<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
October 7, 1997
Dear Shareholder:
You are cordially invited to attend the Special Meeting of
Shareholders of Panax Pharmaceutical Company Ltd. ("Panax" or "the Company")
to be held on Thursday October 30, 1997, at 10:00 A.M. at the offices of the
Company, 425 Park Avenue, 27th Floor, New York, New York 10022.
At this meeting, you will be asked to consider and vote upon
proposals to amend Panax's Certificate of Incorporation (i) to change the
authorized capital stock by increasing the number of authorized shares of
Common Stock, par value $.0001 per share, from 10,000,000 to 50,000,000 shares,
(ii) to change the authorized capital stock by creating a class of 5,000,000
shares of Preferred Stock, par value $.0001 per share and (iii) to change the
name of the Company to "InKine Pharmaceutical Company, Inc." You will also be
asked to consider and vote upon proposals to increase the number of shares of
Common Stock subject to the 1993 Stock Option Plan to 4,200,000, and to approve
the adoption of the 1997 Consultant Stock Option Plan which relates to
2,500,000 shares of the Common Stock of the Company.
The proposals arise primarily from the redirection of the
focus of Panax's operations to the acquisition of proprietary rights or
licenses to commercially promising drug candidates and platform technologies
under development. Such redirection will require the issuance of shares, or
rights, options or warrants to acquire shares, of capital stock of the Company
to sellers or licensors, qualified employees, consultants and financiers.
The Company is in the final stages of negotiating agreements to acquire the
outstanding shares of Sangen Pharmaceutical Company ("Sangen") and CorBec
Pharmaceuticals, Inc. ("CorBec"). Each agreement is to provide that as part of
the consideration for the relevant transfers of ownership and acquisition of
related licenses, Panax will issue shares of Common Stock of Panax and/or
options or warrants to purchase additional shares of Common Stock of Panax. In
addition, such acquisitions are intended to be contingent, among other things,
on the consummation by the Company of an equity financing of at least $8
million.
The shares of Common Stock which would be required to be
issued and reserved for issuance to consummate the acquisitions and the
related financing will exceed the number of shares of Common Stock which the
Company currently has available for issuance from its authorized shares of
Common Stock after allowing for the present reservation of shares for issuance
for other purposes.
Authorization of a class of Preferred Stock with authority
of the Board to issue shares thereof in such series with such rights and
limitations as it may determine would assist the
<PAGE>
Company in negotiating other acquisitions or licenses for other promising
drugs under development.
The increased authority to issue options under the proposals
with respect to the 1993 Stock Option Plan and the 1997 Consultants Stock
Option Plan will enhance the Company's efforts to effect other acquisitions
and licenses and to attract and obtain key employees and consultants who have
the credentials and professional experience to assist the Company.
You are entitled to vote all shares of Common Stock
registered in your name at the close of business on September 12, 1997.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE URGE YOU
TO SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ACCOMPANYING ENVELOPE AS SOON
AS POSSIBLE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING.
We hope that you will find it convenient to attend the
meeting.
Sincerely,
Dr. Taffy J. Williams
Chairman of the Board, President
and Chief Executive Officer
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
425 PARK AVENUE, 27TH FLOOR
NEW YORK, NEW YORK 10022
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
October 30, 1997
To the Shareholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of
Shareholders of Panax Pharmaceutical Company Ltd. ("Panax") will be held on
Thursday October 30, 1997, at 10:00 A.M. Eastern time at the offices of the
Company, 425 Park Avenue, 27th Floor, New York, New York 10022. At the Special
Meeting, the shareholders of the Company will be asked to consider and vote
upon the following proposals:
1. To approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock, par
value $.0001 per share, of the Company to 50,000,000 shares.
2. To approve an amendment to the Company's Certificate of
Incorporation to authorize a class of 5,000,000 shares of Preferred Stock, par
value $.0001 per share.
3. To approve an amendment to the Company's Certificate of
Incorporation to change the name of the Company to "InKine Pharmaceutical
Company, Inc."
4. To approve an amendment to the Company's 1993 Stock
Option Plan to increase the number of shares of Common Stock under the plan to
4,200,000.
5. To approve the adoption of the 1997 Consultant Stock
Option Plan which relates to 2,500,000 shares of Common Stock.
6. To transact such other business as properly may come
before the Special Meeting or any adjournments thereof.
The Board of Directors of the Company has fixed the close of
business on October 7, 1997 as the record date for the determination of
shareholders entitled to notice of and to vote at the Special Meeting or any
adjournment thereof. You are entitled to vote all shares of Common Stock
registered in your name at the close of business on such date.
<PAGE>
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING, WE URGE YOU TO SIGN THE ENCLOSED PROXY, WHICH IS SOLICITED BY THE
BOARD OF DIRECTORS OF THE COMPANY, AND RETURN IT IN THE ACCOMPANYING ENVELOPE
(FOR WHICH NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES) AS SOON
AS POSSIBLE, SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING. IT IS
IMPORTANT THAT YOUR PROXY BE RETURNED PROMPTLY IN ORDER TO AVOID THE
ADDITIONAL EXPENSE OF FURTHER SOLICITATION. YOU ARE URGED TO READ THE ATTACHED
PROXY STATEMENT, WHICH CONTAINS INFORMATION RELEVANT TO THE ACTIONS TO BE
TAKEN AT THE MEETING.
By Order of the Board of Directors,
Dr. Taffy J. Williams
Chairman of the Board, President
and Chief Executive Officer
October 7, 1997
New York, New York
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
425 Park Avenue, 27th Floor
New York, New York 10022
(212) 319-8300
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
To be held on October 30, 1997
Your proxy is solicited by the Board of Directors (the
"Board") of Panax Pharmaceutical Company Ltd. ("Panax" or the "Company") in
connection with the Special Meeting of Shareholders of the Company to be held
on Thursday October 30, 1997, at 10:00 A.M. Eastern time at the offices of
Panax, 425 Park Avenue, 27th Floor, New York, New York 10022 and any
postponement or adjournment thereof (the "Special Meeting").
Panax has authorized one class of voting securities, Common
Stock, par value $.0001 per share ("Common Stock"). There were 3,356,912
shares of Common Stock issued and outstanding at the close of business on
October 7, 1997 (the "Record Date"). All shareholders of record of the
Common Stock at the close of business on the Record Date will be entitled to
vote at the Special Meeting. Each share of Common Stock is entitled to one
vote.
The shareholders will be asked to consider and vote upon
three proposals to amend the Company's Certificate of Incorporation - one to
increase the number of authorized shares of Common Stock from 10,000,000 to
50,000,000, with the same par value of $.0001 per share, a second to create a
class of 5,000,000 shares of Preferred Stock, par value $.0001 per share, and
a third to change the name of Panax to "Inkine Pharmaceutical Company, Inc." In
addition, the shareholders will be asked to consider proposals to approve an
amendment to the 1993 Stock Option Plan to increase the number of shares
available under the plan to 4,200,000, and to approve the adoption of the 1997
Consultant Stock Option Plan relating to 2,500,000 shares of Common Stock. If
the accompanying proxy is properly executed, returned to Panax in time to be
voted at the Special Meeting, and not revoked, the shares of Common Stock
represented thereby will be voted in accordance with the instructions marked
on the proxy. Unless contrary instructions are given with respect to a
proposal, the persons designated as proxy holders in the proxy will vote FOR
the proposal.
1
<PAGE>
Any shareholder giving a proxy has the right to attend the
Special Meeting and vote his or her shares of Common Stock in person (thereby
revoking any prior proxy) and also has the right to revoke a previously
granted proxy at any time before it is exercised by written notice filed with
the Secretary of the Company. Attendance at the Special Meeting will not, in
itself, constitute revocation of a previously granted proxy.
The Proxy Statement and the accompanying form of proxy and
Notice of Meeting are being mailed on or about October 8, 1997 to the
Company's shareholders as of the Record Date.
In addition to solicitation by mail, officers, directors
("Directors") and employees of Panax may solicit proxies by telephone,
telecopy and personal contact. All costs of solicitation, including printing
and mailing of this Proxy Statement and accompanying materials, reimbursement
of brokerage firms and others for their expenses in forwarding solicitation
material to the beneficial owners of the Company's Common Stock, and
supplementary solicitations to submit proxies, if any, will be borne by Panax.
QUORUM AND VOTING REQUIREMENTS
The presence at the Special Meeting, in person or by proxy,
of the holders of a majority of the shares of Common Stock outstanding on the
Record Date will constitute a quorum.
Approval of each proposal to amend the Company's Certificate
of Incorporation requires the affirmative vote of a majority of the shares of
Common Stock outstanding. Abstentions and indications by brokers that they do
not have authority to vote certain shares will have the effect of a negative
vote on such proposal.
The Board has, for purposes of administrative simplicity,
incorporated all three proposed amendments --the increase in the authorized
shares of Common Stock, the authorization of a class of Preferred Stock and
the change in the Company's corporate name, into one proposed amendment to the
Certificate of Incorporation as set forth in Annex A. To the extent that fewer
than a majority of the shares of Common Stock outstanding are voted FOR any
but not all three of the foregoing proposed amendments to the Certificate of
Incorporation, an amendment to the Certificate of Incorporation incorporating
only those elements, if any, which receive the affirmative vote of a majority
of the shares of Common Stock outstanding will be prepared and filed on behalf
of the Company.
Approval of the proposals to approve the amendment to the
1993 Stock Option Plan and to adopt the 1997 Consultant Stock Option Plan
requires, in each case, the affirmative vote of the holders of at least a
majority of the shares of Common Stock present in person or represented by
proxy at the Special Meeting. Abstentions will have the effect of negative
votes, but if a broker indicates that it does not have authority to vote
certain shares of Common Stock, those votes will not be considered as shares
present and entitled to vote at the Special Meeting with respect to
2
<PAGE>
such matters and will not be counted toward the outcome of the vote.
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to
the beneficial ownership of shares of Common Stock as of June 30, 1997, of
each shareholder of Panax known to Panax to be a beneficial owner of more than
5% of the outstanding shares of Common Stock, and all executive officers and
Directors as a group. The number of shares beneficially owned is determined
under the rules of the Securities and Exchange Commission and the information
is not necessarily indicative of beneficial ownership for any other person.
Under such rules, "beneficial ownership" includes shares as to which the
undersigned has sole or shared voting power or investment power and shares
which the undersigned has the right to acquire within 60 days of June 30, 1997
through the exercise of any stock option or warrant. Unless otherwise
indicated, the named person has sole investment and voting power with respect
to the shares set forth in the table.
Number of Shares Percentage of
Name and Address Beneficially Owned (1) Outstanding Shares
- ---------------- ------------------ ------------------
Taffy James Williams * 180,000(2) 5.1%
Tanya Akimova * 222,994(3) 6.6%
All Directors and Executive
Officers as a Group (5 persons) 782,995 (4) 22.1%
- --------------
* His or her address is c/o Panax, 425 Park Avenue, New York, New York
10022.
(1) Unless otherwise indicated, the persons named in the table above have
sole voting and investment power with respect to all shares
beneficially owned by them.
(2) Includes 170,000 shares subject to options and 5,000 shares subject
to warrants exercisable within 60 days of June 30, 1997.
(3) Includes 8,334 shares subject to options exercisable within 60 days
of June 30, 1997 and 40,000 shares owned by her husband, as to which
40,000 shares she disclaims beneficial ownership.
(4) Includes 183,334 shares subject to options and warrants exercisable
within 60 days, 220,000 shares owned by spouses as to which
beneficial ownership has been disclaimed and 60,000 shares owned by
minor children.
3
<PAGE>
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THE SECTIONS "PROPOSAL TO
AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION" AND "PROPOSED ACQUISITIONS"
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, WHICH ARE INTENDED TO BE COVERED BY THE SAFE HARBORS CREATED THEREBY.
ALL SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES INCLUDING
STATEMENTS REGARDING THE FUTURE DEVELOPMENT OF PROPOSED DRUGS AND TECHNOLOGY
WHICH RELATE TO THE PURGATIVE TABLET, THE CONSUMMATION OF THE ACQUISITIONS,
THE DEVELOPMENT OF PHARMACEUTICAL DRUGS AND TECHNOLOGIES TO BE ACQUIRED AS A
RESULT OF THE CORBEC OR SANGEN ACQUISITIONS, THE CONSUMMATION OF THE PROPOSED
FINANCING, FUTURE LICENSING OR COLLABORATIVE ARRANGEMENTS AS TO SUCH
DEVELOPMENT, AND THE ADEQUACY OF THE FINANCING AND AVAILABILITY OF FUTURE
FINANCINGS BY THE COMPANY FOR DEVELOPMENT. MANY IMPORTANT FACTORS AFFECT THE
COMPANY'S ABILITY TO ACHIEVE ITS STATED OBJECTIVES AND TO SUCCESSFULLY DEVELOP
AND COMMERCIALIZE ITS PRODUCT CANDIDATES INCLUDING, AMONG OTHER THINGS, THE
ABILITY TO OBTAIN SUBSTANTIAL ADDITIONAL FUNDS, OBTAIN AND MAINTAIN ALL
NECESSARY PATENTS OR LICENSES, DEMONSTRATE THE SAFETY AND EFFICACY OF PRODUCT
CANDIDATES AT EACH STAGE OF DEVELOPMENT, MEET APPLICABLE REGULATORY STANDARDS
AND RECEIVE REQUIRED REGULATORY APPROVALS, MEET OBLIGATIONS AND REQUIRED
MILESTONES UNDER LICENSE AGREEMENTS, PRODUCE DRUG CANDIDATES IN COMMERCIAL
QUANTITIES AT REASONABLE COSTS, COMPETE SUCCESSFULLY AGAINST OTHER PRODUCTS
AND MARKET PRODUCTS IN A PROFITABLE MANNER. AS A RESULT, THERE CAN BE NO
ASSURANCE THAT THE FORWARDLOOKING STATEMENTS INCLUDED IN THIS PROXY STATEMENT
WILL PROVE TO BE ACCURATE. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT
IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF SUCH
INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION OR WARRANTY BY PANAX OR
ANY OTHER PERSON THAT THE OBJECTIVES AND PLANS OF PANAX WILL BE ACHIEVED IN
ANY SPECIFIED TIME FRAME, IF AT ALL.
4
<PAGE>
PROPOSAL TO AMEND THE COMPANY'S
CERTIFICATE OF INCORPORATION
TO INCREASE THE AUTHORIZED COMMON STOCK
The Board of Directors of the Company has adopted, subject
to shareholder approval, an amendment to the Company's Certificate of
Incorporation increasing the authorized shares of Common Stock, par value
$.0001 per share, from 10,000,000 to 50,000,000 shares.
The proposed increase in the authorized shares of Common
Stock of the Company is contemplated by the Board of Directors of the Company
to assist the Company in effecting acquisitions of and licenses to the
proprietary rights to promising candidates for development into commercially
successful pharmaceutical products and technologies and to attract and retain
the services of qualified persons to assist in their development and the
location and evaluation. The Company in many instances will be required to
issue to the owners or holders of such rights and to consultants and employees
shares of capital stock or rights, options, or warrants to acquire shares of
capital stock of the Company in addition to making cash payments.
The Company is currently negotiating proposed acquisitions
of Sangen Pharmaceutical Company ("Sangen") and CorBec Pharmaceuticals Inc.
("CorBec"), two privately held development stage pharmaceutical companies. See
"Proposed Acquisitions." The Company has commenced a private placement of
Common Stock and warrants to purchase Common Stock in an effort to raise
up to $12,000,000 (exclusive of additional options) to fund, among other
things, the proposed acquisitions and the development of the drugs and
platform technologies associated therewith, and has entered into letters of
intent and is in the final stages of negotiating agreements with Sangen and
CorBec to acquire or license the proprietary rights to pharmaceutical products
and technologies which the Company believes are promising candidates for
commercially successful development.
In connection with or upon consummation of the proposed
acquisitions, Dr. Leonard S. Jacob, the sole officer, director and shareholder
of Sangen will be appointed and employed as Chairman of the Board and Chief
Executive Officer of the Company pursuant to a long term employment agreement,
Dr. Taffy J. Williams, the Company's Chief Executive Officer and President
will become President and Chief Operating Officer and his employment agreement
will be revised, and certain Directors of the Company will resign and two new
Directors, Messrs. Jerry Weisbach and Thomas Stagnaro, will be appointed.
Accordingly, a vote in favor of the proposal to increase the authorized shares
of Common Stock, is in effect a vote in favor of (i) the proposed
acquisitions, (ii) the appointment of Dr. Jacob and his entering into a
long-term employment agreement, (iii) the revision of the terms of Dr.
Williams employment and (iv) the elections of Messrs. Weisbach and Stagnaro as
Directors. There is no assurance that either the Sangen or the CorBec
acquisitions will be consummated or that any financing or a financing of as
much as $8,000,000 will be effected by the Company. Nonetheless, the foregoing
amendment, if approved, will allow the Company to pursue other opportunities
that would require it to issue shares or options or warrants to acquire shares
of its Common Stock in
5
<PAGE>
amounts greater than are now authorized. See "Proposed Acquisitions--Interests
of Certain Persons with Respect to the Proposed Acquisitions" and "--Possible
Change of Control" and "Executive Compensation."
As of June 30, 1997, the Company had outstanding 3,356,912
shares of Common Stock. In addition there were reserved for issuance: (i)
1,264,615 shares upon exercise of the outstanding Redeemable Common Stock
Purchase Warrants which are currently exercisable on or prior to April 27,
1998 at $6.84 per share and which were issued along with shares of Common
Stock as part of the Units constituting the Company's public offering on
January 1995 (the "IPO Warrants"); (ii) 215,000 shares upon exercise of an
option expiring January 2000 granted to the underwriter of the Company's
initial public offering to purchase 107,500 Units at a price of $7.33 per
Unit, each consisting of one share and one IPO Warrant; (iii) 320,000 shares
upon exercise on or prior to October 2, 2000 of a warrant issued to a
financial consultant at a price of $1.00 per share, (iv) 1,394,500 shares
(including 549,500 options which may not be exercised prior to the approval
by the shareholders of the increase in availability of shares under the
1993 Stock Option Plan upon exercise of options outstanding under the Company's
1993 Stock Option Plan) with the number of shares to be reserved under the Plan
to increase to 4,200,000 shares if the proposed amendment to the 1993 Stock
Option Plan is approved, and (v) 2,500,000 shares upon exercise of options to
be granted under the 1997 Consultant Stock Option Plan if such plan is
approved at this Meeting. See "Proposal to Approve the Amendment to the
1993 Stock Option Plan"; "Proposal to Approve the 1997 Consultant Stock Option
Plan" and "Executive Compensation" for further information.
If the proposals as to the 1993 Stock Option Plan and the
1997 Consultant Stock Option Plan are approved, there would be reserved for
issuance an aggregate of 8,46,615 shares which, when added to the outstanding
shares, could equal 11,841,942 shares. Such amount exceeds the currently
authorized 10,000,000 shares of common Stock.
Consummation of the proposed Sangen and CorBec acquisitions,
each of which is contingent upon consummation of a financing of at least
$8,000,000 is expected to result in the issuance and reservation of additional
shares of Common Stock which in the aggregate would range from 5,470,000
shares to 12,720,000 shares depending on the achievement of certain milestones
representing 162.9% and 378.9% of the shares outstanding as of June 30, 1997.
No assurances can be given that the proposed terms of the acquisitions
and of the financing will not materially change and that as a result the
number of additional shares to be issued and received will not increase
substantially. See "Proposed Acquisitions" and "Price Range of Company's
Common Stock".
Consummation of either or both acquisitions is not, however,
a condition to the filing of the proposed amendment if the amendment is
approved by the shareholders.
The substance of this proposed amendment to the Certificate
of Incorporation of the Company is contained in Annex A.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED
COMMON STOCK.
6
<PAGE>
PROPOSED ACQUISITIONS
SUMMARY
The Company is in the final stages of negotiating an
agreement with Sangen Pharmaceutical Company ("Sangen") to acquire the
outstanding shares of such company (the Sangen Acquisition Agreement") and an
Agreement and Plan of Organization with CorBec Pharmaceuticals, Inc.
("CorBec"), pursuant to which CorBec will, by merger, become a wholly-owned
subsidiary of the Company (the "CorBec Acquisition Agreement). Sangen and
CorBec are each privately held development stage pharmaceutical companies. The
Sangen Acquisition Agreement and the CorBec Acquisition Agreement, each of
which is based on an executed letter of intent, will be contingent upon, among
other things, the Company effecting an equity financing of at least $8,000,000
(the "Financing"). A vote in favor of the increase in the authorized shares of
Common Stock described in "Proposal to Amend the Company's Certificate of
Incorporation to Increase the Authorized Common Stock" constitutes a vote in
favor of each of the proposed acquisitions, although no assurance can be given
that either acquisition will be consummated. Shareholders will not have
another opportunity to evaluate and vote on the proposed acquisitions.
The acquisition of Sangen as contemplated by the draft
Sangen Acquisition Agreement would provide for the employment of Dr. Leonard
S. Jacob, Sangen's sole stockholder, officer and director, as the Company's
Chairman and Chief Executive Officer pursuant to a three-year employment
agreement providing for an annual base salary of $225,000. In addition, Dr.
Jacob is to receive a ten year Common Stock purchase warrant entitling him to
purchase 1,200,000 shares of Common Stock and, if on the closing date of the
acquisitions 1,200,000 shares is less than 7 1/2% of the "Fully Diluted
Capitalization" of the Company, an option, exercisable for 10 years, to
purchase such number of shares of Panax Common Stock as is equal to the
difference between 1,200,000 shares and 7 1/2% of the "Fully Diluted
Capitalization" of the Company. "Fully Diluted Capitalization" means the sum
of (i) all shares issued and outstanding on the date of the consummation of
the proposed acquisitions (the "Acquisition Date"); (ii) the shares sold in
the Financing, (iii) the shares reserved for issuance upon exercise of all
warrants sold to investors and the placement agents in the Financing, (iv)
shares to be reserved for issuance pursuant to the agreements related to the
proposed acquisitions and to licenses for proprietary rights to technology
already licensed by the Company and to be licensed in connection with the
proposed acquisitions, and (v) all other shares currently reserved for
issuance upon exercise of options and warrants outstanding on the date of the
acquisition of Sangen other than (a) all shares reserved and available for
issuance under the Company's 1993 Stock Option Plan and 1997 Consultant Stock
Option Plan but not currently subject to outstanding grants and (b) shares
issuable upon exercise of warrants issued in the Company's initital public
offering (the "IPO Warrants") and a purchase option granted to the underwriter
(the "Unit Purchase Option") in the initial public offering (unless exercised
prior to April 1998, in the case of the IPO Warrants, and January 2000, in the
case of the Unit Purchase Option). Dr. Jacob's ten-year warrant with respect
to 1,200,000 shares is to be exercisable at $.61 per share and his ten year
option with respect to additional shares, if any, is to
7
<PAGE>
be exercisable at the fair market value of the Common Stock on the Acquisition
Date. The maximum number of shares issuable to Dr. Jacob under his warrant
and option is 1,377,515, which would constitute 11.9% and 12.9% of the
outstanding Common Stock of the Company respectively, if the maximum number
or minimum number of Units are sold as currently proposed in the Financing.
Pursuant to Dr. Jacob's employment agreement, up to a maximum of 900,000 shares
acquired upon exercise of such warrant may be repurchased by the Company for
nominal consideration in the event Dr. Jacobs has failed to fulfill his
employment agreement obligations with the Company by either leaving the
employ of the Company without cause or being terminated for "cause", as
defined in the employment agreement, during the term of such agreement. The
Company's repurchase right, however, is to expire at the rate of 25,000 shares
for each month he was employed under the employment agreement. The shares in
excess of 1,200,000 included in Dr. Jacob's option will vest in equal
increments over a period of 36 months commencing on the closing date of the
proposed acquisitions. See "Executive Compensation."
As its sole asset, Sangen has the rights to acquire by
license from Allegheny University of the Health Sciences ("AUHS") and Dr.
George Tuszynski, Professor of Surgery, Medicine and Pathology at AUHS, the
rights to the Thrombospondin Technology (as defined in "--Business of
Sangen"). The agreement is to provide that, concurrently with the consummation
of the Company's acquisition of Sangen, the Company will license such rights
from AUHS and Dr. Tuszynski pursuant to an exclusive, world-wide license to
make, have made, use, sell, import, offer for sale and sublicense the
Thrombospondin Technology and to utilize and exploit the related patents and
proprietary information. The license agreement is to terminate, unless earlier
terminated for breach or for failure of the Company to achieve certain FDA
product approval milestones, within seven years, upon the expiration or
abandonment of the last patent related to the Thrombospondin Technology. The
Company deems the acquisition of the Thrombospondin Technology to be material
to the Company and to the success of its strategy of acquiring and developing
proprietary rights to pharmaceutical drug and platform technologies under
development. See "--Business of Sangen." If the Sangen acquisition is
consummated, the license would require the Company to issue to AUHS 125,000
shares of Common Stock and options to purchase 125,000 shares, to issue to
Dr. Tuszynski ten-year warrants to purchase 250,000 shares of Common Stock,
to pay AUHS royalties of 2% of net sales of licensed products, to provide AUHS
funding ranging from $150,000 (in the first year) to $1,350,000 (over seven
years, inclusive) for sponsored research and would obligate the Company to
engage Dr. Tuszynski as a consultant for two years at $50,000 per year.
The acquisition of CorBec as contemplated by the draft
acquisition agreement would require the Company to pay the CorBec stockholders
an aggregate of $750,000 and issue to them an aggregate of 750,000 shares of
Common Stock. Additional cash payments in the aggregate amount of $16,580,000,
and additional issuances of an aggregate of 720,000 shares of Common Stock are
to be made upon the achievement, if any, of the following milestones and
targets: (i) $500,000 and 180,000 shares upon the Company's receipt of a
letter of approval from the United States Food and Drug Administration (the
"FDA") allowing for the commercial sale of its drug currently under
development ("CBP-1011"); (ii) 80,000 shares following the first fiscal year
net
8
<PAGE>
revenues from CBP-1011 sales equals or exceeds $20,000,000; (iii) $7,500,000
(payable in five equal annual installments) following the first fiscal year
net revenues from CBP-1011 equals or exceeds $30,000,000; (iv) 180,000 shares
following the first fiscal year net revenues from CBP-1011 sales equals or
exceeds $40,000,000; (v) $500,000 and 30,000 shares upon the Company's filing
of an Investigational New Drug Application ("IND") with the FDA with respect
to a second generation compound (a "Second Drug"); (vi) $80,000 upon the
successful completion of Phase II clinical trials with respect to a Second
Drug; (vii) 120,000 shares upon the Company's filing of a New Drug Application
("NDA") with respect to a Second Drug; (viii) $500,000 and 130,000 shares upon
receipt of a letter of approval from the FDA allowing for the commercial sale
of a Second Drug; and (ix) $7,500,000 (payable in five equal annual
installments) following the first fiscal year net revenues from the Second
Drug equals or exceeds $75,000,000. In addition, the Company is to enter into
three-year consulting agreements with Dr. Alan Schreiber, who is a CorBec
stockholder and the inventor, and with the Chief Executive Officer of CorBec,
providing for aggregate annual consulting fees of $150,000 during the first
year, $170,000 during the second year and $185,000 during the third year, and
for the grant to them of five year options to purchase at the market price on
the date of the CorBec acquisition an aggregate of 170,000 shares of Common
Stock which become exercisable in three equal annual installments. An option
to purchase an additional 200,000 shares at the market price on the date of
grant for the five year period following FDA approval, if any, of an IND and
the commencement of clinical trials with respect to a third generation
compound is also to be granted to Dr. Schreiber. The acquisition agreement is
to also require the Company to fund up to $240,000 of sponsored research over
the course of three years and at least $1,000,000 to fund clinical trials of
the CBP-1011.
To satisfy the condition as to Financing, the Company is
presently attempting to effect a private placement to raise up to $12,000,000,
involving an offering of 4,000,000 to 6,000,000 shares of Common Stocks plus
five year warrants to purchase a number of additional shares ranging from
800,000 to 1,200,000 shares of Common Stock. The warrants, according to the
currently contemplated terms thereof, are to be exercisable at any time after
issuance up to a date five years from the final closing date of the Financing
at an exercise price of $2.60 per share, subject to anti-dilution adjustments
(the "Warrant Exercise Price"). In addition, the warrants are subject to
redemption by the Company for $.01 per warrant, upon 30 days written notice, if
the average of the last sales prices of the Common Stock for period of ten
consecutive trading days exceeds 200%, 250%, 300% and 350% of the Warrant
Exercise Price in the second, third, fourth and fifth years after the final
closing date of the Financing, respectively. In addition, if the offering is
successfully consummated, the Company has an option to place up to an
additional 1,000,000 shares of Common Stock and warrants to purchase up to an
additional 200,000 shares of Common Stock. The Placement Agents are to receive
five year Warrants to purchase such number of shares of Common Stock as equals
10% (12.5% if the maximum number of Units is sold) of the sum of shares sold
and the shares reserved for issuance with respect to the warrants sold in the
placement. No assurance can be given that the Financing will be consummated,
or, if consummated, that it will be consummated for the amounts or on terms
materially consistent
9
<PAGE>
with those currently contemplated and as a result that the number of
shares required to be issued and reserved to consummate the Financing
will not increase materially.
As presently contemplated, the consummation of the
acquisitions and the related Financing would require the issuance and
reservation for issuance of from 5,470,000 to 12,720,000 shares of Common
Stock in the aggregate; accordingly, the acquisitions could not be effected
without an authorization of additional shares of Common Stock. Such amounts
represent 162.9% and 378.9%, respectively, of the shares of Common Stock
outstanding as of June 30, 1997. No assurance can be given that the proposed
terms of the acquisitions and of the Financing will not be materially changed
and that as a result the number of additional shares to be issued and reserved
will not increase substantially. Shareholder approval of the proposed
Amendment to the Certificate of Incorporation therefore would have the effect
of approving the acquisitions.
The proposed acquisitions and the private placement are
expected to be consummated immediately following or shortly after the Special
Meeting of Shareholders if the proposal is approved. A condition to the
consummation of the private placement is the simultaneous closing of the
acquisitions. No assurance can be given that either the Sangen or the CorBec
acquisition will be consummated or that a financing of as much as $8,000,000
will be effected by the Company. Nonetheless, the foregoing amendment, if
approved, will allow the Company to pursue other opportunities that would
require it to issue shares or options or warrants to acquire shares of its
Common Stock in amounts greater than are now authorized.
BACKGROUND
From 1989 to 1996, Dr. Jacob had been Chief Operating
Officer of Magainin Pharmaceuticals Inc., ("Magainin"), a pharmaceutical
development company of which he was a co-founder, and with respect to which he
was responsible for setting its technical and operating strategy. From 1992
until he joined the Company in 1995, Dr. Williams had been Vice President of
Research for Magainin. Since 1996, Dr. Jacob has been an independent
consultant to various biotechnical companies.
In May 1996 Dr. Jacob agreed to provide, as an independent
contractor, advisory services to the Company with respect to technology the
Company presents to him for evaluation, provided that he would not be required
to expend more than 20 days in a year performing such services. In
consideration for his services, the Company granted him a ten year option to
purchase 15,000 shares of Common Stock at a price of $1.25 per share and
agreed to pay him a fee of $20,000 per year.
In November 1996, Dr. Jacob advised the Company that he had
reached an understanding with Dr. George Tuszynski and Allegheny University of
Health and Science ("AUHS") pursuant to which Dr. Jacob would form a company
(Sangen) for the purpose of acquiring a world-wide exclusive license to the
rights to the Thrombospondin Technology (see "-Business of Sangen") which AUHS
and Dr. Tuszynski were developing. In addition, Dr. Jacob advised the Company
that he had reached an understanding with two other co-inventors with respect
to which Sangen was to acquire their proprietary rights or a license to their
proprietary rights to another development-stage pharmaceutical technology (the
"Other Technology"). Discussions were then held between Dr. Williams and Dr.
Jacob as to Dr. Jacob's proposal that the Company enter into an agreement to
acquire Sangen subject to Sangen having the rights to acquire the foregoing
proprietary rights.
10
<PAGE>
At the Annual Meeting of the Board of Directors held on
December 19, 1996, the Board of Directors determined to change the focus of
the Company's operations from the discovery and development of new compounds
isolated and identified from plants to the acquisitions of proprietary rights
or licenses to commercially promising drug candidates and platform technology
under development. It was advised of the Company's negotiations to acquire a
license with respect to a purgative product under development (see "-Business
of the Company") and of Dr. Jacob's willingness to become the Chief Executive
Officer of the Company and his opportunity to cause the transfer of the rights
to the Thrombospondin Technology and the rights to another technology (the
"Other Technology") to the Company. Dr. Jacob discussed his proposal that the
Company acquire Sangen and, thereby, the rights to the Thrombospondin
Technology. In addition, the Board was presented with two other proposals from
other individuals as to opportunities the Company could invest in and pursue.
The Board chose to investigate all these proposals further, and authorized
Dr. Williams to proceed with negotiations with respect to the purgative
product license.
Following that meeting, discussions ensued between
Dr. Jacob and Sangen on one hand and Dr. Williams and the Company's
independent financial consultant on the other hand. A letter of understanding
was then negotiated between the Company, represented by Dr. Williams and the
financial consultant, and Sangen, represented by Dr. Jacob. The letter of
understanding provided that Sangen would merge with or be acquired by the
Company, Dr. Jacob would enter into a three-year employment agreement as Chief
Executive Officer and that the Company at the time of the Sangen acquisition
would acquire the rights to the Thrombospondin Technology for the consideration
set forth under "Proposed Acquisitions-Business of Sangen" and to the Other
Technology for a consideration to consist (subject to the achievement of
certain milestones) of up to 333,340 shares of Common Stock and warrants to
purchase up to 532,800 additional shares, cash royalties of 1% based on sales,
research funding commitments ranging from $900,000 to $1,200,000, reimbursement
of licensor's patent costs of up to $125,000 and the retention of the licensors
as consultants for a two-year term for consulting fees aggregating $125,000 per
year. In addition, the letter provided that Dr. Jacob would receive an option
to purchase the greater of 1,200,000 shares of Common Stock of the Company or
such number of shares as equals 7.5% of the Fully Diluted Capitalization as
defined under "Proposed Acquisitions--Summary." The option was to provide that
up to a maximum of 900,000 shares acquired by Dr. Jacob upon exercise of the
option may be repurchased by the Company for nominal consideration in the
event Dr. Jacobs has failed to fulfill his employment agreement obligations
with the Company by either leaving the employ of the Company without cause or
being terminated for "cause", as defined in the agreement, during the
three-year employment period. The Company's repurchase right, however, was to
expire at the rate of 25,000 shares for each month he was employed under the
Agreement. The shares in excess of 1,200,000 included in Dr. Jacob's option
were to vest in equal increments over a period of 36 months commencing on the
closing date of the proposed acquisitions. The letter also provided that
consummation of the transactions was to be subject to the execution of a
definitive agreement and consummation by the Company of an equity financing of
at least $7,500,000, with the understanding that the transaction will only
proceed if Sangen reaches an understanding with the holders of the foregoing
proprietary rights on the
11
<PAGE>
terms outlined in the letter. On January 3, 1997, the Company's Executive
Committee, after having completed its investigation of Dr. Jacob's proposal
that the Company acquire Sangen, and the other two proposals presented to the
Board of Directors at its December 19, 1996 meeting, chose to pursue
Dr. Jacob's proposal and forego the other two. They then reviewed the
proposed letter of intent with Dr. Jacob and approved it, and it was
executed and delivered.
On January 8, 1997, Allegheny Health Education and Research
Foundation executed a letter agreement with Sangen providing for the proposed
transfer of its proprietary technologies and related patent rights to the
Thrombospondin Technology for the consideration set forth under "-Business of
Sangen" which letter agreement provided that Sangen was to be formed by Dr.
Jacob for the purpose of acquiring control of the Thrombospondin Technology
and thereafter combine with the Company.
On January 20, 1997, Dr. Jacob advised the Company that he
had entered into the foregoing letter of intent with Allegheny Health
Education and Research Foundation and that he had entered into a letter of
intent with the holders of the Other Technology. On January 21, 1997 the
Company issued a press release advising of the execution of the letters of
intent as to the proposed acquisition of Sangen and the proposed employment of
Dr. Jacob as Chairman of the Board and Chief Executive Officer of the Company
and of Dr. Williams as President and Chief Operating Officer pursuant to long
term employment agreements which were to be effective upon consummation of the
acquisition.
In April 1997 Dr. Jacob, who had prior contacts over several
years with the Chief Executive Officer of CorBec, suggested to CorBec and
Panax that an acquisition by Panax of CorBec which was engaged in the
discovery and development of pharmaceuticals to modulate the immune system by
macrophage and mast cell functions would be in their mutual best interests.
Discussions then ensued between CorBec through its Chief Executive Officer and
the Company through Dr. Jacob, Dr. Williams and the Company's independent
financial consultant. On April 23, 1997 at a meeting of the Executive
Committee the proposed acquisition of CorBec was discussed and the Committee
authorized Dr. Williams to negotiate a letter of intent. On May 7, 1997, a
letter of intent was presented to the Executive Committee providing for the
acquisition of CorBec's business either by means of a stock acquisition or
merger with a subsidiary of the Company for the consideration set forth under
"-Business of CorBec". The Committee approved the letter and on that date the
letter was executed by the Company.
On the same day the Company was advised by Dr. Jacob that
Sangen had determined not to proceed with its proposed license arrangements
with the co-inventors with respect to the Other Technology. The Executive
Committee then met on the same day and determined that the Company was not
interested in seeking the rights to the Other Technology from the proposed
licensors but desired the Company to proceed with the proposed acquisition of
Sangen.
On May 8, 1997 the Company issued a press release disclosing
the execution of the letter of intent as to CorBec and Sangen's determination
not to proceed with the Other Technology license proposal.
12
<PAGE>
In view of the facts that (i) consideration to be paid with
respect to the Other Technology was no longer required, (ii) Dr. Jacob had
made a significant contribution to the Company's securing the letter of
understanding with CorBec and (iii) the material portion of the option to be
granted to Dr. Jacob related to his employment, the Executive Committee
determined not to require any reduction in the consideration to be paid to Dr.
Jacob for Sangen in connection with the acquisition as set forth in the
January 3, 1997 letter of intent.
Upon consummation of the proposed acquisitions, Dr. Williams
will enter into a three-year employment agreement, pursuant to which he will
serve as President and Chief Operating Officer of the Company. His new salary
will be $200,000 for the first year, as compared to $185,000 under his
existing agreement, with the annual salary for the following year to be
determined by the Board of Directors but to be adjusted to reflect at least
increases in the Consumer Price Index. Dr. Williams will also be entitled to
an annual bonus pursuant to the new agreement, as determined by the Board of
Directors, with the bonus for the first year to be no less than $34,000. If
Dr. Williams is terminated without "cause" under his new agreement, he will be
entitled to one, one and one-half or two years of his then-current annual
salary if he is so terminated in the first, second or third year of the
agreement, respectively, and all options held by him will become immediately
exercisable. Under his existing agreement, if terminated without cause, he is
entitled to salary and benefits for a period ending on the earlier of the end
of the term of the agreement or four months from the date of the notice of
termination.
The acquisition agreements are currently in the final stages
of negotiation. The terms of the Sangen Acquisition Agreement and the CorBec
Acquisition Agreement described herein are not final, and the final terms of
such acquisitions may be materially different from those described. The terms
of the proposed acquisitions will not be subject to further shareholder review
and approval.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Company believes that acquisitions of the proprietary
rights to the drugs under development by CorBec and under the proposed license
for the Thrombospondin Technology will materially enhance the Company's
efforts to achieve commercial success in its recently adopted business goal to
seek and acquire or license the proprietary rights to develop commercially
promising pharmaceutical drugs and technology under development. The original
focus of the Company in 1993 was the discovery and development of new
pharmaceutical compounds identified and isolated from plants located
principally in the Commonwealth of Independent States. The Company felt that
in order to secure adequate financing to allow for the satisfactory growth
and development of the Company, it would need to acquire and develop later stage
pharmaceutical prospects. The Board of Directors believe that the drugs under
development by CorBec and under the license to the Thrombospondin Technology
present an opportunity to achieve commercial success in a shorter time period.
The ownership of such rights is also expected to enhance the perception of the
Company as a meaningful pharmaceutical development company and thereby
13
<PAGE>
help attract both financing opportunities and move promising drugs under
development for acquisition or licensing.
.
The aggregate consideration to be paid for the Sangen and
CorBec acquisitions was determined by arms-length negotiations, in the case of
Sangen, between the Company and Dr. Jacob, the sole Sangen shareholder and an
independent consultant to the Company and, in the case of CorBec, between the
Company and the management and principal shareholders of CorBec, none of whom
is affiliated with the Company, Sangen, or Dr. Jacobs.
In its determination, the Board also noted that a
substantial portion of the consideration to be paid is in the form of options
and that the contingent consideration of cash and stock issuances is dependent
upon the achievement of certain milestones which if achieved should contribute
value to the Company in excess of the amount paid. The Board also believes
that securing the long term services under an employment agreement of Dr.
Jacob who has a background and record in the development of pharmaceutical
products will be of material benefit to the Company.
The Board, however, also noted that the issuances of the
securities to effect the acquisitions and achieve the Financing will
materially dilute the equity interests of the current shareholders, that the
Company will be required to make material cash payments and incur substantial
expenditures to effect the acquisitions and to attempt to develop the drugs,
and that there is no assurance that any of the drugs under development or to
be developed will be successfully developed or, if successfully developed,
will prove commercially profitable for the Company.
Furthermore, it is reasonable to expect that developmental
efforts will require the Company to seek additional funding or
collaborative arrangements with other companies for the services and
facilities needed to complete the development and to market the drug or drugs
developed. No assurance can be given that such funding or collaborative
arrangements can be successfully consummated on terms reasonable to the
Company.
INTERESTS OF CERTAIN PERSONS WITH RESPECT TO THE PROPOSED ACQUISITIONS
For his services in connection with originating and
negotiating the Sangen transaction, and the purgative product license (see
"-Business of the Company"), Dr. Williams was granted in January 1997 under
the 1993 Stock Option Plan a ten-year option to purchase 500,000 shares of
Common Stock or, if greater, such number of shares as equals 5% of the Fully
Diluted Capitalization of the Company at the time of the consummation of the
proposed acquisitions. The exercise price of the option as to the first
500,000 shares is $.61 per share and as to the balance of the shares, if any,
will be the fair market value of Common Stock on the date of the consummation
of the proposed acquisitions.
14
<PAGE>
Dr. Jacob, who had been engaged by the Company since May
1996 as a consultant, received from the Company in connection with such
engagement a ten-year option to purchase 15,000 shares of Common Stock under
the Company's Common Stock Option Plan at a price of $1.25 per share and a fee
of $25,000 per year. Pursuant to the terms of the proposed Sangen Acquisition
Agreement, Dr. Jacob's proposed employment agreement and related agreements,
Dr. Jacob is to receive, in consideration for his sale to the Company of the
outstanding capital stock of Sangen, a warrant to purchase 1,200,000 shares of
Common Stock and, if on the closing date of the acquisition 1,200,000 shares
is less than 7 1/2% of the Fully Diluted Capitalization of the Company, an
option to purchase such number of shares of Panax Common Stock as is equal to
the difference between 1,200,000 shares and 7 1/2% of the Fully Diluted
Capitalization of the Company. The exercise price of the warrant as to
1,200,000 shares is $.61 per share and of the option as to additional shares
is to be the fair market value of the Common Stock on the Acquisition Date.
The proposed Sangen Acquisition Agreement provides that upon
consummation of the proposed acquisition, the Company will enter into a three-
year employment agreement with Dr. Jacob under which he will serve as Chairman
of the Board and Chief Executive Officer of the Company at an annual base
salary of $225,000 for the first year with annual increases as determined by
the Board of Directors for subsequent years; the increases are to reflect no
less than the increase in the Consumer Price Index. In addition, Dr. Jacob
will receive an annual bonus, as declared by the Board of Directors, with the
bonus for the first year to be no less than $56,250.
Upon consummation of the Sangen acquisition, the Company and
Dr. Williams will enter into a three-year employment agreement, pursuant to
which he will serve as President and Chief Operating Officer of the Company at
an annual base salary of $200,000 for the first year, with annual increases as
determined by the Board of Directors for subsequent years; the increases are
to reflect no less than the increase in the Consumer Price Index. In addition,
Dr. Williams will receive an annual bonus, as declared by the Board of
Directors, with the bonus for the first year to be no less than $34,000.
THE PROPOSED ACQUISITION AGREEMENTS
The Company is in the final stages of negotiating an
agreement with Sangen to acquire the outstanding shares of such company and an
Agreement and Plan of Organization with CorBec, pursuant to which CorBec will,
by merger, become a wholly-owned subsidiary of the Company. Sangen and CorBec
are each privately held development stage pharmaceutical companies. Each of
the Sangen Acquisition Agreement and the CorBec Acquisition Agreement is based
on an executed letter of intent and will be subject to the satisfaction of a
number of conditions as set forth below.
Proposed CorBec Acquisition Agreement. Pursuant to the
proposed CorBec Acquisition Agreement, CorBec will become a wholly-owned
subsidiary of Panax by merging with a
15
<PAGE>
subsidiary of Panax (the "Acquisition Subsidiary"). CorBec will be the survivor
of such merger. At the effective time of the merger, which is to be concurrent
with the consummation of a financing by Panax of at least $8,000,000, all of
the outstanding Common Stock of CorBec will be converted into the right to
receive an aggregate of $750,000 in cash and an aggregate of 750,000 shares of
Common Stock of Panax. See "--Summary" for a more complete description of all
consideration, contingent and otherwise, payable in connection with the
proposed CorBec Acquisition Agreement.
The obligations of each party to complete the transactions
contemplated by the proposed merger will be conditioned upon (i) the
acquisition of Sangen by Panax; (ii) the absence of legal proceedings
prohibiting the transactions; (iii) the consummation by Panax of a financing
in the minimum aggregate amount of $8,000,000; (iv) the inclusion for
quotation on Nasdaq, subject to official notice of issuance, of the shares of
Common Stock of Panax to be issued to the sellers upon consummation of the
merger; and (v) the execution of a registration rights agreement by the
parties giving the CorBec shareholders rights to register at the Company's
expense under the Securities Act of 1933 the Company's Common Stock received
or to be received by them upon exercise of options.
In addition, Panax's obligation to complete the transactions
is conditioned upon (i) CorBec having performed all of its obligations under
the proposed CorBec Acquisition Agreement; (ii) the accuracy of CorBec's
representations and warranties; (iii) the delivery by CorBec of certain
certificates, consents and approvals; (iv) the delivery of an opinion of
counsel to CorBec, as more fully described below; (v) the conversion of all
outstanding preferred stock of CorBec into Common Stock of CorBec and the
exercise of all options to purchase Common Stock of CorBec thereof prior to
consummation of the merger; (vi) the resignation of certain officers and
directors of CorBec as requested by Panax; and (vii) the absence of material
litigation against CorBec not previously disclosed.
The obligations of CorBec and its stockholders to complete
the transactions also will be conditioned upon (i) Panax having performed all
of its obligations under the proposed CorBec Acquisition Agreement; (ii) the
accuracy of Panax's representations and warranties; (iii) the delivery by
Panax and the Acquisition Subsidiary of certain certificates; (iv) the
delivery of an opinion of counsel to Panax, as more fully described below; (v)
the absence of material litigation against Panax or Sangen not previously
disclosed; and (vi) the payment by Panax of $150,000 under the ALW license.
The proposed CorBec Acquisition Agreement will be terminable
(a) by mutual consent of Panax and CorBec; (b) by Panax or CorBec upon notice
to the other on the closing date of the proposed acquisition that, as of such
closing date, a condition precedent to the obligations of such party has not
been performed or waived; or (c) by Panax or CorBec, upon notice to the other,
if the proposed acquisition shall not have occurred on or prior to October 31,
1997.
Pursuant to the proposed CorBec Acquisition Agreement, the
holders of 70% of the
16
<PAGE>
outstanding shares of CorBec (the "Principal CorBec Stockholders") are to
indemnify Panax and CorBec (as a subsidiary of Panax) for all losses in excess
of $50,000 in the aggregate resulting from any breach of representation or
warranty by CorBec or any such stockholder or any failure by CorBec or any
such stockholder to perform any covenant or obligation of CorBec or any such
stockholder under the agreement and from any claims, actions, judgments, costs
and expenses incident to the foregoing, and Panax agrees to indemnify the
Principal CorBec Stockholders for their losses in excess of $50,000 in the
aggregate resulting from any breach of representation or warranty by Panax or
any failure by Panax to perform any covenant or obligation of Panax under the
agreement and from any claims, actions, judgments, costs and expenses incident
to the foregoing.
The maximum aggregate liability of the Principal CorBec
Stockholders to Panax, and of Panax to the Principal CorBec Stockholders, is
not to exceed the sum of (x) $750,000 (the cash payable to such stockholders
by Panax as consideration for the merger) plus (y) 70% of the fair market
value of the shares delivered to such stockholders as consideration for the
merger.
Proposed Sangen Acquisition Agreement. Pursuant to the
proposed Sangen Acquisition Agreement, Panax will purchase all of the
outstanding stock of Sangen from Dr. Jacob. At the effective time of the
acquisition, which is to be concurrent with the consummation of a financing by
Panax of at least $8,000,000, Panax is to deliver to Dr. Jacob a Common Stock
Purchase Warrant to purchase 1,200,000 shares of Common Stock of Panax at $.61
per share and, if applicable, Panax will issue to Dr. Jacob options to
purchase such number of shares of Common Stock which is equal to the
difference between 1,200,000 shares of Common Stock and 7 1/2 % of the Fully
Diluted Capitalization of the Company. See "-Summary" for a more complete
description of all consideration, contingent and otherwise, payable in
connection with the proposed Sangen Acquisition Agreement.
The obligations of each party to complete the transactions
contemplated by the merger will be conditioned upon (i) the consummation by
Panax of a financing in the minimum aggregate amount of $8,000,000; (ii) the
absence of legal proceedings prohibiting the transactions; and (iii) the
completion of all proceedings contemplated in connection with the closing of
the acquisition under the proposed Sangen Acquisition Agreement.
The obligations of Panax to complete the transactions
contemplated by the merger will also be conditioned upon (i) the delivery by
Dr. Jacob of certain certificates, consents and approvals; (ii) the absence of
any material adverse change in the assets, liabilities or other condition of
Sangen; (iii) the accuracy of Dr. Jacob's representations and warranties; (iv)
Dr. Jacob having performed all of his obligations under the proposed Sangen
Acquisition Agreement; and (v) the delivery by Sangen of duly executed copies
of (x) documents transferring to Panax AUHS's rights to the Thrombospondin
Technology, (y) Dr. Jacob's stock certificates evidencing transfer of his
ownership of Sangen to Panax, and (z) Dr. Jacob's employment agreement with
Panax.
17
<PAGE>
The obligations of Dr. Jacob and Sangen to complete the
transactions contemplated by the proposed Sangen Acquisition Agreement will be
also conditioned upon (i) the accuracy of the representations and warranties
of Panax; (ii) the performance by Panax of its obligations under the proposed
Sangen Acquisition Agreement; and (iii) the absence of any material adverse
change in the assets, liabilities or other condition of Panax.
The proposed Sangen Acquisition Agreement will be terminable
(a) by mutual consent of Panax and Sangen; (b) by Panax or Sangen upon notice
to the other on the closing date of the proposed acquisition that, as of such
closing date, a condition precedent to the obligations of such party has not
been performed or waived; or (c) by Panax or Sangen, upon notice to the other,
if the proposed acquisition shall not have occurred on or prior to October 31,
1997.
Pursuant to the proposed Sangen Acquisition Agreement, Dr.
Jacob agrees to indemnify Panax for all losses in excess of $50,000 resulting
from any breach of representation or warranty by Sangen or Dr. Jacob, and
Panax agrees to indemnify Dr. Jacob for all losses in excess of $50,000
resulting from any breach of representation or warranty by Panax under the
agreement.
The opinions of counsel to Panax and its Acquisition
Subsidiary and to CorBec and Sangen to be delivered in connection with the
proposed acquisition agreements are to be as to standard matters including
with respect to such counsel's client: its due incorporation and
authorization; its power and authority to execute and deliver the relevant
agreements; its due authorization of the transactions and the valid and
binding nature of the agreements; its consummation of the transactions not
violating applicable laws or resulting in defaults; its general compliance,
with applicable laws and the performance of obligations; and the absence of
material undisclosed litigation. In addition, counsel to the Company is to
render an opinion with respect to Panax's qualification and standing in Russia
and the due authorization, valid issuance and non-assessability of the shares
issued by Panax in connection with the transactions contemplated by the
proposed acquisitions. Counsel to CorBec and Sangen are also to render
opinions as to the authorized capitalization and outstanding capital stock of
each thereof, the due authorization, valid issuance and non-assessability of
such capital stock; the lack of outstanding options or rights to purchase, or
commitments by such company to issue shares of capital stock; and the lack of
ownership by each such Company of any equity interest in any other business
entity.
BUSINESS OF THE COMPANY
The Company, organized in 1993, originally focused on the
discovery and development of new pharmaceutical compounds isolated and
identified from plants. To that end, the Company developed, and continues to
maintain, an affiliation with a natural product isolation and synthetic
chemistry laboratory at the Komarov Botanical Institute of the Russian Academy
of Sciences in St. Petersburg, Russia (the "Komarov Institute"). In early
1996, Panax modified
18
<PAGE>
its strategy, reducing its natural product discovery activities and
redirecting its principal efforts to expanding its pipeline of commercially
viable pharmaceutical products by licensing or acquiring specifically-targeted
products being developed for the treatment of certain diseases. In late 1996,
Panax began the transition of the focus of its core chemistry group into a
fee-for-services business. Revenues from such activity since then have been
minimal. The activities of the Company during 1996 are discussed further under
"Chemical Libraries and Chemical Services" below.
At least for the near term, the Company intends to maintain
its affiliation with the Komarov Institute and continue, although on a more
limited basis if the acquisitions of Sangen and CorBec are consummated, its
natural product discovery activities. The Company believes that the agreement
with the Komarov Institute permits a more limited participation at the option
of the Company.
The Company in February 1997 entered into an exclusive
world-wide license agreement with ALW Partnership ("ALW"), the partners of
which are Craig Aronchick, M.D., William H. Lipshutz, M.D., and
Scott H. Wright, M.D. to manufacture, have manufactured, use, sell and
sub-license in the field of colonic purgatives or laxatives a solid dosage
form of sodium phosphate for use as a colonic purgative or laxative (the
"Purgative Product") along with ALW's body of proprietary, technology
information, trade secrets and know-how relating thereto. Panax's rights under
the ALW License automatically extend to improvements developed by Panax and/or
ALW which are derivative of the Purgative Product. Panax also has a right of
first refusal with respect to any new products developed by ALW or a principal
thereof which relate to the field of use of the Product but which are not
derivative of the Purgative Product.
A Phase IIb clinical study was completed by Dr. Aronchick,
Head of the Endoscopy Unit at Pennsylvania Hospital and Associate Professor of
Medicine at Jefferson Medical College, and his colleagues. Dr. Aronchick
serves as a consultant to the Company and is a member of its Scientific
Advisory Board. In the study, 305 patients undergoing colonoscopy were
randomized to one of three purgative methods (Colyte, Fleet's Phospho-soda or
sodium phosphate tablets). All three preparations in this study showed equal
efficacy with respect to the quality of bowel surface cleansing. Forty-six
percent (46%) of patients taking liquid Fleets Phospho-soda and over 14% of
patients taking liquid Colyte found the taste unacceptable. Six percent (6%)
of the patients taking liquid Fleet's Phospho-soda and liquid Colyte
experienced moderate to severe vomiting as compared to none taking the
Purgative Product. All patients taking the Company's sodium phosphate tablets
found the pills to have no taste or a pleasant taste. Almost all patients who
took the Purgative Product during this study, and who had previously had
liquid Colyte or liquid Fleet's Phospho-soda for prior colonoscopies,
preferred the tablets for future colonoscopies. The Company intends to submit
an IND to the FDA and expand on these clinical findings by conducting a
multi-center Phase III pivotal clinical trial. It is anticipated, although
there can be no assurance, that this confirmatory clinical trial could begin
in the fourth quarter of 1997 and be completed in 1998.
19
<PAGE>
A U.S. patent as to the Purgative Product (covering any
solid form of administration of sodium phosphate for use as a colonic
cleansing agent or as a laxative) was issued on April 1, 1997. Patents on the
Purgative Product are pending in Europe, Japan, and Canada. To expand its
product lines under the ALW License, Panax recently filed a patent application
covering alternative salt mixtures which may be utilized in place of the
sodium phosphate formulation used in the Purgative Product.
Panax paid ALW $100,000 upon execution of the ALW License in
February 1997 and is obligated to pay ALW an additional $150,000 subject to
and upon consummation of a $2,000,000 financing (which will occur in
connection with the Financing if successfully concluded). Pursuant to the ALW
License and three-year consulting agreements with the partners of ALW,
additional cash payments, royalty payments and options to purchase shares of
Common Stock are to be made as follows: (i) $250,000 upon the Company's
receipt of an NDA with the FDA of any product under the ALW License; (ii)
royalties of: (a) 2% on the first $5,000,000 in net sales of the Purgative
Product during each calendar year; (b) 4% on net sales of the Purgative
Product above $5,000,000 and up to $10,000,000 during each calendar year; and
(c) 6% on net sales of the Purgative Product above $10,000,000 during each
calendar year, provided that after February 2003, in order to maintain
exclusivity of the licensed rights, the Company must make minimum annual
payments to the ALW of $100,000 and provided further that royalties shall be
decreased or eliminated in accordance with the ALW License if the patent on
the Purgative Product expires or is found to be invalid or unenforceable; and
(iii) options exercisable at $.61 per share to purchase an aggregate of (a)
250,000 shares during the period commencing on the date of the consummation of
the $2,000,000 financing and ending February 14, 2007; (b) 250,000 shares
during the period commencing with the first sale in the United States of any
product under the ALW License and ending the later of February 14, 2007 or the
earlier of the third anniversary of the first such sale or February 14, 2010
and (c) 250,000 shares during the period which commences with the first day
following the first fiscal year during which net sales of all products under
the ALW License exceeds $20,000,000 and ends on the later of (i) February 14,
2007 or the earlier of the third anniversary of such first sale or February
14, 2010. The Company is also to fund at least $1,000,000 of additional
research over the course of two years commencing with the consummation of the
financing.
The options are to be subject to the 1997 Consultant Stock
Option Plan. If the Plan is not approved, the options will remain outstanding.
The Company is obligated to register under the Securities Act of 1933, as
amended, the shares subject to the options.
The ALW License is terminable by ALW if the Company (i) has
failed to conclude the $2,000,000 financing by November 14, 1997 (ii) fails to
commit at least $1,000,000 of funding to the development of the Purgative
Product for the first two years following consummation of the $2,000,000
financing, (iii) has not paid royalties by February 2003 of at least $100,000
per year whether or not sales have occurred, or (iv) if no commercial sale of
the product or "improvement" as defined in the ALW License has occurred by
February 2005.
20
<PAGE>
No assurances can be given that the Company will have
sufficient funding to permit the full development of the Purgative Product,
that the Purgative Product will be fully developed, that the required
approvals from the FDA and other regulatory bodies will be obtained or that if
developed and approvals are obtained that the Product will prove commercially
profitable for the Company or that the issued patents or those that are
obtained will provide the Company with adequate protection. FDA regulatory
matters in connection with the Purgative Product have not been reviewed or
opined upon on behalf of Panax by independent patent or FDA regulatory
counsel.
Chemical Libraries and Chemical Services. Panax historically
has been engaged in the discovery and development of new pharmaceutical
compounds identified in and isolated from plants. Panax had taken an
ethnobotanical approach to the study of plants which is supplemented by
natural product chemistry and synthetic medicinal chemistry.
Many of the plants targeted by Panax are indigenous to
Russia and other states of the Commonwealth of Independent States. Panax's
drug discovery efforts have been and continue to be fostered by an exclusive
long term agreement with the world renowned Komarov Institute.
Panax has laboratory space and facilities for natural
product isolation and synthetic chemistry at its Chemical Services Division at
the Komarov Institute. Routinely, as many as 20 chemists work on chemistry
projects for Panax. Costs of this program since 1994 have been less than
$250,000 per year which includes payments to the Komarov Institute and Russian
personnel, and the costs of materials and leased facilities associated with
the medicinal chemistry program.
In late calendar 1996, Panax began to transition its
Chemical Services Division to a fee-for-services business. The group has
collected a library of over 30,000 pure compounds and numerous natural
products to which Panax has certain rights and has implemented a sales
strategy which includes providing third parties access to the library and
custom chemistry. The program was established to generate revenues and provide
low cost medicinal, synthetic and combinatorial chemistry, as well as natural
product isolation work, in support of future discovery activities around new
receptors or novel research programs brought to Panax from external sources.
The Company intends to evaluate the Chemical Services Division on a regular
basis to determine whether to enhance, adjust or terminate the program.
Revenues from these activities have been minimal to date.
Legal Proceedings. The Company is not a party to any
material legal proceedings. The Company, however, has been advised by Sangen
of a possible claim for damages by the two individuals, owners of the
proprietary rights to the Other Technology who have asserted that Sangen
breached an obligation to enter into an agreement with them to acquire the
Other Technology. Sangen has advised the Company that it believes that any
such claim is without merit.
21
<PAGE>
Facilities. The Company's offices which are located at 425
Park Avenue, 27th floor, New York, New York, 10022 are occupied pursuant to a
sublease expiring April 2000 which provides for an annual rent of $193,500,
plus insurance, taxes and maintenance. As soon as practicable following the
closing of the proposed acquisitions, the Company plans to relocate to the
Philadelphia, Pennsylvania area. The Company has hired a consultant, Amercom
Funding Ltd., to assist the Company in being released from its obligations
under its current sublease. See "Executive Compensation-General."
The Company also leases laboratory space and facilities at
its Chemical Services Division at the Komarov Institute in St. Petersburg,
Russia which makes available chemists to perform services on the Company's
medicinal, synthetic and combinatorial chemistry as well as its natural
product isolation work.
Employees. As of June 30, 1997, Panax employed three
persons, two of whom are executive officers, and has through the Komarov
approximately 20 scientists and technicians working on chemical extraction and
plant isolation activities in St. Petersburg, Russia.
BUSINESS OF CORBEC
Founded in 1993 by Hillman Medical Ventures to discover and
develop pharmaceuticals designed to modulate the immune system by manipulating
macrophage and mast cell function, CorBec has focused on developing treatments
in three therapeutic areas: autoimmune disease, serious infections and
asthma/allergy. The therapeutic agents which have traditionally constituted
the mainstay for the treatment of autoimmune disorders are glucocorticoid
hormones (typically prednisone), which inhibit macrophage Fc receptor
expression but which must be administered in high dosages and/or for extended
periods of time and which are accompanied by substantial side effects,
including exacerbation of diabetes, hypertension, electrolyte imbalance,
weight gain, osteoporosis and increased susceptibility to infection. In the
case of idiopathic thrombocytopenia purpura (ITP), an autoimmune disease from
which over 100,000 patients in the United States suffer, most patients relapse
after glucocorticoid treatment is tapered, and in a majority of such cases,
surgical removal of the spleen is ultimately required. The CorBec technology,
developed under the guidance of Alan D. Schreiber, M.D., Professor of Medicine
and Assistant Dean for Research at the University of Pennsylvania School of
Medicine, consists of steriod derivatives which do not have the toxic
side effects of glucocorticoid hormone treatments and which also do not have
the potentially undesirable sex-organ hormonal effects normally associated
with traditional progesterone and other sex hormone treatments.
The most advanced product in the family of compounds
comprising the CorBec technology is CBP-1011, a potential ITP treatment.
CorBec also is in an early stage of development of CBP-2011/2012, a second
generation compound of CBP-1011. CBP-1011 is an orally administered steroid
analog, demonstrating steroid-like properties but without the sideeffect
profile commonly associated with steroids. Clinical testing to date suggests
that CBP-1011 is safe and effective in the treatment of patients with ITP.
After a meeting with the FDA in September 1996, CorBec initiated Phase III
pivotal trials at 15 sites in the United States. There can be no assurance,
however, that the Phase III clinical trials of CBP-1011 will be successful,
that, even if such trials are successful, CBP-1011 will be approved by the
FDA, or that, even if it
22
<PAGE>
is so approved, the Company will be able obtain and maintain orphan drug
protection with respect to the compound and successfully market it.
The development activities are being performed under a
research agreement with the University of Pennsylvania, which has granted
CorBec pursuant to a license agreement the exclusive world-wide rights to
make, have made, use and sell the technology and products developed subject to
the right of non-profit organizations to use the products solely for education
or research purposes. The license with respect to the licensed compounds
comprising the CorBec Technology (the "CorBec License") may be terminated by
the licensor if the Company has not, by June 1998, (i) submitted a product to
the FDA for approval, (ii) offered a product for sale, either directly or
through a sublicensee, or (iii) made continuing reasonable efforts to develop
a product for submission for FDA approval or for sale. The CorBec License may
also be terminated if the Company fails to make minimum annual royalty
payments of $50,000 during 1998 and 1999 and $100,000 thereafter. Patent
matters in connection with the CorBec Technology have not been reviewed or
opined upon on behalf of Panax by independent patent counsel. FDA regulatory
matters in connection with the CorBec Technology have not been reviewed or
opined on behalf of Panax independent FDA regulatory counsel.
CorBec does not have any employees or facilities. Its
managerial and administrative activities are performed by part-time
consultants. Its executive offices are maintained under a fee arrangement
with, and in the offices of, Hillman Medical Ventures in West Conshocken,
Pennsylvania.
The Company has been advised by CorBec that CorBec is not a
party to any material legal proceeding.
BUSINESS OF SANGEN
Sangen was incorporated by Dr. Jacob, its sole shareholder,
executive officer and director, in January 1997. Its sole asset is its right
to acquire a world-wide exclusive license to develop, manufacture, sell, have
manufactured or sub-license a certain technology for inhibition and prevention
of tumor metastasis. Dr. George Tuszynski, Professor of Surgery, Medicine and
Pathology at AUHS, has found a specific amino acid sequence in Thrombospondin
("TSP-1") that is believed to be responsible for promoting the effects of this
molecule on tumor cell adhesion and metastasis. From this discovery, Dr.
Tuszynski invented a series of peptide molecules, and a patent for the
molecules has been allowed in the United States. These molecules significantly
reduced metastasis of a mouse tumor cell line and a human tumor cell line when
injected into athymic mice. Dr. Tuszynski has also developed a murine
polyclonal antibody against the TSP-1 receptor which was also shown to prevent
or significantly reduce metastasis in athymic mice. The Company anticipates
that a patent application directed to a novel sequence of the thrombospondin
receptor and monoclonal antibodies directed to the same will be filed in the
near future. The peptide molecules, the polyclonal antibody and the TSP-1
receptor are referred to herein as the "Thrombospondin Technology."
23
<PAGE>
Tumor metastasis is a multi-step process involving cell
adhesion, migration, invasion, colonization of distant organs and
angiogenesis. TSP-1 is a large glycoprotein secreted by platelets and
synthesized by many cell types, including endothelial and tumor cells. TSP-1
has been implicated as a promoter of tumor progression and angiogenesis. A
number of studies have demonstrated that TSP-1 can bind to multiple surface
receptors on the same cell or bind to different receptors on different cells,
including carcinoma cells. The Company believes that blocking the TSP-1
receptor may represent a novel approach for the treatment and prevention of
metastasis by uniquely acting on certain steps of the metastatic cascade.
Dr. Tuszynski has also identified a hexapeptide structure
which appears to prevent the spread of human tumors in animals by blocking the
TSP-1 receptor. Preclinical testing is to be conducted to determine if the
pharmacokinetics and safety profile warrant the introduction of this molecule
into humans. If such studies support its introduction, human clinical testing
could begin in late 1998.
No assurance can be given that further studies will indicate
the use of the Thrombospondin Technology will prove to be successful in the
inhibition of metastases, that if the acquisition is effective the Company
will be successful in the development of commercially or profitable
pharmaceutical products from such technology or that the funds or
collaboration arrangement required for such development will be available to
the Company on reasonable terms. Patent matters in connection with the
Thrombospondin Technology have not been reviewed or opined upon on behalf of
Panax by independent patent counsel. FDA regulatory matters in connection with
the Thrombospondin Technology have not been reviewed or opined upon on behalf
of Panax by independent FDA regulatory counsel.
The Company has been advised by Sangen of a possible claim
against Sangen for damages by two individuals who have asserted that Sangen
breached an obligation to enter into an agreement with them to acquire a
license to the Other Technology. See "--Background" and "-Business of the
Company - Legal Proceedings". Sangen has advised the Company that it believes
that any such claim is without merit.
PROPOSED FINANCING
The proposed Financing which is a condition to the closing
of the CorBec and Sangen acquisitions and which, if effected in an amount of
at least $2,000,000, will also satisfy one of the conditions for the
continuation of the ALW License, is currently being attempted in the form of a
private offering exempt from registration under the Securities Act of 1933, as
amended (the "Act"), by virtue of Rule 506 under Regulation D of the Act. The
offering is in the form of Units consisting of shares of Common Stock and five
year warrants to purchase additional shares of Common Stock, with each Unit
presently intended to consist of 125,000 shares and warrants to purchase
25,000 additional shares. It is also presently intended that the offering is
to produce gross proceeds of up to $12,000,000 (exclusive of an option to
increase the offering).
24
<PAGE>
The offering also contemplates the issuance of warrants currently which are to
be exercisable at any time after issuance up to a date five years from the
final closing date of the Financing at an exercise price of $2.60 per share,
subject to anti-dilution adjustments (the "Warrant Exercise Price"). In
addition, the warrants are subject to redemption by the Company for $.01 per
warrant, upon 30 days written notice, if the average of the last sales prices
of the Common Stock for a period of ten consecutive trading days exceeds 200%,
250%, 300% and 350% of the Warrant Exercise Price in the second, third, fourth
and fifth years after the final closing date of the Financing, respectively.
In addition, if the offering is successfully consummated, the Placement Agents
have an option to place up to an additional 1,000,000 shares of Common Stock
and warrants to purchase up to an additional 200,000 shares of Common Stock
and are to receive five year Warrants to purchase such number of shares of
Common Stock as equals 10% (12.5% if the maximum number of Units is sold) of
the sum of shares sold and the shares reserved for issuance with respect to
the warrants sold in the placement.
No assurance can be given that the Financing or any other
financing will be successfully consummated or, if successfully consummated,
that it will be consummated on the foregoing terms or that the Company will
not be required to issue and reserve for issuance a materially larger number
of shares of Common Stock than discussed above. Furthermore, it is highly
likely that even if the Financing is successfully consummated and that
condition to the acquisitions is satisfied, the Company will require
additional financing to adequately fund the proposed development of the
technology and drug candidates which are to be acquired with the CorBec and
Sangen acquisitions.
POSSIBLE CHANGE OF CONTROL.
If the CorBec and Sangen acquisitions are effected, there
will be changes in the Board of Directors and officers of the Company. The
Board currently consists of five members - Dr. Taffy J. Williams, Chairman and
Chief Executive Officer; Dr. Tanya Akimova, Vice President, Research
Administration; Mr. J.R. LeShufy, Vice President, Investor Relations, Mr.
Bernard Nagelberg, Vice President, Finances and Dr. Leonid Shpilenya, Vice
President, Russia Operations. The Board was reduced in February 1997 from
eight members as a result of the resignations in February 1997 of Dr. Armen L.
Takhtajan, Chairman of the Board and Mr. Norman Eisner, Vice President, Chief
Financial Officer, Treasurer and Secretary from their positions as officers
and directors and Mr. David Zaretsky from his position as director of the
Company.
In view of their recognition that the Board of Directors
should reflect the principal focus of the Company's efforts and at the same
time not be unwieldy because of its size, Dr. Akimova who is involved in
Company's activities involving securing low cost medicinal chemistry service
contracts, and Dr. Shpilenya, who is involved in the natural product discovery
activities, have advised the Company that if the acquisitions are successfully
consummated they will resign as
25
<PAGE>
directors of the Company. Mr. Bernard Nagelberg who has no business experience
in the pharmaceutical drug development business other than through his
association with the Company has advised the Company that for the same reasons
he would resign as an officer and director if the acquisitions were effected.
Dr. Jacob will then be appointed as Chairman of the Board and Chief Executive
Officer, Dr. Williams will remain as President and become Chief Operating
Officer, and Jerry Weisbach, Ph.D and Mr. Thomas Stagnaro will be appointed as
directors.
Dr. Jacob, age 48, the President and Chief Executive Officer
of Sangen, has been since June 1996 a consultant to various biotechnology
companies. From 1989 to 1996, Dr. Jacob, as a co-founder of Magainin
Pharmaceuticals Inc., was employed as Chief Operating Officer and was
responsible for setting Magainin's technical and operational strategy. From
1980 to 1988, Dr. Jacob was employed by SmithKline and French Laboratories
where he served as Worldwide Vice President and a member of SmithKline
Beacham's Corporate Management Committee. Dr. Jacob had responsibility for 500
physicians, scientists and other technical personnel and managed a budget of
$50 million per year. Under his leadership, 17 IND's were successfully
submitted and 4 NDA's were approved. Dr. Jacob received his medical degree
from the Medical College of Pennsylvania and his Ph.D. in molecular
pharmacology from the Temple University School of Medicine. He is an elected
member of Alpha Omega Alpha, the National Medical Honor Society. Dr. Jacob has
served on the Board of Directors of Endorex Pharmaceutical Corp., MacroMed
Corp. and Orasomal Technologies, Inc. He also serves on the Board of Directors
of AUHS where he is an Adjunct Professor.
Jerry Weisbach, Ph.D, age 63, is a former Vice President of
the Warner Lambert Company and President of its Pharmaceutical Research
Division, where, from 1979 to 1987, he was responsible for all pharmaceutical
research and development activities of that company. Prior to joining Warner
Lambert in 1979, Dr. Weisbach was employed at SmithKline and French
Laboratories from 1960 to 1979, where he was Vice President, Research from
1977 to 1979. From 1988 to 1994, he was Director of Technology Transfer at the
Rockefeller University. Currently, Dr. Weisbach is a member of the Board of
Directors at Neose Technologies, Cima Labs, Xytronics, Synthon, Foodex, Strong
Pharmaceuticals, Encore and Exponential Biotheques. He also consults in the
area of licensing and technology and serves on a number of scientific advisory
boards. Dr. Weisbach received his Ph.D. in Organic Chemistry from Harvard
University.
Mr. Stagnaro, age 54, has served as President and Chief
Executive Officer of 3-Dimensional Pharmaceuticals, Inc since 1995, where he
has been instrumental in securing financing and obtaining significant
corporate partnerships. Prior to that Mr. Stagnaro was, for more than six
years, the President and Chief Executive Officer of Univax Biologics where he
was responsible for numerous financings and successfully completed three
corporate partnerships. In 1995, under the direction of Mr. Stagnaro, Univax
was sold to NABI. Mr. Stagnaro also serves as Chairman of the Board of CARB
(Center for Advanced Research in Biotechnology) and is a member of the Board
of Directors of US Biomaterials and the Maryland Biotechnology Institute.
See "Executive Compensation-General" for information as
to the proposed employment
26
<PAGE>
agreements with Drs. Williams and Jacob.
27
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of Panax with respect
to the statements of operations for the years ended June 30, 1997 and June 30,
1996 and for the period July 1, 1993 (commencement of operations) through June
30, 1997 and with respect to the balance sheet data at June 30, 1997 have been
derived from the financial statements of Panax which have been audited by
Richard A. Eisner & Company, LLP, independent auditors whose report thereon
contains an explanatory paragraph regarding the Company's ability to continue
as a going concern and which appears elsewhere in this Proxy Statement. All of
the following information should be read in conjunction with such financial
statements and the notes thereto.
The following selected financial data with respect to the
statements of operations of CorBec for the years ended December 31, 1996 and
December 31, 1995 and for the period from inception (June 11, 1993) to
December 31, 1996 have been derived from the financial statements of CorBec
that have been audited by Arthur Andersen, LLP whose report thereon contains
an explanatory paragraph regarding the Company's ability to continue as a
going concern and which appears elsewhere in this Proxy Statement. The selected
financial data with respect to the statement of operations of CorBec for the
six months ended June 30, 1997 and June 30, 1996 and the period from inception
(June 11, 1993) to June 30,1997 and with respect to the balance sheet of
CorBec as of June 30, 1997 have been derived from unaudited financial
statements of CorBec, which appear elsewhere in this Proxy Statement and
which, in the opinion of CorBec, reflect all adjustments, consisting only of
normal recurring adjustments, necessary for fair presentation of such data.
Operating results of CorBec for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the full year
or any other period.
The financial information set forth below is qualified by
and should be read in conjunction with the financial statements of Panax and
of CorBec and the notes thereto included elsewhere in this Proxy Statement and
"Plan of Operations of Panax" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of CorBec."
28
<PAGE>
STATEMENT OF OPERATIONS DATA(1)
(In Thousands except share data)
Panax
<TABLE>
<CAPTION>
Years ended June 30, Period July 11, 1993
1996 1997 (Inception) through June 30, 1997
---- ---- ---------------------------------
<S> <C> <C> <C>
Research and development $ 644 $ 742 $ 1,908
General and administrative 812 1,011 2,431
Net loss 1,219 1,649 3,992
Net loss per share 0.38 0.51
Weighted average common
shares outstanding 3,231,038 3,259,640
</TABLE>
CorBec
<TABLE>
<CAPTION>
Years Ended Inception Six Months Ended Inception
December 31, (June 11, 1993) to June 30 (June 11, 1993) to
1995 1996 December 31, 1996 1996 1997 June 30, 1997
---- ---- ----------------- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Research and Development $441 $770 $1,690 $349 $273 $1,962
General and Administrative 64 147 334 96 72 405
Net loss 496 909 1,982 441 340 2,321
</TABLE>
Pro Forma (2) Year Ended June 30,
1997
-------------------
Research and development $1,800
General and administrative 1,790
Net Loss 3,477
Loss per share 0.43
Weighted average common
shares outstanding 8,134,540
BALANCE SHEET DATA
(in thousands)
June 30, 1997
------------------------------------
Panax CorBec Pro Forma (3)
Cash and cash equivalents $ 101 $335 $6,717
Investments to be held to maturity 1,075 -- 1,075
Total assets 1,785 347 8,259
Mandatory Redeemable Preferred
Stock -- 2,650 --
Shareholders' equity (deficit) 1,599 (2,303) 8,073
(1) Statement of operations and balance sheet data of Sangen are not
included since they were not material.
(2) Assumes acquisition of Sangen and CorBec will occur, and that they
had occurred on July 1, 1996 and includes the results of CorBec for
the twelve months ended
29
<PAGE>
June 30, 1997 based on the internal financial statements of the
management of CorBec for that period.
(3) Assumes acquisitions of Sangen and CorBec will occur, and that they
had occurred on June 30, 1997 and that the proposed related Financing
involving the issuance of 4,000,000 shares of Common Stock and Class
A Redeemable Common Stock Purchase warrants to purchase 800,000
additional shares of common stock had been effected on June 30, 1997
for gross proceeds of $8,000,000 (net proceeds of $6,980,000).
30
<PAGE>
PLAN OF OPERATIONS OF
PANAX PHARMACEUTICAL COMPANY LTD.
The following discussion of the financial condition and
results of operations of the Company should be read in conjunction with the
Financial Statements of the Company and Notes thereto appearing elsewhere in
this Proxy Statement.
OVERVIEW
Panax historically has been engaged in the discovery and
development of new pharmaceutical compounds identified in and isolated from
plants. The Company takes the ethnobotanical approach to the study of plants
which is supplemented by medical science and natural product chemistry. Many
of the plants targeted by the Company are indigenous to Russia and other
states of the Commonwealth of Independent States.
Commencing in late calendar 1996, Panax has sought out
opportunities to expand its product pipeline via licensing or acquisition of
drug candidates and platform technologies. The Company entered in: (i) January
1997 into a letter of intent to acquire Sangen, which was recently organized
to engage in the discovery and development of pharmaceutical products for the
treatment of cancer (Sangen's principal asset is its right to acquire an
exclusive worldwide license to the Thrombospondin Technology which as
indicated by early preclinical studies, may be useful in the prevention of
metastatic cancer including breast, lung, prostate, pancreas and squamous cell
cancer); (ii) February 1997 into an agreement granting the Company an
exclusive worldwide license to manufacture and sub-license a novel purgative
product being developed by the licensors for clearing the colon prior to
colonoscopy ("Purgative Product"); and (iii) May 1997 into a letter of intent
to acquire CorBec, which is engaged in the development of pharmaceuticals
designed to modulate the immune system by manipulating macrophage and mast
cell function.
Pursuant to the proposed acquisition agreements,
consummation of the acquisitions of Sangen and CorBec and of the license of
the Thrombospondin Technology are subject to several conditions, including the
execution and delivery of acquisition agreements and the consummation by the
Company of a financing of at least $8,000,000 by October 31, 1997. The license
agreement for the Purgative Product provides the licensor with the right to
terminate the agreement if the Company has not completed a financing of at
least $2,000,000 by November 14, 1997.
Pursuant to the proposed Sangen Acquisition Agreement and
related agreements, if consummated, Dr. Leonard S. Jacob, Sangen's sole
stockholder and Chief Executive Officer, who will become Chairman of the Board
and Chief Executive Officer of the Company under a long term employment
agreement, is to be issued a ten year Common Stock Purchase Warrant
31
<PAGE>
entitling him to purchase 1,200,000 shares of Common Stock and, if on the
closing date of the acquisition 1,200,000 shares is less than 7 1/2% of the
Fully Diluted Capitalization of the Company, an option, exercisable for 10
years, to purchase such number of shares of Panax Common Stock as is equal to
the difference between 1,200,000 shares and 7 1/2% of the Fully Diluted
Capitalization of the Company. Dr. Taffy J. Williams, Panax's President and
Chief Executive Officer, who will become President and Chief Operating Officer
of the Company following the acquisition, received in January 1997, an option
to purchase the greater of 500,000 shares of Common Stock or such number of
shares of Common Stock at the time of the acquisition as equals 5% of the
Fully Diluted Capitalization of the Company. The exercise price of Dr. Jacob's
warrant (up to 1,200,000 shares) and Dr. Williams' option (up to 500,000
shares) is $.61 per share. The exercise price of Dr. Jacob's option (in excess
of 1,200,000 shares) and Dr. Williams' option (in excess of 500,000 shares) is
the market price on the closing date of the proposed acquisition. "Fully
Diluted Capitalization" has the meaning set forth in the second paragraph of
"Proposed Acquisitions--Summary."
The Sangen acquisition will also involve the grant to Dr.
Tuszynski, the inventor of the Thrombospondin Technology, and AUHS of 125,000
shares and options to purchase an aggregate of 375,000 shares, of which
options for 250,000 shares will be exercisable upon achievement of specified
milestones in the development of a new drug candidate. In addition, Dr.
Tuszynski, and AUHS will be entitled to cash royalties based on net sales and
sub-license fees derived from the technology. The Company has agreed to fund
additional research in Dr. Tuszynski's laboratory in an amount ranging from
$150,000 (in the first year) to $1,350,000 (over seven years, inclusive). Dr.
Tuszynski is to be engaged as a consultant to the Company for a two year
period at a fee of $50,000 per year.
In consideration for the grant of a license to the Purgative
Product, the Company (i) is obligated to make certain payments based on
milestones, aggregating up to $500,000 based on the completion of a financing
and certain development milestones, of which $100,000 has been paid, (ii) has
issued options to purchase an aggregate of 750,000 shares of Common Stock at a
price of $0.61 per share, of which 250,000 shares are to be exercisable upon
consummation of a financing of $2,000,000 or more and 500,000 shares become
exercisable if certain developmental milestones are met and (iii) is required
to pay cash royalties of 2% of net sales of the related drug which percentage
will increase to 4% with respect to net sales between $5,000,000 and
$10,000,000 and to 6% as to net sales in excess of $10,000,000. The payment of
$100,000 is not refundable in the event a financing of at least $2,000,000 is
not completed by November 1997 and the licensor chooses to terminate the
license agreement.
The acquisition of CorBec, if consummated, will result in
the payment of $750,000 and the issuance of 750,000 shares of Common Stock of
the Company with provisions for additional cash payments and stock issuances
based upon the achievement of certain milestones for CorBec's most advanced
drug candidate, CBP-1011, an orally administered glucocorticoid analog, which
is in a Phase III pivotal clinical trial in the United States. These
milestones include the receipt of an FDA letter of approval to sell the drug,
and certain designated annual
32
<PAGE>
amounts of sales. The maximum cash and shares to be issued will be an
aggregate of $16,580,000,000 in cash and 720,000 shares of Common Stock, of
which cash payments of up to $8,500,000 and 280,000 shares of Common Stock are
to be made based on the achievement of certain annual levels of sales of a
second drug developed from the CorBec technology.
The Company will incur a non-recurring charge attributable
to each acquisition which will be treated as purchased research and
development and expensed in the period that each acquisition is consummated.
RESULTS OF OPERATIONS
Year Ended June 30, 1997 and 1996
The Company incurred a loss of $1,649,951, or $0.51 per
share, for the year ended June 30, 1997 compared to $1,216,930, or $0.38 per
share for the year ended June 30, 1996. The Company expects to incur
additional losses in the foreseeable future.
The Company anticipates incurring additional losses over at
least the next several years, and such losses are expected to increase as the
Company expands its research and development activities relating to its
Purgative Product and its contemplated acquisition of two technologies for the
treatment of auto-immune diseases and cancer. To achieve profitability, the
Company, alone or with others, must successfully develop and commercialize its
technologies and products, conduct pre-clinical studies and clinical trials,
obtain required regulatory approvals and successfully manufacture, introduce
and market such technologies and products. The time required to reach
profitability is highly uncertain, and there can be no assurance that the
Company will be able to achieve profitability on a sustained basis, if at all.
Research and development expenses amounted to $742,539 for
the year ended June 30, 1997 compared to $644,051 for the year ended June 30,
1996. The increase was attributable to development expenses on the Purgative
Product licensed in February 1997, expenses for plant extraction, development
of chemical libraries and salaries. The increases were partially offset by
decreases in expenses for plant collections in Russia and the extraction and
isolation of compounds from those plants. Research and development expenses
are expected to increase substantially in the future if the foregoing proposed
acquisitions are consummated and development of the Purgative Product
continues provided the license is not terminated.
General and administrative expenses amounted to $1,010,937
for the year ended June 30, 1997 compared to $811,901 for the year ended June
30, 1996. The increases in general and administrative expenses are the result
of increased salary expense, legal expense and consulting expenses associated
with the Company's seeking new technologies and products. If the Sangen and
CorBec acquisitions are consummated, the Company expects general and
administrative expenses to increase with the addition of Dr. Leonard S. Jacob
as Chairman of the Board and Chief Executive Officer of the Company and an
expanded scale of operations associated with the
33
<PAGE>
development of multiple technologies.
Interest income amounted to $103,525 and $239,022 for the
years ended June 30, 1997 and June 30, 1996, respectively. Interest income was
earned on the proceeds of the Company's initial public offering in January
1995 of its common stock and warrants. Interest income has been decreasing
reflecting reduced cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has incurred net operating
losses and, as of June 30, 1997, had an accumulated deficit of $3,992,351. The
Company has financed its net operating losses through June 30, 1997 by a
series of debt and equity financing.
At June 30, 1997, the Company had remaining cash, cash
equivalents and investments of $1,175,597. Cash and cash equivalents is
comprised primarily of the proceeds from the Company's initial public offering
in January 1995. Management does not believe that available cash, cash
equivalents and investments are sufficient to fund the Company through the end
of fiscal year 1998 without additional debt or equity financing. Pursuant to
the proposed acquisition agreements, the Sangen and CorBec acquisitions will
be subject to completion of an equity financing by the Company of at least
$8,000,000 by October 31, 1997. No assurance can be given that the financing
will be completed. In the event that the acquisitions are completed, the
Company's cash requirements will be substantially increased to fund the
development of the CorBec technology and the Thrombospondin Technology.
The Company's capital requirements depend on numerous
factors which cannot be quantified, including continued progress in its
research and development activities, progress with pre-clinical studies and
clinical trials, prosecuting and enforcing patent claims, technological and
market developments, the ability of the Company to establish product
development arrangements, the cost of manufacturing, scale-up, effective
marketing activities and arrangements, and licensing or acquisition activity.
The Company is seeking to obtain additional funds through equity or debt
financing. No assurance can be given that additional financing will be
available when needed or on terms acceptable to the Company. If adequate
additional funds are not available, the Company may be required to delay,
scale back or eliminate certain of its research, drug discovery or development
activities or certain other aspects of its business. If adequate funds are not
available, the Company's business will be materially and adversely affected.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF
CORBEC PHARMACEUTICAL COMPANY LTD.
The following discussion of the financial condition and
results of operations of CorBec should be read in conjunction with the
Financial Statements of CorBec and Notes thereto appearing elsewhere in this
Proxy Statement.
OVERVIEW
CorBec, a development-stage company, commenced operations in
June of 1993, and has devoted substantially all of its resources to the
development of manufacturing and marketing therapies for the modification of
Fc receptor expression on macrophage white blood cells. CorBec does not
anticipate receiving revenues from product sales for at least the next several
years. Required funding will be attempted through future equity or debt
financings. No assurance can be given that such financings will be effected or
if so, in adequate amounts.
CorBec has not generated any working capital from
operations. Its only source of working capital has been interest income and
cash from the sale of CorBec's preferred stock. CorBec has incurred losses
since its inception and, as of June 30, 1997, had a deficit accumulated during
the development stage of approximately $2.3 million. CorBec anticipates
incurring additional losses for at least the next several years. Such losses
may fluctuate significantly from quarter to quarter and are expected to
increase as CorBec expands its research and development programs.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
Research and development expenses for the six months ended
June 30, 1997, was $273,000 compared $349,000 for the corresponding period in
1996. The decrease was primarily attributable to slow enrollment of patients
(slow patient accrual rate) into the Phase III clinical trial of CBP-1011.
General and administrative expenses for the six months ended
June 30, 1997, was $72,000 compared to $96,000 for the corresponding period in
1996. The decrease was primarily attributable to slow patient accrual rate
into the Phase III clinical trial of CBP-1011.
Interest income for the six months ended June 30, 1997, was
$4,500 compared to $3,600 for the corresponding period in 1996. The increase
was primarily attributable to higher average cash balances resulting from the
closing of a private placement of equity securities in September 1996.
35
<PAGE>
Years Ended December 31, 1996 and 1995
CorBec's research and development expenses increased to
$770,000 in 1996 from $441,000 in 1995. The increase was primarily
attributable to an increase in expenses connected with CorBec's Phase II
clinical research and testing of CBP-1011.
General and administrative expenses increased to $147,000 in
1996 from $64,000 in 1995. The increase reflected additional legal expenses
associated with filing foreign patent applications relating to two of CorBec's
United States patents.
Interest income decreased to $8,000 in 1996 from $9,000 in
1995 due to lower average cash balances during 1996.
LIQUIDITY AND CAPITAL RESOURCES
CorBec has incurred a cumulative net loss of approximately
$2.3 million from inception through June 30, 1997, and has financed its
operations through private offerings of its preferred stock. CorBec has
$335,000 in cash and cash equivalents at June 30, 1997, compared to $877,000
at December 30, 1996. This decrease is primarily attributable to the use of
cash to fund clinical trials of CBP-1011. In September 1996, CorBec sold
500,000 shares of Series C convertible preferred stock at a price per share
of $2.00 and received proceeds of approximately $1 million after deducting
offering expenses.
On June 12, 1997, CorBec extended its Sponsored Research and
License Agreements with the Trustees of the University of Pennsylvania until
June 11, 1998. Under the Sponsored Research Agreement, CorBec is required to
pay the University of Pennsylvania the sum of $50,000 to fund certain
sponsored research and development to be conducted during the one-year period
ending June 30, 1998. CorBec charged $25,000, $50,000 and $37,500 to fund
certain sponsored research and development expense for the six months ended
June 30, 1997 and the years ended December 31, 1996 and 1995, respectively.
Under the License Agreement, CorBec acquired an exclusive
worldwide royalty-bearing right and license over certain patent rights,
information and inventions of the University of Pennsylvania and options to
license inventions developed under the Sponsored Research Agreement. CorBec is
required to pay the University of Pennsylvania a royalty, as defined, on all
of the net sales of any product utilizing the licenses technology. Minimum
royalties are required under the agreement beginning in 1998. Sponsored
research payments are creditable against these minimum royalties. The License
Agreement will terminate upon the expiration of the last patent right covered
under the License Agreement.
On December 5, 1996, CorBec renewed an agreement with an
individual to provide project management services for CorBec. The agreement
provides for compensation of $110,000 to be paid in equal monthly installments
over the one-year term of the contract.
36
<PAGE>
On April 15, 1996, CorBec entered into an agreement with a
clinical research organization to provide CorBec with clinical services.
CorBec charged $42,000 and $98,000 to research and development expense related
to this agreement for the six months ended June 30, 1997 and the year ended
December 31, 1996, respectively. Future commitments under this agreement as of
June 30, 1997 are $349,000 and will be incurred over the course of the study,
which is expected to continue through March 1998.
On August 1, 1996 CorBec entered into an agreement with a
clinical laboratory services company to provide CorBec with clinical services.
CorBec charged $1,000 and $5,000 to research and development expense related
to this agreement for the six months ended June 30, 1997 and the year ended
December 31, 1996, respectively. Future commitments under this agreement as of
June 30, 1997 are $45,000 and will be incurred over the course of the study.
The term of this agreement commenced on August 1, 1996 and will automatically
renew for successive one-year terms, terminating at the conclusion of the
testing protocol.
CorBec has incurred negative cash flows from operations
since its inception, and has expended, and expects to continue to expend in
the future, substantial funds to continue its research and development
programs. CorBec's existing capital resources without additional financings,
will not be adequate to fund its capital requirements through June 30, 1998.
CorBec's future capital requirement and the adequacy of available funds will
depend on many factors, primarily related to its research and development
activities, including its pharmaceutical discovery and development programs,
the magnitude and scope of these activities, progress with pre-clinical
studies and clinical trials, the costs involved in preparing, filing,
prosecuting, maintaining, and enforcing patent claims and other intellectual
property rights, competing technological and market developments, changes in
existing collaborative research relationships and strategic alliances, the
ability of CorBec to establish additional collaborative arrangements for
product development, the cost of manufacturing, scale-up and developing
effective marketing activities and arrangements and the ability of CorBec to
obtain long-term financing. To the extent that funds generated from CorBec's
operations, together with its existing capital resources and the net proceeds
of future private offerings and the interest earned thereon, are insufficient
to meet current or planned operating requirements, it is likely that CorBec
will seek to obtain additional funds through other equity or debt financing,
collaborative or other arrangements with corporate partners and others, and
from other sources. There can be no assurance that additional financing will
be available when needed or on terms acceptable to CorBec. If adequate
additional funds are not available for these purposes or otherwise, CorBec may
be required to delay, scale back, or eliminate certain of its research and
development activities or certain other aspects of its business or attempt to
obtain funds through collaborative arrangement that may require CorBec to
relinquish some or all of its rights to certain of its intellectual property,
product candidates, or products. If adequate funds are not available, CorBec's
business, financial condition, and results of operations will be materially
and adversely affected.
37
<PAGE>
PROPOSAL TO AMEND THE COMPANY'S
CERTIFICATE OF INCORPORATION
TO AUTHORIZE A CLASS OF PREFERRED STOCK
The Board of Directors of the Company has adopted, subject
to shareholder approval, an amendment to the Company's Certificate of
Incorporation authorizing a class of 5,000,000 shares of Preferred Stock, par
value $.0001.
The authority of the Board of Directors to issue shares of
Preferred Stock as a series having rights and privileges which can be geared
by the Board to the interests or the needs or circumstances of potential
sellers and or licensors will provide the Company with a flexibility which
should prove helpful in consummating acquisitions or licenses in addition to
the proposed acquisitions. The Company's Certificate of Incorporation
currently does not provide for a class of Preferred Stock.
PREFERRED STOCK
The proposed amendment would authorize the Board of
Directors of the Company, without action by the shareholders, to issue shares
of Preferred Stock in one or more series and, within certain limitations, to
determine the voting rights (including the right to vote as a series on
particular matters), preferences as to dividends and in liquidation,
conversion, redemption and other rights of each such series. The Board of
Directors could issue a series with rights more favorable with respect to
dividends, liquidation and voting than those held by the holders of any class
of Common Stock.
The authority of the Board to issue the Preferred Stock
could have the effect of discouraging attempts to obtain control of the
Company by means of merger, tender offer, proxy contests or otherwise or could
delay and make more costly any such attempt. The voting and conversion rights
provided to such shares could adversely affect the voting power of the holders
of Common Stock. There are presently no agreements or understandings with
respect to the issuance of, and the Board of Directors has no intention to
issue any, shares of Preferred Stock or adopt a shareholder rights plan.
The substance of this proposed amendment to the Certificate
of Incorporation of the Company is contained in Annex A.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO AUTHORIZE A CLASS OF
PREFERRED STOCK.
38
<PAGE>
PROPOSAL TO AMEND THE COMPANY'S
CERTIFICATE OF INCORPORATION
TO CHANGE THE COMPANY'S NAME
The Board of Directors of the Company has adopted, subject
to shareholder approval, an amendment to the Company's Certificate of
Incorporation, changing the name of the Company to "InKine Pharmaceutical
Company, Inc."
CHANGE OF NAME
The Board of Directors believes that the Company's current
name is associated with the Company's plant product discovery
activities and, in view of the change in the Company's focus, the adoption of
the name "InKine Pharmaceutical Company, Inc." will differentiate the
Company's business and operations going forward. The Board therefore believes
that adoption of a new name would be desirable and that the amendment, if
approved, will enhance the Company's efforts to change the focus of its
operations from the discovery and development of new pharmaceutical compounds
identified and isolated from plants located principally in the Commonwealth of
Independent States to the acquisition and development of proprietary rights to
pharmaceutical drug and platform technologies under development.
The substance of this proposed amendment to the Certificate
of Incorporation of the Company is contained in Annex A.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO CHANGE THE COMPANY'S NAME.
39
<PAGE>
PRICE RANGE OF COMPANY'S COMMON STOCK
Panax's Common Stock has traded on the Nasdaq SmallCap Market
since January 1995. The following table sets forth by fiscal quarter the
range on the Nasdaq of high and low closing bid prices of the outstanding
Common Stock of Panax for the period from April 1, 1996 through June 30, 1997.
Period Low High
------ --- ----
4/1/96 - 6/30/96 $.72 $1.63
7/1/96 - 9/30/96 .50 .875
10/1/96 - 12/31/96 .44 .69
1/1/97 - 3/31/97 .63 3.25
4/1/97 - 6/30/97 1.75 2.72
Dividend Policy. Panax has not paid cash dividends on its
Common Stock since its inception and does not intend to pay any dividends on
its Common Stock in the foreseeable future.
40
<PAGE>
PROPOSAL TO APPROVE THE AMENDMENT TO THE
1993 STOCK OPTION PLAN
GENERAL
Shareholders are being asked to approve an amendment to the
Company's 1993 Stock Option Plan, which as amended in December 1996 relates to
800,000 shares of Common Stock, (the "1993 Plan"), to increase to 4,200,000
the number of shares subject to the 1993 Plan. The following description of
the 1993 Plan is qualified in its entirety by reference to the 1993 Plan, a
copy of which is attached as Annex B.
As of June 30, 1997 options with respect to 30,700 shares
have been exercised and options with respect to 1,394,500 shares are
outstanding, including options with respect to 594,500 shares which have been
granted subject to the approval by the shareholders of the Company of the
proposed amendment (the "Subject-to Options"). See "Executive Compensation"
and "Proposal to Amend the Company's Certificate of Incorporation." The
closing price of a share of Common Stock on the Nasdaq SmallCap Market on
September 24, 1997 was $1.6875.
The Subject-to Options were granted to the extent of 194,500
shares to Dr. Williams and to the extent of 400,000 shares to Amercom Funding
Ltd. ("Amercom") as a consultant. See "Proposed Acquisitions - Summary" and
"Executive Compensation" for terms of the options. In the event that the
proposal is not approved at this meeting and the Company plans to amend the
Subject-to Options granted to Amercom to permit their exercise upon the filing
and effectiveness of a registration statement registering the options
under the Securities Act of 1933. As to the Subject-to Options granted
to Dr. Williams, which are not exercisable prior to shareholder approval of
the amendment, the Company in the event of nonapproval, plans to submit the
proposal to the next meeting of shareholder for approval. The Company,
however, plans to make available for his Subject-to-Options such additional
shares as become available under the Plan as a result of the termination or
cancellation of previously granted options
The 1993 Plan provides for the grant of options to purchase
Common Stock to Directors of the Company, employees of the Company or its
subsidiaries and non-employee consultants and advisors who render bona fide
services to the Company or its subsidiaries. Options granted under the 1993
Plan may be incentive stock options (as defined in the Code) or non-qualified
stock options.
The Board of Directors believes that the Company's future
success depends upon its ability to attract and retain the highest caliber
personnel and to use their capabilities to the fullest extent possible by
encouraging their dedication to the Company's interest and welfare through an
opportunity to acquire a proprietary interest in the Company. The Board
believes that one of the best ways to provide such opportunities is by means
of stock options granted under the 1993 Plan.
41
<PAGE>
ADMINISTRATION AND SUMMARY OF THE 1993 PLAN
The 1993 Plan is administered by the Board of Directors or a
committee appointed and maintained by the Board (the "Plan Administrator"),
which must consist of at least three members who shall serve at the pleasure
of the Board. The Plan Administrator currently is a Committee consisting of
Dr. Taffy James Williams and Messrs. Bernard Nagelberg and J.R. LeShufy,
current officers and Directors of the Company. If the proposed CorBec and
Sangen acquisitions are consummated, the Board will reconstitute the Committee
to include Dr. Weisbach and Mr. Sangaro. See "Proposed Acquisitions--Possible
Change of Control".
The Board or the Plan Administrator has full power and
authority: (i) to designate participants; (ii) to designate Options or any
portion thereof as ISOs; (iii) to determine the terms and provisions of
respective Option Agreements (which need not be identical) including, but not
limited to, provisions concerning the time or times when and the extent to
which the Options may be exercised and the nature and duration of restrictions
as to transferability or restrictions constituting substantial risk of
forfeiture; (iv) to accelerate the right of an optionee to exercise in whole
or in part any previously granted Option; and (v) to interpret the provisions
and supervise the administration of the Plan.
The Board or the Plan Administrator also has the authority
to grant Options in its discretion to the holder of an outstanding Option, in
addition to or in exchange for the surrender and cancellation of the
outstanding Option, which additional or new Option may have a purchase price
lower than provided in the outstanding Option and containing such other terms
and conditions as the Board or the Plan Administrator may prescribe in
accordance with the provisions of the Plan.
All decisions and selections made by the Board or the Plan
Administrator pursuant to the provisions of the Plan shall be made by a
majority of its members except that no member of the Board or Plan
Administrator shall vote on, or be counted for quorum purposes, with respect
to any proposed action of the Board or Plan Administrator relating to any
Option to be granted to that member. Any decision reduced to writing and
signed by a majority of the members who are authorized to make such decision
shall be fully effective as if it had been made by a majority at a meeting
duly held.
The purchase price of each share subject to an ISO shall not
be less than 100% (or 110%, if at the time of grant the optionee owns,
directly or indirectly, more than 10% of the combined voting power of all
classes of stock of the Company or of any subsidiary of the Company) of the
Fair Market Value of such share (as defined in the 1993 Plan) on the date the
ISO is granted. The purchase price of each share subject to an Option or any
portion thereof which is not designated by the Board or Committee as an ISO
shall not be less than the Fair Market Value of such share on the date the
Option is granted or the par value of the Company's Stock.
The Fair Market Value of a share shall be the closing sales
price on the date of grant of
42
<PAGE>
the Common Stock on a national securities exchange or, if not listed on an
exchange, on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") or, the average closing sales price for such
period (not longer than 30 days) immediately preceding the date of grant as
the Board or the Plan Administrator deems reasonable in the circumstances
giving consideration to the volume of trading in the shares. If the shares are
traded in the over-the-counter market but not listed or admitted on NASDAQ,
the Fair Market Value shall be the mean between the high bid and low-asked
prices as quoted by the National Quotation Bureau, Inc. on the OTC Bulletin
Board for such date or period.
The option price shall be payable upon the exercise of the
Option in cash, by check, or, at the option of the Board or the Committee, in
shares of the Company's stock (valued at their Fair Market Value) or other
form satisfactory to the Board or the Committee. The proceeds of the sale of
the Stock subject to an Option are to be added to the general funds of the
Company and used for its corporate purposes.
The Option Agreement sets forth the terms of the Option,
including the period during which it must be exercised, except that no Option
may be exercisable after the expiration of 10 years from the date of grant or,
if granted to a person who owns more than 10% of the voting stock of the
Company at the time of grant, after the expiration of five years from the date
of grant.
Options granted under the Plan shall not be transferable by
optionees other than by will or the laws of descent and distribution, and
during an optionee's lifetime shall be exercisable only by that optionee.
Options granted to the Company's employees or directors may
not be exercised after the termination of the term of employment of the
employee or, if the optionee is a non-employee director, after service as a
director, unless (i) prior to the date of termination of employment or
service, the Board or the Plan Administrator authorizes, in the relevant
Option Agreement or otherwise, an extension of the term of all or part of the
Option beyond the date of such termination for a period not to exceed the
period during which the Option by its terms would otherwise have been
exercisable, (ii) termination of employment of the optionee is without cause,
in which event any Option still in force and unexpired may be exercised within
a period of 90 days from the date of such termination, but only with respect
to the number of shares purchasable at the time of such termination, or (iii)
termination is the result of death or disability, in which event any Option
still in force and unexpired may be exercised in whole or in part without
regard to the installment exercise provisions of the Option, within a period
designated in the Option Agreement, but not less than 60 days from the date of
termination. An Option held by a consultant or advisor may by its terms permit
its exercise beyond the date of the consultancy period but not beyond the term
of that option. An Option held by a non-employee consultant or advisor which
is still in force and unexpired on the date of such person's death may be
exercised by such person's legal representative in whole or in part without
regard to the installment exercise provisions of the Option, within a period
designated in the Option Agreement, but not less than 60 days from the date of
death.
43
<PAGE>
Optionees are protected against dilution, and appropriate
changes will be made to the aggregate number and kind of shares available
under the 1993 Plan and those subject to each outstanding option and to the
exercise prices, in the event of a stock dividend, recapitalization, stock
split, merger, consolidation, combination, exchange of shares or the like.
The Board of Directors may, from time to time, adopt
amendments to the 1993 Plan. The 1993 Plan may be suspended or terminated at
any time by the Board, but such action shall not affect options previously
granted. In the event an option, for any reason, expires or terminates
unexercised, the shares subject to such option may again become available for
option under the 1993 Plan. Unless sooner terminated, the 1993 Plan will
terminate in February 2003 after which no further options will be granted
under the 1993 Plan, but outstanding options at the date of termination will
not be canceled by such termination.
FEDERAL INCOME TAX TREATMENT
Non-Qualified Stock Options
The following is a general summary of the federal income tax
consequences under current tax law of non-qualified stock options
("Non-Qualified Options"). This summary does not purport to cover all of the
special rules, including the state or local income or other tax consequences,
inherent in the ownership and exercise of Non-Qualified Options and the
ownership and disposition of the underlying shares.
An individual who receives a Non-Qualified Option will not
recognize any taxable income upon the grant of such Non-Qualified Option. In
general, upon exercise of a Non-Qualified Option, an individual will recognize
ordinary income in an amount equal to the excess (at the time of exercise) of
the fair market value of the shares of Common Stock received over the
aggregate exercise price. However, if the individual is an executive officer
or Director of the Company or the beneficial owner of more than ten percent of
any class of equity securities of the Company, the timing of recognition of
income (and the determination of the amount thereof) under certain
circumstances possibly may be deferred for a period following the exercise of
a Non-Qualified Option (the "Deferral Period"), unless the individual files a
written election with the IRS, within 30 days after the date of exercise, to
include in income the excess (on the date of exercise) of the fair market
value of the shares of Common Stock received over the aggregate exercise
price.
An individual's tax basis in the shares of Common Stock
received upon the exercise of a Non-Qualified Option for cash paid on
exercise, plus the amount of ordinary income recognized by the optionee upon
the exercise of such option. The holding period for such shares would begin
just after the receipt of such shares or, in the case of an executive officer,
Director or beneficial owner of more than ten percent of any class of equity
securities of the Company, just after the expiration of the Deferral Period,
if any (unless the individual elected to be taxed as of the date of exercise).
A deduction for federal income tax purposes will be allowed to the
44
<PAGE>
Company in an amount equal to the ordinary income included by the optionee,
provided that such deduction constitutes an ordinary and necessary business
expense to the Company and is reasonable in amount and the limitations of
Section 162(m) of the Code do not apply.
If an individual exercises a Non-Qualified Option by
delivering other shares of Common Stock, the individual will not recognize
gain or loss with respect to the exchanged shares, even if their then fair
market value is different from the individual's tax basis in such shares. The
individual, however, will be taxed as described above with respect to the
exercise of the Non-Qualified Option as if the individual had paid the exercise
price in cash, and the Company generally will be entitled to an equivalent tax
deduction. Provided the individual receives a separate identifiable stock
certificate therefor, the individual's tax basis in that number of shares
received on such exercise which is equal to the number of shares surrendered
on such exercise will be equal to the individual's tax basis in the shares
surrendered and the individual's holding period for such number of shares
received will include the individual's holding period for the shares
surrendered. The individual's tax basis and holding period for the additional
shares received on exercise of a Non-Qualified Option paid for, in whole or in
part, with shares of Common Stock will be the same as if the individual had
exercised the Non-Qualified Option solely for cash.
Incentive Stock Options
The following is a general summary of the federal income tax
consequences under current tax law of incentive stock options. It does not
purport to cover all of the special rules, including special rules relating to
optionees subject to Section 16(b) of the Exchange Act, and the exercise of an
option with previously acquired shares or the state or local income or other
tax consequences inherent in the ownership and exercise of incentive stock
options and the ownership and disposition of the underlying shares.
An optionee will not recognize taxable income for federal
income tax purposes upon the grant of an incentive stock option. In the case
of an incentive stock option, no taxable income is recognized upon exercise of
the option. If the optionee disposes of the shares of Common Stock acquired
pursuant to the exercise of an incentive stock option more than two years
after the date of grant and more than one year after the transfer of the
shares of Common Stock to the optionee, the optionee will recognize long-term
capital gain or loss and the Company will not be entitled to a compensation
deduction. However, if the optionee fails to hold such shares of Common Stock
for the required period, the optionee would realize ordinary income on the
excess of the fair market value of the Common Stock at the time the option was
exercised over the exercise price (with the balance, if any, being long-term
capital gain, provided that the holding period for the shares exceeded one
year and the optionee held such shares as a capital asset at such time), and
the Company will generally be entitled to deduct such amount, provided that
such amount constitutes an ordinary and necessary business expense to the
Company and is reasonable in amount and the limitations of Section 162(m) of
the Code do not apply. In addition to the federal income tax consequences
described above, an optionee may be subject to the alternative minimum tax,
which is payable to the extent it exceeds the optionee's regular tax. For this
45
<PAGE>
purpose, upon the exercise of an incentive stock option, the excess of the
fair market value of the shares over the exercise price thereof is a tax
preference item. If an optionee is required to pay an alternative minimum tax,
the amount of such tax which is attributable to the incentive stock option
preference (and other deferral preferences) is allowed as a credit against the
optionee's regular tax liability in subsequent years. To the extent it is not
used, it is carried forward.
Section 162(m)
Section 162(m) of the Code precludes a public corporation
from taking a tax deduction for certain compensation in excess of $1 million
paid to its chief executive officer or any of its four other highest-paid
executive officers. This limitation, however, does not apply to certain
performance-based compensation. Under Section 162(m) of the Code and the
regulations adopted by the IRS to implement such section, the Company believes
that any compensation expense derived from the exercise of stock options
granted under and pursuant to the 1993 Plan will be deductible by the Company
for federal income tax purposes to an exemption for performance-based plans.
As a result of the Taxpayer Relief Act of 1997, long term
capital gains on shares held for more than 12 months will be subject to a 28%
maximum rate unless held for more than 18 months in which event they will be
subject to a 20% maximum rate.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE AMENDMENT TO THE COMPANY'S 1993 STOCK OPTION PLAN.
46
<PAGE>
PROPOSAL TO APPROVE THE
1997 CONSULTANT STOCK OPTION PLAN
GENERAL
The Board of Directors has adopted, subject to approval of
the shareholders, the 1997 Consultant Stock Option Plan, a copy of which is
attached hereto as Annex C (the "Consultant Plan"). The Consultant Plan
provides for the grant to non-employee consultants and advisors to the Company
and its subsidiaries, of options to acquire up to 2,500,000 shares of Common
Stock.
As of June 30, 1997, options were granted to consultants to
purchase an aggregate of 750,000 shares. The options are to be deemed subject
to the Consultant Plan in connection with the Purgative Product License
entered into in February 1997, if such Plan is approved by the shareholders.
The options were granted to the co-licensors of the Purgative Product - for
450,000 shares to Dr. Craig Aronchik and 150,000 shares to each of Dr. William
Lipshutz and Dr. Scott Wright. See "Proposed Acquisitions--Business of the
Company." In addition, the Company has agreed to grant options to other
consultants which are to be subject to the Consultant Plan if it is approved
by shareholders with respect to an additional 820,000 shares under the Plan
upon consummation of proposed acquisitions. See "Proposed Acquisitions --
Business of CorBec" and "-- Business of Sangen".
If the Consultant Plan is not approved, the options
described in the preceding paragraph will remain outstanding and the Company
will be obligated to register under the Securities Act of 1933, as amended,
the shares subject to the options.
In view of the Company's limited resources and the
desirability of attracting and motivating qualified scientific, technical and
professional persons who are available only on a part time basis to provide
their technical and professional advice to the Company, the Company believes
that a separate option plan dedicated to consultants and advisors will prove
helpful in attracting and rewarding such persons.
The terms and administration of the Consultant Plan are
materially the same as those of the 1993 Stock Option Plan except that (i) the
exercise price of the options shall be determined by the Board or the Plan
Administrator subject to the only limitation that it may not be less than par
value and (ii) under the current provisions of the Internal Revenue Code,
options granted under the Consultant Plan under current provisions of the
Internal Revenue Code cannot qualify as an ISO.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE COMPANY'S 1997 CONSULTANT STOCK OPTION PLAN.
47
<PAGE>
EXECUTIVE COMPENSATION
General
The following table sets forth the compensation paid or
accrued by the Company during the fiscal years ended June 30, 1997, 1996 and
1995 to the Company's Chief Executive Officer and President (and the only
other executive officer who received compensation in excess of $100,000 during
any of the three years).
<TABLE>
<CAPTION>
Annual Compensation
Securities
Year Salary Bonus Other Compensation Underlying Options
<S> <C> <C> <C> <C> <C>
Taffy James Williams, 1997 $185,000 $22,500 540,000(3)
President and CEO 1996 165,833 8,250 $16,600(2) 60,000
1995(1) 11,975 100,000
Robert Krell, 1997 123,400 10,000
Executive Vice President(4) 1996 53,000 60,000
</TABLE>
(1) Dr. Williams entered the Company's employ on June 5, 1995.
(2) Represents a nonaccountable expense allowance equal to 10% of the
base salary through June 5, 1996.
(3) See "Proposed Acquisitions - Summary".
(4) Mr. Krell entered the Company's employ in 1996 and resigned effective
May 9, 1997.
Dr. Williams, President and Chief Executive Officer of the
Company is employed pursuant to a three year agreement, dated June 4, 1995,
providing for his full time employment at an annual salary of $165,000 for the
first year with the salary for each of the following years of the term to be
determined by the Board of Directors but to be not less than the salary for
the preceding 12-month period. The Board of Directors increased Dr. Williams'
salary in June 1996 to an annual rate of $185,000. The agreement may be
terminated by Dr. Williams either upon six months prior notice, or in the
event of a default by the Company upon 30 days prior notice if the default
remains uncured, or by the Company either upon three days prior notice with
the Company obligated for additional salary for a four month period or
immediately upon cause.
If the proposed acquisition of Sangen is consummated (see
"Proposed Acquisitions -Summary" and "--Interests of Certain Persons with
respect to the Proposed Acquisitions"), Dr. Williams and Dr. Jacob, currently
a consultant to the Company and Chief Executive Officer and sole director and
stockholder of Sangen, will each enter into employment agreements with the
Company.
The Company will enter into a three-year employment
agreement with Dr. Jacob under which he will serve as Chairman of the Board
and Chief Executive Officer of the Company at an annual base salary of
$225,000 for the first year with annual increases as determined by the Board
of Directors for subsequent years; the increases are to reflect no less than
the increase in the Consumer Price Index. In addition, Dr. Jacob will receive
an annual bonus, as declared by the Board of Directors, with the bonus for the
first year to be no less than $56,250.
In addition, the Company and Dr. Williams will enter into a
three-year employment
48
<PAGE>
agreement, pursuant to which he will serve as President and Chief Operating
Officer of the Company at an annual base salary of $200,000 for the first
year, with annual increases as determined by the Board of Directors for
subsequent years; the increases are to reflect no less than the increase in
the Consumer Price Index. In addition, Dr. Williams will receive an annual
bonus, as declared by the Board of Directors, with the bonus for the first
year to be no less than $34,000. See "Proposed Acquisition - Summary" for
information as to the issuances of a ten year option to Dr. Williams under the
1993 Stock Option Plan to purchase the greater of 500,000 shares or 5% of the
"Fully Diluted Capitalization" of the Company and issuance, upon consummation
of the proposed Sangen Acquisition, to Dr. Jacob of a ten year warrant to
purchase 1,200,000 shares of Common Stock and, if applicable, a ten-year
option to purchase such number of shares as equals the difference between
1,200,000 shares of Common Stock or 7 1/2% of the Fully Diluted Capitalized of
the Company, each exercisable commencing with the date of the acquisition of
Sangen.
The Company's agreements with each of Drs. Williams and
Jacob shall continue for the three year period unless terminated by either
party on written notice of not less than 30 days. Each employment agreement
may be terminated by the Company with or without "cause". In the event the
Company terminates the officer's employment other than for cause, the Company
is required to pay as severance (i) if termination occurs during the first
year, a lump sum payment equal to one year's salary based on the annual rate
in effect on the date of termination; (ii) if termination occurs during the
second year, a lump sum payment equal to one and one-half year's salary based
on the annual rate in effect on the date of termination; or (iii) if
termination occurs during the third year or thereafter, a lump sum payment
equal to two year's salary based on the annual rate in effect on the date of
termination. "Cause" is defined as conviction for a crime involving moral
turpitude, material violation of a written directive of the Board of
Directors, or willful misconduct which has a material adverse effect of the
Company as determined by a majority of the Board including each independent
director.
Under a Management Services Agreement dated December 31,
1993 and amended as of September 30, 1994, Amercom Funding Ltd. ("Amercom")
has provided advice to the Company with respect to strategic planning,
financial matters, merger and acquisition policies, executive employment and
investor relations and the services as executive officers of Messrs. LeShufy
and Nagelberg, currently officers and directors, and Messrs. Norman Eisner and
David Zaretsky, former officers and directors, all four of whom are
stockholders, officers and directors of Amercom, or comparable services or in
the event any of the foregoing individuals is unable to perform such duties, a
reasonably capable replacement, subject to the approval of a majority of the
Company's directors. Each such officer may be required under the agreement to
provide services for up to 20 hours per five consecutive business days and up
to an aggregate of 75 hours per 20 consecutive business days. Amercom provided
through February 1, 1995, the initial closing date of the public sale of the
Company's Units, certain administrative services and executive offices and
facilities in New York City.
For the period from February 1 through June 30, 1995, the
year ended June 30, 1996 and
49
<PAGE>
through January 1, 1998 Amercom received and is to receive a monthly fee of
$8,333. In November 1996, the Company agreed to issue to Amercom 165,441
shares of Common Stock in satisfaction of a fee of $112,500 for the year ended
June 30, 1994 which was to be payable after, and subject to, the Company
achieving net income for fiscal year of at least $500,000 as determined in
accordance with generally accepted accounting principles.
The agreement which was to expire on February 1, 1998, was
extended on January 3, 1997 for an additional two year period with the fee for
the first year of the extended term to be $100,000 and the fee for the second
year is a ten year option which is to be subject to the 1993 Stock Option
Plan to purchase commencing February 1, 1998, 175,000 shares of the Company's
Common Stock at a price of $0.61 per share, representing the average of the
closing sales prices of Common Stock of the Company on the Nasdaq SmallCap
Market for the 30 consecutive trading day period commencing on the 45th
trading day prior to January 3, 1997. The option also relates to 225,000
additional shares which are to become exercisable in the following amounts and
after the following events related to the services of Amercom to relieve or
reduce the Company's obligations under its sublease, which has a term ending
in April 2000, of its facilities at 425 Park Avenue, New York, New York:
56,250 shares commencing on the date Amercom secures a return of the Company's
$150,000 security obligation and up to 168,750 shares based on the date it
secures a release of the Company from the sublease: all 168,000 shares if the
release occurs on or prior to December 31, 1997; 112,500 shares if effected
thereafter but not later than December 31, 1998; 56,250 shares if effected
thereafter but not later than December 31, 1999 and no shares if the release
is not secured by the latter date. If the amendment to the Plan is not
approved by the shareholders, the options will remain outstanding and the
Company intends to register the shares subject to the option.
Amercom and other affiliates of Messrs LeShufy, Nagelberg,
Eisner and Zaretsky occupy a portion of the Company's facilities at 425 Park
Avenue, New York City for which they reimburse the Company for the Company's
costs for making available such space.
On June 24, 1997, the Company forgave a debt of $25,250 of
Amercom in consideration of services in connection with the negotiations of
the proposed Financing.
During the term of the Management Services Agreement, the
Company will not pay any compensation or fees to Amercom or any officers,
directors or affiliates of Amercom who are also officers, directors or
affiliates of the Company except pursuant to the Management Services
Agreement.
GRANTS AND EXERCISES OF OPTIONS
The following table reflects information with respect to
options which have been granted under the Stock Option Plan to the executive
officers named in the Summary Compensation Table, all current executive
officers as a group, all non-executive officers as a group , and all employees
as a group for the years ended June 30, 1997, 1996 and 1995.
50
<PAGE>
OPTION GRANTS
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
GRANTED TO
NUMBER OF SHARES EMPLOYEES IN
UNDERLYING OPTIONS GRANTED FISCAL YEAR(2) EXERCISE PRICE EXPIRATION DATE
-------------------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Years Ended June 30, 1997
Taffy James Williams 500,000(1) 81.3% $.61 1/3/2007
40,000 6.5% $.50 12/10/2006
Robert Krell 60,000 9.8% $.50 9/2001
All Current Executive
Officers as a Group 555,000 99.4% $.50-$.61 12/10/2006-1/3/2007
All Current Non-Executive Officer
Directors as a Group None None None None
All Employees as a Group 558,500 100.0% $1.50-$.75 12/10/2006-1/3/2007
Year Ended June 30, 1996
Taffy James Williams 60,000(1) 41.0% $0.875 6/15/2006
Robert Krell 60,000 41.0% $1.00 9/2001
All Current Executive
Officers as a Group 130,000 100.0% $.875-$1.00 4/8/2000-6/15/2006
All Current Non-Executive Officer
Directors as a Group None None None None
All Employees as a Group 146,000 100.0% $1.875-$1.25 4/8/2000-6/15/2006
Year ended June 30, 1995
Taffy James Williams 100,000 100.0% $1.125 6/8/2000
All Current Executive
Officers as a Group 100,000 100.0% $1.125 6/8/2000
All Current Non-Executive Officer
Directors as a Group None None None None
All Employees as a Group 100,000 100.0% $1.125 6/8/2000
</TABLE>
(1) See "Proposed Acquisitions -- Summary" and "Proposal to Amend
Certificate of Incorporation to Increase Authorized Common Stock" for
information as to terms of the option and possible increase of the
amount.
(2) Does not include options granted to consultants as follows: during
the year ended June 30, 1996 to purchase 15,000 shares at a price of
$1.25 per share to Dr. Jacob and during the year ended June 30, 1997
to purchase 750,000 shares in connection with the Purgative Product
License, and 400,000 shares to Amercom, all at a price of $.61 per
share. See "Proposed Acquisitions -- Business of the Company" and
"--General."
As of June 30, 1997 options have been exercised with respect
to 30,700 shares of Common Stock. During the year ended June 30, 1997, options
with respect to 30,000 shares were exercised by Mr. Robert Krell, who resigned
May 9, 1997 an Executive Vice President and options with respect to 700 shares
were exercised by a former non-executive employee for realized values of
$76,900 and $1,500, respectively, based on the market prices on dates of
exercise.
The following table sets forth the values of the options
held by its Chief Executive Officer as of June 30, 1997. Mr. Krell resigned as
an officer and employee of the Company on May 9, 1997.
51
<PAGE>
OPTION VALUES
<TABLE>
Name Number of Securities Underlying Options Value of Unexercised in-the-Money Options (1)
Exercisable / Unexercisable Exercisable / Unexercisable
<S> <C> <C> <C> <C>
Taffy James Williams 160,000 540,000 $180,000 $772,000
All Current Executive Officers as a Group 172,334 546,666 188,000 793,000
All Current Non-Executive Officer Directors
as a Group -- -- -- --
All Employees as a Group 172,333 546,666 188,000 793,000
</TABLE>
(1) Based on the closing sales price for the Company's Common Stock on
June 30, 1997 of 2.06.
EXPERTS
The financial statements of Panax Pharmaceutical Company
Ltd. as of June 30, 1997 and for each of the years in the two-year period then
ended and for the period from July 1, 1993 (commencement of operations) through
June 30, 1997, audited by Richard A. Eisner & Company, LLP, independent
auditors, have been included in this Prospectus in reliance upon their report
appearing elsewhere herein, given upon the authority of said firm as experts
in accounting and auditing. Reference is made to said report which includes an
explanatory paragraph regarding the Company's ability to continue as a
going concern.
The financial statements of CorBec Pharmaceuticals Inc. as
of December 31, 1996 and 1995 and for the years ended December 31, 1996 and
1995 and for the period from inception (June 11, 1993) to December 31, 1996,
included in this Proxy Statement have been audited by Arthur Andersen, LLP,
independent public accountants, as indicated in their report with respect
thereto and are included in reliance upon the authority of said firm as
experts in giving said report. Reference is made to said report which includes
an explanatory paragraph regarding the Company's ability to continue as a
going concern.
A representative of Richard A. Eisner & Company, LLP, is
expected to be present or available by telephone at the Meeting with an
opportunity to make a statement to the shareholders if he or she desires to do
so, and respond to appropriate questions.
OTHER MATTERS
The Board of Directors does not intend to present, and does
not have any reason to believe that others intend to present, any matter of
business at the meeting other than as set forth above. If any other matter
should be presented properly, it is the intention of the persons named in the
enclosed form of proxy to vote any proxies in accordance with their best
judgment with respect to any such matter.
52
<PAGE>
SHAREHOLDERS ARE URGED TO FORWARD THEIR PROXIES WITHOUT
DELAY. A PROMPT RESPONSE WILL BE GREATLY APPRECIATED.
<PAGE>
INDEX TO UNAUDITED PRO FORMA AND AUDITED FINANCIAL STATEMENTS
PAGE
NUMBER
------
PANAX PHARMACEUTICAL COMPANY LTD.
- ---------------------------------
PRO FORMA UNAUDITED CONDENSED
BALANCE SHEET AT JUNE 30, 1997.......................... F-1
NOTES TO PRO FORMA UNAUDITED CONDENSED
BALANCE SHEET AT JUNE 30, 1997.......................... F-3
PRO FORMA UNAUDITED CONDENSED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997.......... F-4
REPORT OF INDEPENDENT AUDITORS............................................ F-6
BALANCE SHEET AS OF JUNE 30, 1997 ........................................ F-7
STATEMENTS OF OPERATIONS FOR YEARS ENDED
JUNE 30, 1997 AND JUNE 30, 1996 AND
FOR THE PERIOD JULY 1, 1993 (COMMENCEMENT
OF OPERATIONS) THROUGH JUNE 30, 1997.................... F-8
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIENCY) FOR EACH OF YEARS ENDED
JUNE 30, 1997 AND JUNE 30, 1996 AND FOR THE PERIOD FROM
JULY 1, 1993 (COMMENCEMENT OF OPERATIONS) THROUGH
JUNE 30, 1997........................................... F-9
STATEMENTS OF CASH FLOWS FOR YEARS ENDED
JUNE 30, 1997 AND JUNE 30, 1996 AND THE
PERIOD JULY 1, 1993 (COMMENCEMENT OF
OPERATIONS) THROUGH JUNE 30, 1997....................... F-10
NOTES TO FINANCIAL STATEMENTS............................................. F-11
CORBEC PHARMACEUTICALS, INC.
- ----------------------------
REPORT OF INDEPENDENT AUDITORS............................................ F-20
BALANCE SHEETS AS OF DECEMBER 31, 1996
AND DECEMBER 31, 1995................................... F-21
STATEMENTS OF OPERATION FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995
AND THE PERIOD FROM INCEPTION (JUNE 11, 1993)
TO DECEMBER 31, 1996.................................... F-22
STATEMENT OF STOCKHOLDERS' DEFICIT FOR THE PERIOD FROM INCEPTION
(JUNE 11, 1993) TO DECEMBER 31, 1996.................... F-23
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND DECEMBER 31, 1995
AND THE PERIOD FROM INCEPTION (JUNE 11, 1993)
TO DECEMBER 31, 1996.................................... F-24
NOTES TO FINANCIAL STATEMENTS............................................. F-25
BALANCE SHEET AS OF JUNE 30, 1997 (UNAUDITED)............................. F-29
STATEMENTS OF OPERATION FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1996
AND FOR THE PERIOD FROM INCEPTION
(JUNE 11, 1993) TO JUNE 30, 1997 (UNAUDITED)............ F-30
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1996
AND FOR THE PERIOD FROM INCEPTION
(JUNE 11, 1993) TO JUNE 30, 1997 (UNAUDITED)............ F-31
NOTES TO FINANCIAL STATEMENTS............................................. F-32
SANGEN PHARMACEUTICAL COMPANY
- -----------------------------
BALANCE SHEET AS OF JUNE 30, 1997 (UNAUDITED)............................. F-33
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
AT JUNE 30, 1997
The following pro forma condensed balance sheet assumes the
transactions indicated below will occur and reflects the transactions if they
had occurred on June 30, 1997: (1) the acquisition of CorBec Pharmaceutical
Inc. ("CorBec") for 750,000 shares of common stock and $750,000, (2) the
acquisition of Sangen Pharmaceutical Inc. ("Sangen") for an option for 300,000
shares of common stock, (3) the issuance of 32 units at $250,000 per unit
yielding net proceeds of $6,980,000, and (4) acquisition of certain
technologies from Allegheny University ("TSP-1 Technology") for 125,000 shares
of Common Stock and a license from AWL Partnership for the Purgative Product
for $250,000. The acquisitions of CorBec and Sangen are accounted for as
purchases in accordance with Accounting Principles Board Opinion No. 16. In
the opinion of the management of Panax Pharmaceutical Company Ltd., all
adjustments necessary to present fairly such pro forma balance sheet have been
made.
The pro forma condensed balance sheet should be read in
conjunction with the notes thereto, the financial statements of the Company,
CorBec and Sangen and the related notes thereto, included elsewhere in this
Proxy Statement. The pro forma condensed balance sheet is not necessarily
indicative of what the actual financial position would have been had the
transactions occurred at June 30, 1997 nor does it purport to represent the
financial position of the Company.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Historical Adjustments Adjustments Pro Forma
------------------------------------- for for Balance
Panax CorBec Sangen Acquisitions Subtotal Financing Sheet
------------ ---------- ---------- ------------ ----------- ---------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.... $ 101,000 $ 335,000 $1,000(4) $ (20,000)
(5) (750,000)
(8) (150,000) (483,000)(6) 7,200,000 6,717,000
Investments to be held to
maturity................... 1,075,000 1,075,000 1,075,000
Prepaid expenses and other
current assets............. 25,000 12,000 37,000 37,000
------------ ---------- ------- ----------- ----------- ---------
Total current assets . 1,201,000 347,000 1,000 (920,000) 629,000 7,200,000 7,829,000
Equipment, net.................. 30,000 30,000 30,000
Deferred assets................. 304,000 (1) (54,000)
(5) (30,000) 220,000 (6) (220,000)
Other assets.................... 250,000 (8) 150,000 400,000 400,000
------------ ---------- ------- ----------- ----------- --------- ---------
TOTAL................. 1,785,000 347,000 1,000 (854,000) 1,279,000 6,980,000 8,259,000
============ ========== ======= =========== =========== ========= =========
Current liabilities:
Accounts payable and other
accrued expenses........... $ 186,000 186,000 186,000
------------ ----------- =========
F-1
<PAGE>
Redeemable convertible
preferred stock............... 2,650,000 (5) (2,650,000) 0 0
----------- -----------
Stockholders' equity (deficit):
Common stock and additional
paid-in capital............ 5,841,000 19,000 1,000(1) 623,000
(2) 503,000
(3) 313,000
(5) (19,000)
(5) 1,875,000
(7) 945,000
(9) 1,701,000 11,802,000 (6) 6,980,000 18,782,000
Unearned portion of (9) (1,701,000)
compensatory stock/warrants (214,000) (2) (243,000) (2,158,000) (2,158,000)
Deficit accumulated during
the development stage...... (3,992,000) (2,322,000) (1) (677,000)
(2) (260,000)
(3) (313,000)
(4) (20,000)
(5) 2,322,000
(5) (2,308,000)
(7) (945,000) (8,515,000) (8,515,000)
Treasury Stock (36,000) (36,000) (36,000)
------------ ---------- ------- ----------- ----------- --------- ---------
Total stockholders'
equity (deficit)..... 1,599,000 (2,303,000) 1,000 1,796,000 1,093,000 6,980,000 8,073,000
------------ ---------- ------- ----------- ----------- --------- ---------
TOTAL................. 1,785,000 347,000 1,000 (854,000) 1,279,000 6,980,000 8,259,000
============ ========== ======= =========== =========== ========= =========
</TABLE>
F-2
<PAGE>
PANAX PHARMACEUTICAL COMPANY, LTD.
(a development stage company)
NOTES TO PRO FORMA UNAUDITED CONDENSED BALANCE SHEET
AS AT JUNE 30, 1997
(1) Reflects acquisition of Sangen, for 300,000 options issued at an
exercise price of $.61 per share (estimated fair value $624,000) and
costs of $54,000. The excess of the cost over the estimated fair
value of the net assets of Sangen is treated as purchased research
and development and charged to expense immediately. Technological
feasibility of the purchased in-process research and development has
not yet been established and the technology has no alternative uses.
(2) Reflects the estimated fair value of 295,000 options to be issued to
consultants of Sangen for TSP-1 technology and CorBec. The Company
has immediately charged operations for $260,000 for options that vest
immediately and the remaining $243,000 will be charged to operations
over the three year term of the consulting agreements.
(3) Reflects the issuance of 125,000 shares of common stock at an
estimated market price of $2.50 per share to Allegheny University for
certain technology rights which has been charged to expense
immediately. Technological feasibility of the technology rights has
not yet been established and the technology has no alternative uses.
(4) Reflects the obligations of the Company for payment of patent costs
incurred by Allegheny University prior to completion of the
acquisition of technology rights.
(5) Reflects the acquisition of common and preferred stock of CorBec at a
cost of $2,655,000 (750,000 shares of common stock, $750,000 in cash
and costs of $30,000). In addition, cash payments in the aggregate
amount of $16,580,000 and issuances of an aggregate of 720,000 shares
of Common Stock are to be made upon the achievement, if any, of
milestones and targets, as defined. The excess of cost over the
estimated fair value of the net assets of CorBec of $2,308,000 is
treated as purchased research and development and expensed
immediately. Technological feasibility of the purchased in-process
research and development has not yet been established and the
technology has no alternative uses. CorBec preferred stock will be
converted to common stock immediately prior to the acquisition.
(6) Reflects the issuance of 32 units, each unit consisting of 125,000
shares of Common Stock, and 25,000 Class A Redeemable Common Stock
Purchase Warrants at $250,000 per unit, yielding net proceeds of
$6,980,000 after offering costs and placement agent fees aggregating
$1,020,000 ($220,000 paid as at June 30, 1997).
(7) Reflects the recognition of compensation expense ($945,000) for the
difference between the fair value of the underlying common stock and
the exercise price of 500,000 options issued to the President and
Chief Operating Officer. The option provides that the shares become
exercisable at the initial closing date.
(8) Consideration of $250,000 in cash (of which $100,000 was prepaid) for
the ALW License of the purgative product; the $150,000 is payable upon
consummation of a financing of $2,000,000 by November 14, 1997. In
addition, options for 500,000 shares of common stock will be granted
upon the achievement of certain development and sales milestones.
(9) Reflects the recognition of unearned compensation of $(1,701,000) for
the difference between the underlying common stock (estimated at
$2.50 per share) and the exercise price of 900,000 options to be
issued to the new Chairman of the Board and Chief Executive Officer.
The option is to provide that the shares become exercisable at the
initial closing date with up to a maximum of 900,000 shares
repurchaseable by the Company at the exercise price in the event that
the new Chairman and Chief Executive Officer voluntarily terminates
his employment or is terminated by the Company for "just cause" as
defined during the three year employment period; such right however
to expire at the rate of 25,000 shares for each month of employment.
F-3
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1997
The following pro forma condensed statement of operations
reflects the recurring operations on the assumption that the acquisitions of
CorBec Pharmaceutical Inc. ("CorBec") and Sangen Pharmaceutical Inc.
("Sangen") will occur and reflects such transactions as if they had occurred
on July 1, 1996. The acquisitions of CorBec and Sangen have been accounted for
as purchases in accordance with Accounting Principles Board Opinion No. 16. In
the opinion of management of the Company, all adjustments necessary to present
fairly such pro forma statements of operations have been made. The historical
financial data represents operations for the twelve months ended June 30,
1997.
This pro forma condensed statement of operations should be
read in conjunction with the notes thereto, the financial statements of the
Company and CorBec and the related notes thereto. The pro forma condensed
statements of operations are not necessarily indicative of what the actual
results of operations would have been had the transactions occurred at July 1,
1996 nor do they purport to indicate the results of future operations.
Pro Forma
Results
Historical (1) Pro Forma of
Panax CorBec(2) Adjustments Operations
--------- ----------- ----------
(unaudited) (unaudited)
Costs and expenses:
Research and
development . . . $ 743,000 $679,000 (3) 58,000
(5) 65,000
(6) 225,000
(7) 30,000 1,815,000
General and
administrative. . 1,011,000 137,000 (3) 23,000
(4) 567,000
(5) 52,000 1,775,000
---------- -------- ---------- ---------
Total. . . . 1,754,000 816,000 1,020,000 3,590,000
Interest (income) . (104,000) (9,000) (113,000)
---------- -------- ---------- ----------
PRO FORMA LOSS . . . . 1,650,000 807,000 1,020,000 3,477,000
========== ======== ========== =========
Pro forma loss per
share . . . . . . . $0.51 $0.43(8)
========== =========
Pro forma weighted
average shares
outstanding . . . . 3,259,640 (9) 125,000
==========
(10) 750,000
(11) 4,000,000 8,134,540
=========
(1) Does not include the operations of Sangen since they were not material.
(2) Based on management's internal financial statements for the twelve months
ended June 30, 1997.
(3) To record amortization of fair value of options granted to consultants.
(4) To record amortization of fair value of options granted to the new
Chairman of the Board and Chief Executive Officer.
(5) To record additional consulting fees to be paid to consultants to Sangen
for TSP-1 Technology and CorBec.
(6) To record additional contractual funding research for TSP-1 Technology and
the CorBec Technology. In addition, the Company is also required to fund
at least $1,000,000 of additional research in furtherance of the
development of the Purgative Product over the course of two years
commencing following completion of the financing.
F-4
<PAGE>
(7) To record additional amortization of fair value of options granted for
consulting services in connection with ALW license and amortization of ALW
license.
(8) The net loss and pro forma loss per share does not reflect the excess of
cost over the estimated fair value of the net assets of CorBec and Sangen
aggregating $2,985,000, which is a nonrecurring charge directly attributed
to the transaction and is treated as purchased research and development
expense which will be expensed in the period the acquisition will be
consummated.
(9) Represents the issuance of 125,000 shares of Common Stock to Allegheny
University for certain technology rights.
(10) Represents the issuance of 750,000 shares of Common Stock in connection
with the CorBec acquisition.
(11) Represents the issuance of 4,000,000 shares of Common Stock in connection
with a proposed financing.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Panax Pharmaceutical Company Ltd.
New York, New York
We have audited the accompanying balance sheet of Panax
Pharmaceutical Company Ltd. (a development stage company) as at June 30, 1997,
and the related statements of operations, changes in stockholders' equity
(deficiency) and cash flows for each of the years in the two-year period ended
June 30, 1997 and for the period July 1, 1993 (commencement of operations)
through June 30, 1997. 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 enumerated above
present fairly, in all material respects, the financial position of Panax
Pharmaceutical Company Ltd. at June 30, 1997, and the results of its
operations and its cash flows for each of the years in the two-year period
ended June 30, 1997 and for the period July 1, 1993 (commencement of
operations) through June 30, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as going concern. As discussed in Note
A to the financial statements, the Company has sustained recurring losses from
operations and will require additional financing. These factors raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note A.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Richard A. Eisner & Company, LLP
New York, New York
July 24, 1997
F-6
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
BALANCE SHEET
AS AT JUNE 30, 1997
A S S E T S
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents (Note B[3]) ................................................... $ 100,859
Investments to be held to maturity (Note C) ............................................. 1,074,738
Prepaid expenses and other current assets (including $8,221 prepaid to affiliates) ...... 25,003
----------
Total current assets ............................................................. 1,200,600
----------
Equipment: (Note B[1])
Testing equipment ....................................................................... 113,434
Computer equipment ...................................................................... 15,872
----------
129,306
Less accumulated depreciation ........................................................... 99,323
----------
29,983
----------
Restricted certificate of deposit (Note G[3]) .............................................. 150,000
Deferred assets (Note I) ................................................................... 304,000
Other assets (Note I) ...................................................................... 100,000
----------
Total other assets .............................................................. 554,000
----------
T O T A L ........................................................................ $1,784,583
==========
L I A B I L I T I E S
Current liabilities:
Accounts payable and other accrued expenses ............................................. $ 186,390
----------
Commitments (Note G)
STOCKHOLDERS' EQUITY
(NOTE F)
Common stock, $.0001 par value; authorized 10,000,000
shares; issued 3,373,027 shares......................................................... 337
Additional paid-in capital................................................................. 5,760,119
Unearned portion of compensatory stock options/warrants ................................... (133,268)
Deficit accumulated during the development stage........................................... (3,992,351)
Less common stock held in treasury (16,515 shares) ........................................ (36,644)
------------
Total stockholders' equity....................................................... 1,598,193
-----------
T O T A L........................................................................ $ 1,784,583
============
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
F-7
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
(COMMENCEMENT OF
YEAR ENDED YEAR ENDED OPERATIONS) THROUGH
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
------------- ------------- --------------
<S> <C> <C> <C>
Costs and expenses:
Research and development........................ $ 742,539 $644,051 $ 1,907,981
General and administrative..................... 1,010,937 811,901 2,431,490
Write-off of debt discount...................... 75,000
Interest expense................................ 6,160
-------------- ------------- ------------
1,753,476 1,455,952 4,420,631
Interest (income).................................. (103,525) (239,022) (428,280)
-------------- ------------- -------------
NET LOSS........................................... $ 1,649,951 $ 1,216,930 $ 3,992,351
============= =========== ===========
Net loss per share (Note B[4])..................... $ 0.51 $ 0.38
====== ======
Weighted average number of common
shares outstanding.............................. 3,259,640 3,231,038
========= =========
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
F-8
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
UNEARNED DEFICIT
COMMON STOCK PORTION OF ACCUMULATED TREASURY STOCK TOTAL
------------------ ADDITIONAL COMPENSATORY DURING THE ------------------ STOCKHOLDERS'
NUMBER OF PAID-IN COMMON STOCK OPTIONS/ DEVELOPMENT NUMBER OF EQUITY
SHARES AMOUNT CAPITAL SUBSCRIPTION WARRANTS STAGE SHARES AMOUNT (DEFICIENCY)
---------- ------ ---------- ------------ ------------ ----------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock subscription.. 2,000,000 $200 $ 800 $(1,000)
Payment of common stock
subscription on
June 23, 1994.............. 1,000 $ 1,000
Issuance of stock rights
in conjunction with
notes payable (Note F[1]).. 21,875 21,875
Capital contribution -
expenses paid on
behalf of Company (Note E). 96,682 96,682
Net loss................... $ (326,443) (326,443)
--------- ----- ---------- ------- ---------- ------------ -------- --------- -----------
Balance - June 30, 1994.... 2,000,000 200 119,357 -- -- (326,443) -- -- (206,886)
Issuance of stock rights
in conjunction with
notes payable (Note F[1]).. 53,125 53,125
Initial public offering,
net of expense of
$1,192,876 (Note F[2]).... 1,235,710 123 4,985,551 4,985,674
Value of option granted
(Note F[4])................ 80,000 80,000
Exercise of options
and stock rights........... 80,000 8 4,992 5,000
Net loss................... (799,027) (799,027)
--------- ----- ---------- ------- ---------- ------------ -------- --------- -----------
Balance - June 30, 1995.... 3,315,710 331 5,243,025 -- -- (1,125,470) -- -- 4,117,886
Value of option and
warrants granted
(Notes F[4] and F[5])...... 217,500 $(217,500)
Compensatory options/
warrants earned............ 78,681 78,681
Common stock acquired
(Note F[6])................ 18 (180,000) (18)
Net loss................... (1,216,930) (1,216,930)
--------- ----- ---------- ------- ---------- ------------ -------- --------- -----------
Balance - June 30, 1996.... 3,315,710 331 5,460,543 -- (138,819) (2,342,400) (180,000) (18) 2,979,637
Value of option and
warrants granted
(Notes F[4]................ 133,750 (133,750) 0
Compensatory options/
warrants earned............ 139,301 139,301
Exercise of options........ 30,700 3 25,347 25,350
Common stock issued
to settle debt
(Notes E and F[6]) ........ -- -- 112,483 165,441 17 112,500
Common stock issued
to settle debt
(Notes E and F[6]) ........ 26,617 3 27,996 14,559 1 28,000
Common stock reacquisitions
(Note F[6])................ (16,515) (36,644) (36,644)
Net loss................... (1,649,951) (1,649,951)
--------- ----- ---------- ------- ---------- ------------ -------- --------- -----------
Balance - June 30, 1997.... 3,373,027 $ 337 $5,760,119 $ 0 $(133,268) $(3,992,351) (16,515) $(36,644) $ 1,598,193
========= ===== ========== ======= ========== ============ ======== ========= ===========
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
F-9
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
(COMMENCEMENT
OF OPERATIONS)
YEAR END YEAR END THROUGH
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(1,649,951) $(1,216,930) $(3,992,351)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization............................. 32,978 35,928 99,821
Write-off of debt discount................................ 75,000
Value of services paid by options and warrants............ 80,000
Accretion of compensatory options and warrants............ 139,301 78,681 217,982
(Increase) in prepaid expenses
and other assets....................................... (49,376) (51,072) (124,434)
Increase in accounts payable and accrued
expenses............................................... 114,971 6,807 214,390
Expenses paid by affiliate................................ 96,682
Increase in management fees payable....................... 112,500
------------ ------------ -------------
Net cash (used in) operating activities............... (1,412,077) (1,146,586) (3,220,410)
------------ ------------ -------------
Cash flows from investing activities:
Purchases of investments and certificates of deposit............... (2,157,134) (2,181,502) (8,125,113)
Redemption of investments and certificates of
deposit........................................................... 3,590,375 3,310,000 6,900,375
Acquisition of equipment........................................... (3,700) (41,757) (129,304)
Deferred acquisition costs - Sangen and CorBec..................... (83,750) (83,750)
Organization costs................................................. (1,069)
------------ ------------ -------------
Net cash provided by (used in) investing activities..... 1,345,791 1,086,741 (1,438,861)
------------ ------------ -------------
Cash flows from financing activities:
Issuance of common stock - net of expenses......................... 25,350 5,017,024
Cost of shares acquired ........................................... (36,644) (36,644)
Proceeds from notes payable - affiliates........................... 14,000
Proceeds from notes payable - stockholders......................... 96,300
Proceeds from notes payable - other................................ 300,000
Deferred offering costs............................................ (220,250) (220,250)
Repayment of notes payable - stockholders and other................ (410,300)
------------ ------------ -------------
Net cash (used in) provided by financing activities..... (231,544) 4,760,130
------------ ------------ -------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.............................................................. (297,830) (59,845) 100,859
Cash and cash equivalents - beginning of period.......................... 398,689 458,534 - 0 -
------------ ------------ -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD................................ $ 100,859 $ 398,689 $ 100,859
=========== ============ =============
Supplemental disclosure of cash flow information:
Cash paid for interest ............................................. - 0 - - 0 - $ 6,160
</TABLE>
See Note E for conversion of certain liabilities into Common Stock and Note F
for options and warrants granted for services.
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
F-10
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and Basis of Presentation:
Panax Pharmaceutical Company Ltd. (the "Company") was incorporated in
May 1993 and commenced operations in July 1993. The Company was originally
formed to develop pharmaceutical products through bioassaying of plant
extracts, identifying, and isolating active compounds from plants with a
history of medicinal use. In 1996, Panax modified its strategy, reducing its
natural product discovery activities and redirecting its principal efforts
toward expanding its pipeline of commercially viable pharmaceutical products by
licensing or acquiring specifically-targeted products developed for the
treatment of certain diseases.
In February 1997, Panax acquired the rights to develop and
commercialize a novel purgative tablet to clean the colon for any medical
purpose and for use as a laxative (the "Purgative Product"), with respect to
which a Phase IIb clinical trial for use prior to colonoscopy has been
completed (see Note I). The Company is seeking an equity investment and if it
is able to raise at least $8 million, expects to acquire the rights to develop
and commercialize two additional technologies: (i) technologies to down- or
up-regulate the Fc receptors on macrophages and other cells to treat serious
autoimmune disorders and other diseases, including asthma/allergy and certain
serious infectious diseases (the "CorBec Technology") and (ii) a Thrombospondin
Technology for the treatment of cancer, specifically, the inhibition and
prevention of tumor metastasis. The compounds and technologies making up the
CorBec Technology and the Thrombospondin Technology are, like the Purgative
Product, currently either in clinical trials or earlier stages of development,
and there can be no assurance that the Company will be able to successfully
develop or commercialize any of such technologies.
The Company is in the development stage and its efforts have been
principally devoted to research and development, raising capital and recruiting
personnel. The Company is subject to those risks associated with development
stage companies. As shown in the accompanying financial statements, the Company
has incurred losses from operations since inception and substantial additional
financing will be required by the Company to fund its research and development
activities. These factors raise substantial doubt about the Company's ability
to continue as a going concern. In order to fund its operation the Company has
signed a letter of intent with a placement agent for a private placement equity
offering (see Note I). Absent any additional funding, management plans would be
to curtail activities to a level which would allow a portion of its technology
to be exploited. However, there is no assurance that such financing will be
completed or that the Company's planned products will be commercially
successful. The financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
On June 24, 1997, the Board of Directors approved a change in the name
of the Company to InKine Pharmaceutical Company, Inc. subject to stockholder
approval.
(NOTE B) - Summary of Significant Accounting Policies:
[1] Equipment:
Equipment is stated at cost less accumulated depreciation.
Depreciation is computed using straight-line methods over the useful lives of
the assets (three years).
[2] Research and development:
Research and development costs are charged to operations as incurred.
[3] Cash equivalents:
The Company considers investments with original maturity dates of up
to 90 days to be cash equivalents.
F-11
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
[4] Net loss per share:
Net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period. Common equivalent shares
such as options and warrants are not included in the per share calculation
where the effect of their inclusion would be antidilutive.
[5] 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
[6] Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation". SFAS 123 encourages, but does not require,
companies to record compensation plans at fair value. The Company has elected
to continue to account for its stock-based compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees" and disclose the pro
forma effects on net income and earnings per share had the fair value of options
been expensed. Under the provisions of APB 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of the grant over the amount an employee
must pay to acquire the stock. (See Note F[4]).
The Company accounts for stock-based compensation granted to
nonemployees based on the fair value of the consideration received or the fair
value of the instrument issued, whichever is more reliably measureable. The
fair value is amortized over the period of the respective services provided.
[7] Recently Issued Accounting Pronouncements:
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share". This new standard requires dual presentation of basic and diluted
earnings per share ("EPS") on the face of the statement of income and requires
reconciliation of the numerators and the denominators of the basic and diluted
EPS calculations. This statement will be effective for the second quarter of
the Company's 1998 fiscal year. The Company has not yet quantified what effect
the adoption of SFAS 128 will have on its earnings per share of common stock.
In addition, the Financial Accounting Standards Board has recently
issued Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The above pronouncements will not have a significant effect on
the information presented in the financial statements.
(NOTE C) - Investments:
The Company classifies its investments as held-to-maturity, available
for sale, or trading securities. Investments at June 30, 1997 consisted of U.S.
Treasury bills with maturities of one year or less and are reported at
amortized cost which approximates market.
(NOTE D) - Income Taxes:
At June 30, 1997, the Company has available for federal income tax
purposes net operating loss carry forwards of approximately $1,450,000,
expiring through 2012, that may be used to offset future taxable
F-12
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
income. The difference between the net loss for financial reporting purposes
and the net operating loss for tax purposes is primarily due to certain
general and administrative costs which are not currently deductible for tax
purposes. The Company has provided a valuation reserve of $1,622,000 against
the full amount of the net operating loss benefit of $652,000 and the benefit
of $970,000 from other temporary differences, principally general and
administrative expenses, since in the opinion of management based upon the
earnings history of the Company, it is more likely than not that the benefits
will not be realized. The difference between the federal statutory tax rate of
34% and the Company's effective tax benefit rate of 0% is attributable to the
nondeductible portion of compensation expense for stock options issued of
$140,000 and an increase in valuation allowance of $675,000 in 1997 and
nondeductible portion of compensation expense for stock options issued of
$79,000 and an increase in valuation allowance of $507,000 in 1996.
(NOTE E) - Related Party Transactions:
During the years ended June 30, 1997 and June 30, 1996 the Company
paid $100,000 per year to Amercom Funding Ltd., ("Amercom"), a company owned by
certain of its officers, directors and stockholders, pursuant to a management
agreement ("Management Agreement") (see Note G[4]). In November 1996, the
Company issued 165,441 shares of its Common Stock to Amercom, in satisfaction
of an obligation to pay Amercom $112,500 for consulting services rendered
through June 30, 1994.
Pursuant to employment and research agreements with various
stockholders, the Company incurred research and development expenses of
approximately $241,000 and $107,000 for the years ended June 30, 1997 and June
30, 1996, respectively. During the fiscal year ended June 30, 1994 Amercom paid
certain operating expenses on behalf of the Company aggregating $94,786, which
amount plus related interest of $1,896 was contributed to the Company as
capital.
In January 1997, the Company agreed to extend for two years the term
of the Management Agreement with Amercom, which would have expired on February
1, 1998, upon the occurrence of a financing of at least $8,000,000. Amercom is
to receive compensation of $100,000 for services during the first year of the
extension and an option for 175,000 shares of Common Stock at an exercise price
of $.61 per share as compensation for the second year of extension.
In January 1997, the Company agreed to issue under the 1993 Stock
Option Plan, additional options to purchase up to 225,000 shares of Common
Stock at an exercise price of $0.61 per share, the exercise of which is to be
subject to the success of Amercom in securing the release of the Company from
its obligations under its current office lease in New York City. The options
are to become exercisable with respect to 56,250 shares upon the early return
of the Company's $150,000 security deposit, with the balance of 168,750 shares
to become exercisable depending on the date, if any, that the Company is
released from its lease obligations: 168,750 if the lease is terminated by the
end of 1997; 112,500 if the lease is terminated by the end of 1998; and 56,250
if the lease is terminated by the end of 1999.
On June 24, 1997, the Company forgave a debt of $25,250 of Amercom in
consideration of services conducted by Amercom in connection with the proposed
private placement of the Company's securities.
In November 1996, the Company issued 41,176 shares of the Common Stock
to a stockholder/officer in full satisfaction of accrued salary of $28,000.
Subsequent to the issuance 16,515 of such shares were returned to the Company
in connection with the payment of withholding tax relating to the issuance.
These returned shares are being held by the Company as treasury shares.
F-13
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE F) - Stockholders' Equity:
[1] Notes Payable:
During calendar 1994 the Company borrowed $300,000 pursuant to 4%
demand notes. The note holders received one share of the Company's common stock
for each ten dollars of notes outstanding (30,000 shares) upon completion of a
public offering of the Company's securities (Note F[2]). The value of these
stock rights was recorded as a discount on the notes and expensed immediately.
The notes were repaid in January and February 1995.
[2] Public offering:
In January 1995, the Company effected an initial public offering of
its securities. A total of 1,235,710 units, each comprised of one share of
common stock and one redeemable common stock purchase warrant, were sold
yielding net proceeds of approximately $4,986,000 after underwriting
commissions and expenses.
[3] Authorized shares:
On June 24, 1997 the Board of Directors approved an increase in the
authorized share capital to 50,000,000 shares of common stock and 5,000,000
shares of preferred stock, subject to stockholder approval. An increase in
authorized common shares is required to accommodate all prospective grants of
stock options and warrants under existing and proposed plans.
[4] Stock options:
The Company applies APB 25 and related interpretations in accounting
for its stock option and purchase plans. In October 1995, SFAS 123 was issued
and requires the Company to elect either expense recognition or disclosure-only
alternative for stock-based employee compensation. The expense recognition
provision encouraged by SFAS 123 would require fair-value based financial
accounting to recognize compensation expense for the employee stock
compensation plans. The Company has elected the disclosure-only alternative.
The Company has computed the pro forma disclosures required under SFAS
123 for employee stock options granted as of June 30, 1997 and June 30, 1996
using the Black Scholes option pricing model prescribed by SFAS 123.
The assumptions used and the weighted average information for the
years ended June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1997 JUNE 30, 1996
--------------- --------------
<S> <C> <C>
Risk-free interest rates.................................... 5.84% - 6.21% 6.10 - 6.72%
Expected dividend yield..................................... - -
Expected lives.............................................. 3 - 6 years 6 years
Expected volatility......................................... 85% 85%
Weighted-average grant-date fair value of options
granted during the period................................... $0.38 $0.71
</TABLE>
Management has determined that accounting for stock-based compensation
under SFAS 123 would not have a significant effect on pro forma net loss or pro
forma net loss per share for the year ended June 30, 1997 and 1996. Accordingly
such pro forma information is not presented herein.
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option-pricing models require the
input of highly subjective assumptions including expected stock price
volatility. Because the
F-14
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
During 1993 the Board of Directors and the stockholders of the Company
approved a Stock Option Plan (the "1993 Plan") as amended, which provides for
the granting of up to 800,000 shares of common stock, pursuant to which
directors, employees, non-employees, consultants and advisors are eligible to
receive stock options. On June 24, 1997 the Board of Directors approved,
subject to stockholder approval, an increase in the number of shares under the
1993 Plan to 4,200,000. Options granted under the 1993 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 value on date of grant, except that the exercise period
of options granted to a stockholder owning more than 10% of the outstanding
capital stock may not exceed five years and their exercise price may not be
less than 110% of the fair value of the common stock at date of grant.
Stock option activity under the 1993 Plan in the years ending June 30,
1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------------- --------- ------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year.......................................... 418,000 $1.10 157,000 $1.17
Granted..................................... 1,048,500 (1) 0.61 261,000 1.05
Exercised................................... (30,700) 0.50
Canceled.................................... (41,300) 0.98
Outstanding at end of year...................... 1,394,500 (1) 0.75 418,000 1.10
Options exercisable at year-end................. 398,184 1.03 183,250 1.18
Options available for future grant.............. 2,774,000 82,000
</TABLE>
- --------------
(1) Including options granted for 594,500 shares of common stock which are
subject to approval by stockholders of an increase to 4,200,000 shares
under the 1993 Plan.
Stock options outstanding under the 1993 Plan at June 30, 1997 have an
exercise price from $.50 to $1.25 and a weighted average remaining life of 7.02
years.
In April 1995, the Company granted a business consultant an option
outside the 1993 Plan to purchase 50,000 shares at $2.00 per share and 50,000
shares at $3.00 in lieu of payment for services rendered. At the date of grant
the Company recorded an expense of $45,000 for such services. The option
agreement was amended to reduce the option exercise price to $0.10 per share
for 50,000 shares (this option was exercised for 50,000 shares in May 1995)
resulting in an additional expense of $35,000. The remaining option for 50,000
shares was canceled.
During the years ended June 30, 1997 and 1996 the Company issued
options for 91,500 and 115,500 shares of common stock under the 1993 Plan to
consultants which were valued at $45,750 and $57,500, respectively and are
being amortized over the period of the related agreements.
On June 24, 1997 the Board of Directors approved the
1997 Consultant Stock Option Plan (the "1997 Plan") subject to stockholder
approval which provides for the granting of up to 2,500,000 shares of Common
Stock, pursuant to which consultants and advisors to the Company are eligible
to receive stock options. Options granted under the 1997 Plan are exercisable
for a period not to extend beyond February 14, 2007 and at an exercise price
determined by the Board or Plan Administrator. As of June 30, 1997, in
F-15
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
connection with the license of the Purgative Product, the Company granted
options for 750,000 shares to consultants exercisable at $0.61 per share. Of
the options for 750,000 shares, 250,000 options vest on the earlier of
November 14, 1997 or the completion of a debt or equity financing of at least
$2,000,000 with the remaining 500,000 options vesting upon the achievement of
certain development and sales milestones. In the year ended June 30, 1997, the
Company valued the 250,000 options at $88,000 which is being amortized over the
term of the consulting agreements. When the remaining 500,000 options vest the
Company will record a charge to operations based on the difference between
their market price and $.61. A stockholder meeting to consider approval of the
1997 Plan and other matters has been scheduled.
[5] Warrants:
The Company has the following warrants outstanding at June 30, 1997
for the purchase of its common stock:
(continued)
<TABLE>
<CAPTION>
NUMBER
OF WARRANTS EXERCISE
OUTSTANDING PRICE DESCRIPTION AND EXPIRATION DATE
----------- ----- -------------------------------
<S> <C> <C> <C>
Public 1,264,615 $6.84 Each warrant entitles the holder to purchase one share of
Warrants common stock at a the exercise price subject to adjustment for
dilution through May 31, 1998. The warrants may be redeemed
by the Company at a price of $.05 per warrant on 30 days
prior written notice if the closing bid price of common
stock averages at least $9.00 for the 20 consecutive
trading day period ending within 15 days of the notice of
redemption.
Underwriter's 107,500 $7.33 January 2000 - Each warrant entitles the holder to purchase
Warrant one share of stock and one warrant exercisable at $7.33.
Warrants 320,000 $1.00 October 2000 - The Company issued a warrant to purchase
Issued for 320,000 shares of common stock for financial and business
Services - services to be provided in accordance with an agreement with
1996 an investment banking firm. The Company valued the
warrants at $160,000 which is being amortized over the
period of the agreement.
</TABLE>
The weighted average exercise price for warrants exercisable into one
share of common stock was $5.86 as of June 30, 1997.
[6] Treasury Stock:
In December 1995, the Center of Efferent Therapy returned to the
Company 30,000 shares of the Company's common stock upon termination of an
agreement pursuant to which the shares were issued in 1993 in connection with
its agreement to perform certain testing services on behalf of the Company. In
February 1996, the Vice President of Ethnobotany resigned and returned 150,000
shares of common stock to the Company which he received in 1993 in connection
with an employment agreement. Such returns of shares have been accounted for at
their value when originally issued (par value). In November 1996, the Company
issued 165,441 shares to Amercom and 41,176 shares to a stockholder/officer in
settlement of certain obligations of which 180,000 of such shares came from
treasury (Note E). In May 1997, the stockholder officer transferred to the
Company 16,515 shares previously issued to her in payment of accrued salary,
such transfer was made in satisfaction of her obligation to the Company arising
from the payment of withholding tax relating to the issuance. The repurchased
shares are being held by the Company as treasury shares.
F-16
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTE G) - Commitments:
[1] Employment and consulting agreements:
The Company has entered into three to five-year employment and
consulting agreements with Russian and American botanists, ethnobotanists and
phytochemists, many of whom are stockholders. At June 30, 1997, future minimum
payments are as follows for employment and consulting agreements:
1998..................................... $61,000
1999..................................... 25,000
2000..................................... 10,000
------------
Total.................................... $ 96,000
===========
Effective June 5, 1995, the Company entered into a three year
employment agreement with the President and Chief Executive Officer for a base
annual salary of $165,000 subject to annual increases as determined by the
Board of Directors. The Board of Directors approved an increase to $185,000 per
annum in June 1996.
[2] Research agreements:
The Company has entered into an agreement with the Komarov Botanical
Institute of the Russian Academy of Sciences in St. Petersburg, Russia and
other institutions of higher education, for the use of laboratories and other
facilities and for research services. At June 30, 1997, future annual minimum
payments under the agreements are as follows:
1998....................................................... 18,000
1999....................................................... 18,000
2000....................................................... 18,000
2001....................................................... 18,000
2002....................................................... 18,000
Thereafter................................................. 18,000
---------
Total...................................................... $ 108,000
=========
[3] Lease commitment:
Prior to the closing of its initial public offering, nominal space was
provided at no charge by Amercom. In July 1995 the Company entered into a lease
agreement expiring April 2000, which provides for base rent of $195,300 per
annum. In connection with its lease agreement, the Company opened an
irrevocable letter of credit of $150,000, as security for its rental
obligation. The letter of credit is secured by a $150,000 certificate of
deposit.
In conjunction with the lease agreement, the Company entered into a
month to month cost-sharing agreement with Amercom and its affiliates ("Amercom
Affiliates") which provides for the use of a substantial portion of the office
space by Amercom Affiliates at the Company's approximate cost. The agreement
also provides for reimbursement by Amercom Affiliates for furnishings,
equipment and support services.
Rent expense was approximately $70,000 and $66,000 after reimbursement
by Amercom Affiliates for the years ended June 30, 1997 and June 30, 1996,
respectively. In January 1997, the Company agreed to issue an option to Amercom
which is subject to the success of Amercom in securing the release of the
Company from its obligations under its current office lease in New York City
(Note E).
F-17
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
[4] Other:
Pursuant to a management agreement with Amercom, the Company was
required to pay $112,500 for services rendered through June 30, 1994 which in
November 1996, was satisfied in full with the issuance of 165,441 shares of
Common Stock (Note E). Effective February 1995 the Company was required to pay
$8,333.33 per month, for a three-year period, for management services through
January 31, 1998. The Company has agreed to extend the Management Agreement by
two years. (See Note E).
(NOTE H) - Fair Value of Financial Instruments:
Financial instruments consist of cash and cash equivalents, U.S.
Treasury Bills and accounts payable. The carrying amount of these instruments
approximate fair value due to their short term nature.
(NOTE I) - Proposed Acquisitions and Private Placement
When it commenced operations, Panax focused on the discovery and
development of new pharmaceutical compounds identified in and isolated from
plants. In 1996, Panax modified its strategy, reducing its natural product
discovery activities and redirecting its principal efforts toward expanding its
pipeline of commercially viable pharmaceutical products by licensing or
acquiring specifically-targeted products developed for the treatment of certain
diseases.
Purgative Product. In February 1997, the Company entered into an
exclusive world-wide license agreement with ALW Partnership ("ALW") to develop,
use, market, sell, manufacture, have manufactured and sub-license in the field
of colonic purgative or laxatives a solid dosage form of sodium phosphate salt
for use as a colonic purgative or laxative. The Company paid ALW $100,000 as a
license fee upon execution of the agreement and is obligated to pay an
additional $150,000 upon consummation of a financing of $2,000,000.
Pursuant to the ALW License and certain three-year consulting
agreements with the partners of the ALW Partnership the Company is obligated
for: (i) additional cash payments of $250,000 upon receipt of FDA approval of a
product developed using the technology, (ii) royalties of 2% to 6% based on net
sales as defined and minimum royalties of $100,000 per annum after February
2003 and (iii) options as to an aggregate of up to 750,000 shares of Company
Common Stock issuable to partners of the ALW Partnership upon the achievement,
if any, of certain milestones and targets pertaining to FDA approval of
compounds and net sales targets.
The License is terminable by ALW if the Company: (i) fails to commit
at least $1,000,000 of funding to the development of the Purgative Product for
the first two years following consummation of the $2,000,000 financing, (ii)
has not paid royalties by February 2003 of at least $100,000 per year, (iii)
has failed to conclude a $2,000,000 financing by November 14, 1997 or (iv) if
no commercial sales of the product or "improvement" as defined have commenced
by February 2005. If the license is terminated by ALW, the Company would be
required to write off all amounts capitalized in connection therewith.
In connection with the acquisitions of CorBec and Sangen to be
consummated on the date when the Company completes an initial closing of an
equity investment of at least $8,000,000 ("Initial Closing"), the Company will
be obligated to pay acquisition consideration as follows:
CorBec. In May 1997, the Company entered into a letter of intent to
acquire the outstanding capital stock of CorBec Pharmaceuticals, Inc.
("CorBec"), a company involved in research and development. In connection with
the CorBec acquisition, the Company shall be obligated, upon consummation of
the Initial Closing, to pay to CorBec's shareholders $750,000 in cash and
to issue to such shareholders 750,000 shares of the Company's Common Stock.
Additional cash payments in the aggregate amount of $16,580,000, and issuances
of Company Common Stock in the aggregate amount of 720,000 shares shall
F-18
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
be due from the Company to CorBec's shareholders upon the achievement, if any,
of certain milestones and targets as defined. In addition, Panax has agreed to
enter into three-year consulting agreements with a consultant and the Chief
Executive Officer of CorBec, providing for aggregate consulting fees over three
years equal to $510,000, and for the grant of options with respect to an
aggregate of 170,000 shares of Common Stock with an option for an additional
200,000 shares to be granted to a consultant upon the achievement of certain
development milestones. The Company is also to fund up to $240,000 of sponsored
research over the course of three years.
Sangen and Thrombospondin Technology. In January 1997, the Company
entered into a letter of understanding to acquire the outstanding capital stock
of Sangen Pharmaceutical Company ("Sangen"), a company, the sole asset of which
is the right to acquire by license the rights to the Thrombospondin Technology.
In connection with the acquisition of Sangen, the Company has granted Dr.
Leonard S. Jacob, the sole stockholder of Sangen, who is to become Chairman of
the Board and Chief Executive Officer of the Company upon consummation of the
Initial Closing, options to purchase the greater of 1,200,000 shares of Common
Stock (900,000 options to be granted in connection with employment) or such
number of shares as will equal 7.5% of the "Fully Diluted Capitalization" of
the Company as defined. In connection with the acquisition of Sangen and its
licensed rights to the Thrombospondin Technology, the Company will issue
125,000 shares of Common Stock to Allegheny University of the Health Sciences
("AUHS") upon consummation of the Initial Closing; in addition, royalties based
on net sales and options as to an aggregate of up to 375,000 shares of Company
Common Stock shall be payable and issuable, as the case may be, by the Company
to AUHS and Dr. Tuszynski, upon the achievement of certain development and
sales milestones. Finally, the Company is to pay AUHS an aggregate of between
$450,000 (over the course of two years) and $850,000 (over the course of four
years) to fund sponsored research, depending on achievement of certain
development milestones.
In connection with the proposed acquisitions and a private placement
being attempted to raise the required financing, the Company has incurred
$304,000 of expenses at June 30, 1997 which have been classified as deferred
expenses. If the proposed acquisitions and private placement are not
consummated these costs will be expensed.
F-19
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To CorBec Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of CorBec Pharmaceuticals,
Inc. (a Delaware corporation in the development stage) as of December 31, 1996
and 1995, and the related statements of operations, stockholders' deficit and
cash flows for the years then ended, and for the period from inception (June
11, 1993) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CorBec Pharmaceuticals, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended and for the period from inception to
December 31, 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company
has incurred losses from its research and development activities and will
require additional funding to continue those activities. Such factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Arthur Andersen, LLP
Philadelphia, Pa.,
March 11, 1997
F-20
<PAGE>
CORBEC PHARMACEUTICALS, INC.
(a development-stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 877,449 $ 657,308
Prepaid expenses and other 2,083 4,129
------------ ------------
Total current assets 879,532 661,437
EQUIPMENT, net 493 2,465
------------ ------------
$ 880,025 $ 663,902
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable 1,779 3,764
Contracts payable 167,524 53,019
Accrued expenses 23,573 11,000
------------ ------------
Total current liabilities 193,056 67,783
------------ ------------
MANDATORY REDEEMABLE CONVERTIBLE
PREFERRED STOCK 2,650,000 1,650,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 7 and 8)
STOCKHOLDERS' DEFICIT:
Common Stock, $.001 par value; 10,000,000 shares
authorized; 369,230 shares issued and outstanding 369 369
Additional paid-in capital 18,278 18,278
Deficit accumulated during development stage (1,981,678) (1,072,528)
------------ ------------
Total stockholders' deficit (1,963,031) (1,053,881)
------------ ------------
$ 880,025 $ 663,902
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
CORBEC PHARMACEUTICALS, INC.
(a development-stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the
Period from
Inception
For the For the (June 11,
Year Ended Year Ended 1993)
December December to
31, 31, December 31,
1996 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development expenses $ 770,163 $ 441,263 $ 1,689,565
General and administrative expenses 146,739 63,575 333,715
---------- ---------- ------------
Net loss from operations (916,902) (504,838) (2,023,280)
INTEREST INCOME 7,752 9,273 41,602
---------- ---------- ------------
Net loss $(909,150) $(495,565) $(1,981,678)
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
CORBEC PHARMACEUTICALS, INC.
(a development-stage company)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During
Common Paid-in Development
Stock Capital Stage Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JUNE 11, 1993 $ -- $ -- $ -- $ --
Issuance of 184,615 shares of Common
Stock at $.001 per share to founder
on June 11, 1993 185 -- -- 185
Issuance of 184,615 shares of Common
Stock at $.10 per share for
technology on June 17, 1993 184 18,278 -- 18,462
Net loss -- -- (238,188) (238,188)
----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1993 369 18,278 (238,188) (219,541)
Net loss -- -- (338,775) (338,775)
----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1994 369 18,278 (576,963) (558,316)
Net loss -- -- (495,565) (495,565)
----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1995 369 18,278 (1,072,528) (1,053,881)
Net loss -- -- (909,150) (909,150)
----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1996 $ 369 $ 18,278 $(1,981,678) $(1,963,031)
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
CORBEC PHARMACEUTICALS, INC.
(a development-stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Period from
Inception
For the For the (June 11, 1993)
Year Ended Year Ended to
December 31, December 31, December 31,
1996 1995 1996
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (909,150) $ (495,565) $(1,981,678)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation 1,972 1,973 5,424
Licensed technology acquired with stock -- -- 18,462
(Increase) decrease in prepaid expenses and
other 2,046 (2,187) (2,083)
Increase in accounts payable, contracts
payable and accrued expenses 125,273 42,229 193,056
----------- ---------- -----------
Net cash used in operating activities (779,859) (453,550) (1,766,819)
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment -- -- (5,917)
----------- ---------- -----------
Net cash used in investing activities -- -- (5,917)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES: -- -- 185
Proceeds from issuance of common stock
Proceeds from issuance of preferred stock 1,000,000 650,000 2,650,000
----------- ---------- -----------
Net cash provided by financing
activities 1,000,000 650,000 2,650,185
----------- ---------- -----------
Net increase in cash and
cash equivalents 220,141 196,450 877,449
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 657,308 460,858 --
----------- ---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 877,449 $ 657,308 $ 877,449
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
CORBEC PHARMACEUTICALS, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BACKGROUND AND GOING CONCERN:
Background
CorBec Pharmaceuticals, Inc. (the "Company") is a development-stage company,
which was incorporated in Delaware on June 11, 1993, for the purposes of
developing, manufacturing and marketing therapies for the modification of Fc
receptor expression on macrophage white blood cells. Operations of the Company
are subject to certain risks and uncertainties including, but not limited to,
uncertainties related to technology uncertainty, uncertainties related to
clinical trials, uncertainty of future profitability and access to capital and
dependence on key personnel. See "Going Concern".
Going Concern
As of December 31, 1996 the Company has a stockholders' deficit. The Company
has incurred losses from its research and development activities and will
require additional funding to continue those activities. There is no assurance
that future financing will be available when needed or that the Company's
planned products will be commercially successful. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents for the purpose of
determining cash flows. Cash equivalents at December 31, 1996 and 1995 consist
of money market accounts.
Research and Development
Expenditures for research and development are charged to expense as incurred.
In addition, it is the Company's policy to charge patent costs to expense as
incurred.
Equipment
Equipment consists of computer equipment recorded at cost and depreciated
over an estimated useful life of three years. As of December 31, 1996 and 1995,
accumulated depreciation was $5,424 and $3,452, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
the objective of which is to recognize the amount of current and deferred
income taxes payable or refundable at the date of the financial statements as
a result of all events that have been recognized in the financial statements
as measured by enacted tax laws.
F-25
<PAGE>
At December 31, 1996, the Company had net operating loss carry forwards for
federal income tax purposes of approximately $289,000. The net operating loss
carry forwards begin to expire in 2008 and are subject to review and possible
adjustment by the Internal Revenue Service.
The approximate income tax effect of each type of temporary differences and
carry forward is as follows:
December 31,
---------------------------
1996 1995
---------- ----------
Benefit of operating loss carry forwards $ 98,260 $ 42,688
Start-up costs 108,752 60,687
Capitalized research and development 464,122 259,712
Valuation allowance (671,134) (363,087)
---------- ----------
$ -- $ --
========== ==========
Due to the uncertainty surrounding the realization of the deferred tax asset,
the Company has provided a full valuation allowance against this amount.
3. RESEARCH AND LICENSE AGREEMENTS:
On June 17, 1993, the Company and the Trustees of the University of
Pennsylvania ("U of P") entered into a Research Agreement and a License
Agreement. This agreement was extended on June 14, 1996, and expires June 17,
1997. Under the Research Agreement, the Company is required to fund the
sponsored research and development in accordance with the Research Agreement.
In 1996 and 1995, the Company charged $50,000 and $37,500, respectively, to
research and development expense. Under the Research Agreement, the Company is
committed to pay U of P the sum of $25,000 in 1997.
Under the Licensing Agreement, the Company will receive the first option to
acquire an exclusive worldwide royalty bearing right and license over certain
patent rights, information and inventions of U of P. The Company is required
to pay U of P a royalty, as defined, on all of the net sales of any product
utilizing the licensed technology. Minimum royalties are required under the
agreement beginning in 1998. The License Agreement will terminate upon the
expiration of the last patent right covered under the Research and License
Agreements or may be terminated by either party by following the specific
actions stipulated in the License Agreement.
4. MANDATORY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The Company has authorized 5,000,000 shares of Convertible Preferred Stock.
During 1993, the Company sold 1,000,000 shares of Series A Convertible
Preferred Stock ("Series A") for $1 per share, generating proceeds of
$1,000,000. The Series A shares are convertible into Common Stock based on a
defined conversion rate (currently one Common Stock share for each Series A
share). Prior to an initial public offering, the Series A shares are
redeemable at the option of the holder at any time. The Series A shareholders
are entitled to dividends equal to those declared to Common Stock shareholders
at an amount based on the number of Common Stock shares that would be
outstanding if the Series A shares were converted to Common Stock on the date
of the declaration of the dividend. The Series A redemption price equals the
sum of all accrued or declared but unpaid dividends, plus $1 per Series A
share. The Series A shareholders have the same voting rights as the Common
Stock shareholders and are entitled to one vote for each Series A share held.
During 1995, the Company sold 520,000 shares of Series B Convertible Preferred
Stock ("Series B") for $1.25 per share, generating proceeds of $650,000. The
rights and obligations of the Series B shareholders are the same as the Series
A shareholders except for the redemption price, which equals the sum of all
accrued but unpaid dividends, plus $1.25 per Series B share.
During 1996, the Company sold 500,000 shares of Series C Convertible Preferred
Stock ("Series C") for $2.00 per share, generating proceeds of $1,000,000. The
rights and obligations of the Series C shareholders are the same as the Series
A shareholders except for the redemption price, which equals the sum of all
accrued but unpaid dividends, plus $2.00 per Series C share.
F-26
<PAGE>
5. COMMON STOCK
On June 11, 1993, the Company issued 184,615 shares of Common Stock to its
founder at a price of $.001 per share. Subsequent to the preferred stock
financing, on June 17, 1993, the Company issued 184,615 shares of Common Stock
to U of P as part of the Licensing Agreement discussed in Note 3. The fair
market value of the shares issued of $18,462 was charged to research and
development expense.
6. STOCK OPTION PLAN:
On June 17, 1993, the Company issued nonqualified stock options to a
consultant to purchase 49,231 shares of Common Stock at $.10 per share. These
options are exercisable in full upon the date of issuance. The options expire
ten years from the date of issuance or upon other events as defined in the
agreement. None of these options has been exercised as of December 31, 1996.
The Company's Amended and Restated 1993 Equity Incentive Plan provides for
both incentive and nonqualified stock options to be granted to employees and
consultants of the Company. Under the plan, options may be granted for the
purchase of up to 180,000 shares of Common Stock. The number of options to be
granted and the option prices are determined by the Stock Option Committee in
accordance with the terms of the plan. The exercise price of the incentive
stock options granted under the plan must be at least equal to the fair market
value of such shares on the date of grant, and the maximum exercise period is
five years.
The exercise price of the nonqualified stock option granted under the plan
must be at least equal to 85% of the fair market value of such shares on the
date of grant, and the maximum exercise period is ten years.
The Company accounts for the Option Plan under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for the Option
Plan been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income would have been reduced by
approximately $2,600 for the year ended December 31, 1996. The fair value of
options granted at market during the year ended December 31, 1996 was
estimated as $0.15.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 6.10% for 1996 and 1995 grants; an
expected life of seven years; dividend yield of zero; and volatility of zero
for all grants. Because SFAS No. 123 method of accounting is not required to
be applied to options granted prior to January 1, 1995, the resulting pro
forma compensation charge may not be representative of that to be expected in
future years.
Outstanding Option Aggregate
Options Prices Price
----------- ------ ---------
BALANCE, DECEMBER 31, 1993 -- $ -- $ --
Granted 20,000 .10 2,000
------ -------
BALANCE, DECEMBER 31, 1994 20,000 2,000
.10
Granted 60,000 .125 7,500
------ -------
BALANCE, DECEMBER 31, 1995 80,000 .10 -.125 9,500
Granted 10,000 .20 2,000
------ -------
BALANCE, DECEMBER 31, 1996 90,000 $.10-$.20 $11,500
====== ========= =======
As of December 31, 1996, there were 46,662 options exercisable under the
Amended and Restated 1993 Equity Incentive Plan. In addition, in 1995, the
Company committed to grant 100,000 options to a consultant subject to the
attainment of specific milestones, as defined. As of December 31, 1996, none
of these milestones have been attained.
7. RELATED-PARTY TRANSACTIONS:
Included in research and development expense for 1996 and 1995 is $60,000
related to a consulting agreement with a stockholder of the Company. The
agreement provides for monthly payments of $5,000 and expires in June 1997.
F-27
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
On December 5, 1996, the Company renewed an agreement with an individual to
provide management services for the Company. The agreement provides for
compensation of $110,000 to be paid in equal monthly installments over the
one-year term of the contract. During 1996, the Company charged $100,833 to
research and development expense under this agreement. Future commitments
under this agreement are $100,833.
On April 15, 1996, the Company entered into an agreement with a clinical
services laboratory to provide the Company with chemical and other clinical
services. During 1996, the Company charged $98,244 to research and development
expense related to this agreement. Future commitments under this agreement are
$391,248 and are expected to be incurred over the course of the study, which
is expected to run through March of 1998.
On August 1, 1996, the Company entered into an agreement with a clinical
services laboratory to provide the Company with general clinical services.
During 1996, the Company charged $4,513 to research and development expense
related to this agreement. Future commitments under this agreement are $46,520
and are to be incurred over the course of the study. The term of this
agreement commences on August 1, 1996 and will automatically renew for
successive one year terms, terminating at the conclusion of the testing
protocol.
F-28
<PAGE>
CORBEC PHARMACEUTICALS, INC.
BALANCE SHEET
June 30,
1997
(Unaudited)
-----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 335,259
Prepaid expenses and other 11,949
------------
Total current assets 347,208
EQUIPMENT, net --
$ 347,208
============
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accrued expenses $ --
-----------
Total current liabilities --
------------
MANDATORY REDEEMABLE PREFERRED STOCK 2,650,000
------------
STOCKHOLDERS' DEFICIT:
Common Stock 369
Additional paid-in capital 18,278
Deficit accumulated during development stage (2,321,439)
-----------
Total stockholders' deficit (2,302,792)
------------
$ 347,208
------------
See accompanying notes.
F-29
<PAGE>
CORBEC PHARMACEUTICALS, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the
Period from
For the Inception
For the Six Months (June 11, 1993)
Six Months Ended Ended through
June 30, June 30, June 30,
1997 1996 1997
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -------------
<S> <C> <C> <C>
OPERATING EXPENSES:
Research and development expenses $ 272,508 $ 348,617 $ 1,962,073
General and administrative expenses 71,715 96,271 405,430
---------- ---------- ------------
Net loss from operations (344,223) (444,888) (2,367,503)
INTEREST INCOME: 4,462 3,564 46,064
---------- ---------- ------------
Net loss $(339,761) $(441,324) $(2,321,439)
========== ========== ============
</TABLE>
See accompanying notes.
F-30
<PAGE>
CORBEC PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Period from
For the For the Inception
Six Months Six Months (June 11, 1993)
Ended Ended through
June 30, June 30, June 30,
1997 1996 1997
(Unaudited) (Unaudited) (Unaudited)
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $ (339,761) $ (441,324) $(2,321,439)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation 493 985 5,917
Licensed technology acquired
with stock -- -- 18,462
(Increase) decrease in prepaid
expenses and other (9,866) 4,129 (11,949)
Increase (decrease) in accounts
payable and accrued expenses (193,056) (67,783) --
----------- ----------- -----------
Net cash used in operating
activities (542,190) (503,993) (2,309,009)
------------ ----------- -----------
CASH FROM INVESTING ACTIVITIES:
Purchase of equipment -- -- (5,917)
----------- ----------- -----------
Net cash used in investing activities
-- -- (5,917)
----------- ----------- -----------
CASH FLOW FROM FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock -- -- 185
Proceeds from issuance of preferred
stock -- -- 2,650,000
----------- ----------- -----------
Net cash provided by financing
activities -- -- 2,650,185
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (542,190) (503,993) 335,259
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 877,449 657,308 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 335,259 $ 153,315 $ 335,259
=========== =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE>
CORBEC PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The financial statements as of June 30, 1997 and for the six months ended June
30, 1997 and 1996 are unaudited and, in the opinion of management of CorBec
Pharmaceuticals, Inc. (the "Company"), include all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
results for those interim periods. The results of operations for the six
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for the full year. For further information reference is made to the
Company's year end financial statements appearing elsewhere in this Proxy
Statement.
2. SALE OF COMPANY
In May 1997, the Company's Board of Directors entered into a letter of intent
to sell the Company to Panax Pharmaceutical Company, Ltd. ("Panax"). The sale
is subject to certain conditions including Panax obtaining necessary
financing.
F-32
<PAGE>
SANGEN PHARMACEUTICAL COMPANY
BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
ASSETS
Cash $1,000
STOCKHOLDER'S EQUITY
Stockholder's Equity
Common Stock, $1.00 par value,
1000 shares authorized, 100 shares
issued and outstanding $ 100
Additional paid-in capital $ 900
------
$1,000
------
Sangen Pharmaceutical Company was organized in January 1997 and
incorporated in the State of Delaware. Sangen's principal asset is its
right to enter into an exclusive worldwide license to the Thrombospondin
Technology, a cancer treatment technology, currently owned by Allegheny
University of the Health Sciences.
F-33
<PAGE>
Annex A
Certificate of Amendment of the Certificate of Incorporation
of
Panax Pharmaceutical Company Ltd.
Under Section 805 of the Business Corporation Law
It is hereby certified that:
FIRST: The name of the corporation is Panax Pharmaceutical Company
Ltd.
SECOND: The certificate of incorporation of the corporation was filed
with the Department of State on May 27, 1993 and a certificate of amendment
thereto was filed on [ , 1994].
THIRD: The certificate of incorporation is hereby amended as
authorized in Subdivision 1 of Section 801 of the Business Corporation Law, to
delete Article "FIRST" in its entirety and to effect the following Article
FIRST:
"FIRST: The name of the corporation is Inkine Pharmaceutical Company,
Inc."
FOURTH: The certificate of incorporation is hereby amended as
authorized in Subdivision 7 of Section 801 of the Business Corporation Law, to
delete Article "FOURTH" in its entirety and to effect the following Article
FOURTH:
"FOURTH: The aggregate number of shares which the corporation shall
have the authority to issue is: (a) Fifty Million (50,000,000) shares
of Common Stock, all of which shall have a par value of One Hundredth
($.001) of a cent; and (b) Two Million (2,000,000) shares of Preferred
Stock in series and the authority to establish and fix the
designations of each series and the variations in the relative rights,
preferences and limitations as between series shall be vested in the
Board of Directors of the corporation. The Board of Directors is
authorized to file an amendment to the certificate of incorporation of
the corporation under Section 805-A of the BCL setting forth the
designations of each series and the variations in the relative rights,
preferences and limitations of each series of preferred stock without
further action by the shareholders of the corporation."
FIFTH: The foregoing amendment of the certificate of incorporation of
the corporation was authorized by the vote in writing of all the members of the
Board of Directors of the corporation, followed by the vote of the holders of
at least a majority of all the outstanding shares of the corporation entitled
to vote on the said amendment of the certificate of incorporation.
IN WITNESS WHEREOF, we have subscribed this document on the date set
forth below and do hereby affirm, under the penalties of perjury, that the
statements contained herein have been examined by us and are true and correct.
Panax Pharmaceutical Company Ltd
Date: , 1997 --------------------------------
------------ -- By: , President
and
--------------------------------
By: , Secretary
A-1
<PAGE>
Annex B
PANAX PHARMACEUTICAL COMPANY, LTD.
STOCK OPTION PLAN
1. Purpose of Plan. The Panax Pharmaceutical Company, Ltd. Stock
Option Plan (the "Plan") is intended as an incentive to attract and retain
persons of training, experience and ability as directors, employees and
non-employee consultants and advisors of Panax Pharmaceutical Company, Ltd., a
New York corporation (the "Company") and its subsidiaries, to encourage the
sense of proprietorship of such persons, and to stimulate the active interest
of such persons in the development and financial success of the Company and its
subsidiaries. Stock options ("Options") granted under the Plan may, at the
discretion of the granting authority, but need not, contain such terms as will
qualify the Options as incentive stock options ("ISOs") within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
any successor provision thereto.
2 Administration of Plan. The Board of Directors (the "Board") or a
committee appointed and maintained by the Board shall administer the Plan (the
"Plan Administrator"). The Plan Administrator shall consist of at least three
members who shall serve at the pleasure of the Board. The Board or the Plan
Administrator shall have full power and authority: (i) to designate
participants; (ii) to designate Options or any portion thereof as ISOs; (iii)
to determine the terms and provisions of respective Option Agreements (which
need not be identical) including, but not limited to, provisions concerning the
time or times when and the extent to which the Options may be exercised and the
nature and duration of restrictions as to transferability or restrictions
constituting substantial risk of forfeiture; (iv) to accelerate the right of an
optionee to exercise in whole or in part any previously granted Option; and (v)
to interpret the provisions and supervise the administration of the Plan.
The Board or the Plan Administrator shall also have the authority to
grant Options in its discretion to the holder of an outstanding Option, in
addition to or in exchange for the surrender and cancellation of the
outstanding Option, which additional or new Option may have a purchase price
lower than provided in the outstanding Option and containing such other terms
and conditions as the Board or the Plan Administrator may prescribe in
accordance with the provisions of the Plan.
All decisions and selections made by the Board or the Plan
Administrator pursuant to the provisions of the Plan shall be made by a
majority of its members except that no member of the Board or Plan
Administrator shall vote on, or be counted for quorum purposes, with respect to
any proposed action of the Board or Plan Administrator relating to any Option
to be granted to that member. Any decision reduced to writing and signed by a
majority of the members who are authorized to make such decision shall be fully
effective as if it had been made by a majority at a meeting duly held.
Each member of the Board or the Plan Administrator shall be
indemnified and held harmless by the Company against any cost or expense
(including counsel fees) reasonably incurred by him or liability (including any
sum paid in settlement of a claim with the approval of the Company) arising out
of any act or omission to act in connection with the Plan unless arising out of
such member's own fraud or bad faith, to the extent permitted by applicable
law. Such indemnification shall be in addition to any rights of indemnification
the member may have as director or otherwise under the by-laws of the Company,
any agreement, vote of stockholders or disinterested directors, or otherwise.
3. Designation of Participants. The persons eligible for participation
in the Plan as recipients of Options shall include only directors of the
Company and employees and non-employee consultants and advisors of the Company
or any of its subsidiaries; provided that only employees of the Company or of
any subsidiary of the Company shall be eligible to be recipients of ISOs; and
provided further that eligible consultants and advisors shall be only those who
render bona fide services to the Company or any subsidiary, which services may
not be in connection with the offer or sale of securities in a capital-raising
transaction.
4. Stock Reserved for Plan. Subject to adjustment as provided in
paragraph 6 hereof, a total of 4,200,000 shares of the Common Stock, $.0001 par
value, of the Company ("Stock") shall be subject to the
B-1
<PAGE>
Plan. The shares subject to the Plan shall consist of unissued shares, and
such number of shares shall be, and hereby is, reserved for sale for such
purpose. Any of such shares which may remain unsold and which are not subject
to outstanding Options at the termination of the Plan shall cease to be
reserved for the purpose of the Plan, but until termination of the Plan the
Company shall at all times reserve a sufficient number of shares to meet the
requirements of the Plan. Should any Option for any reason expire or be
cancelled prior to its exercise or relinquishment in full, the shares
theretofore subject to such Option may again be subjected to an Option
under the Plan.
5. Option Price. (a) The purchase price of each share subject to an
ISO shall not be less than 100% (or 110%, if at the time of grant the optionee
owns, directly or indirectly, more than 10% of the combined voting power of all
classes of stock of the Company or of any subsidiary of the Company) of the
Fair Market Value of such share (as defined in paragraph (b)) on the date the
ISO is granted. The purchase price of each share subject to an Option or any
portion thereof which is not designated by the Board or Committee as an ISO
shall not be less than the Fair Market Value of such share on the date the
Option is granted or the par value of the Company's Stock.
(b) The determination of the Fair Market Value of a share shall be
made by the Board of Directors using such method as it determines to be
reasonable in the circumstances unless the shares of Common Stock are
listed or admitted for trading on a national securities exchange or on the
National Association of Securities Dealers Automated Quotation System
("NASDAQ") or, if not so listed or admitted, selling prices are quoted by the
National Quotation Bureau, Inc. If listed or admitted, the Fair Market Value
of the shares shall be the closing sale price on the date of grant or the
average of the closing sales prices for such period (but not longer than
thirty days) immediately preceding the date of grant the Board of Directors or
the Plan Administrator deems reasonable in the circumstances given,
consideration the volume of trading in the shares:
A. On:
(I) the national securities exchange, if listed or admitted
on such exchange; or
(ii) if not so listed or admitted, on NASDAQ, if listed or
admitted on NASDAQ; or
B.If the shares are traded in the over-the-counter market and
not listed or admitted on NASDAQ, the Fair Market Value or the average
of the high bids and low asked prices of a share shall be the mean
between the high bid and low asked prices as quoted for the date of
grant or for such period by the National Quotation Bureau in its "pink
sheets" or equivalent record or publication.
(c) The option price shall be payable upon the exercise of the Option
in cash, by check, or, at the option of the Board or the Committee, shares of
the Company's stock (valued at their Fair Market Value) or other form
satisfactory to the Board or the Committee.
(d) The proceeds of the sale of the Stock subject to an Option are to
be added to the general funds of the Company and used for its corporate
purposes.
6. Adjustments. (a) If the Company is reorganized, or merged or
consolidated with another corporation while unexercised Options remain
outstanding under the Plan, there shall be substituted for the shares subject
to the unexercised portions of such outstanding Options an appropriate number
of shares of each class of stock or other securities of the reorganized, or
merged or consolidated corporation which were distributed to these stockholders
of the Company in respect of such shares; provided, however, that all such
Options may be exercised in full by the optionees as of the effective date of
any such reorganization, merger or consolidation of the Company without regard
to the installment exercise provisions of the Option, by the optionees' giving
notice in writing to the Company of their intention to so exercise.
(b) If the Company is liquidated or dissolved while unexercised
Options remain outstanding under the
Plan, then all such outstanding Options may be exercised in full by the
optionees as of the effective date of any such liquidation or dissolution of
the Company without regarding to the installment exercise provisions of the
Option, by the optionees' giving notice in writing to the Company of their
intention to so exercise.
B-2
<PAGE>
(c) If the outstanding shares of Stock shall at any time be changed or
exchanged by declaration of a stock dividend, stock split, combination or
exchange of shares, recapitalization, extraordinary dividend payable in stock
of a corporation other than the Company, or otherwise in cash, or any other
like event by or of the Company, and as often as the same shall occur, then the
number, class and kind of shares subject to this Plan and subject to any
outstanding Options theretofore granted, and the option prices, shall be
appropriately and equitably adjusted so as to maintain the proportionate number
of shares without changing the aggregate option price; provided, however, that
no adjustment shall be made by reason of the distribution of subscription
rights on outstanding stock.
7. Term and Exercise of Options. (a) The Option Agreement evidencing
the Option shall set forth the terms of the Option, including the period during
which it must be exercised, except that no Option may be exercisable after the
expiration of 10 years from the date of grant or, if granted to a person who
owns more than 10% of the voting stock of the Company at the time of grant,
after the expiration of five years from the date of grant.
(b) Options granted under the Plan shall not be transferable by
optionees other than by will or the laws of descent and distribution, and
during an optionee's lifetime shall be exercisable only by that optionee.
(c) Options granted to the Company's employees or directors may not be
exercised after the termination of the term of employment of the employee or,
if the optionee is a non-employee director, after service as a director, unless
(i) prior to the date of termination of employment or service, the Board or the
Plan Administrator shall authorize, in the relevant Option Agreement or
otherwise, an extension of the term of all or part of the Option beyond the
date of such termination for a period not to exceed the period during which the
Option by its terms would otherwise have been exercisable, (ii) termination of
employment is without cause of the optionee, in which event any Option still in
force and unexpired may be exercised within a period of 90 days from the date
of such termination, but only with respect to the number of shares purchasable
at the time of such termination, or (iii) termination is the result of death or
disability, in which event any Option still in force and unexpired may be
exercised in whole or in part without regard to the installment exercise
provisions of the Option, within a period designated in the Option Agreement,
but not less than 60 days from the date of termination. An Option held by a
non-employee consultant or advisor which is still in force and unexpired on the
date of such person's death may be exercised by such person's legal
representative in whole or in part without regard to the installment exercise
provisions of the Option, within a period designated in the Option Agreement,
but not less than 60 days from the date of death.
(d) The holders of Options shall not be or have any of the rights or
privileges of stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until, following
exercise, certificates representing such shares shall have been issued by the
Company to such holders.
(e) Any form of Option Agreement authorized by the Plan may contain
such other provisions as the Board or the Plan Administrator may, from time to
time, deem advisable. Without limiting the foregoing, the Board or the Plan
Administrator may, with the consent of the optionee, from time to time cancel
all or any portion of any Option then subject to exercise, and the Company's
obligation in respect of such Option may be discharged by (i) payment to the
optionee of an amount in cash equal to the excess, if any, of the Fair Market
Value of the shares at the date of such cancellation subject to the portion of
the Option so cancelled over the aggregate purchase price of such shares, (ii)
the issuance or transfer to the optionee of shares of Stock with a Fair Market
Value at the date of such transfer equal to any such excess, or (iii) a
combination of cash and shares with a combined value equal to any such excess,
all as determined by the Board or the Plan Administrator in its sole
discretion.
(f) Options shall be exercised by the optionee by giving written
notice to the Company, which exercise shall be effective upon receipt of such
notice by the Secretary of the Company at its principal office. The notice
shall specify the number of shares with respect to which the Option is being
exercised.
8. Maximum ISO Award. The aggregate Fair Market Value of Stock
(determined as of the date of the grant of options) with respect to which ISOs
are exercisable for the first time by any optionee during any calendar year
shall not exceed the limitation provided under Section 422 of the Code or any
successor provision thereto.
B-3
<PAGE>
9. Purchase for Investment. Unless shares of Stock covered by the Plan
have been registered under the Securities Act of 1933, as amended (the "Act"),
or the Company has determined that such registration is unnecessary, each
person exercising an Option under the Plan may be required by the Company to
give a representation in writing that such person is acquiring such shares for
his or her own account, for investment and not with a view to, or for sale in
connection with, the distribution of any part thereof. The Company reserves the
right to appropriately legend certificates evidencing the shares issuable upon
exercise that the shares may not be sold or transferred until they are
registered under the Act or transferred in a transaction exempt from
registration thereunder and to place stop transfer orders on their records as
to such shares.
10. Termination of Plan. The Plan shall be effective as of August 1,
1993 and shall terminate on a date 10 years thereafter.
11. Amendments or Termination. The Board may amend, alter, or
discontinue the Plan, except that no amendment or alteration shall be made
which would impair the rights of the holder of any Option theretofore granted
without his consent, and except that no amendment or alteration shall be made
which, without the approval of the stockholders of the Company, would:
(a) Increase the total number of shares reserved for the purposes of
the Plan, except as is provided in Section 6, or decrease the option price
provided in Section 5, or change the class of persons eligible to participate
in the Plan as provided in Section 3; or
(b) Extend the option period provided for in Section 7.
12. Government Regulations. The Plan, and the granting and exercise of
Options hereunder, and the obligation of the Company to sell and deliver shares
or cash under such Options, shall be subject to all applicable laws, rules, and
regulations, including the registration of the shares under to the Securities
Act of 1933, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
13. Governing Law. This Plan shall be deemed made in the State of New
York and shall be governed by and construed and enforced in accordance with the
laws of such State applicable to contracts made and to be performed in such
State, without giving effect to the principles of conflict laws.
B-4
<PAGE>
ANNEX C
PANAX PHARMACEUTICAL COMPANY LTD.
1997 CONSULTANT STOCK OPTION PLAN
1. Purpose of Plan. The Panax Pharmaceutical Company Ltd. 1997
Consultant Stock Option Plan (the "Plan") is intended as an incentive to
attract and retain persons of training, experience and ability as consultants
and advisors to Panax Pharmaceutical Company Ltd. (the "Company") and its
subsidiaries, to encourage the sense of proprietorship of such persons, and to
stimulate the active interest of such persons in the development and financial
success of the Company and its subsidiaries.
2. Administration of Plan. The Board of Directors of the Company (the
"Board") or a Stock Option Committee (the "Committee") appointed and maintained
by the Board shall have the power to administer the Plan. The Committee shall
consist of at least two members who shall serve at the pleasure of the Board.
The Board or the Committee shall have full power and authority: (i) to
designate participants; (ii) to determine the terms and provisions of
respective Option Agreements (which need not be identical) including, but not
limited to, provisions concerning the time or times when and the extent to
which the Options may be exercised and the nature and duration of restrictions
as to transferability or restrictions constituting substantial risk of
forfeiture; (iii) to accelerate the right of an optionee to exercise in whole
or in part any previously granted Option; and (iv) to interpret the provisions
and supervise the administration of the Plan.
The Board or the Committee shall also have the authority to grant
Options in its discretion to the holder of an outstanding Option, in addition
to or in exchange for the surrender and cancellation of the outstanding Option,
which additional or new Option may have a purchase price lower than provided in
the outstanding Option and containing such other terms and conditions as the
Board or the Committee may prescribe in accordance with the provisions of the
Plan and as agreed to by the Optionee.
All decisions and selections made by the Board or the Committee
pursuant to the provisions of the Plan shall be made by a majority of its
members except that no member of the Board or Committee shall vote on, or be
counted for quorum purposes, with respect to any proposed action of the Board
or Committee relating to any Option to be granted to that member. Any decision
reduced to writing and signed by a majority of the members who are
authorized to make such decision shall be fully effective as if it had been
made by a majority at a meeting duly held.
Each member of the Board or Committee shall be indemnified and held
harmless by the Company against any cost or expense (including counsel fees)
reasonably incurred by him or liability (including any sum paid in settlement
of a claim with the approval of the Company) arising out of any act or omission
to act in connection with the Plan unless arising out of such member's own
fraud or bad faith, to the extent permitted by applicable law. Such
indemnification shall be in addition to any rights of indemnification the
member may have as director or otherwise under the by-laws of the Company, any
agreement, vote of stockholders or disinterested directors, or otherwise.
3. Designation of Participants. The persons eligible for participation
in the Plan as recipients of Options shall include only consultants and
advisors to the Company or any of its subsidiaries; and provided that eligible
consultants and advisors shall be only those who render bona fide services to
the Company or any subsidiary, which services may not be in connection with the
offer or sale of securities in a capital-raising transaction. Employees of the
Company are not eligible to participate in the Plan.
4. Stock Reserved for Plan. Subject to adjustment as provided in
paragraph 6 hereof, a total of 2,500,000 shares of the Common Stock, $.001 par
value, of the Company ("Stock") shall be subject to the Plan. The Stock subject
to the Plan shall consist of unissued shares, and such number of shares shall
be, and hereby is, reserved for sale for such purpose. Any of such Stock which
may remain unsold and which are not subject to outstanding Options at the
termination of the Plan shall cease to be reserved for the purpose of the Plan,
but until termination of the Plan the Company shall at all times reserve a
sufficient
C-1
<PAGE>
number of shares of Stock to meet the requirements of the Plan. Should any
Option for any reason expire or be cancelled prior to its exercise
or relinquishment in full, the Stock theretofore subject to such Option may
again be subjected to an Option under the Plan.
5. Option Price.
(a) The purchase price of each share subject to an Option shall be
determined by the Board of Directors but shall not be less than the par value
of the shares.
(b) The option price shall be payable upon the exercise of the Option
in cash, by check, or, at the option of the Board or the Committee or as
otherwise permitted by the Option Agreement, shares of the Company's stock
(valued at their Fair Market Value) or other form or value satisfactory to the
Board or the Committee.
(c) Fair Market Value on the date of the exercise shall be:
(i) If the shares of Common Stock are listed or admitted for
on a national securities exchange or if not listed or trading on an
exchange, on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), the closing sales price of shares of the
Common Stock on such date; or
(ii) If no sales have been effected on such date, the average
of the closing sale prices on the most recent three trading days
preceding the date of exercise on the national securities exchange on
which it is listed or admitted or on NASDAQ if not listed or admitted
on an exchange or, if no such sales were effected on any of such
markets during such three trading days, the Fair Market Value shall be
the mean between the high bid and low asked prices on the exchange or
NASDAQ on the date of exercise, as the case may be; or
(iii) If the shares are traded in the over-the-counter market
and not listed or admitted on NASDAQ, the mean between the high bid
and low asked prices as quoted on the date of exercise on the
Over-The-Counter Bulletin Board by the National Association of
Securities Dealer Inc. or, if no bid prices are quoted on such date,
the next preceding date to the date of grant for which a bid price is
quoted.
(d) The proceeds of the sale of the Stock subject to an Option are to
be added to the general funds of the Company and used for its corporate
purposes.
6. Adjustments.
(a) In the case of any reorganization of the Company or
reclassification or recapitalization of the outstanding shares of Common Stock
(other than a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision of combination) or
in the case of any consolidation of the Company with, or merger of the Company
into another corporation, or in the case of any sale, lease, transfer or
conveyance of all, or substantially all, of the assets of the Company, then, as
a part of such reorganization, reclassification, recapitalization,
consolidation, merger, sale, lease, transfer or conveyance, provision shall be
made so that the Optionee shall thereafter be entitled to receive upon exercise
hereof the number of shares of stock,
warrants, or other securities, property or other assets of the Company, or of
the successor corporation resulting from such reorganization, reclassification,
recapitalization, consolidation, merger, sale, lease, transfer or conveyance,
to which a holder of that number of shares of Stock deliverable upon the
exercise of Options previously granted hereunder would be entitled on such
reorganization, reclassification, recapitalization, consolidation, merger,
sale, lease, transfer or conveyance as if such Options had been exercised in
full immediately prior to the effectiveness of such reorganization,
reclassification, recapitalization, consolidation, merger, sale, lease,
transfer or conveyance, subject to further adjustment as provided for in such
Option agreements; provided, however, that any unexercised Options may be
exercised in full by the Optionees at any time prior to the effective date of
any such reorganization, reclassification, recapitalization, consolidation,
merger, sale, lease, transfer or conveyance, by giving written notice to the
Company.
(b) In case, prior to the expiration of the Options by exercise or by
their terms, the Company shall at any time make any distribution of its assets
to holders of its Common Stock as a liquidating or partial
C-2
<PAGE>
liquidating dividend by way of return of capital or otherwise (other than as
either a cash dividend payable out of any surplus legally available for the
payment of dividends under the laws of the State of New York or as a stock
dividend) or the Company is dissolved, then upon receipt of any Stock upon
exercise of such Option after the date of record for the determination of
holders of Common Stock entitled to such distribution of assets, the Optionee
shall also be entitled to receive, in addition to the Stock, the amount of
such assets or dividend which the Optionee would have received had it been
the holder of record on the record date for the determination of those
entitled to such distribution of such assets; provided that any unexercised
Options may be exercised in full by the Optionee at any time prior to the
effective date of any such liquidating dividend or dissolution by giving
written notice to the Company.
(c) If the outstanding shares of Common Stock shall at any time be
changed or exchanged by declaration of a stock dividend, stock split,
combination or exchange of shares, extraordinary dividend payable in stock of a
corporation other than the Company, or otherwise in cash, or any like event by
or of the Company, and as often as the same shall occur, then the number, class
and kind of Stock subject to this Plan and subject to any outstanding Options
theretofore granted, and the option prices, shall be appropriately and
equitably adjusted so as to maintain the proportionate number of shares of
Stock without changing the aggregate option price; provided,
however, that no adjustment shall be made by reason of the distribution of a
subscription right on outstanding stock.
(d) The Board of Directors or the Committee may provide in the Option
Agreement for other adjustments.
7. Term and Exercise of Options.
(a) The Option Agreement evidencing the Option shall set forth the
terms of the Option, including the period during which it must be exercised,
except that no qualifies as an "incentive stock option" under the applicable
provision of the Internal Revenue Code (the "Code") may be exercisable after
the period, if any, prescribed in the Code.
(b) Options granted under the Plan shall not be transferable by
optionees other than by will or the laws of descent and distribution, and
during an optionee's lifetime shall be exercisable only by that optionee.
(c) An Option which is still in force and unexpired on the date of
such person's death may be exercised by such person's legal representative in
whole or in part during the period designated in the Option Agreement.
(d) The holders of Options shall not be or have any of the rights or
privileges of stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until, following
exercise, certificates representing such shares shall have been issued by the
Company to such holders.
(e) Any form of Option Agreement authorized by the Plan may contain
such other provisions as the Board or the Committee may, from time to time,
deem advisable. Without limiting the foregoing, the Board or the Committee may,
with the consent of the optionee, from time to time cancel all or any portion
of any Option then subject to exercise, and the Company's obligation in respect
of such Option may be discharged by (i) payment to the optionee of an amount in
cash equal to the excess, if any, of the Fair Market Value of the Stock at the
date of such cancellation subject to the portion of the Option so cancelled
over the aggregate exercise price of such shares, (ii) the issuance or transfer
to the optionee of shares of Stock with a Fair Market Value at the date of such
transfer equal to any such excess, or (iii) a combination of cash and shares
with a combined value equal to any such excess, all as determined by the Board
or the Committee in its sole discretion.
(f) Options shall be exercised by the optionee by giving written
notice to the Company, which
exercise shall be effective upon receipt of such notice by the Secretary of
the Company at its principal office or as otherwise provided in the Option
Agreement. The notice shall specify the number of shares with respect to which
the Option is being exercised.
C-3
<PAGE>
8. Purchase for Investment. Unless shares of Stock covered by the plan
have been registered under the Securities Act of 1933, as amended (the "1933
Act"), or the Company has determined that such registration is unnecessary,
each person exercising an Option under the Plan may be required by the Company
to give a representation in writing that such person is acquiring such shares
for his or her own account, for investment and not with a view to, or for sale
in connection with, the distribution of any part thereof. The Company reserves
the right appropriately to legend certificates evidencing the shares of Stock
issuable upon exercise, that the such Stock may not be sold or transferred
until they are registered under the 1933 Act or transferred in a transaction
exempt from registration thereunder and to place stop transfer orders on their
records as to such shares.
9. Termination of Plan.The Plan shall be effective as of February 14,
1997 and shall terminate on a date 10 years thereafter. The termination of the
Plan shall not affect any Option previously granted under the Plan.
10. Amendments. The Board may amend or alter the Plan, except that no
amendment or alteration shall be made which would impair the rights of the
holder of any Option theretofore granted without his consent, and except that
no amendment or alteration shall be made which, without the approval of the
stockholders of the Company, would increase the total number of shares reserved
for the purposes of the Plan, except as is provided in Section 6.
11. Government Regulations. The Plan, and the granting and exercise of
Options hereunder, and the obligation of the Company to sell and deliver shares
or cash under such Options, shall be subject to all applicable laws, rules, and
regulations, including the registration of the shares under the 1933 Act, and
to such approvals by any governmental agencies or national securities exchanges
as may be required.
12. Governing Law. This Plan shall be deemed made in the State of New
York and shall be governed by and construed and enforced in accordance with the
laws of such State applicable to contracts made and to be performed in such
State, without giving effect to the principles of conflict of laws.
C-4
<PAGE>
PANAX PHARMACEUTICAL COMPANY LTD.
PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints TAFFY JAMES WILLIAMS and J.R.
LESHUFY, or either of them, with full power of substitution, as attorneys for
and the name, place and stead of the undersigned, to vote all the shares of
the Common Stock of PANAX PHARMACEUTICAL COMPANY LTD, owned or entitled to be
voted by the undersigned as the Record Date, at the Special Meeting of
Shareholders of the Company scheduled to be held at the offices of the Company
at 425 Park Avenue, 27th Floor, New York, New York, on Thursday, October 30,
1997, at 10:00 a.m. Eastern time or an adjournment or adjournments of said
meeting, on the following proposals as indicated.
THIS PROXY, IF PROPERLY EXECUTED AND RETURNED, WILL BE VOTED IN ACCORDANCE
WITH THE DIRECTIONS SPECIFIED HEREOF. IF NO DIRECTIONS ARE SPECIFIED THIS
PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 AND 5.
-7-
<PAGE>
1. TO AMEND THE CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED SHARES OF
COMMON STOCK
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. TO AMEND THE CERTIFICATE OF INCORPORATION TO AUTHORIZE A CLASS OF
PREFERRED STOCK
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. TO AMEND THE CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(continued and to be signed on reverse)
4. TO AMEND THE 1993 STOCK OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. TO ADOPT THE 1997 CONSULTANT STOCK OPTION PLAN
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. To Transact Such Other Business As May Properly Come Before The Meeting
Or Any Adjournment Thereof
Please sign exactly as your name appears hereon and date. Joint owners should
each sign. Trustees and fiduciaries should indicate the capacity in which they
are signing. Please be sure to sign and date this Proxy in the box below.
Dated:
--------------------------
--------------------------------
(Stockholder sign above)
--------------------------------
(Co-holder (if any) sign above)
Please mark boxes [ ] or [X] in blue or black.
Detach above card, sign, date and mail in postage paid envelope provided
