As filed with the Securities and Exchange Commission on October 4, 1996
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
TITAN PHARMACEUTICALS, INC.
(Exact name of Small Business Issuer as specified in its charter)
----------
Delaware 2836 94-3171940
- ---------------- --------------------------- ---------------------
(State or other (Primary standard industrial (I.R.S. employer
jurisdiction of classification code number) identification number)
incorporation)
400 Oyster Point Blvd.
South San Francisco, California 94080
(415) 244-4990
(Address and telephone number of principal executive offices
and principal place of business)
------------------------------
Louis R. Bucalo, M.D., Chief Executive Officer
Titan Pharmaceuticals, Inc.
400 Oyster Point Blvd.
South San Francisco, California 94080
(415) 244-4990
(Name, address and telephone number of agent for service)
------------------------------
Copies to:
Fran Stoller, Esq.
Bachner, Tally, Polevoy & Misher LLP
380 Madison Avenue
New York, New York 10017
(212) 687-7000
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Amount to Offering Price Offering Registration
Securities to be Registered be Registered Per Unit Price (1) Fee
- --------------------------- ------------- -------------- ---------- ------------
<S> <C> <C> <C> <C>
Units, each consisting of 1,536,000 $16.875 $25,920,000 $ 8,938
one share of Common
Stock, $.001 par value and one
Class A Warrant (2)
Common Stock, 1,536,000 6.20 9,523,200 3,284
$.001 par value (3)
Total $35,443,200 $ 12,222
=========== ===========
</TABLE>
- ----------
(1) Estimated solely for purposes of calculating the registration fee.
(2) Registered for resale by selling security holders.
(3) Issuable upon exercise of the Class A Warrants registered for resale
by the selling securityholders.
----------
Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are also being registered such additional shares of Common Stock as may become
issuable pursuant to anti-dilution provisions upon exercise of the Class A
Warrants.
----------
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus contained herein is a combined Prospectus relating to this
Registration Statement and Registration Statement No. 33-99386 pursuant to which
the Company had registered (i) 3,660,400 shares of Common Stock underlying Class
A Warrants which were contained in the Units (the "IPO Units") sold in the
Company's initial public offering; (ii) 259,123 shares of Common Stock
underlying Class A Warrants which were originally held by certain selling
securityholders; (iii) 1,615,877 Class A Warrants and the 1,615,877 underlying
shares of Common Stock which continue to be held by certain selling
securityholders; and (iv) unit purchase options to purchase up to 320,000 IPO
Units and the underlying securities. The Company paid a total fee of $11,701.50
in connection with such Registration Statement.
----------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
(ii)
<PAGE>
- --------------------------------------------------------------------------------
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
- --------------------------------------------------------------------------------
PROSPECTUS
- ----------
SUBJECT TO COMPLETION - DATED OCTOBER 4, 1996
1,536,000 Shares of Common Stock
7,071,400 Class A Warrants
7,071,400 shares of Common Stock issuable upon exercise of Class A Warrants
TITAN PHARMACEUTICALS, INC.
Titan Pharmaceuticals, Inc. (the "Company") hereby offers: (i) 3,660,400
shares of Common Stock, $.001 par value (the "Common Stock") issuable upon
exercise of the redeemable Class A Warrants (the "Warrants") issued in
connection with the Company's initial public offering in January 1996 (the
"IPO"); and (ii) 259,123 shares of Common Stock issuable upon exercise of
259,123 Warrants issued in connection with a bridge financing (the "Bridge
Financing") completed by the Company prior to the IPO which were subsequently
resold.
This Prospectus also relates to the offer and sale by certain of the
investors (the "Bridge Investors") in the Bridge Financing of (i) up to
1,615,877 Warrants issued to the Bridge Investors in connection with the Bridge
Financing; and (ii) the 1,615,877 shares of Common Stock issuable upon exercise
of such Warrants. See "Selling Securityholders."
This Prospectus also relates to the offer and sale by certain investors
(the "Private Placement Investors") in a private placement by the Company
completed in August 1996 ("Private Placement") of (i) 1,536,000 units ("Units"),
each Unit consisting of one share of Common Stock and one Warrant; and (ii) the
1,536,000 shares of Common Stock issuable upon exercise of such Warrants.
Each Warrant currently entitles the registered holder thereof to purchase
one share of Common Stock at $6.20 through January 18, 2001. The exercise price
of the Warrants is subject to adjustment. Commencing January 18, 1997, the
Warrants are subject to redemption by the Company at $.05 per Warrant on 30
days' prior written notice if the closing bid price of the Common Stock averages
in excess of $9.10 per share for 30 consecutive business days ending within 15
days of the date of notice of redemption. See "Description of Securities." As of
September 20, 1996, 19,600 Warrants had been exercised.
The Units, Common Stock and Warrants are traded on The Nasdaq SmallCap
Market ("Nasdaq") under the symbols TTNPU, TTNP, and TTNPW, respectively. On
September 30, 1996, the closing bid prices of the Units, Common Stock and
Warrants were $16.75, $11.625 and $5.00, respectively.
----------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Company has agreed to pay a solicitation fee (the "Solicitation Fee")
equal to 5% of the exercise price in connection with the exercise of Warrants
under certain conditions. See "Plan of Distribution." The exercise prices of the
Warrants were determined by negotiation between the Company and D.H. Blair
Investment Banking Corp. ("Blair"), the underwriter of the Company's IPO, and
are not necessarily related to the Company's asset value, net worth or other
established criteria of value.
================================================================================
Warrant
Warrant Solicitation Proceeds to
Exercise Price Fee (1) Company (2)
-------------- ------------ -------------
Per Warrant $6.20 $.31 $5.89
Total (2) $43,842,680.00 $2,192,134.00 $41,650,546.00
================================================================================
The date of this Prospectus is_____ , 1996
<PAGE>
(1) Represents Solicitation Fees payable to Blair pursuant to the warrant
agreements dated as of January 18, 1996 and July 31, 1996 (collectively, the
"Warrant Agreements") between the Company and Blair under which the Company
agreed to pay Blair a fee of 5% of the aggregate exercise price of each Warrant
exercised solicited by its representatives if (i) the market price of the Common
Stock on the date the Warrant is exercised is greater than the then Warrant
exercise price; (ii) the exercise of the Warrant was solicited by a member of
the National Association of Securities Dealers, Inc. as designated in writing on
the Warrant Certificate subscription form; (iii) the Warrant is not held in a
discretionary account; (iv) disclosure of compensation arrangements was made
both at the time of the offering and at the time of the exercise of the
Warrants; and (v) the solicitation of exercise of the Warrant was not in
violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934,
as amended.
(2) Assumes the exercise of all outstanding Warrants and that the
Solicitation Fee is paid on all Warrants exercised. As of September 20, 1996,
only 19,600 of the Warrants had been exercised and there can be no assurance
that any additional Warrants will be exercised.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended ("Act") covering the securities offered by
this Prospectus. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance such
statement is qualified by reference to each such contract or document. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and in accordance therewith files
reports and other information with the Commission. Reports and other information
filed by the Company with the Commission can be inspected and copies obtained at
the public reference facilities maintained by the Commission at the following
addresses: New York Regional Office, Seven World Trade Center, New York, New
York 10048; and Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
-2-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements (including the notes thereto) appearing elsewhere in this Prospectus.
Except as otherwise noted, all information in this Prospectus (i) reflects a
0.461308687-for-one reverse stock split effected in February 1995 and a
0.36977472-for-one reverse stock split effected in November 1995; (ii) gives
effect to the conversion of outstanding preferred stock into Common Stock in
January 1996, (iii) assumes no exercise of (a) the Warrants; (b) unit purchase
options (collectively, the "Unit Purchase Options") issued in connection with
the IPO and the Private Placement; (c) options granted or available for grant
under the Company's stock option plans; or (d) other outstanding options and
warrants. See "Capitalization," "Management - Stock Option Plans," "Certain
Transactions" and "Description of Securities."
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in "Risk
Factors."
The Company
The Company is a biopharmaceutical company engaged in the identification
and acquisition of synergistic technologies, with applications in the areas of
cancer, disorders of the central nervous system, and other life threatening
diseases for further research and development by various subsidiaries of the
Company. The Company's operations are currently conducted through five entities
(the "Operating Companies") Ansan, Inc. ("Ansan"), a company engaged in the
development of small molecule-based therapeutics intended for the treatment of
cancer and other life threatening diseases; Ingenex, Inc. ("Ingenex"), a company
engaged in the development of proprietary gene-based therapies and the
application of functional genetics to pharmaceutical discovery initially for the
treatment of cancer and certain viral diseases; ProNeura, Inc., ("ProNeura"), a
company engaged in research and development activities relating to a polymeric
implantable drug delivery technology; Theracell, Inc. ("Theracell"), a company
engaged in the development of cell-based therapeutics intended for the
restorative treatment of neurological diseases and central nervous system
disorders; and Trilex Pharmaceuticals, Inc. ("Trilex"), a company engaged in
research and development of therapeutic cancer vaccines utilizing anti-idiotypic
antibody technology.
Ansan completed an initial public offering of its securities in August 1995
which reduced the Company's ownership to 44% resulting in its deconsolidation
for financial reporting purposes. The other Operating Companies remain as
consolidated subsidiaries.
References to the Company include the Operating Companies unless the
context requires otherwise. The Company was incorporated in Delaware in February
1992. The Company's executive offices are located at 400 Oyster Point Blvd.,
Suite 505, South San Francisco, California 94080 and its telephone number is
(415) 244-4990.
The Offering
Securities Offered.......... 3,919,523 shares issuable upon exercise of
Warrants. See "Description of Securities."
Securities Offered
Concurrently by
Selling Securityholders .. 1,536,000 Units, each Unit consisting of one share
of Common Stock and one Warrant. See "Selling
Securityholders."
1,615,877 Warrants. See "Selling Securityholders."
Common Stock Outstanding
Before Offering.......... 12,321,779 shares
Common Stock Outstanding
After Offering........... 19,393,179 shares(1)
Nasdaq Symbols
Units.................. TTNPU
Common Stock........... TTNP
Class A Warrants....... TTNPW
Risk Factors................ Investment in the securities offered hereby
involves a high degree of risk and immediate
substantial dilution. See "Risk Factors."
- -------------
(1) Assumes the exercise of all outstanding Warrants.
-3-
<PAGE>
Summary Financial Information
<TABLE>
<CAPTION>
Six Months Period from
Year Ended Ended July 25, 1991
December 31, 1995 June 30, (commencement of
------------------ ------------- operations)
Statement of 1995 1996 through June 30, 1996
Operations Data: ---- ----- ---------------------
<S> <C> <C> <C> <C>
Grant revenue $ 139,522 $ 89,881 $ 49,705 $ 189,227
Research and development expenses 5,201,507 3,544,459 2,349,988 24,363,609
Acquired in-process research and
devlopment expenses 686,000 -- -- 686,000
General and administrative expenses 3,657,900 2,130,920 1,975,986 8,540,368
Equity in loss of Ansan (457,114) -- (355,489) (812,603)
Interest income 67,868 34,010 339,748 794,506
Interest expense (1,899,148) (326,452) (1,818,206) (3,970,544)
------------ ------------ ------------ ------------
Net loss $(11,693,454) $ (5,877,940) $ (6,100,363) $(37,344,619)
============ ============ ============ ============
Pro forma net loss per share $ (1.54) $ (0.81)
============ ============
Shares used in computing pro forma
net loss per share(1) 7,617,470 7,229,183
Net loss per share $ (1.18)
============
Shares used in computing net loss
per share(1) 9,791,050
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1996
----------------------------------------------------------
Balance Sheet Data: Actual Pro Forma(2) As Adjusted(3)
------ ------------ --------------
<S> <C> <C> <C>
Working capital $ 4,564,750 $ 18,554,260 $ 60,204,730
Total assets 8,831,683 22,821,193 64,471,739
Total current liabilities 1,975,207 1,975,207 1,975,207
Long-term liabilities 1,633,874 1,633,874 1,633,874
Deficit accumulated
during development stage (37,344,619) (37,344,619) (37,344,619)
Total stockholders' equity $ 3,981,570 $ 17,971,080 $ 59,621,626
</TABLE>
- ----------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) Gives pro forma effect to completion of the Private Placement and the
exercise of 19,600 Warrants subsequent to June 30, 1996.
(3) Assumes the exercise of all outstanding Warrants.
-4-
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and an investment
in the Units offered hereby involves a high degree of risk. In addition to the
other information contained in this Prospectus, prospective investors should
carefully consider the following risk factors in evaluating whether to purchase
the Units offered hereby.
History of Operating Losses; Need for Additional Financing. The Company has
experienced substantial operating losses since its inception in July 1991. As of
June 30, 1996, the Company's accumulated deficit was $(37,344,619), which amount
has increased significantly since such date. The Company anticipates incurring
substantial and increasing operating losses over the next several years. Such
losses have been principally the result of the various costs associated with
research and development activities of Ansan, Ingenex, Theracell and a former
operating subsidiary, and the Company's provision of financial, administrative,
regulatory and management services to the Operating Companies. The Company
believes that available funds will enable it to fund its operations for
approximately 18 months. The Company will be required to seek substantial
additional financing to continue its activities beyond such date and to
commercialize any products that the Operating Companies may successfully
develop. The Company has no bank lines of credit and there can be no assurance
that the Company will be able to obtain any needed additional financing on
commercially reasonable terms in the event the Warrants are not exercised in
substantial numbers. If the Company is unable to obtain the necessary financing,
it will be required to significantly curtail its activities or to cease
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business - Strategy."
Development Stage of Company. The Company has conducted limited research
and development activities through the Operating Companies and has not generated
any revenues to date from operations. Accordingly, the Company must be evaluated
in light of the expenses, delays, uncertainties and complications typically
encountered by newly established biopharmaceutical businesses, many of which may
be beyond the Company's control. These include, but are not limited to,
unanticipated problems relating to product development, testing, regulatory
compliance, manufacturing, marketing and competition, and additional costs and
expenses that may exceed current estimates. There can be no assurance that the
Company or any of the Operating Companies will successfully develop and
commercialize any products, generate any revenues or ever achieve profitable
operations. See "Business."
Early Stage of Development of Proposed Products. The Operating Companies'
proposed products are at an early stage of development and will require
significant further research, development, testing and regulatory clearances
prior to commercialization. There can be no assurance that any proposed products
will be successfully developed, prove to be safe and efficacious, receive
requisite regulatory approvals, demonstrate substantial therapeutic benefits in
the treatment of any disease or condition, be capable of being produced in
commercial quantities at reasonable costs or be successfully marketed. See
"Business."
Government Regulation. The research, preclinical development, clinical
trials, product manufacturing and marketing to be conducted by the Operating
Companies are subject to regulation by the FDA and similar health authorities in
foreign countries. FDA approval of the Operating Companies' products, as well as
the manufacturing processes and facilities, if any, used to produce such
products, will be required before such products may be commercialized in the
United States. The process of obtaining approvals from the FDA is costly, time
consuming and often subject to unanticipated delays. There can be no assurance
that approvals of any of the proposed products, processes or facilities will be
granted on a timely basis, if at all. Even if regulatory approval is granted,
such approval may include significant limitations on indicated uses for which
any such products could be marketed. Further, even if such regulatory approvals
are obtained, a marketed drug and its manufacturer are subject to continued
review, and later discovery of previously unknown problems may result in
restrictions on such product or manufacturer, including withdrawal of the
product from the market. New government regulations in the United States or
foreign countries also may be established that could delay or prevent regulatory
approval of the Operating Companies products under development. Further, because
gene therapy is a relatively new technology and has not been extensively tested
in humans, the regulatory requirements governing gene therapy products are
uncertain and may be subject to substantial further review by various regulatory
authorities in the United States and abroad. This uncertainty may result in
extensive delays in initiating clinical trials and in the regulatory approval
process for Ingenex. Regulatory requirements ultimately imposed could have a
material adverse effect upon the business of
-5-
<PAGE>
Ingenex and, ultimately, the Company. Failure by the Operating Companies to
obtain regulatory approval of their proposed products, processes or facilities
could have a material adverse effect on the business, financial condition and
results of operations of the Company. The proposed products under development
may also be subject to certain other federal, state and local government
regulations, including, but not limited to, the Federal Food, Drug and Cosmetic
Act, the Environmental Protection Act, the Occupational Safety and Health Act,
and state, local and foreign counterparts to certain of such acts. See "Business
- - Government Regulation."
Reliance on Patents and Other Proprietary Rights. The Company's success
will depend, in part, on its ability, and the ability of the Operating Companies
and their licensor(s), to obtain protection for their products and technologies
under United States and foreign patent laws, to preserve their trade secrets,
and to operate without infringing the proprietary rights of third parties. The
Operating Companies have obtained rights to certain patents and patent
applications and may, in the future, seek rights from third parties to
additional patents and patent applications. There can be no assurance that
patent applications relating to the Operating Companies' potential products or
technologies, including those licensed from others, or that it may license in
the future, will result in patents being issued, that any issued patents will
afford adequate protection or not be challenged, invalidated, infringed, or
circumvented, or that any rights granted thereunder will afford competitive
advantages to the Company. Furthermore, there can be no assurance that others
have not independently developed, or will not independently develop, similar
products and/or technologies, duplicate any of the Operating Companies' products
or technologies, or, if patents are issued to, or licensed by, the Company,
design around such patents.
There can be no assurance that the validity of any of the patents licensed
to the Operating Companies would be upheld if challenged by others in litigation
or that the Company's activities would not infringe patents owned by others. The
Company could incur substantial costs in defending itself and/or the Operating
Companies in suits brought against them or any of their licensors, or in suits
in which the Company may assert, against others, patents in which the Company
and/or the Operating Companies have rights. Should the Operating Companies'
products or technologies be found to infringe patents issued to third parties,
the manufacture, use, and sale of such products could be enjoined and the
Company and/or the Operating Companies could be required to pay substantial
damages. In addition, the Company and/or the Operating Companies may be required
to obtain licenses to patents or other proprietary rights of third parties, in
connection with the development and use of their products and technologies. No
assurance can be given that any licenses required under any such patents or
proprietary rights would be made available on acceptable terms, if at all.
The Company and the Operating Companies also rely on trade secrets and
proprietary know-how, which they seek to protect, in part, by confidentiality
agreements with employees, consultants, advisors, and others. There can be no
assurance that such employees, consultants, advisors, or others, will maintain
the confidentiality of such trade secrets or proprietary information, or that
the trade secrets or proprietary know-how of the Company and the Operating
Companies will not otherwise become known or be independently developed by
competitors in such a manner that the Company and the Operating Companies will
have no practical recourse.
The Company is aware of the existence of prior art references which may
affect the validity of certain claims in the Nudelman patent licensed by Ansan
which broadly cover AN 10, among other compounds. Reexamination of this patent
by the U.S. Patent and Trademark Office ("PTO"), in light of these references,
may be necessary to obtain valid claims which are both free of the prior art and
which specifically cover AN 10. In the course of preparing for reexamination or
otherwise, additional prior art may be uncovered which might affect the validity
of such proposed narrow claims. Such art would need to be brought to the
attention of the PTO in connection with any reexamination. Moreover, there can
be no assurance that the PTO will grant a request for reexamination, or if
granted, that such reexamination will result in the issuance of the desired
claims. In any event, given that the already-uncovered prior art references
relate to compounds but not to methods of treatment, the existence of such
references would not, as a matter of United States patent law, be expected to
affect the patentability of any claims directed to the use of AN 10 to treat
fetal hemoglobinopathies which presently are pending in the application licensed
by Ansan.
The Company also is aware of certain issued United States patents (the
"Perrine patents") which appear to cover the administration of butyric acid,
during gestation or infancy, to ameliorate (beta)-globin disorders, including
sickle cell anemia and (beta)-thalassemia, by increasing the level of fetal
hemoglobin. To the extent that AN 10 converts
-6-
<PAGE>
to butyric acid and in the event Ansan's commercial activities include
administration of AN 10 during gestation and/or infancy, such activities could
give rise to issues of infringement of the Perrine patents.
The Company is aware of an issued United States patent (as well as
corresponding patents and patent applications in foreign countries) relating to
multidrug resistance in mammalian cells. This patent claims substantially the
same subject matter as is claimed by certain issued United States patents that
have been licensed by Ingenex. The Company is also aware of an issued United
States patent, relating to ex vivo gene therapy. The Company believes that this
patent claims subject matter that relates to any gene therapeutic developed by
Ingenex to the extent that the introduction of the gene into the subject's cells
is performed ex vivo. Thus, it may be necessary for Ingenex to obtain a license
under either or both of such patents to pursue commercialization of its proposed
gene therapy products utilizing the MDR1 gene or ex vivo therapies, as
applicable. There can be no assurance that Ingenex will be able to obtain such
licenses or that such licenses, if available, can be obtained on terms
acceptable to Ingenex. Failure of Ingenex to obtain such licenses could have a
material adverse effect on the business, financial condition and results of
operations of Ingenex and the Company. Ingenex has received notice that three
companies are opposing the grant of a European patent which has claims directed
to the human MDR1 gene and gene fragments.
Competition and Technological Change. Competition in the pharmaceutical and
biotechnology industries is intense and is expected to increase. The Company
will face competition from numerous companies that currently market, or are
developing, products for the treatment of diseases and disorders targeted by the
Operating Companies. Many of these entities have significantly greater research
and development capabilities, experience in obtaining regulatory approvals and
manufacturing, marketing, financial and managerial resources than the Company or
its Operating Companies. Acquisitions of or investments in competing
biotechnology companies by large pharmaceuticals companies could enhance such
competitors' financial, marketing and other resources. The Company also competes
with universities and other research institutions in the development of
products, technologies and processes. There can be no assurance that competitors
of the Company will not succeed in developing technologies or products that are
more effective than those of the Operating Companies or that will render the
Operating Companies' products or technologies noncompetitive or obsolete. In
addition, certain of such competitors may achieve product commercialization or
patent protection earlier than the Operating Companies. See "Business
Competition."
Dependence Upon Key Collaborative Relationships and License and Sponsored
Research Agreements. The Company relies significantly on the resources of third
parties to conduct research and development. The Company's success will depend,
in part, on its ability and the ability of the Operating Companies to maintain
existing collaborative relationships and to develop new collaborative
relationships with third parties. There can be no assurance that the Company
will be successful in maintaining its existing collaborative arrangements, that
any collaborative arrangements will lead to the successful commercialization of
products or that such collaborative arrangements will continue to be available
to the Company or the Operating Companies.
The license agreements that have been or may in the future be entered into
by the Operating Companies typically require the payment of an up-front license
fee and royalties based on sales of licensed products and processes under the
license and any sublicense with minimum annual royalties, the use of due
diligence in developing and bringing products to market, the achievement of
funding milestones and, in some cases, the grant of stock to the licensor. The
sponsored research agreements that have been or may in the future be entered
into by the Operating Companies generally require periodic payments on an annual
or quarterly basis. Some agreements also may require funding or production
facilities relating to clinical research. If the Operating Companies fail to
meet their financial or other obligations under either their license agreements
or their sponsored research agreements in a timely manner, the rights to their
proprietary technology or the right to have the applicable university or
institution conduct research and development efforts could be lost. Further,
Ingenex has assigned its rights under four of its principal licenses to a lender
and has sublicensed back such rights in exchange for monthly license payments
aggregating $1,545,265 at June 30, 1996. There can be no assurance that Ingenex
will have sufficient funds to meet its payment obligations and reacquire its
rights to these licenses. See "Business - Sponsored Research and License
Agreements."
Dependence on Third Parties for Manufacturing and Marketing Activities. To
date, the Operating Companies have not introduced any products on the commercial
market. To conduct human clinical trials and
-7-
<PAGE>
ultimately to gain market acceptance, the products under development must be
manufactured in compliance with regulatory requirements and at acceptable costs.
It is not expected that the Company or any of the Operating Companies will have
the resources in the foreseeable future to allocate to the manufacture or direct
marketing of their proposed products and, therefore, it is intended that
collaborative arrangements be pursued regarding the manufacture and marketing of
any products that may be successfully developed. The future success of the
Company may depend, in part, on the ability of the Operating Companies to enter
into and maintain such collaborative relationships, the collaborator's strategic
interest in the products under development, and their ability to successfully
manufacture or market any such products. To the extent that any of the Operating
Companies decide not to, or are unable to, enter into collaborative arrangements
with respect to the manufacture or marketing of their proposed products,
significant capital expenditures, management resources and time will be required
to establish a manufacturing facility or develop a sales force. There can also
be no assurance that collaborative arrangements to manufacture or market any
proposed products will be entered into or, in lieu thereof, that any
manufacturing operations can be successfully established or that any sales force
can be successfully implemented. See "Business - Sales and Marketing" and
"Business - Manufacturing and Supplies."
Dependence on Key Personnel. The Company is highly dependent on the
services of Dr. Louis R. Bucalo, President and Chief Executive Officer, as well
as the other principal members of management and scientific staff of the Company
and the Operating Companies. The loss of one or more of such individuals could
substantially impair ongoing research and development programs and the ability
of the Company and/or the Operating Companies to obtain additional financing.
The future success of the Company depends in large part upon its ability and
that of the Operating Companies to attract and retain highly qualified
personnel. The Company and the Operating Companies face intense competition for
such highly qualified personnel from other pharmaceutical and biotechnology
companies, as well as universities and nonprofit research organizations, and may
have to pay higher salaries to attract and retain such personnel. There can be
no assurance that sufficient qualified personnel can be hired on a timely basis
or retained. The loss of such key personnel or failure to recruit additional key
personnel could have a material adverse effect on the Company's and the
Operating Companies' business, financial condition and results of operations.
See "Management."
Risk of Product Liability. In the event that any products under development
by the Operating Companies are successfully developed, the Company will face an
inherent business risk of financial exposure to product liability claims
alleging that the use of such products produced adverse effects. The Company
does not presently carry product liability insurance, but the Company expects
that it and/or the applicable Operating Company will obtain such insurance prior
to the commercial distribution or sale of any products or processes. However,
there can be no assurance that adequate product liability insurance can be
obtained at acceptable costs. In the event of an uninsured or inadequately
insured product liability claim, the Company's business and financial condition
could be materially adversely affected. See "Business."
Potential Adverse Effects of Preferred Stock. The Company's Amended and
Restated Certificate of Incorporation authorizes the issuance of shares of
5,000,000 "blank check" preferred stock, which will have such designations,
rights and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors will be empowered, without
stockholder approval (but subject to applicable government regulatory
restrictions), to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Common Stock. In the event of such issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any shares of preferred
stock, there can be no assurance that the Company will not do so in the future.
See "Description of Securities Preferred Stock."
No Dividends. The Company has not paid any cash dividends on its Common
Stock and does not expect to declare or pay any cash or other dividends in the
foreseeable future. See "Dividend Policy."
Shares Eligible for Future Sale. Future sales of Common Stock by existing
stockholders pursuant to Rule 144 under the Securities Act, pursuant to an
effective registration statement declared effective in January 1996 or
otherwise, could have an adverse effect on the price of the Company's
securities. Warrants to purchase 1,875,000 shares of Common Stock and the
underlying shares were registered for resale concurrently with the IPO, subject
to a contractual restriction that during the period from 91 to 270 days after
January 18, 1996, may only sell specified
-8-
<PAGE>
percentages of such warrants. Approximately 6,800,000 shares of Common Stock and
374,000 additional shares of Common Stock underlying vested options issued
pursuant to the Company's stock option plans are eligible for resale pursuant to
Rules 144 and/or 701 under the Securities Act. However, holders of approximately
95% of the outstanding shares of Common Stock and outstanding options prior to
the IPO have agreed not to sell any shares of Common Stock until February 1997
without the prior written consent of Blair. Sales of Common Stock, or the
possibility of such sales, in the public market may adversely affect the market
price of the Company's securities.
Exercise of Registration Rights. The holders of the Unit Purchase Options,
warrants to purchase 556,534 shares of Common Stock and 5,521,140 shares of
Common Stock have certain demand and "piggy-back" registration rights with
respect to their securities commencing January 1997. Exercise of such rights
could involve substantial expense to the Company.
Potential Adverse Effect of Redemption of Warrants. Commencing January 18,
1997, the Warrants may be redeemed by the Company at a redemption price of $.05
per Warrant upon not less than 30 days' prior written notice if the closing bid
price of the Common Stock shall have averaged in excess of $9.10 per share for
30 consecutive trading days ending within 15 days of the notice. Redemption of
the Warrants could force the holders (i) to exercise the Warrants and pay the
exercise price therefor at a time when it may be disadvantageous for the holders
to do so, (ii) to sell the Warrants at the then current market price when they
might otherwise wish to hold the Warrants, or (iii) to accept the nominal
redemption price which, at the time the Warrants are called for redemption, is
likely to be substantially less than the market value of the Warrants. See
"Description of Securities Redeemable Warrants."
Current Prospectus and State Registration to Exercise Warrants. Holders of
Warrants will be able to exercise the Warrants only if (i) a current prospectus
under the Securities Act relating to the shares of Common Stock underlying the
Warrants is then in effect and (ii) such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the states in
which the various holders of Warrants reside. Although the Company has
undertaken and intends to use its best efforts to maintain a current prospectus
covering the shares underlying the Warrants following completion of the Offering
to the extent required by Federal securities laws, there can be no assurance
that the Company will be able to do so. The value of the Warrants may be greatly
reduced if a prospectus covering the shares issuable upon the exercise of the
Warrants is not kept current or if the securities are not qualified, or exempt
from qualification, in the states in which the holders of Warrants reside.
Persons holding Warrants who reside in jurisdictions in which such securities
are not qualified and in which there is no exemption will be unable to exercise
their Warrants and would either have to sell their Warrants in the open market
or allow them to expire unexercised. If and when the Warrants become redeemable
by the terms thereof, the Company may exercise its redemption right even if it
is unable to qualify the underlying securities for sale under all applicable
state securities laws. See "Description of Securities - Redeemable Warrants."
Possible Restrictions on Market-Making Activities in Company's Securities.
D.H. Blair & Co., Inc. ("Blair & Co.") makes a market in the Company's
securities. Rule 10b-6 under the Securities Act of 1934, as amended (the
"Exchange Act"), may prohibit Blair & Co. from engaging in any market-making
activities with regard to the Company's securities for the period from nine
business days (or such other applicable period as Rule 10b-6 may provide) prior
to any solicitation by Blair of the exercise of Warrants until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that Blair may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, Blair & Co. may be unable to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable. In addition, under applicable rules and regulations
under the Exchange Act, any person engaged in the distribution of the Selling
Securityholder Securities may not simultaneously engage in market-making
activities with respect to any securities of the Company for the applicable
"cooling off" period (at least two and possibly nine business days) prior to the
commencement of such distribution. Accordingly, in the event Blair or Blair &
Co. is engaged in a distribution of the Selling Securityholder securities,
neither of such firms will be able to make a market in the Company's securities
during the applicable restrictive period. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of the
Company's securities. See "Plan of Distribution."
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<PAGE>
USE OF PROCEEDS
At September 20, 1996, only 19,600 Warrants had been exercised. Holders of
Warrants are not obligated to exercise their Warrants and there can be no
assurance that such holders will choose to exercise all or any of their
Warrants. In the event that all of the remaining 7,071,400 outstanding Warrants
are exercised, the net proceeds to the Company would be $41,650,546, after
deducting the Solicitation Fee and excluding other expenses of the offering.
The Company intends to use the net proceeds received upon exercise of the
Warrants, if any, for research and development, product and technology
acquisitions and for general corporate purposes.
Prior to expenditure, the net proceeds from the exercise of the Warrants
will be invested in highly-liquid interest bearing securities or money market
funds.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. The Company
currently intends to retain all earnings, if any, for use in the expansion of
the Company's business. The declaration and payment of future dividends, if any,
will be at the sole discretion of the Board of Directors and will depend upon
the Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996; (ii) pro forma as of June 30, 1996 to reflect the completion of
the Private Placement and the exercise of 19,600 Warrants subsequent to such
date. This table should be read in conjunction with the Financial Statements and
the Notes thereto included elsewhere in this Prospectus.
June 30, 1996
-----------------------------
Actual Pro Forma
------ ---------
Long-term debt and capital lease
obligations, including
current portion .......................... $ 2,410,229 $ 2,410,229
------------ ------------
Stockholders' equity:
Preferred Stock, $.001 par value;
30,000,000 shares authorized;
no shares issued and outstanding ......... -- --
Common Stock, $.001 par value;
30,000,000 shares authorized;
10,766,179 shares issued and
outstanding actual; 12,321,779
shares issued and outstanding
pro forma(1) ............................. 35,513,836 49,503,346
Additional paid-in capital ............... 6,186,353 6,186,353
Deferred compensation .................... (374,000) (374,000)
Deficit accumulated during development
stage ................................. (37,344,619) (37,344,619)
------------ ------------
Total stockholders' equity .......... 3,981,570 17,971,080
------------ ------------
Total capitalization .......... $ 6,391,799 $ 20,381,309
============ ============
- ----------
(1) Excludes (i) 7,071,400 shares of Common Stock issuable upon exercise of
outstanding Warrants; (ii) 1,254,400 shares of Common Stock issuable upon
exercise of the Unit Purchase Options and the Warrants included in such
options; (iii) 321,671 shares of Common Stock issuable upon exercise of
outstanding options granted under the Company's 1993 Stock Option Plan;
(iv) 300,000 shares of Common Stock reserved for issuance under the
Company's 1995 Stock Option Plan (which amount will increase to 1,300,000
if stockholder approval is obtained); and (v) 668,917 shares of Common
Stock issuable upon exercise of other outstanding options and warrants. See
"Management--Stock Option Plans," "Certain Transactions," "Description of
Capital Stock" and "Selling Securityholders."
Private Placement
In August 1996, the Company completed the Private Placement of an aggregate
of 1,536,000 Units for gross proceeds of $16,000,000. The Company paid the
placement agent a commission of $1,600,000 and a non-accountable expense
allowance of $480,000 in connection with the Private Placement and granted the
placement agent a unit purchase option to purchase 307,200 Units. The Private
Placement Securities have been registered for resale hereby, subject to the
contractual restriction that the Private Placement Investors have agreed not to
sell their Units or the components thereof except after specified periods. See
"Selling Securityholders."
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<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical and pro forma financial
data of the Company. The selected historical financial data in the table at and
for the year ended December 31, 1995 is derived from the consolidated financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. The financial data at June 30, 1996 for the six months
ended June 30, 1995 and 1996 and for the period from July 25, 1991 (commencement
of operations) through June 30, 1996 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position and the results of operations
at that date and for those periods. Operating results for the six months ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the entire fiscal year ending December 31, 1996. The selected financial data
set forth below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
Six Months Period from
Year Ended Ended July 25, 1991
December 31, 1995 June 30, (commencement of
----------------- ---------- operations)
1995 1996 through June 30, 1996
---- ---- ---------------------
<S> <C> <C> <C> <C>
Statement of
Operations Data:
Grant revenue $ 139,522 $ 89,881 $ 49,705 $ 189,227
Research and development expenses 5,201,507 3,544,459 2,349,988 24,363,609
Acquired in-process research and
development expenses 686,000 -- -- 686,000
General and administrative expenses 3,657,900 2,130,920 1,975,986 8,540,368
Equity in loss of Ansan (457,114) -- (355,489) (812,603)
Interest income 67,868 34,010 339,748 794,506
Interest expense (1,899,148) (326,452) (1,818,206) (3,970,544)
----------- ----------- ----------- -----------
Net loss $(11,693,454) $(5,877,940) $(6,100,363) $(37,344,544)
============ ============ ============ ============
Pro forma net loss per share $ (1.54) $ (0.81)
============ ===========
Shares used in computing pro forma
net loss per share(1) 7,617,470 7,229,183
Net loss per share $ (1.18)
===========
Shares used in computing net
loss per share (1) 9,791,050
</TABLE>
<TABLE>
<CAPTION>
At December 31,1995 At June 30,1996
------------------- ---------------
Balance Sheet Data: Actual Pro Forma(2)
------ ------------
<S> <C> <C> <C>
Working capital (deficit) $(6,231,672) $ 4,564,750 $18,554,260
Total assets 4,732,171 8,831,683 22,821,193
Total current liabilities 7,277,339 1,975,207 1,975,207
Long-term liabilities 2,036,455 1,633,874 1,633,874
Deficit accumulated during
development stage (31,244,256) (37,344,619) (37,344,619)
Total stockholders' equity
(net capital deficiency) $(5,822,655) $ 3,981,570 $17,971,080
</TABLE>
- ----------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) Gives pro forma effect to completion of the Private Placement and the
exercise of 19,600 Warrants subsequent to June 30, 1996.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
Results of Operations
General
The Company is a development stage company. The Company has had no
significant revenue and has incurred an accumulated deficit through June 30,
1996 of $(37,344,619). Since its inception in July 1991, the Company's efforts
have been principally devoted to acquiring licenses and technologies, research
and development, securing patent protection and raising capital. These losses
have resulted from expenditures for research and development and general and
administrative activities, including legal and professional activities, and have
continued to date. Through June 30, 1996, research and development expenses
totalled $25,049,609 and general and administrative expenses totalled
$8,540,368.
The Company expects to continue to incur substantial research and
development costs in the future as a result of funding ongoing (i) research and
development programs at the Operating Companies, (ii) manufacturing of products
for use in clinical trials, (iii) patent and regulatory related expenses, and
(iv) preclinical and clinical testing of the Operating Companies' products. The
Company also expects that general and administrative costs necessary to support
such research and development activities will increase. Accordingly, the Company
expects to incur increasing operating losses for the foreseeable future. The
Company will also seek to identify new technologies for possible in-licensing or
acquisition. There can be no assurance that the Company will ever achieve
profitable operations.
The Company's strategy will continue to be to seek public or private
financing for the Operating Companies through the sale of securities or
corporate partnering arrangements at such time as their stage of development and
working capital requirements permit such outside financing in order to reduce
their financial dependence on the Company and enable the Company to continue to
expand its product portfolio through acquisitions. There can be no assurance
that financing from such sources or others will be available to any of the
Operating Companies.
Six Months Ended June 30, 1996 Compared With Six Months Ended June 30, 1995
Research and development expenses for the six months ended June 30, 1996
(the "1996 six months") were approximately $2,350,000 as compared to $3,544,000
for the six months ended June 30, 1995 (the "1995 six months"), a decrease of
34%. The decrease reflects the deconsolidation of Ansan, Inc. effective August
1995, the cessation of operations of Geneic Sciences, Inc. ("Geneic") in
September 1995 and the completion of certain sponsored research for Ingenex in
1995.
General and administrative expenses for the 1996 six months were
approximately $1,976,000 as compared to $2,131,000 for the 1995 six months, a
decrease of 7%. The decrease was due primarily to the cessation of operations of
Geneic and a decrease in general and administrative personnel.
As a result of the foregoing expenses, the Company incurred an operating
loss of approximately $4,276,000 for the 1996 six months compared with
$5,585,000 for the 1995 six months.
For the 1996 six months, interest income was $340,000 compared with $34,000
for the 1995 six months. This was a result of a substantial increase in the
amount of cash from the IPO. Interest expense increased to approximately
$1,818,000 during the 1996 six months from $326,000 for the 1995 six months. The
increase for the 1996 period reflects a non-recurring charge due to the
repayment in January 1996 of notes issued in a bridge financing ("Bridge
Notes"). This non-recurring charge represents the $950,000 unamortized portion
of the $1,200,000 debt discount and $458,000 of debt issuance costs relating to
the Bridge Notes.
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<PAGE>
Other income (expense) for the 1996 six months also includes approximately
$355,000 of losses representing the Company's share of Ansan's losses.
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Research and development expenses for the year ended December 31, 1995 were
approximately $5,888,000 (including a $686,000 charge for acquired in-process
research and development) as compared to $10,602,000 for the year ended December
31 ,1994, a decrease of 44%. The decrease reflects the deconsolidation of Ansan,
Inc. effective August 1995, the cessation of operations of Geneic Sciences, Inc.
("Geneic") in September 1995 and the completion of certain sponsored research
for Ingenex in 1995.
General and administrative expenses for 1995 were approximately $3,658,000
as compared to $2,504,000 for 1994, an increase of 46%. The increase was due
primarily to increased expenses associated with supporting the activities of the
Company and the Operating Companies.
Primarily a result of the foregoing decrease in research and development
expenses, the Company incurred an operating loss of approximately $9,406,000 for
1995 compared with $13,106,000 for 1994.
For 1995, interest expense increased to approximately $1,899,000 from
$97,000 for 1994. Approximately $1,250,000 of the increase for 1995 reflects
amortization of the discount on the warrants issued in the bridge financings.
Other income (expense) for 1995 also includes approximately $457,000 of
losses representing the Company's shares of Ansan's losses.
Liquidity and Capital Resources
In January 1996, the Company completed the IPO which resulted in net
proceeds to the Company of approximately $8,622,000 after payment of
underwriting discounts, a non-accountable expense allowance to the underwriter
and other expenses of the offering and the repayment of the Bridge Notes and
notes issued by Ingenex. In February 1996, the underwriter of the Company's IPO
exercised its overallotment option, resulting in net proceeds to the Company,
after discounts and commissions to the underwriter, of $2,160,000.
Upon completion of the IPO, the Company's previously outstanding shares of
preferred stock were converted automatically into shares of common stock at
adjusted conversion prices per common share less than the public offering price
per common share. The deemed benefit to the preferred stockholders approximated
$5,400,000 which deemed benefit was recorded by offsetting charges and credits
to additional paid-in capital at the time of conversion. There was no effect on
net loss per share from the mandatory conversion. However, the amount increased
the loss allocable to common stock, in the calculation of net loss per share in
the 1996 six months.
On July 31 and August 2, 1996, the Company completed the Private Placement
which resulted in net proceeds to the Company of approximately $13,867,990 after
payment of placement agent fees and other expenses of the Private Placement.
The Company expects to continue to incur substantial additional operating
losses from costs related to continuation and expansion of research and
development, clinical trials, and increased administrative and fund raising
activities over at least the next several years. While the Company believes that
the proceeds of the IPO and the Private Placement will be sufficient to sustain
its planned operations for approximately the next 18 months, the Company will be
required to seek additional financing to continue its activities beyond the near
term. There can be no assurance that the Company will be able to obtain any
required additional funds, in which event it may be necessary for the Company to
significantly curtail its operations.
The Company is party to a master capital equipment lease with respect to
which the Operating Companies have entered into a sublease and assignment with
the Company. At June 30, 1996, the amount outstanding under the equipment lease
was $864,964 with monthly payments of $30,459.
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<PAGE>
The Company has guaranteed the obligations of Ingenex under an assignment
and sublicense agreement pursuant to which Ingenex received $2,000,000 in
financing in January 1995. Such agreement currently provides for 40 monthly
payments of $60,060 through January 1999. See "Business Sponsored Research and
License Agreements - Ingenex."
At December 31, 1995, the Company had consolidated net operating loss
carryforwards for Federal income tax purposes of $23,600,000, of which
$21,800,000 is attributable to the Operating Companies (excluding Ansan). The
net operating loss and credit carryforwards expire from 2008 through 2010.
Utilization of net operating loss carryforwards may be subject to a substantial
annual limitation due to ownership change provisions of the Internal Revenue
Code of 1986.
-15-
<PAGE>
BUSINESS
General
The Company is a biopharmaceutical company engaged in the identification
and acquisition of synergistic technologies, with applications in the areas of
cancer, disorders of the central nervous system ("CNS") and other life
threatening diseases, for further research and development by various
subsidiaries of the Company. The Company's operations are currently conducted
through five entities (the "Operating Companies") Ansan, a company engaged in
the development of small molecule-based therapeutics intended for the treatment
of cancer and other life threatening diseases; Ingenex, a company engaged in the
development of proprietary gene-based therapies and the application of
functional genetics to pharmaceutical discovery initially for the treatment of
cancer and certain viral diseases; ProNeura, a company engaged in research and
development activities relating to a polymeric implantable drug delivery
technology; Theracell, a company engaged in the development of cell-based
therapeutics intended for the restorative treatment of neurological diseases and
central nervous system disorders; and Trilex, a company engaged in research and
development of therapeutic cancer vaccines utilizing anti-idiotypic antibody
technology.
Statements in this report that are not descriptions of historical facts may
be forward looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated.
Strategy
The Company participates in the development and growth of the Operating
Companies by identifying and acquiring technologies and by providing initial
financing, management expertise and other resources. In acquiring synergistic
technologies with applications in the areas of cancer, CNS disorders and other
life threatening diseases, the Company pursues opportunities that encompass the
full breadth of mainstream therapeutic approaches to drug discovery, including
small molecule therapy, gene therapy and cell therapy. The Company believes its
strategy may enhance product development opportunities and result in more
efficient use of limited resources. The Company intends, if sufficient financing
can be obtained, to continue to build value through identifying and acquiring
additional complementary technologies or products and/or development-stage
biopharmaceutical companies.
The Company's strategy is to invest in the Operating Companies, to the
extent of available resources, and to develop the technology to the stage of
initial clinical testing and to seek joint venture, licensing or other
collaborative arrangements with one or more pharmaceutical companies which will
bear the cost of the regulatory approval process necessary to commercialize
therapeutics in the United States and in foreign markets, as well as to market
any products which may be successfully developed by the Operating Companies and
approved for commercialization. It is not anticipated that any of the Operating
Companies' proposed products will receive the requisite regulatory approval for
commercialization in the United States or elsewhere for several years, if at
all.
The Operating Companies
Ansan
Ansan is engaged in the research and development of small molecule
therapies intended to treat cancer, blood disorders and other serious diseases.
Ansan's initial product under development, Pivanex(TM), is derived from AN 9, a
patented analog of butyric acid, and is intended for the treatment of cancer by
promoting cellular differentiation. Traditional cytotoxic chemotherapeutics tend
to kill cancer cells preferentially because cancer cells divide more often and
more rapidly than most normal cells. Unfortunately, such agents may also kill
rapidly dividing normal cells, including blood cells and cells of the intestinal
lining, which leads to side effects such as anemia, nausea, vomiting and risk of
infection. Unlike traditional cytotoxic chemotherapy, differentiation therapy
represents a relatively new direction in cancer research, and involves the
development of agents that, in contrast to the function of cytotoxic agents,
induce cancer cells to differentiate, mature and exhibit more normal growth
properties. Differentiation therapy may also lead to apoptosis, or what is known
as normal "programmed cell death," resulting in the destruction of the cancer
cells while sparing normal cells. Pivanex is currently in Phase I clinical
trials.
-16-
<PAGE>
Ansan is also developing Novaheme(TM), which is derived from AN 10, another
novel analog of butyric acid, and is intended for the treatment of sickle cell
anemia and b-thalassemia, genetic disorders that impair one's ability to produce
normal adult hemoglobin, the oxygen carrying protein of red blood cells. Initial
preclinical experiments indicate that Novaheme(TM) appears to be more potent at
increasing fetal hemoglobin levels than its competitors (including butyric acid,
hydroxyurea and isobutyramide). Ansan believes that Novaheme(TM) may also prove
to exhibit lower toxicity than certain of the other current treatment options
(such as the cytotoxic agent hydroxyurea) and may, therefore, prove useful in
the treatment of such blood disorders.
Ansan is also attempting to broaden it's portfolio of drug development
candidates through inlicensing. Target drugs have patent protection, novel
applications and development needs suitable to the current organization of
Ansan. In May 1996, the Company acquired rights to develop an intravenous
formulation of the drug Apafant for all clinical indications. The Company will
initially focus on the use of such drug for the treatment of acute pancreatitis.
There can be no assurance that Ansan will be able to enter into any other such
licensing arrangements.
In September 1995, Ansan completed an initial public offering of its
securities. Its common stock is currently traded on the Nasdaq SmallCap Market
under the symbol ANSN. The Company currently owns approximately 44% of the
outstanding capital stock of Ansan. The Company holds an option, which expired
on September 8, 1996, to purchase an additional 400,000 shares of Ansan's Common
Stock, the exercise of which would result in the Company owning a majority of
Ansan's outstanding capital stock. The Company and Ansan are presently
negotiating to further extend this option.
Ingenex
Ingenex is engaged in the research and development of gene-based
therapeutics and efforts to discover medically important genes intended
initially for the treatment of cancer and certain viral diseases. Gene therapy
is an approach to the treatment and prevention of genetic and acquired diseases
that involves the insertion of new genetic information into target cells to
produce specific proteins or effect changes in the regulation of gene expression
needed to correct or modulate disease conditions. The operations of Ingenex are
focused on developing the proprietary gene component of gene-therapy products
(as opposed to the vector used to insert the gene). To this end, Ingenex has
licensed three core technologies, one of which is an enabling technology which
identifies new gene therapy products (the GSX(TM) System) and two of which are
gene therapy product candidates (MDRx1(TM) and RB-94(TM)).
The GSX(TM) System being developed by Ingenex and its collaborators is a
proprietary method for rapidly identifying and isolating specific fragments of
genes, known as genetic suppressor elements ("GSEs"), that interfere with a
given biologic or disease process. The GSX(TM) System selects the portion or
portions of the gene or genes that confer(s) a specific, desired behavior to
cells and does so via a system that utilizes "Darwinian selection" or survival
of the GSE with the most desired behavior. Such behavior could include
resistance to viruses, tolerance of harmful drug side effects, reversal of
cancerous cellular transformation, or other desirable properties. Ingenex
believes that the GSX(TM) System represents a new approach to gene discovery
based on its ability to provide information regarding the function of discovered
genes. While Ingenex believes that the GSX(TM) System has broad application,
Ingenex intends to use it initially to identify gene-based therapeutics for the
treatment of viral diseases, such as hepatitis and AIDS. Ingenex also is
exploring the use of the GSX(TM) System to discover novel therapeutics for
cancer and other diseases characterized by aberrant cellular function.
Ingenex is currently developing two potential gene therapy products for the
treatment of cancer, including a novel gene therapy program designed to protect
normal bone marrow and blood cells in an effort to improve the effectiveness of
chemotherapy against many common cancers, including breast, ovarian and lung
cancer. Ingenex and its collaborators are developing a gene-based
chemoprotective product, MDRx1(TM), to genetically engineer multidrug resistance
into blood progenitor (or stem) cells in order to protect these otherwise
sensitive normal cells from chemotherapy toxicity. MDRx1(TM) utilizes the human
multi-drug resistance gene (MDR1) which encodes "P-glycoprotein," a membrane
protein capable of pumping a variety of chemicals out of cells. MDRx1(TM)
involves the insertion of the MDR1 gene ex vivo into stem cells that have been
removed from cancer patients in order to render some portion of the stem cells
resistant to chemotherapeutic agents. The modified stem cells are then reinfused
into the patients where they repopulate the blood system with chemo-resistant
blood cells. The conferred resistance would potentially allow patients to be
given higher doses of anti-cancer agents than could be given under normal
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circumstances (i.e., if the bone marrow was not protected). Bone marrow
suppression is the biggest dose-limiting toxicity factor in the treatment of
cancer patients because chemotherapy must be interrupted or reduced in order to
allow the bone marrow to recover. MDRx1(TM) may allow for the administration of
greater or more frequent doses of chemotherapy while protecting the bone marrow
cells. If this approach proves successful, it is also possible that MDR1 will be
utilized as a co-selective gene to help introduce and maintain other genes of
potential therapeutic value in human cells.
Clinical testing is in progress at MD Anderson Cancer Center, Houston,
Texas of a preliminary form of MDRx1(TM) with patients being treated for ovarian
cancer (since December 1994) and with patients being treated for breast cancer
(since January 1995) to determine whether the MDR1 gene can be introduced and
maintained in humans. The clinical testing involves introducing ex vivo the MDR1
gene in human blood stem cells extracted from the bone marrow of cancer patients
and then reintroducing the cells, which have been made resistant to
chemotherapeutic agents, where they quickly repopulate the hematopoietic system.
To date, the results of such testing show that the MDR1 gene has been
successfully introduced into a fraction of the donor bone marrow of most or all
of the patients in the study. There are a number of issues which will need to be
addressed in the event the outcome of the ongoing studies is positive, including
ascertaining the optimal vector for the MDR1 gene and contracting for large
scale production of the final product.
Ingenex is developing a second product, RB-94(TM), based on a tumor
suppressor gene, for the treatment of solid tumors. RB-94(TM) is a gene therapy
product in preclinical development that combines a truncated variant (p94) of a
tumor suppressor gene (the "RB gene") with a viral vector. Although
reintroducing the RB gene itself into RB deficient tumor cells inhibits the
growth of these cells, it sometimes does so incompletely and tumor regrowth
occurs in reconstituted cells after a period of latency. Ingenex believes the
form of the RB protein encoded by the RB-94(TM) gene therapy product is more
effective at causing suppression of tumor cells than the full-length RB protein,
based on data demonstrating in vitro suppression of numerous tumor types tested
to date, including tumors of the bladder, prostate, cervix, bone, breast, lung
and fibrous tissue. In addition, preliminary experiments indicate the modified
gene is effective in suppressing some cancer cell lines in vitro that continue
to contain the functional native gene.
The potential gene therapy product RB-94(TM) will consist of the modified
RB gene and an appropriate liposome or viral vector. The product would be
delivered directly to tumor cells through local application. In collaboration
with Baylor College of Medicine, Ingenex is currently testing RB-94(TM) in
preclinical studies of solid tumors in mouse models. There can be no assurance,
however, that the results of such studies will be positive or that positive
results would correlate to similar results in human subjects.
Ingenex has obtained licenses under patents and patent applications
relating to each of the core technologies relating to its various products under
development and its gene discovery system. These include an issued United States
patent and patent applications directed to certain aspects of the GSX(TM)
System; an issued United States patent directed to a nucleic acid encoding the
human MDR1 protein responsible for multidrug resistance; an issued United States
patent directed to a monoclonal antibody, that can be used to reverse multidrug
resistance; an issued United States patent relating to the use of MDR gene in
creating and selecting drug resistant mammalian cells; and an allowed United
States patent application directed to DNA molecules that encode the
tumor-suppressing protein p94RB (the protein relevant to the Company's potential
RB-94(TM) product) and related, pending applications directed to methods of gene
therapy and the protein. The issued patents expire in either 2010 or 2012.
The Company currently owns approximately 81% of the outstanding capital
stock of Ingenex. Ingenex has filed a registration statement with the Commission
for an initial public offering of its securities. If such an offering is
consummated on the terms currently contemplated, the Company's ownership in
Ingenex will be reduced to approximately 54%.
Theracell
Theracell is engaged in the research and development of cell-based
therapeutics intended for use in the restorative treatment of neurological
diseases and other serious brain disorders. A majority of neurological
disorders, including Parkinson's disease, Alzheimer's disease, stroke and
epilepsy, occur when brain cells (neurons) die. Because neurons cannot
regenerate, most current pharmaceutical therapies are directed toward amplifying
the function of the remaining neurons, an approach which becomes less effective
over time as an increasing number of
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the neurons die. Theracell's proprietary technologies enable the development of
cell-based therapies for minimally-invasive, site specific (i.e., stereotaxic)
delivery to the central nervous system ("CNS") to replace or provide therapeutic
factors precisely where they are needed in order to treat the neurological
disease or disorder.
One of Theracell's technologies involve the direct implantation into the
CNS of microscopic beads ("microcarriers"), the surfaces of which are coated
with live cells that secrete therapeutic factors useful in the treatment of
certain neurological diseases. The beads provide a matrix, or membrane-like
surface, to which cells attach and grow. Theracell believes that this cell
coated microcarrier ("CCM(TM)") technology can facilitate site-specific delivery
of missing or deficient neurotransmitters, growth factors and replacement tissue
to diseased or injured areas of the brain by increasing the survival and
successful engraftment of the cells. Preliminary animal studies of Theracell's
CCM(TM) technology indicate that the presence of the microcarriers enhances
transplanted cell survival beyond that of cells that have no such membrane for
attachment. Theracell's initial product candidate based on this technology is
Spheramine(TM), microcarriers coated with dopamine-producing human pigmented
retinal epithelial ("HPRE") cells intended for the treatment of Parkinson's
disease.
A proof of the CCM(TM) concept, using an investigator sponsored clinical
trial, could begin during 1996. The goal of this trial will be to reduce the
number of fetal cells required in human fetal cell transplants in Parkinson's
patients by improving engraftment of such cells. If the effect of microcarriers
can be demonstrated, Theracell anticipates clinical testing of Spheramine(TM)
utilizing HPRE cells (non-fetal human cells) could begin in the second quarter
of 1998.
Theracell's development efforts with respect to the CCM(TM) technology are
at an early stage and there are a number of issues that must be resolved
including, long term effects of bead implantation, source of HPRE cells, etc.
Product research and development is being done through New York University
("NYU"), University of South Florida and contract research and manufacturing
organizations. Theracell has obtained an exclusive worldwide license from NYU
under a United States patent application (the "NYU License") and corresponding
foreign patent applications relating to the CCM(TM) technology.
Complementing CCM(TM) is a technology based on Sertoli cells which has been
licensed exclusively on a worldwide basis under patent applications from the
University of South Florida (the "USF License"). These unique cells secrete a
host of growth factors important to the repair and resprouting of damaged
neurons, and thus may be useful in restoring function in degenerative diseases,
including Huntington's disease, stroke, Alzheimer's disease, epilepsy and
traumatic brain injuries. Additionally, they are capable of providing an
immunologically privileged and nurturing environment to other types of cells of
interest for transplant, and thus, analogous to CCM(TM) may facilitate
successful engraftment of such cells.
Theracell's development efforts with regard to Sertoli cell technology are
at an early stage and there are a number of issues that must be resolved
including source of cells, long term effects of cell implantation, etc. Product
research and development is being done through the University of South Florida
and contract research and manufacturing organizations. Initial product
development efforts are focused towards Huntington's disease.
The Company currently owns 99% of the outstanding stock of Theracell.
ProNeura
ProNeura is engaged in the research and development of CNS-related
technology with application in the treatment of a number of neurologic and
psychiatric disorders in which conventional treatment is limited by variability
of drug concentration in blood and poor patient compliance. The technology,
which has been licensed from the Massachusetts Institute of Technology ("MIT"),
consists of a polymeric drug delivery system that provides controlled drug
release over extended periods (i.e., from three months to more than one year).
The technology involves imbedding the drug of interest in a polymer. The matrix
is then implanted subcutaneously to provide systemic delivery as body fluids
wash over the implant and the drug is released. This release occurs layer by
layer, resulting in a constant rate of release similar to intravenous
administration. ProNeura believes that such long-term, linear release
characteristics are highly desirable for many pharmacological agents, avoiding
peak and trough level dosing that poses problems for many CNS therapeutic
agents.
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The MIT technology offers significant potential benefits to patients
suffering from chronic CNS disorders, including Huntington's disease,
Parkinson's disease, schizophrenia and psychosis and chronic pain by providing
long-term, intravenous type dosing in a single administration, in an ambulatory
outpatient setting. Patients that pose compliance concerns, including those who
are impaired or whose socioeconomic circumstances hinder compliance with
traditional chronic drug administration could also potentially benefit from this
technology. There are, however, a number of factors that will need to be
addressed in the research and development phase of any product that results from
this polymer matrix technology, including (i) flexibility in dosing; (ii) drug
potency; (iii) potential negative effects from long-term continuous drug
delivery; and (iv) feasibility of surgical device implantation and removal.
There can be no assurance that such factors will be successfully resolved.
ProNeura expects to have prototype product development done through
contract research and manufacturing organizations and is currently in
discussions with several companies. The Company owns approximately 79% of
ProNeura.
Trilex
Trilex was incorporated under the name Ascalon, Inc. in May 1996 to engage
in research and development of cancer therapeutic vaccines utilizing
anti-idiotypic ("anti-id") antibody technology licensed from the University of
Kentucky Research Foundation. Anti-id monoclonal antibodies are not traditional
antibodies, but are exact mirror images of normal antibodies at their variable
regions. The anti-id therapeutics under development by Trilex are targeted at a
specific epitope (site) that is only present on the targeted cancer cell and is
not found on normal tissue. From a molecular biological perspective the anti-id
antibody is structurally similar to the cancer epitope. When injected into that
patient, the antibody acts as a trigger for the normal immune system's response
of T and B lymphocytes to destroy target cancer cells. The amount of protein
required to elicit this response is relatively small at two milligrams per dose,
compared with the tens or hundreds of milligrams per dose utilized in so-called
"traditional" monoclonal therapy or radio imaging. Trilex believes this low
dosage level is the reason for the insignificant side effects exhibited in
patients.
To date, Trilex has identified four separate anti-id antibodies that are
demonstrating an immune response against antigens associated with
adenocarcinomas, breast cancer, small cell lung cancer and melanoma, T-cell
lymphoma and leukemia. All of such antibodies have successfully entered Phase I
clinical trials and Phase II and Phase III clinical trials for three of the
antibodies are scheduled to begin in early to mid 1997. The four antibodies are:
o Anti-sH1 antibody (CEA antibody) CeaVac. The Company believes this
product has potential utility for adjuvant therapy and the treatment of advanced
adenocarcimonas, notably, colorectal cancer, non-small cell lung cancer,
pancreatic cancer and gastric cancer. Carcinoembryonic antigen ("CEA") is
produced by the largest group of cancers, adenocarcinomas. In particular, the
anti-CEA antibody has received widespread interest in the international oncology
community as it is the first potential vaccine to break CEA immune tolerance. In
animal models (i.e., mice), Trilex has demonstrated that the anti-id antibody
can protect against the development of colorectal cancers that express the
carcinoembrionic antigen. Trilex is seeking, during 1997, to initiate Phase III
studies in colorectal cancer in patients who have been rendered disease-free by
surgery, but are at high risk for recurrence. A modified study has already begun
and the first patients continue to be disease-free after 24 months.
o Anti-I17 antibody TriGem. The Company believes this product has potential
utility in adjuvant therapy and for the treatment of advanced cancers that
express the GD2 ganglioside, including melanoma, small cell lung cancer and
sarcoma.
o Anti-11D10 antibody TriAB. The Company believes this product has
potential utility in adjuvant therapy for the treatment of breast cancer.
o Anti-4Dc antibody. The Company believes this product has potential
utility in adjuvant therapy for the treatment of T-cell lymphoma and leukemia.
A number of United States and foreign patent applications covering both
therapeutic and diagnostic applications of the anti-id antibody technology are
pending. At June 30, 1996, the Company owned 100% of Trilex.
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Sponsored Research and License Agreements
The Operating Companies are party to several agreements with research
institutions, universities and other entities for the performance of research
and development activities and for the acquisition of licenses relating to such
activities.
Ansan
The majority of Ansan's research and certain of the development activities
to date have been conducted pursuant to a two-year sponsored research agreement
with Bar-Ilan which terminated in October 1994. This program involved in vitro
and in vivo testing of AN 9 and AN 10, as well as the preparation and evaluation
of additional derivatives of butyric acid. The research agreement granted Ansan
an option to license exclusively any technology related to butyric acid
conceived or reduced to practice as a result of the research program.
Ansan has acquired, pursuant to a license agreement with Bar-Ilan (the
"Bar-Ilan Agreement"), an exclusive, worldwide license to an issued United
States patent and certain foreign patents and patent applications covering novel
analogs of butyric acid owned by Bar-Ilan University and Kupat Hulim Health
Insurance Institution. The Bar-Ilan Agreement provides for the payment by Ansan
to Bar-Ilan of royalties based on sales of products and processes incorporating
the licensed technology, subject to minimum annual amounts commencing in 1995,
as well as a percentage of any income derived from and sublicense of the
licensed technology. Ansan must also pay all costs and expenses incurred in
patent prosecution and maintenance. The minimum annual royalties for 1996 are
$15,000 and increase annually to $60,000 for 1999.
Ansan must also satisfy certain other terms and conditions set forth in the
Bar-Ilan Agreement in order to retain its license rights thereunder, including
the use of reasonable best efforts to bring any products developed under the
Bar-Ilan Agreement, to market and to continue diligent marketing efforts for the
life of the license, the timely commencement of toxicology testing on small and
large animals, the development of and compliance with a detailed business plan
and the timely payment of royalty fees.
In May 1996, Ansan entered into a license agreement (the "BI Agreement")
with Boehringer Ingleheim GmbH ("BI") pursuant to which Ansan acquired the
exclusive right in the United States and the European Union to develop an
intravenous formulation of the patented drug Apafant. The BI Agreement provides
for the payment by Ansan to BI of future milestones and royalty payments. Under
certain circumstances, BI can reacquire such rights and assume development and
commercialization of the drug. In such event, BI is obligated to make certain
milestone and royalty payments to Ansan.
Ingenex
Ingenex is a party to several license agreements with the University of
Illinois at Chicago ("UIC") which grant Ingenex the exclusive worldwide license
under certain issued patents and patent applications, including those relating
to the GSX(TM) System, methods for preventing multi drug resistance and the
human MDR1 gene (collectively, the "UIC Licenses"). The exclusive nature of the
licenses is subject in certain instances to certain reservations, including the
use of all or part of the subject matter of the licenses for research, education
and other non-commercial purposes. In addition, Ingenex's rights under the MDR1
license are subject to a non-exclusive right granted to Burroughs-Wellcome to
transfect cell lines with the MDR1 gene, and to use the transfectants for
research purposes. Burroughs-Wellcome does not, however, have the right to sell
or transfer the transfectants or any derivatives thereof, without the written
authorization of UIC.
The UIC Licenses provide for the payment of license issue fees totaling, in
the aggregate, approximately $145,000 and a royalty to UIC based on sales of
products and processes incorporating the licensed technology. Each UIC License
also requires the payment of certain minimum amounts during the time periods
provided therein. Furthermore, Ingenex will pay to UIC (i) royalties based on
sublicensing income, (ii) a percentage of revenues from research relating to the
subject matter of each UIC License that is performed on a contract basis for
third parties and (iii) all costs and expenses associated with patent
prosecution and maintenance. Ingenex must also satisfy certain other terms and
conditions of the UIC Licenses in order to retain its license rights thereunder,
including the use of best efforts to bring any products developed under the UIC
Licenses to market, the development of and compliance
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with a detailed business plan, obtaining all necessary government approvals and
the timely payment of license and royalty fees. In addition, Ingenex has the
right in all instances to elect to assume control of patent prosecution of the
licensed technology. However, Ingenex may determine that the benefits of filing
for patent protection are outweighed by costs, security or other constraints. As
a result, there can be no assurances that Ingenex will obtain or seek patent
protection in all jurisdictions into which it sells products made under the
licenses.
Ingenex has obtained additional exclusive, worldwide licenses from UIC to
foreign and domestic patent applications relating to genes and genetic elements
associated with (i) sensitivity to cisplatin in human cells, (ii) neoplastic
transformation and (iii) sensitivity to chemotherapeutic drugs along with the
association of kinesin with chemotherapeutic drug sensitivity. Further
development of the technologies to which the licensed patent applications relate
will depend on the ability of Ingenex to enter into corporate partnering
arrangements on acceptable terms. All three of these licenses are subject to
certain rights of third parties for non-commercial research and educational
purposes. These licenses provide for the payment of license issue fees totaling
$50,000 ($10,000 of which has been paid through the date hereof), royalties
based on sales of products and processes incorporating the licensed technology,
subject to certain minimum annual amounts, and a percentage of all revenue
received from any sublicense of the licensed technology. The obligations of
Ingenex under these agreements are substantially similar to those contained in
the UIC Licenses.
Ingenex has acquired an exclusive license from MIT (the "MIT License")
under an issued patent relating to the use of MDR genes for creating and
selecting drug resistant mammalian cells. The license to Ingenex is subject to
prior grants of (a) an irrevocable, royalty-free, nonexclusive license granted
to the United States government, (b) non-exclusive licenses granted to Eli
Lilly, Inc. and Genetics Institute, Inc. for research purposes and (c)
non-exclusive, commercial licenses that may be granted pursuant to options
granted to Eli Lilly, Inc. and Genetics Institute, Inc. to use aspects of the
licensed technology but only to make products that do not incorporate genes
claimed in the patent, proteins expressed by such genes or antibodies and
inhibitors to such genes. The MIT License provides for the payment of royalties
based on net sales of products and processes incorporating the licensed
technology, subject to certain minimum annual amounts, a percentage of
sublicensing income arising from the license of such products and processes, and
the issuance to MIT of shares of its Common Stock . Under the MIT License,
Ingenex must also use reasonable best efforts to bring any products developed
under the MIT License to market, develop and comply with a detailed business
plan and make timely payment of license and royalty fees.
In January 1995, Ingenex entered into an assignment and license back
transaction pursuant to which Ingenex assigned its rights under the three
primary UIC Licenses relating to the human MDR1 gene, methods for preventing
multi-drug resistance and the GSX(TM) System and the MIT License (the "Assigned
Licenses") to Aberlyn Capital Management Limited Partnership ("ACM") in exchange
for payment of $2,000,000 from ACM to Ingenex (the "ACM Agreement"). Under the
ACM Agreement, the rights under the Assigned Licenses are sublicensed back to
Ingenex by ACM in consideration for six monthly payments of $25,000 beginning in
February 1995 and 42 monthly payments of $60,060 thereafter (collectively, the
"License Payments"). The License Payments may be prepaid at any time. After
receipt by ACM of all amounts due under the License Payments, Ingenex may
repurchase the Assigned Licenses from ACM for one dollar. In the event Ingenex
defaults in its obligations with respect to the monthly License Payments, ACM
will have the right to terminate the sublicense, in which event, Ingenex will
lose all of its rights under the Assigned Licenses. The Company has guaranteed
the obligations of Ingenex under the ACM Agreement.
In October 1992, Ingenex acquired an exclusive, worldwide license (the
"Baylor License") under United States and foreign patent applications assigned
to Baylor College of Medicine relating to a modified tumor suppressor gene, the
RB gene, including its use in conferring senescence to tumors that forms the
basis of SG-94(TM). The Baylor License provides for royalties based on net sales
of products and processes incorporating the licensed technology, subject to
certain minimum annual amounts and a percentage of sublicensing income arising
from the license of such products and processes. Under the Baylor License,
Ingenex must use reasonable best efforts to bring any products developed under
the Baylor License to market, develop and comply with a detailed business plan,
fund research pursuant to the Baylor research agreement, commence a cancer
therapy research program, make timely payment of royalty fees and pay all costs
and expenses incurred in patent filing, prosecution and maintenance.
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Theracell
Theracell has acquired an exclusive, worldwide license under certain United
States and foreign patent applications pursuant to a research and license
agreement with New York University (the "NYU Agreement"). These patent
applications relate to technology that enables cells of neural and paraneural
origin to be transplanted into the mammalian brain by attaching such cells to a
support matrix of microcarrier beads and implanting the beads into the CNS. The
NYU Agreement provides for the payment of royalties based on net sales of
products and processes incorporating licensed technology, as well as a
percentage of any income it receives from any sublicense thereof. Theracell is
also obligated to reimburse NYU for all costs and expenses incurred by NYU in
filing, prosecuting and maintaining the licensed patents and patent
applications.
Theracell must satisfy certain other terms and conditions of the NYU
Agreement in order to retain its license rights thereunder. These include, but
are not limited to, the use of best efforts to bring licensed products to market
as soon as commercially practicable and to diligently commercialize such
products thereafter, the use of best efforts to carry out the performance of all
efficacy, pharmaceutical, safety, toxicological and clinical tests and to obtain
all appropriate governmental approvals for the production, use and sale of the
licensed products, the development of and compliance with a detailed business
plan, the timely payment of license and royalty fees and Theracell's timely
payment of research funds (approximately $250,000 and $200,000 during 1996 and
1997, respectively).
In March 1996, Theracell acquired an exclusive, worldwide license under
United States and foreign patent applications pursuant to a license agreement
(the "USF Agreement') with the University of South Florida and the University of
South Florida Research Foundation, Inc. (collectively, "USF"). These patent
applications relate to the preparation and use of sertoli cells for the
treatment of neurodegenerative disorders. The USF Agreement provides for the
payment of royalties based on net sales by Theracell or any sublicensees of
products and processes incorporating licensed technology. Theracell is also
obligated to reimburse USF for all costs and expenses incurred by USF in filing,
prosecuting and maintaining the licensed patent rights. Theracell must satisfy
certain other terms and conditions of the USF Agreement in order to retain its
license rights thereunder. These include the development and introduction into
clinical trials of at least one product based on the licensed technology within
three years from the effective date of the USF Agreement, a second product
within five years of such date and an additional product every two years
thereafter until commercialization of one product, the timely payment of license
and royalty fees and the payment of research funds aggregating at least
$1,500,000 during the two years following the effective date.
ProNeura
The Company has acquired from MIT and assigned to ProNeura an exclusive
worldwide license to certain United States and foreign patents which expire in
2007 and 2009 and patent applications relating to the polymeric implantable drug
delivery system (the "MIT License"). The MIT License requires ProNeura to invest
at least $1,800,000 in operating capital toward development of products and
processes covered by the MIT License over the 24 month period commencing
September 1995. The MIT License provides for the payment by ProNeura of
royalties based on sale of products and processes incorporating the licensed
technology, as well as a percentage of income derived from sublicenses of the
licensed technology.
ProNeura must also satisfy certain other terms and conditions set forth in
the MIT License in order to retain its license rights thereunder, including
using its reasonable best efforts to obtain the necessary regulatory approvals
to conduct clinical testing of the licensed technology and to market such
products, if successfully developed, in the United States and Europe. The
exclusive nature of the MIT License is also subject to the condition that
ProNeura file an IND with the FDA by December 31, 1997.
Trilex
Trilex has acquired an exclusive, worldwide license under certain United
States and foreign patent applications pursuant to a license agreement with the
University of Kentucky Research Foundation (the "Kentucky Agreement"). These
patent applications relate to the anti-idiotypic antibodies known as 3H1, 1A7
and 11D10 and their fragments, derivatives or analogs. The Kentucky Agreement
obligates Trilex to fund research at the University of Kentucky in the amount of
$350,000 per year for five years. The Kentucky Agreement provides for the
payment
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of certain license fees totaling up to a maximum of $470,000 as well as
royalties based on net sales of licensed products by Trilex or any sublicensees.
Trilex must also diligently pursue a vigorous development program with respect
to the licensed technology in order to maintain its license rights under the
Kentucky Agreement.
Management and Financial Services
The Company has historically provided a full range of management services to its
Operating Companies as follows:
o Executive Management and Administrative Services such as:
-- development of business strategies and plans
-- development of strategies and plans for raising capital
-- operational planning and implementation
-- investor relations
o Business Development Services such as:
-- seeking and negotiating technology licenses
-- seeking and negotiating corporate partnerships
-- seeking and negotiating equity investments
o Financial Services such as:
-- preparation of budget and financial statements
-- cash flow management
-- expenditure monitoring and control
-- bookkeeping services and managing external audit relationship
-- daily banking activities
-- processing payroll
-- compliance reporting
-- accounts payable management
o Human Resources Services such as:
-- recruiting
-- compensation consulting
-- labor law compliance and interfacing with government agencies
-- personnel documentation and benefit program administration
The services utilized by any of the Operating Companies are based upon
their respective needs and stages of development. The amount billed to each
Operating Company for such services is based upon an estimate of the cost of
providing such services and is fixed on an annual basis. Each Operating Company
also pays for any out-of-pocket expenses incurred by the Company in providing
the services to the Operating Company.
Patents and Proprietary Rights
General
The Company's success will depend, in part, on its ability, and the ability
of the Operating Companies and their licensor(s), to obtain protection for their
products and technologies under United States and foreign patent laws, to
preserve their trade secrets, and to operate without infringing the proprietary
rights of third parties. The Operating Companies have obtained rights to certain
patents and patent applications and may, in the future, seek rights from third
parties to additional patents and patent applications. There can be no assurance
that patent applications relating to the Operating Companies potential products
or technologies, including those licensed from others, or that it may license in
the future, will result in patents being issued, that any issued patents will
afford adequate protection or not be challenged, invalidated, infringed, or
circumvented, or that any rights granted thereunder will afford competitive
advantages to the Company. Furthermore, there can be no assurance that others
have not independently developed,
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or will not independently develop, similar products and/or technologies,
duplicate any of the Operating Companies' products or technologies, or, if
patents are issued to, or licensed by, the Company, design around such patents.
There can be no assurance that the validity of any of the patents licensed
to the Operating Companies would be upheld if challenged by others in litigation
or that the Company's activities would not infringe patents owned by others. The
Company could incur substantial costs in defending itself and/or the Operating
Companies in suits brought against them or any of their licensors, or in suits
in which the Company may assert, against others, patents in which the Company
and/or the Operating Companies have rights. Should the Operating Companies'
products or technologies be found to infringe patents issued to third parties,
the manufacture, use, and sale of such products could be enjoined and the
Company and/or the Operating Companies could be required to pay substantial
damages. In addition, the Company and/or the Operating Companies may be required
to obtain licenses to patents or other proprietary rights of third parties, in
connection with the development and use of their products and technologies. No
assurance can be given that any licenses required under any such patents or
proprietary rights would be made available on acceptable terms, if at all.
The Company and the Operating Companies also rely on trade secrets and
proprietary know-how, which they seek to protect, in part, by confidentiality
agreements with employees, consultants, advisors, and others. There can be no
assurance that such employees, consultants, advisors, or others, will maintain
the confidentiality of such trade secrets or proprietary information, or that
the trade secrets or proprietary know-how of the Company and the Operating
Companies will not otherwise become known or be independently developed by
competitors in such a manner that the Company and the Operating Companies will
have no practical recourse.
Ansan
The Company is aware of the existence of prior art references which may
affect the validity of certain claims in the Nudelman patent licensed by Ansan,
which claims broadly cover AN 10, among other compounds. Reexamination of this
patent by the U.S. Patent and Trademark Office ("PTO"), in light of these
references, may be necessary to obtain valid claims which are both free of the
prior art and which specifically cover AN 10. In the course of preparing for
reexamination or otherwise, additional prior art may be uncovered which might
affect the validity of such proposed narrow claims. Such art would need to be
brought to the attention of the PTO in connection with any reexamination.
Moreover, there can be no assurance that the PTO will grant a request for
reexamination, or if granted, that such reexamination will result in the
issuance of the desire claims. In any event, given that the already-uncovered
prior art references relate to compounds but not to methods of treatment, the
existence of such references would not, as a matter of United States patent law,
be expected to affect the patentability of any claims directed to the use of AN
10 to treat fetal hemoglobinopathies which presently are pending in the Fetal
Hemaglobinopathies application which Ansan has licensed.
The Company also is aware of certain issued United States patents which
appear to cover the administration of butyric acid, during gestation or infancy,
to ameliorate b-globin disorders, including sickle cell anemia and
b-thalassemia, by increasing the level of fetal hemoglobin. To the extent that
AN 10 converts to butyric acid and in the event Ansan's commercial activities
include administration of AN 10 during gestation and/or infancy, such activities
could give rise to issues of infringement of such patents.
Ingenex
The Company is aware of a U.S. patent issued to a third party (the "Riordan
patent") relating to multidrug resistance. The Riordan patent describes the
isolation of two DNA molecules that code for fractional portions of the hamster
protein associated with multidrug resistance (the "hamster MDR-1 gene"), whereas
a patent licensed by Ingenex (the "Roninson patent") describes and claims the
entire human MDR-1 gene, which is the DNA that codes for the entire protein
associated with multidrug resistance in human cells. Nonetheless, the Riordan
patent claims a DNA molecule coding for a protein, or a fragment of a protein,
that is associated with multidrug resistance in living cells, including human
cells. The Riordan patent has an earlier effective filing date than the Roninson
patent, and there can be no assurance that the Riordan patent will not be
asserted against the Company. Thus, it may be necessary for the Company to
obtain a license under the Riordan patent to pursue commercialization of its
proposed gene therapy products utilizing the MDR-1 gene. There can be no
assurance that such a license, if required, will be
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made available to Ingenex, if at all, on terms acceptable to Ingenex. Failure to
obtain such a license, if required, could have a material adverse effect on
Ingenex.
The Company also is aware of a U.S. patent issued to a third party (the
"Anderson patent") relating to ex vivo gene therapy. The Anderson patent is
reported to be exclusively licensed to Genetics Therapy, Inc. The Company
believes that the Anderson patent could be asserted to cover gene therapeutics
developed by Ingenex, to the extent that the introduction of a gene into a
subject's cells is performed ex vivo. In January 1996, it was reported that an
interference proceeding had been instituted in the U.S. Patent and Trademark
Office between the issued Anderson patent and two pending patent applications.
Depending on the outcome of the interference, it may or may not be necessary for
Ingenex to obtain a license from a party to the interference (or its licensee)
to pursue commercialization of its proposed gene therapy products utilizing ex
vivo gene therapy. There can be no assurance that such a license, if required,
will be made available to Ingenex, if at all, on terms acceptable to Ingenex.
Failure to obtain such a license, if required, could have a material adverse
effect on Ingenex.
Ingenex has received notice that three companies, Chiron Corporation,
Sandoz AG and Introgene NV, are opposing the grant of a European patent
corresponding to the Roninson patent, which Ingenex has licensed from UIC, with
claims directed to the human MDR-1 gene and gene fragments. While Ingenex,
through its licensor, intends to vigorously respond to the oppositions, no
assurance can be given as to the scope of the claims, if any, which the European
Patent Office ultimately will find patentable.
The Company is aware of the existence of a prior art reference (European
Patent Application 0 259 031) ("EP 0 259 031"), which discloses a DNA sequence
corresponding to the sequence of the RB94 DNA molecule that is claimed in an
issued U.S. Patent licensed by Ingenex from Baylor (the "Baylor patent"). The
Baylor patent also contains claims directed to specific expression vectors
containing the RB94 DNA molecule. Although an issued patent is presumed valid,
there can be no assurance that the claims of the Baylor patent, if challenged,
will not be found invalid. In any event, given that EP 0 259 031 relates to DNA
sequences but not to methods of gene therapy, the existence of this reference
alone would not, as a matter of U.S. law, be expected to affect the
patentability of claims directed to the use of the RB94 DNA molecule in gene
therapy for certain cancers, which gene therapy claims presently are pending in
a related patent application licensed by Ingenex from Baylor. EP 0 259 031
further discloses the deduced amino acid sequence encoded by the disclosed DNA
sequence, which amino acid sequence corresponds to that of the RB94 protein. The
U.S. Patent and Trademark Office has cited this reference in a Final Office
Action rejection as anticipating the claim directed to the RB94 protein, which
claim presently is pending in a second, related patent application licensed by
Ingenex from Baylor.
Theracell
The PTO has issued a notice of allowance on the core subject material of a
patent application underlying the NYU License with Theracell and a U.S. Patent
is expected to issued shortly. An Australian patent on the core material of a
patent application underlying the NYU License with Theracell was granted in May
1996. Prosecution of various divisional and continuation applications and their
foreign counterparts continues satisfactorily; there can be no guarantee,
however, that additional patents will be granted. The Company is also aware of
an issued United States patent relating to a method for treating defective or
diseased cells in the mammalian CNS by grafting genetically modified donor cells
in the CNS (i.e., the brain), which cells can produce molecules (i.e., L-DOPA)
in a sufficient amount to ameliorate the defect or disease. To the extent
Theracell's commercial activities include the grafting of genetically modified
donor cells, such activities could give rise to issues of infringement of this
patent.
Competition
The pharmaceutical and biotechnology industries are characterized by
rapidly evolving technology and intense competition. Many companies of all
sizes, including major pharmaceutical companies and specialized biotechnology
companies, are engaged in the development and commercialization of therapeutic
agents designed for the treatment of the same diseases and disorders targeted by
the Operating Companies. Many of the competitors of the Company have
substantially greater financial and other resources, larger research and
development staffs and more experience in the regulatory approval process.
Moreover, potential competitors have or may have patent or other rights that
conflict with patents covering technologies of the Operating Companies. In
certain circumstances, it may be difficult or impossible for certain Operating
Companies to obtain appropriate licenses, which would thereby
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hamper or prevent the commercialization of their proposed products. The failure
to obtain such licenses could have a material adverse affect on the business,
results of operations and financial condition of such Operating Companies, which
in turn may have an adverse affect on the business, results of operations and
financial condition of the Company.
With regard to Ansan, the Company is aware that Alpha Therapeutics
Corporation ("Alpha") is currently developing, alone and/or with a collaborative
partner, through technology covered by certain patents held by Perrine, a
butyrate-related treatment for blood disorders that would directly compete with
Ansan's Novaheme(TM) product. There can be no assurance that Novaheme(TM) will
prove to be more efficacious in the treatment of blood disorders than the drug
under development by Alpha or that, in the event that Novaheme(TM) is approved
for commercialization, that Novaheme(TM) will gain wider market acceptance than
the Alpha product. In addition, Novaheme(TM) will face competition from
hydroxyurea, a therapeutic agent currently marketed for other indications and
which has just completed clinical testing for the treatment of blood disorders.
Although Ansan believes that hydroxyurea will only have limited utility in the
treatment of hemoglobinopathies since initial studies have shown it to be toxic
and, in certain animal models, less effective than Novaheme(TM) at increasing
the ex vivo expression of HbF levels, there can be no assurance that
Novaheme(TM) will ultimately prove to be more efficacious at treating blood
disorders than hydroxyurea or that, in the event that Novaheme(TM) is approved
for commercialization, that it will gain wider market acceptance than
hydroxyurea.
With regard to Ingenex, the Company is aware of several development stage
and established enterprises that are exploring the field of human gene therapy
or are actively engaged in research and development in the area of multidrug
resistance, including Genetix Pharmaceuticals, Inc. ("Genetix") and two research
organizations receiving funding from the National Institutes of Health ("NIH").
There can be no assurance that Ingenex's MDRx1(TM) product will prove to be more
efficacious as a gene therapy than any gene therapy under development by Genetix
or either of the two research organizations. The Company is aware of other
commercial entities that have produced gene therapy products used in human
trials. Further, it is expected that competition in this field will intensify.
With regard to Theracell, the Company is aware of several new drugs for
Parkinson's disease that are in preclinical and clinical development. The
Company is aware that Amgen is pursuing clinical trials in Parkinson's patients
with GDNF and is collaborating with Medtronics, Inc. in its delivery to the CNS.
In addition, the Company is aware of several well-funded public and private
companies that are actively pursuing alternative cell transplant technologies,
including Somatix Therapy Corporation ("Somatix"), CytoTherapeutics Inc. and
Diacrin, Inc. The technology under development by Diacrin, Inc. involves using
antibodies to eliminate the need for immunosuppression when transplanting fetal
pig cells into Parkinson's patients, and would directly compete with
Spheramine(TM). There can be no assurance that any of the products under
development by Somatix, CytoTherapeutics Inc. or Diacrin, Inc., or which might
be developed by other entities, will not prove to be more efficacious in the
treatment of Parkinson's disease than the product under development by
Theracell.
With regard to ProNeura, the Company is aware of an implantable therapeutic
system being developed by Alza Corp. Additionally, companies such as Medtronic,
Inc. are developing implantable pumps that could be used to infuse drugs into
the CNS.
With regard to Trilex, the Company is aware of several companies involved
in the development of cancer therapeutics that target the same cancers as the
products under development by Trilex. Such companies include Progenics, Biomira,
AltaRex, Genentech, ImClone and Glaxo-Wellcome.
In addition to the foregoing, colleges, universities, governmental agencies
and other public and private research organizations are likely to continue to
conduct research and are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed, some of which may be directly competitive with the technologies being
developed by the Company. These institutions also compete with the Company in
recruiting highly qualified scientific personnel. The Company expects
therapeutic developments in the areas of oncology and hematology to occur at a
rapid rate and competition to intensify as advances in this field are made.
Accordingly, the Company will be required to continue to devote substantial
resources and efforts to research and development activities.
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Government Regulation
The Operating Companies research and development activities are, and the
production and marketing of their products will be, subject to regulation for
safety and efficacy by numerous governmental authorities in the United States
and other countries. In the United States, pharmaceutical products are subject
to rigorous FDA review. The Federal, Food, Drug, and Cosmetic Act and other
federal statutes and regulations govern or influence the research, testing,
manufacture, safety, labeling, storage, recordkeeping, approval, advertising and
promotion of such products. Noncompliance with applicable requirements can
result in fines, recall or seizure of products, refusal to permit products to be
imported into or exported out of the United States, refusal of the government to
approve product approval applications or to allow a company to enter into
government supply contracts, withdrawal of previously approved applications and
criminal prosecution.
In order to obtain FDA approval of a new drug, a company generally must
submit proof of purity, potency, safety and efficacy, among others. In most
cases, such proof entails extensive clinical and preclinical laboratory tests.
The testing and preparation of necessary applications is expensive and may take
several years to complete. There is no assurance that the FDA will act favorably
or quickly in reviewing submitted applications, and significant difficulties or
costs may be encountered by the Operating Companies in their efforts to obtain
FDA approvals, which difficulties or costs could delay or preclude them from
marketing any products they may develop. The processing of those applications by
the FDA is a lengthy process and may also take several years. Any future failure
to obtain or delay in obtaining such approvals could adversely affect the
ability of the Operating Companies to market their proposed products. Moreover,
even if regulatory approval is granted, such approval may include significant
limitations on indicated uses for which any such products could be marketed.
Further, a marketed drug and its manufacturer are subject to continued review,
and later discovery of previously unknown problems may result in restrictions on
such product or manufacturer, including withdrawal of the product from the
market. In addition, new government regulations may be established that could
delay or prevent regulatory approval of the products under development.
Among the conditions for clinical studies and IND approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to good manufacturing practices ("GMP"), which
must be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical compliance.
The FDA may also require post-marketing testing and surveillance of
approved products, or place other conditions on its approvals. These
requirements could cause it to be more difficult or expensive to sell the
products, and could therefore restrict the commercial applications of such
products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit such technologies.
The procedure for obtaining FDA approval to market a new drug involves
several steps. Initially, the manufacturer must conduct preclinical animal
testing to demonstrate that the product does not pose an unreasonable risk to
human subjects in clinical studies. Upon completion of such animal testing, an
IND must be filed with the FDA before clinical studies may begin. An IND
application consists of, among other things, information about the proposed
clinical trials. Once the IND is approved (or if FDA fails to act within 30
days), the clinical trials may begin.
Human clinical trials on drugs are typically conducted in three sequential
phases, although the phases may overlap. Phase I trials typically consist of
testing the product in a small number of healthy volunteers or in patients,
primarily for safety in one or more doses. During Phase II, in addition to
safety, the efficacy of the product is evaluated in up to several hundred
patients and sometimes more. Phase III trials typically involve additional
testing for safety and efficacy in an expanded patient population at multiple
test sites. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
The results of the preclinical and clinical testing on new drugs are
submitted to the FDA in the form of a new drug application ("NDA") for new
drugs. The NDA approval process requires substantial time and effort and
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there can be no assurance that any approval will be granted on a timely basis,
if at all. The FDA may refuse to approve an NDA if applicable regulatory
requirements are not satisfied. Product approvals, if granted, may be withdrawn
if compliance with regulatory standards is not maintained or problems occur
following initial marketing.
Under guidelines established by NIH, deliberate transfers of recombinant
DNA into human subjects conducted within NIH laboratories or with NIH funds must
be approved by the NIH Director. The Director may approve a procedure if it is
determined that no significant risk to health or the environment is presented.
The NIH has established the Recombinant DNA Advisory Committee (the "RAC") to
advise the NIH Director concerning approval of NIH-supported research involving
the use of recombinant DNA. A proposal will be considered by the RAC only after
the protocol has been approved by the investigator's local Institutional Review
Board and other committees. Although the jurisdiction of the NIH applies only
when NIH-funded research or facilities are involved in any aspect of the
protocol, the RAC encourages all gene transfer protocols to be submitted for its
review. The Company intends to comply with RAC and NIH guidelines even when it
may not be subject to them.
There can be no assurance that any required FDA or other governmental
approval will be granted, or if granted, will not be withdrawn. Governmental
regulation may prevent or substantially delay the marketing of the Operating
Companies proposed products, cause them to undertake costly procedures and
furnish a competitive advantage to more substantially capitalized companies with
which they expect to compete. In addition, the extent of potentially adverse
government regulations which might arise from future administrative action or
legislation cannot be predicted.
The Company believes it is in compliance with all material applicable
regulatory requirements.
Foreign Regulatory Issues
Sales of pharmaceuticals products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not FDA approval has been obtained, approval of a product by a
comparable regulatory authority of a foreign country must generally be obtained
prior to the commencement of marketing in those countries. Although the time
required to obtain such approval may be longer or shorter than that required for
FDA approval, the requirements for FDA approval are among the most detailed in
the world and FDA approval generally takes longer than foreign regulatory
approvals.
Employees
The Company currently has ten full-time employees. Ingenex currently has 16
employees, Theracell currently has two employees and Trilex currently has three
employees. ProNeura currently has no full-time employees. The Company's future
success depends in significant part upon the continued service of its key
scientific personnel and executive officers, as well as those of the Operating
Companies and all of such entities' continuing ability to attract and retain
highly qualified scientific and managerial personnel. Competition for such
personnel is intense and there can be no assurance that key employees can be
retained or that other highly qualified technical and managerial personnel can
be retained in the future.
None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.
Facilities
The Company has a four year lease, expiring in April 2000, for
approximately 3,800 square feet of office space in South San Francisco,
California. The monthly rental payment is $ 6,185. Ingenex has a three year
lease, expiring in March 1999, for approximately 22,700 square feet of space in
Menlo Park, California that includes laboratories, offices and warehouse space.
The base rent is $27,200 per month. Theracell has a three year lease, expiring
in August 1999, for approximately 1,900 square feet of space in Somerville, New
Jersey, at a monthly rental payment of $3,362. Trilex has a five year lease,
expiring in August 2000, for approximately 3,600 square feet in Scottsdale,
Arizona at a monthly rental payment of $6,788.
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Legal Proceedings
The Company is not involved in any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth the names, ages and positions of the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Louis R. Bucalo, M.D.(1) 37 President and Chief Executive Officer and Director
Sunil Bhonsle 46 Executive Vice President and Chief Operating Officer
Richard C. Allen, Ph.D. 52 Executive Vice President
Robert E. Farrell 46 Executive Vice President and Chief Financial Officer
Michael K. Hsu(2) 46 Director
Hubert Huckel, M.D.(3) 64 Director
Marvin E. Jaffe, M.D.(2) 60 Director
Peter M. Kash 34 Director
Lindsay A. Rosenwald, M.D.(1)(3) 40 Director
Konrad M. Weis, Ph.D.(1) 67 Director
Kenneth J. Widder, M.D.(1)(3) 42 Director
Ernst-Gunter Afting 53 Director
</TABLE>
- ----------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Louis R. Bucalo, M.D., is a co-founder of the Company and of each of the
Operating Companies and has served as the Company's President and Chief
Executive Officer since January 1993. Dr. Bucalo has served as a director of the
Company since March 1993. Dr. Bucalo also serves as Chairman of the Board of
each of the Operating Companies and as Chairman and Chief Executive Officer of
ProNeura. From July 1990 to April 1992, Dr. Bucalo was Associate Director of
Clinical Research at Genentech, Inc., a biotechnology company. Dr. Bucalo holds
an M.D. from Stanford University and a B.A. in biochemistry from Harvard
University.
Sunil Bhonsle joined the Company as Executive Vice President and Chief
Operating Officer in September 1995. Mr. Bhonsle served in various positions,
including Vice President and General Manager, Plasma Supply and Manager,
Inventory and Technical Planning, at Bayer Corporation from July 1975 until
April 1995. Mr. Bhonsle holds an M.B.A. from the University of California at
Berkeley and a B.Tech. in chemical engineering from the Indian Institute of
Technology.
Richard C. Allen, Ph.D., joined the Company in August 1995. He also
currently serves as President and Chief Executive Officer of Theracell, which he
joined in January 1995 and President and Chief Operating Officer of ProNeura.
From June 1991 until December 1994, Dr. Allen was Vice President and General
Manager of the Neuroscience Strategic Business Unit of Hoechst-Roussel
Pharmaceuticals, Inc. Dr. Allen holds a Ph.D. in medicinal chemistry and a B.S.
in pharmacy from the Medical College of Virginia.
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Robert E. Farrell joined the Company as Executive Vice President and Chief
Financial Officer in September 1996. Mr. Farrell was employed by Fresenius USA,
Inc. ("Fresenius") from 1991 until August 1996 where he served in various
capacities, including Vice President Administration, Chief Financial Officer and
General Counsel. His last position was Corporate Group Vice President.
Michael K. Hsu has served as a director of the Company since March 1993.
Mr. Hsu is President of Biotechnology Venture Capital Representative for the
government of Taiwan. From November 1994 through October 1995, he served as
Director - Corporate Finance of Coleman and Company Securities. Since March
1989, Mr. Hsu has served as President of APS Bioventures Co., which until
November 1994 was an investment banking division of RAS Securities. Mr. Hsu
previously held various executive positions with Steinberg and Lyman Health Care
Company, Ventana Venture Growth Fund, Asian Pacific Venture Group (Thailand) and
D. Blech Company.
Hubert Huckel, M.D. has served as a director of the Company since October
1995. From 1964 until his retirement in December 1992, Dr. Huckel served in
various positions with The Hoechst Group. At the time of his retirement, he was
chairman of the Board of Hoechst-Roussel Pharmaceuticals, Inc., Chairman and
President of Hoechst-Roussel Agri-Vet Company and a member of the Executive
Committee of Hoechst Celanese Corporation. He currently serves on the Board of
Directors of Royce Laboratories, Inc. and Sano Corporation.
Marvin E. Jaffe, M.D. has served as a director of the Company since October
1995. From 1988 until April 1994, Dr. Jaffe served as President of R.W. Johnson
Pharmaceutical Research Institute where he was responsible for the research and
development activities in support of a number of Johnson & Johnson companies,
including ORTHO-McNeil Pharmaceuticals, ORTHO Biotech and CILAG. From 1970 until
1988, he was Senior Vice President of the Merck Research Laboratories. He
currently serves on the Board of Directors of Chiroscience, plc and
Immunomedics, Inc.
Peter M. Kash is a co-founder of the Company and has served as a director
of the Company since March 1993. Mr. Kash has served as Senior Managing Director
of Paramount Capital, Inc. since August 1991. From August 1988 until August
1991, he was employed with D.H. Blair & Co., Inc. Mr. Kash serves on the Board
of Directors of Ansan.
Lindsay A. Rosenwald, M.D., is a co-founder of the Company and has served
as a director of the Company since March 1993. Dr. Rosenwald co-founded
Interneuron Pharmaceuticals, Inc. and has served as its Chairman since February
1989. Dr. Rosenwald has been the Chairman and President of The Castle Group,
Ltd., a New York medical venture capital firm ("Castle"), since October 1991 and
the Chairman and President of Paramount Capital, Inc., an investment banking
firm, since February 1992. In June 1994, Dr. Rosenwald founded Aries Financial
Services, Inc., a money management firm specializing in the health sciences
industry. From 1987 to September 1991, Dr. Rosenwald was a Managing Director,
Corporate Finance at D.H. Blair & Co., Inc. Dr. Rosenwald also is a director of
the following publicly-traded pharmaceutical biotechnology companies: Ansan,
Inc., Avigen, Inc., Atlantic Pharmaceuticals, Inc., BioCryst Pharmaceuticals,
Inc., Neose Technologies, Inc., Sparta Pharmaceuticals, Inc., VimRx
Pharmaceuticals, Inc. and Xenometrix, Inc. and is a director of a number of
privately-held companies founded by Castle in the biotechnology or
pharmaceutical fields.
Konrad M. Weis, Ph.D., has served as a director of the Company since March
1993. Dr. Weis is Honorary Chairman and former President and Chief Executive
Officer of Bayer Corporation. Dr. Weis serves as a director of PNC Equity
Management Company, Michael Baker Company, and Dravo Company.
Kenneth J. Widder, M.D. has served as a director of the Company since March
1993. Dr. Widder is Chairman and Chief Executive Officer of Molecular
Biosystems, Inc. Dr. Widder serves on the Board of Directors of Wilshire
Technologies, Inc. and Digivision.
Ernst-Gunter Afting, M.D., Ph.D., has served as a director of the Company
since May 1996. Dr. Afting has served as the President of the GSF-National
Center for Environment and Health, a government research center in Germany since
1995. From 1984 until 1995, he was employed in various capacities by the Hoechst
Group, serving as Divisional Head of the Pharmaceuticals Division of the Hoechst
Group from 1991 to 1993 and as President and Chief Executive Officer of Roussel
Uclaf (a majority stockholder of Hoechst AG) in Paris from 1993 until 1995.
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Directors serve until the next annual meeting or until their successors are
elected and qualified. Officers serve at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment. See
"Management - Employment Agreements."
Management of the Operating Companies
Ansan
S. Mark Moran, M.D. (47) has served as Ansan's President and Chief
Executive Officer and a director since April 1995. Prior to joining Ansan, Dr.
Moran was employed by Glycomed, Inc. a biopharmaceutical company in Alameda,
California, serving as Vice President-Operations from July 1994 to April 1995,
and Vice President-Medical Affairs from October 1991 to June 1994. Prior to
joining Glycomed, Dr. Moran was employed for more than five years by G.D. Searle
& Co., in positions of increasing responsibility. Dr. Moran holds an M.D. from
Washington University School of Medicine, and M.B.A. from the Kellogg School of
Management at Northwestern University and a B.S. in Mathematics from the
University of Oklahoma.
Ingenex
Mark E. Furth, Ph.D. (44) has served as Ingenex' President and Chief
Executive Officer since August 1995. From May 1993 to August 1995, Dr. Furth was
Vice President-Molecular Sciences, of Glaxo Wellcome, Inc. From January 1992 to
May 1993, Dr. Furth was Vice President-Technology, of Regeneron Pharmaceuticals,
Inc. From July 1988 to January 1992, Dr. Furth was Program Director-Molecular
and Cell Biology of Regeneron Pharmaceuticals, Inc. From January 1987 to July
1988. Dr. Furth was Program Director-Diagnostics of Oncogene Science, Inc. Dr.
Furth was an assistant professor of Medicine at the Sloan Kettering Division of
the Cornell University Graduate School of Medicine, and held postgraduate
fellowships with the Laboratory of Tumor Virus Genetics, Bethesda, Maryland, and
the Medical Research Council Laboratory of Molecular Biology, Cambridge,
England. Dr. Furth holds a Ph.D. in Molecular Biology from the University of
Wisconsin-Madison and a B.A. in Biochemical Sciences from Harvard University.
Theracell
Victor J. Bauer, Ph.D. (61) has served as Chairman of the Board of
Theracell since April 1995. From 1971 until his retirement in 1992, Dr. Bauer
served in various executive capacities with Hoeschst Pharmaceuticals, Inc., a
subsidiary of Hoechst Celanese Corp., serving last as President from 1989 to
1992. Dr. Bauer holds a Ph.D. in Chemistry from the University of Wisconsin and
served as a Research Fellow at Harvard University.
As stated above, Richard C. Allen serves as President and Chief Executive
Officer of Theracell.
ProNeura
As stated above, Louis R. Bucalo and Richard C. Allen serve as Chairman and
Chief Executive Officer and President and Chief Operating Officer, respectively,
of ProNeura.
Trilex
Edward L. Jacobs (50) has served as President and Chief Executive Officer
of Trilex since its inception in May 1996. Prior thereto, Mr. Jacobs served as
President and Chief Executive Officer of Ascalon, Inc. (from 1994 - 1995) and
Senmed Medical Ventures (from 1993 - 1995). From 1990 to 1993, Mr. Jacobs served
as Vice President and General Manager of the Oncology Service Group of Syncor
International, Inc. From 1986 until 1990, he served as Vice President -
Marketing and Sales of NeoRx Corporation, a monoclonal-based imaging and therapy
products company.
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Board Committees and Designated Directors
The Board of Directors has an Executive Committee, a Compensation Committee
and an Audit Committee. The Executive Committee exercises all the power and
authority of the Board of Directors in the management of the Company between
Board meetings, to the extent permitted by law. The Compensation Committee makes
recommendations to the Board concerning salaries and incentive compensation for
officers and employees of the Company and may administer the Company's 1995
Stock Option Plan. See "Management - Stock Option Plans." The Audit Committee
reviews the results and scope of the audit and other accounting related matters.
The Company has agreed, if requested by Blair, to nominate a designee of
Blair to the Company's Board of Directors for a period of five years ending
January 18, 2001.
Director Compensation
Non-employee directors are entitled to receive $2,000 for each Board and
committee meeting attended and are reimbursed for their expenses in attending
such meetings. Directors are not precluded from serving the Company in any other
capacity and receiving compensation therefor. In addition, directors are
entitled to receive options ("Director Options") pursuant to the Company's 1995
Stock Option Plan. Director Options are exercisable in four equal annual
installments commencing six months from the date of grant and expire the earlier
of 10 years after the date of grant or 90 days after the termination of the
director's service on the Board of Directors. In January 1996, each of the
Company's current directors other than Dr. Afting received Director Options to
purchase 10,000 shares of Common Stock at an exercise price of $5.00 per share.
Dr. Afting received Director Options to purchase 10,000 shares of Common Stock
at an exercise price of $8.50 per share when he joined the Board of Directors in
May 1996. See "Management - Stock Option Plans."
Scientific Advisors
Since the Company's inception, the Company has sought the advisory services
of a number of scientists, researchers and clinicians with extensive experience
in each of the Operating Companies' fields of interest (the "Scientific
Advisors"). The Scientific Advisors have assisted the Company and the Operating
Companies in identifying scientific and product development opportunities, in
reviewing and evaluating with management the progress of research programs, and
in recruiting and evaluating scientists and other employees.
Executive Compensation
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to executive officers whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1995 (collectively, the "named executive officers") for
services during the fiscal years ended December 31, 1995, 1994 and 1993:
Summary Compensation Table
Annual Compensation
----------------------
Compensation Name
and Principal Position Year Salary Bonus
- ---------------------- ---- ------ -----
Louis R. Bucalo ........................ 1995 $188,000(1) $ 0
President and Chief Executive Officer... 1994 $206,000 $35,000
1993 $144,000 $ 0
Richard C. Allen ........................ 1995 $166,000 $ 0
Executive Vice President(2)............ 1994 $ 0 $ 0
1993 $ 0 $ 0
- ----------
(1) A portion of the cash compensation paid to Dr. Bucalo is allocable to the
Operating Companies pursuant to management services arrangements between
them and the Company. See "Certain Transactions."
-34-
<PAGE>
(2) Dr. Allen also serves as President and Chief Executive Officer of Theracell
and President and Chief Operating Officer of ProNeura. Dr. Allen receives
his entire salary from Theracell which he joined in January 1995.
On April 19, 1996, the Compensation Committee agreed to grant Dr. Bucalo
and Dr. Allen a cash bonus of $42,000 and $15,500, respectively, payment of
which will be deferred (with interest at the rate of prime plus 1% commencing
May 1, 1996) until such time, if ever, as one-half of the Warrants issued in the
IPO have been exercised.
Option Grants in Last Fiscal Year
The following table contains information concerning the stock option grants
made to the named executive officers during the fiscal year ended December 31,
1995. No stock appreciation rights were granted to these individuals during such
year.
<TABLE>
<CAPTION>
Number of Individual Grant
Securities -------------------------------------------------
Underlying % of Total
Options Options Granted Exercise or
Granted to Employees in Base Price Expiration
Name (#)(1) Fiscal Year ($/Sh) (2) Date
- ---- -------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Louis R. Bucalo....................... -0- -0- -0- N/A
Richard C. Allen...................... 57,906 26.5% $1.35 8/1/2005
</TABLE>
- ----------
(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable thereunder are subject to the repurchase by the Company
at the original exercise price paid per share upon the optionee's cessation
of service prior to the fourth anniversary of the option grant of such
shares. Such repurchase right lapsed with respect to 7,721 shares on August
1, 1995 and will lapse with respect to 10,037 of such shares on August 1,
1996 and 1/48th of the balance of such shares at the commencement of each
of the first 48 months commencing September 1996.
(2) The exercise price may be paid in cash, in shares of Common Stock valued at
the fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchase shares. The Company may
also finance the option exercise by loaning the optionee sufficient funds
to pay the exercise price for the purchased shares, together with any
federal and state income tax liability incurred by the optionee in
connection with such exercise.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1995 with respect to the
named executive officers. No stock appreciation rights were exercised during
such year or were outstanding at the end of that year.
<TABLE>
<CAPTION>
Number of Securities Value of
Underlying Unexercised Unexercised in-the-Money
Shares Options at FY-End (#) Options at FY-End(1)
Acquired --------------------- --------------------
Name on Exercise(#) Exercisable Unexercisable(2) Exercisable Unexercisable(2)
- ---- -------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Louis R. Bucalo.............. -0- 37,471 44,248 $161,500 $190,864
Richard C. Allen............. -0- 7,721 50,185 $27,410 $178,157
</TABLE>
- ----------
(1) Based on the fair market value of the Company's Common Stock at year-end,
$4.90 per share (as determined by the Company's Board of Directors), less
the exercise price payable for such shares.
-35-
<PAGE>
(2) Options are immediately exercisable for all the option shares; however,
since a portion of the shares purchasable upon exercise of the options are
subject to repurchase by the Company at the original exercise price per
share upon the optionee's cessation of service, such options are deemed
unexercisable for purposes of this table. As of June 30, 1996, the
repurchase right has lapsed as to 55,411 of such shares.
Employment Agreements
The Company is a party to employment agreements with each of Dr. Bucalo,
Sunil Bhonsle, Executive Vice President and Chief Operating Officer of the
Company, Richard C. Allen, Executive Vice President of the Company, and Robert
E. Farrell, Executive Vice President and Chief Financial Officer of the Company.
All of the agreements contain confidentiality provisions.
The agreement with Dr. Bucalo expires in February 1999 and provides for a
current base annual salary of $210,000, subject to annual increases of 5% and
bonuses of up to 20% at the discretion of the Board of Directors. In the event
of the termination of the agreement with Dr. Bucalo, other than for reasons
specified therein, the Company is obligated to make severance payments equal to
his base annual salary for the greater of the balance of the term of the
agreement or 18 months.
Dr. Allen receives no salary from the Company (his primary compensation is
from Theracell) but has been granted certain stock options which vest over five
years if he remains employed by the Company.
The agreement with Mr. Bhonsle provides for a base annual salary of
$185,000 subject to automatic annual increases, based on increases in the
consumer price index, and bonuses of up to 20% at the discretion of the Board of
Directors. In the event Mr. Bhonsle's employment is terminated other than for
"good cause" (as defined), the Company is obligated to make severance payments
equal to his base annual salary for between six and nine months. Mr. Bhonsle has
also been granted certain options that vest over five years if he remains
employed by the Company.
The agreement with Mr. Farrell provides for a base annual salary of
$185,000 subject to automatic annual increases, based on increases in the
consumer price index, and bonuses of up to 20% at the discretion of the Board of
Directors. In the event Mr. Farrell's employment is terminated other than for
"good cause" (as defined), the Company is obligated to make severance payments
equal to his base annual salary for between six and nine months. Mr. Farrell has
also been granted certain options that vest over five years if he remains
employed by the Company.
The Company has agreed with Blair that notwithstanding the provisions of
the foregoing employment agreements, the compensation of the executive officers
who were employed at the time of the Company's initial public offering in
January 1996 will not increase from current levels prior to February 23, 1997.
Stock Option Plans
The 1995 Stock Option Plan
In October 1995, the Board of Directors adopted and the Company's
stockholders approved, the 1995 Stock Option Plan (the "1995 Plan") covering
300,000 shares of the Company's Common Stock pursuant to which employees,
officers and directors of, and consultants or advisers to, the Company and any
subsidiary corporations are eligible to receive incentive stock options
("incentive options") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") and/or options that do not qualify as
incentive options ("non-qualified options"). The Board of Directors has approved
an increase in the number of shares reserved under the 1995 Plan to 1,300,000
and submitted this amendment to the 1995 Plan for approval by stockholders at
the next annual meeting scheduled for October 18, 1996. The 1995 Plan, which
expires in October 2005, is currently administered by the Company's Compensation
Committee but may also be administered by the Board of Directors. The purposes
of the 1995 Plan are to ensure the retention of existing executive personnel,
key employees, directors, consultants and advisors who are expected to
contribute to the Company's future growth and success and to provide additional
incentive by permitting such individuals to participate in the ownership of the
Company, and the criteria to be utilized by the Board of Directors or the
committee in granting options pursuant to the 1995 Plan will be consistent with
these purposes. The 1995 Plan provides for automatic grants of options to
certain directors in the manner set forth below.
-36-
<PAGE>
Options granted under the 1995 Plan may be either incentive options or
non-qualified options. Incentive options granted under the 1995 Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive option granted under the
1995 Plan to a stockholder owning more than 10% of the outstanding voting power
may not exceed five years and its exercise price may not be less than 110% of
the fair market value of the Common Stock on the date of the grant. To the
extent that the aggregate fair market value, as of the date of grant, of the
shares for which incentive options become exercisable for the first time by an
optionee during the calendar year exceeds $100,000, the portion of such option
which is in excess of the $100,000 limitation will be treated as a non-qualified
option. Options granted under the 1995 Plan to officers, directors or employees
of the Company may be exercised only while the optionee is employed or retained
by the Company or within 90 days of the date of termination of the employment
relationship or directorship. However, options which are exercisable at the time
of termination by reason of death or permanent disability of the optionee may be
exercised within 12 months of the date of termination of the employment
relationship or directorship. Upon the exercise of an option, payment may be
made by cash or by any other means that the Board of Directors or the committee
determines. No option may be granted under the 1995 Plan after October 2005.
Options may be granted only to such employees, officers and directors of,
and consultants and advisors to, the Company or any subsidiary of the Company as
the Board of Directors or the committee shall select from time to time in its
sole discretion, provided that only employees of the Company or a subsidiary of
the Company shall be eligible to receive incentive options. An optionee may be
granted more than one option under the 1995 Plan. The Board of Directors or the
committee will, in its discretion, determine (subject to the terms of the 1995
Plan) who will be granted options, the time or times at which options shall be
granted, and the number of shares subject to each option, whether the options
are incentive options or non-qualified options, and the manner in which options
may be exercised. In making such determination, consideration may be given to
the value of the services rendered by the respective individuals, their present
and potential contributions to the success of the Company and its subsidiaries
and such other factors deemed relevant in accomplishing the purpose of the 1995
Plan.
At September 20, 1996, options to purchase an aggregate of 265,500 shares
are outstanding under the 1995 Plan. Options to purchase an additional 843,135
shares have been granted under the 1995 Plan, which grants are subject to
stockholder approval of an amendment to the 1995 Plan to increase the number of
shares authorized for issuance thereunder to 1,300,000. The following executive
officers have been granted options subject to obtaining such stockholder
approval.
Stockholder Number of Shares
Name Subject to Option
----------- -----------------
Louis R. Bucalo 456,088
Sunil Bhonsle 175,116
Richard Allen 61,931
Robert E. Farrell 150,000
The provisions of the 1995 Plan provide for the automatic grant of
non-qualified stock options to purchase shares of Common Stock ("Director
Options") to directors of the Company who are not employees or principal (i.e.
10%) stockholders of the Company ("Eligible Directors"). Eligible Directors of
the Company will be granted a Director Option to purchase 10,000 shares of
Common Stock upon joining the Board (an "Initial Director Option"). Further,
commencing on the day immediately following the date of the annual meeting of
stockholders for the Company's fiscal year ending December 31, 1996, each
Eligible Director, other than directors who received an Initial Director Option
since the last annual meeting, will be granted a Director Option to purchase
2,000 shares of Common Stock on the day immediately following the date of each
annual meeting of stockholders, as long as such director is a member of the
Board of Directors. The exercise price for each share subject to a Director
Option shall be equal to the fair market value of the Common Stock on the date
of grant. Director Options are exercisable in four equal annual installments,
commencing six months from the date of grant. Director Options expire the
earlier of 10 years after the date of grant or 90 days after the termination of
the director's service on the Board of Directors.
-37-
<PAGE>
The 1993 Stock Option Plan
In 1993, the Company adopted a stock option plan which was subsequently
amended and restated (the "1993 Plan"). The 1993 Plan provided for the issuance
of 1,209,754 shares of Common Stock to eligible participants. At September 30,
1996, options to purchase 321,671 shares of Common Stock are outstanding under
the 1993 Plan, which options are exercisable at prices ranging from $.59 to
$1.35 per share. The Company has agreed with the Underwriter not to grant
additional options under the 1993 Plan.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages for
breach of their fiduciary duty as directors. This provision does not eliminate
the liability of a director (i) for breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions by the director not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for willful or negligent declaration of an unlawful dividend, stock
purchase or redemption, or (iv) for transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief of recession.
The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' fees, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any civil or criminal action or administrative
proceeding arising out of his performance of his duties as a director or
officer, other than an action instituted by the director or officer. Such
indemnification will be available if the indemnitee acted in good faith and in a
matter he reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action, had no reasonable cause
to believe his conduct was unlawful. The Indemnification Agreements also require
that the Company indemnify the director or other party thereto in all cases to
the fullest extent permitted by applicable law. Each Indemnification Agreement
permits the director or officer that is party thereto to bring suit to seek
recovery or amounts due under the Indemnification Agreement and to recover the
expenses of such a suit if he is successful.
The Company's By-laws provide that the Company shall indemnify its
directors, officers, employees or agents to the full extent permitted by the
Delaware General Corporation Law, and the Company shall have the right to
purchase and maintain insurance on behalf of any such person whether or not the
Company would have the power to indemnify such person against the liability. The
Company currently maintains such an insurance policy on behalf on any of its
directors, officers, employees or agents.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for indemnification.
-38-
<PAGE>
CERTAIN TRANSACTIONS
In March and April 1993, the Company borrowed an aggregate of $1,200,000
from Venturetek, L.P. and Dr. Lindsay A. Rosenwald, the co-founder and a
director of the Company. See "Principal Shareholders." The loan was evidenced by
10% promissory notes payable on demand. The lenders received warrants which are
currently exercisable to purchase an aggregate of 13,327 and 20,355 shares of
Common Stock, respectively, at an exercise price of $4.50 per share. In June
1995, the notes, together with accrued interest, were cancelled in consideration
of the issuance to Venturetek L.P. and Dr. Rosenwald of shares of Series A
Preferred Stock which subsequently converted into 151,388 and 215,135 shares of
Common Stock, respectively.
In April and May 1993, Dr. Rosenwald made loans to the Company in the
aggregate principal amount of $1,014,000. Such loans were repaid, together with
accrued interest at the rate of 7% per annum, from the proceeds of the private
placement of Series A Preferred Stock described below.
Between July and November 1993, Paramount Capital, Inc. ("Paramount") acted
as placement agent in connection with the Company's private placement of Series
A Preferred Stock. Paramount received $1,729,575 in commissions and a $576,525
expense allowance in consideration for its services. In addition, designees of
Paramount received warrants to purchase Series A Preferred Stock in connection
with the private placement which currently represent warrants to purchase an
aggregate of 469,107 shares of Common Stock exercisable at $4.50 per share. Dr.
Rosenwald and Peter M. Kash, directors of the Company, serve as the President
and Chairman, and a Managing Director, respectively, of Paramount. Dr. Rosenwald
and Mr. Kash received warrants to purchase 221,221 and 96,191 of the
aforementioned shares of Common Stock, respectively.
In January 1995, the Company agreed to issue warrants to purchase an
aggregate of 7,395 shares of Common Stock at an exercise price of $3.25 per
share to Ray Dirks Research ("RDR") or its designees for services rendered in
connection with a license transaction. Michael Hsu, a director of the Company,
serves as a consultant to RDR and received one-half of such warrants.
In February 1995, Paramount acted as placement agent in connection with the
Company's private placement of Series B Preferred Stock. Paramount received
$103,125 in commissions and a $45,375 expense allowance for services rendered in
connection with such private placement. In addition, designees of Paramount
received Series B Preferred Stock purchase warrants which currently represent
warrants to purchase an aggregate of 46,350 shares of Common Stock at an
exercise price of $3.92 per share. Dr. Rosenwald and Mr. Kash received warrants
to purchase 17,961 and 8,709 of such shares, respectively.
Between August and October 1995, The Aries Domestic Fund L.P. and The Aries
Trust loaned the Company an aggregate of $250,000 evidenced by the promissory
notes (the "Investor Notes") which bore interest at the rate of 12% per annum
and were payable on the earlier of the closing of an initial public offering or
one year from the date of issuance. In accordance with their terms, the
principal amount of the Investor Notes was converted into $250,000 principal
amount of 10% promissory notes (the "Bridge Notes") and 125,000 Class A Warrants
as part of a bridge financing completed in October 1995. Accrued interest on the
Investor Notes was repaid in January, 1996. Repayment of the principal and
accrued interest on the Bridge Notes was made upon completion of the Company's
initial public offering in January 1996. Dr. Rosenwald is the President of the
general partner of The Aries Domestic Fund L.P. and serves as investment manager
for The Aries Trust.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company has adopted a policy that all future
transactions, including loans, between the Company and its officers, directors,
principal shareholders and their affiliates will be approved by a majority of
the Board of Directors, including a majority of the independent and
disinterested outside directors on the Board of Directors, and will continue to
be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
-39-
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 25, 1996, certain
information concerning the beneficial ownership of the Company's Common Stock by
(i) each stockholder known by the Company to own beneficially five percent or
more of the outstanding Common Stock of the Company; (ii) each director; (iii)
each executive officer of the Company; and (iv) all executive officers and
directors of the Company as a group, and their percentage ownership and voting
power.
Shares Beneficially Percent of Shares
Name and Address of Beneficial Owner (1) Owned (2) Beneficially Owned
- ---------------------------------------- ------------------- ------------------
Louis R. Bucalo, M.D..................... 338,172(3) 2.72 %
Ernst-Gunter Afting...................... 0 *
Richard C. Allen Ph.D.................... 63,775(4) *
Sunil Bhonsle............................ 132,913(5) 1.07
Robert E. Farrell........................ 0 *
Michael K. Hsu........................... 22,346(6) *
Hubert Huckel, M.D....................... 2,500(7) *
Marvin E. Jaffe, M.D..................... 2,500(7) *
Peter M. Kash............................ 152,452(8) 1.23
Lindsay A. Rosenwald, M.D................ 660,034(9) 5.24
Konrad M. Weis, Ph.D..................... 51,852(10) *
Kenneth J. Widder, M.D................... 15,237(10) *
Invesco Trust Company.................... 1,220,538(11) 9.91
7800 E. Union Avenue
Denver, CO 80237
All executive officers and directors
as a group (12) persons.............. 1,441,781(12) 11.05%
- ----------
*Less than one percent.
(1) Unless otherwise indicated, the address of such individual is c/o Titan
Pharmaceuticals, Inc., 400 Oyster Point Boulevard, Suite 505, South San
Francisco, California 94080.
(2) In computing the number of shares beneficially owned by a person and the
percentage ownership of a person, shares of Common Stock of the Company
subject to options held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however,
are not deemed outstanding for purposes of computing the percentage
ownership of each other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the persons
named in the table have sole voting and investment power with respect to
all shares of Common Stock.
(3) Includes 127,943 shares issuable upon exercise of outstanding options.
28,506 of such shares are subject to (i) obtaining stockholder approval of
an increase in the number of shares reserved for issuance under the 1995
Stock Option Plan and (ii) if such approval is obtained, repurchase by the
Company upon the occurrence of certain events.
(4) Represents shares issuable upon exercise of outstanding options. 3,871 of
such shares are subject to (i) obtaining stockholder approval of an
increase in the number of shares reserved for issuance under the 1995 Stock
Option Plan and (ii) if such approval is obtained, repurchase by the
Company upon the occurrence of certain events.
(5) Represents shares issuable upon exercise of outstanding options. 10,945 of
such shares are subject to (i) obtaining stockholder approval of an
increase in the number of shares reserved for issuance under the 1995 Stock
Option Plan and (ii) if such approval is obtained, repurchase by the
Company upon the occurrence of certain events.
(6) Includes 11,314 shares issuable upon exercise of outstanding options.
(7) Represents shares issuable upon exercise of outstanding options.
-40-
<PAGE>
(8) Includes 112,517 shares issuable upon exercise of outstanding options and
warrants and 3,411 shares held in trust for the benefit of his son. See
"Certain Transactions."
(9) Includes (i) 90,084 shares held by entities owned by Mr. Rosenwald, and
(ii) 267,154 shares issuable upon exercise of outstanding options and
warrants. Does not include (i) 94,589 shares held by his wife; (ii) 40,536
shares held by his wife in trust for the benefit of their children; (iii)
585,718 shares held by or underlying warrants held by Venturetek L.P., a
limited partnership, the limited partners of which include Dr. Rosenwald's
wife and children; or (iv) shares underlying Class A Warrants held by The
Aries Trust and The Aries Domestic Fund L.P. as to which Dr. Rosenwald
serves as investment manager and President of the general partner,
respectively. Dr. Rosenwald disclaims beneficial ownership as to all of
such shares. See "Certain Transactions."
(10) Includes 7,617 shares issuable upon exercise of outstanding options.
(11) Represents shares held by three mutual funds managed by Invesco Funds
Group, Inc. or Invesco Trust Company.
(12) See Notes (3) through (10) above.
-41-
<PAGE>
SELLING SECURITYHOLDERS
Bridge Financing Investors
An aggregate of up to 1,615,877 Warrants and 1,615,877 shares of Common
Stock issuable upon exercise of such Warrants (collectively, the "Bridge
Financing Securities") may be offered for resale by the Bridge Financing
Investors who received their Warrants in exchange for warrants received in the
Bridge Financing and continue to hold such securities.
The following table set forth certain information with respect to each
Bridge Financing Investor for whom the Company is registering the Bridge
Financing Securities for resale to the public. The Company will not receive any
of the proceeds from the sale of such securities. Upon exercise of the Warrants
held by the Bridge Financing Investors, the Company would receive the $6.20
exercise price, less the Solicitation Fee. To the Company's knowledge there are
no material relationships between any of the Bridge Financing Investors and the
Company, nor have any such material relationships existed within the past three
years. Each of the Bridge Financing Investors has sole investment power with
respect to its securities offered hereby, except where joint ownership is noted
below.
Number of Warrants Beneficially
Bridge Financing Investors Owned and Maximum Number to be Sold(1)
- -------------------------- --------------------------------------
Leonard J. Adams......................................... 12,500
James L. Alderman........................................ 12,500
Byron M. Allen........................................... 6,250
Delbert & Patsy Allen, JTWROS............................ 25,000
Alta Resource Group...................................... 12,500
Robert S. & Sonia T.
Benach, JTWROS......................................... 12,500
Mark Berger.............................................. 6,250
Larry G. Berglund........................................ 12,500
Benjamin Bollag.......................................... 12,500
Michael Bollag........................................... 12,500
Jacob & Channah Borenstein............................... 3,000
Theodore I. Botter - Defined
Benefit Pension Trust.................................. 12,500
David James Brown, Money
Pension Plan........................................... 12,500
Daniel C. Callow......................................... 12,500
James P. Clay............................................ 12,500
John A. Cleary........................................... 12,500
C.L.F.S. Equities, Ltd................................... 9,375
Kenneth & Sherry Cohen, JTWROS........................... 12,500
Robert H. Cohen & Nanette C.
Koryn, JTWROS.......................................... 6,250
Michael G. Conniff....................................... 12,500
Alan Conners............................................. 12,500
Robert S. Cowles III..................................... 12,500
John M. Dalena........................................... 12,500
Donald D. Drapkin........................................ 50,000
Raymond Drapkin.......................................... 25,000
Nathan & Rose Eisen, JTWROS.............................. 6,250
Joseph A. & Theresa M.
Fabiani, JTWROS........................................ 12,500
Leonard R. Farber........................................ 3,125
Denise Feder............................................. 12,500
-42-
<PAGE>
Bruce Fetzer............................................. 12,500
David Fisch.............................................. 3,125
Jerome Fisch............................................. 6,250
Marvin Fischman.......................................... 1,563
Andrew J. Fremer, Jr..................................... 6,250
Malrene Friedler......................................... 12,500
Carl Frischling.......................................... 3,125
Andrew P. Geiss.......................................... 12,500
Robert F. Goecker........................................ 8,000
Jefrey Goffman........................................... 12,500
Sandra Goldstein......................................... 6,250
Barbara Grae............................................. 12,500
Stuart Gruber............................................ 12,500
Daniel Gutkin............................................ 25,000
Harry M. Hart............................................ 6,250
Richard Hirsch........................................... 12,500
Tatiana Hirsu............................................ 3,125
Badr Idbeis.............................................. 12,500
International Foam Products, Inc......................... 12,500
Craig Johnson............................................ 12,500
James W. Johnson......................................... 12,500
Bruce Kashkin............................................ 25,000
Melvin L. Katten......................................... 7,500
Robert Katz.............................................. 12,500
Daniel Kessel, M.D....................................... 25,000
Ida Kessel............................................... 12,500
Lawrence J. Kessel....................................... 12,500
Jay Kestenbaum........................................... 12,500
Gilman R. King........................................... 6,250
Robert Klein, M.D. &
Myriam Gluck, M.D., JTWROS............................. 62,500
Michael & Nicole Kubin, JTWROS........................... 12,500
Joseph S. Kulpa.......................................... 25,000
Gregory S. Lenchner, M.D................................. 12,500
Lawrence I. Lerner....................................... 12,500
Benjamin Lehrer.......................................... 8,000
Alda Campisi Levitt...................................... 12,500
Joseph Littenberg........................................ 6,250
J. Jay Lobell............................................ 12,500
Ludlow Management, Inc................................... 12,500
Arthur C. Madresh........................................ 12,500
Joan Maher-Hurley........................................ 12,500
George I. Mallis......................................... 12,500
MATSET, Inc.............................................. 25,000
Charles T. McManus....................................... 12,500
Albert Milstein.......................................... 12,500
Harvey & Susan Mininberg, JTWROS......................... 25,000
Patrick & Ruth Morgan, JTWROS............................ 12,500
Jerome J. Mullins........................................ 25,000
North Oaks Ob-Gyn FBO
Samuel R. Staggers, PSP................................ 12,500
Robert M. Patton......................................... 12,500
Pegasus Capital Strategies, L.P.......................... 12,500
-43-
<PAGE>
Ruth Peyser.............................................. 12,500
Henry Platt.............................................. 25,000
Anatoli Prokoptshouk..................................... 18,750
Pierre F. & Claire T. Pype, JTWROS....................... 12,500
Roger B. Rankin TTEE FBO
Roger B. Rankin........................................ 12,500
Lawrence Rothberg........................................ 25,000
Walter Sabrin............................................ 1,564
Wayne Saker.............................................. 12,500
Roy & Marlena Schaeffer, JTWROS.......................... 12,500
Louis Schell............................................. 12,500
Abraham Schrieber........................................ 12,500
Joel M. Schreiber........................................ 3,125
Richard Serbin........................................... 12,500
E. Donald Shapiro........................................ 12,500
Shari Lyn Leasing Corp................................... 3,125
Steven Sklow............................................. 50,000
Leonard A. Solomon....................................... 12,500
Norman Steinberg......................................... 5,000
Miriam Stern............................................. 6,250
James G. Stramondo....................................... 25,000
Bernard & Bernice Strassner, JTWROS...................... 12,500
Alice C. Tate............................................ 12,500
Theodore R. Tetzlaff..................................... 12,500
Thorunn Wathne........................................... 25,000
Carl & Beverly Weiman, JTWROS............................ 12,500
J. Michael Wolfe......................................... 6,250
Isadore & Margaret Zaneski, JTWROS....................... 18,750
Herman L. Zeller - Living Trust.......................... 12,500
Martin Zelman............................................ 12,500
Robert Zelman............................................ 3,125
Murray Zung.............................................. 12,500
The Aries Domestic
Fund, L.P.............................................. 62,500
The Aries Trust.......................................... 62,500
- ----------
(1) Does not include shares of Common Stock issuable upon exercise of the
Warrants. The Bridge Financing Investors have agreed not to exercise their
Warrants until January 18, 1997. None of the Bridge Financing Investors
beneficially own in excess of 1% of the outstanding shares of Common Stock
of the Company.
Private Placement Investors
An aggregate of up to 1,536,000 Units comprised of 1,536,000 Warrants and
1,536,000 shares of Common Stock issuable and an additional 1,536,000 shares of
Common Stock issuable upon exercise of such Warrants (collectively, the "Private
Placement Securities") may be offered for resale by investors who received their
Units in the Private Placement. The components of the Units are separately
transferable.
The following table sets forth certain information with respect to each
Private Placement Investor for whom the Company is registering the Private
Placement Securities for resale to the public. The Company will not receive any
of the proceeds from the sale of such securities. Upon exercise of the Warrants
held by the Private Placement Investors, the Company would receive the $6.20
exercise price, less the Solicitation Fee. To the Company's knowledge there are
no
-44-
<PAGE>
material relationships between any of the Private Placement Investors and the
Company, nor have any such material relationships existed within the past three
years. Each of the Private Placement Investors has sole investment power with
respect to the securities offered hereby, except where joint ownership is noted
below.
<TABLE>
<CAPTION>
Number of Securities Beneficially
Owned and Maximum Number to be Sold
-----------------------------------
Private Placement Investors Units Shares of Common Stock Warrants(1)
- --------------------------- ----- ---------------------- -----------
<S> <C> <C> <C>
Dr. George Spiegel................................. 9,600 9,600 9,600
Paul T. Gentile and Yvette
Aguiar Gentile................................... 9,600 9,600 9,600
Quest Enterprises, Inc............................. 2,400 2,400 2,400
George Lionikis, Sr................................ 7,200 7,200 7,200
Jack W. Rosen...................................... 4,800 4,800 4,800
Allan S. Lerner.................................... 4,800 4,800 4,800
Nathan Plafsky..................................... 9,600 9,600 9,600
Martin G. Mendelssohn and Lynn
Mendelssohn, JTWROS.............................. 7,200 7,200 7,200
Robert Brahms...................................... 2,400 2,400 2,400
Daniel Gutkin...................................... 2,400 2,400 2,400
Thomas Rourke Trust................................ 2,400 2,400 2,400
James P. Weaver.................................... 2,400 2,400 2,400
Bruce F. Fetzer and D'Arbra L.
Fetzer, JTWROS................................... 4,800 4,800 4,800
Alvin Fried........................................ 4,800 4,800 4,800
Bruce Kashkin and Marjorie
Kashkin, JTWROS.................................. 2,400 2,400 2,400
International Foam Products, Inc................... 2,400 2,400 2,400
Joseph S. Kulpa.................................... 4,800 4,800 4,800
Lawrence Martin.................................... 2,400 2,400 2,400
Epifanio Almodovar................................. 2,400 2,400 2,400
Benjamin A. Miller Trust........................... 4,800 4,800 4,800
Harold Yordy and Phyllis
Yordy, JTWROS.................................... 2,400 2,400 2,400
Henry Warner....................................... 2,400 2,400 2,400
James P. Clay...................................... 2,400 2,400 2,400
Alda C. Levitt..................................... 2,400 2,400 2,400
Harold H. Singer................................... 2,400 2,400 2,400
Henry Warner Spec. No. 2........................... 2,400 2,400 2,400
Jerry Lubliner and Melissa
Lubliner, JTWROS................................. 2,400 2,400 2,400
Harold Sparks...................................... 9,600 9,600 9,600
S&A Enterprises, Inc. Profit
Sharing Plan..................................... 2,400 2,400 2,400
The John E. Fetzer Memorial
Trust Fund......................................... 4,800 4,800 4,800
SJG Management, Inc. Profit
Sharing Plan....................................... 7,200 7,200 7,200
Carmine T. Agnello................................. 48,000 48,000 48,000
Wayne Mixson....................................... 7,200 7,200 7,200
Kevin Waltzer and Lisa
Waltzer.......................................... 9,600 9,600 9,600
Agent 17 Inc....................................... 2,400 2,400 2,400
</TABLE>
-45-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Sherwyn J. Wayne................................... 4,800 4,800 4,800
Michael Ambroselli................................. 9,600 9,600 9,600
Antonio Fabbri..................................... 2,400 2,400 2,400
Frank Loccisano and Mary Anne
Loccisano, JTWROS................................ 7,200 7,200 7,200
Alfons Melohn...................................... 38,400 38,400 38,400
Gilman R. King..................................... 4,800 4,800 4,800
Harry Bram......................................... 4,800 4,800 4,800
John Bahng......................................... 2,400 2,400 2,400
Morton L. Topfer................................... 4,800 4,800 4,800
Neil C. Friess..................................... 2,400 2,400 2,400
Albert G. Bledig and Alice
Bledig, JTWROS................................... 4,800 4,800 4,800
Jose Francisco..................................... 2,400 2,400 2,400
Lawrence Faisina................................... 4,800 4,800 4,800
Curtis R. Unanue and Maria
D. Unanue, JTWROS................................ 4,800 4,800 4,800
Joel O. Wooten..................................... 2,400 2,400 2,400
Mordecai Bluth and Pearl
Bluth, JTWROS.................................... 2,400 2,400 2,400
Jacqueline J. Corbin............................... 2,400 2,400 2,400
Dr. Ilesanmi Adesida and Dr.
Patience O. Adesida, JTWROS...................... 2,400 2,400 2,400
Milan Beres........................................ 4,800 4,800 4,800
Bruce A. Hudson and Fumi
Hudson, JTWROS................................... 2,400 2,400 2,400
Gray Nesbit and Patricia
Nesbit, JTWROS................................... 2,400 2,400 2,400
Radiation Therapists Associates
Profit Sharing Plan F/B/O Hosny Selim............ 2,400 2,400 2,400
Jeffrey I. Mechanick, M.D.......................... 12,000 12,000 12,000
John P. Diesel..................................... 2,400 2,400 2,400
Vennard C. McCann.................................. 2,400 2,400 2,400
Alice C. Tate...................................... 4,800 4,800 4,800
Daniel C. Callow................................... 2,400 2,400 2,400
Theodore R. Jabara and Helene
E. Jabara........................................ 14,400 14,400 14,400
Stuart Gruber...................................... 4,800 4,800 4,800
Gail Silberman..................................... 2,400 2,400 2,400
Amore Perpetuo, Inc................................ 14,400 14,400 14,400
Dawn C. Kass Irrevocable Trust..................... 9,600 9,600 9,600
Alex Grunberger and Eva
Grunberger, JTWROS................................. 2,400 2,400 2,400
Mitchell Birzon and Kathryn W.
Birzon, JTWROS................................... 2,400 2,400 2,400
Dr. Robert Klein and Dr. Myriam
Klein, JTWROS.................................... 24,000 24,000 24,000
Jonathan Elias and Irene
Elias, JTWROS...................................... 4,800 4,800 4,800
Steven Sklow....................................... 7,200 7,200 7,200
Donald W. McCue and Mary
Ellen McCue, JTWROS................................ 9,600 9,600 9,600
</TABLE>
-46-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Matthew C. Schilowitz.............................. 24,000 24,000 24,000
Jay E. Fennessy.................................... 2,400 2,400 2,400
Leonard A. Solomon................................. 4,800 4,800 4,800
Jeremy P. Waletzky Revocable Trust................. 2,400 2,400 2,400
Fred Rosen......................................... 2,400 2,400 2,400
Howard Gelman...................................... 2,400 2,400 2,400
My Seven Children, Inc............................. 4,800 4,800 4,800
Herbert Michitsch and Mary
Michitsch, JTWROS................................ 2,400 2,400 2,400
Rocco W. Belmonte.................................. 2,400 2,400 2,400
Marc K. Siegel..................................... 2,400 2,400 2,400
Bob Gold and Gwendolyn
Gold, JTWROS..................................... 4,800 4,800 4,800
Ruth Morgan........................................ 2,400 2,400 2,400
Natalie Bernstein.................................. 2,400 2,400 2,400
Thomas A. Corvo.................................... 2,400 2,400 2,400
Robert Huebner..................................... 2,400 2,400 2,400
Clarence B. Horton................................. 4,800 4,800 4,800
Wayne Saker........................................ 14,400 14,400 14,400
James A. Cook and Karen
S. Cook, TIC..................................... 2,400 2,400 2,400
M.S. Corporation................................... 2,400 2,400 2,400
Alan A. Cohen, M.D................................. 2,400 2,400 2,400
Walter James Smith................................. 2,400 2,400 2,400
Walter Futterweit, M.D............................. 2,400 2,400 2,400
Kishu Idnani....................................... 2,400 2,400 2,400
Michael M. Sher and Claude
A. Sher, JTWROS.................................. 4,800 4,800 4,800
Tommy B. Austin and Brenda
J. Austin, JTWROS................................ 2,400 2,400 2,400
Charles W. Dunn Revocable Trust.................... 9,600 9,600 9,600
Stephen Posovsky Money Purchase
Keogh Plan & Trust............................... 2,400 2,400 2,400
Howard E. Zucker and Paulette
Zucker, JTWROS................................... 4,800 4,800 4,800
Irwin H. Parnes.................................... 2,400 2,400 2,400
Robert Katz........................................ 14,400 14,400 14,400
Howard Brownstein and Leslie
Brownstein, JTWROS............................... 2,400 2,400 2,400
Kathleen McGlynn................................... 19,200 19,200 19,200
Howard Sternheim and Sharon
Sternheim, JTWROS................................ 2,400 2,400 2,400
Allan Bruce Mekles................................. 2,400 2,400 2,400
John A. Long....................................... 4,800 4,800 4,800
Edwards Culver Kidd III............................ 2,400 2,400 2,400
Rene Grodko........................................ 2,400 2,400 2,400
L.S. Agrawal....................................... 4,800 4,800 4,800
Steven Sheck....................................... 2,400 2,400 2,400
Chaitanya K. Agarwal............................... 2,400 2,400 2,400
Alan N. Parnes, D.D.S.............................. 2,400 2,400 2,400
Michael Szikman and Francoise
Szikman, JTWROS.................................. 2,400 2,400 2,400
GYN/OBS Associates of New Rochelle................. 2,400 2,400 2,400
</TABLE>
-47-
<PAGE>
<TABLE>
<S> <C> <C> <C>
David Eckstein and Marianna
Eckstein, JTWROS................................... 4,800 4,800 4,800
Mark Scheinfeld and Novy
Scheinfeld, JTWROS............................... 2,400 2,400 2,400
Sophia Schwartzman and Alex
Schwartzman, JTWROS.............................. 2,400 2,400 2,400
Gary L. Godlewski.................................. 2,400 2,400 2,400
Bernard J. Perini.................................. 9,600 9,600 9,600
George Goldstein................................... 2,400 2,400 2,400
The Interiors Workshop of Naples Inc............... 2,400 2,400 2,400
Glenn Hammer DDC Profit
Sharing Plan..................................... 2,400 2,400 2,400
William A. Schneider............................... 2,400 2,400 2,400
Robert Lombardi and Margaret
Lombardi, JTWROS................................. 4,800 4,800 4,800
Bernard Strassneer and Bernice
Strassner, JTWROS................................ 2,400 2,400 2,400
Anand J. Sathe..................................... 12,000 12,000 12,000
George Wailand..................................... 2,400 2,400 2,400
Richard P. Cole.................................... 2,400 2,400 2,400
Murray Cohen....................................... 2,400 2,400 2,400
Norman Chalif and Rosalie
Chalif, JTWROS................................... 2,400 2,400 2,400
Herbert Hoffner, M.D............................... 2,400 2,400 2,400
R. Douglas Scheidt................................. 4,800 4,800 4,800
Douglas S. Drysdale................................ 2,400 2,400 2,400
Grace T. O'Steen and Ruby
O'Steen, TIC..................................... 4,800 4,800 4,800
James Nigro........................................ 31,200 31,200 31,200
Raymond M. Warren, Jr.............................. 4,800 4,800 4,800
Jan Linhart, D.D.S................................. 2,400 2,400 2,400
David Richard Simon................................ 2,400 2,400 2,400
Herbert H. Derian and Lorelei
F. Derian, JTWROS................................ 2,400 2,400 2,400
Lee Miller, M.D. and Lynne
Miller, JTWROS................................... 2,400 2,400 2,400
Lisa A. Neibart.................................... 1,200 1,200 1,200
Martin A. Cooper, M.D.
Retirement Plan.................................. 4,800 4,800 4,800
Richard W. Schreiber............................... 2,400 2,400 2,400
South Ferry Building Company....................... 72,000 72,000 72,000
Aaron Wolfson...................................... 24,000 24,000 24,000
Abraham Wolfson.................................... 4,800 4,800 4,800
Display Presentations Defined
Benefit Pension Plan............................. 2,400 2,400 2,400
Robert D. Frankel and Marie N.
Frankel, JTWROS.................................. 2,400 2,400 2,400
Charles F. Larimer................................. 2,400 2,400 2,400
David C. Ward and Patricia
Bray-Ward, JTWROS................................ 4,800 4,800 4,800
C.A. Siver......................................... 2,400 2,400 2,400
Barry L. Kroll..................................... 2,400 2,400 2,400
Frank Carrea and Michelle
</TABLE>
-48-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Carrea, JTWROS................................... 2,400 2,400 2,400
Michael Rosin...................................... 19,200 19,200 19,200
Stephen Baldwin Jayne.............................. 4,800 4,800 4,800
The Rubin Family Foundation, Inc................... 4,800 4,800 4,800
Gordon M. Berger................................... 2,400 2,400 2,400
John R. Manion..................................... 2,400 2,400 2,400
Arnold Baruch Simon................................ 9,600 9,600 9,600
Howard L. Etchell Trust............................ 2,400 2,400 2,400
Vadim Milstein..................................... 2,400 2,400 2,400
David Wilkes and Ruth
Wilkes, JTWROS................................... 2,400 2,400 2,400
Stafford R. Broumand............................... 4,800 4,800 4,800
Mike Teofilovich................................... 2,400 2,400 2,400
Barbara Bogan...................................... 2,400 2,400 2,400
David H. Szikman and Michael
Szikman, JTWROS.................................. 2,400 2,400 2,400
John Motulsky...................................... 2,400 2,400 2,400
Robert Cowles...................................... 2,400 2,400 2,400
Louis Centofanti................................... 2,400 2,400 2,400
Howard Berg........................................ 9,600 9,600 9,600
25 Broadway Realty Company......................... 48,000 48,000 48,000
Robert Sloan and Irene
Sloan, JTWROS.................................... 2,400 2,400 2,400
Fred Margolin and Ann
Margolin, JTWROS................................. 2,400 2,400 2,400
Robert M. Saul..................................... 2,400 2,400 2,400
Walter Schenk...................................... 2,400 2,400 2,400
Jules H. Dreyfuss.................................. 7,200 7,200 7,200
Eugene Silverman................................... 4,800 4,800 4,800
Jonathan I. Greene, M.D. and Laurie
J. Greene, JTWROS................................ 2,400 2,400 2,400
Ahmad Rashad....................................... 4,800 4,800 4,800
Marvin Kogod and Muriel
Kogod, JTWROS.................................... 4,800 4,800 4,800
Gary A. Greenberg.................................. 1,200 1,200 1,200
George R. Isely and Judith
A. Isely, JTWROS................................. 2,400 2,400 2,400
J. Jay Lobell and Beverly
O. Lobell, JTWROS................................ 19,200 19,200 19,200
The Mary Patoff Revocable Trust.................... 5,200 5,200 5,200
The Michael Patoff Revocable Trust................. 5,200 5,200 5,200
The Clara Patoff Revocable Trust................... 4,000 4,000 4,000
Bryan A. Simmons................................... 2,400 2,400 2,400
Richard A. Nelson and Elaine
M. Nelson, JTWROS................................ 16,800 16,800 16,800
Michael Kubin and Nicole
Kubin, JTWROS.................................... 19,200 19,200 19,200
Lawrence Helfant................................... 9,600 9,600 9,600
Victor Molinsky and Janet ......................... 2,400 2,400 2,400
Marlene Levine..................................... 2,400 2,400 2,400
Bernard Golan Trust................................ 4,800 4,800 4,800
Stephen J. Kornfeld, M.D. and
Janice T. Kornfeld, JTWROS....................... 2,400 2,400 2,400
</TABLE>
-49-
<PAGE>
<TABLE>
<S> <C> <C> <C>
George I. Mallis................................... 2,400 2,400 2,400
Matthew A. Bishop.................................. 1,200 1,200 1,200
Elie Douer......................................... 48,000 48,000 48,000
Charles T. McManus................................. 2,400 2,400 2,400
Vincent J. Pizzulli................................ 2,400 2,400 2,400
Gary Novetsky and Sandra
Novetsky, JTWROS................................. 2,400 2,400 2,400
Yong S. Chen....................................... 2,400 2,400 2,400
Donald Shaver...................................... 2,400 2,400 2,400
Joseph Fishman..................................... 2,400 2,400 2,400
Jeffrey M. Walters................................. 2,400 2,400 2,400
Petrocelli Industries Inc.......................... 2,400 2,400 2,400
Leonard Moskowitz and Vickie
Moskowitz, JTWROS................................ 4,800 4,800 4,800
Robert M. Patton................................... 2,400 2,400 2,400
Manhattan Partners................................. 2,400 2,400 2,400
Richard J. Stephenson.............................. 9,600 9,600 9,600
Michael Bollag..................................... 14,400 14,400 14,400
Benjamin Bollag.................................... 14,400 14,400 14,400
Jay Harris......................................... 2,400 2,400 2,400
Murray Zung........................................ 2,400 2,400 2,400
Henry Szikman and Gloria
Szikman, JTWROS.................................. 2,400 2,400 2,400
Mark A. Respler and Yale
E. Respler, JTWROS............................... 2,400 2,400 2,400
Ivan Jacobs........................................ 2,400 2,400 2,400
Leonard J. Adams................................... 14,400 14,400 14,400
George J. Wegler Living Trust...................... 2,400 2,400 2,400
David J. Domeier and Patricia
Sue Domeier, JTWROS.............................. 2,400 2,400 2,400
Abraham Douer...................................... 38,400 38,400 38,400
Brynde Berkowitz................................... 2,400 2,400 2,400
Regina Lehrer...................................... 4,800 4,800 4,800
Albert Milstein.................................... 4,800 4,800 4,800
Nathan Eisen....................................... 9,600 9,600 9,600
Ruth Peyser........................................ 2,400 2,400 2,400
Morris Friedman.................................... 4,800 4,800 4,800
Martin Sirotkin.................................... 2,400 2,400 2,400
Eugene P. Souther.................................. 4,800 4,800 4,800
Howard Garfield.................................... 1,200 1,200 1,200
William J. Fox..................................... 1,200 1,200 1,200
KBCS Inc........................................... 1,200 1,200
Patrick J. Storm and Marie
Storm............................................ 1,200 1,200 1,200
Leon Melohn........................................ 19,200 19,200 19,200
Joseph Abatiello................................... 1,440 1,440 1,440
Lisa Susan Gatschet................................ 4,800 4,800 4,800
Samuel J. Holtzman Trust........................... 12,000 12,000 12,000
Michael Jordan..................................... 4,800 4,800 4,800
Curtis Polk........................................ 2,400 2,400 2,400
Arnold Pusar Trust................................. 1,920 1,920 1,920
Eric J. Wiborg and Laurie
Wiborg, JTWROS................................... 2,400 2,400 2,400
</TABLE>
-50-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Eric J. Wiborg Trust............................... 4,800 4,800 4,800
Allan Novetsky and Chaikie
Novetsky, JTWROS................................. 2,400 2,400 2,400
Allan Novetsky and Hillel
Novetsky, JTWROS................................. 2,400 2,400 2,400
Dr. Ross Golding................................... 2,400 2,400 2,400
Marvin S. Becker, M.D. and
Jacqueline Becker, JTWROS.......................... 1,200 1,200 1,200
Kirit S. Patel and Shobha
K. Patel......................................... 1,200 1,200 1,200
James L. Alderman.................................. 2,400 2,400 2,400
Robert S. Benach and Sonia
Benach........................................... 1,200 1,200 1,200
Gary B. Flom....................................... 1,200 1,200 1,200
Venjamin Nilva..................................... 1,200 1,200 1,200
Iouri Ostanine..................................... 1,200 1,200 1,200
Hermann L. Zeller Living Trust..................... 2,400 2,400 2,400
Roger C. Rohrs..................................... 2,400 2,400 2,400
Carl F.R. Weiman and Beverly
Weiman, JTWROS................................... 1,200 1,200 1,200
Technochem Technical Services, Inc................. 2,400 2,400 2,400
Judith A. Price.................................... 3,600 3,600 3,600
Kenneth F. Price................................... 3,600 3,600 3,600
Casimer Zaremba.................................... 1,200 1,200 1,200
John F. Mowrer..................................... 2,400 2,400 2,400
Stephen F. Ficchi.................................. 2,400 2,400 2,400
Leonard Brawer..................................... 1,200 1,200 1,200
</TABLE>
- ----------
(1) Does not include shares of Common Stock issuable upon exercise of such
Warrants. None of the Private Placement Investors beneficially own in
excess of 1% of the outstanding shares of Common Stock of the Company.
PLAN OF DISTRIBUTION
The securities offered hereby by the Company are being offered directly by
the Company pursuant to the terms of the Warrants. The securities offered hereby
by the Selling Securityholders may be sold by the Selling Securityholders or by
their transferees or other successors in interest. The distribution of all
securities offered hereby may be effected in one or more transactions that may
take place on the over-the-counter market, including ordinary broker's
transactions, privately-negotiated transactions or through sales to one or more
broker/dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by these holders in connection with
such sales. No underwriter is being utilized in connection with this offering.
The Company has agreed not to solicit Warrant exercises other than through
Blair. Upon any exercise of the Warrants, the Company will pay Blair a fee of 5%
of the aggregate exercise price if (i) the market price of the Company's Class A
Common Stock on the date the Warrant is exercised is greater than the then
exercise price of the Warrants; (ii) the exercise of the Warrant was solicited
by a member of the National Association of Securities Dealers, Inc. as
designated in writing on the Warrant certificate subscription form; (iii) the
Warrant is not held in a discretionary account; (iv) disclosure of compensation
arrangements was made both at the time of the offering and at the time of
exercise of the Warrants, and (v) the solicitation of exercise of the Warrant
was not in violation of Rule 10b-6 promulgated under the Exchange Act.
Blair acted as underwriter of the Company's IPO and as placement agent
for the Private Placement. Other than the securities underlying the Unit
Purchase Options granted to Blair and D.H. Blair & Co., Inc. ("Blair & Co."), a
selling group
-51-
<PAGE>
member in the IPO which is substantially owned by family members of J. Morton
Davis, the sole stockholder of an entity that is the parent and sole stockholder
of Blair, the Company is not aware of any other securities of the Company owned
by Blair or Blair & Co.
The Company is aware that Blair & Co. is currently making a market in the
Company's securities. Unless granted an exemption by the Commission from Rule
10b-6 promulgated under the Exchange Act, Blair & Co. will be prohibited from
engaging in any market making activities with regard to the Company's securities
for the period from two to nine business days (or such other applicable period
as Rule 10b-6 may provide) prior to any solicitation by Blair of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that Blair may have to receive
a fee for the exercise of Warrants following such solicitation. As a result,
Blair & Co. may be unable to provide a market for the Company's securities
during certain periods while the Warrants are exercisable.
Blair has informed the Company that the Commission is conducting an
investigation concerning various business activities of Blair and Blair & Co.
The investigation appears to be broad in scope, involving numerous aspects of
Blair and Blair & Co.'s compliance with the Federal securities laws and
compliance with the Federal securities laws by issuers whose securities were
underwritten by Blair or Blair & Co. or in which Blair or Blair & Co. made
over-the-counter markets, persons associated with Blair or Blair & Co., such
issuers and other persons. The Company has been advised by Blair that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. Blair cannot predict whether this investigation will
ever result in any type of formal enforcement action against Blair or Blair &
Co., or, if so, whether any such action might have an adverse effect on Blair or
the securities offered hereby. An unfavorable resolution of the Commission's
investigation could have the effect of limiting such firm's ability to solicit
the Company's Warrants.
-52-
<PAGE>
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to
be complete and is subject in all respects to applicable Delaware law and to the
provisions of the Company's Amended and Restated Certificate of Incorporation
and By-laws and the Warrant Agreements among the Company, the Underwriter and
Continental Stock Transfer & Trust Company, as warrant agent, pursuant to which
the Warrants have been issued, copies of all of which are on file with the
Commission.
Units
Each Unit consists of one share of Common Stock and one Warrant. Each
Warrant entitles the holder thereof to purchase one share of Common Stock. The
Common Stock and Warrants comprising the Units are separately transferable.
Common Stock
The Company has authorized 30,000,000 shares of Common Stock, of which
12,321,779 are currently outstanding. Holders of Common Stock have the right to
cast one vote for each share held of record on all matters submitted to a vote
of holders of Common Stock, including the election of directors. There is no
right to cumulate votes for the election of directors. Stockholders holding a
majority of the voting power of the capital stock issued and outstanding and
entitled to vote, represented in person or by proxy, are necessary to constitute
a quorum at any meeting of the Company's stockholders, and the vote by the
holders of a majority of such outstanding shares is required to effect certain
fundamental corporate changes such as liquidation, merger or amendment of the
Company's Certificate of Incorporation.
Holders of Common Stock are entitled to receive dividends pro rata based on
the number of shares held, when, as and if declared by the Board of Directors,
from funds legally available therefor, subject to the rights of holders of any
outstanding preferred stock. In the event of the liquidation, dissolution or
winding up of the affairs of the Company, all assets and funds of the Company
remaining after the payment of all debts and other liabilities, subject to the
rights of the holders of any outstanding preferred stock, shall be distributed,
pro rata, among the holders of the Common Stock. Holders of Common Stock are not
entitled to preemptive or subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock.
Redeemable Warrants
Each Warrant entitles the registered holder to purchase one share of Common
Stock at an exercise price of $6.20 at any time until 5:00 P.M., New York City
time, on January 18, 2001. Commencing one year from the date of this Prospectus,
the Warrants are redeemable by the Company on 30 days' written notice at a
redemption price of $.05 per Warrant if the "closing price" of the Company's
Common Stock for any 30 consecutive trading days ending within 15 days of the
notice of redemption averages in excess of $9.10 per share. "Closing price"
shall mean the closing bid price if listed in the over-the-counter market on
Nasdaq or otherwise or the closing sale price if listed on the Nasdaq National
Market or a national securities exchange. All Warrants must be redeemed if any
are redeemed.
The Warrants were issued pursuant to warrant agreements (the "Warrant
Agreements") among the Company, Blair and Continental Stock Transfer & Trust
Company, New York, New York, as warrant agent (the "Warrant Agent"), and will be
evidenced by warrant certificates in registered form. The Warrants provide for
adjustment of the exercise price and for a change in the number of shares
issuable upon exercise to protect holders against dilution in the event of a
stock dividend, stock split, combination or reclassification of the Common Stock
or upon issuance of shares of Common Stock at prices lower than the market price
of the Common Stock, with certain exceptions.
The exercise price of the Warrants was determined by negotiation between
the Company and the Underwriter and should not be construed to be predictive of
or to imply that any price increases in the Company's securities will occur.
The Company has reserved from its authorized but unissued shares a
sufficient number of shares of Common Stock for issuance upon the exercise of
the Warrants. A Warrant may be exercised upon surrender of the Warrant
certificate on or
-53-
<PAGE>
prior to its expiration date (or earlier redemption date) at the offices of the
Warrant Agent, with the Subscription Form on the reverse side of the Warrant
certificate completed and executed as indicated, accompanied by payment of the
full exercise price (by certified or bank check payable to the order of the
Company) for the number of shares with respect to which the Warrant is being
exercised. Shares issued upon exercise of Warrants and payment in accordance
with the terms of the Warrants will be fully paid and non-assessable.
For the life of the Warrants, the holders thereof have the opportunity to
profit from a rise in the market value of the Common Stock, with a resulting
dilution in the interest of all other stockholders. So long as the Warrants are
outstanding, the terms on which the Company could obtain additional capital may
be adversely affected. The holders of the Warrants might be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital by a new offering of securities on terms more favorable than
those provided for by the Warrants.
The Warrants do not confer upon the Warrantholder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrantholders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants.
Unit Purchase Options
In connection with the IPO, the Company granted to Blair and its designees,
unit purchase options (the "IPO Unit Purchase Options") to purchase up to
320,000 Units identical to the Units sold in the IPO except that the Warrants
included in the IPO Unit Purchase Options are only subject to redemption by the
Company after the IPO Unit Purchase Options have been exercised and the
underlying Warrants are outstanding. The IPO Unit Purchase Options cannot be
transferred, sold, assigned or hypothecated prior to January 1999, except to any
officer of Blair or members of the selling group or their officers. The IPO Unit
Purchase Options are exercisable during the two-year period commencing January
18, 1999 at an exercise price of $6.50 per Unit subject to adjustment in certain
events to protect against dilution.
In connection with the Private Placement, the Company issued to Blair and
its designees, unit purchase options (the "Private Placement Unit Purchase
Options") to purchase up to 307,200 Units, substantially identical to the Units
sold in the IPO and the Private Placement, except that the Warrants included in
the Private Placement Unit Purchase Options are not subject to redemption by the
Company. The Private Placement Unit Purchase Options are exercisable during the
five-year period commencing July 31, 1996 at an exercise price of $10.42 per
Unit subject to adjustment in certain events to protect against dilution.
The holders of the Unit Purchase Options have certain demand and piggyback
registration rights.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of "blank-check"
preferred stock (the "Preferred Stock"). The Board of Directors will have the
authority to issue this Preferred Stock in one or more series and to fix the
number of shares and the relative rights, conversion rights, voting rights and
terms of redemption (including sinking fund provisions) and liquidation
preferences, without further vote or action by the stockholders. If shares of
Preferred Stock with voting rights are issued, such issuance could affect the
voting rights of the holders of the Company's Common Stock by increasing the
number of outstanding shares having voting rights, and by the creation of class
or series voting rights. If the Board of Directors authorizes the issuance of
shares of Preferred Stock with conversion rights, the number of shares of Common
Stock outstanding could potentially be increased by up to the authorized amount.
Issuance of Preferred Stock could, under certain circumstances, have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Common Stock. Also, Preferred Stock could have
preferences over the Common Stock (and other series of preferred stock) with
respect to dividend and liquidation rights. The Company currently has no plans
to issue any Preferred Stock.
-54-
<PAGE>
Transfer Agent
Continental Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
Business Combination Provisions
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested stockholders," defined as persons who have
acquired at least 15% of a corporation's stock. Under the law, a corporation may
not engage in any business combination with any interested stockholder for a
period of three years from the date such person became an interested stockholder
unless certain conditions are satisfied. The statute contains provisions
enabling a corporation to avoid the statute's restrictions.
The Company has not sought to "elect out" of the statute and, therefore,
upon closing of the Offering and the registration of its shares of Common Stock
under the Exchange Act, the restrictions imposed by such statute will apply to
the Company.
Registration Rights
The Company has granted certain demand and piggy-back registration rights
to the holders of the 5,521,140 shares of Common Stock to purchase 549,139
shares of Common Stock. Such registration rights are exercisable commencing
January 1997.
The holders of warrants to purchase an aggregate of 7,395 shares of Common
Stock have certain demand and piggy-back registration rights commencing February
1997.
The holders of the Unit Purchase Options have demand and piggy-back
registration rights relating to such options and the underlying securities.
-55-
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
At September 20, 1996, the Company had outstanding 12,321,779 shares of
Common Stock. Of these shares, are freely transferable without restriction or
further registration under the Securities Act, unless purchased by affiliates of
the Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The remaining _______ shares of Common Stock currently
outstanding are "restricted securities" and may not be sold publicly unless they
are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration. However, holders of approximately 95% of
the outstanding shares and options and warrants have agreed not to sell or
otherwise dispose of any shares of Common Stock without Blair's prior written
consent until February 18, 1997.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and the availability of current public information about
the Company. However, a person who is not deemed an affiliate and has
beneficially owned such shares for at least three years is entitled to sell such
shares without regard to the volume or other resale requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period. If all the requirements of Rule 701 are
met, an aggregate of _____ shares subject to outstanding vested stock options
may be sold pursuant to such rule at the end of this 90-day period, subject to
an agreement by all option holders not to sell or otherwise dispose of any
shares of Common Stock for a period of 13 months after the date of this
Prospectus without Blair's prior written consent.
Pursuant to registration rights granted in the Bridge Financing, the
Company, concurrently with the IPO, registered for resale on behalf of the
Bridge Financing Investors, the Bridge Financing Securities subject to the
contractual restriction that the Bridge Financing Investors agreed (i) not to
exercise their Warrants prior to January 23, 1997 and (ii) not to sell their
Warrants except pursuant to the restrictions set forth below:
Lock-Up Period Percentage Eligible for Resale
-------------- ------------------------------
Between 91 and 150 days after
closing 25%
Between 151 and 210 days after
closing 50%
Between 211 and 270 days after
closing 75%
After 270 days after closing 100%
Pursuant to registration rights granted in the Private Placement, the
Company is registering herewith for resale on behalf of the Private Placement
Investors, the Private Placement Securities subject to the contractual
restriction that the Private Placement Investors agreed not to sell the Private
Placement Securities except pursuant to the restrictions set forth below:
-56-
<PAGE>
Lock-Up Period Percentage Eligible for Resale
-------------- ------------------------------
Prior to November 30, 1996 0%
Between December 1, 1996
and March 31, 1997 50%
After April 1, 1977 100%
Blair has demand and "piggy-back" registration rights with respect to the
securities underlying the Unit Purchase Options. In addition, the holders of
5,521,140 shares of Common Stock and holders of warrants to purchase 556,534
shares of Common Stock have demand and "piggy-back" registration rights
commencing either January or February 1997. See "Description of Securities -
Registration Rights."
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Bachner, Tally, Polevoy & Misher LLP, New York, New York.
EXPERTS
The consolidated financial statements of Titan Pharmaceuticals, Inc. at and
for the years ended December 31, 1994 and 1995, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the Units
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits thereto. For further information with respect to the Company
and the Units offered hereby, reference is hereby made to the Registration
Statement and such exhibits, which may be inspected without charge at the office
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and at 500 West Madison (Suite 1400), Chicago,
Illinois 60661. Copies of such material may also be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Statements contained in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference.
-57-
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Ernst & Young LLP, Independent Auditors............................F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets...............................................F-3
Consolidated Statements of Operations.....................................F-4
Consolidated Statement of Stockholders' Equity (Net Capital Deficiency)...F-5
Consolidated Statements of Cash Flows.....................................F-7
Notes to Consolidated Financial Statements................................F-9
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Titan Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Titan
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1994 and
1995, and the related consolidated statements of operations, stockholders'
equity (net capital deficiency), and cash flows for the years ended December 31,
1994 and 1995 and the period from commencement of operations (July 25, 1991) to
December 31, 1995 (not separately presented herein). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Titan
Pharmaceuticals, Inc. (a development stage company) at December 31, 1994 and
1995, and the consolidated results of its operations and its cash flows for the
years ended December 31, 1994 and 1995 and the period from commencement of
operations (July 25, 1991) to December 31, 1995 (not separately presented
herein) in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 23, 1996
F-2
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
---------------------------- June 30,
1994 1995 1996
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 1,346,444 $ 947,805 $ 67,032
Short-term investments 6,311,501
Prepaid sponsored research 76,844 -- --
Prepaid expenses and other current assets 34,652 40,071 78,973
Receivable from Ansan, Inc. -- 57,791 82,451
------------ ------------ ------------
Total current assets 1,457,940 1,045,667 6,539,957
Furniture and equipment, net 1,156,337 848,852 756,980
Deferred stock offering costs -- 522,299 27,483
Deferred financing costs 283,564 600,183 119,474
Investment in Ansan, Inc. -- 1,589,826 1,234,337
Other assets 170,887 125,344 153,452
------------ ------------ ------------
$ 3,068,728 $ 4,732,171 $ 8,831,683
============ ============ ============
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current liabilities:
Accounts payable $ 19,642 $ 714,896 $ 781,876
Notes payable by Ingenex, Inc. - bridge financing -- 1,500,000 --
Notes payable by Titan Pharmaceuticals, Inc. - bridge -- 2,800,000 --
financing
Notes and advances payable to related parties 1,200,000 -- --
Accrued legal fees 323,477 691,368 --
Accrued sponsored research 767,604 304,202 59,065
Other accrued liabilities 298,352 546,057 357,911
Current portion of capital lease obligation 172,981 226,709 245,325
Current portion of technology financing - Ingenex, Inc. -- 494,107 531,030
------------ ------------ ------------
Total current liabilities 3,682,056 7,277,339 1,975,207
Noncurrent portion of capital lease obligation 1,010,512 747,142 619,639
Noncurrent portion of technology financing - Ingenex, Inc. -- 1,289,313 1,014,235
Commitments
Minority interest - Series B preferred stock of Ingenex, Inc. 1,241,032 1,241,032 1,241,032
Stockholders' Equity (net capital deficiency)
Preferred stock, $0.001 par value per share;
30,000,000 shares authorized at December 31, 1994 and 1995
(5,000,000 at June 30, 1996) issuable in series:
Series A; 3,885,571 shares designated, 3,278,069 shares issued
and outstanding at December 31, 1994 and 3,534,199 shares
issued and outstanding at December 31, 1995, none at June 30, 1996;
liquidation preference of $20,740,571 at December 31, 1995 16,457,649 17,763,978 --
Series B; 2,440,513 shares designated, none issued
or outstanding at December 31, 1994, 244,043 shares issued
and outstanding at December 31, 1995; none at June 30, 1996
liquidation preference of $1,650,000 at December 31, 1995 -- 1,143,794 --
Common stock, $0.001 par value per share; 50,000,000 shares
authorized at December 31, 1994 and 1995 (30,000,000 at
June 30, 1996); 1,408,519 shares, 1,548,519 shares, and
10,766,179 shares issued and outstanding at December 31, 1994
and 1995 and June 30, 1996, respectively 59,476 745,476 35,513,836
Additional paid-in capital 168,805 6,186,353 6,186,353
Deferred compensation -- (418,000) (374,000)
Deficit accumulated during the development stage (19,550,802) (31,244,256) (37,344,619)
------------ ------------ ------------
Total stockholders' equity (net capital deficiency) (2,864,872) (5,822,655) 3,981,570
------------ ------------ ------------
$ 3,068,728 $ 4,732,171 $ 8,831,683
============ ============ ============
</TABLE>
F-3
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Commencement
Year ended December 31, Six Months Ended June 30, of Operations
----------------------- ------------------------- (July 25, 1991) to
1994 1995 1995 1996 June 30, 1996
------------- ------------- ------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Grant revenue $ -- $ 139,522 $ 89,881 $ 49,705 $ 189,227
Costs and expenses:
Research and development 10,601,726 5,201,507 3,544,459 2,349,988 24,363,609
Acquired in-process research
and development -- 686,000 -- 686,000
General and administrative 2,503,903 3,657,900 2,130,920 1,975,986 8,540,368
------------ ------------ ------------ ------------ ------------
Total costs and expenses 13,105,629 9,545,407 5,675,379 4,325,974 33,589,977
------------ ------------ ------------ ------------ ------------
Loss from operations (13,105,629) (9,405,885) (5,585,498) (4,276,269) (33,400,750)
Other income (expense):
Equity in loss of Ansan, Inc. -- (457,114) -- (355,489) (812,603)
Interest income 201,322 67,868 34,010 339,748 794,506
Interest expense (97,134) (1,899,148) (326,452) (1,818,206) (3,970,544)
------------ ------------ ------------ ------------ ------------
Other income (expense) - net 104,188 (2,288,394) (292,442) (1,833,947) (3,988,641)
------------ ------------ ------------ ------------ ------------
Loss before minority interest (13,001,441) (11,694,279) (5,877,940) (6,110,216) (37,389,391)
Minority interest in losses of
subsidiaries 27,266 825 -- 9,853 44,772
------------ ------------ ------------ ------------ ------------
Net loss $(12,974,175) $(11,693,454) $ (5,877,940) $ (6,100,363) $(37,344,619)
============ ============ ============ ============ ============
Pro forma net loss per share $ (1.86) $ (1.54) $ (0.81)
============ ============ ============
Shares used in computing proforma net
loss per share 6,993,003 7,617,470 7,229,183
============ ============ ============
Net loss per share $ (1.18)
============
Shares used in computing net loss per share 9,791,050
============
</TABLE>
F-4
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Net Capital Deficiency)
<TABLE>
<CAPTION>
Series A Series B Common Stock
Preferred Stock Preferred Stock Class A Class B
--------------- --------------- ------- -------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net loss-Commencement of
operations (July 25, 1991)
to December 31, 1992 -- $ -- -- $-- -- $ -- -- $ --
Issuance of shares of Class A
common stock for cash to founders
and investors in February 1993 for
$0.005 per share -- -- -- -- 998,367 5,853 -- --
Issuance of shares of Class B common
stock for cash to an employee in
February 1993 for $0.005 per share -- -- -- -- -- -- 95,951 563
Issuance of Class A common stock
for cash to investors in March 1993
for $0.297 per share, net of issuance
costs of $1,503 -- -- -- -- 184,994 52,722 -- --
Grant of shares of Class A common
stock to an employee in June 1993 at
$0.005 per share -- -- -- -- 42,645 250 -- --
Issuance of shares of Series A Preferred
stock for cash to investors in
November 1993 for $5.868 per share,
net of issuance costs of $2,759,851 3,278,069 16,457,649 -- -- -- -- -- --
Conversion of shares of Class B common
stock into shares of Class A common
stock -- -- -- -- 167,587 563 (95,951) (563)
Forgiveness of notes payable
to stockholder -- -- -- -- -- -- -- --
Net loss - Year ended December 31, 1993 -- -- -- -- -- -- -- --
--------- --------- ----- ----- --------- ------ ----- -----
Balances at December 31, 1993 3,278,069 16,457,649 -- -- 1,393,593 59,388 -- --
Issuance of shares of Class A common
stock for cash to a consultant in April 1994
for $0.005 per share -- -- -- -- 14,926 88 -- --
Increase in paid-in capital from issuance
of common stock by Ingenex, Inc. -- -- -- -- -- -- -- --
Net loss - Year ended December 31, 1994
--------- --------- ----- ----- --------- ------ ----- -----
Balances at December 31, 1994 3,278,069 6,457,649 -- -- 1,408,519 59,476 -- --
<CAPTION>
Deficit Total
Accumulated Stockholders'
Additional During the Equity
Paid-In Deferred Development (Net Capital
Capital Compensation Stage Deficiency)
------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Net loss-Commencement of
operations (July 25, 1991)
to December 31, 1992 $-- $-- $ (819,331) $ (819,331)
Issuance of shares of Class A
common stock for cash to founders
and investors in February 1993 for
$0.005 per share -- -- -- 5,853
Issuance of shares of Class B common
stock for cash to an employee in
February 1993 for $0.005 per share -- -- -- 563
Issuance of Class A common stock
for cash to investors in March 1993
for $0.297 per share, net of issuance
costs of $1,503 -- -- -- 52,722
Grant of shares of Class A common
stock to an employee in June 1993 at
$0.005 per share -- -- -- 250
Issuance of shares of Series A Preferred
stock for cash to investors in
November 1993 for $5.868 per share,
net of issuance costs of $2,759,851 -- -- -- 16,457,649
Conversion of shares of Class B common
stock into shares of Class A common
stock -- -- -- --
Forgiveness of notes payable
to stockholder 40,000 -- -- 40,000
Net loss - Year ended December 31, 1993 -- -- (5,757,296) (5,757,296)
------- ------- ----------- ----------
Balances at December 31, 1993 40,000 -- (6,576,627) 9,980,410
Issuance of shares of Class A common
stock for cash to a consultant in April 1994
for $0.005 per share -- -- -- 88
Increase in paid-in capital from issuance
of common stock by Ingenex, Inc. 128,805 -- -- 128,805
Net loss - Year ended December 31, 1994 -- -- (12,974,175) (12,974,175)
------- ------- ----------- ----------
Balances at December 31, 1994 168,805 -- (19,550,802) (2,864,872)
</TABLE>
F-5
<PAGE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Net Capital Deficiency)
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock
--------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of Series B preferred stock in
February 1995 for cash at $6.761 per share,
net of issuance costs of $506,206 -- -- 244,043 1,143,794
Increase in paid-in capital from issuance
of warrants by Ingenex, Inc. in connection
with bridge financing -- -- -- --
Increase in paid-in capital from issuance
of warrants by Titan Pharmaceuticals, Inc.
in connection with bridge financing -- -- -- --
Conversion of notes payable to related
parties and accrued interest into shares of
Series A preferred stock 256,130 1,306,329 -- --
Increase in paid-in capital from issuance
of common stock by Ansan, Inc. -- -- -- --
Deferred compensation related to grant of
stock options, net of amortization -- -- -- --
Issuance of Class A common stock to
acquire minority interest of Theracell -- -- -- --
Net loss - Year ended December 31, 1995 -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1995 3,534,199 17,763,978 244,043 1,143,794
Conversion of Preferred stock to common in
January 1996 (3,534,199) (17,763,978) (244,043) (1,143,794)
Issuance of common stock in initial
public offering in January 1996 (unaudited)
net of issuance costs of $2,309,643 (unaudited) -- -- -- --
Issuance of common stock in
overallotment in February 1996 (unaudited) -- -- -- --
Issuance of common stock upon exercise
of stock option grants in April through
June 1996 (unaudited) -- -- -- --
Net loss-six months ended June 30, 1996
(unaudited) -- -- -- --
------------ ------------ ------------ ------------
Balances at June 30, 1996 -- $ -- -- $ --
============ ============ ============ ============
<CAPTION>
Common Stock
------------------------------------------------------------
Class A Class B
--------------------------- ----------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of Series B preferred stock in
February 1995 for cash at $6.761 per share,
net of issuance costs of $506,206 -- -- -- --
Increase in paid-in capital from issuance
of warrants by Ingenex, Inc. in connection
with bridge financing -- -- -- --
Increase in paid-in capital from issuance
of warrants by Titan Pharmaceuticals, Inc.
in connection with bridge financing -- -- -- --
Conversion of notes payable to related
parties and accrued interest into shares of
Series A preferred stock -- -- -- --
Increase in paid-in capital from issuance
of common stock by Ansan, Inc. -- -- -- --
Deferred compensation related to grant of
stock options, net of amortization -- -- -- --
Issuance of Class A common stock to
acquire minority interest of Theracell 140,000 686,000 -- --
Net loss - Year ended December 31, 1995 -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 1995 1,548,519 745,476 -- --
Conversion of Preferred stock to common in
January 1996 5,521,140 18,907,772 -- --
Issuance of common stock in initial
public offering in January and February 1996
net of issuance costs of $2,309,643 (unaudited) 3,680,000 15,850,357 -- --
Issuance of common stock upon exercise
of stock option grants in April through
June 1996 (unaudited) 16,520 10,231 -- --
Net loss-six months ended June 30, 1996
(unaudited) -- -- -- --
------------ ------------ ------------ ------------
Balances at June 30, 1996 10,766,179 $ 35,513,836 -- $ --
============ ============ ============ ============
<CAPTION>
Deficit Total
Accumulated Stockholders'
Additional During the Equity
Paid-In Deferred Development (Net Capital
Capital Compensation Stage Deficiency)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Issuance of Series B preferred stock in
February 1995 for cash at $6.761 per share,
net of issuance costs of $506,206 -- -- -- 1,143,794
Increase in paid-in capital from issuance
of warrants by Ingenex, Inc. in connection
with bridge financing 600,000 -- -- 600,000
Increase in paid-in capital from issuance
of warrants by Titan Pharmaceuticals, Inc.
in connection with bridge financing 1,200,000 -- -- 1,200,000
Conversion of notes payable to related
parties and accrued interest into shares of
Series A preferred stock -- -- -- 1,306,329
Increase in paid-in capital from issuance
of common stock by Ansan, Inc. 3,777,548 -- -- 3,777,548
Deferred compensation related to grant of
stock options, net of amortization 440,000 (418,000) -- 22,000
Issuance of Class A common stock to
acquire minority interest of Theracell -- -- -- 686,000
Net loss - Year ended December 31, 1995 -- -- (11,693,454) (11,693,454)
------------ ------------ ------------ ------------
Balances at December 31, 1995 6,186,353 (418,000) (31,244,256) (5,822,655)
Conversion of Preferred stock to common in
January 1996 -- -- -- --
Issuance of common stock in initial
public offering in January and February 1996
net of issuance costs of $2,309,643 (unaudited) -- -- -- 15,850,357
Issuance of common stock upon exercise
of stock option grants in April through
June 1996 (unaudited) -- -- -- 10,231
Net loss-six months ended June 30, 1996
(unaudited) -- -- (6,100,363) (6,100,363)
------------ ------------ ------------ ------------
Balances at June 30, 1996 $ 6,186,353 $ (374,000) $(37,344,619) $ 3,981,570
============ ============ ============ ============
</TABLE>
F-6
<PAGE>
<TABLE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Period from
Commencement of
Years ended December 31, Six Months Ended June 30, Operations (July
------------------------ ------------------------- 25, 1991) to
1994 1995 1995 1996 June 30, 1996
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss $(12,974,175) $(11,693,454) $ (5,877,940) $ (6,100,363) $(37,344,619)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 201,014 328,611 198,025 222,417 789,142
Loss on disposal of assets -- 8,947 6,212 227 9,174
Accretion of discount on indebebtedness -- 883,333 119,047 1,407,579 2,290,912
Equity in loss of Ansan, Inc. -- 457,114 -- 355,489 812,603
Minority interest (27,266) (825) -- (9,853) (44,772)
Grant of common stock to employee -- -- -- -- 250
Issuance of common stock to acquire
minority interest of Theracell, Inc. -- 686,000 -- -- 686,000
Changes in operating assets and liabilities:
Prepaid sponsored research 198,794 76,844 24,413 -- --
Prepaid expenses and other current assets (34,652) (5,419) 22,581 (38,902) (78,973)
Receivable - Ansan, Inc. -- (57,791) -- (24,660) (82,451)
Other assets (32,311) 45,543 14,323 (28,108) (158,417)
Note receivable from employee 150,000 -- -- -- --
Accounts payable (93,542) 29,444 (123,627) 66,980 1,016,066
Accrued legal fees 210,994 367,891 (26,977) (691,368) --
Accrued sponsored research 529,144 (364,320) (156,954) (245,137) 158,147
Other accrued liabilities 36,338 639,039 646,866 (188,146) 749,245
------------ ------------ ------------ ------------ ------------
Net cash used in operating activities (11,835,662) (8,599,043) (5,154,031) (5,273,845) (31,197,693)
============ ============ ============ ============ ============
Cash flows from investing activities
Purchase of furniture and equipment (136,044) (8,073) (7,189) (63,641) (865,964)
Purchases of short-term investments -- -- -- (10,261,502) (34,193,995)
Proceeds from sales of short-term investments 8,932,411 -- -- 3,950,000 27,882,493
Effect of deconsolidation of Ansan, V -- (135,934) -- -- (135,934)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 8,796,367 (144,007) (7,189) (6,375,143) (7,313,400)
============ ============ ============ ============ ============
Cash flows from financing activities
Issuance of common stock 88 -- -- 16,357,887 16,417,113
Deferred Offering Costs -- (522,299) (361,747) (2,483) (524,782)
Deferred financing costs (283,564) (526,684) (96,303) -- (810,248)
Issuance of preferred stock -- 1,143,794 1,143,794 -- 17,601,443
Proceeds from notes payable -- -- -- -- 465,000
Repayment of notes payable -- -- -- -- (425,000)
Proceeds from notes and advances
payable to related parties -- -- -- -- 2,216,500
Repayment of notes payable to
related parties -- -- -- -- (1,016,500)
Proceeds for Ansan bridge financing 1,425,000 1,425,000 -- 1,425,000
Proceeds from Titan and Ingenex bridge financing 5,250,000 1,500,000 -- 5,250,000
Repayment of Titan and Ingenex -- (5,250,000) (5,250,000)
Proceeds from capital lease bridge financing 658,206 -- -- -- 658,206
Payments of principal under capital lease obligation (69,949) (209,642) (109,016) (108,887) (388,478)
Proceeds from Ingenex, Inc. technology financing -- 2,000,000 2,000,000 -- 2,000,000
Principal payments on Ingenex, Inc.
technology financing -- (216,580) (29,624) (238,155) (454,735)
Increase in minority interest from issuances of
preferred stock by Ingenex, Inc. 1,241,032 -- -- -- 1,241,032
Issuance of common stock by subsidiaries 156,071 822 -- 9,853 173,574
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities 1,701,884 8,344,411 5,472,104 10,768,215 38,578,125
============ ============ ============ ============ ============
</TABLE>
F-7
<PAGE>
<TABLE>
TITAN PHARMACEUTICALS, INC.
(a development stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Period from
Commencement of
Years ended December 31, Six Months Ended June 30, Operations (July
---------------------------- ---------------------------- 25, 1991) to
1994 1995 1995 1996 June 30, 1996
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents (1,337,411) (398,639) 310,884 (880,773) 67,032
Cash and cash equivalents at beginning of period 2,683,855 1,346,444 1,346,444 947,805 --
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 1,346,444 $ 947,805 $ 1,657,328 $ 67,032 $ 67,032
=========== =========== =========== =========== ===========
Supplemental cash flow disclosure
Interest paid $ 81,317 $ 370,864 $ 180,361 $ 387,497 $ 995,734
=========== =========== =========== =========== ===========
Conversion of notes payable to related parties and
accrued interest into Series A preferred stock $ -- $(1,306,329) $(1,306,329) $ -- $(1,306,329)
=========== =========== =========== =========== ===========
Acquisition of furniture and equipment pursuant to
capital lease $ 595,236 $ -- $ -- $ -- $ 595,236
=========== =========== =========== =========== ===========
F-8
</TABLE>
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
1. Organization and Summary of Significant Accounting Policies
The Company and its Several Development Stage Subsidiaries
Titan Pharmaceuticals, Inc. (the "Company" individually or with its
consolidated subsidiaries, as the sense requires) was incorporated in February
1992 in the State of Delaware. It is the holding company for several development
stage biotechnology companies ("the Operating Companies"). The development stage
companies, which rely significantly on third parties to conduct sponsored
research, are Ansan, Inc. ("Ansan"), Ingenex, Inc. ("Ingenex"), Theracell, Inc.
("Theracell"), and ProNeura, Inc. ("ProNeura") and Trilex, Inc. ("Trilex,"
formed in May 1996), each of which continues in operation, and Geneic Sciences,
Inc. ("Geneic"), which ceased operation in September 1995.
Ansan, Inc.
Ansan was incorporated in November 1992 to engage in the development of
novel analogs of butyric acid for the treatment of cancer and other disorders
characterized by abnormal cellular growth and differentiation. It was a
majority-owned consolidated subsidiary until August 1995. In August 1995, Ansan
completed an initial public offering of its securities. Such offering reduced
the Company's ownership in Ansan from approximately 95% to approximately 44%.
Since August 1995, the Company has accounted for its investment in Ansan using
the equity method. Concurrent with the Ansan public offering, Ansan granted the
Company a one-year option to purchase up to 400,000 shares of Ansan common stock
with an exercise price of $6.00 per share. In July 1996, Ansan extended the
option through September 8, 1996, in order to allow the Company and Ansan an
opportunity to renegotiate the terms of the option. The Company and Ansan are
presently negotiating to extend this option. Should the Company exercise its
option in full, it may again hold a majority interest in Ansan.
In connection with the Ansan offering, of the 1,212,654 shares of Ansan
that Titan owns, 346,472 shares have been placed in escrow. The escrow shares
are not transferable or assignable but may be voted. The escrow shares will be
released from escrow if, and only if, Ansan satisfies certain earnings or share
price criteria. If the conditions are not met by March 31, 2000, the escrow
shares will be canceled and contributed to Ansan's capital.
Ingenex, Inc.
Ingenex was incorporated in July 1991 and reincorporated in June 1992. It
is engaged in the development of gene-based therapeutics and the discovery of
medically important genes for the treatment of cancer and viral diseases. In
September 1994, Ingenex issued shares of its Series B convertible preferred
stock to a third party for $1,241,032, net of issuance costs. This transaction
reduced the Company's ownership of Ingenex from approximately 82% in the second
quarter of fiscal 1994 to approximately 61% at December 31, 1994 (or from
approximately 94% to approximately 72% if conversion of all Ingenex preferred
stock is assumed). See Note 5 as to bridge notes due December 31, 1995 in the
principal amount of $1,500,000, which Ingenex did not repay by that date. In
June 1996, Ingenex issued 981,818 shares of common stock to the Company,
converting $5,400,000 of debt payable to the Company to equity. At June 30,
1996, the Company owned 81% of Ingenex.
Theracell, Inc.
Theracell was incorporated in November 1992 to engage in the development of
novel treatments for various neurologic disorders through the transplantation of
neural cells and neuron-like cells directly into the brain. The Company's
ownership in Theracell was 85% through November 1995, at which time the Company
entered into an agreement with the minority stockholders of Theracell pursuant
to which 140,000 shares of the Company's stock were issued in exchange for all
the outstanding shares of Theracell common stock held by them. In connection
with the issuance of the 140,000 shares, the Company recorded a charge for
acquired in-process research and development of $686,000. In November 1995, the
former minority stockholders of Theracell were granted an option to acquire 5%
of the issued and outstanding capital stock of Theracell. These options can be
exercised at a price of $1.59 per share within a period of three (3) years from
January 18, 1996. Commencing thirty (30) days after the date Theracell's shares
are first publicly traded, the Theracell options
F-9
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
may be subject to redemption under certain conditions by Theracell on thirty
(30) days' written notice at a redemption price of $0.05 per share if the
"Closing Price"(as defined therein) of Theracell's common stock for any thirty
(30) consecutive trading days ending within fifteen (15) days of the notice of
redemption averages in excess of $3.18 per share. At June 30, 1996, the Company
owned 99% of Theracell.
ProNeura, Inc.
ProNeura was incorporated in October 1995 to engage in the development of
cost effective, long term treatment solutions to neurological and psychiatric
disorders through an implantive drug delivery system. At December 31, 1995 and
June 30, 1996, the Company owned 79% of ProNeura.
Trilex, Inc.
Trilex was incorporated in May 1996 to engage in research and development
of cancer therapeutic vaccines utilizing anti-idiotypic antibody technology. At
June 30, 1996, the Company owned 100% of Trilex.
Geneic Sciences, Inc.
Geneic had conducted research and development activities pursuant to
sponsored research and licensing agreements with a university, which was a
minority stockholder of Geneic. In September 1995 the Company and the university
terminated the agreements, at which time all rights in the technology licensed
from the university reverted to the university and the minority interest in
Geneic held by the university was contributed to the capital of Geneic. Geneic
ceased operations at such time.
Initial Public Offering
In January 1996, the Company completed its initial public offering ("IPO")
of 3,200,000 units (consisting of one share of common stock and one redeemable
warrant to acquire one share of common stock - see Note 7) resulting in net
proceeds of approximately $14.4 million ($16.6 million after exercise of the
underwriter's overallotment option as to 480,000 units in February 1996). In
connection with the IPO, the underwriter was granted an option to acquire
320,000 additional units at a price of $6.50 per unit.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and the majority owned Operating Companies. Ansan was consolidated
until its initial public offering in August 1995. All significant intercompany
transactions and accounts have been eliminated in consolidation. The financial
statements of the Company include the results of Ingenex from the date Ingenex
was incorporated (July 25, 1991), as the entities were under common control.
The activities of the Company have primarily consisted of establishing
offices and research facilities, recruiting personnel, conducting research and
development, performing business and financial planning and raising capital.
Accordingly, the Company is considered to be in the development stage and
expects to incur increasing losses and require additional financial resources to
achieve commercialization of its products.
The Company anticipates working on a number of long-term development projects
which will involve experimental and unproven technologies. The projects may
require many years and substantial expenditures prior to commercialization.
Therefore, the Company will need to obtain additional funds from the issuance of
equity or debt securities, from corporate partners, or from other sources to
continue its research and development activities, fund operating expenses,
pursue regulatory approvals and build production, sales and marketing
capabilities, as necessary. While the Company believes that the proceeds of the
IPO and the
F-10
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
Private Placement (see Note 11) will be sufficient to sustain its planned
operations through at least December 31, 1997, thereafter the Company will be
required to seek addition financing to continue its activities beyond the near
term, but there can be no assurance that the Company will be able to obtain
additional funds.
The Company effected a 0.461308687-for-one reverse stock split in February
1995, and a 0.36977472-for-one reverse stock split in November 1995. The reverse
stock splits covered each class and series of the Company's stock, options and
warrants outstanding. The accompanying financial statements have been adjusted
to retroactively reflect the stock splits for all periods presented.
The interim financial statements at June 30, 1996 and for the six month
periods ended June 30, 1995 and 1996 are unaudited but include, in the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation. Results of any interim period are
not necessarily indicative of results for the full fiscal year.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with a maturity from
the date of purchase of 90 days or less to be cash equivalents. At December 31,
1994 and 1995, the Company had $1,089,525 and $855,114 respectively, in money
market mutual funds which invest in various U.S. government securities including
Treasury bills, notes and bonds. The funds seek to maintain a constant $1 net
asset value per share. These amounts are included in cash and cash equivalents.
At June 30, 1996, short term investments is comprised of auction market
preferred funds and money market funds. Such investments are carried at cost,
which approximates their fair value.
The Company's investment policy is to maintain liquidity and ensure safety
of principal.
Furniture and Equipment
Furniture and equipment is stated at cost and is depreciated using the
straight-line method over the estimated useful lives of the assets ranging from
three to five years. Assets under capital leases are amortized over the shorter
of the lease term or life of the asset.
Revenue
Revenue consists of revenue from government grants which support the
Company's research effort in specific research projects. These grants generally
provide for reimbursement of approved costs incurred as defined in the various
agreements.
Sponsored Research
Research and development expenses under sponsored research arrangements are
recognized as the related services are performed, generally ratably over the
period of service. Payments for license fees are expensed when paid.
Stock-based Compensation
The Company recognizes no compensation expense for stock options granted
unless the grant price is less than the fair value at the date of grant.
The Company recorded $440,000 in deferred compensation for the difference
between the grant price and the deemed fair value of the Company's common stock
for certain options granted in the 12-month period prior to the IPO. The
deferred compensation is being amortized to expense over the vesting period of
the options, generally five years.
F-11
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
Per Share Data
For purposes of computing per share data for the six months ended June 30,
1996, the net loss has been increased by a $5,431,871 deemed dividend (see Note
7). Except as noted below, per share data is computed using the weighted average
number of common shares outstanding. Common equivalent shares are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common
and common equivalent shares (stock options, warrants and preferred stock)
issued during the period commencing 12 months prior to the initial filing of the
IPO at prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods through December 31,
1995 (using the treasury stock method for stock options and warrants and the
if-converted method for preferred stock).
Per share information calculated on the above noted basis is as follows:
Year ended December 31,
-----------------------
1994 1995
---- ----
Net loss per share $ (5.64) $ (5.03)
========== ==========
Shares used in computing net loss per share $2,302,048 $2,323,885
========== ==========
Pro forma loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock issued more than 12 months from the proposed initial
public offering that automatically converted upon completion of the Company's
initial public offering (using the if-converted method) from the original date
of issuance.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-12
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
2. Investment in Ansan, Inc.
Summarized financial information for Ansan, which was a majority-owned
consolidated subsidiary until August 1995, at which time it became an equity
method investee of the Company, is as follows:
Financial position at December 31, 1995:
Assets:
Cash and cash equivalents.............. $ 3,854,312
Other.................................. 126,333
-------------
3,980,645
Less liabilities
Payable to Company..................... 57,791
Other.................................. 280,172
-------------
337,963
-------------
Stockholders' equity:
Common stock-- 2,786,798 shares issued
and outstanding........................ 10,678,061
Deferred compensation.................. (236,118)
Accumulated deficit.................... (6,799,261)
-------------
$ 3,642,682
=============
Company share
1,212,654 shares (approximately 44%)... $ 1,589,826
=============
F-13
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
Operating results and accumulated deficit:
<TABLE>
<CAPTION>
As consolidated subsidiary As an equity investee
of Company of Company
---------- ----------
Seven months August
Year ended ended through
December 31, 1994 July 31, 1995 December 1995
----------------- ------------- -------------
<S> <C> <C> <C>
Cost and expenses
Research and development $ 2,572,915 $ 917,290 $ 503,472
General and administrative 568,344 719,103 328,692
----------- ----------- -----------
Loss from operations (3,141,259) (1,636,393) (832,164)
Interest income (expense), net 13,367 (141,168) 211,681
----------- ----------- -----------
Net loss (3,127,892) (1,777,561) (1,043,845)
Accumulated deficit
Beginning of period (849,963) (3,977,855) (5,755,416)
----------- ----------- -----------
End of period $(3,977,855) $(5,755,416) $(6,799,261)
=========== =========== ===========
Company company's share of net loss:
As consolidated subsidiary $(3,127,892) $(1,777,561)
=========== ===========
As equity investee (approximately 44%) $ (457,114)
===========
</TABLE>
<TABLE>
<CAPTION>
Changes in capital stock:
Company's Investment
Investment by Others Total
---------- --------- -----
<S> <C> <C> <C>
Inception through December 31, 1994
and July 31, 1995 ............................................... $ 2,473,556 $ 447,891 $ 2,921,447
Shares ........................................................ 860,097 60,510 920,607
Percent ....................................................... 93% 7%
August 1995 contribution of
indebtedness to capital ......................................... 1,551,252 -- 1,551,252
Shares .......................................................... 352,557 -- 352,557
Initial public offering in August 1995 ............................ -- 6,199,251 6,199,251
Shares .......................................................... -- 1,495,000 1,495,000
Amortization of deferred compensation on options
issued below market prior to offering ........................... 6,111 7,778 13,889
----------- ----------- -----------
At December 31, 1995 .............................................. $ 4,030,919 $ 6,410,820 $10,678,061
=========== =========== ===========
Shares .......................................................... 1,212,654 1,555,510 2,768,164
=========== =========== ===========
Percent ......................................................... 44% 56%
</TABLE>
F-14
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
Company's investment at December 31, 1995:
Through July 1995 as a consolidated subsidiary
Contributed capital........................................... $ 2,473,556
Less accumulated losses....................................... (5,755,416)
-------------
(3,281,860)
As an equity investee after July 1995
Contribution of indebtedness to capital....................... 1,551,252
Adjustment for equitable share of initial public offering..... 3,777,548
Less 44% of losses August through December 1995............... (457,114)
-------------
$ 1,589,826
============
The units sold by Ansan in its initial public offering consisted of one
share of common stock, one redeemable Class A warrant and one redeemable Class B
warrant. These securities are separately but thinly traded. The Company's
investment in Ansan consists solely of shares of common stock. As of December
31, 1995, the closing bid price on Ansan's common stock was $2.75 per share.
Based on this closing bid price, the fair market value of the Company's
investment in Ansan's common stock on December 31, 1995 would approximate $
3,334,000. As of June 30, 1996, the closing bid price was $4.00 per share. Based
on this closing bid price, the fair market value of the Company's investment in
Ansan would approximate $4,851,000.
3. Furniture and Equipment
Furniture and equipment consists of the following at December 31:
1994 1995
---------- ----------
Furniture and office equipment ............. $ 137,971 $ 136,366
Laboratory equipment ....................... 1,066,651 1,062,302
Computer equipment ......................... 184,864 189,179
---------- ----------
1,389,486 1,387,847
Less accumulated depreciation
and amortization ......................... (233,149) (538,995)
---------- ----------
Furniture and equipment, net ........ $1,156,337 $ 848,852
========== ==========
Depreciation expense was $201,014 and $306,611 for the years ended December
31, 1994 and 1995, respectively.
4. Sponsored Research and License Agreements
The Operating Companies have entered into various agreements with research
institutions, universities, and other entities for the performance of research
and development activities and for the acquisition of licenses related to those
activities. Expenses under these agreements totaled $4,758,159 and $1,024,283 in
the years ended December 31, 1994 and 1995, respectively.
At December 31, 1995, the aggregate commitments the Company has under these
agreements, including minimum license payments, are as follows:
1996..................................... $ 589,040
1997..................................... 328,500
1998..................................... 165,500
----------
$1,083,040
==========
F-15
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
After 1998, the Company must make annual payments aggregating $150,500 per
year to maintain certain of their licenses. Certain of the licenses provide for
the payment of royalties by the Company on future product sales, if any. In
addition, in order to maintain license and other rights during product
development, the Company must comply with various conditions including the
payment of patent related costs and obtaining additional equity investments by
specified dates.
In May 1996, Trilex signed an exclusive license agreement with the
University of Kentucky Research Foundation (the "Kentucky Agreement"). The
Kentucky Agreement obligates Trilex to fund research at the University of
Kentucky in the amount of $350,000 per year for five years. The Kentucky
Agreement also provides for the payment of certain license fees totaling up to a
maximum of $470,000 as well as royalties based on net sales of licensed products
by Trilex or any sublicensees.
5. Debt Obligations
Notes and Advances Payable to Related Parties
In March and April 1993, the Company borrowed $500,000 and $700,000,
respectively, from stockholders. The unsecured notes payable had an interest
rate of 10% per annum and were payable upon demand. The notes and accrued
interest were convertible at the option of the holders into shares of Series A
preferred stock at a conversion price of $5.11 per share. Additionally, in
connection with these transactions, the stockholders were granted warrants to
purchase 23,537 shares of Series A preferred stock at an exercise price of $6.44
per share. Upon the close of the IPO these warrants became exercisable for
33,682 shares of common stock at a price of $4.50 per share. The warrants expire
in January 1999. In March 1994, the stockholders gave notice of their intention
to convert the notes and $106,329 of accrued interest at December 31, 1993 into
256,130 shares of Series A preferred stock. However, the underlying shares of
preferred stock were not issued until June 1995.
From August through October 1995, entities managed by or affiliated with a
director of the Company loaned the Company an aggregate of $250,000. The notes
payable bore interest at the rate of 12% per annum and were made payable on the
earlier of the closing of an IPO of the Company's common stock or one year from
the date of issuance. See "Titan Bridge Financing Notes Payable" below.
Ingenex Technology Financing Agreement
In January 1995, Ingenex assigned its rights under certain of its
technology license agreements to a capital management partnership in exchange
for $2,000,000. Ingenex has licensed back the technology for research and
development purposes and has agreed to make monthly payments of $25,000 through
July 1995 and $60,060 from August 1995 through January 1999. Each payment
includes implicit interest at approximately 11.6% per annum. At the end of the
payment term, the assigned license rights can be reacquired by Ingenex for
$1.00. As part of the financing agreement, the Company issued to the capital
management partnership a warrant to purchase 112,375 shares of the Company's
Common Stock at a price of $3.56 per share. The warrant expires January 31,
2002. The capital management partnership has agreed to not sell, assign, or
transfer any securities of the Company without prior written consent of the
Company's underwriter. In addition, it has waived any registration rights for a
period of 13 months. Ingenex incurred a finder's fee of $140,000 related to this
transaction which has been capitalized as deferred financing costs and is being
amortized over 48 months. An additional $45,000 of fees has also been
capitalized and is being amortized over 48 months. The Company has guaranteed
payment of the loan and has issued finder and director warrants to purchase an
aggregate of 7,395 shares of the Company's common stock at an exercise price of
$3.25 per share. The warrants expire in January 2002.
F-16
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
Ingenex Bridge Financing Notes Payable
In May 1995, Ingenex completed a bridge financing pursuant to which Ingenex
issued $1,500,000 principal amount of bridge notes payable and 300,000 bridge
warrants. Net proceeds from the bridge financing were approximately $1,305,000
(after expenses of the bridge financing). The bridge notes payable were due,
together with interest at the rate of 9% per annum, on the earlier of December
31, 1995 or upon the consummation of an IPO of Ingenex common stock. Ingenex did
not complete an initial public offering prior to the December 31, 1995 due date
of the bridge notes and was not otherwise able to repay the notes by that date.
Therefore Ingenex and the Company negotiated an extension of the bridge notes
until February 28, 1996. The bridge notes were subsequently repaid by the
Company with proceeds from the IPO in January 1996. The bridge warrants entitle
the holders thereof to purchase one share of Ingenex common stock until May 30,
2000 at a price of $2.50 per share. The bridge warrants have been assigned a
value of $600,000. This amount was also reflected as a discount on the bridge
notes and was accreted as additional financing (interest) expense over the
initial term of the notes payable.
Titan Bridge Financing Notes Payable
In October 1995, the Company completed a bridge financing pursuant to which
the Company issued $3,750,000 principal amount of bridge notes payable and
1,875,000 bridge warrants. A bridge warrant entitles the holder to purchase one
share of the Company's common stock at a price of $3.00 per share. The warrants
expire October 13, 2000. This amount includes the $250,000 for loans to the
Company from August through October 1995 (noted above) which were converted, in
accordance with the terms of the loans, into $250,000 principal amount of bridge
notes payable and 125,000 bridge warrants. Net proceeds from the bridge
financing were approximately $3,262,500 (after expenses of the issuance). The
bridge notes, together with interest at the rate of 10% per annum, were repaid
upon the consummation of the IPO in January 1996. The bridge warrants were
assigned a value of $1,200,000. This amount was reflected as a discount on the
bridge notes and was accreted as additional financing (interest) expense over
the term of the notes until the IPO.
Expenses of the bridge financing, including $487,500 in commissions,
totaled $577,995, which has been capitalized as deferred financing costs. Upon
consummation of the IPO, the unamortized portion of the debt discount and the
deferred financing costs were written off in January 1996.
Fair Value of Debt Obligations
The carrying amounts of the Ingenex technology financing and Ingenex bridge
financing notes payable approximate fair value, which was estimated using
discounted cash flow analysis, based on Ingenex' current incremental borrowing
rate for similar types of borrowing arrangements. The carrying amount of the
bridge financing notes payable of the Company reflects the unamortized discount.
However, the fair value of these instruments at December 31, 1995 would
approximate $3.7 million, as they were repaid out of the proceeds of the IPO in
January 1996.
6. Leases
The Company leases facilities under an operating lease that expires in
March 1996. In March 1996, a new lease was signed which expires in April 2000.
Rent expense was $600,974 and $550,015 for years ended December 31, 1994 and
1995, respectively.
The Company is obligated under capital leases for certain equipment with an
aggregate cost of $1,253,441 at December 31, 1994 and 1995. Amortization expense
for leased assets is included in depreciation and amortization expense. The
leases require the Company to purchase all of the equipment upon expiration of
the leases at 25% of the original equipment cost.
F-17
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
The following is a schedule of future minimum lease payments at December
31, 1995.
Operating Capital
Lease Leases
----- ------
1996........................................ $ 222,744 $ 365,508
1997........................................ 74,220 365,508
1998........................................ 74,220 519,609
1999 24,740 ----
----------- ----------
Total minimum payments required ............ $ 395,924 1,250,625
===========
Less amount representing interest .......... (276,774)
----------
Present value of future lease payments ..... 973,851
Less current portion ....................... (226,709)
----------
$ 747,142
==========
7. Stockholders' Equity
Each share of Series A and Series B preferred stock was originally
convertible into (and carried voting rights equal to) one share of common stock.
In October 1995, pursuant to the terms of the Series B preferred stock agreement
and in contemplation of the IPO, the board of directors and stockholders
approved a change in the conversion ratio of Series A and Series B preferred
stock providing that in the event of an IPO of common stock on or before March
31, 1996, each share of Series A and Series B preferred stock would
automatically be converted into 1.4310444107 and 1.8993878755 shares of common
stock, respectively (the "IPO Conversion Ratio"). The IPO Conversion Ratio was
not higher than the ratio which otherwise would have applied in an IPO during
this period. In conjunction with the IPO in January 1996 all outstanding shares
of Series A and Series B preferred stock were converted into 5,521,140 shares of
common stock.
Holders of shares of Series A and Series B preferred stock were entitled to
receive dividends prior and in preference to any holders of common stock, at the
rate of $1.76 per share of Series A preferred stock and $2.70 per share of
Series B preferred stock, per annum, payable on each of May 31, 1995, May 31,
1996 and May 31, 1997, if declared by the board of directors. Such dividends are
cumulative and if not declared and paid when due will accrue, accumulate and be
included in the liquidation preference of the Series A and Series B preferred
stock. Upon conversion of the Series A or the Series B preferred stock into
common stock, all accrued and unpaid dividends (whether or not declared) were
canceled. No dividends have been declared through December 31, 1995.
The holders of Series A and Series B preferred stock received common stock
in January 1996 with an aggregate fair value (at the $5.00 per share value of
the IPO) which exceeded by $5,431,871 the cost of their initial investment of
Series A and Series B preferred stock. This amount has been deemed to be the
equivalent of a preferred stock dividend. The Company recorded the deemed
dividend at the time of the conversion by offsetting charges and credits to
additional paid in capital, without any effect on total stockholders' equity
(net capital deficiency). There was no effect on net loss from the mandatory
conversion. However, the amount did increase the loss applicable to common
stock, in the calculation of net loss per share in the 1996 period.
Unit Offering
In January 1996, the Company issued 3,200,000 units at $5.00 per unit in
its IPO. Each unit consisted of one share of common stock and one redeemable
Class A warrant. The net
F-18
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
proceeds (after underwriter's discount and expenses, and other costs associated
with the IPO) totaled $13,955,079. At the closing of the offering, all of the
Company's outstanding preferred stock automatically converted into common stock.
Each share of Series A and Series B preferred stock was converted into
1.4310444107 and 1.8993878755 shares of common stock, respectively.
In January 1996, the Company repaid the $3,750,000 principal and accrued
interest of $105,083 related to a bridge financing with a portion of the
proceeds of the IPO. The Company also repaid $1,500,000 of principal and accrued
interest of $87,898 of notes issued by Ingenex in a bridge financing.
In February 1996, the Company issued an additional 480,000 units, at $5.00
per share, in accordance with the underwriter's over-allotment option. The net
proceeds of the underwriter's over-allotment option totaled $2,160,000.
Warrants
In November 1993, in connection with the Series A preferred stock offering,
the Company issued warrants to the placement agent to purchase 327,813 shares of
Series A preferred stock at $6.44 per share. The warrants are immediately
exercisable and expire in November 1998. Upon the close of the IPO these
warrants became exercisable for 469,115 shares of common stock at a price of
$4.50 per share.
In connection with the Series B preferred stock private placement in 1995,
the Company issued warrants to the placement agent to purchase 24,402 shares of
Series B preferred stock at an exercise price of $7.44 per share. The warrants
expire in 2005 or five years from the IPO, whichever is earlier. Upon the close
of the IPO, these warrants became exercisable for 46,350 shares of common stock
at a price of $ 3.92 per share.
The warrants issued in the IPO entitle the holder to purchase one share of
common stock at an exercise price of $6.50, subject to adjustment in certain
circumstances (see Note 11), at any time for a period of five years. Commencing
one year from the date of the IPO, the warrants are redeemable by the Company on
thirty days written notice at a redemption price of $0.05 per warrant if the
closing price of the Company's common stock for any thirty consecutive trading
days averages in excess of $9.10 per share. The Company has reserved a
sufficient number of shares of the authorized but unissued shares of common
stock for issuance upon exercise of the warrants.
Stock Option Plan
Under the terms of the Company's amended and restated stock option plan
(the "1993 Plan"), incentive stock options may be granted to employees, and
nonstatutory stock options may be granted to employees, directors and
consultants of the Company and Operating Companies. A total of 558,073 shares of
common stock have been reserved and authorized for issuance under the 1993 Plan.
Options granted under the 1993 Plan expire no later than ten years from the
date of grant, except when the grantee is a 10% shareholder of the Company or an
Operating Company, in which case the maximum term is five years from the date of
grant. The exercise price of incentive stock options, nonstatutory stock options
and options granted to 10% shareholders of the Company (or the Operating
Companies), shall be at least 100%, 85% and 110%, respectively, of the fair
market value of the stock subject to the option on the grant date. The options
are exercisable immediately upon grant, however, the shares issuable upon
exercise of the options are subject to repurchase by the Company. Such
repurchase rights will lapse over a period of up to five years from the date of
grant.
F-19
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
Activity under the option plan is summarized below:
Shares Options Outstanding
Available ------------------------
For Grant of Number of Price Per
Options Shares Shares
------- ------ ------
Balance at December 31, 1993 ......... 550,056 8,017 $0.29
Options granted .................... (330,136) 330,136 $0.59-$1.17
Options canceled ................... 48,960 (48,960) $0.59
-------- --------
Balance at December 31, 1994 ......... 268,880 289,193 $0.29-$1.17
Options granted .................... (218,127) 218,127 $0.59-$1.35
Options canceled ................... 157,243 (157,243) $0.29-$1.35
-------- --------
Balance at December 31, 1995 ......... 207,996 350,077 $0.29-$1.35
Options exercised................... - (16,520) $0.29-$1.35
Options canceled.................... 11,886 (11,886) $0.59-$1.17
-------- --------
Balance at June 30, 1996.............. 219,882 321,671 $0.59-$1.35
======== ========
No options had been exercised as of December 31, 1995. All options granted
are immediately exercisable, of which 265,842 and 241,267 shares of common stock
underlying the options as of December 31, 1995 and June 30, 1996, respectively,
would be subject to repurchase by the Company should such options be exercised
and the optionees' employment or consulting relationship terminate. No further
options will be granted under the 1993 Stock Option Plan.
In November 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Option Plan"). A total of 300,000 shares of common stock are reserved and
authorized for issuance under the 1995 Option Plan (see Note 11). The provisions
of the 1995 Option Plan provide for the automatic grant of nonqualified stock
options to purchase shares of common stock to directors of the Company who are
not principal (10%) stockholders of the Company ("Eligible Directors"). Each
Eligible Director of the Company was granted an option to purchase 10,000 shares
of common stock upon the effective date of the IPO. As of June 30, 1996, 255,500
shares of common stock (with exercise prices ranging from $5.00 - $7.125) have
been granted and 248,833 are subject to repurchase by the Company.
In addition, the Operating Companies, with the exception of ProNeura, each
have a stock option plan under which options to purchase common stock of the
Operating Companies have been and may be granted.
Shares Reserved for Future Issuance
As of December 31, 1995, shares of common stock reserved by the Company for
future issuance (after giving effect to the IPO) consisted of the following:
Warrants issued in connection with
related party debt.............................. 33,682
Ingenex Technology Financing warrants............ 119,770
Bridge warrants.................................. 1,875,000
IPO warrants..................................... 3,680,000
Placement agent warrants......................... 515,465
Stock options................................... 650,077
----------
Total.......................................... 6,873,994
==========
F-20
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
Ingenex Conversion and Purchase Rights
In September 1994, Ingenex sold 283,400 shares of Series B preferred stock.
Pursuant to the Series B purchase agreement, in the event the Company has, and
Ingenex has not, effected an IPO of the shares of its common stock within three
years from the date of the initial Ingenex Series B financing, the holders of
the Series B shares will have the right (the "Put Right") to require the Company
to purchase, in exchange for either cash or registered shares of the Company's
common stock, at the Company's option, the Series B shares from such holders at
the then fair value of the Series B shares. In November 1995, the Series B
purchase agreement was amended to provide that in the event the Company were to
complete an IPO prior to May 31, 1996, the holders of the Ingenex Series B
preferred shares will waive the Put Right. As a result of the IPO, the Put Right
has terminated.
8. Minority Interest
The $1,241,032 received by Ingenex upon the issuance of Series B
convertible preferred stock has been classified as minority interest in the
consolidated balance sheet and has not been reduced by any portion of the losses
of Ingenex.
Amounts invested by outside investors in the common stock of the
consolidated subsidiaries has been apportioned between minority interest and
additional paid-in capital in the consolidated balance sheets. Losses applicable
to the minority interest holdings of the Operating Companies' common stock have
reduced that interest.
9. Income Taxes
The Company and the Operating Companies have not elected to file a
consolidated federal tax return.
As of December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $23,600,000, of which approximately $21,800,000
is attributable to the Operating Companies (excluding Ansan). The net operating
loss carryforwards will expire at various dates beginning in 2008 through 2010,
if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986. The annual limitation may result in the
expiration of net operating losses before utilization.
As of December 31, 1995, the Company had deferred tax assets of
approximately $10,400,000, of which approximately $9,700,000 is attributable to
the Operating Companies. The net deferred tax asset has been fully offset by a
valuation allowance. The net valuation allowance increased by approximately
$5,400,000 and $2,400,000 during 1994 and 1995, respectively.
Significant components of the Company's deferred tax assets for federal
income taxes as of December 31, 1995 are as follows:
Deferred tax assets:
1994 1995
---- ----
Net operating loss carryforwards........ $6,500,000 $ 8,700,000
Research credit carryforwards........... 500,000 800,000
Capitalized research and development.... 900,000 600,000
Other - net............................. 100,000 300,000
---------- -----------
Deferred tax assets..................... 8,000,000 10,400,000
Valuation allowance..................... (8,000,000) (10,400,000)
---------- -----------
Net deferred tax assets.............. $ -- $ --
========== ===========
F-21
<PAGE>
Titan Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
(Information at June 30, 1996 and for the
six-month period ended June 30, 1996 is unaudited)
The deferred tax assets attributable to Ansan as of December 31, 1994 and
1995 were $1,600,000 and zero, respectively.
10. Related Party Transactions
In November 1993, in connection with the Company's private placement
offering of Series A preferred stock, Paramount Capital, Inc. ("Paramount"), a
related party, acted as the agent to place the preferred stock. The Company made
a cash payment of $2,306,143 to Paramount out of the private placement proceeds
as compensation and expense allowance related to the offering. This amount was
offset against the proceeds from the offering. Additionally, Paramount received
warrants to purchase 327,813 shares of Series A preferred stock (see Note 7).
In connection with the Company's private placement offering of Series B
preferred stock in 1995, Paramount also acted as the placement agent. The
Company made a cash payment of $148,500 to Paramount out of the private
placement proceeds as compensation and expense allowance related to the
offering. This amount was offset against the proceeds from the offering.
Additionally, Paramount received warrants to purchase 24,402 shares of Series B
preferred stock (see Note 7).
11. Subsequent Events (Unaudited)
On July 3, 1996, Ingenex filed an amendment to a registration statement for
an initial public offering for 1,850,000 shares of its common stock. It is
currently anticipated that the initial public offering price of the common stock
will be between $9.50 and $10.50 per share. In consideration of a payment to
Ingenex of $100,000, Ingenex will issue to the Company an option to purchase
approximately an additional 315,789 shares of common stock at an exercise price
per share equal to the initial public offering price and an additional option
and a right of first refusal with respect to future issuances of common stock in
order for the Company to maintain ownership of a majority of the outstanding
common stock.
On July 31, 1996, the Company granted options to purchase an aggregate of
693,135 shares of common stock, at an exercise price of $10.75 per share, to
certain executives of the Company under the 1995 Stock Option Plan ("Plan")
subject to approval by the shareholders of an increase in the number of shares
reserved for issuance under the Plan at the next annual meeting of the
shareholders scheduled for October 18, 1996. As of June 30, 1996, 20,500 shares
remained available for option grants under the Plan. If the stock price
increases above $10.75 at the date the shareholders approve, then the difference
must be recognized as deferred compensation.
On July 31, 1996 and August 2, 1996, the Company completed a private
placement of 1,536,000 units, each unit consisting of one share of common stock
and one redeemable Class A warrant, for total gross proceeds of $16,000,000.
After deducting placement agent fees and other expenses of the private
placement, the net proceeds to the Company were $13,867,990. Each warrant
entitles the registered holder to purchase one share of common stock at $6.20
throught January 18, 2001. The exercise price of the warrants is subject to
adjustment. Commencing January 18, 1997 the warrants are subject to redemption
by the Company at $.05 per warrant on 30 days' prior written notice if the
closing bid price of the common stock averages in excess of an amount per share
to be determined for 30 consecutive business days ending within 15 days of the
date of notice of redemption. As of September 20, 1996, 19,600 warrants had been
exercised. Upon completion of the private placement, the warrants issued in
connection with the IPO and the bridge financing have been adjusted to an
exercise price of $6.20.
F-22
<PAGE>
================================================================================
[Back Cover]
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by the Underwriter.
This Prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy, any securities offered hereby by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer, or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein contained is correct as of any time
subsequent to the date of this Prospectus.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary ..................................................... 3
Risk Factors ........................................................... 5
Use of Proceeds ........................................................ 10
Dividend Policy ........................................................ 10
Capitalization ......................................................... 11
Selected Financial Data ................................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations ........................................................ 13
Business ............................................................... 16
Management ............................................................. 31
Certain Transactions ................................................... 39
Principal Stockholders ................................................. 40
Selling Securityholders ................................................ 42
Plan of Distribution ................................................... 51
Description of
Securities ........................................................... 53
Shares Eligible for
Future Sale .......................................................... 56
Legal Matters .......................................................... 57
Experts ................................................................ 57
Additional Information ................................................. 57
Index to Financial
Statements ........................................................... F-1
================================================================================
================================================================================
TITAN PHARMACEUTICALS, INC.
--------------------------
PROSPECTUS
--------------------------
, 1996
================================================================================
<PAGE>
PART II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The Amended and Restated Certificate of Incorporation and By-Laws of the
Registrant provide that the Registrant shall indemnify any person to the full
extent permitted by the Delaware General Corporation Law (the "GAL"). Section
145 of the GAL, relating to indemnification, is hereby incorporated herein by
reference.
In accordance with Section 102(a)(7) of the GAL, the Certificate of
Incorporation of the Registrant eliminates the personal liability of directors
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director with certain limited exceptions set forth in
Section 102(a)(7).
The Registrant also enters into indemnification agreements with each of its
officers and directors, the form of which is filed as Exhibit 10.6 and reference
is hereby made to such form.
In addition, the Registrant currently maintains an officers' and directors'
liability insurance policy which insures, subject to the exclusions and
limitations of the policy, officers and directors of the Company against certain
liabilities which might be incurred by them solely in such capacities.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant,
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. See Item 28,
"Undertakings."
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than the
Warrant solicitation fee) are as follows:
Amount
------
SEC Registration Fee......................................... $12,222
Printing and Engraving Expenses.............................. *
Accounting Fees and Expenses................................. *
Legal Fees and Expenses...................................... *
Blue Sky Fees and Expenses................................... *
Miscellaneous Expenses....................................... *
-------
Total............................................... $*
=======
- ---------------
* To be completed by amendment
Item 26. Recent Sales of Unregistered Securities
The following discussion gives retroactive effect to the reverse stock
splits effected in 1995. During the last three years, the Registrant has sold
and issued the following unregistered securities:
Between July 1993 and November 1993, the Registrant sold an aggregate of
3,278,127 shares of Series A Preferred Stock to 121 accredited investors in a
private placement for an aggregate of $19,217,500 or $5.862 per share. The
Registrant issued warrants to purchase an aggregate of 351,367 shares of Series
A Preferred to designees of the placement agent. In connection with this private
placement, the Registrant also paid sales commissions in the amount of
$1,729,575 and a non-accountable expense allowance in the amount of $576,525.
In March and April 1993, the Registrant issued promissory notes in the
aggregate principal amount of $1,200,000 to a director and a stockholder. In
connection with this loan transaction, the Registration issued them an aggregate
of 34,738 Series A Preferred Stock Warrants. In June 1995, the lenders converted
their notes into 256,130 shares of Series A Preferred Stock.
II-1
<PAGE>
Between February and March 1995, the Registrant sold an aggregate of
244,063 shares of Series B Preferred Stock to nine accredited investors in a
private placement for an aggregate of $1,650,000 or $6.761 per share. The
Registrant issued warrants to purchase 24,406 shares of Series B Preferred Stock
to designees of the placement agent. In connection with this private placement,
the Registrant paid sales commission in the amount of $103,125 and a
non-accountable expense allowance in the amount of $112,500.
In October 1995, the Registrant sold 75 units, each unit consisting of a
note in the principal amount of $50,000 bearing interest at 10% per annum and
warrants to purchase 25,000 shares of Common Stock at an exercise price of $3.00
per share, which warrants were converted into Class A Warrants upon completion
of the initial public offering in January 1996, to 113 accredited investors for
an aggregate purchase price of $3,750,000. In connection therewith, the
Registrant paid sales commissions in the amount of $375,000 and a
non-accountable expense allowance in the amount of $112,500.
In July and August 1996, the Registrant sold 1,536,000 units, each unit
consisting of one share of Common Stock and one Class A Warrant, to 231
accredited investors for an aggregate purchase price of $16,000,000. In
connection therewith, the Registrant paid sales commissions of $1,600,000 and a
non-accountable expense allowance of $480,000. The Registrant also issued
options to purchase 307,200 units to the placement agent.
The above transactions were private transactions not involving a public
offering and were exempt from the registration provisions of the Securities Act
of 1933, as amended, pursuant to Section 4(2) thereof. The sale of securities
was without the use of an underwriter, and the certificates evidencing the
shares bear a restrictive legend permitting the transfer thereof only upon
registration of the shares or an exemption under the Securities Act of 1933, as
amended.
Item 27. Exhibits
<TABLE>
<S> <C>
3.1 -- Restated Certificate of Incorporation of the Registrant(1)
3.2 -- Form of Amendment to Restated Certificate of Incorporation of the Registrant(1)
3.3 -- By--laws of the Registrant(1)
4.1 -- Form of Bridge Note(1)
4.2 -- Bridge Warrant Agreement(1)
4.3 -- Form of Warrant Agreement(1)
4.4 -- Form of Underwriter's Unit Purchase Option(1)
4.5 -- Form of Investor Rights Agreement between the Registrant and the holders of Series A and Series B Preferred Stock(1)
4.6 -- Form of Placement Agent's Unit Purchase Option
5.1 -- Opinion of Bachner, Tally, Polevoy & Misher LLP*
10.1 -- 1993 Stock Option Plan(1)
10.2 -- 1995 Stock Option Plan(1)
10.3 -- Employment Agreement between the Registrant and Louis Bucalo dated February 1, 1993, amended as of February 3,
1994(1)
10.4 -- Employment Agreement between Registrant and Richard Allen dated July 28, 1995(1)
10.5 -- Employment Agreement between Registrant and Sunil Bhonsle, dated August 6, 1995(1)
10.6 -- Form of Indemnification Agreement(1)
10.7 -- Master Equipment Lease between the Registrant and Phoenix Leasing Incorporated, dated February 15, 1995 and Sublease
and Acknowledgement of Assignment between the Registrant and Ansan, Inc.,Ingenex, Inc. and Theracell, Inc. and
Geneic Sciences, Inc. dated February 15, 1994(1)
+10.8 -- GSE Exclusive License Agreement between Ingenex, Inc. (formerly Pharm--Gen Systems Ltd.) and the Board of Trustees
of the University of Illinois dated May 6, 1992(1)
+10.9 -- MDR Exclusive License Agreement between Ingenex, Inc. (formerly Pharm--Gen Systems Ltd.) and the Board of Trustees
of the University of Illinois dated May 6, 1992(1)
10.10 -- License Agreement between Ansan, Inc. and Bar--Ilan Research and Development Company Ltd. dated October 31,
1992(1)
+10.11 -- License Agreement between Theracell, Inc. and New York University dated November 20, 1992, as amended as of
February 23, 1993 and as of February 25, 1995(1)
+10.12 -- License Agreement between the Registrant and the Massachusetts Institute of Technology dated September 28, 1995(1)
+10.13 -- License Assignment between Ingenex, Inc. and Aberlyn Capital Management Limited Partnership dated January 31, 1995,
as amended(1)
+10.14 -- Exclusive License Agreement between Ingenex, Inc. and the Board of Trustees of the University of Illinois, dated July
1, 1994(1)
+10.15 -- Exclusive License Agreement between Ingenex, Inc. and the Board of Trustees of the University of Illinois, dated July
1, 1994(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
+10.16 -- License Agreement between Ingenex, Inc. and the Massachusetts Institute of Technology, dated September 11, 1992(1)
+10.17 -- License Agreement between Ingenex, Inc. and Baylor College of Medicine, dated October 21, 1992(1)
10.18 -- Lease for Registrant's facilities(2)
+10.19 -- License Agreement between Theracell, Inc. and the University of South Florida dated March 15, 1996(3)
++10.20 -- License Agreement between Trilex Pharmaceuticals, Inc. (formerly Ascalon Pharmaceuticals, Inc.) and the University
of Kentucky Research Foundation dated May 30, 1996.
+10.21 -- License Agreement between Ansan, Inc. and Boehringer Ingleheim GmbH dated May 31, 1996(4)
11 -- Computation of net loss per share
23.1 -- Consent of Bachner, Tally, Polevoy & Misher LLP - Included in Exhibit 5.1*
23.2 -- Consent of Ernst & Young LLP - Included on Page II-7
24.1 -- Power of Attorney - Included on Page II-5
</TABLE>
- ----------
+ Confidential treatment has been granted with respect to portions of this
exhibit.
++ Confidential treatment has been requested with respect to portions of this
exhibit.
* To be filed by amendment.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (File No. 33-99386).
(2) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 1995.
(3) Incorporated by reference from the Registrant's Quarterly Report on Form
10-QSB for the period ended March 31, 1996.
(4) Incorporated by reference from Ansan, Inc.'s Quarterly Report on Form
10-QSB for the period ended June 30, 1996.
Item 28. Undertakings
Undertaking Required by Regulation S-B, Item 512(a).
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Undertaking required by Regulation S-B, Item 512(e).
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or controlling persons pursuant
to the foregoing provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Undertakings required by Regulation S-B, Item 512(f).
II-3
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, as amended, the information omitted from the
form of prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in the form of prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement or Amendment thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of South San Francisco, State of
California on the 3rd day of October, 1996.
TITAN PHARMACEUTICALS, INC.
By: /s/ Louis R. Bucalo
-------------------------------------
Louis R. Bucalo, M.D., President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints Louis R. Bucalo and
Lindsay A. Rosenwald, or either of them, his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities to sign any or all amendments
to this registration statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement or Amendment thereto has been signed by the following
persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis R. Bucalo President, Chief Executive Officer October 3, 1996
- --------------------------------- and Director (principal
Louis R. Bucalo, M.D. executive officer)
/s/ Lindsay A. Rosenwald Director October 3, 1996
- ---------------------------------
Lindsay A. Rosenwald, M.D.
/s/ Michael K. Hsu Director October 3, 1996
- ---------------------------------
Michael K. Hsu
/s/ Hubert E. Huckel Director October 3, 1996
- ---------------------------------
Hubert E. Huckel, M.D.
/s/ Marvin E. Jaffe, M.D. Director October 3, 1996
- ---------------------------------
Marvin E. Jaffe, M.D.
Director
- ---------------------------------
Peter M. Kash
/s/ Ernst-Gunter Afting Director October 3, 1996
- ---------------------------------
Ernst-Gunter Afting, Ph.D., M.D.
/s/ Konrad M. Weis Director October 3, 1996
- ---------------------------------
Konrad M. Weis, Ph.D.
Director
- ---------------------------------
Kenneth J. Widder, M.D.
/s/ Robert E. Farrell Executive Vice President and October 3, 1996
- --------------------------------- Chief Financial Officer (principal
Robert E. Farrell financial and accounting officer)
</TABLE>
II-5
<PAGE>
CONSENT OF COUNSEL
The consent of Bachner, Tally, Polevoy & Misher LLP will be contained in
its opinion to be filed as Exhibit 5.1 to the Registration Statement.
II-6
<PAGE>
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated February 23,
1996, in the Registration Statement (Form SB-2) and related Prospectus of Titan
Pharmaceuticals, Inc. for the registration of Units (each Unit consisting of one
share of Common Stock and one Class A Warrant ) and Common Stock.
/s/ ERNST & YOUNG LLP
Palo Alto, California
October 2, 1996
II-7
Option to Purchase
Units
TITAN PHARMACEUTICALS, INC.
Unit Purchase Option
Dated: August 2, 1996.
THIS CERTIFIES THAT [D.H. Blair Investment Banking Corp. and its designees]
(herein sometimes called the "Holder") is entitled to purchase from Titan
Pharmaceuticals, Inc., a Delaware corporation (hereinafter called the
"Company"), at the prices and during the periods as hereinafter specified, up to
_______________________ Units ("Units"), each Unit consisting of one share of
the Company's Common Stock, $.001 par value, as now constituted ("Common Stock")
and one Class A warrant ("Class A Warrants"). Each Class A Warrant is
exercisable to purchase one share of Common Stock at an exercise price of $6.20
from the date hereof to January 18, 2001. The Class A Warrants are herein
collectively referred to as the "Warrants."
This Option, together with options of like tenor, constituting in the
aggregate options (the "Options") to purchase 307,200 Units, subject to
adjustment in accordance with Section 8 of this Option (the "Option Units"), was
issued pursuant to a placement agent agreement between the Company and D.H.
Blair Investment Banking Corp. as Placement Agent (the "Placement Agent") in
connection with a private offering (the "Offering") of up to 1,536,000 Units
through the Placement Agent, in consideration of $160 received for the Options.
Except as specifically otherwise provided herein, the Common Stock and the
Warrants issued pursuant to the option herein granted (the "Option") shall bear
the same terms and conditions as described under the caption "Description of
Securities" in the Company's Registration Statement on form SB-2 (File No.
33-27436), declared effective by the Securities and Exchange Commission on
January 18, 1996 (the "Registration Statement"), and the Warrants shall be
governed by the terms of the Warrant Agreement dated as of July 31, 1996 (the
"Warrant Agreement"), and except that (i) the holder shall have registration
rights under the Securities Act of 1933, as amended (the "Act"), for the Option,
the Common Stock and the Warrants included in the Option Units, and the shares
of Common Stock underlying the Warrants, as more fully described in Section 6 of
this Option and (ii) the Warrants issuable upon exercise of the Option will not
be subject to redemption by the Company nor will it be callable by the Company.
The Company will list the Common Stock underlying this Option and, at the
Holder's request the Warrants, on the Nasdaq National Market, the Nasdaq Small
Cap Market or such other exchange or market as the Common Stock or Public
Warrants may then be listed or quoted. In the event of any extension of the
expiration date or reduction of the exercise price of the Public Warrants, the
same changes to the Warrants included in the Option Units shall be
simultaneously effected.
<PAGE>
1. The rights represented by this Option shall be exercised at $10.42 per
Unit, subject to adjustment in accordance with Section 8 of this Option ("the
"Exercise Price"), from the date hereof until August 2, 2001. In the event that
this Option is exercised after January 18, 2001, the Option will be exercisable
to purchase the Common Stock contained in the Units only.
2. (a) The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); and (ii) payment to the
Company of the exercise price then in effect for the number of Option Units
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any. This Option shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Option is surrendered and payment is made in
accordance with the foregoing provisions of this Section 2, and the person or
persons in whose name or names the certificates for shares of Common Stock and
Warrants shall be issuable upon such exercise shall become the holder or holders
of record of such Common Stock and Warrants at that time and date. The
certificates for the Common Stock and Warrants so purchased shall be delivered
to the Holder as soon as practicable but not later than ten (10) days after the
rights represented by this Option shall have been so exercised.
(b) At any time during the period above specified, during which this Option
may be exercised, the Holder may, at its option, exchange this Option, in whole
or in part (an "Option Exchange"), into the number of Option Units determined in
accordance with this Section (b), by surrendering this Option at the principal
office of the Company or at the office of its stock transfer agent, accompanied
by a notice stating such Holder's intent to effect such exchange, the number of
Option Units into which this Option is to be exchanged and the date on which the
Holder requests that such Option Exchange occur (the "Notice of Exchange"). The
Option Exchange shall take place on the date specified in the Notice of Exchange
or, if later, the date the Notice of Exchange is received by the Company (the
"Exchange Date"). Certificates for the shares of Common Stock and Warrants
issuable upon such Option Exchange and, if applicable, a new Option of like
tenor evidencing the balance of the Option Units remaining subject to this
Option, shall be issued as of the Exchange Date and delivered to the Holder
within seven (7) days following the Exchange Date. In connection with any Option
Exchange, this Option shall represent the right to subscribe for and acquire the
number of Option Units (rounded to the next highest integer) equal to (x) the
number of Option Units specified by the Holder in its Notice of Exchange up to
the maximum number of Option Units subject to this option (the "Total Number")
less (y) the number of Option Units equal to the quotient obtained by dividing
(A) the product of the Total Number and the existing Exercise Price by (B) the
Fair Market Value. "Fair Market Value" shall mean first, if there is a trading
market as indicated in Subsection (i) below for the Units, such Fair Market
Value of the Units and if there is no such trading market in the Units, then
Fair Market Value shall have the meaning indicated in Subsections (ii) through
(v) below for the aggregate value of all shares of Common Stock and Warrants
which comprise a Unit:
- 2 -
<PAGE>
(i) If the Units are listed on a national securities exchange or
listed or admitted to unlisted trading privileges on such exchange or
listed for trading on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value shall be the average of the last reported
sale prices or the average of the means of the last reported bid and asked
prices, respectively, of the Units on such exchange or market for the
twenty (20) business days ending on the last business day prior to the
Exchange Date; or
(ii) If the Common Stock or Warrants are listed on a national
securities exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National Market or the Nasdaq
SmallCap Market, the Fair Market Value shall be the average of the last
reported sale prices or the average of the means of the last reported bid
and asked prices, respectively, of Common Stock or Warrants, respectively,
on such exchange or market for the twenty (20) business days ending on the
last business day prior to the Exchange Date; or
(iii) If the Common Stock or Warrants are not so listed or admitted to
unlisted trading privileges, the Fair Market Value shall be the average of
the means of the last reported bid and asked prices of the Common Stock or
Warrants, respectively, for the twenty (20) business days ending on the
last business day prior to the Exchange Date; or
(iv) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the Fair
Market Value shall be an amount, not less than book value thereof as at the
end of the most recent fiscal year of the Company ending prior to the
Exchange Date, determined in such reasonable manner as may be prescribed by
the Board of Directors of the Company; or
(v) If the Warrants are not so listed or admitted to unlisted trading
privileges, and bid and asked prices are not so reported for Warrants, then
Fair Market Value for the Warrants shall be an amount equal to the
difference between (i) the Fair Market Value of the shares of Common Stock
and Warrants which may be received upon the exercise of the Warrants, as
determined herein, and (ii) the Warrant Exercise Price.
3. Any assignment shall be effected by the Holder (i) executing the form of
assignment at the end hereof and (ii) surrendering this Option for cancellation
at the office or agency of the Company referred to in Section 2 hereof,
accompanied by a certificate (signed by an authorized officer of the Holder if
the Holder is a corporation), stating that each transferee is a permitted
transferee under this Section 3 hereof; whereupon the Company shall issue, in
the name or names specified by the Holder (including the Holder) a new Option or
Options of like tenor and representing in the aggregate rights to purchase the
same number of Option Units as are purchasable hereunder.
- 3 -
<PAGE>
4. The Company covenants and agrees that all shares of Common Stock which
may be issued as part of the Option Units purchased hereunder and the Common
Stock which may be issued upon exercise of the Warrants will, upon issuance in
accordance with the terms of this Option and the Warrant Agreement, be duly and
validly issued, fully paid and nonassessable and no personal liability will
attach to the holder thereof. The Company further covenants and agrees that
during the periods within which this Option may be exercised, the Company will
at all times have authorized and reserved a sufficient number of shares of its
Common Stock to provide for the exercise of this Option and that it will have
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants included in the Option Units.
5. This Option shall not entitle the Holder to any voting rights or any
other rights, or subject to the Holder to any liabilities, as a stockholder of
the Company.
6. (a) The Company shall advise the Holder or its transferee, whether the
Holder holds the Option or has exercised the Option and holds Option Units or
any of the securities underlying the Option Units, by written notice at least
three weeks prior to the filing of any new registration statement or
post-effective amendment thereto under the Act covering any securities of the
Company, for its own account or for the account of others, and will for a period
of seven years from August 2, 1996, upon the request of the Holder, include in
any such registration statement, such information as may be required to permit a
public offering of all or any of the Option Units, the Common Stock or Warrants
included in the Option Units or the Common Stock issuable upon the exercise of
the Warrants (the "Registrable Securities").
(b) If D.H. Blair Investment Banking Corp., D.H. Blair & Co., Inc. or
J. Morton Davis (the "Requesting Holder") shall give notice to the Company at
any time to the effect that such holder desires to register under the Act this
Option, the Option Units or any of the underlying securities contained in the
Option Units under such circumstances that a public distribution (within the
meaning of the Act) of any such securities will be involved then the Company
will promptly, but no later than twenty (20) business days after receipt of such
notice, file a new registration statement on Form S-1 or such other form as may
be permissable pursuant to the Act, to the end that the Registrable Securities
may be publicly sold under the Act as promptly as practicable thereafter and the
Company will use its best efforts to cause such registration to become and
remain effective (including the taking of such steps as are necessary to obtain
the removal of any stop order); provided, that such holder shall furnish the
Company with appropriate information in connection therewith as the Company may
reasonably request in writing. The Requesting Holder may, at its option, request
the filing of a new registration statement under the Act on two occasions during
the seven year period beginning one year from the final closing date of the
Offering. The Holder may, at its option request the registration of the Option
and/or any of the securities underlying the Option in a registration statement
made by the Company as contemplated by Section 6(a) or in connection with a
request made pursuant to this Section 6(b) prior to acquisition of the Option
Units issuable upon exercise of the Option and even though the Holder has not
given notice of exercise of the Option. The Requesting Holder may, at its
option, request such new registration statement during the described period with
respect to the Option Units as a unit, or separately as to the Common Stock
and/or Warrants included in the Option Units and/or the
- 4 -
<PAGE>
Common Stock issuable upon the exercise of the Warrants, and such registration
rights may be exercised by the Requesting Holder prior to or subsequent to the
exercise of the Option.
Within ten days after receiving any such notice pursuant to this Section
6(b), the Company shall give notice to the other holders of the Options,
advising that the Company is proceeding with such registration statement and
offering to include therein the Registrable Securities of the other holders,
provided that they shall furnish the Company with such appropriate information
(relating to the intentions of such holders) in connection therewith as the
Company shall reasonably request in writing. In the event the registration
statement is not filed within the period specified herein, the expiration date
of this Option and the underlying Warrants shall be extended by an amount of
time equal to the delay in filing. All costs and expenses of the first such new
registration statement under this paragraph 6(b) shall be borne by the Company,
except that the holders shall bear the fees of their own counsel and any
underwriting discounts or commissions applicable to any of the securities sold
by them. If the Company determines to include securities to be sold by it in any
registration statement originally requested pursuant to this Section 6(b), such
registration shall instead be deemed to have been a registration under Section
6(a) and not under this Section 6(b).
The Company will maintain such registration statement current under the Act
for a period of at least six months (and for up to an additional three months if
requested by the Holder) from the effective date thereof.
(c) Whenever pursuant to Section 6 a registration statement relating
to any Registrable Securities is filed under the Act, amended or supplemented,
the Company shall (i) supply prospectuses and such other documents as the Holder
may request in order to facilitate the public sale or other disposition of the
Registrable Securities, (ii) use its best efforts to register and qualify any of
the Registrable Securities for sale in such states as such Holder designates,
(iii) furnish indemnification in the manner provided in Section 7 hereof, (iv)
notify each Holder of Registrable Securities at any time when a prospectus
relating thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, contains an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and, at the request of
any such Holder, prepare and furnish to such Holder a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not included an untrue statement of a material
fact or omit to state material fact required to be stated therein or necessary
to make the statements therein not misleading and (v) do any and all other acts
and things which may be necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Registrable Securities,
The Holder shall furnish appropriate information in connection therewith and
indemnification as set forth in Section 7.
7. (a) Whenever pursuant to Section 6 a registration statement relating to
the Registrable Securities is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each holder of the Registrable
Securities covered by such registration
- 5 -
<PAGE>
statement, amendment or supplement (such holder being hereinafter called the
"Distributing Holder"), and each person, if any, who controls (within the
meaning of the Act) the Distributing Holder, and each underwriter (within the
meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or supplement thereto,
or arise out of or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will reimburse the Distributing Holder and each such controlling
person and underwriter for any legal or other expenses reasonably incurred by
the Distributing Holder or such controlling person or underwriter in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in said registration statement, said preliminary
prospectus, said final prospectus or said amendment or supplement in reliance
upon and in conformity with written information furnished by such Distributing
Holder specifically for use in the preparation thereof.
(b) If requested by the Company prior to the filing of any
registration statement covering the Registrable Securities, each Distributing
Holder will agree, severally but not jointly, to indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder specifically for use in the preparation
thereof; except that the maximum amount which may be recovered from the
Distributing Holder pursuant to this Section 7 or otherwise shall be limited to
the amount of net proceeds received by the Distributing Holder from the sale of
the Registrable Securities.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Section 7.
- 6 -
<PAGE>
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
(8) In addition to the provisions of Section 1(a) of this Option, the
Exercise Price in effect at any time and the number and kind of securities
purchasable upon the exercise of the Options shall be subject to adjustment from
time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution of its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of
Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller
number of shares, the Exercise Price in effect at the time of the
record date for such dividend or distribution or of the effective date
of such subdivision, combination or reclassification shall be adjusted
so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to
such action, and the numerator of which shall be the number of shares
of Common Stock outstanding immediately prior to such action. Such
adjustment shall be made successively whenever any event listed above
shall occur.
(b) In case the Company shall fix a record date for the issuance
of rights or warrants to all holders of its Common Stock entitling
them to subscribe for or purchase shares of Common Stock (or
securities convertible into Common Stock) at a price (the
"Subscription Price") (or having a conversion price per share) less
than (i) the current market price of the Common Stock (as defined in
Subsection (h) below) on the record date mentioned below, or (ii) the
Exercise Price on a per share basis giving no value to the Warrants
included in the Option Units (the "Per Share Exercise Price") on such
record date, the Exercise Price shall be adjusted so that the same
shall equal the lower of (i) the price determined by multiplying the
number of shares then comprising an Option Unit by the product of the
Per Share Exercise Price in effect immediately prior to the date of
such issuance multiplied by a fraction, the numerator of which shall
be the sum of the number of shares of Common Stock outstanding on the
record date mentioned below and the number of additional shares of
Common Stock which the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion price
of the convertible securities so offered) would purchase at such
current market price per share of the
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<PAGE>
Common Stock, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding on such record date
and the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so
offered are convertible) or (ii) in the event the Subscription Price
is equal to or higher than the current market price but is less than
the Per Share Exercise Price, the price determined by multiplying the
number of shares then comprising an Option Unit by the product of the
Per Share Exercise Price in effect immediately prior to the date of
issuance multiplied by a fraction, the numerator of which shall be the
sum of the number of shares outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the
aggregate offering price of the total number of shares of Common Stock
so offered (or the aggregate conversion price of the convertible
securities so offered) would purchase at the Per Share Exercise Price
in effect immediately prior to the date of such issuance, and the
denominator of which shall be the sum of the number of shares of
Common Stock outstanding on the record date mentioned below and the
number of additional shares of Common Stock offered for subscription
or purchase (or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately
after the record date for the determination of shareholders entitled
to receive such rights or warrants; and to the extent that shares of
Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or
warrants the Exercise Price shall be readjusted to the Exercise Price
which would then be in effect had the adjustments made upon the
issuance of such rights or warrants been made upon the basis of
delivery of only the number of shares of Common Stock (or securities
convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the holders
of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions and dividends or distributions
referred to in Subsection (a) above) or subscription rights or
warrants (excluding those referred to in Subsection (b) above), then
in each such case the Exercise Price in effect thereafter shall be
determined by multiplying the number of shares then comprising an
Option Unit by the product of the Per Share Exercise Price in effect
immediately prior thereto multiplied by a fraction, the numerator of
which shall be the total number of shares of Common Stock outstanding
multiplied by the current market price per share of Common Stock (as
defined in Subsection (h) below), less the fair market value (as
determined by the Company's Board of Directors) of said assets or
evidences of indebtedness so distributed or of such rights or
warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market
price per share of Common Stock. Such adjustment shall be made
successively whenever such a record date is fixed. Such adjustment
shall be made whenever any such distribution is made and shall become
effective immediately after
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<PAGE>
the record date for the determination of shareholders entitled to
receive such distribution.
(d) In case the Company shall issue shares of its Common Stock
(excluding shares issued (i) in any of the transactions described in
Subsections (a), (b), (c) or (e) of this Section 8; (ii) upon exercise
of options granted to the Company's employees under a plan or plans
adopted by the Company's Board of Directors and approved by its
shareholders, if such shares would otherwise be included in this
Subsection (d), (but only to the extent that the aggregate number of
shares excluded hereby and issued after the date hereof, shall not
exceed 15% of the Company's Common Stock outstanding at the time of
any issuance); (iii) upon exercise of options and warrants or upon
conversion of convertible securities outstanding at July 31, 1996, and
this Option; (iv) to shareholders of any corporation which merges into
the Company in proportion to their stock holdings of such corporation
immediately prior to such merger, upon such merger; (v) in a bona fide
public offering pursuant to a firm commitment underwriting; or (vi) in
a private placement offering through either D.H. Blair Investment
Banking Corp. or D.H. Blair & Co., Inc., as placement agent; but only
if no adjustment is required pursuant to any other specific subsection
of this Section (8) (without regard to Subsection (i) below) with
respect to the transaction giving rise to such rights for a
consideration per share (the "Offering Price") less than (i) the
current market price per share (as defined in Subsection (h) below) on
the date the Company fixes the offering price of such additional
shares, or (ii) the Per Share Exercise Price, then the Exercise Price
shall be adjusted immediately thereafter so that it shall equal the
lower of (i) the price determined by multiplying the number of shares
then comprising an Option Unit by the product of the Per Share
Exercise Price in effect immediately prior thereto multiplied by a
fraction, the numerator of which shall be the sum of the number of
shares of Common Stock outstanding immediately prior to the issuance
of such additional shares and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in
Subsection (g) below) for the issuance of such additional shares would
purchase at such current market price per share of Common Stock, and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after the issuance of such additional shares
or (ii) in the event the Offering Price is equal to or higher than the
current market price per share but less than the Per Share Exercise
Price, the price determined by multiplying the number of shares then
comprising an Option Unit by the product of the Per Share Exercise
Price in effect immediately prior to the date of issuance multiplied
by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to the issuance of such
additional shares and the number of shares of Common Stock which the
aggregate consideration received (determined as provided in Subsection
(g) below) for the issuance of such additional shares would purchase
at the Per Share Exercise Price in effect immediately prior to the
date of such issuance, and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after the
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<PAGE>
issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
(e) In case the Company shall issue any securities convertible
into or exchangeable for its Common Stock (excluding securities issued
in transactions described in Subsections (b) and (c) above) for a
consideration per share of Common Stock (the "Conversion Price")
initially deliverable upon conversion or exchange of such securities
(determined as provided in Subsection (g) below) less than (i) the
current market price per share (as defined in Subsection (h) below) in
effect immediately prior to the issuance of such securities, or (ii)
the Per Share Exercise Price, then the Exercise Price shall be
adjusted immediately thereafter so that it shall equal the lower of
(i) the price determined by multiplying the number of shares then
comprising an Option Unit by the product of the Per Share Exercise
Price in effect immediately prior thereto multiplied by a fraction,
the numerator of which shall be the sum of the number of shares of
Common Stock outstanding immediately prior to the issuance of such
securities and the number of shares of Common Stock which the
aggregate consideration received (determined as provided in Subsection
(g) below) for such securities would purchase at such current market
price per share of Common Stock, and the denominator of which shall be
the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance and the maximum number of shares of
Common Stock of the Company deliverable upon conversion of or in
exchange for such securities at the initial conversion or exchange
price or rate, or (ii) in the event the Conversion Price is equal to
or higher than the current market price per share but less than the
Per Share Exercise Price, the price determined by multiplying the
number of shares then comprising an Option Unit by the product of the
Per Share Exercise Price in effect immediately prior to the date of
issuance multiplied by a fraction, the numerator of which shall be the
sum of the number of shares outstanding immediately prior to the
issuance of such securities and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in
Subsection (g) below) for such securities would purchase at the Per
Share Exercise Price in effect immediately prior to the date of such
issuance, and the denominator of which shall be the sum of the number
of shares of Common Stock outstanding immediately prior to the
issuance of such securities and the maximum number of shares of Common
Stock of the Company deliverable upon conversion of or in exchange for
such securities at the initial conversion or exchange price or rate.
Such adjustment shall be made successively whenever such an issuance
is made.
(f) Whenever the Exercise Price payable upon exercise of each
Option is adjusted pursuant to Subsections (a), (b), (c), (d) or (e)
above, (i) the number of shares of Common Stock included in an Option
Unit shall simultaneously be adjusted by multiplying the number of
shares of Common Stock included in Option Unit immediately prior to
such adjustment by the Exercise Price in effect immediately prior to
such adjustment and dividing the product so obtained by the
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<PAGE>
Exercise Price, as adjusted and (ii) the number of shares of
Common Stock or other securities issuable upon exercise of the
Warrants included in the Option Units and the exercise price of such
Warrants shall be adjusted in accordance with the applicable terms of
the Warrant Agreement.
(g) For purposes of any computation respecting consideration
received pursuant to Subsections (d) and (e) above, the following
shall apply:
(A) in the case of the issuance of shares of Common Stock
for cash, the consideration shall be the amount of such cash,
provided that in no case shall any deduction be made for any
commissions, discounts or other expenses incurred by the Company
for any underwriting of the issue or otherwise in connection
therewith;
(B) in the case of the issuance of shares of Common Stock
for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair
market value thereof as determined in good faith by the Board of
Directors of the Company (irrespective of the accounting
treatment thereof), whose determination shall be conclusive; and
(C) in the case of the issuance of securities convertible
into or exchangeable for shares of Common Stock, the aggregate
consideration received therefor shall be deemed to be the
consideration received by the Company for the issuance of such
securities plus the additional minimum consideration, if any, to
be received by the Company upon the conversion or exchange
thereof (the consideration in each case to be determined in the
same manner as provided in clauses (A) and (B) of this Subsection
(g)).
(h) For the purpose of any computation under Subsections (b),
(c), (d) and (e) above, the current market price per share of Common
Stock at any date shall be deemed to be the average of the daily
closing prices for 30 consecutive business days before such date. The
closing price for each day shall be the last sale price regular way
or, in case no such reported sale takes place on such day, the average
of the last reported bid and asked prices regular way, in either case
on the principal national securities exchange, including the Nasdaq
National Market, on which the Common Stock is admitted to trading or
listed, or if not listed or admitted to trading on such exchange or
market, the average of the highest reported bid and lowest reported
asked prices as reported by Nasdaq, or other similar organization if
Nasdaq is no longer reporting such information, or if not so
available, the fair market price as determined by the Board of
Directors acting in good faith.
(i) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five
cents ($0.05) in such price; provided, however, that any adjustments
which by reason of this
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<PAGE>
Subsection (c)(i) are not required to be made shall be carried forward
and taken into account in any subsequent adjustment required to be made
hereunder. All calculations under this Section 8 shall be made to the
nearest cent or to the nearest one-hundredth of a share, as the case may
be. Anything in this Section 8 to the contrary notwithstanding, the Company
shall be entitled, but shall not be required, to make such changes in the
Exercise Price, in addition to those required by this Section 8, as it
shall determine, in its sole discretion, to be advisable in order that any
dividend or distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter made by the
Company shall not result in any Federal Income tax liability to the holders
of Common Stock or securities convertible into Common Stock (including
Warrants issuable upon exercise of this Option).
(j) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly but no later than 10 days after any request for such
an adjustment by the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Option Units issuable upon exercise
of each Option and, if requested, information describing the transactions
giving rise to such adjustments, to be mailed to the Holders, at the
address set forth herein, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors
(who may be the regular accountants employed by the Company) to make any
computation required by this Section 8, and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(k) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder of this Option thereafter
shall become entitled to receive any shares of the Company, other than
Common Stock, thereafter the number of such other shares so receivable upon
exercise of this Option shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in Subsections (a) through (j)
inclusive above.
(l) In case any event shall occur as to which the other provisions of
this Section 8 or Section 1(a) hereof are not strictly applicable but as to
which the failure to make any adjustment would not fairly protect the
purchase rights represented by this Option in accordance with the essential
intent and principles hereof then, in each such case, the Holders of
Options representing the right to purchase a majority of the Option Units
may appoint a firm of independent public accountants reasonably acceptable
to the Company, which shall give their opinion as to the adjustment, if
any,
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<PAGE>
on a basis consistent with the essential intent and principles
established herein, necessary to preserve the purchase rights represented
by the Options. Upon receipt of such opinion, the Company will promptly
mail a copy thereof to the Holder of this Option and shall make the
adjustments described therein. The fees and expenses of such independent
public accountants shall be borne by the Company.
9. This Agreement shall be governed by and in accordance with the laws of
the State of New York, without giving effect to the principles of conflicts of
law thereof.
IN WITNESS WHEREOF, Titan Pharmaceuticals, Inc. has caused this Option to
be signed by its duly authorized officers under its corporate seal, and this
Option to be dated August 2nd, 1996.
TITAN PHARMACEUTICALS, INC.
By: ____________________________
Louis R. Bucalo, President
(Corporate Seal)
Attest:
- --------------------------
Sunil Bhonsle, Secretary
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<PAGE>
PURCHASE FORM
(To be signed only upon exercise of option)
The undersigned, the holder of the foregoing Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder, _______Units of Titan Pharmaceuticals, Inc., each Unit
consisting of _________ shares of Common Stock and _________ Class A Warrant(s)
to purchase _________ share(s) _________ of Common Stock, and herewith makes
payment of $_________ therefor.
Dated: _________, 19__. Instructions for Registration of Stock and Warrants
----------------------------------------
Print Name
----------------------------------------
Address
----------------------------------------
Signature
<PAGE>
OPTION EXCHANGE
The undersigned, pursuant to the provisions of the foregoing Option, hereby
elects to exchange its Option for _________ Units of Titan Pharmaceuticals,
Inc., each Unit consisting of __________shares of $.001 Par Value Common Stock
and __________ Class A Warrant(s) to purchase _________ share(s) of Common
Stock, pursuant to the Option Exchange provisions of the Option.
Dated: _____________, 19__.
----------------------------------------
Print Name
----------------------------------------
Address
----------------------------------------
Signature
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and transfers
unto ______________the right to purchase Units represented by the foregoing
Option to the extent of __________ Units , and appoints ____________________
attorney to transfer such rights on the books of Titan Pharmaceuticals, Inc.
with full power of substitution in the premises.
Dated: _______________, 19__
By:
-----------------------------------
----------------------------------------
Address
In the presence of:
Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by an * and [ ], have been
separately filed with the Commission.
LICENSE AGREEMENT BETWEEN THE UNIVERSITY OF
KENTUCKY RESEARCH FOUNDATION & ASCALON INC.
THIS AGREEMENT, entered into and made effective May 30, 1996 (the "Effective
Date") by and between the University of Kentucky Research Foundation, a
corporation duly organized and existing under the laws of the Commonwealth of
Kentucky and having its principal office at Lexington, Kentucky, U.S.A.
(hereinafter referred to as "UKRF"), and Ascalon Inc., a corporation duly
organized under the laws of Delaware, and having its principal office in
Scottsdale, Arizona U.S.A. (hereinafter referred to as "Licensee").
W I T N E S S E T H
WHEREAS, UKRF is the owner of certain "Patent Rights" and "Technical Data and
Materials" (as later defined herein) relating to certain inventions involving
the treatment of diseases and conditions, and has the right to grant exclusive
licenses under said Patent Rights and Technical Data and Materials as described
herein.
WHEREAS, UKRF desires to have the Patent Rights and Technical Data and Materials
utilized in the public interest and is willing to grant an exclusive license
thereunder; and
WHEREAS, Licensee has represented to UKRF, to induce UKRF to enter into this
Agreement, that the Licensee will, as needed, retain employees, officers or
consultants who are experienced in the development, production, manufacture,
marketing and sale of products similar to the "Licensed Product(s)" (as later
defined herein) and that it shall commit itself to a thorough, vigorous and
diligent program of exploiting the Patent Rights and Technical Data and
Materials so that public utilization shall result therefrom; and
WHEREAS, Licensee desires to obtain an exclusive license under the Patent Rights
and Technical Data and Materials upon the terms and conditions hereinafter set
forth.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the parties hereto agree as follows:
Article 1 - Definitions
For the purposes of this Agreement, the following words and phrases shall have
the following meanings:
<PAGE>
1.1 "Licensee" shall mean Ascalon Inc. and any subsidiary or successor entities
or any permitted assignees under Article 9 hereof. Ascalon Inc. is not
affiliated with or a predecessor or successor in interest to Ascalon
Pharmaceuticals, Inc., an Arizona Corporation.
1.2 "Subsidiary" shall mean any corporation, company or other entity more than
fifty percent (50%) of whose voting stock is owned or controlled directly or
indirectly by Licensee.
1.3 "Patent Rights" shall mean the United States and Foreign pending patent
applications set forth in Appendix A attached hereto and made a part hereof
(hereinafter referred to as the "Patent Rights Patent Application(s)"), and
theUnited States patents and Foreign patents issuing from said pending United
States and Foreign patent applications or later-filed foreign applications based
upon any of said United States patents and applications and any continuations,
continuations-in-part, divisions, reissues, additions, amendments or extensions
or any of the foregoing (hereinafter referred to as the "Patent Rights
Patent(s)").
1.4 "Licensed Product(s)" shall mean any product which:
(a) is covered in whole or in part by (i) a pending claim contained in a
Patent Rights Patent Application in the country in which the Licensed
Product(s) is made, used or sold or (ii) a valid and unexpired claim
contained in a Patent Rights Patent in the country in which the
Licensed Product(s) is made, used or sold.
(b) is manufactured by using a process which is covered in whole or in
part by (i) a pending claim contained in a Patent Rights Patent
Application in the country in which the Licensed Process(es) is used
or (ii) a valid and unexpired claim contained in a Patent Rights
Patent in the country in which the Licensed Process(es) is used.
1.5 "Licensed Process(s)" shall mean a process for making or using
anti-idiotypic antibodies or other compositions of matter and which is covered
in whole or in part by (i) a pending claim contained in a Patent Rights Patent
Application or (ii) a valid and unexpired claim contained in a Patent Rights
Patent.
1.6 "Technical Data and Materials" shall mean any information or materials in
the possession of UKRF, the University of Kentucky, or their employees and
scientists, relating to the manufacture, testing, development or use of the
Licensed Products or Licensed Processes, including, but not limited any and all
of the following: data, know-how, testing or manufacture methods, uses, assays,
immunogens, cell lines and characteristics of anti-idiotypic antibodies, and the
hybridomas, cell lines, phages, plants, animals, polynucleotide, polypeptide or
other polymer sequences or other biological or chemical source materials, used
in the production of such anti-idiotypic antibodies or any fragments,
derivatives or analogs thereof (limited to, the cell lines used for the creation
and production of the antibodies known as 3H1, 1A7, and 11D10).
2
<PAGE>
1.7. "Anti-idiotypic antibody" shall mean the anti-idiotypic antibodies known by
the parties as 3H1, 1A7 or 11D10, or their fragments, derivatives or analogs.
Article 2 - Grant
2.1 UKRF hereby grants to Licensee an exclusive, sublicenseable, complete and
worldwide license to all rights UKRF has or may have in such Patent Rights and
Technical Data & Materials for all fields of use, including but not limited to
any and all rights to make, have made, use, import, export, lease, sell and
offer to sell the Licensed Product(s) and to utilize the Licensed Process under
the Patent Rights to the full end of the term of the last expiring Patent Rights
Patent for which the Patent Rights are granted unless sooner terminated as
hereinafter provided.
2.2 In order to establish a period of exclusivity for Licensee, UKRF hereby
agrees that it shall not permit, grant, or offer to grant any license or rights
to any other persons, to practice or use the Patent Rights or Technical Data &
Materials during the period of time commencing with the Effective Date of this
Agreement and terminating with the full end of the term of this Agreement,
unless sooner terminated as hereinafter provided. Any such grant or offer to
grant any such third party Licensee shall be void ab initio. University of
Kentucky, UKRF and their employees, may, however, practice the Patent Rights and
use the technical data related thereto, for its own non-commercial research;
provided that the University of Kentucky and its employees take reasonable
measures to prevent the dissemination of the Anti-idiotypic antibodies to any
third person and that the obligations under Article 7 of this Agreement shall
not apply to any such research conducted by the University of Kentucky or its
employees.
2.3 Licensee shall have the exclusive and worldwide right to sublicense,
transfer, or assign any or all of the rights, privileges and license granted
hereunder.
2.4 Licensee agrees it shall incorporate Articles 5, 10, and 12 of this
Agreement into all sublicensing agreements granted by it, and shall expressly
provide for UKRF's right to enforce such Articles.
2.5 Licensee agrees to forward to UKRF a copy of any and all fully executed
sublicense agreements, and further agrees to forward to UKRF annually a copy of
such reports received by Licensee from its Sublicensees during the preceding
twelve (12) month period under the sublicenses as shall be pertinent to a
royalty accounting under said sublicense agreements.
Article 3 - Due Diligence
3.1. Licensee shall use its best efforts to bring the Licensed Product(s) and/or
Licensed Process(es) to market through a thorough, vigorous and diligent program
for exploitation of the Patent Rights. UKRF and Licensee acknowledge and agree
that substantial research, development, clinical and non-clinical testing of the
Licensed Products (collectively
3
<PAGE>
The information below marked by * and [ ] has been omitted pursuant to a request
for confidential treatment. The omitted portion has been separately filed with
the Commission.
"Licensed Products Research") are necessary to enable commercial
exploitation of the Patent Rights. Such Licensed Products Research shall include
work conducted at the University of Kentucky, or its affiliates, with funding
obtained from or with the assistance of the Licensee, or its Sublicensees, of at
least $ 350,000 per year for each of the five years following the Effective Date
(measured from the Effective Date), exclusive of Federal grants paid directly to
the University of Kentucky or UKRF; up to an aggregate maximum of $ 1,750,000.
Such funds shall be used exclusively and directly for such Licensed Products
Research which is of good scientific and commercial purpose and design and which
the University of Kentucky, or its affiliates, is able to competently and
diligently perform, and shall be contingent upon execution by the parties of a
commercially reasonable research and option agreement for such Licensed Products
Research negotiated by the parties in good faith.
3.2 Licensee shall be responsible, at its sole expense through patent counsel of
its choice reasonably acceptable to UKRF, to conduct all further prosecution and
maintenance of the Patent Rights Patent Applications and Patent Rights Patents.
Licensee shall however, provide UKRF with a copy of any filing, for its review
and approval, prior to its submission to the designated patent office.
Article 4 - Royalties
4.1. For the rights, privileges and license granted hereunder, Licensee shall
pay to UKRF in the manner hereinafter provided to the end of the term of the
Patent Rights or until this Agreement shall be terminated as hereinafter
provided:
(a) License fees in the following amounts:
(i) [*] Dollars, which shall be due upon the Effective Date.
(ii) [*] Dollars, which shall be due twelve (12) months from the
Effective Date.
(iii) [*] Dollars, which shall be due upon Licensee obtaining clear
title to all rights under the Patents Rights Patents, including
resolution of any claims that are or may be asserted by the
Scripps Institute or Roswell Park Institute.
(iv) The following amount, upon Licensee completing an Initial Public
Offering
o [*] Dollars if the IPO raises no more than $5,000,000;
o [*] Dollars if the IPO raises $5,000,001 to $10,000,000;
o [*] Dollars if the IPO raises $10,000,001 to 15,000,000;
o [*] Dollars if the IPO raises over $15,000,000.
4
<PAGE>
The information below marked by * and [ ] has been omitted pursuant to a request
for confidential treatment. The omitted portion has been separately filed with
the Commission.
(v) [*] Dollars, which shall be due upon each FDA approval of an
initial Product Marketing Application for a Licensed Product,
which is not designated as an Orphan Drug or Orphan Biologic
Product under 21 U.S.C. 360bb, for which a full and
non-refundable "Human Drug Application Fee" is paid under the
Prescription Drug User Fee Act of 1992.
(b) A royalty in the amount of [*] of the Net Sales Price of the Licensed
Product(s) used, leased or sold by or for Licensee or its
Sublicensees.
(i) Beginning with the calendar year starting the January 1 following
two (2) years after the first FDA approval of a Licensed Product
which obligates Licensee to Pay UKRF the fee due under Article
4.1(a)(v) of this Agreement, Licensee and its Sublicensees shall
together pay UKRF an aggregate annual minimum royalty on the
sales of all Licensed Products sold or leased by them of no less
than [*] per year.
(ii) No royalty shall be due for the use, lease or sale of any
Licensed Products manufactured, used or sold for conducting
studies related to obtaining marketing approvals from U.S. or
foreign regulatory agencies, nor for payments to any party
contracted by Licensee or another Sublicensee to manufacture
Licensed Products.
4.2. As used herein, the phrase "Net Sales Price" shall mean Licensee's billings
for the Licensed Product(s) produced hereunder less the sum of the following:
(a) Discounts, and commissions incurred in connection with non-U.S.
sales, allowed or paid in amounts customary in the trade;
(b) Sales, tariff duties and/or use taxes directly imposed and with
reference to particular sales;
(c) Transportation costs or expenses, incurred, paid or allowed; and
(d) Amounts allowed or credited on returns or rejects.
Licensed Product(s) shall be considered "sold" when billed out or invoiced, in
accordance with generally accepted accounting practices.
4.3. No multiple royalties or fees shall be payable because the Licensed
Product(s), its manufacture, lease or sale are or shall be covered by more than
one patent application or patent licensed under this Agreement.
5
<PAGE>
The information below marked by * and [ ] has been omitted pursuant to a request
for confidential treatment. The omitted portion has been separately filed with
the Commission.
(a) Only a single royalty shall be due on any specific lot(s) of
Licensed Products made, used or sold by Licensee and its
Sublicensees, and which shall not exceed the royalty that would
be due based on the highest Net Sales Price for which such lot(s)
of Licensed Products is(are) sold by Licensee or its
Sublicensees.
(b) The royalties and fees due UKRF under this Agreement shall be
reduced to the extent that Licensee, or its Sublicensees, are
required to pay any amounts of royalty, fees, or settlements, to
any third party in order to make, have made, use, sell, offer to
sell, import, Licensed Products or products made with Licensed
Processes, or otherwise practice the Patent Rights granted
herein, provided that the royalty rate due UKRF shall not be less
than [*].
4.4. Licensee shall have the right, but not the obligation, to defend and
enforce the Patent Rights, and Licensee's rights in said Patent Rights and in
the Technical Data and Materials. In the event that Licensee shall undertake, or
be financially responsible for the enforcement and/or defense of the Patent
Rights or Technical Data (including, but not limited to, resolving, settling or
litigating any claims or actions related to any third party opposition, patent
interferences, infringement, or patent validity), Licensee may withhold up to
fifty percent (50%) of the payments otherwise due UKRF under Article 4 hereunder
and apply the same toward reimbursement of Licensee's actual expenses, including
reasonable attorneys' fees and expert witnesses' fees, in connection with the
conduct, investigation, settlement or resolution of such enforcement or defense.
Any recovery of damages by Licensee for enforcement of Licensee's rights shall
be applied first in satisfaction of any unreimbursed expenses and legal fees of
Licensee relating its enforcement and defense of its rights, and next toward
reimbursement of UKRF for any payments under Article 4 past due or withheld and
applied pursuant to this Article 4.4. The balance remaining from any such
recovery shall be shared by UKRF and Licensee. No settlement, consent judgment
or other voluntary final disposition of the suit may be entered into without the
consent of UKRF, which shall not be unreasonably withheld. Licensor hereby
consents to entry or joinder by Licensee, as Licensee determines to be necessary
or desirable, as a named party in any action Licensee brings or defends with
respect to the Patent Rights Patents or any other rights or actions related to
this Agreement; provided, that such joinder shall not affect Licensee's right to
bring, defend and control such actions.
4.5. Royalty payments shall be paid in United States dollars in Lexington,
Kentucky, or at such other place as UKRF may reasonably designate consistent
with the laws and regulations controlling in any foreign country. Any
withholding taxes which Licensee or any Sublicensee shall be required by law to
withhold on remittance of the royalty payments shall be deducted from royalty
paid to UKRF. Licensee shall furnish UKRF the original copies of all official
receipts for such taxes. If any currency conversion shall be required in
connection with the payment of royalties hereunder, such conversion shall be
made by using the exchange rate
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actually paid, or the rate stated in the Wall Street Journal, plus customary
exchange fees or premiums, on the last business day of the calendar quarterly
reporting period to which such royalty payments relate.
Article 5 - Reports and Records
5.1. Licensee shall keep full, true and accurate books of account containing all
particulars that may be necessary for the purpose of showing the amount payable
to UKRF by way of royalty as aforesaid. Said books of account shall be kept at
Licensee's principal place of business or the principal place of business of the
appropriate Division of Licensee to which this Agreement relates. Said books and
the supporting data shall be open at all reasonable times, for five (5) years
following the end of the calendar year to which they pertain, to the reasonable
inspection of the UKRF Internal Audit Division and/or an independent certified
public accountant retained by UKRF and/or a certified public accountant employed
by UKRF, for the purpose of verifying Licensee's royalty statement or compliance
in other respects with this Agreement. Provided, however, that any such persons
conducting the audit or inspection shall have executed confidentiality
agreements reasonably acceptable to Licensee or Sublicensee, respectively, and
that the purpose for and the information or evaluation obtained from such
inspection or audit is strictly limited to use by UKRF for verifying Licensee's
compliance with the terms of this Agreement.
5.2. Licensee, within thirty (30) days after June 30 and December 31, of each
year, shall deliver to UKRF true and accurate reports, giving such particulars
of the business conducted by Licensee during the preceding six-month period
under this Agreement as shall be pertinent to a royalty accounting hereunder.
These shall include at least the following:
(a) All Licensed Products manufactured and sold;
(b) Total billings for Licensed Product sold;
(c) Deductions applicable as provided in Article 4;
(d) Total royalties due;
(e) Names and addresses of all Sublicensees of Licensee; and
(f) Annually, the Licensee's certified financial statements for the
preceding twelve (12) months including, at a minimum, a Balance Sheet
and an Operating Statement.
5.3. With each such report submitted, Licensee shall pay to UKRF the royalties
due and payable under this Agreement. If no royalties shall be due, Licensee
shall so report.
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Article 6 - Termination
6.1. If Licensee shall become bankrupt, or shall file a petition in bankruptcy,
or if the business of Licensee shall be placed in the hands of a receiver,
assignee or trustee for the benefit of creditors, whether by the voluntary act
of Licensee or otherwise, this Agreement shall automatically terminate.
6.2. Should Licensee fail in its payment to UKRF of royalties or license fees
due under Article 4 of this Agreement, UKRF shall have the right to serve notice
upon Licensee by certified mail at the address designated in Article 12, hereof,
of its intention to terminate this Agreement within thirty (30) days after
receipt of said notice of termination unless Licensee shall pay to UKRF, within
the thirty (30) day period, all such royalties and license fees due and payable.
Upon the expiration of the thirty (30) day period, if Licensee shall not have
made a payment of such royalties and license fees due and payable, the rights,
privileges and license granted hereunder shall thereupon immediately terminate.
6.3. Upon any material breach or default of this Agreement by Licensee, other
than those occurrences set out in Articles 6.1, 6.2 and 6.4 herein, which shall
always take precedence in that order over any other material breach or default
of this Agreement, UKRF shall have the right to terminate this Agreement and the
rights, privileges and license granted hereunder by ninety (90) days' notice by
certified mail to Licensee. Such termination shall become effective unless
Licensee shall have made a good faith effort to cure any such breach or default
prior to the expiration of the ninety (90) day period from receipt of UKRF's
notice of termination.
6.4. In the event that Licensee fails, for a continuous period of at least six
months, to cause payment for Licensed Products Research required under Article 3
and is not using due diligence to pursue a vigorous program to develop a
Licensed Product based on a use of 3H1, 1A7 and 11D10, then UKRF shall have the
right to request reasonable assurances from Licensee that it, or its
Sublicensees will provide such funding and use due diligence to pursue such
program.
(a) If Licensee, or its Sublicensees, do not provide such assurances
within 90 days of receiving such request from UKRF ("Licensee's Cure
Period"), then the rights granted by Article 2.1 to the Patent Rights
solely and specifically with respect to the antibody that is not
subject to a vigorous program to develop a Licensed Product may be
forfeited upon seasonable notice by UKRF. Provided, however, that UKRF
shall provide Licensee and all Sublicensees of record, of its intent
to exercise such partial license forfeit, under this Article 6.4, of
the licensed Patent Rights within 90 days after the expiration of the
Licensee's Cure Period, and allow such Sublicensees, or other
reasonably acceptable party, 45 days after receipt of such notice of
forfeiture to provide the such requested assurances.
(b) Upon forfeiture, if any, Licensee shall have no obligation to
prosecute, maintain, enforce or defend any Patent Rights Patent
Application or Patent Rights Patent, or any claim therein, with may
pertain to such forfeited rights.
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6.5. Licensee shall have the right to terminate this Agreement at any time on
six (6) months' notice by certified mail to UKRF.
6.6. Upon termination of this Agreement for any reason, nothing herein shall be
construed to release either party from any obligation that matured prior to the
effective date of such termination. Licensee and/or any Sublicensee thereof may,
however, after the effective date of such termination, sell all Licensed
Products, and complete Licensed Products ordered or in the process of
manufacture at the time of such termination and sell the same, provided that
Licensee shall pay to UKRF the royalties thereon as required by Article 4 of
this Agreement and shall submit the reports required by Article V hereof on the
sales of Licensed Products.
Article 7 - Product Liability
7.1. Licensee shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold UKRF, its trustees, officers, and
employees (collectively "Indemnified Parties") harmless against all claims and
expenses, including legal expenses and reasonable attorneys' fees, arising out
of the death of or injury to any person or persons or out of any damage to
property and against any other claim, proceeding, demand, expense and liability
of any kind whatsoever resulting from Licensee's production, manufacture, sales,
use, consumption or advertisement of the Licensed Product(s), and/or Licensed
Process(es), manufactured by Licensee after the Effective Date, or arising from
any obligation of Licensee hereunder, and that would otherwise be imposed on
such indemnified parties solely because of the UKRF status as a licensor of the
rights granted under this Agreement. All such obligations to defend, indemnify,
and hold harmless shall fully exclude any claim, proceeding, demand, expense and
liability of any kind whatsoever resulting from or arising out of any fraud or
criminal act by any Indemnified Party.
7.2. If Licensee produces, manufactures or sells any Licensed Product(s) and/or
licensed process(es), Licensee will maintain product liability insurance, with
an endorsement naming this Agreement the University of Kentucky Research
Foundation, officers and employees as additional insureds covering liabilities
for the production, manufacture and/or sale of the Licensed Product(s) and
Licensed Process(es), which are imposed on the such parties solely because of
this Agreement. The policy of insurance shall contain a provision of
non-cancellation except upon the provision of sixty (60) days notice to the
University. Policy limits shall be not less than $ 1,000,000 per person per
occurrence until an approval for commercial distribution of therapeutic products
in the U.S. has been obtained from the United States Food & Drug Administration,
and $ 5,000,000 per person per occurrence thereafter.
7.3. If Licensee, sublicenses any of the rights, privileges and licenses granted
hereunder, Licensee shall ensure that the aggregate amount of product liability
insurance coverage held by Licensee and Sublicensee together are at least equal
to amounts required under Article 7.2.
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7.4. UKRF shall use its best efforts to obtain the full cooperation of all
Indemnified Parties or other persons under its control with the Licensee's
investigation, defense and settlement of such claim, proceeding, or demand for
which indemnification or defense is sought.
7.5 In addition, Licensee shall hold Health Research Inc., Roswell Park
Division, ("Roswell") harmless from any claims resulting from an "Additional
Interest" in the "Inventions" (as those terms are defined in the agreement
between UKRF and Roswell signed by those entities May 10 and 15, respectively),
and from any damages directly resulting from the use of any "Invention" or
"Patent," (as that term is defined in said agreement) by Licensee.
Article 8 - Warranties
8.1. Licensee AGREES THAT EXCEPT AS STATED IN article 8.3 THE RIGHTS GRANTED ARE
MADE AVAILABLE WITHOUT WARRANTY OF ANY KIND EXPRESSED OR IMPLIED INCLUDING, BUT
NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
8.2. Licensee further agrees that UKRF has not conducted nor had conducted a
patentability or infringement study and thus except as stated in Article 8.3 it
makes no claims that the licensed rights will not infringe any third parties
valid patent rights.
8.3. Notwithstanding anything to the contrary herein UKRF warrants that it has
lawfully and validly secured and conveys as described herein all rights which
are or may be asserted or claimed by UKRF, University of Kentucky, or any of
their respective trustees, officers, employees, affiliates, including, but not
limited to Kenneth A. Foon, Malaya Chatterjee, Sunil Chatterjee and Heinz Kohler
Article 9 - Assignment
Licensee may assign or otherwise transfer this Agreement and the license granted
hereby and any or all of the rights acquired by it hereunder so long as such
assignment or transfer shall be accompanied by a sale or other transfer of
Licensee's entire business or of that part of Licensee's business to which the
license granted hereby relates, or such assignment or transfer is made to an
entity controlling Licensee. Licensee shall give UKRF thirty (30) days prior
notice of such assignment and transfer and if UKRF raises no substantial and
reasonable objection to such assignment or transfer, in writing within thirty
(30) days after the giving of such notice and stating the reasons for such
objection, then UKRF shall be deemed to have approved such assignment or
transfer; provided, however, UKRF shall not be deemed to have approved such
assignment and transfer unless such assignee or transferee shall have agreed in
writing to be bound by the terms and conditions of this Agreement. Upon such
assignment or transfer and agreement by such assignee or transferee, the term
Licensee as used herein shall include such
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assignee or transferee. If Licensee shall sell or otherwise transfer its entire
business or that part of its business to which the license granted hereby
relates and the transferee shall not have agreed in writing to be bound by the
terms and conditions of this Agreement, or new terms and conditions shall not
have been agreed upon within sixty (60) days of such sale or transfer, UKRF
shall have the right to terminate this Agreement.
Article 10 - Non-Use of Names
Licensee shall not use the names of the University of Kentucky, UKRF, their
employees, Kenneth A. Foon or Malaya Chatterjee, or any adaptation thereof in
any advertising, promotional or sales literature for Licensed Products without
prior written consent obtained from UKRF, in each case, except that Licensee may
state that it is licensed by UKRF under one or more of the patents and/or
applications comprising the Patent Rights, or other statements reasonably made
in connection with disclosures required under applicable laws and regulations,
including those laws and regulations pertaining to Securities and the
development, manufacture and sale of biological pharmaceuticals.
Article 11 - Export Controls
It is understood that UKRF is subject to United States laws and regulations
controlling the export of technical data, computer software, laboratory
prototypes and other commodities (including the Arms Export Control Act, as
amended, and the Export Administration Act of 1979), and that its obligations
hereunder are contingent on compliance with applicable United States export laws
and regulations. The transfer of certain technical data and commodities may
require a license from the cognizant agency of the United States Government
and/or written assurances by Licensee that Licensee shall not export data or
commodities to certain foreign countries without prior approval of such agency.
UKRF neither represents that a license shall not be required nor that, if
required, it shall be issued.
Article 12 - Payments, Notices and Other Communications
Any payment, notice or other communication pursuant to this Agreement shall be
sufficiently made or given on the date of mailing if sent to such party by
certified first class mail, postage prepaid, addressed to it at its address
below or as it shall designate by written notice given to the other party:
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In the case of UKRF:
University of Kentucky, Research Foundation
207 Administration Building
Lexington, Kentucky 40506
With a copy to:
University Legal Counsel
7 Administration Building
Lexington, Kentucky 40506
In the case of Licensee:
Ascalon Inc.
1252 East Appaloosa Place
Scottsdale, AZ 85259
Acct: President
Article 13 - Miscellaneous Provisions
13.1. This Agreement shall be construed, governed, interpreted and applied in
accordance with the laws of the Commonwealth of Kentucky, U.S.A., except that
questions affecting the construction and effect of any patent shall be
determined by the law of the country in which the patent was granted.
13.2. The parties hereto acknowledge that this Agreement sets forth the entire
Agreement and understanding of the parties hereto as to the subject matter
hereof, and shall not be subject to any change or modification except by the
execution of a written instrument subscribed to by the parties hereto.
13.3. UKRF shall take all actions necessary to implement this Agreement,
including but not limited to, obtaining or executing any affidavits or
approvals, and transfer of the Technical Data and Materials to Licensee.
13.4. The provisions of this Agreement are severable, and in the event that any
provision of this Agreement shall be determined to be invalid or unenforceable
under any controlling body of law, such invalidity or unenforceability shall not
in any way affect the validity or enforceability of the remaining provisions
hereof, which shall be interpreted and enforced consistently with the intent of
the parties at the Effective Date. To the extent that any provision is deemed
invalid or unenforceable such that economic value of this Agreement is
materially altered, the parties shall negotiate in good faith a valid
replacement provision that best implements the parties' intent at Effective
Date.
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13.5. The failure of either party to assert a right hereunder or to insist upon
compliance with any term or condition of this Agreement shall not constitute a
waiver of that right or excuse a similar subsequent failure to perform any such
term or condition by the other party.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and
seals and duly executed this License Agreement the day and year first set forth
below.
For University of Kentucky Research Foundation Ascalon, Inc.
By: _________________________________ By: ________________________
Dr. Fitzgerald B. Bramwell, Louis R. Bucalo
Executive Director Chairman
Date: Date:
By execution of this Agreement, the undersigned acknowledge receiving a
copy of this Agreement prior to its execution, having read and reviewed same,
and having agreed to the terms and conditions, specifically including but not
limited to Article 8.3.
_____________________________ Date:
Ken Foon
_____________________________ Date:
Malaya Chatterjee
_____________________________ Date:
Sunil Chatterjee
_____________________________ Date:
Heinz Kohler
13
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE EXHIBIT 11
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
------------------------------- -------------------------------
1994 1995 1995 1996
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss applicable to common stock $(12,974,175) $(11,693,454) $ (5,877,940) $ (6,100,363)
Deemed dividend upon conversion of preferred stock -- -- -- (5,431,871)
------------ ------------ ------------ ------------
Net loss applicable to common stock $(12,974,175) $(11,693,454) $ (5,877,940) $(11,532,234)
============ ============ ============ ============
Weighted average shares of
common stock outstanding 1,404,212 1,426,049 1,408,519 9,791,050
Shares related to Staff Accounting
Bulletin topic 4D:
Stock options and warrants 897,836 897,836 897,836 --
============ ============ ============ ============
Shares used in computing net loss per share 2,302,048 2,323,885 2,306,355 9,791,050
============ ============ ============ ============
Net loss per share $ (5.64) $ (5.03) $ (2.55) $ (1.18)
============ ============ ============ ============
Pro Forma
Net loss applicable to common stock $(12,974,175) $(11,693,454) $ (5,877,940)
============ ============ ============
Calculation of shares outstanding for
computing pro forma net loss per share:
Shares used in computing net loss per share 2,302,048 2,323,885 2,306,355
Adjusted to reflect the effect of the
assumed conversion of preferred stock 4,690,955 5,293,585 4,922,183
------------ ------------ ------------
Shares used in computing pro forma net
loss per share 6,993,003 7,617,470 7,228,538
============ ============ ============
Pro forma net loss per share $ (1.86) $ (1.54) $ (0.81)
============ ============ ============
</TABLE>
