents, or of more fully perfecting or renewing
the Lender's rights with respect to the Collateral pursuant hereto or thereto.
Upon the exercise by the Lender of any power, right, privilege or remedy
pursuant to the Loan Documents which requires any consent, approval,
registration, qualification or authorization of any governmental authority or
instrumentality, the Borrower will execute and deliver, or will cause the
execution and delivery of, all applications, certifications, instruments and
other documents and papers that the Lender may be required to obtain for such
governmental consent, approval, registration, qualification or authorization. In
the event the Borrower or any of its Subsidiaries shall at any time or from time
to time acquire, own or lease any additional real property, the Borrower will,
if requested by the Lender, promptly execute and deliver, or cause to be
executed and delivered, to the Lender a deed of trust or mortgage (or
assignment), satisfactory in form and substance to the Lender and its counsel,
granting a valid first lien on such real property or leasehold for the benefit
of the Lender as security for the Note and the other obligations of the Borrower
hereunder..
5.6 EXISTENCE; CONDUCT OF BUSINESS. The Borrower and its Subsidiaries
will do or cause to be done all things necessary to preserve, renew and keep in
full force and effect their legal existence and the rights, licenses, permits,
privileges and franchises (including without limitation patent and trademark
registrations) material to the conduct of their businesses; provided that the
foregoing shall not prohibit any merger or consolidation. The Borrower and each
Subsidiary will keep and maintain all property material to the conduct of their
businesses in good working order and condition, ordinary wear and tear excepted.
5.7 COMPLIANCE WITH LAWS. The Borrower and each Subsidiary will comply
with (i) all laws, rules, regulations and orders including, without limitation,
with respect to Hazardous Materials, of any Governmental Authority and (ii) all
contractual obligations, in each case applicable to them or their property,
except where the failure to do so, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.
5.8 NOTICE OF DEFAULTS. The Borrower shall immediately notify the
Lender of the occurrence of any Default.
SECTION 6
NEGATIVE COVENANTS
So long as any of the Loans shall remain available to the Borrower, and until
the principal of and interest on the Note and all fees, if any, due hereunder
shall have been paid in full, the Borrower agrees that:
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<PAGE> 24
6.1 INDEBTEDNESS. The Borrower will not, and will not permit any
Subsidiary to, create, incur, assume or become or remain liable in respect of
any Indebtedness, except Indebtedness to the Lender hereunder and to PMC under
the PMC Loan Agreement or Indebtedness described in Schedule 3.3.
6.2 MORTGAGES, LIENS, ETC. The Borrower will not, and will not permit
any Subsidiary to, directly or indirectly, create, incur, assume or suffer to
exist, any mortgage, lien, charge or encumbrance on, or security interest in, or
pledge of, or conditional sale or other title retention agreement (including any
capital lease) with respect to, any property or asset now owned or hereafter
acquired by the Borrower or any Subsidiary, except for any Lien described in
Schedule 3.3.
6.3 LOANS, GUARANTEES AND INVESTMENTS. The Borrower will not, and will
not permit any Subsidiary to, make or permit to remain outstanding any loan or
advance to, or guarantee or endorse (except as a result of endorsing negotiable
instruments for deposit or collection in the ordinary course of business) or
otherwise assume or remain liable with respect to any obligation of, or make or
own any Investment in, or acquire (except in the ordinary course of business)
the properties or assets of, any Person, except:
(i) Extensions of credit by the Borrower or any
Subsidiary in the ordinary course of
business in accordance with customary trade
practices;
(ii) Marketable direct obligations of the United
States of America or any department or
agency thereof maturing not more than one
(1) year from the date of issuance thereof;
(iii) Certificates of deposit, repurchase
agreements, money market deposits or other
similar types of Investments maturing not
more than 90 days from the date of
acquisition thereof and evidencing direct
obligations of a commercial bank having
capital surplus and undivided profits in
excess of $100,000,000; or
(iv) Customary advances from time to time to
employees for travel and related expenses
incurred in the ordinary performance of such
employees' jobs.
6.4 CASH EXPENDITURES. Until the occurrence of either of the conditions
set forth in Sections 4.1(j)(i) or 4.1(j)(ii), the Borrower will not, and will
not permit any Subsidiary, to make any cash expenditures except for cash
expenditures in the ordinary course of business, and the net cash expenditures
(or net cash inflows) of the Borrower and its Subsidiaries in the aggregate for
any calendar week shall not
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<PAGE> 25
exceed (or be less than) the amounts set forth on Schedule 6.4 opposite each
such calendar week plus, to the extent reasonably necessary as agreed by the
Borrower and the Lender, the amount of any additional weekly cash expenditures
of the Borrower or its Subsidiaries resulting from the Borrower or any of its
Subsidiaries entering into a collaboration or license agreement after the date
hereof. The Borrower shall deliver to the Lender a certificate on each Friday
confirming compliance with the requirements to this Section 6.4 for the prior
week and describing such expenditures in reasonable detail.
It is understood that Schedule 6.4 represents the Borrower's best
estimate of its net cash expenditure requirements as of the date of this
Agreement and that the Borrower shall propose in writing updates to Schedule 6.4
as reasonably necessary to reflect changes in the net cash expenditures
necessary for the Borrower's conduct of its business as it is presently
conducted and the timely payment of its creditors, and Schedule 6.4 shall be
modified from time to time to reflect such changes upon the prior written
consent of the Lender, which shall not be unreasonably withheld.
6.5 RESTRICTED PAYMENTS. The Borrower will not declare or make any
Restricted Payment at any time provided that any wholly-owned Subsidiary of the
Borrower may make Restricted Payments to the Borrower.
6.6 NAME AND LOCATION. Without ten days' prior written notice to the
Lender, the Borrower shall not change its name, its Federal tax identification
number or the location of its chief executive office.
SECTION 7
DEFAULTS; REMEDIES
7.1 EVENTS OF DEFAULT; ACCELERATION. If any of the following events
(each an "Event of Default") shall occur:
(a) The Borrower shall default in the payment of principal of
or interest on the Loans or any other fee due hereunder on the date the same
becomes due and payable, whether at maturity or at a date fixed for the payment
of any prepayment thereof or otherwise; or
(b) The Borrower shall default in the performance of or
compliance with any term contained in Section 5 or Section 6; or
(c) The Borrower or any Subsidiary or other Affiliate shall
default in the performance of or compliance with any term contained in the
Security Documents or in the performance of or compliance with any term
contained in any other written agreement with the Lender relating to the
transactions contemplated hereby, and
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<PAGE> 26
such default not have been remedied within 3 Business Days after written notice
thereof to the Borrower by the Lender; or
(d) Any representation or warranty made by or with respect to
the Borrower, or any Subsidiary in or pursuant to any of the Loan Documents
shall prove to have been false or incorrect in any material respect; or
(e) The Borrower or any Subsidiary shall default in any
payment due on any Indebtedness in respect of borrowed money (other than as
described in (a) above) in excess of $5,000, any capital lease or the deferred
purchase price of property and such default shall continue for more than the
period of grace, if any, applicable thereto, or in the performance of or
compliance with any term of any evidence of such Indebtedness or of any
mortgage, indenture or other agreement relating thereto, and any such default
shall continue for more than the period of grace, if any, specified therein and
shall not have been waived pursuant thereto and the holder of such Indebtedness
shall have the right to accelerate the same except for any payment default under
the PMC Loan Agreement due to the failure of the Lender to agree to such payment
in accordance with Section 2.11(b)(iii); or
(f) The Borrower or any Subsidiary shall discontinue its
business or shall make an assignment for the benefit of creditors, or shall fail
generally to pay its debts as such debts become due, or shall apply for or
consent to the appointment of or taking possession by a trustee, receiver or
liquidator (or other similar official) of the Borrower or such Subsidiary or any
substantial part of the property of the Borrower or such Subsidiary or shall
commence a case or have an order for relief entered against it under the Federal
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal or state bankruptcy, insolvency or other similar law, or if the Borrower
or such Subsidiary shall take any action to dissolve or liquidate the Borrower
or such Subsidiary; or
(g) If, within thirty (30) days after the commencement against
the Borrower or any Subsidiary of a case under the Federal bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal or state
bankruptcy, insolvency or other similar law, such case shall have been consented
to or shall not have been dismissed or all orders or proceedings thereunder
affecting the operations or the business of the Borrower or any Subsidiary
stayed, or if the stay of any such order or proceeding shall thereafter be set
aside, or if within thirty (30) days after the entry of a decree appointing a
trustee, receiver or liquidator (or other similar official) of the Borrower or
any Subsidiary any substantial part of the property of the Borrower or any
Subsidiary, such appointment shall not have been vacated; or
(h) A final judgment which, with other outstanding final
judgments against the Borrower or any Subsidiary, exceeds an aggregate of
$50,000 shall be rendered against the Borrower or any of its Subsidiaries and
if, within thirty (30)
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<PAGE> 27
days after entry thereof, such judgment shall not have been discharged or
execution thereof stayed pending appeal, or if, within thirty (30) days after
the expiration of any such stay, such judgment shall not have been discharged,
or if any such judgment shall not be discharged forthwith upon the commencement
of proceedings to foreclose any lien, attachment or charge which may attach as
security therefor and before any of the property or assets of the Borrower or
any Subsidiary shall have been seized in satisfaction thereof; or
(i) Any of the following shall occur: (i) the Liens created by
the Security Documents shall at any time (other than by reason of the Lender
relinquishing such Lien) cease to constitute valid and perfected Liens on the
Collateral intended to be covered thereby; (ii)<-1- 95>except for expiration in
accordance with its respective terms, any material Security Document shall for
whatever reason be terminated, or shall cease to be in full force and effect; or
(iii) the enforceability of any Security Document shall be contested by the
Borrower or any Subsidiary; or
(j) Any of the following agreements shall be terminated or the
Borrower shall be in material breach of any representation, warranty, covenant
or other agreement contained in any of the following agreements: (i) the Master
Agreement dated as of March 31, 1995 with PMC; (ii) the Merger Agreement prior
to any termination thereof; (iii) any license agreement in respect of any
intellectual property material to the business of the Borrower or (iv) any lease
for real property or equipment in which the Borrower is the lessee; or
then, and in any such event, and at any time thereafter, (i) if any Event of
Default described in clauses (f) or (g) above shall then be continuing, the
principal of and accrued interest in respect of the Note shall automatically be
declared to be forthwith due and payable, whereupon the principal of and accrued
interest in respect of the Note shall become forthwith due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrower, and all Commitments to make Loans
hereunder shall be automatically terminated, whereupon said Commitment of the
Lender hereunder shall forthwith terminate without any other notice of any kind
or (ii) if any other Event of Default shall then be continuing, the Lender may
(A) declare the principal of and accrued interest in respect of the Note to be
forthwith due and payable, whereupon the principal of and accrued interest in
respect of the Note shall become forthwith due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby expressly
waived by the Borrower, and/or (B) terminate its Commitment to make any or all
of the Loans hereunder, whereupon said Commitment of the Lender hereunder shall
forthwith terminate without any other notice of any kind.
7.2 REMEDIES ON DEFAULT, ETC. In case any one or more Events of Default
shall occur and be continuing, the Lender may proceed to protect and enforce the
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<PAGE> 28
Lender's rights by an action at law, suit in equity or other appropriate
proceeding, whether for the specific performance of any agreement contained in
any of the Loan Documents, or for an injunction against a violation of any of
the terms hereof or thereof, or in aid of the exercise of any power granted
hereby or thereby or by law. In case of a default in the payment of any
principal of or interest on the Note, or in the payment of any fee due
hereunder, the Borrower will pay to the Lender such further amount as shall be
sufficient to cover the reasonable cost and expense of collection, including,
without limitation, reasonable attorneys' fees, expenses and disbursements. No
course of dealing and no delay on the part of the Lender in exercising any right
shall operate as a waiver thereof or otherwise prejudice the Lender's rights. No
right conferred by any Loan Document upon the Lender shall be exclusive of any
other right referred to herein or therein or now or hereafter available at law,
in equity, by statute or otherwise.
SECTION 8
MISCELLANEOUS
8.1 LENDER'S RIGHT OF SETOFF. If the Borrower becomes insolvent,
howsoever evidenced, or any Event of Default occurs, any Indebtedness from the
Lender to the Borrower or any Subsidiary may be offset and applied toward the
payment of any Indebtedness from the Borrower to the Lender hereunder, whether
or not such Indebtedness, or any part thereof shall then be due. The Borrower
hereby grants to the Lender a lien and security interest and right of setoff as
security for all liabilities and obligations to the Lender whether now existing
or hereafter arising, upon and against all credits, collateral and property now
or hereafter in the possession, custody, safekeeping or control of the Lender or
any entity under the control of the Lender, or in transit to any of them. At any
time, without demand or notice, the Lender may set off the same or any part
thereof and apply the same to any liability or obligation of the Borrower even
though unmatured and regardless of the adequacy of any other collateral securing
the Loans. ANY AND ALL RIGHTS TO REQUIRE THE LENDER TO EXERCISE ITS RIGHTS OR
REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE LOANS PRIOR TO
EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER
PROPERTY OF THE BORROWER ARE HEREBY KNOWINGLY VOLUNTARILY AND IRREVOCABLY
WAIVED.
8.2 EXPENSES. The Borrower agrees to pay all reasonable expenses,
including reasonable fees and disbursements of counsel for the Lender, which the
Lender may hereafter incur in connection with enforcement of the rights of the
Lender under the Loan Documents in the event of a Default hereunder or a default
thereunder.
8.3 INDEMNIFICATION.
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<PAGE> 29
(a) The Borrower shall indemnify the Lender and its directors,
partners, officers and employees and each other Person, if any, who controls the
Lender, or any of them, and will hold the Lender and such other Persons harmless
from and against any and all claims, damages, losses, liabilities, judgments and
expenses (including without limitation all reasonable fees and expenses of
counsel and all expenses of litigation or preparation therefor) which the Lender
or such other Persons may incur or which may be asserted against the Lender or
such other Persons in connection with or arising out of any investigation,
litigation or proceeding involving the Borrower or any Subsidiary or Affiliate
of the Borrower (including compliance with or contesting of any subpoenas or
other process issued against the Lender, or any director, officer or employee of
the Lender, or any Person, if any, who controls the Lender or any of them in any
proceeding involving the Borrower or any Subsidiary or Affiliate of the
Borrower), whether or not the Lender is party thereto, other than claims,
damages, losses, liabilities or judgments with respect to any matter as to which
the Lender or such other Person seeking indemnity shall have been adjudicated
not to have acted in good faith or to have acted with gross negligence. Promptly
upon receipt by any indemnified party hereunder of notice of the commencement of
any action, such indemnified party shall, if a claim in respect thereof is to be
made against the Borrower hereunder, notify the Borrower in writing of the
commencement thereof.
(b) The Borrower shall indemnify the Lender and its directors,
partners, officers and employees and each other Person, if any, who controls the
Lender, or any of them, and will hold the Lender and such other Persons harmless
from and against any and all claims, damages, losses, liabilities, judgments and
expenses (including without limitation all reasonable fees and expenses of
counsel and all expenses of litigation or preparation therefor) which the Lender
or such other Persons may incur or which may be asserted against the Lender or
such other Persons in connection with or arising out of any investigation,
litigation or proceeding involving (i) any failure of the Borrower to comply
with any law, rule or regulation relating to any Hazardous Materials or any use
or operation or any real property owned, leased or used by the Borrower or any
shareholder or any Subsidiary or Affiliate of the Borrower, or (ii) the
presence, existence or threat of release of any Hazardous Materials at, on,
about, under, within or in connection with any real property owned, leased or
used by the Borrower or any Subsidiary or Affiliate of the Borrower (including
compliance with or contesting of any subpoenas or other process issued against
the Lender, or any director, officer or employee of the Lender, or any Person,
if any, who controls the Lender or any of them in any proceeding involving the
Borrower or any Subsidiary or Affiliate of the Borrower), whether or not the
Lender is party thereto.
8.4 WAIVERS. The Lender's failure to insist upon the strict performance
of any term, condition or other provision of the Loan Documents or to exercise
any
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<PAGE> 30
right or remedy hereunder or thereunder shall not constitute a waiver by the
Lender of any such term, condition or other provision or Default or Event of
Default in connection therewith; and any waiver of any such term, condition or
other provision or of any such Default or Event of Default shall not affect or
alter the Loan Documents, and each and every term, condition and other provision
of the Loan Documents shall, in such event, continue in full force and effect
and shall be operative with respect to any other then existing or subsequent
Default or Event of Default in connection therewith.
8.5 NOTICES, ETC. All notices and other communications hereunder shall
be in writing and shall be personally delivered or mailed by first class mail,
postage pre-paid, return receipt requested, by facsimile or by overnight
delivery service freight pre-paid, as follows:
(a) If to the Lender:
Peptide Therapeutics Group plc
321 Cambridge Science Part
Milton Road
Cambridge CB4 4WG
Tel: +44 0 1223 423 333
Fax: +44 0 1223 423 111
with a copy (which copy shall not constitute notice) to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attention: Michael Lytton
Tel: (617) 573-0247
Fax: (617) 227-4420
(b) If to the Borrower:
OraVax, Inc.
38 Sydney Street
Cambridge, MA 02139
Attention: Brigid Makes
Tel: (617) 494-1339
Fax: (617) 494-0924
27
<PAGE> 31
with a copy (which copy shall not constitute notice) to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: John M. Westcott, Jr.
Tel: (617) 526-6000
Fax: (617) 526-5000
or to such other address or addresses as the party to whom such notice is
directed may have designated in writing to the other party hereto. A notice
shall be deemed to have been given upon the earlier to occur of (i) five (5)
days after the date on which it is deposited in the mails, (ii) upon
transmission by telephonic facsimile, (iii) two (2) Business Day after delivery
to an overnight delivery service freight pre-paid or (iv) receipt by the party
to whom such notice is directed.
8.6 AMENDMENT, MODIFICATION AND WAIVER
(a) Neither this Agreement nor any provision hereof may be
waived, amended or modified except pursuant to an agreement or agreements in
writing entered into by the Borrower and the Lender.
(b) None of the Security Documents or the Note nor any
provision thereof may be waived, amended or modified except pursuant to an
agreement or agreements in writing entered into by the Borrower or other parties
thereto and by the Lender.
8.7 SURVIVAL OF AGREEMENTS, ETC. This Agreement shall inure to the
benefit of the Lender and its successors and assigns including any subsequent
holder or holders of the Note, and the term "Lender" shall include any such
holder or holders whenever the context permits. All agreements, representations
and warranties made herein shall survive the execution and delivery of this
Agreement and the making of the Loans hereunder.
8.8 COUNTERPARTS, ETC. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all the
counterparts shall together constitute one and the same instrument.
8.9 ENTIRE AGREEMENT, ETC. This Agreement and the other Loan Documents
together constitute the entire contract between the parties hereto and shall
supersede and take the place of any other instrument purporting to be an
agreement of the parties hereto relating to the transactions contemplated
hereby. This Agreement may
28
<PAGE> 32
not be changed orally but only by an agreement in writing signed by the party
against whom any waiver, change, modification or discharge is sought.
8.10 GOVERNING LAW; JURISDICTION; WAIVER OF JURY TRIAL. This Agreement
and the Note, including the validity thereof and the rights and obligations of
the parties hereunder and thereunder, shall be construed in accordance with and
governed by the laws of the Commonwealth of Massachusetts without reference to
the conflicts or choice of law principles thereof. The Borrower, to the extent
that it may lawfully do so, hereby consents to service of process, and to be
sued, in the Commonwealth of Massachusetts and consents to the jurisdiction of
the courts of the Commonwealth of Massachusetts and the United States District
Court for the District of Massachusetts, as well as to the jurisdiction of all
courts to which an appeal may be taken from such courts, for the purpose of any
suit, action or other proceeding arising out of any of its obligations under the
Loan Documents or with respect to the transactions contemplated hereby or
thereby, and expressly waives any and all objections it may have as to venue in
any such courts. The Borrower further agrees that a summons and complaint
commencing an action or proceeding in any of such courts shall be properly
served and shall confer personal jurisdiction if served personally or by
certified mail to it at its address provided in Section 9.6 or as otherwise
provided under the laws of the Commonwealth of Massachusetts. TO THE EXTENT
PERMITTED BY LAW, THE BORROWER AND THE LENDER MUTUALLY HEREBY KNOWINGLY,
VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY WAIVE THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH
ANY OF THE LOAN DOCUMENTS OR OTHER DOCUMENTS EXECUTED OR CONTEMPLATED TO BE
EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS,
STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER
CONSTITUTES A MATERIAL INDUCEMENT FOR THE LENDER TO ACCEPT THE NOTE AND MAKE THE
LOANS.
8.11 SUCCESSORS AND ASSIGNS. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns permitted hereby, except that the Borrower may not assign
or otherwise transfer any of their rights or obligations hereunder without the
prior written consent of the Lender (and any attempted assignment or transfer by
the Borrower without such consent shall be null and void). Nothing in this
Agreement, expressed or implied, shall be construed to confer upon any Person
(other than the parties hereto, their respective successors and assigns
permitted hereby and, to the extent expressly contemplated hereby, the officers,
employees, and Lenders of the Lender) any legal or equitable right, remedy or
claim under or by reason of this Agreement.
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<PAGE> 33
8.12 ASSIGNMENTS. The Lender may assign all or any portion of its
rights and obligations hereunder to any Person only with the prior written
consent of the Borrower.
[THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]
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<PAGE> 34
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
a sealed instrument as of the date first above written.
ORAVAX, INC.
By: /s/ Lance Gordon
--------------------------------
Name: Lance Gordon
Title: President & CEO
PEPTIDE THERAPEUTICS GROUP PLC
By: /s/ Gordon Cameron
-------------------------------
Name: Gordon Cameron
Title: Finance Director
<PAGE> 1
EXHIBIT 10.04
FIRST AMENDMENT
TO
FACILITY AGREEMENT
------------------
THIS FIRST AMENDMENT TO FACILITY AGREEMENT dated January 25 1999 (this
"FIRST AMENDMENT"), is among: ORAVAX JVM, INC., a Delaware corporation (the
"BORROWER") and CONNAUGHT LABORATORIES, INC., a Delaware corporation ("the
"LENDER").
WITNESSETH:
----------
WHEREAS, the Borrower and the Lender executed that certain Facility
Agreement dated as of November 2, 1998 (the "FACILITY AGREEMENT") whereby, upon
the terms and conditions therein stated, the Lender agreed to make a loan to the
Borrower up to the maximum principal amount of $3,000,000; and
WHEREAS, the Borrower and the Lender mutually desire to amend certain
aspects of the Facility Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained and of the loan, extension of credit and commitment hereinafter
referred to, the parties hereto agree as follows:
1. SECTION 1, SECOND PARAGRAPH of the Facility Agreement is hereby
amended by deleting the second paragraph thereof in its entirety and
substituting in lieu thereof the following:
The Loan will be payable, including any interest accrued up to such date,
on the earliest to occur of (i) the date of consummation of the Merger (as
defined below); (ii) July 31, 1999 or (iii) the date on which such
Facility is terminated in accordance with the provisions hereof (such
earliest date, the "Maturity Date"). "Merger" shall mean the consummation
of the transactions described in the Agreement and Plan of Acquisition
dated November 10, 1998 (the "Merger Agreement") by and between OraVax,
Inc., Peach Acquisition Corp. and Peptide Therapeutics Group plc, a
corporation organized and existing under the laws of England and Wales
("PT") pursuant to which PTR proposes to acquire the Borrower.
<PAGE> 2
2. SECTION 9 of the Facility Agreement is hereby amended by adding a
new subsection (h) which will read:
(h) It will maintain all of its rights relating to the Japanese
encephalitis vaccine, the tick-borne encephalitis vaccine and the hepatitis
C vaccine until the first to occur of (i) effective time of the Merger, or
(ii) the termination of the Merger Agreement.
3. SECTION 10 of the Facility Agreement is hereby amended by adding a
new subsection (j) which will read:
(j) The failure of the Borrower to perform, observe or comply with its
obligations set forth in Section 9(h).
4. The Borrower agrees to consent to the assignment of the Facility
Agreement to Pasteur Merieux Serums $ Vaccins S.A. ("PMC") such that $2,100,000
of the $3,000,000 Facility shall be assigned to PMC and to Merieux America
Holdings, Inc. ("MAHI") such that $900,000 of the $3,000,000 Facility shall be
assigned to MAHI. In connection with such assignment, the Borrower agrees to
execute and deliver all documents necessary to effect such assignment within 3
days after such documents have been delivered to the Borrower.
5. Except as expressly provided herein, the Facility Agreement and the
other instruments and agreements referred to herein and in the Facility
Agreement are not amended, modified or affected by this First Amendment, and all
such documents remain in full force and effect according to the terms,
provisions and conditions thereof; and any and all rights, titles, interests,
liens and powers created or existing thereunder are renewed, extended and
carried forward hereby, and all of the foregoing are ratified and confirmed in
all respects.
6. The Borrower hereby reaffirms all representations and
warranties made in the Facility Agreement as of the date hereof and confirms
that no Default or Event of Default exists thereunder.
7. All the defined terms used herein but not defined herein shall have
the same meanings herein as in the Facility Agreement.
8. On and after the date on which this First Amendment becomes
effective, the terms "this Agreement," "hereof," "herein," "hereunder" and terms
of like import, when used herein or in the Facility Agreement shall, except
where the context otherwise requires, refer to the Facility Agreement, as
amended by this First Amendment.
2
<PAGE> 3
9. This First Amendment shall benefit and bind the Borrower and the
Lender, and their respective assigns, successors, and legal representatives.
10. This First Amendment shall not become effective until fully executed
by the Borrower and the Lender, together with such other documents as the Lender
may reasonably request.
11. THIS FIRST AMENDMENT, THE FACILITY AGREEMENT, THE NOTE, AMENDMENT TO
PLEDGE AGREEMENT, THE PLEDGE AGREEMENT AND THE FACILITY DOCUMENTS REPRESENT THE
FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARITIES.
12. The provisions of Sections 12 and 13 of the Facility Agreement are
hereby incorporated by reference.
[Remainder of page intentionally left blank.]
3
<PAGE> 4
The parties hereto have caused this First Amendment to be duly executed as
of the day and year first above written.
BORROWER: ORAVAX JVM, INC., a
-------- Delaware corporation
By /s/ Lance Gordon
------------------------------------------
Name: Lance Gordon
Title: President & CEO
Address for Notices:
--------------------
38 Sidney Street
----------------
Cambridge, MA 02139
---------------------
Telecopier No.: (617) 494 0924
-------------
Telephone No.: (617) 494 9024
-------------
Attention: Lance Gordon
------------
LENDER: CONNAUGHT LABORATORIES, INC., a
------ Delaware corporation
By:
---------------------------------------
Name:
Title:
Address for Notices
-------------------
Route 611
Swiftwater, PA 18370
Telecopier No.: (717) 839-4096
Telephone No.: (717) 839-5587
Attention: Vice President & General Counsel
The undersigned hereby consents to the foregoing First Amendment
and confirms that such first Amendment shall not affect the validity or
enforceability of the Pledge Agreement dated as of November 2, 1998 as amended
by that certain Amendment to Pledge Agreement dated of even date herewith, which
is hereby ratified and confirmed in all respects.
ORAVAX JVM, INC., as Pledgor
By: /s/ Lance Gordon
------------------------
Name: Lance Gordon
Title: President & CEO
4
<PAGE> 5
The parties hereto have caused this First Amendment to be duly executed as
of the day and year first above written.
BORROWER: ORAVAX JVM, INC., a
-------- Delaware corporation
By:
--------------------------------------
Name:
Title:
Address for Notices:
-------------------
----------------------------
----------------------------
Telecopier No.: ( )
------------
Telephone No.: ( )
-------------
Attention:
------------------
LENDER: CONNAUGHT LABORATORIES, INC., a
------ Delaware corporation
By: /s/ Paul Kirkconnell
--------------------
Name: Paul Kirkconnell
Title: Corporate Vice President
Address for Notices
-------------------
Route 611
Swiftwater, PA 18370
Telecopier No.: (717) 839-4096
Telephone No.: (717) 839-5587
Attention: Vice President & General Counsel
The undersigned hereby consents to the foregoing First Amendment and
confirms that such First Amendment shall not affect the validity or
enforceability of the Pledge Agreement dated as of November 2, 1998 as amended
by that certain Amendment to Pledge Agreement dated of even date herewith, which
is hereby ratified and confirmed in all respects.
ORAVAX JVM, INC., as Pledgor
By:
----------------------------
Name:
Title:
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