<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1996
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
DEPOTECH CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
CALIFORNIA 2834 33-0387911
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
10450 SCIENCE CENTER DRIVE, SAN DIEGO, CALIFORNIA 92121 (619) 625-2424
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
EDWARD L. ERICKSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DEPOTECH CORPORATION
10450 SCIENCE CENTER DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 625-2424
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
CRAIG S. ANDREWS, ESQ. M. WAINWRIGHT FISHBURN, JR., ESQ.
FAYE H. RUSSELL, ESQ. NANCY E. DENYES, ESQ.
BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD CASTRO
550 WEST "C" STREET, SUITE 1300 HUDDLESON & TATUM
SAN DIEGO, CALIFORNIA 92101 4365 EXECUTIVE DRIVE, SUITE 1100
SAN DIEGO, CALIFORNIA 92121
</TABLE>
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Approximate date of commencement of proposed sale to the public:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: / /
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
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</TABLE>
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
<S> <C> <C> <C> <C>
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Common Stock, no par value........ 2,300,000 shares $22.625 $52,037,500 $17,944
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</TABLE>
(1) Includes 300,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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<PAGE> 2
DEPOTECH CORPORATION
------------------------
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN
FORM S-1 REGISTRATION STATEMENT CAPTION IN PROSPECTUS
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Cover Page of Registration Statement;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Cover Page of Registration Statement
6. Dilution................................... Dilution
7. Selling Security Holders................... Inapplicable
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered................................. Outside Front Cover Page; Description of
Capital Stock
10. Interests of Named Experts and Counsel..... Legal Matters; Experts
11. Information with Respect to the
Registrant................................. Outside Front Cover Page; Prospectus
Summary; The Company; Risk Factors;
Dividend Policy; Capitalization; Selected
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results
of Operations; Business; Management;
Certain Transactions; Principal
Shareholders; Description of Capital Stock;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Inapplicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JULY 10, 1996
2,000,000 SHARES
[DEPOTECH CORPORATION LOGO]
COMMON STOCK
THE 2,000,000 SHARES OF COMMON STOCK (THE "COMMON STOCK") OFFERED HEREBY
(THIS "OFFERING") ARE BEING OFFERED BY DEPOTECH CORPORATION ("DEPOTECH" OR THE
"COMPANY"). THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET ("NASDAQ")
UNDER THE SYMBOL "DEPO." ON JULY 9, 1996, THE LAST REPORTED SALES PRICE OF THE
COMMON STOCK ON NASDAQ WAS $22.00 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."
FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 6 TO 14.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS* COMPANY+
<S> <C> <C> <C>
PER SHARE.................. $ $ $
TOTAL++.................... $ $ $
</TABLE>
- ---------------
* THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITING."
+ BEFORE DEDUCTING EXPENSES OF THIS OFFERING PAYABLE BY THE COMPANY
ESTIMATED TO BE $325,000.
++ THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO 300,000 ADDITIONAL SHARES OF COMMON STOCK ON THE SAME TERMS PER SHARE
SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN
FULL, THE TOTAL PRICE TO PUBLIC WILL BE $ , THE TOTAL
UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $ AND THE TOTAL
PROCEEDS TO THE COMPANY WILL BE $ . SEE "UNDERWRITING."
---------------------
THE COMMON STOCK IS BEING OFFERED BY THE UNDERWRITERS AS SET FORTH UNDER
"UNDERWRITING" HEREIN. IT IS EXPECTED THAT THE DELIVERY OF THE CERTIFICATES
THEREFOR WILL BE MADE AT THE OFFICES OF DILLON, READ & CO. INC., NEW YORK, NEW
YORK, ON OR ABOUT , 1996. THE UNDERWRITERS INCLUDE:
DILLON, READ & CO. INC.
UBS SECURITIES
VECTOR SECURITIES INTERNATIONAL, INC.
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE> 4
[DRAWING DEPICTING THE INJECTION OF DEPOCYT INTO AND ITS MODE OF ACTIVITY IN THE
CEREBROSPINAL FLUID]
[CHART DEPICTING PATIENTS' RESPONSE RATES IN THE COMPANY'S PHASE III CLINICAL
TRIAL OF DEPOCYT AS COMPARED TO STANDARD THERAPY (METHOTREXATE)]
[CHART DEPICTING PHASE OF DEVELOPMENT OF THE COMPANY'S PRODUCT PROGRAMS AND
FEASIBILITY PROGRAMS]
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected at the
Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the Commission's regional offices at 7
World Trade Center, 13th Floor, New York, New York 10048; and at Northwest
Atrium Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511.
Copies of such material can also be obtained at prescribed rates at the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Common Stock of the Company is traded on the Nasdaq National
Market.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
All of the Company's product names, except DepoCyt(TM) (which is a joint
trademark with Chiron Corporation), are trademarks of the Company. This
Prospectus also includes names and trademarks of companies other than the
Company.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
This Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed under "Risk Factors," as well as those discussed elsewhere in
this Prospectus.
THE COMPANY
DepoTech is a drug delivery company engaged in the development and
manufacture of sustained-release therapeutic products based on DepoFoam, an
injectable, depot drug delivery technology. DepoFoam consists of microscopic,
spherical particles composed of hundreds to thousands of nonconcentric chambers
each separated from adjacent chambers by a bilayer lipid membrane. The Company
has developed DepoFoam formulations which release drugs over an extended period
of time, such as several weeks, or over a shorter period, such as a few days.
DepoTech has demonstrated that its proprietary DepoFoam technology can be used
to encapsulate a wide spectrum of generic and proprietary water-stable drugs,
including proteins, peptides, antisense oligonucleotides and DNA, for a range of
therapeutic indications. DepoTech believes that its technology enables the
development of highly-differentiated, proprietary products with enhanced safety
and efficacy, improved profit margins, broadened labeling, extended or renewed
patent life and significantly reduced administration schedules.
The Company's lead product, DepoCyt, is a proprietary DepoFoam formulation
of cytarabine, a generic anti-cancer drug, also known as ara-C. DepoCyt is being
developed in collaboration with Chiron Corporation ("Chiron") in the United
States, Canada and Europe for the treatment of three subtypes of neoplastic
meningitis arising from solid tumors, leukemia and lymphoma. In June 1996, the
Company announced response rate data, a primary endpoint of the solid tumor arm
of a pivotal Phase III clinical trial which compared DepoCyt to standard therapy
(methotrexate) in patients with neoplastic meningitis. Response was defined as
the absence of malignant cells in two consecutive samples of patients'
cerebrospinal fluid ("CSF") and lack of disease progression as assessed through
neurological evaluation. Of 54 evaluable patients, 36% of the 25 patients
treated with DepoCyt showed a response versus 17% of the 29 patients treated
with methotrexate. Based on these data and other study endpoints still to be
completed, the Company plans to file a new drug application ("NDA") for the
treatment of neoplastic meningitis arising from solid tumors in the fourth
quarter of 1996.
In addition to DepoCyt, DepoTech has a diversified development pipeline
that demonstrates the breadth of the Company's technology. The Company is: (i)
developing DepoAmikacin, a DepoFoam formulation of amikacin, a potent,
broad-spectrum antibiotic for the treatment and prophylaxis of bacterial
infections; (ii) developing DepoMorphine, a DepoFoam formulation of morphine
sulfate, for post-surgical acute pain management; and (iii) evaluating D0601, a
DepoFoam formulation of insulin-like growth factor 1 ("IGF-1"), a Chiron
proprietary protein, for a rheumatologic indication. The Company completed a
Phase I clinical trial for DepoAmikacin in April 1996 in which the drug was
found to be well-tolerated for all dosage levels studied. DepoTech has also
completed formulation and initial manufacturing scale-up of DepoMorphine, is
currently conducting preclinical studies and intends to file an investigational
new drug application ("IND") in 1996. In addition, D0601 scale-up and
preclinical development are currently underway. DepoTech is also evaluating
DepoFoam formulations of several additional compounds which may offer
significant medical benefits and substantial market potential, including
antisense oligonucleotides, local anesthetics and anti-
thrombotics.
Since March 1994, DepoTech and Chiron have collaborated in the development
of DepoCyt and DepoFoam formulations of certain of Chiron's proprietary
products, including IGF-1. The collaborative agreement provides for the future
development of additional DepoFoam formulations of other Chiron
2
<PAGE> 6
proprietary products, including certain cytokines, vaccines, growth factors and
gene therapy products. Under the terms of the agreement, DepoTech retains
manufacturing rights to DepoCyt and the DepoFoam formulations of Chiron's
proprietary products. Chiron will market and distribute DepoCyt in the United
States, Canada and Europe and will have worldwide marketing rights to DepoFoam
formulations of its own proprietary products.
The Company's strategy is focused on the development and commercialization
of proprietary DepoFoam formulations of generic drugs or, in collaboration with
corporate partners, the development of DepoFoam formulations of compounds
proprietary to the corporate partners. The Company is implementing this strategy
by: (i) developing high value-added DepoFoam formulations of approved or
late-stage drugs; (ii) expanding the product pipeline by identifying new product
opportunities according to stringent criteria and by conducting feasibility
studies; (iii) establishing collaborative and funding arrangements for
development and commercialization of new DepoFoam products; and (iv) retaining
certain manufacturing rights to DepoFoam formulations. The Company believes this
strategy minimizes certain risks associated with traditional pharmaceutical
discovery and development.
3
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,000,000 shares
Common Stock to be outstanding after this
Offering(1)................................ 13,364,978 shares
Use of proceeds.............................. For research, clinical and process
development expenses for ongoing and future
programs, further clinical development and
initial commercialization of DepotCyt and
general corporate purposes, including
research and development, clinical testing
and capital expenditures in support of
manufacturing, scientific and administrative
equipment. See "Use of Proceeds."
Nasdaq National Market symbol................ DEPO
</TABLE>
- ------------
(1) Does not include: (i) 1,122,373 shares of Common Stock issuable upon
exercise of options outstanding at a weighted average exercise price of $3.93
per share pursuant to the Company's stock option plans at March 31, 1996; (ii)
568,041 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants at a weighted average exercise price of $6.65 per share at
March 31, 1996; and (iii) subsequent to March 31, 1996, 17,300 shares of Common
Stock issuable upon the exercise of options granted, 114,890 shares of Common
Stock issued upon exercise of options, 6,502 options terminated and 24,730
shares of Common Stock issued under the Company's Employee Stock Purchase Plan.
See "Capitalization," "Management -- Benefit Plans," "Description of Capital
Stock -- Warrants to Purchase Common Stock."
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue................. $ 69,500 $ 582,120 $ 5,825,784 $3,154,540 $ 1,200,654
Marketing rights fee............. -- -- 1,000,000 1,000,000 --
Costs and expenses:
Research and development....... 3,231,169 7,426,815 12,699,247 2,411,589 3,271,404
General and administrative..... 827,250 1,880,861 2,826,538 463,431 786,261
----------- ----------- ----------- ---------- -----------
Total costs and
expenses................ 4,058,419 9,307,676 15,525,785 2,875,020 4,057,665
----------- ----------- ----------- ---------- -----------
Income (loss) from operations.... (3,988,919) (8,725,556) (8,700,001) 1,279,520 (2,857,011)
Interest income.................. 128,652 286,984 1,084,244 207,375 511,359
Interest expense................. (36,639) (122,915) (404,790) (52,417) (144,583)
----------- ----------- ----------- ---------- -----------
Net income (loss)................ $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235)
=========== =========== =========== ========== ===========
Net income (loss) per share(1)... $(0.78) $(1.26) $(0.92) $0.17 $(0.22)
------ ------ ------ ----- ------
------ ------ ------ ----- ------
Shares used in computing net
income (loss) per share(1)..... 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------
ACTUAL AS ADJUSTED(2)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................... $ 30,545,566 $ 71,580,566
Working capital...................................................... 29,813,463 70,848,463
Total assets......................................................... 45,812,895 86,847,895
Obligations under capital leases, less current portion............... 3,592,219 3,592,219
Accumulated deficit.................................................. (28,110,167) (28,110,167)
Total shareholders' equity........................................... 38,885,713 79,920,713
</TABLE>
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(1) See Note 1 of Notes to Financial Statements for information concerning
the computation of net income (loss) per share and shares used in computing net
income (loss) per share.
(2) As adjusted to reflect the sale of the Common Stock offered hereby and
the application of the estimated net proceeds of this Offering based upon an
assumed public offering price of $22.00 per share. See "Use of Proceeds."
4
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 6 through 14 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: "Early Stage
Company;" "Government Regulation; Uncertainty of Obtaining Regulatory Approval;"
"Limited Manufacturing Experience; Risk of Scale-Up;" "History of Operating
Losses; Uncertainty of Future Profitability;" "Dependence Upon Partners for
Development and Commercialization;" "Limited Sales and Marketing Capability;"
"Dependence on Suppliers;" "Reliance on Manufacturing Process;" "Reliance on
Technology Rights from Research Development Foundation;" "Patents and
Proprietary Technology;" "Access to Drugs;" "Future Capital Needs;" "Uncertainty
of Additional Funding;" "Dependence on Key Personnel;" "Highly Competitive
Industry;" "Product Liability; Availability of Insurance;" "Hazardous
Materials;" "Possible Volatility of Stock Price;" "No Dividends;" "Registration
Rights; Lockup;" "Dilution;" "Uncertainty of Health Care Reform Measures and
Third-Party Reimbursement;" and "Possible Anti-Takeover Effect of Certain
Charter Provisions."
THE COMPANY
The Company was incorporated in the State of California in October 1989.
Unless the context indicates otherwise, the "Company" or "DepoTech" refers to
DepoTech Corporation. The Company's principal executive offices are located at
10450 Science Center Drive, San Diego, California 92121, and its telephone
number is (619) 625-2424.
5
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Company. Prospective investors are cautioned that the statements in this
Prospectus that are not descriptions of historical facts may be forward-looking
statements that are subject to risks and uncertainties. Actual results could
differ materially from those currently anticipated due to a number of factors,
including those set forth in the following "Risk Factors" and elsewhere in this
Prospectus.
EARLY STAGE COMPANY
DepoTech's products are at an early stage of development, and, to date,
only two of the Company's DepoFoam formulations, DepoCyt and DepoAmikacin, have
been subject to any human clinical testing. Although many of the drug compounds
which the Company has encapsulated in DepoFoam have been tested in humans by
others using alternate delivery routes, the Company's potential products will
require extensive research, formulation, development, preclinical and clinical
testing, and may involve a lengthy regulatory approval process prior to
commercialization. There can be no assurance that DepoCyt, DepoAmikacin or any
of the Company's other products or potential products will prove safe and
effective in clinical trials, meet applicable regulatory standards, be capable
of being produced in commercial quantities at acceptable cost or be successfully
commercialized. In addition, there can be no assurance that preclinical or
clinical testing will accurately predict safety or efficacy in broader human
use, or that delays in the regulatory approval process will not result in longer
clinical trial schedules than those currently expected by the Company. Even if
all of the Company's products prove to be safe and effective and are approved
for marketing by the United States Food and Drug Administration ("FDA") and
other regulatory authorities, there can be no assurance that health care
providers, payors and patients will accept the Company's products. Any failure
of the Company to achieve technical feasibility, demonstrate safety, achieve
clinical efficacy, obtain regulatory approval or, together with its partners,
successfully market products would have a material adverse effect on the
Company.
DepoCyt is the Company's only product currently in pivotal phase III
trials. Data from the solid tumor arm of the trial was reported in June 1996 and
the two other arms of the trial, for neoplastic meningitis arising from leukemia
and lymphoma, are expected to be completed by the end of 1996. The Company
expects to file an NDA under the FDA's expedited approval process for the
treatment of neoplastic meningitis arising from solid tumors in the fourth
quarter of 1996. In the case of DepoCyt, as with all drugs subject to
accelerated approval, the FDA has requested that the Company submit a Phase IV
protocol prior to the submission of an NDA. There can be no assurance that the
data reported to date regarding DepoCyt will be sufficient to gain FDA approval,
that additional results from the pivotal Phase III trial will confirm earlier
results or that the Phase IV and other clinical trials of DepoCyt will generate
positive results. Any of these occurrences could have a material adverse effect
on the Company and its ability to fund the further development and
commercialization of DepoCyt and its other products. See "-- Government
Regulation; Uncertainty of Obtaining Regulatory Approval."
GOVERNMENT REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL
DepoTech's research and development activities are, and its future business
will be, subject to significant regulation by governmental authorities in the
United States, primarily by the FDA. Pharmaceutical products intended for
therapeutic use in humans are governed principally by the Federal Food, Drug,
and Cosmetic Act, as amended, and by the FDA regulations in the United States
and by comparable laws and regulations in foreign countries. DepoTech is also
subject to regulation under the food and drug statutes and regulations of the
State of California.
DepoTech recently announced certain results of the solid tumor arm of the
Phase III clinical trial for DepoCyt which showed an increased response rate for
DepoCyt versus standard therapy. There can be no assurance that these results
will meet the requirements for regulatory approvals necessary to commercialize
DepoCyt in the United States or otherwise.
6
<PAGE> 10
The clinical testing and FDA review process for new drugs or biologics
requires substantial time, effort and expense. There can be no assurance that
any approval will be granted to the Company on a timely basis, if at all. The
FDA may refuse to approve a product for commercial sale or shipment if
applicable statutory and/or regulatory criteria are not satisfied, or may
require additional testing or information. There can be no assurance that such
additional testing or the provision of such information, if required, will not
have a material adverse effect on the Company. Also, the regulatory process can
be modified by Congress or the FDA in a manner that could materially affect the
Company.
In 1988, the FDA issued regulations intended to expedite the development,
evaluation and marketing of new therapeutic products to treat life-threatening
and severely debilitating illnesses for which no satisfactory alternative
therapies exist. These regulations provide for early consultation between the
sponsor and the FDA in the design of both preclinical studies and clinical
trials. At the present time, DepoCyt is being developed under such an
accelerated program. There can be no assurance, however, that any future
products the Company may develop will be eligible for evaluation by the FDA
under the 1988 regulations. In addition, there can be no assurance that DepoCyt
or any future products (if eligible) will be approved for marketing at all or,
if approved for marketing, will be approved for marketing sooner than would be
traditionally expected. Regulatory approval granted under these regulations may
be restricted by the FDA as necessary to ensure the safe use of the drug. In
addition, post-marketing clinical studies, sometimes called Phase IV studies,
may be required.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition," which generally is a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States. Under current law, orphan drug designation confers United
States marketing exclusivity upon the first company to receive FDA approval to
market such designated drug for the designated indication for a period of seven
years following approval of the NDA, subject to certain limitations. Orphan drug
designation does not convey any advantage in, or shorten the duration of, the
regulatory approval process. In June 1993, the Company obtained an orphan drug
designation for DepoCyt from the FDA to treat neoplastic meningitis. There can
be no assurance that the Company will receive the first FDA approval to market
sustained-release cytarabine to treat neoplastic meningitis and thus receive
market exclusivity for DepoCyt to treat neoplastic meningitis arising from
leukemia, lymphoma or solid tumor metastases. Although obtaining FDA approval to
market a product with an orphan drug designation can be advantageous, there can
be no assurance that the scope of protection or the level of marketing
exclusivity that is currently afforded by orphan drug designation and marketing
approval will remain in effect in the future.
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and biologics in such foreign jurisdictions. The requirements
relating to the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country and there can be no assurance
that the Company or any of its partners will meet and sustain any such
requirements. See "Business -- Government Regulation."
LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP
Although DepoTech is currently manufacturing materials for human clinical
trials, the Company has no experience manufacturing products for commercial
purposes. The Company will need to significantly scale-up its current
manufacturing operations and comply with current Good Manufacturing Practices
("cGMPs") and other regulations prescribed by various regulatory agencies in the
United States and other countries to achieve the prescribed quality and required
levels of production of such products and to obtain marketing approval. Failure
by the Company to successfully scale-up its manufacturing operations or to
comply with cGMPs and other regulations would have a material adverse impact on
the Company, including the loss of manufacturing rights under the Chiron
agreement. See "Business -- Manufacturing."
7
<PAGE> 11
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred an accumulated deficit of $28.1 million through
March 31, 1996. The Company expects to continue to incur substantial losses over
at least the next two years as the Company's research and development efforts,
preclinical and clinical testing activities and manufacturing scale-up and sales
and marketing arrangement efforts expand. All of the Company's revenues to date
have consisted of contract revenues, milestone payments and interest income. No
revenues have been generated from product sales. There can be no assurance that
the Company can generate sufficient product or contract revenue to become
profitable or sustain profitability. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
DEPENDENCE UPON PARTNERS FOR DEVELOPMENT AND COMMERCIALIZATION
The Company does not currently possess all the resources necessary to
develop, complete the FDA approval process for and commercialize any of its
potential therapeutic products. The Company intends to enter into collaborative
arrangements with other companies to fund research, development and clinical
trials, to assist in obtaining regulatory approvals in the United States and
internationally and to commercialize its products. In addition, the Company's
ability to apply its drug delivery technology to a broad range of
pharmaceuticals will depend upon its ability to establish and maintain
collaborative arrangements because the rights to many of the pharmaceuticals
most suited to the Company's drug delivery technology are currently owned by
third parties. While the Company has entered into preliminary collaborations to
test feasibility of its delivery technology with certain compounds and has
entered into a collaboration with Chiron, there can be no assurance that the
Company will be able to enter into additional collaborations to develop
commercial applications of its drug delivery technology. In addition, there can
be no assurance that the Company will be able to enter into or maintain existing
or future collaborations or that such collaborations will be successful. The
failure of the Company to enter into a collaboration with the owner of rights to
a particular formulation or pharmaceutical would preclude the Company from
developing its drug delivery technology with respect to such formulation or
pharmaceutical. The failure to enter into or maintain existing or future
collaborations would have a material adverse effect on the Company.
The Company's partners may pursue parallel development of other drug
delivery technologies that may compete with the Company's drug delivery
technology. In addition, definitive agreements negotiated with such partners may
provide that these partners may terminate the collaboration at any time without
significant penalty. Both the Company and Chiron have the ability to terminate a
portion or all of the collaboration at certain intervals and with advance
notice. In addition, Chiron has the ability to terminate the development of a
proprietary Chiron compound with a limited amount of advance notice. Termination
of a portion or all of the collaboration with Chiron would have a material
adverse effect on the Company. Although the Company intends generally to
formulate and manufacture pharmaceuticals for partners, certain partners may
choose to formulate or manufacture their own formulations, thereby limiting one
or more potential sources of revenue for DepoTech. In addition, the Company
believes that it may be precluded from entering into arrangements with companies
whose products compete with products sold by its partners. The Company also will
have limited or no control over the resources that any partner may devote to the
Company's products, over partners' development efforts, including the design and
conduct of clinical trials, or over the pricing of products. There can be no
assurance that any of the Company's present or future collaborative partners
will perform their obligations as expected or will devote sufficient resources
to the development, clinical testing or marketing of the Company's potential
products. Any parallel development by a partner of alternate drug delivery
technologies, preclusion from entering into competitive arrangements, failure to
obtain timely regulatory approvals, premature termination of a collaborative
agreement or failure by a partner to devote sufficient resources to the
development and commercialization of the Company's products would have a
material adverse effect on the Company. See "Business -- DepoTech's Strategy"
and "Business -- Strategic Alliances."
8
<PAGE> 12
LIMITED SALES AND MARKETING CAPABILITY
Commercialization of the Company's products is expected to be expensive and
time-consuming. In the event that the Company elects to participate directly in
sales and marketing efforts for the Company's products, the Company will need to
build such capability in the targeted markets. The Company currently has a
limited marketing staff. There can be no assurance that the Company will be able
to establish an adequate sales and marketing capability in any or all targeted
markets or that it will be successful in gaining market acceptance for its
products. To the extent the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties and there can be no assurance that such efforts will be
successful. To the extent the Company relies on its collaborators, there can be
no assurance that any of these collaborators or their sublicensees will
successfully market or distribute the Company's products or that the Company
will be able to establish a successful direct sales organization, co-promotion
or distribution arrangements. See "Business -- Sales and Marketing."
DEPENDENCE ON SUPPLIERS
The Company currently relies on a limited number of suppliers to provide
the materials used to manufacture its DepoFoam formulations. Certain of these
materials are purchased only from one supplier. In the event the Company could
not obtain adequate quantities of necessary materials from its existing
suppliers, there can be no assurance that the Company would be able to access
alternative sources of supply within a reasonable period of time or at
commercially reasonable rates. Regulatory requirements applicable to
pharmaceutical products tend to make the substitution of suppliers costly and
time-consuming. The unavailability of adequate commercial quantities, the
inability to develop alternative sources, a reduction or interruption in supply
or a significant increase in the price of materials could have a material
adverse effect on the Company's ability to manufacture and market its products.
See "Business -- Manufacturing."
RELIANCE ON MANUFACTURING PROCESS
To date, the Company has relied on a particular proprietary method of
manufacture. There can be no assurance that this method will be applicable to
all pharmaceuticals or biologics the Company desires to commercialize. Further,
the yield of product incorporated into the delivery system may be highly
variable for different therapeutic agents. Finally, the Company will need to
successfully meet any manufacturing challenges associated with the
characteristics of the drug to be encapsulated. The physical and chemical
stability of the DepoFoam formulation may vary with each therapeutic agent over
time and under various storage conditions. There can be no assurance that the
manufacturing process will result in economically viable yields of product or
that it will produce formulations of therapeutic products sufficiently stable
under suitable storage conditions to be commercially useful. In the event that
the Company decides to pursue alternative manufacturing methods for some or all
of its drugs, there can be no assurance that these methods will prove to be
commercially practical or that the Company will have or be able to acquire
rights to use such alternative methods. See "Business -- Manufacturing."
RELIANCE ON TECHNOLOGY RIGHTS FROM RESEARCH DEVELOPMENT FOUNDATION
In February 1994, the Company entered into an Assignment Agreement with
Research Development Foundation ("RDF"), pursuant to which RDF assigned to
DepoTech exclusive rights to certain intellectual property relating to the
DepoFoam technology, including the corresponding patents and patent applications
for such property (the "RDF Technology"). As consideration for the assignment of
the RDF Technology, DepoTech will pay RDF an earned royalty on gross revenues
from the sale by DepoTech or its collaborators of products incorporating the RDF
Technology. The Company's products, including DepoCyt, incorporate the RDF
Technology. In certain other circumstances, DepoTech will pay RDF a percentage
of the royalties or other consideration received by DepoTech from licensees (or,
if greater, the amount of royalty DepoTech would have owed had it engaged in the
9
<PAGE> 13
same conduct as the licensees). In addition, RDF retains the right to terminate
the agreement or to convert the exclusive nature of the rights granted under the
agreement into a nonexclusive license in the event that the Company does not
satisfy its contractual obligations, including making certain minimum annual
payments. Additional termination events include bankruptcy, a material uncured
breach of the agreement by DepoTech or a contest by DepoTech of the patents
included in the RDF Technology. The termination of the Assignment Agreement or
the conversion of its exclusive nature to a nonexclusive agreement would have a
material adverse effect on the Company. See "Business -- Patents and Proprietary
Rights."
PATENTS AND PROPRIETARY TECHNOLOGY
DepoTech relies on a combination of technical leadership, patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of June 1, 1996, the Company had exclusive
rights under its agreement with RDF discussed above to three issued United
States patents, six pending United States patent applications, 46 issued foreign
patents and 18 pending foreign applications. As of the same date and in its own
name, the Company has one issued United States patent, one allowed United States
patent application, four pending United States patent applications, one issued
foreign patent and 20 pending foreign patent applications on file covering
various aspects of its drug delivery technology. The Company intends to file
additional patent applications in the future. There can be no assurance that the
Company will be issued any additional patents or that, if any patents are
issued, they will provide the Company with significant protection or will not be
challenged. Even if such patents are enforceable, the Company anticipates that
any attempt to enforce its patents would be time consuming and costly. Moreover,
the laws of some foreign countries do not protect the Company's proprietary
rights in the products to the same extent as do the laws of the United States.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including DepoTech, are uncertain and involve complex legal and
factual issues. Additionally, the coverage claimed in a patent application can
be significantly reduced before the patent is issued. As a consequence, there
can be no assurance that any of the Company's patent applications will result in
the issuance of patents or, if any patents issue, that they will provide
significant proprietary protection or will not be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issue and publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first inventor of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions. Moreover, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office ("PTO") to
determine priority of invention that could result in substantial cost to the
Company, even if the eventual outcome is favorable to the Company. There can be
no assurance that the Company's patents, if issued, would be held valid by a
court of competent jurisdiction. An adverse outcome of any patent litigation
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from or to third parties or require the Company
to cease using the technology in dispute.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertions will not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of such parties. There can be no assurance that any
such licenses would be available on terms acceptable to the Company, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block the Company's ability to
further develop or commercialize its products in the United States and abroad
and could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse affect on the
Company. Finally, litigation, regardless of outcome, could result in substantial
cost to and a diversion of efforts by the Company. See "Business -- Patents and
Proprietary Rights."
10
<PAGE> 14
ACCESS TO DRUGS
The Company's ability to develop and commercialize its technology will be
affected by the Company's or its partners' access to the drugs that are to be
formulated. The Company intends in certain circumstances to rely on the ability
of its partners to provide access to the drugs that are to be formulated for use
with DepoFoam. There can be no assurance that the Company's partners will be
able to provide access to drug candidates for formulation in DepoFoam, or that,
if such access is provided, the Company or its partner will not be alleged or
determined to be infringing on third parties' rights and will not be prohibited
from using the drug or be found liable for damages that may not be subject to
indemnification. Any restriction on access or liability for damages would have a
material adverse effect on the Company. See "-- Dependence Upon Partners for
Development and Commercialization" and "Business -- Patents and Proprietary
Rights."
FUTURE CAPITAL NEEDS
The development and commercialization of the Company's products will
require substantial funds to conduct research and development and preclinical
and clinical testing of products and to manufacture and commercialize any
products that are approved for commercial sale. The Company has a contractual
commitment arising from the Chiron collaboration to fund 50% of the sales and
marketing expenses incurred for DepoCyt in the United States, Canada and Europe.
In addition, in December 1994, the Company entered into an agreement to lease an
82,000 square foot facility for a 20-year term with a future minimum rental
commitment ranging from approximately $2.1 million to $4.5 million per year,
based upon pre-established annual rent increases. Finally, the Company has a
right of first refusal and right of first offer to purchase land located
adjacent to its headquarters which must be exercised on or before October 15,
1997. The Company may elect to exercise such option in 1997 in order to build a
facility to house packaging, labeling and warehousing and administrative
offices. The estimated capital expenses associated with this facility would be
approximately $8.5 million. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its products
and process development programs, progress with preclinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the cost
of manufacturing scale-up, the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims, competing technological and market
developments, changes in existing collaborative relationships, the ability of
the Company to establish collaborative arrangements and the cost of establishing
effective sales and marketing arrangements. To date, the Company has not
received any revenues from product sales. The Company anticipates that its
existing, available cash, cash equivalents and short-term investments, combined
with the proceeds of this Offering, its committed future contract revenue,
projected funding from equipment leases and interest income, will be adequate to
satisfy its capital requirements and fund operations at least through 1998. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
UNCERTAINTY OF ADDITIONAL FUNDING
The Company intends to seek additional funding through collaborative
arrangements, contract research or through public or private financings. There
can be no assurance that additional financing will be available on acceptable
terms or at all. If additional funds are raised by issuing equity securities,
further dilution to then existing shareholders may result. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate one
or more of its research and development programs or seek to obtain funds through
arrangements with collaborative partners or others even if the arrangements
would require the Company to relinquish certain rights to certain of its
technologies, product candidates or products that the Company would not
otherwise relinquish.
DEPENDENCE ON KEY PERSONNEL
The success of the Company is highly dependent, in part, on its ability to
retain highly qualified personnel, including senior management and scientific
personnel. Competition for such personnel is
11
<PAGE> 15
intense and the inability to retain additional key employees or the loss of one
or more current key employees could adversely affect the Company. Although the
Company has been successful in retaining required personnel to date, there can
be no assurance that the Company will be successful in the future. The Company
has not entered into employment agreements with any personnel. See "Management."
HIGHLY COMPETITIVE INDUSTRY
The drug delivery, pharmaceutical and biotechnology industries are highly
competitive and rapidly evolving, with significant developments expected to
continue at a rapid pace. The Company's success will depend upon maintaining a
competitive position and developing products and technologies for efficient and
cost-effective drug delivery. The Company's products will compete with other
formulations of drugs and with other drug delivery systems. There can be no
assurance that any of the Company's products will have advantages that will be
significant enough to cause medical professionals to use them. DepoTech believes
that its products will compete on the basis of quality, efficacy, cost,
convenience, safety and patient compliance. New drugs or further development in
alternative drug delivery methods may provide greater therapeutic benefits for a
specific drug or indication, or may offer comparable performance at lower cost
than those offered by the Company's DepoFoam drug delivery system. The Company
is aware of many other competitors in the field of drug delivery, including
competitors developing injectable or implantable drug delivery systems, oral
drug delivery technologies, passive transdermal systems, electrotransport
systems, oral transmucosal systems and inhalation systems. There can be no
assurance that developments by others will not render the Company's products or
technologies uncompetitive or obsolete. Many of the Company's existing or
potential competitors have substantially greater research and development
capabilities, experience, manufacturing, marketing, financial and managerial
resources than the Company. Furthermore, acquisitions of competing drug delivery
companies by large pharmaceutical companies could enhance competitors'
financial, marketing and other resources. Accordingly, the Company's competitors
may succeed in developing competing technologies, obtaining FDA approval or
gaining market share for products more rapidly than the Company. See
"Business -- Competition."
PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The design, development and manufacture of the Company's products involve
an inherent risk of product liability claims and associated adverse publicity.
The Company obtained clinical trial product liability insurance for its human
clinical trials and intends to obtain insurance for future clinical trials of
other products under development and for potential product liability associated
with the commercial sale of the Company's products. There can be no assurance,
however, that the Company will be able to obtain or maintain insurance for any
of its clinical trials or commercial products. Although the Company currently
maintains general liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Product
liability insurance is expensive, difficult to obtain and may not be available
in the future on acceptable terms or at all. A successful claim brought against
the Company in excess of the Company's insurance coverage would have a material
adverse effect upon the Company.
HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials, chemicals and various radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by local, state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company. The Company may incur substantial costs to
comply with environmental regulations.
12
<PAGE> 16
POSSIBLE VOLATILITY OF STOCK PRICE
Factors such as the announcements of technological innovations or new
products by the Company, its competitors and other third parties, as well as
variations in the Company's results of operations, market conditions, analysts'
estimates and the stock market generally (and stock market perceptions of the
pharmaceutical, biotechnology and/or drug delivery industries specifically) may
cause the market price of the Company's common stock to fluctuate significantly.
Companies such as DepoTech have, in recent years, experienced dramatic stock
price volatility. Also, future sales of shares by existing shareholders pursuant
to Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or
through the exercise of outstanding registration rights, could have an adverse
effect on the price of the Company's common stock.
NO DIVIDENDS
The Company currently intends to retain any future earnings for use in its
business and does not anticipate paying any cash dividends in the future. Under
the terms of an equipment financing facility, the Company may not pay or declare
any dividends without the lender's prior written consent. See "Dividend Policy."
REGISTRATION RIGHTS; LOCKUP
Holders of 3,671,051 shares of Common Stock are entitled to certain rights
with respect to registration of such shares of Common Stock for offer or sale to
the public (taking into account the exercise of outstanding options and
warrants). Such sales may have an adverse effect on the Company's ability to
raise needed capital and may adversely affect the market price of the Common
Stock.
Shareholders owning an aggregate of approximately 4,214,469 shares of
Common Stock, representing approximately 37% of the total shares outstanding
(and 820,171 shares issuable upon exercise of outstanding warrants and options),
including shares held by all executive officers and directors and certain
shareholders of the Company, have agreed not to offer, sell, contract to sell,
grant any option to purchase, transfer or otherwise dispose of, directly or
indirectly, any shares of Common Stock or securities convertible into or
exchangeable for Common Stock, or warrants or other rights to purchase Common
Stock for a period of 90 days from the date of this Prospectus without the prior
written consent of Dillon, Read & Co. Inc. See "Description of Capital
Stock -- Registration Rights" and "Underwriting."
DILUTION
The public offering price of the Common Stock is substantially higher than
the net tangible book value per share of the Common Stock. Investors
participating in this Offering will therefore incur an immediate, substantial
dilution in net tangible book value of approximately $16.04 per share and may
incur additional dilution upon exercise of outstanding stock options and
warrants. See "Dilution."
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD-PARTY REIMBURSEMENT
The uncertainty created by a series of legislative and regulatory proposals
announced in recent years could have a materially adverse effect on the
Company's ability to raise capital and to identify and reach agreements with
potential partners. In the event such proposals are eventually adopted, they
could have a material adverse effect on the Company. Furthermore, the Company's
ability to commercialize its potential product portfolio may be adversely
affected to the extent that such proposals have a material adverse effect on the
business, financial condition and profitability of other companies that are
current or prospective collaborators for certain of the Company's proposed
products.
In both domestic and foreign markets, sales of the Company's potential
products, if any, will depend in part on the availability of reimbursement of
third-party payors such as government health
13
<PAGE> 17
administration authorities, private health insurers and other organizations.
Third-party payors are increasingly challenging the price and cost-effectiveness
of medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. There can be no
assurance that the Company's proposed products will be considered cost effective
or that adequate third-party reimbursement will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development. Legislation and regulations affecting the
pricing of pharmaceuticals may change before the Company's proposed products are
approved for marketing and any such changes could further limit reimbursement
for medical products and services. See "Business -- Health Care Reform Measures
and Third-Party Reimbursement."
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The Company's Articles of Incorporation include, among other things, a
provision (the "Fair Price Provision") that requires the approval of the holders
of two-thirds of the Company's voting stock as a condition to a merger or
certain other business transactions with, or proposed by, a holder of 15% or
more of the Company's voting stock, except in cases where certain directors
approve the transaction or certain minimum price criteria and other procedural
requirements are met. The Fair Price Provision and other charter provisions may
discourage certain types of transactions involving an actual or potential change
in control of the Company, including transactions in which the shareholders
might otherwise receive a premium for their shares over then current market
prices, and may limit the ability of the shareholders to approve transactions
that they may deem to be in their best interests. The Board of Directors (the
"Board") also has the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the rights, priorities, preferences,
qualifications, limitations and restrictions, including the dividend rates,
conversion rights, voting rights, terms of redemption, terms of sinking funds,
liquidation preferences and the number of shares constituting any series,
without any further vote or action by the shareholders, which could decrease the
amount of earnings and assets available for distribution to holders of Common
Stock or adversely affect the rights and powers, including voting rights, of the
holders of the Common Stock. The issuance of Preferred Stock may have the effect
of delaying or preventing a change in control of the Company and may adversely
affect the rights of the holders of Common Stock. See "Description of Capital
Stock -- Preferred Stock" and "Description of Capital Stock -- Possible
Anti-Takeover Effect of Certain Charter Provisions."
14
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby are estimated to be approximately $41,035,000
($47,239,000 if the Underwriters' over-allotment option is exercised in full),
assuming a public offering price of $22.00 per share and after deducting the
estimated underwriting discounts and commissions and other estimated offering
expenses.
The Company expects to use the net proceeds, including the interest
thereon, (i) to fund research, clinical and process development expenses for
ongoing and future programs (approximately 70%), (ii) to fund further clinical
development and initial commercialization of DepoCyt (approximately 10%) and
(iii) for general corporate purposes, including research and development,
clinical testing and capital expenditures in support of manufacturing,
scientific and administrative equipment (approximately 20%). The amounts
actually expended for each purpose may vary significantly depending upon
numerous factors, including the progress of the Company's research and
development programs, the results of preclinical and clinical studies, the
timing of regulatory approvals, technological advances, the commercial potential
of proposed compounds and the status of competitive products. In addition,
expenditures will also depend upon the establishment of collaborative research
agreements with other companies, the availability of additional financing and
other factors. The Company believes that its existing, available cash, cash
equivalents and short-term investments, combined with the net proceeds of this
Offering, its committed future contract revenue, projected funding from
equipment leases and interest income, will be adequate to satisfy its capital
requirements and fund operations at least through 1998. Pending application of
the net proceeds as described above, the Company intends to invest the net
proceeds of this Offering in investment-grade securities.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the over-the-counter market and prices are
quoted on the Nasdaq under the symbol "DEPO." The following table sets forth the
intraday high and low prices for the Common Stock for the periods indicated, as
reported on the Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
3rd Quarter (Sept. 29 and Sept. 30)............................... $14.00 $12.75
4th Quarter....................................................... 21.75 12.50
YEAR ENDING DECEMBER 31, 1996:
1st Quarter....................................................... $25.50 $18.00
2nd Quarter....................................................... 29.50 22.50
3rd Quarter (through July 9, 1996)................................ 25.50 22.00
</TABLE>
On July 9, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $22.00 per share. As of June 1, 1996, there were
approximately 310 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company does not anticipate paying any cash dividends within the foreseeable
future. Under the terms of an equipment financing facility, the Company may not
pay or declare any dividends without the lender's prior written consent.
15
<PAGE> 19
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company as of
March 31, 1996 and (ii) as adjusted to give effect to the sale by the Company of
2,000,000 shares of Common Stock offered hereby, assuming a public offering
price of $22.00 per share less estimated underwriting discounts and commissions
and other expenses of this Offering.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Obligations under capital leases, less current portion........ $ 3,592,219 $ 3,592,219
Shareholders' equity:
Convertible Preferred Stock, no par value, 5,000,000 shares
authorized and none issued and outstanding actual and as
adjusted................................................. -- --
Common Stock, no par value, 30,000,000 shares authorized,
11,364,978 and 13,364,978 shares issued and outstanding
actual and as adjusted................................... 67,190,282 108,225,282
Deferred compensation related to stock options, net........... (201,326) (201,326)
Unrealized gain on investments................................ 6,924 6,924
Accumulated deficit........................................... (28,110,167) (28,110,167)
------------ ------------
Total shareholders' equity(1)............................ 38,885,713 79,920,713
------------ ------------
Total capitalization................................ $ 42,477,932 $ 83,512,932
============ ============
</TABLE>
- ------------
(1) Does not include: (i) 1,122,373 shares of Common Stock issuable upon
exercise of options outstanding at a weighted average exercise price of $3.93
per share pursuant to the Company's stock option plans at March 31, 1996; (ii)
568,041 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants at a weighted average exercise price of $6.65 per share at
March 31, 1996; and (iii) subsequent to March 31, 1996, 17,300 shares of Common
Stock issuable upon the exercise of options granted, 114,890 shares of Common
Stock issued upon exercise of options, 6,502 options terminated and 24,730
shares of Common Stock issued under the Company's Employee Stock Purchase Plan.
See "Management -- Benefit Plans" and "Description of Capital Stock -- Warrants
to Purchase Common Stock."
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<PAGE> 20
DILUTION
The net tangible book value of the Company at March 31, 1996 was
$38,569,713, or $3.39 per share. Net tangible book value per share of Common
Stock represents the amount of total tangible assets of the Company less total
liabilities divided by the number of shares of the Common Stock outstanding.
After giving effect to the sale of the 2,000,000 shares of Common Stock offered
hereby at an assumed public offering price of $22.00 per share, and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company, the Company's net tangible book value as of March 31,
1996 would have been $79,604,713 or $5.96 per share of Common Stock. This
represents an immediate increase in net tangible book value per share of Common
Stock of $2.57 to existing holders and immediate dilution in net tangible book
value of $16.04 per share to new investors purchasing Common Stock in this
Offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................ $22.00
Net tangible book value per share of Common Stock before
this Offering................................................. $3.39
Increase per share attributable to new investors................. 2.57
Net tangible book value per share of Common Stock after
this Offering.................................................... 5.96
-----
Dilution per share to new investors(1)............................. $16.04
=====
</TABLE>
- ------------
(1) If the Underwriters' over-allotment option is exercised in full,
dilution per share to new investors would be $15.72.
17
<PAGE> 21
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations for each of the three years in the period ended
December 31, 1995, and with respect to the Company's balance sheets at December
31, 1994 and 1995, are derived from the audited financial statements of the
Company that have been audited by Ernst & Young LLP, independent auditors, which
are included elsewhere herein and are qualified by reference to such Financial
Statements and Notes related thereto. The statement of operations data for the
years ended December 31, 1991 and 1992, and the balance sheet data at December
31, 1991, 1992 and 1993 have been derived from financial statements audited by
Ernst & Young LLP which are not included herein. The statement of operations
data for the three months ended March 31, 1995 and 1996 and the balance sheet
data at March 31, 1996 have been derived from unaudited financial statements;
however, management believes such financial statements include all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of the financial position and results of
operations for these periods. Operating results for the three months ended March
31, 1996 are not necessarily indicative of the results that may be expected for
the entire year ending December 31, 1996. The selected financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Company's Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue........... $ -- $ 15,000 $ 69,500 $ 582,120 $ 5,825,784 $3,154,540 $ 1,200,654
Marketing rights fee....... -- -- -- -- 1,000,000 1,000,000 --
Costs and expenses:
Research and
development............ 62,440 741,733 3,231,169 7,426,815 12,699,247 2,411,589 3,271,404
General and
administrative......... 82,467 433,929 827,250 1,880,861 2,826,538 463,431 786,261
--------- ----------- ----------- ----------- ----------- ---------- -----------
Total costs and
expenses........... 144,907 1,175,662 4,058,419 9,307,676 15,525,785 2,875,020 4,057,665
--------- ----------- ----------- ----------- ----------- ---------- -----------
Income (loss) from
operations............... (144,907) (1,160,662) (3,988,919) (8,725,556) (8,700,001) 1,279,520 (2,857,011)
Interest income............ 2,455 2,205 128,652 286,984 1,084,244 207,375 511,359
Interest expense........... -- (51,049) (36,639) (122,915) (404,790) (52,417) (144,583)
--------- ----------- ----------- ----------- ----------- ---------- -----------
Net income (loss).......... $(142,452) $(1,209,506) $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235)
========= =========== =========== =========== =========== ========== ===========
Net income (loss) per
share(1)................. $(0.07) $(0.52) $(0.78) $(1.26) $(0.92) $0.17 $(0.22)
----- ----- ----- ----- ----- ---- -----
----- ----- ----- ----- ----- ---- -----
Shares used in computing
net income (loss) per
share(1)................. 1,986,950 2,326,059 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501
========= =========== =========== =========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
--------- ----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments................ $ 116,287 $ 6,095,987 $ 7,519,096 $ 9,983,046 $ 38,661,534 $ 30,545,566
Working capital................... 79,878 6,066,903 6,674,114 8,530,570 35,375,372 29,813,463
Total assets...................... 145,592 6,333,479 10,107,087 15,346,654 48,977,573 45,812,895
Obligations under capital leases,
less current portion............ -- -- 303,366 1,274,381 2,831,010 3,592,219
Note payable...................... -- -- -- 231,938 -- --
Accumulated deficit............... (203,063) (1,412,569) (5,309,475) (15,766,991) (25,619,932) (28,110,167)
Total shareholders' equity........ 104,242 6,170,556 8,702,521 10,903,253 41,505,530 38,885,713
</TABLE>
- ------------
(1) See Note 1 of Notes to Financial Statements for information concerning
the computation of net income (loss) per share and shares used in computing net
income (loss) per share.
18
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with "Selected Financial Data"
and the Company's Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."
OVERVIEW
Since its inception in October 1989, the Company has devoted substantially
all of its resources to the development of its potential products. To date, the
Company has not received any revenues from the sale of products. The Company has
funded its development programs primarily from equity-derived working capital
and through strategic alliances with other companies. DepoTech expects to incur
substantial losses over at least the next two years as the Company's research
and development efforts, preclinical and clinical testing activities and
manufacturing scale-up and sales and marketing activities expand. The amount of
net losses and the time required for the Company to achieve profitability are
highly uncertain. Operating losses may also fluctuate from quarter to quarter as
a result of differences in timing of expenses incurred. There can be no
assurance that the Company will be able to achieve profitability at all or on a
sustained basis. As of March 31, 1996, the Company's accumulated deficit was
approximately $28.1 million.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
The Company had total revenues of $1.2 million for the three months ended
March 31, 1996 compared to $4.2 million for the same period in 1995. Total
revenues were primarily derived from reimbursement of 50% of the clinical trial
and manufacturing scale-up expenses for the Company's lead product, DepoCyt,
under a collaborative agreement with Chiron. In addition, Chiron reimbursed
DepoTech for 100% of feasibility studies performed on their behalf. 1995 total
revenues included a one-time marketing rights fee and reimbursement of prior
year clinical trial expenses for DepoCyt totaling $3.5 million earned by the
Company in January 1995 upon achievement of a development milestone under the
Chiron collaboration. Revenues derived from this milestone will not re-occur in
future periods. Revenues may fluctuate from period to period depending on the
level of clinical and process development activities for projects covered under
the collaboration agreement and the achievement of milestones.
Research and development expenses for the first quarter ended March 31,
1996 increased to $3.3 million compared to $2.4 million for the same period in
1995. Factors contributing to this increase include expanded efforts in Phase
III clinical trials and manufacturing scale-up for DepoCyt, and clinical and
preclinical development of other potential DepoFoam products. The Company
completed a Phase I clinical trial for DepoAmikacin in April 1996.
Under the collaborative agreement with Chiron, the Company is obligated to
fund 50% of the sales and marketing expenses incurred for DepoCyt. DepoTech is
recognizing such pre-launch expenses incurred in 1996 prior to the onset of any
product revenue.
General and administrative expenses for the first quarter of 1996 increased
to $0.8 million from $0.5 million in the same period in 1995. The increase was
primarily due to expansion in administrative staffing, higher occupancy expenses
and costs associated with being a public company.
19
<PAGE> 23
Interest income increased to $0.5 million for the three months ended March
31, 1996 from $0.2 million for the same period in 1995. The increase was
principally due to higher average cash investment balances following the
Company's initial public offering in October 1995 and increases in available
market interest rates. Interest expense increased to $145,000 for the three
months ended March 31, 1996 from $52,000 for the same period in 1995. The
increase in interest expense was due to higher balances outstanding for
obligations under capital leases and loans.
Years Ended December 31, 1995, 1994 and 1993
The Company had contract revenues of $5.8 million for the year ended
December 31, 1995 compared to $0.6 million for 1994 and $0.1 million for 1993.
The 1995 and 1994 contract revenues were primarily derived from the Company's
collaborative agreement with Chiron. The increase in contract revenues from 1993
to 1994 was due principally to agreements for feasibility studies with corporate
partners. In January 1995, the Company achieved a development milestone under
the Chiron agreement which resulted in revenues of approximately $2.5 million
from Chiron for reimbursement of 50% of clinical trial expenses for DepoCyt
incurred from July 1993 to December 1994. The remaining $3.3 million in contract
revenues represents Chiron's reimbursement of 50% of clinical trial expenses for
DepoCyt incurred during 1995 and Chiron's reimbursement of 100% of costs
associated with feasibility studies performed on Chiron's behalf. In addition,
during 1995, the Company recorded revenues totaling $1.0 million for a marketing
rights fee for DepoCyt in the United States, Canada and Europe. Clinical trial
expenses for DepoCyt in the United States and Canada are funded equally by
DepoTech and Chiron. Revenues from the reimbursement of clinical trial expenses
from prior years and the marketing rights fee are one time payments which will
not re-occur in future periods. In 1996, the Company anticipates that contract
revenue from Chiron will continue at approximately the same level as that
recognized in 1995.
Research and development expenses increased to $12.7 million for the year
ended December 31, 1995, from $7.4 million in 1994 and $3.2 million in 1993.
Factors contributing to these increases include substantial expansion in staff,
the purchase of laboratory and manufacturing supplies, the expansion of pilot
manufacturing and laboratory facilities and increases in equipment depreciation.
Research and development expenses are expected to continue to increase in 1996
due to the ongoing clinical trials for DepoCyt, the continuation of clinical
trials for DepoAmikacin, the expansion of preclinical and clinical testing of
DepoMorphine and other new product development programs, and higher occupancy
expense.
General and administrative expenses increased to $2.8 million during 1995
from $1.9 million in 1994 and $0.8 million in 1993. The increases were primarily
due to expansion in staffing and higher business development and occupancy
expenses. General and administrative expenses are expected to continue to
increase in 1996 due to increases in staffing and costs associated with being a
public company.
Interest income was $1.1 million for the year ended December 31, 1995
compared to $0.3 million in 1994 and $0.1 million in 1993. The increases were
principally due to higher average cash investment balances and increases in
available market interest rates. Interest expense was $0.4 million for the year
ended December 31, 1995 compared to $0.1 million in 1994 and $37,000 in 1993.
The increases in interest expense were due to higher balances outstanding for
obligations under capital leases and costs associated with a $4.0 million bank
credit line.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, DepoTech has financed its operations primarily through
public and private placements of equity securities, which provided aggregate net
proceeds of approximately $67.2 million through March 31, 1996, and through
capital equipment leases. In October 1995, the Company completed its initial
public offering of common stock with net proceeds of $38.1 million.
20
<PAGE> 24
As of March 31, 1996, the Company had cash, cash equivalents and short-term
investments of $30.5 million as compared to $38.7 million at December 31, 1995.
The decrease of $8.2 million in cash, cash equivalents and short-term
investments was due primarily to net cash used to fund operations of $4.2
million and payments totaling $3.4 million for capital expenditures. Working
capital decreased to $29.8 million as of March 31, 1996 compared to $35.4
million as of December 31, 1995.
Through March 31, 1996, the Company has invested an aggregate of $14.3
million for property and equipment of which $6.6 million has been funded through
capital equipment leases. In April 1996, the Company obtained a $2.5 million
equipment lease which was used to finance certain tenant improvement costs
incurred in the first quarter for the build-out of the Company's main
manufacturing space and equipment purchases. In June 1996, the Company signed a
bank credit facility for $9.0 million to finance future equipment purchases.
DepoTech intends to continue to finance through third parties a substantial
portion of future capital expenditures supplemented by internal cash resources,
where appropriate. In September 1995, the Company occupied the initial phase
(50,000 square feet) of a build-to-suit facility housing its administrative,
research, development and clinical activities. DepoTech began paying rent in
mid-March 1996 for the remaining space (32,000 square feet) which is intended to
provide future multi-line manufacturing capability. This will result in
increased facility expenses in future periods. The future minimum rental
commitment for this facility will range from $2.1 million to $4.5 million per
year over 20 years, based upon pre-established annual rent increases. In
addition, the Company has a right of first refusal and right of first offer to
purchase land located adjacent to its headquarters which must be exercised on or
before October 15, 1997. The Company may elect to exercise such option in 1997
in order to build a facility to house packaging, labeling and warehousing and
administrative offices. The estimated capital expenses associated with this
facility would be approximately $8.5 million.
The Company's operations to date have consumed substantial amounts of cash,
which is expected to continue over the foreseeable future. The amount of net
losses and the time required for the Company to achieve profitability are highly
uncertain. There can be no assurance that the Company will be able to achieve
profitability at all or on a sustained basis. It is the Company's intention to
fund certain product research and development costs through additional
collaborative relationships with suitable corporate partners. There can be no
assurance that any future collaborative agreements will successfully reduce the
Company's funding requirements. Additional equity or debt financing will be
required, and there can be no assurance that these funds will be available on
favorable terms, if at all. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its product
development programs or obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates or products that the Company would not
otherwise relinquish.
DepoTech anticipates that its existing, available cash, cash equivalents
and short-term investments, combined with the proceeds of this Offering, its
committed future contract revenue, projected funding from equipment leases and
interest income will be adequate to satisfy its capital requirements and fund
operations at least through 1998. The Company's future capital requirements will
depend on many factors, including continued scientific progress in its products
and process development programs, progress with preclinical testing and clinical
trials, the time and costs involved in obtaining regulatory approvals, the cost
of manufacturing scale-up, the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims, competing technological and market
developments, changes in existing collaborative relationships, the ability of
the Company to establish collaborative arrangements and the cost of establishing
effective sales and marketing arrangements.
21
<PAGE> 25
BUSINESS
OVERVIEW
DepoTech is a drug delivery company engaged in the development and
manufacture of sustained-release therapeutic products based on DepoFoam, an
injectable, depot drug delivery technology. DepoFoam consists of microscopic,
spherical particles composed of hundreds to thousands of nonconcentric chambers
each separated from adjacent chambers by a bilayer lipid membrane. The Company
has developed DepoFoam formulations which release drugs over an extended period
of time, such as several weeks, or over a shorter period, such as a few days.
DepoTech has demonstrated that its proprietary DepoFoam technology can be used
to encapsulate a wide spectrum of generic and proprietary water-stable drugs,
including proteins, peptides, antisense oligonucleotides and DNA, for a range of
therapeutic indications. DepoTech believes that its technology enables the
development of highly-differentiated, proprietary products with enhanced safety
and efficacy, improved profit margins, broadened labeling, extended or renewed
patent life and significantly reduced administration schedules.
The Company's lead product, DepoCyt, is a proprietary DepoFoam formulation
of cytarabine, a generic anti-cancer drug, also known as ara-C. DepoCyt is being
developed in collaboration with Chiron in the United States, Canada and Europe
for the treatment of three subtypes of neoplastic meningitis arising from solid
tumors, leukemia and lymphoma. In June 1996, the Company announced response rate
data, a primary endpoint of the solid tumor arm of a pivotal Phase III clinical
trial which compared DepoCyt to standard therapy (methotrexate) in patients with
neoplastic meningitis. Response was defined as the absence of malignant cells in
two consecutive samples of patients' CSF and lack of disease progression as
assessed through neurological evaluation. Of 54 evaluable patients, 36% of the
25 patients treated with DepoCyt showed a response versus 17% of the 29 patients
treated with methotrexate. Based on these data and other study endpoints still
to be completed, the Company plans to file an NDA for the treatment of
neoplastic meningitis arising from solid tumors in the fourth quarter of 1996.
In addition to DepoCyt, DepoTech has a diversified development pipeline
that demonstrates the breadth of the Company's technology. The Company is: (i)
developing DepoAmikacin, a DepoFoam formulation of amikacin, a potent,
broad-spectrum antibiotic for the treatment and prophylaxis of bacterial
infections; (ii) developing DepoMorphine, a DepoFoam formulation of morphine
sulfate, for post-surgical acute pain management; and (iii) evaluating D0601, a
DepoFoam formulation of IGF-1, a Chiron proprietary protein, for a rheumatologic
indication. The Company completed a Phase I clinical trial for DepoAmikacin in
April 1996 in which the drug was found to be well-tolerated for all dosage
levels studied. DepoTech has also completed formulation and initial
manufacturing scale-up of DepoMorphine, is currently conducting preclinical
studies and intends to file an IND in 1996. In addition, D0601 scale-up and
preclinical development are currently underway. DepoTech is also evaluating
DepoFoam formulations of several additional compounds which may offer
significant medical benefits and substantial market potential, including
antisense oligonucleotides, local anesthetics and antithrombotics.
Since March 1994, DepoTech and Chiron have collaborated in the development
of DepoCyt and DepoFoam formulations of certain of Chiron's proprietary
products, including IGF-1. The collaborative agreement provides for the future
development of additional DepoFoam formulations of other Chiron proprietary
products, including certain cytokines, vaccines, growth factors and gene therapy
products. Under the terms of the agreement, DepoTech retains manufacturing
rights to DepoCyt and the DepoFoam formulations of Chiron's proprietary
products. Chiron will market and distribute DepoCyt in the United States, Canada
and Europe and will have worldwide marketing rights to DepoFoam formulations of
its own proprietary products.
The Company's strategy is focused on the development and commercialization
of proprietary DepoFoam formulations of generic drugs or, in collaboration with
corporate partners, the development of DepoFoam formulations of compounds
proprietary to the corporate partners. The Company is
22
<PAGE> 26
implementing this strategy by: (i) developing high value-added DepoFoam
formulations of approved or late-stage drugs; (ii) expanding the product
pipeline by identifying new product opportunities according to stringent
criteria and by conducting feasibility studies; (iii) establishing collaborative
and funding arrangements for development and commercialization of new DepoFoam
products; and (iv) retaining certain manufacturing rights to DepoFoam
formulations. The Company believes this strategy minimizes certain risks
associated with traditional pharmaceutical discovery and development.
DEPOFOAM TECHNOLOGY
DepoFoam is a proprietary enabling drug delivery technology that permits
the formulation of sustained release therapeutic compounds. DepoFoam consists of
microscopic, spherical particles composed of hundreds to thousands of
nonconcentric internal aqueous chambers containing the encapsulated drug, with
each chamber separated from adjacent chambers by a bilayer lipid membrane.
DepoFoam can be administered by a number of routes, including subcutaneous,
intramuscular, intra-articular, epidural and intrathecal. Because the components
of DepoFoam are synthetic duplicates of lipids normally present in the body, the
material is biodegradable and biocompatible. Typically, a DepoFoam particle
consists of less than 10% lipid, with the remaining 90% consisting of drug in
aqueous solution. The resulting DepoFoam formulation is stored under
refrigeration in ready-to-use form.
The Company has tested DepoFoam formulations that release drugs over a
period of days to weeks with the period of release defined by the lipid
composition, chemistry of the encapsulated drug and manufacturing parameters of
the DepoFoam particles. The Company believes drugs may be released from DepoFoam
particles as the drugs diffuse and/or leach through the walls and by gradual
erosion of the outside surface. The nature of drug release may also be
determined by the specific chemistry and size of each drug molecule. As a
result, the Company has demonstrated the ability to develop DepoFoam
formulations which release drugs over an extended period of time, such as
several weeks, or over a shorter period, such as one to two days. DepoTech has
demonstrated that its proprietary DepoFoam technology can be used to encapsulate
a wide spectrum of generic and proprietary water-stable drugs, including
proteins, peptides, antisense oligonucleotides and DNA, for a range of
therapeutic indications.
ADVANTAGES OF DEPOFOAM
The Company believes DepoFoam addresses many of the limitations associated
with traditional drug delivery technologies. Most drugs are administered orally,
by injection in intermittent and frequent doses or by continuous infusion. These
routes of administration are not optimal for several reasons, including
difficulty in achieving therapeutic drug levels over time, problems with
toxicity, high costs due to frequent or continuous administration and poor
patient compliance. Furthermore, innovations in biotechnology have led to an
increase in the number of large-molecule protein and peptide drugs under
development. These therapeutics, because of their large molecular size and
susceptibility to degradation in the gastrointestinal tract, must usually be
administered by multiple injections often in a hospital or other clinical
setting.
The Company believes that DepoFoam's key advantage over traditional methods
of drug delivery, including bolus injections and oral administration, is that
DepoFoam's sustained-release characteristics allow drugs to perform more safely
and effectively. To attain the desired therapeutic effect, conventional drug
delivery requires a dosage that delivers an initially high level of the drug
followed by a sharp decline over time, whereas DepoFoam can provide a more
consistent drug level over an extended period. For example, DepoCyt clinical
trials to date have shown that DepoCyt has a therapeutic life of up to two weeks
after a single intrathecal injection, compared to one day with unencapsulated
cytarabine.
23
<PAGE> 27
The Company believes that DepoFoam's key features, including lower initial
drug levels and delivery of therapeutic drug levels over an extended period of
time, make it superior to traditional drug delivery techniques, as well as other
sustained-release delivery formulations. DepoFoam may:
- Enhance safety and efficacy. The Company believes DepoFoam may improve
the ratio of therapeutic effect to toxicity by decreasing the initial
peak concentrations of drug associated with toxicity, while maintaining
levels of drug at therapeutic, sub-toxic concentrations for an extended
period of time. Many drugs demonstrate optimal efficacy when
concentrations are maintained at therapeutic levels over an extended
period of time. When a drug is administered intermittently, the
therapeutic concentration is often exceeded for some period of time, and
then the concentration rapidly drops below effective levels. Excessively
high concentrations are a major cause of side effects, and
sub-therapeutic concentrations are ineffective.
- Lower overall treatment costs. To be commercially viable in today's
health care market, drugs must show cost effectiveness, as well as
therapeutic effectiveness. The Company believes that DepoFoam
formulations of drugs may offer substantial cost savings by reducing the
need for continuous infusion, the frequency of administration and the
number of visits a patient must make to the doctor. These formulations
may furthermore enable some patients that are typically treated in a
hospital to be treated as out-patients, reduce the need for diagnostic
monitoring of some products, reduce complications of therapy caused by
poor compliance and eliminate the need for additional procedures or
equipment.
- Expand types of drugs capable of delivery over an extended period of
time. Proteins and peptides, because of their large molecular size and
susceptibility to degradation in the gastrointestinal tract, must
currently be administered frequently by injection or by continuous
infusion, typically in a hospital or other clinical setting. The Company
believes DepoFoam may be able to deliver these drugs more effectively,
including proteins, peptides, antisense oligonucleotides and DNA.
- Expand indications of currently-marketed drugs. The Company believes
that the therapeutically useful release of drugs from a DepoFoam
formulation may allow such drugs to be marketed for indications where the
Company believes they cannot currently be used because of the limitations
of current delivery methods. For example, the Company believes DepoCyt
will be indicated for treating solid tumor and lymphoma metastases in
neoplastic meningitis even though the active ingredient of DepoCyt,
cytarabine, is currently not labeled for these indications.
- Improve profit margins through proprietary reformulation. The Company
believes DepoFoam offers the potential to produce new proprietary
formulations of generic products that may be differentiated from the
nonsustained-release versions by virtue of reduced dosing requirements,
improved efficacy, additional applications or decreased toxicity. The
Company believes the proprietary position of such DepoFoam formulations
will be based on the proprietary nature of DepoFoam, and may offer more
attractive margins and increased sales relative to the generic
competition.
DEPOTECH'S STRATEGY
DepoTech's strategy is focused on the development and commercialization of
proprietary DepoFoam formulations of generic drugs or, in collaboration with
corporate partners, the development of DepoFoam formulations of compounds
proprietary to its corporate partners. The Company is implementing this strategy
by:
- Developing high value-added DepoFoam formulations of approved or
late-stage drugs. The Company's product development efforts are focused
primarily on drugs that either have proven safety and efficacy and are
approved for marketing or are in late-stage clinical trials. The Company
does not engage in basic research to discover new molecular entities.
- Expanding the product pipeline by identifying new product opportunities
according to stringent criteria and by conducting feasibility
studies. The Company focuses its efforts on selecting new drug
24
<PAGE> 28
candidates based on stringent criteria and developing DepoFoam
formulations of drugs where sustained-release formulations offer a clear
medical or cost benefit. Once a candidate compound passes these screening
criteria, DepoTech performs a limited set of tests to establish technical
feasibility for the product before undergoing expensive clinical
development. The Company believes that proprietary DepoFoam formulations
will add additional value to such drugs by potentially increasing their
level of efficacy, reducing their toxicity and side effects, lowering
overall treatment costs and expanding the indications they address.
- Establishing collaborative and funding arrangements for development and
commercialization of new DepoFoam products. As part of its
commercialization strategy, the Company intends to focus its efforts on
establishing collaborative arrangements with corporate partners to obtain
access to specific compounds, obtain marketing and distribution
capabilities and fund product development. With respect to products that
are proprietary to the partner, DepoTech will seek to have the partner
fund the feasibility, formulation, development, clinical testing and
regulatory costs of the DepoFoam formulations of the product and will
generally grant worldwide distribution rights to the DepoFoam formulation
to the partner. In March 1994, the Company entered into a collaboration
with Chiron that contained these strategic elements. In addition, in
selected instances, DepoTech may retain certain marketing or co-promotion
rights.
- Retaining certain manufacturing rights to DepoFoam formulations. A key
strategy of the Company is to seek to maintain exclusive formulation and
manufacturing rights to DepoFoam encapsulated drugs, including
proprietary products of corporate partners. The Company believes it has
developed significant proprietary expertise in the formulation and
manufacture of DepoFoam and expects to receive compensation for its
expertise and effort in manufacturing DepoFoam formulations of drugs.
25
<PAGE> 29
PRODUCT RESEARCH AND DEVELOPMENT PROGRAMS
The table below summarizes DepoTech's portfolio of products currently under
development and formulations undergoing feasibility testing.
<TABLE>
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------
CORPORATE
PRODUCT (ACTIVE COMPOUND) INTENDED USE STATUS(1) PARTNER/TERRITORY(2)
- -------------------------------------------------------------------------------------------------------
PRODUCT PROGRAMS
- -------------------------------------------------------------------------------------------------------
DepoCyt (cytarabine) Neoplastic meningitis
solid tumors Phase IV Chiron/North America
leukemia/lymphoma Phase III Chiron/North America
pediatric Phase I/II Chiron/North America
Neoplastic meningitis Pharmacokinetics Chiron/Europe
study
Neoplastic meningitis Dose confirmation None/Japan
study
DepoAmikacin (amikacin) Bacterial infections Phase I None
DepoMorphine (morphine) Acute post-operative Preclinical None
pain management
D0601 (IGF-1) Rheumatologic diseases Preclinical Chiron/worldwide
- -------------------------------------------------------------------------------------------------------
FEASIBILITY PROGRAMS
- -------------------------------------------------------------------------------------------------------
Antisense oligonucleotides CMV retinitis Feasibility ISIS/worldwide
(ISIS 2922)
Local anesthetics Acute post-operative Feasibility None
(bupivacaine) pain management
Antithrombotics Arterial and venous Feasibility None
(heparin) thrombosis
- -------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) "Feasibility" means initial laboratory testing to determine the ability
to encapsulate the drug efficiently in DepoFoam, establish preliminary
stability, engineer appropriate in vitro release rates and conduct limited
animal studies. "Preclinical" means formulation optimization, scale-up
experiments, additional stability testing following initial feasibility studies
and other studies, including additional animal studies focused on toxicology and
efficacy, necessary to prepare and file an IND. "Dose confirmation study" means
a study to confirm the appropriateness of a dose established in one patient
population in a different patient population. "Phase I" means initial human
studies designed to establish the safety, dose tolerance and sometimes
pharmacokinetics of a compound. "Phase I/II" means studies specific to cancer
trials where safety, pharmacokinetics and dose finding are established in
patients. "Phase III" means human studies designed to lead to accumulation of
data sufficient to support an NDA. "Phase IV" means human studies that are
generally performed after approval of a new drug. In the case of DepoCyt, as
with all drugs subject to accelerated approval, the FDA has requested that the
Company submit a Phase IV protocol prior to submission of an NDA. Completion of
a Phase IV study is not a prerequisite for review of an NDA by the FDA.
"Pharmacokinetics study" means human studies to confirm that therapeutic levels
of drug in the CSF can be achieved by the lumbar route of administration.
(2) The Company will seek to maintain manufacturing rights to DepoFoam
formulations of compounds and will generally grant worldwide distribution rights
to the DepoFoam formulation to the partner. For instance, in its collaboration
with Chiron, DepoTech will manufacture DepoCyt and will encapsulate Chiron's
proprietary compounds in DepoFoam.
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DepoCyt
The Company's lead product, DepoCyt, is a proprietary DepoFoam formulation
of cytarabine, a generic anti-cancer drug, also known as ara-C. DepoCyt is being
developed in collaboration with Chiron in the United States, Canada and Europe
for the treatment of three subtypes of neoplastic meningitis arising from solid
tumors, leukemia and lymphoma. In June 1996, the Company announced response rate
data, a primary endpoint of the solid tumor arm of a pivotal Phase III clinical
trial which compared DepoCyt to standard therapy (methotrexate) in patients with
neoplastic meningitis. Based on these data and other study endpoints still to be
completed, the Company plans to file an NDA initially for the treatment of
neoplastic meningitis arising from solid tumors in the fourth quarter of 1996.
Background. Neoplastic meningitis is a form of metastatic cancer arising
from the spread of leukemia, lymphoma or solid tumors to the tissue, known as
the meninges, which surrounds the brain and spinal cord and encloses the CSF.
Because of the blood-brain barrier, drugs in the bloodstream do not penetrate
well into the CSF. Thus, when cancer cells metastasize to the meninges, the most
effective therapy is to inject anti-cancer drugs directly into the CSF.
Cytarabine is one of the two drugs most commonly used for this therapy.
Cytarabine acts by inhibiting a vital enzyme in DNA synthesis, DNA polymerase,
causing a halt to the synthesis of DNA and resulting in death of the cell.
Therefore, the best results are obtained when the drug is localized in the
vicinity of dividing cancer cells for an extended period.
Because the therapeutic half-life of cytarabine in the CSF is relatively
short, frequent and repeated injections are necessary for effective treatment.
For safety reasons, continuous intrathecal infusion of cytarabine is not a
viable option. The result is that neoplastic meningitis cannot be treated
effectively without the use of repeated, intrathecal injections that are
inconvenient and uncomfortable for patients, require physician supervision and
increase the risk of infection. Because of these and other factors, the disease
is often under-diagnosed and frequently left untreated. Without effective
treatment, life expectancy for patients diagnosed with this disease is between
two and four months. Clinical trials to date have shown that DepoCyt maintained
therapeutically useful concentrations of cytarabine in the CSF for two weeks
after a single intrathecal injection as compared to less than one day with
traditional intrathecal injections of cytarabine. As a consequence, the use of
DepoCyt results in less frequent injections and extended therapeutic levels of
the drug in the CSF.
Markets. The Company estimates that the current treated market for
neoplastic meningitis is approximately 20,000 patients per year in the United
States. However, the Company expects the treatment market to grow and estimates
that approximately 65,000 patients per year in the United States develop this
disease. In June 1993, the Company obtained orphan drug designation for DepoCyt
from the FDA to treat neoplastic meningitis.
Clinical Development. In the Phase III clinical trial as originally
designed and initiated in April 1994, patients with one of the three subtypes of
neoplastic meningitis selected from multiple centers were randomized to receive
either DepoCyt or standard therapy. Standard therapy for metastases of solid
tumors is methotrexate and the standard therapy for metastases of leukemia and
lymphoma is unencapsulated cytarabine. Within each subtype, at least 20 patients
are to receive DepoCyt and at least 20 patients are to receive standard therapy.
A total of 40 patients are to be treated for each subtype of the disease and a
total of only 120 patients are required to complete all three arms of the study.
Analysis of patients' response to treatment in the solid tumor arm has been
completed and the leukemia and lymphoma arms are ongoing.
In June 1996, the Company announced response rate data, a primary endpoint
of the solid tumor arm of a pivotal Phase III clinical trial which compared
DepoCyt to standard therapy (methotrexate) in patients with neoplastic
meningitis. In this multicenter, controlled, non-blinded trial of DepoCyt, 61
patients were randomized to treatment either with DepoCyt or methotrexate.
Fifty-four of these patients were evaluable for the analysis of response to
therapy. Response was defined as the absence of malignant cells in two
consecutive patients' samples of CSF and lack of disease progression as assessed
through neurological evaluation. Of 54 evaluable patients, 36% of the 25
patients treated with DepoCyt
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showed a response versus 17% of the 29 patients treated with methotrexate. The
study design did not include an evaluation of partial response.
Additionally, because previous studies have shown that methotrexate has a
better response rate in neoplastic meningitis arising from breast and small cell
lung cancers compared to other types of solid tumor metastases, patients
entering the study were stratified into two subgroups and randomized to
treatment either with DepoCyt or methotrexate. In the breast and small cell lung
cancer subgroup, of eight evaluable patients treated with DepoCyt, 38% showed
complete response versus 25% of 12 evaluable patients treated with methotrexate.
In the subgroup comprised of all other solid tumor cancers, of 17 evaluable
patients receiving DepoCyt, 35% responded versus 12% of 17 evaluable patients
treated with methotrexate. DepoTech plans to continue to follow patients still
on study and release additional trial results prior to submission of the NDA
related to other defined endpoints, such as quality of life, duration of
response and mortality. Furthermore, the pivotal study of DepoCyt in neoplastic
meningitis arising from lymphomas and leukemias are continuing.
The Phase III trial is being performed under the expedited development
process of the FDA regulations, which is available for therapeutic products to
treat life-threatening illnesses for which no satisfactory alternative therapies
exist. The FDA has advised the Company that DepoTech may file an NDA with data
collected from any one individual subtype in advance of accruing patients and
completing the analyses on the other two subtypes. The Company plans to file an
NDA for the treatment of neoplastic meningitis arising from solid tumors in the
fourth quarter of 1996.
In the case of DepoCyt, as with all drugs subject to accelerated approval,
the FDA has requested that the Company submit a Phase IV protocol prior to
submission of an NDA. Completion of a Phase IV study is not a prerequisite for
review of an NDA by the FDA. The Company has initiated a multicenter Phase IV
study of DepoCyt for the treatment of neoplastic meningitis arising from solid
tumors in the United States and Canada. This study is a non-randomized trial
intended to collect further data relating to safety and efficacy. The study also
permits additional injections of DepoCyt for patients who fail to respond
completely during the initial induction period of the study or who relapse 30
days following completion of the treatment protocol. See "-- Government
Regulation."
Additional Territories and Indications. Chiron is currently carrying out
pharmacokinetic studies of DepoCyt for the treatment of neoplastic meningitis in
the European Union. In addition, DepoTech is starting a trial of DepoCyt in
Japan. This trial is designed to confirm the applicability of the dosing regimen
used in the North American and European trials to the Japanese population. In
parallel, the Company intends to submit an orphan drug application for the
accelerated marketing approval of DepoCyt in Japan.
To establish the appropriate use of DepoCyt in children afflicted with
neoplastic meningitis, DepoTech, in conjunction with Chiron, is initiating a
multi-center pediatric dose finding trial. This study will evaluate the safety
and pharmacokinetics of DepoCyt in children of various ages. In addition, the
study is expected to provide information regarding the efficacy of DepoCyt and
to collect data on the long-term use of the drug.
The Company is also exploring additional indications for DepoCyt, including
its use in the treatment of other cancers and viral diseases.
DepoAmikacin
DepoTech is developing DepoAmikacin, a DepoFoam formulation of amikacin, a
potent, broad-spectrum antibiotic. The Company believes that DepoFoam offers the
opportunity to reformulate amikacin, which became a generic antibiotic in 1990,
into a proprietary new product and to improve its therapeutic profile. The
Company has successfully encapsulated amikacin in DepoFoam and has tested
various formulations in animals. DepoTech completed a Phase I clinical trial for
DepoAmikacin in April 1996 in which the drug was found to be well-tolerated for
all dosage levels studied.
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Background. Bacteria cause a wide range of illnesses in people, ranging
from clinically unimportant infections to fatal diseases. Injectable forms of
antibiotics are important tools of the physician, especially for more acutely
ill patients. However, most antibiotics that are administered orally, by bolus
injection or by continuous infusion achieve high systemic concentrations but
lesser concentrations in infected tissue, and are generally eliminated from the
body within several hours of administration. Furthermore, the concentration of
certain antibiotics, including amikacin, that can be achieved in the infected
tissue using current formulations is limited by the amount of drug that the body
can tolerate in the bloodstream without causing damage to the kidneys and
auditory nerves.
DepoAmikacin can be administered directly into the site of infection and
may deliver therapeutic levels of amikacin while reducing certain systemic
toxicities associated with this drug. Consequently, DepoAmikacin may be able to
expand the indications for amikacin and result in more attractive prices and
margins. The Company believes DepoAmikacin may be used in many applications,
including treatment and prophylaxis of bacterial infections associated with open
fractures, indwelling vascular catheters, orthopedic implants, peritonitis and
vascular grafts.
Markets. In 1995, there were reported to be a total of over 7.0 million
procedures occurring in the United States in which site-specific antibiotic
treatment may have been appropriate. DepoTech estimates the target United States
market for DepoAmikacin to be approximately 5.6 million procedures. Worldwide
1995 sales of the general class of antibiotics known as aminoglycosides, which
includes amikacin, were approximately $477.0 million. In 1995, amikacin
worldwide unit sales were approximately 8.4 million units, including 631,000
units in the United States, 5.7 million units in Japan and 2.0 million units in
Europe.
Clinical Development. In animal studies performed by the Company, a single
injection of DepoAmikacin administered locally at the site of an intentionally
infected implanted foreign body significantly reduced the number of bacteria
present versus the use of either systemic or local injection of free amikacin.
This animal model is analogous to many surgical situations, from complicated hip
replacement surgery to insertion of catheters. Additional animal models of
infection, including models for peritonitis and infected vascular grafts, are
currently underway. Information from these studies will be used to support the
selection and design of a Phase II clinical study.
DepoMorphine
DepoTech is developing DepoMorphine, a DepoFoam formulation of the opiate
analgesic morphine sulfate, for use in moderating acute pain following surgery.
This product is intended for epidural administration and may replace repeated
epidural or intravenous administration of opiates or patient controlled
analgesia for two to four days following surgery.
The Company believes that DepoMorphine could be used in management of pain
associated with many types of surgery, including Cesarean sections (epidural
morphine is currently used in most Cesarean sections in the United States),
hysterectomies, deep abdominal surgeries, hip and knee replacements and other
surgical procedures. In 1995, the Company identified a total of approximately
5.6 million procedures occurring in the United States that may have been
candidates for DepoMorphine. The Company estimates the target market to be
approximately 3.8 million procedures. Worldwide 1995 sales of morphine were
$110.3 million. In 1995, morphine worldwide unit sales were approximately 64.0
million units, including 41.6 million units in the United States, 9.8 million
units in Japan and 12.6 million units in Europe. The Company believes that
DepoFoam offers the opportunity to reformulate morphine sulfate, which has been
a generic product for many years, into a proprietary new product with
traditional pharmaceutical margins.
DepoTech has completed formulation and initial manufacturing scale-up of
DepoMorphine, is currently conducting preclinical studies and intends to file an
IND in 1996. Preclinical studies in animals showed that DepoMorphine provided a
minimum of two to three days of pain control following a single epidural
injection. One characteristic of certain DepoFoam formulations of drugs is that
an enhanced local effect may occur with limited systemic toxicity. A number of
pharmacokinetic studies in
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animals have confirmed that there are high levels of morphine at the injection
site and in the local cerebral spinal fluid with very low levels in the blood.
These data also show a sustained effect of the morphine and reproducibility from
multiple batches of DepoMorphine.
Chiron Proprietary Products
Under its agreement with Chiron, two Chiron proprietary proteins, IGF-1 and
IL-2, were chosen as the first two proprietary compounds to be developed into
DepoFoam formulations. Feasibility studies including formulation development and
in vivo animal studies on IGF-1 and IL-2 were completed and D0601 (DepoFoam
encapsulated IGF-1) was chosen for further clinical development. D0601 scale-up
and preclinical development are currently underway. In addition, Chiron and the
Company have agreed to initiate another feasibility study on an additional
Chiron proprietary compound or an additional indication for IGF-1 to begin in
the second half of 1996.
New Product Feasibility Programs
DepoTech is also evaluating DepoFoam formulations of several additional
compounds which may offer significant medical benefits and substantial market
potential, including antisense oligonucleotides, local anesthetics and
antithrombotics. The objectives of the feasibility programs are to: (i)
determine the ease and efficiency of encapsulation of candidate drugs; (ii)
evaluate in vitro and in vivo drug release characteristics; and (iii) conduct
initial efficacy and/or safety studies in animal models to demonstrate potential
clinical utility and advantages of the DepoFoam formulations.
Antisense Oligonucleotides. In August 1995, DepoTech signed a research
agreement with ISIS Pharmaceuticals, Inc. ("ISIS"). Under the terms of the
agreement, DepoTech has successfully encapsulated two ISIS compounds and
completed in vitro release and characterization studies of DepoFoam formulations
of proprietary ISIS antisense oligonucleotides. ISIS has performed
pharmacokinetic studies in animal models demonstrating prolonged release of
DepoFoam encapsulated antisense oligonucleotides. Based on these preliminary
studies, ISIS and DepoTech elected to extend the research agreement and to
conduct additional feasibility studies with ISIS 2922 for use in CMV-induced
retinitis. CMV retinitis is a localized, infectious disease that progressively
destroys the retina and eventually results in blindness in AIDS patients. A
different formulation of ISIS 2922 is currently being tested by ISIS in Phase
III clinical trials.
Local Anesthetics. DepoTech is conducting feasibility studies on DepoFoam
formulations of local anesthetics, such as bupivacaine, for use in alleviating
local pain following surgery or injury. The Company has successfully
encapsulated bupivacaine into DepoFoam. Pharmacokinetic studies have shown that
DepoFoam encapsulated bupivacaine is released slowly from the site of injection,
resulting in prolonged duration (more than 24 hours) of analgesia following a
single-dose administration. The Company is now optimizing the DepoFoam
bupivacaine formulation. DepoTech believes that a DepoFoam formulation of a
local anesthetic may complement its current DepoMorphine program and that the
DepoMorphine and local anesthetic formulations may give physicians significantly
improved drugs to manage postoperative pain.
Pain associated with surgery or injury is often treated with local
anesthetics. However, the usefulness of local anesthetics is frequently limited
by their short half-lives which results in recurrence of pain and the need for
repeated drug administration by a medical professional. A DepoFoam formulation
of a local anesthetic may be useful either locally or regionally (e.g.,
epidurally) to provide long-lasting pain relief (more than 24 hours) and to
reduce systemic central nervous system and cardiovascular toxicity associated
with currently-used drugs.
There are more than 5 million surgical procedures and serious trauma
injuries per year that may benefit from longer lasting analgesia. The current
pain relief drugs are short-acting and frequently do not provide adequate
duration of pain relief. The Company believes that a long-lasting, safe DepoFoam
formulation of a local anesthetic, such as bupivacaine, could become the drug of
choice for controlling post-operative and post-injury pain.
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Antithrombotics. The Company is investigating DepoFoam formulations of
both unfractionated heparin ("UFH") and low molecular weight heparins ("LMWH")
to deliver long-lasting antithrombotic activity. The Company believes that a
DepoFoam heparin formulation may be useful to control both venous and arterial
thromboses. The Company has successfully encapsulated UFH and LMWH in initial
feasibility studies. In vitro release studies have shown appropriate slow
release of LMWH from DepoFoam formulations.
Thrombosis, manifested as heart attack and stroke, is a bigger cause of
death than cancer, accidents and infections. Heparin, an anti-coagulant, is one
of the most frequently prescribed injectable drugs in hospitals. The major
disadvantages of heparins are: (i) a short half-life with the associated need
for frequent injections or continuous infusions to achieve adequate
antithrombotic coverage; and (ii) serious bleeding that can result from the high
peak blood levels (supra-therapeutic levels) of heparin that accompany the large
doses given to achieve lasting antithrombotic effects. DepoFoam formulations of
UFH and LMWH have the potential to provide long-lasting (one to four days'
duration) antithrombotic activity from a single dose while limiting
supra-therapeutic blood levels and associated bleeding.
The total market for antithrombotic agents, including generic heparin, is
more than $1 billion, and heparin is the most frequently prescribed agent in
this market. In 1995, the total number of UFH and LMWH doses combined was more
than 120 million in the United States and more than 290 million in Europe. The
Company believes that a long-lasting dosage form of heparin possessing an
acceptable safety profile may increase the usage of this drug to prevent and
treat thrombotic disorders, such as deep vein thrombosis, unstable angina and
arterial restenosis following angioplasty.
STRATEGIC ALLIANCES
As part of its commercialization strategy, the Company intends to focus its
efforts on establishing collaborative arrangements with corporate partners to
obtain access to specific compounds, obtain access to distribution organizations
and fund development work. The Company intends to seek to collaborate with major
pharmaceutical or fully-integrated biotechnology companies that have significant
clinical development, financial and marketing resources. With respect to
products that are proprietary to its partners, DepoTech will seek to have its
partners fund the feasibility, formulation, development, clinical testing and
regulatory costs associated with the product and will generally grant worldwide
distribution rights to the DepoFoam formulation to the partner. A key strategy
of the Company is to retain exclusive formulation and manufacturing rights to
any DepoFoam encapsulated drugs, including proprietary products of corporate
partners. Under these collaborative arrangements, DepoTech expects to receive
compensation based on both the partner's sales of the product and manufacturing
costs of the product.
The Company will have limited or no control over the resources that any
partner may devote to the Company's products, over partners' development
efforts, including the design and conduct of clinical trials, or over the
pricing of products. There can be no assurance that any of the Company's present
or future collaborative partners will perform their obligations as expected or
will devote sufficient resources to the development, clinical testing or
marketing of the Company's potential products. Any parallel development by a
partner of alternate drug delivery technologies, preclusion from entering into
competitive arrangements, failure to obtain timely regulatory approvals,
premature termination of a collaborative agreement or failure by a partner to
devote sufficient resources to the development and commercialization of the
Company's products would have a material adverse effect on the Company.
Chiron
In March 1994, the Company entered into a Collaboration Agreement with
Chiron. The objective of the collaboration is to develop and commercialize
DepoCyt for use in the treatment of cancer, and to explore the use of the
Company's DepoFoam technology for certain compounds proprietary to Chiron.
DepoTech believes that Chiron's pharmacological, clinical development and
marketing resources in
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these areas complement DepoTech's resources. See "-- Product Research and
Development Programs."
The Collaboration Agreement grants Chiron rights to market and sell DepoCyt
in the United States, Canada and Europe. Chiron has funded and will continue to
fund 50% of the clinical development expenses in the United States. Canadian
registration expenses will be funded by Chiron. Any additional clinical trials
required in Europe will be funded by Chiron. DepoTech will manufacture DepoCyt,
Chiron will market, sell, and distribute DepoCyt, and the parties will share all
profits equally. Chiron will make payments to DepoTech upon filing of an NDA and
upon achievement of certain milestones in the European development of DepoCyt.
Chiron also has a right of first refusal to obtain a license to alternate
DepoFoam formulations of cytarabine under terms and conditions to be negotiated
in the future. Following an evaluation of the markets and certain other factors,
the Company and Chiron mutually agreed not to further develop certain additional
generic cancer compounds.
The Collaboration Agreement also provides for the joint development of
DepoFoam formulations of certain compounds proprietary to Chiron ("Chiron
Products"). Feasibility studies, including formulation development and in vivo
animal studies on IGF-1 and IL-2, have been completed and D0601 scale-up and
preclinical development are currently underway. In addition, Chiron and the
Company have agreed to initiate another feasibility study on an additional
Chiron proprietary compound or an additional indication for IGF-1 to begin in
the second half of 1996. In 1997 and thereafter, Chiron must fund one
feasibility program for a Chiron Product per year or lose its option to develop
DepoFoam formulations of additional Chiron proprietary compounds. The agreement
provides that Chiron will pay DepoTech for the Company's feasibility efforts,
and that Chiron will be responsible for all development costs thereafter. The
agreement also provides for payments by Chiron to DepoTech upon achievement of
certain development milestones with regard to the Chiron Products. Chiron will
have exclusive, worldwide distribution rights to all Chiron Products and will
manufacture the bulk unencapsulated drug. DepoTech will then encapsulate the
bulk drug in DepoFoam creating the Chiron Product, and Chiron will market, sell
and distribute the Chiron Products. Chiron will compensate DepoTech based on
both manufacturing costs, including a manufacturing profit, and a percentage of
Chiron's sales of the Chiron Products.
Both DepoTech and Chiron have the ability to terminate a portion or all of
the collaboration at certain intervals and with advance notice. In addition,
Chiron has the ability to terminate the development of a Chiron Product with a
limited amount of advance notice.
In connection with the Collaboration Agreement, Chiron made a $2.5 million
equity investment in the Company. In addition, Chiron paid $1.0 million in March
1994 for a warrant which was converted in January 1995 to a DepoCyt marketing
rights fee. Finally, in January 1995, upon achievement of a development
milestone, Chiron reimbursed DepoTech approximately $2.5 million for Chiron's
share of DepoCyt's clinical trial and development costs from July 1993 through
December 1994 and will continue to share equally in DepoCyt's United States
clinical trials and development costs. The Company will fund 50% of the sales
and marketing expenses incurred for DepoCyt. DepoTech may receive additional
payments upon achievement of certain other developmental milestones.
MANUFACTURING
In connection with its collaborative arrangements, DepoTech intends to
maintain exclusive formulation and manufacturing rights to any DepoFoam
encapsulated drugs, including proprietary products of corporate partners, and
expects to receive compensation based on both manufacturing costs of the product
and the partner's net sales of the product. To date, the Company has
manufactured its drug delivery formulations only for clinical trials and testing
formulations of certain potential therapeutic products and has no experience
manufacturing products for commercial purposes. Since 1995, the Company has
manufactured clinical materials in a 10,000 square foot manufacturing plant
built for this purpose. This manufacturing plant has completed validation to
comply with cGMP regulations for the manufacture of pharmaceuticals. This plant
was also inspected by the California
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Department of Health Services Food and Drug Branch and received a license from
the State to manufacture drugs. In August 1995, the Company completed
construction of a 4,400 square foot addition to the manufacturing plant which
allows the manufacturing scale to increase by a factor of 10 and which is
currently expected to support clinical trial and commercial shipments of DepoCyt
in addition to other clinical trial materials. The Company recently completed
the construction of an 82,000 square foot facility to house its administrative,
research and development and manufacturing activities. See "-- Facilities."
The Company will need to complete validation of the scale-up of its current
manufacturing processes to comply with cGMPs and other regulations prescribed by
various regulatory agencies in the United States and other countries to achieve
the prescribed quality and required levels of production of such products and to
obtain marketing approval.
The Company currently relies on a limited number of suppliers to provide
the materials used to manufacture its DepoFoam formulations. Certain of these
materials are purchased only from one supplier. In the event the Company could
not obtain adequate quantities of necessary materials from its existing
suppliers, there can be no assurance that the Company would be able to access
alternative sources of supply within a reasonable period of time or at
commercially reasonable rates. Regulatory requirements applicable to
pharmaceutical products tend to make the substitution of suppliers costly and
time-consuming. The unavailability of adequate commercial quantities, the
inability to develop alternative sources, a reduction or interruption in supply
or a significant increase in the price of materials could have a material
adverse effect on the Company's ability to manufacture and market its products.
To date, the Company has relied on a particular proprietary method of
manufacture. There can be no assurance that this method will be applicable to
all pharmaceuticals the Company desires to commercialize. Further, the yield of
product incorporated into the delivery system may be highly variable for
different therapeutic agents. Finally, the Company will need to successfully
meet any manufacturing challenges associated with the characteristics of the
drug to be encapsulated. The physical and chemical stability of the DepoFoam
formulation may vary with each therapeutic agent over time and under various
storage conditions. There can be no assurance that the manufacturing process
will result in economically viable yields of product or that it will produce
formulations of therapeutic products sufficiently stable under suitable storage
conditions to be commercially useful.
In the event that the Company decides to pursue alternative manufacturing
methods for some or all of its drugs, there can be no assurance that these
methods will prove to be commercially practical or that the Company will have or
be able to acquire rights to use such alternative methods.
GOVERNMENT REGULATION
DepoTech's research and development activities are, and its future business
will be, subject to significant regulation by governmental authorities in the
United States, primarily the FDA. Pharmaceutical products intended for
therapeutic use in humans are governed principally by the Federal Food, Drug,
and Cosmetic Act, as amended, and by FDA regulations in the United States and by
comparable laws and regulations in foreign countries. The process of completing
clinical testing and obtaining FDA approval for new drugs or biological products
requires a number of years and the expenditure of substantial resources.
DepoTech will also be subject to regulation under the food and drug statutes and
regulations of the State of California.
Pharmaceutical products developed by DepoTech likely will be classified by
the FDA as "new drugs" even though the active ingredient in the product was
previously approved. This is because the Company's products will be intended for
new indications or routes of administration, will provide significantly
different pharmacokinetics or will claim to provide significantly increased
safety or efficacy, requiring approval under an NDA. In some cases, the
Company's products may be marketed as "new drugs" under abbreviated provisions
for generic drugs (e.g., "paper NDA") where there are substantial similarities
with a currently marketed product that is not protected by patents. It is also
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likely that some of the drugs developed by the Company will be classed as
"biologics" under the Public Health Service Act and relevant portions of the
Federal Food, Drug, and Cosmetic Act. In this case, the products will be subject
to somewhat different regulations.
Prior to marketing a new drug product in the United States, other than a
generic drug, it is necessary to complete the following: (i) preclinical
laboratory and animal tests; (ii) submission to the FDA of an application for an
IND, allowing clinical and other studies to assess safety and parameters of use;
(iii) adequate and well-controlled clinical trials to establish the safety and
effectiveness of the drug; (iv) submission of an NDA to the FDA; and (v) FDA
approval of the NDA. For biological products, the process is similar, but not
identical to that described above for drugs, with the NDA being replaced with a
Product License Application ("PLA"). For marketing of a product under the
generic drug provisions, an Abbreviated New Drug Application ("ANDA") must be
submitted to the FDA and approved prior to commercial sale or shipment of the
drug.
Typically, for nongeneric new drugs and therapeutic biological products,
preclinical studies are conducted in the laboratory and in animal model systems
to gain preliminary information about the drug's pharmacology and toxicology and
to identify any potential safety problems. The results of these studies are
submitted to the FDA as part of the IND application. Testing in humans may
commence after clearance of the IND by the FDA. A three-phase clinical trial
program is usually required for FDA approval of a pharmaceutical product. Phase
I clinical trials are designed to determine the metabolism and pharmacological
effects of the drug in humans and the side effects associated with increasing
doses. Phase II studies are conducted to evaluate the effectiveness of the drug
for a particular indication and provide evidence of the short-term side effects
and risks associated with the drug or biologic and are generally designed to
provide the substantial evidence of safety and effectiveness of a drug or
biologic required to obtain FDA approval. Phase III clinical trials often
involve a substantial number of patients in multiple study centers and may
include chronic administration of the agent in order to assess the overall
risk/benefit relationship of the drug or biologic. A clinical trial may combine
the elements of more than one phase and typically two or more Phase III studies
are required. Generally, as the Company intends to utilize active ingredients in
its products that have previously been approved or are in a late stage of
development, these requirements may be somewhat abbreviated.
Upon completion of clinical testing that the Company believes demonstrates
that the product is safe and effective for a specific indication, an NDA or PLA
may be submitted to the FDA. The FDA closely monitors the progress of each of
the three phases of clinical testing and may, at its discretion, re-evaluate,
alter, suspend or terminate the testing based on the data that have been
accumulated to that point and its assessment of the risk to the patient. The
clinical testing and FDA review process for new drugs or biologics will require
substantial time, effort and expense. There can be no assurance that any
approval will be granted to the Company on a timely basis, if at all. The FDA
may refuse to approve an NDA or PLA and may require additional testing or
information. There can be no assurance that such additional testing or the
provision of such information, if required, will not have a material adverse
effect on the Company. Also, the regulatory process can be modified by Congress
or the FDA in a manner that could materially affect the Company.
In 1988, the FDA issued regulations intended to expedite the development,
evaluation and marketing of new therapeutic products to treat life-threatening
and severely debilitating illnesses for which no satisfactory alternative
therapies exist. These regulations provide for early consultation between the
sponsor and the FDA in the design of both preclinical studies and clinical
trials. In some cases, the objectives of the Phase I and Phase II studies are
combined as a single Phase I/II study. If the results of Phase I and Phase II
trials support the safety and effectiveness of the therapeutic agent, and their
design and execution are deemed satisfactory upon review by the FDA, marketing
approval may be sought at the end of Phase II trials or only limited Phase III
trials may be required. NDA or PLA approval granted under these regulations may
be restricted by the FDA as necessary to ensure the safe use of the drug. In
addition, post-marketing clinical studies, sometimes called Phase IV studies,
may be required. If, after approval, a post-marketing clinical study establishes
that the drug does not perform as expected, or if post-marketing restrictions
are not adhered to or are not adequate to ensure
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the safe use of the drug, FDA approval may be withdrawn. The expedited approval
may shorten the traditional drug development process by as much as two to three
years.
At the present time, DepoCyt is being developed under such an accelerated
program. There can be no assurance, however, that any future products the
Company may develop will be eligible for evaluation by the FDA under the 1988
regulations. In addition, there can be no assurance that DepoCyt or any future
products (if eligible) will be approved for marketing at all or, if approved for
marketing, will be approved for marketing sooner than would be traditionally
expected.
Once the sale of a product is approved, the FDA regulates production,
marketing and other activities under the Federal Food, Drug, and Cosmetic Act
and the FDA's implementing regulations. Post-marketing reports are required to
monitor the product's usage and effects. Product approvals may be withdrawn, or
other actions may be ordered, or sanctions imposed, including criminal
prosecution, if compliance with regulatory requirements is not maintained. Other
countries in which any products developed by the Company or its licensees may be
marketed impose a similar regulatory process.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a "rare disease or condition," which generally is a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States. Orphan drug designation must be requested before
submitting an NDA or PLA, and after the FDA grants orphan drug designation, the
generic identity of the therapeutic agent and its potential orphan use are
publicly disclosed by the FDA. Under current law, approval of the first NDA for
a drug with orphan drug designation confers United States marketing exclusivity
to market such designated drug for the designated indication for a period of
seven years following approval of the NDA, subject to certain limitations.
Orphan drug designation does not convey any advantage in, or shorten the
duration of, the regulatory approval process.
In June 1993, the Company obtained orphan drug designation for DepoCyt from
the FDA to treat neoplastic meningitis. There can be no assurance that the
Company will receive the first FDA approval to market sustained-release
cytarabine to treat neoplastic meningitis and thus receive orphan drug
exclusivity for DepoCyt to treat neoplastic meningitis arising from leukemia,
lymphoma or solid tumor metastases. Although obtaining FDA approval to market a
product with an orphan drug exclusivity can be advantageous, there can be no
assurance that the scope of protection or the level of marketing exclusivity
that is currently afforded by orphan drug designation will remain in effect in
the future.
In addition to regulations enforced by the FDA and the State of California,
the Company also is subject to regulation under the Occupational Safety and
Health Act, the Controlled Substances Act, the Environmental Protection Act, the
Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other similar federal, state and local regulations governing permissible
laboratory activities, waste disposal handling of toxic, dangerous or
radioactive materials and other matters. The Company believes that it is in
compliance with such regulations. These regulations are subject to change,
however, and may, in the future, require substantial effort and cost to the
Company to comply with each of the regulations, and may possibly restrict the
Company's business activities.
For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and biologics. The requirements relating to the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. For DepoMorphine, there may be additional regulatory
requirements relating to controlled substances for sale in foreign countries.
PATENTS AND PROPRIETARY RIGHTS
DepoTech relies on a combination of technical leadership, patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of June 1, 1996, the Company has exclusive
rights under its agreement with RDF discussed below to three issued United
States patents, six pending United States patent applications, 46 issued foreign
patents and 18 pending foreign applications. As of the same date and in its own
name, the Company has one issued
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United States patent, one allowed United States patent application, four pending
United States patent applications, one issued foreign patent and 20 pending
foreign patent applications on file covering various aspects of its drug
delivery technology. The Company intends to file additional patent applications
in the future. There can be no assurance that the Company will be issued any
additional patents or that, if any patents are issued, they will provide the
Company with significant protection or will not be challenged. Even if such
patents are enforceable, the Company anticipates that any attempt to enforce its
patents would be time consuming and costly. Moreover, the laws of some foreign
countries do not protect the Company's proprietary rights in the products to the
same extent as do the laws of the United States. The PTO has instituted changes
to the United States patent law including changing the term to 20 years from the
date of filing for applications filed after June 8, 1995. While one of the above
applications was filed after June 8, 1995, the Company cannot predict the effect
that such changes on the patent laws may have on its business, or on the
Company's ability to protect its proprietary information and sustain the
commercial viability of its products.
In February 1994, the Company entered into an Assignment Agreement with the
RDF, pursuant to which RDF assigned to DepoTech exclusive rights to the RDF
Technology. The Company is obligated under the Assignment Agreement to prosecute
certain patent applications and maintain issued patents relating to the RDF
Technology. The term of the Assignment Agreement extends through the life of the
last to expire of the patents or patent applications included in the RDF
Technology. RDF retains the right to terminate the agreement or to convert the
exclusive nature of the rights granted under the agreement into a nonexclusive
license in the event that the Company does not satisfy its contractual
obligations, including making certain minimum annual payments. Additional
termination events include bankruptcy, an uncured material breach of the
agreement or a contest by DepoTech of the patents included in the RDF
Technology. The termination of the Assignment Agreement or the conversion of its
exclusive nature to a nonexclusive agreement would have a material adverse
effect on the Company.
The patent positions of pharmaceutical, biotechnology and drug delivery
companies, including DepoTech, are uncertain and involve complex legal and
factual issues. Additionally, the coverage claimed in a patent application can
be significantly reduced before the patent is issued. As a consequence, there
can be no assurance that any of the Company's patent applications will result in
the issuance of patents or, if any patents issue, that they will provide
significant proprietary protection or will not be circumvented or invalidated.
Because patent applications in the United States are maintained in secrecy until
patents issue and publication of discoveries in the scientific or patent
literature often lag behind actual discoveries, the Company cannot be certain
that it was the first inventor of inventions covered by its pending patent
applications or that it was the first to file patent applications for such
inventions. Moreover, the Company may have to participate in interference
proceedings declared by the PTO to determine priority of invention that could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that the Company's patents,
if issued, would be held valid by a court of competent jurisdiction. An adverse
outcome of any patent litigation could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from or to
third parties or require the Company to cease using the technology in dispute.
There can be no assurance that third parties will not assert infringement
claims against the Company in the future or that any such assertions will not
result in costly litigation or require the Company to obtain a license to
intellectual property rights of such parties. There can be no assurance that any
such licenses would be available on terms acceptable to the Company, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block the Company's ability to
further develop or commercialize its products in the United States and abroad
and could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse affect on the
Company. Finally, litigation, regardless of outcome, could result in substantial
cost to and a diversion of efforts by the Company.
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As part of its confidentiality procedures, the Company generally enters
into nondisclosure agreements with its employees and suppliers, and limits
access to and distribution of its proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's technology without authorization. Accordingly, there can
be no assurance that the Company will be successful in protecting its
proprietary technology or that DepoTech's proprietary rights will preclude
competitors from developing products or technology equivalent or superior to
that of the Company.
The Company may require additional technology in the formulation and
manufacture of Depo-Foam formulations to which the Company currently does not
have rights. If the Company determines that this additional technology is
relevant to the development of future products and further determines that a
license to this additional technology is needed, there can be no assurance that
the Company can obtain a license from the relevant party or parties on
commercially reasonable terms, if at all. There can be no assurance that the
Company can obtain any license to any technology that the Company determines it
needs, on reasonable terms, if at all, or that DepoTech could develop or
otherwise obtain alternate technology. The failure of the Company to obtain
licenses, if needed, would have a material adverse affect on the Company.
The Company's ability to develop and commercialize its technology will be
affected by the Company's or its partners' access to the drugs that are to be
formulated. The Company intends in certain circumstances to rely on the ability
of its partners to provide access to the drugs that are to be formulated for use
with DepoFoam. There can be no assurance that the Company's partners will be
able to provide access to drug candidates for formulation in DepoFoam, or that,
if such access is provided, the Company or its partner will not be alleged or
determined to be infringing on third parties' rights and will not be prohibited
from using the drug or be found liable for damages that may not be subject to
indemnification. Any restriction on access or liability for damages would have a
material adverse effect on the Company.
COMPETITION
The drug delivery, pharmaceutical and biotechnology industries are highly
competitive and rapidly evolving, with significant developments expected to
continue at a rapid pace. The Company's success will depend upon maintaining a
competitive position and developing products and technologies for efficient and
cost-effective drug delivery. The Company's products will compete with other
formulations of drugs and with other drug delivery systems. There can be no
assurance that any of the Company's products will have advantages that will be
significant enough to cause medical professionals to adopt their use. DepoTech
believes that its products will compete on the basis of quality, efficacy, cost,
convenience, safety and patient compliance. New drugs or further development in
alternative drug delivery methods may provide greater therapeutic benefits for a
specific drug or indication, or may offer comparable performance at lower cost
than those offered by the Company's DepoFoam drug delivery system.
The Company is aware of many other competitors in the field of drug
delivery, including competitors developing injectable or implantable drug
delivery systems, oral drug delivery technologies, passive transdermal systems,
electrotransport systems, oral transmucosal systems and inhalation systems.
There can be no assurance that developments by others will not render the
Company's products or technologies uncompetitive or obsolete. Many of the
Company's existing or potential competitors have substantially greater research
and development capabilities, experience, manufacturing, marketing, financial,
and managerial resources than the Company. Furthermore, acquisitions of
competing drug delivery companies by large pharmaceutical companies could
enhance competitors' financial, marketing and other resources. Accordingly, the
Company's competitors may succeed in developing competing technologies,
obtaining FDA approval or gaining market share for products more rapidly than
the Company.
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SALES AND MARKETING
Commercialization of the Company's products is expected to be expensive and
time-consuming. In the event that the Company elects to participate directly in
sales and marketing efforts for the Company's products, the Company will need to
build such capability in the targeted markets. The Company currently has a
limited marketing staff. There can be no assurance that the Company will be able
to establish an adequate sales and marketing capability in any or all targeted
markets or that it will be successful in gaining market acceptance for its
products. To the extent the Company enters into co-promotion or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties and there can be no assurance that such efforts will be
successful. To the extent the Company relies on its collaborators, there can be
no assurance that any of these collaborators or their sublicensees will
successfully market or distribute the Company's products or that the Company
will be able to establish a successful direct sales organization, co-promotion
or distribution arrangements.
HEALTH CARE REFORM MEASURES AND THIRD-PARTY REIMBURSEMENT
A series of legislative and regulatory proposals have been announced aimed
at reforming the United States health care system. While the adoption of such
legislative or regulatory proposals has been delayed, the uncertainty created by
such proposals could have a material adverse effect on the Company's ability to
raise capital and to identify and reach agreements with potential partners. In
the event such proposals are eventually adopted, they could have a material
adverse effect on the Company. Furthermore, the Company's ability to
commercialize its potential product portfolio may be adversely affected to the
extent that such proposals have a material adverse effect on the business,
financial condition and profitability of other companies that are current or
prospective collaborators for certain of the Company's proposed products.
In both domestic and foreign markets, sales of the Company's potential
products, if any, will depend in part on the availability of reimbursement of
third-party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost-effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that the Company's proposed
products will be considered cost effective or that adequate third-party
reimbursement will be available to enable the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development. Legislation and regulations affecting the pricing of
pharmaceuticals may change before the Company's proposed products are approved
for marketing and any such changes could further limit reimbursement for medical
products and services.
HUMAN RESOURCES
As of June 1, 1996, DepoTech had approximately 123 full-time employees,
including 110 in research, development and operations, and 13 in finance and
administration. Of these employees, 42 hold advanced degrees, of which 21 are
M.D.s or Ph.D.s. The Company's future success will depend in large part upon its
ability to attract and retain highly qualified personnel. The Company's
employees are not represented by any collective bargaining agreements, and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are good.
FACILITIES
The Company currently maintains its headquarters in leased facilities in
San Diego, California, that contain all administrative, research and development
and manufacturing activities in 82,000 square feet of space. The future minimum
rental commitment for this facility will range from approximately $2.1 million
to $4.2 million per year over 20 years, based upon pre-established annual rent
increases. The Company also maintains a 14,400 square foot manufacturing plant
for its
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production needs. The Company has subleased certain of its existing facilities
with annual rental income ranging from $223,000 to $290,000. The Company
believes its existing facilities will be adequate to meet its needs through
mid-1997.
In addition, the Company has a right of first refusal and right of first
offer to purchase land located adjacent to its headquarters which must be
exercised on or before October 15, 1997. The Company may elect to exercise such
option in 1997 in order to build a facility to house packaging, labeling and
warehouse capabilities and administrative offices. The estimated capital
expenses associated with this facility would be approximately $8.5 million.
LEGAL PROCEEDINGS
As of the date of this Prospectus, the Company is not a party to any legal
proceedings. From time to time, DepoTech may be involved in litigation relating
to claims arising out of its operations in the normal course of business.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company as of
June 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Fred A. Middleton(1)(2)............. 47 Chairman of the Board and Director
Edward L. Erickson(2)............... 49 President, Chief Executive Officer and Director
John P. Longenecker, Ph.D. ......... 48 Senior Vice President, Research, Development and
Operations
Sinil Kim, M.D. .................... 40 Co-founder, Vice President, Advanced Technology,
Chief Scientific Officer and Director Emeritus
David B. Thomas..................... 56 Vice President, Quality Assurance and Regulatory
Affairs
Williams S. Ettouati, D. Pharm. .... 36 Executive Director, Strategic Marketing
Dana S. McGowan..................... 37 Director of Finance and Administration, Chief
Financial Officer and Treasurer
Jeffery S. Vick..................... 34 Director of Corporate Development and Assistant
Secretary
Roger C. Davisson(1)(3)............. 52 Director
Jean Deleage(1)(2)(3)............... 55 Director
George W. Dunbar, Jr. .............. 49 Director
Stephen B. Howell, M.D. ............ 50 Co-founder and Director
Peter Preuss(1)(3).................. 52 Director
Pieter Strijkert, Ph.D. ............ 60 Director
</TABLE>
- ------------
(1) Member of Compensation Committee.
(2) Member of Nominating Committee
(3) Member of Audit Committee.
FRED A. MIDDLETON is a founder of DepoTech and has served as Chairman of
the Board and a director of the Company since August 1990. In addition, Mr.
Middleton served as Chief Executive Officer of the Company from August 1990
through June 1993. Mr. Middleton has been active in developing biomedical
companies since 1978 and has been general partner of Sanderling Ventures, a
venture capital firm specializing in the development of early stage biomedical
companies, since 1987. Sanderling Ventures is a principal shareholder of the
Company. From May 1984 through July 1986, he served as Managing General Partner
of Morgan Stanley Ventures, L.P., a venture capital firm which funded research
and development programs at leading technology companies. Prior to that, Mr.
Middleton served as Chief Financial Officer, Vice President of Finance and
Corporate Development, and President of Genentech Development Corporation, for
Genentech, Inc. Mr. Middleton received his B.S. in chemistry from Massachusetts
Institute of Technology and an M.B.A. from the Harvard Graduate School of
Business Administration. Currently, he is a director of two other publicly-held
biomedical companies, Regeneron Pharmaceuticals, Inc. and Vical, Inc., as well
as several privately-held biomedical companies.
EDWARD L. ERICKSON has served as President, Chief Executive Officer and a
director of the Company since June 1993. Prior to joining the Company, Mr.
Erickson served as President, Chief Executive Officer and a director of
Cholestech Corporation, a publicly-traded medical products company, from October
1991 through June 1993. Prior to that, Mr. Erickson served as President of
Serono-Baker Diagnostics, Inc., a medical products company and a subsidiary of
The Ares-Serono Group ("Ares-Serono"), an international pharmaceutical company,
from June 1990 to September 1991 and as Vice President, Financial Operations of
Ares-Serono from August 1988 through June 1990.
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Mr. Erickson previously held senior staff and general management positions with
Amersham International, a medical and life-science research products company
based in the United Kingdom. Mr. Erickson received a B.S. in mathematics with
distinction and an M.S. in mathematics from the Illinois Institute of Technology
and an M.B.A. with high distinction from the Harvard Graduate School of Business
Administration, where he was elected a George F. Baker Scholar and received the
John L. Loeb Fellowship in Finance. Mr. Erickson currently serves as a director
of a privately-held biomedical company.
JOHN P. LONGENECKER, PH.D. has served as Senior Vice President, Research,
Development and Operations, of the Company since November 1992. Prior to joining
the Company, Dr. Longenecker served in a number of management and technical
positions with Scios Nova, Inc. (formerly California Biotechnology, Inc.), a
biotechnology company, from 1982 through 1992, including Vice President and
Director of Development from August 1987 through October 1992. In this position
Dr. Longenecker was responsible for pharmaceutical research and development,
including a novel drug delivery group, preclinical studies, process development,
manufacturing and quality control. Dr. Longenecker received a B.S. in chemistry
from Purdue University and a Ph.D. in biochemistry from the Australian National
University and served as a postdoctoral fellow at Stanford University.
SINIL KIM, M.D. is a co-founder of the Company, has served as Vice
President, Advanced Technology, and Chief Scientific Officer, since December
1993 and served as a director of the Company from October 1989 to May 1995, at
which time he was appointed as a director emeritus in recognition of his many
contributions to the founding and development of the Company. Dr. Kim previously
served as a consultant to the Company in the capacity of Vice President of
Technology of the Company from October 1992 through December 1993. Prior to
joining the Company, Dr. Kim served as an assistant professor of medicine in
residence at the University of California, San Diego Cancer Center ("UCSD Cancer
Center") in its division of Hematology/Oncology from February 1988 through July
1992, an assistant adjunct professor of medicine at UCSD Cancer Center in its
division of Hematology/Oncology from July 1992 through May 1994 and an associate
clinical professor at UCSD Cancer Center from May 1994 through the present. Dr.
Kim received a B.S. in chemistry, summa cum laude, and an M.D. with Alpha Omega
Alpha election from University of Washington, Seattle. Dr. Kim served his
internship and residency at University of California, Irvine and a postdoctoral
fellowship at University of California, San Diego in hematology and oncology.
DAVID B. THOMAS has served as Vice President, Quality Assurance and
Regulatory Affairs, of the Company since June 1993. Prior to joining the
Company, Mr. Thomas served as Vice President of Gen-Probe Corporation, a
diagnostics company, from February 1993 to June 1993. Prior to that, Mr. Thomas
served as Vice President, Regulatory Affairs and Quality Assurance of
Ares-Serono from October 1990 through March 1993. Prior to that, Mr. Thomas
served as Vice President, Regulatory Affairs, for C.R. Bard, Inc., a medical
device company, from April 1987 through February 1990. Mr. Thomas also served as
Vice President, Regulatory Affairs/Product Assurance of the Hospital Products
Group of Pfizer, Inc., a pharmaceutical company, from April 1985 through March
1987 and held senior scientific positions at the Biometric Research Institute,
Inc. and at the National Institutes of Health. He has been responsible for the
clinical development and regulatory approvals of a number of new pharmaceuticals
including LAAM and has obtained approvals for new delivery modes and controlled
release formulations for more than 15 drugs. Mr. Thomas received a B.A. in
anthropology (with a minor in mathematics) from San Francisco State University
and an M.A. in anthropology as part of an interdisciplinary program in human
biology from University of California, Los Angeles where he was a National
Science Foundation Fellow at the Brain Research Institute. Mr. Thomas currently
serves as chairman and a director of a privately-held company.
WILLIAMS S. ETTOUATI, D.PHARM. has served as Executive Director of
Strategic Marketing of the Company since July 1995. Prior to joining the
Company, Dr. Ettouati served as Director, New Product Planning at Dura
Pharmaceuticals, Inc. from November 1993 to April 1995. From January 1990 to
July 1993, Dr. Ettouati served as Senior Product Manager and Product Manager for
Syntex International. Dr. Ettouati served as a post doctoral fellow at
University of California, Santa Barbara ("UCSB").
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Dr. Ettouati received a Diplome de Bachelier in mathematics and biology from
Academie de Paris, an M.A. in biology from UCSB and a Diplome d'Etat de Docteur
en pharmacie from Universite Rene Descartes, Paris V.
DANA S. MCGOWAN has served as Director of Finance and Administration of the
Company from January 1994 through May 1994 and as Chief Financial Officer and
Treasurer since June 1994. Prior to joining the Company, Ms. McGowan served as
Director, Accounting and Finance at Alliance Pharmaceutical Corp., a
biotechnology company, from May 1993 to December 1993. Previously, Ms. McGowan
held various financial positions, including Associate Director and Controller at
Cytel Corporation, a biotechnology company, from June 1988 to May 1993. Ms.
McGowan received a B.S. in Business Administration from San Diego State
University and is a Certified Public Accountant.
JEFFERY S. VICK has served as Director of Corporate Development of the
Company since July 1993 and Manager, Planning and Corporate Development since
May 1992. Prior to joining the Company, Mr. Vick served as a business analyst at
Advanced Cardiovascular Systems, a medical device company and subsidiary of Eli
Lilly & Co., from July 1990 to May 1992. Mr. Vick attended graduate school from
September 1988 to June 1990 at Stanford University. He has performed research
into autoimmune diseases and cancer, respectively, at Scripps Clinic & Research
Foundation and the UCSD Cancer Center. Mr. Vick received a B.S. in chemistry
from the University of Virginia, an M.S. in chemistry from the University of
California, San Diego, and an M.B.A. from Stanford Graduate School of Business.
ROGER C. DAVISSON has served as a director of the Company since January
1993. Since September 1980, Mr. Davisson has been a general partner of Brentwood
Associates, a venture capital firm that manages private investment funds. One of
those funds, Brentwood Associates V, L.P., is a principal shareholder of the
Company. Mr. Davisson received a B.S. in engineering and an M.S. in engineering
science from the California Institute of Technology and an M.B.A. from Stanford
Graduate School of Business.
JEAN DELEAGE has served as a director of the Company since November 1992.
He has been a managing partner of Burr, Egan, Deleage & Co., a venture capital
firm, since its formation in 1979. He was the founder of Sofinnova, a venture
capital organization in Paris, and in 1976 formed Sofinnova, Inc. (the United
States subsidiary of Sofinnova). He holds a master's degree in electrical
engineering from Ecole Superieure d'Electricite and a doctorate in economics
from the Sorbonne. In 1993, he was awarded the Legion of Honor from the French
government in recognition of his career accomplishments. Mr. Deleage is
currently a director of Abaxis, Inc. and OraVax, Inc. and of several private
companies.
GEORGE W. DUNBAR, JR. has served as a director of the Company since May
1996. He has served as President, Chief Executive Officer and a director of
Metra Biosystem, Inc. ("Metra") from July 1991 through the present. Prior to
joining Metra, he was the Vice President of Licensing and Business Development
of Ares-Serono, from 1988 until 1991, where he established a licensing and
acquisition group for its health care divisions. From 1974 until 1987, he held
various senior management positions with Amersham International ("Amersham"), a
health care and life sciences company, where he most recently served as Vice
President for its Life Sciences business in North America. Mr. Dunbar also
served as Amersham's General Manager of Pacific Rim markets and Eastern Regional
operations and, prior to that, he managed the international marketing of
Amersham's medical and industrial radioisotopes. Mr. Dunbar holds a B.S. in
electrical engineering and an M.B.A. from Auburn University and sits on the
Auburn School of Business M.B.A. Advisory Committee.
STEPHEN B. HOWELL, M.D. is a co-founder of the Company and has served as a
director of the Company since October 1989. Dr. Howell also served as Vice
President, Medical Affairs, from October 1989 to May 1995, and currently serves
in a consultant capacity as Senior Medical Advisor. Dr. Howell is a Professor of
Medicine in the Department of Medicine and the Cancer Center at the University
of California, San Diego where he has been since 1977. Dr. Howell is Associate
Director for Translational Research of the UCSD Cancer Center, and Director of
the Center's Pharmacology Program.
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Dr. Howell is a member of the National Research Council of the American Cancer
Society. Dr. Howell received an A.B. degree in biology from the University of
Chicago, and an M.D. magna cum laude from Harvard University. Dr. Howell also
holds an honorary M.D. from the University of Goteborg, Sweden. He completed his
residency at the Massachusetts General Hospital and the University of
California, San Francisco, research training at the National Institutes of
Health, and medical oncology specialty training at the Dana Farber Cancer
Institute.
PETER PREUSS has served as a director of the Company since December 1992.
Since 1985, Mr. Preuss has acted as a private investor. He was founder and Chief
Executive Officer of Integrated Software Systems Corporation (ISSCO), a leading
computer graphic software developer, from 1970 to its sale in 1986. Mr. Preuss
received a B.S. equivalent from the Technical University of Hanover, Germany and
an M.S. in Mathematics from University of California, San Diego. Mr. Preuss is a
Regent of the University of California and has served a term on the advisory
committee to the director of the National Institutes of Health. He is president
of The Preuss Foundation for Brain Tumor Research and is a recipient of the
Distinguished Service Award from the American Association of Neurosurgeons. Mr.
Preuss currently serves on a number of boards of not-for-profit institutions as
well as Network Computing Devices, a publicly-held company, and several
privately-held companies.
PIETER STRIJKERT, PH.D. has served as a director of the Company since June
1996. He has served as a member of the Board of Management for Royal
Gist-Brocades NV, a biomedical products company ("Royal Gist-Brocades"), since
June 1995. From July 1993 until June 1995, Dr. Strijkert served as an advisor to
that same group. Prior to that, Dr. Strijkert served as a member of the Board of
Management of Royal Gist-Brocades from May 1985 through June 1993 and served in
other capacities with Royal Gist-Brocades from 1979 through 1985, including Head
of the Biotechnology Group and Associate Director of Research and Development
and Manager of the Microbiology Group Research and Development. Dr. Strijkert
received a Ph.D. in microbiology and a bachelor's degree in biology from the
State University of Utrecht. Dr. Strijkert is a member of the board of directors
of Chiron and other advisory or technical groups.
Members of the Board hold office and serve until the next annual meeting of
the shareholders of the Company or until their respective successors have been
elected and qualified. The Company has a range of directors authorized of not
less than five nor more than nine. The number of directors is currently fixed at
eight. Executive officers are appointed by and serve at the discretion of the
Board.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has a standing Compensation Committee currently composed of
Roger C. Davisson, Jean Deleage, Fred A. Middleton and Peter Preuss. The
Compensation Committee reviews and acts on matters relating to compensation
levels and benefit plans for executive officers and key employees of the
Company, including salary and stock options. The Committee is also responsible
for granting stock awards, stock options and stock appreciation rights and other
awards to be made under the Company's existing incentive compensation plans. The
Company also has a standing Audit Committee composed of Roger C. Davisson, Jean
Deleage and Peter Preuss. The Audit Committee assists in selecting the
independent auditors, designating services they are to perform and in
maintaining effective communication with those auditors. The Company also has a
standing Nominating Committee composed of Jean Deleage, Edward L. Erickson and
Fred A. Middleton. The Nominating Committee recommends director nominees to the
Company's Board.
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table sets forth the aggregate compensation paid by the
Company to the President and Chief Executive Officer and to each of the most
highly compensated executive officers who in 1995
43
<PAGE> 47
earned over $100,000 (the "Named Executive Officers") for services rendered in
all capacities to the Company for the years ended December 31, 1995, 1994 and
1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- ---------------
OTHER SECURITIES
NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS(#) COMPENSATION(1)
- ------------------------- ---- -------- ------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Erickson(2).... 1995 $194,250 $49,138(3) $ 27,000(4) 11,450(5) $51
President and Chief 1994 185,000 -0- 29,000(4) 50,000 2
Executive Officer and 1993 101,631 -0- -0- 250,000 3
Director
John P. Longenecker...... 1995 178,500 24,098(3) 14,667(4) 16,950(5) 46
Senior Vice President, 1994 167,769 -0- 14,667(4) -0- 2
Research, Development 1993 151,006 -0- 14,667(4) 125,000 3
and Operations
Sinil Kim(2)............. 1995 141,750 21,971(3) -0- 17,950(5) 37
Vice President, Advanced 1994 135,000 -0- 5,093(6) 50,000 2
Technology
David B. Thomas(2)....... 1995 136,500 18,428(3) 10,800(4) 6,950(5) 35
Vice President, Quality 1994 130,000 -0- 11,600(4) 20,000 2
Assurance and Regulatory
Affairs
</TABLE>
- ------------
(1) Consists of the dollar value of insurance premiums paid by the Company
with respect to term life insurance for the benefit of the Named Executive
Officers.
(2) Mr. Erickson and Mr. Thomas were hired in June 1993. Dr. Kim was hired
in December 1993.
(3) Consists of amounts earned in 1995 and paid in 1996.
(4) Consists of forgiveness of a portion of a loan made to cover relocation
expenses.
(5) Includes options granted in 1996 for performance during 1995.
(6) Consists of forgiveness of a loan used to purchase 400,000 shares of
the Common Stock.
44
<PAGE> 48
Stock Options
The following table sets forth information concerning stock option grants
made to each of the Named Executive Officers for the year ended December 31,
1995. The Company granted no stock appreciation rights ("SARs") to Named
Executive Officers during 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
-------------------------------------------------------- ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($)
- --------------------------- ----------- --------------- ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Erickson......... 200 0.1% $ 12.00 9/27/05 $ 1,509 $ 3,825
John P. Longenecker........ 10,000 4.0% $ 3.50 3/8/05 22,011 55,781
200 0.1% $ 12.00 9/27/05 1,509 3,825
Sinil Kim.................. 10,000 4.0% $ 3.00 1/17/05 18,867 47,812
200 0.1% $ 12.00 9/27/05 1,509 3,825
David B. Thomas............ 200 0.1% $ 12.00 9/27/05 1,509 3,825
</TABLE>
- ------------
(1) The shares subject to each option will immediately vest in the event
the Company is acquired by a merger or asset sale, unless the Company's
repurchase rights with respect to those shares are transferred to the acquiring
entity. The grant dates for the above options are as follows:
<TABLE>
<CAPTION>
OPTIONS GRANT
NAME GRANTED (#) DATE
----------------------------------------------------- ----------- -------
<S> <C> <C>
Edward L. Erickson................................... 200 9/28/95
John P. Longenecker.................................. 10,000 3/9/95
200 9/28/95
Sinil Kim............................................ 10,000 1/17/95
200 9/28/95
David B. Thomas...................................... 200 9/28/95
</TABLE>
(2) The exercise price per share of options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
respective options were granted as determined by the Board. The exercise price
may be paid in cash or in shares of Common Stock valued at fair market value on
the exercise date or a combination of cash or shares or any other form of
consideration approved by the Board. The fair market value of shares of Common
Stock will be determined in accordance with certain provisions of the Plan based
on the closing selling price per share of a share of Common Stock on the date in
question on the primary exchange on which the Company's common stock is listed
or reported. If shares of the Common Stock are not listed or admitted to trading
on any stock exchange nor traded on the Nasdaq National Market, then the fair
market value shall be determined by the Plan Administrator after taking into
account such factors as the Plan Administrator shall deem appropriate.
(3) There is no assurance provided to any executive officer or any other
holder of the Company's securities that the actual stock price appreciation over
the 10-year option term will be at the assumed 5% or 10% levels or at any other
defined level. Unless the market price of the Common Stock does in fact
appreciate over the option term, no value will be realized from the option
grants made to the executive officers.
45
<PAGE> 49
Option Exercises and Holdings
The following table provides information concerning option exercises during
1995 by the Named Executive Officers and the value of unexercised options held
by each of the Named Executive Officers as of December 31, 1995. No SARs were
exercised during 1995 or outstanding as of December 31, 1995.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1995 (#) AT DECEMBER 31, 1995(2)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Erickson..... 1,000 $19,000 115,275 93,925 $ 2,189,931 $ 1,782,519
John P. Longenecker.... 0 0 51,380 44,542 977,261 824,285
Sinil Kim.............. 0 0 39,192 21,008 696,306 385,644
David B. Thomas........ 12,000 43,000 6,775 31,425 126,681 578,769
</TABLE>
- ------------
(1) "Value realized" is calculated on the basis of the fair market value of
the Common Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.
(2) "Value" is defined as fair market price of the Common Stock at fiscal
year-end ($19.25) less exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year ended December 31, 1995, the Compensation Committee of the
Company's Board established the levels of compensation for the Company's
executive officers. The members of the Company's Compensation Committee are
Messrs. Davisson, Deleage, Middleton and Preuss. Mr. Erickson, the Company's
President and Chief Executive Officer, participated in the deliberations of the
Compensation Committee regarding executive compensation that occurred during
1995, but did not take part in the deliberations regarding his own compensation.
EMPLOYMENT ARRANGEMENTS
Mr. Erickson, the Company's President and Chief Executive Officer and a
director of the Company, entered into an employment arrangement with the Company
in May 1993. In connection therewith, the Company issued 25,000 shares of Common
Stock to Mr. Erickson for an aggregate purchase price of $68,750. $50,000 of the
purchase price was paid for by a promissory note payable to the Company, which
was paid in full prior to its due date of October 31, 1993. Interest accrued at
the lesser of 3.62% per annum or the minimum interest rate required to avoid
imputation of interest under the Internal Revenue Code. Mr. Erickson was granted
an option to purchase 250,000 shares of Common Stock at an exercise price of
$0.25 per share, vesting over four years. In June 1993, Mr. Erickson borrowed
$50,000 from the Company to cover his family's relocation expenses, evidenced by
a promissory note. Interest accrued at 8% per annum. One-half of the outstanding
principal and all then-accrued interest under such note was forgiven by the
Company in June 1994, and the remaining principal and all then-accrued interest
was forgiven in June 1995.
Dr. Longenecker, Senior Vice President of the Company, entered into an
employment arrangement with the Company in September 1992. In connection
therewith, the Company issued stock options for 125,000 shares of Common Stock
to Dr. Longenecker at an exercise price of $0.10. Dr. Longenecker also borrowed
$44,000 from the Company to cover his family's relocation expenses, evidenced by
a promissory note. One-third of the outstanding principal under such note was
forgiven by the Company in January 1994, an additional one-third of the
outstanding principal was forgiven in
46
<PAGE> 50
November 1994, and the remaining principal was forgiven in November 1995. No
interest accrued under the note.
Mr. Thomas, Vice President, Quality Assurance and Regulatory Affairs,
entered into an employment arrangement with the Company in June 1993. In
connection therewith, the Company issued stock options for 40,000 shares of
Common stock to Mr. Thomas at an exercise price of $0.25 per share, vesting over
four years. In June 1993, Mr. Thomas borrowed $20,000 from the Company to cover
his family's relocation expenses, evidenced by a promissory note. Interest
accrued at 8% per annum. One-half of the outstanding principal and all
then-accrued interest under such note was forgiven by the Company in June 1994,
and the remaining principal and all then-accrued interest was forgiven in June
1995.
DIRECTOR COMPENSATION
The Company pays its outside Directors $1,500 per Board meeting attended
and reimburses its directors for out-of-pocket expenses incurred in attending
each meeting and performing other duties as a director. No additional payments
are made with respect to attendance at committee meetings. Non-employee
directors also are eligible to initially participate in the discretionary option
grant program and subsequently in the automatic option grant program under the
Plan. Dr. Howell is a party to a consulting agreement with the Company. See
"Certain Transactions."
BENEFIT PLANS
1995 Stock Option/Stock Issuance Plan
The Plan serves as the successor equity incentive program to the Company's
1991 Stock Option Plan, the 1994 Stock Option Plan and the 1995 Stock Option
Plan (collectively, the "Prior Plans"). The Plan was adopted by the Board and
the shareholders as of June 1995, and amended during 1996. All outstanding stock
options and unvested share issuances under the Prior Plans have been
incorporated into the Plan but will continue to be governed by the terms and
conditions of the specific instruments evidencing those options and issuances. A
total of 2,000,000 shares of Common Stock are authorized for issuance under the
Plan, of which, as of June 1, 1996, 1,022,745 shares of Common Stock are subject
to outstanding options and 515,339 additional shares are reserved for issuance
under the Plan. The total number of shares authorized, as well as shares subject
to outstanding options, will be appropriately adjusted in the event of certain
changes to the Company's capital structure, such as stock dividends, stock
splits or other recapitalizations.
The Plan is divided into three separate programs: the discretionary option
grant program, the automatic option grant program and the stock issuance
program. The Plan will be administered by a committee of two or more
non-employee Board members appointed by the Board (the "Plan Administrator").
The Plan Administrator will have complete discretion under the discretionary
option grant program and the stock issuance program to determine which eligible
individuals are to receive option grants or stock issuances, the number of
shares subject to each such grant or issuance, the status of any granted option
as either an incentive option (which potentially qualify for certain favorable
treatment under federal tax law) or a nonstatutory option, the vesting schedule
to be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. Participation in such
programs is limited to employees (including officers and directors),
non-employee directors (until the last day of the first full calendar month
following a non-employee Board member's election to the Board) and consultants
of the Company or its subsidiary corporations, provided that no non-employee
director may participate in the discretionary option grant program or the stock
issuance program unless the Plan is being administered by two or more
non-employee Board members who have not been granted discretionary options or
received any share issuances within the last year other than pursuant to the
automatic grant program.
The Plan also includes an automatic option grant program under which option
grants will be made to non-employee directors. Under the automatic option grant
program, effective at the Company's 1997
47
<PAGE> 51
Annual Meeting, each eligible non-employee director annually will be
automatically granted a nonstatutory option to purchase 4,000 shares of Common
Stock upon such directors re-election to the Board. The terms and conditions of
the automatic option grants are fixed by the Plan and are not subject to
discretion of the Plan Administrator.
The exercise price for each incentive stock option or for any option
granted under the automatic option grant program must be at least 100% of the
fair market value of the stock on the date of the option grant. The exercise
price for each nonstatutory option or for any share issuance under the Plan must
be at least 85% of the fair market value of the shares on the date of the option
grant or stock issuance. The purchase price for any shares may be paid in cash,
by delivery of shares of Common Stock or through a same-day sale program
pursuant to which the purchased shares will be sold immediately and a portion of
the sale proceeds applied to the payment of the purchase price. The Plan
Administrator may also permit a participant (other than a non-employee director
receiving automatic option grants) to deliver a promissory note in payment of
the purchase price and any tax liability incurred in connection with the
purchase.
Options granted under the discretionary option grant program may be
immediately exercisable for all the option shares, on either a vested or
unvested basis, or may become exercisable for shares in one or more installments
over the participant's period of service. Shares issued under the stock issuance
program may either be fully vested or subject to a vesting schedule tied to
future service. All unvested shares will be subject to repurchase by the
Company, at the original purchase price paid for such shares, upon the
participant's cessation of service prior to vesting in the shares. However, the
Committee will have full discretionary authority to accelerate the
exercisability of any outstanding discretionary option grant or the vesting of
any issued shares.
Each option granted under the Plan will have a maximum term of 10 years and
will be subject to earlier termination in the event of the optionee's cessation
of service. Options are not assignable or transferable by the optionee except in
connection with the participant's death. The participant will have no
shareholder rights with respect to the shares subject to his or her outstanding
options until such options are exercised and the purchase price is paid for the
shares. The participant will, however, have full shareholder rights with respect
to any shares issued under the Plan.
Participants subject to federal or state tax withholding in connection with
any issuance of shares under the Plan may be permitted to apply a portion of the
shares issuable upon the exercise of their outstanding options to the
satisfaction of the federal and state withholding taxes incurred in connection
with such exercise. Alternatively, such participants may be permitted to deliver
existing shares of Common Stock in satisfaction of such tax liability. In either
case, the Company will pay cash to the appropriate government authority equal to
the fair market value of the stock as a deposit of taxes withheld.
Directors of the Company receiving automatic option grants will have a
special stock appreciation right in connection with their options under which
the outstanding options can be surrendered for cancellation upon a hostile
take-over of the Company in return for a cash distribution from the Company,
based on the excess of the price per share paid by the acquiring entity in
effecting the take-over above the option exercise price. Officers may be granted
similar rights at the discretion of the Plan Administrator. The Committee may
grant other stock appreciation rights with respect to discretionary option
grants. The other stock appreciation rights would provide the holders with the
right to receive an appreciation distribution from the Company equal to the
excess of (i) the fair market value (on the date such right is exercised) of the
shares of Common Stock in which the optionee is at the time vested under the
surrendered option over (ii) the aggregate exercise price payable for such
shares. Such appreciation distribution would be able to be made, at the Plan
Administrator's discretion, in shares of Common Stock valued at fair market
value on the exercise date, in cash or in a combination of cash and Common
Stock.
In the event the Company is acquired, whether by merger, asset sale or
change in control each outstanding option which is not to be assumed by the
successor corporation or replaced with a
48
<PAGE> 52
comparable option to purchase the capital stock of the successor corporation
will automatically accelerate in full, and all unvested shares not assigned to
the successor corporation will automatically vest, except to the extent such
accelerated vesting is precluded by the terms of the agreements evidencing those
unvested shares. The Committee can apply this acceleration to options
outstanding under the Prior Plans.
To the extent outstanding options terminate prior to exercise, the shares
subject to those options will be available for subsequent grant. In addition,
the Committee may effect cancellation/regrant programs pursuant to which
outstanding options under the discretionary option grant program (including
options incorporated from the Prior Plans) are cancelled and new options are
granted for the same or different number of option shares at an exercise price
per share not less than 85% of the fair market value of the Common Stock on the
new grant date.
The Board may amend or modify the Plan at any time, subject to certain
shareholder approval requirements. The Plan will terminate September 28, 2005
unless sooner terminated by the Board.
Employee Stock Purchase Plan
The 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
the Board and the shareholders as of June 1995. The Purchase Plan covers an
aggregate of 250,000 shares of Common Stock and is intended to qualify as an
employee stock purchase plan within the meaning of Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). Under the Purchase Plan, eligible
employees, including officers, will be entitled to participate in periodic
offerings following the commencement of the Purchase Plan. The initial offering
period commenced on September 28, 1995, and will terminate on the last business
day in December 1997. Each subsequent offering period will commence immediately
upon the termination of the prior offering period and end on the last business
day of the next December. The Purchase Plan will terminate on the earlier of
December 31, 2005, or the date on which all shares available under the Purchase
Plan have been purchased by the participants.
Employees are eligible to participate if they are employed by the Company
(or a subsidiary of the Company designated by the Board) for at least 20 hours
per week and at least five months per year. All employees of the Company as of
the effective date of the Purchase Plan will be allowed to participate
immediately in the initial offering period. Employees who first become an
eligible employee after the start of an offering period may join that period at
the beginning of the next semi-annual purchase date. Employees eligible to
participate in an offering can elect to have up to 15% of their regular
compensation withheld under the Purchase Plan and used to purchase shares of the
Common Stock at semi-annual intervals. The price of Common Stock purchased under
the Purchase Plan will be equal to 85% of the lower of the fair market value of
the Common Stock on (i) the commencement date of the offering period or (ii) the
purchase date. Employees may end their participation in the offering at any time
during the offering period, except the last five days of that period, and
participation ends automatically on termination of employment with the Company.
Employees who do not join an offering when first permitted to do so, or who end
their participation in any offering, may not participate again until the next
offering period. Employees may alter their level of participation on a limited
basis.
No participant may accrue rights to purchase more than $25,000 of stock in
any calendar year. Upon an acquisition of the Company, the outstanding payroll
deductions will be immediately applied to the purchase of Common Stock.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Articles of Incorporation that
eliminate to the fullest extent permissible under California law the liability
of its directors to the Company for monetary damages. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
49
<PAGE> 53
The Company's Articles of Incorporation and Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted under
California law, and the forms of indemnification agreements include
indemnification in circumstances in which indemnification is otherwise
discretionary under California law. The Company has entered into indemnification
agreements with its officers and directors containing provisions that may
require the Company, among other things, to indemnify the officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from intentional or
knowing and culpable violations of law) and to advance their expenses incurred
as a result of any proceeding against them as to which they could be
indemnified. The Company has obtained an insurance policy covering officers and
directors for claims made that such officers or directors may otherwise be
required to pay or for which the Company is required to indemnify them, subject
to certain exclusions.
CERTAIN TRANSACTIONS
In August 1995, the Company established a $4.0 million bank credit line.
The Company immediately borrowed $4.0 million under the credit line which was
repaid from the proceeds of the Company's initial public offering. In connection
with the establishment of the credit line, certain principal shareholders of the
Company committed to lend the Company $2.0 million and provide $1.0 million in a
loan guarantee if the Company's aggregate cash, cash equivalents, and short-term
investments declined to less than $5.5 million. As consideration for such
commitments and guarantee, the Company issued 30,000 shares of Common Stock to
the shareholders and warrants to purchase 714 shares of Common Stock to the bank
and paid a cash fee of $25,000 to the bank.
Mr. Erickson, the President and Chief Executive Officer and a director of
the Company, entered into an employment arrangement with the Company in May
1993. See "Management -- Employment Arrangements."
Mr. Thomas, Vice President, Quality Assurance and Regulatory Affairs, is a
director and shareholder of Sierra Scientific Software, Inc. ("Sierra"). Sierra
entered into a Software License Agreement dated June 30, 1993 with DepoTech
pursuant to which Sierra provides DepoTech with certain scientific software and
other software development services and earned an aggregate of approximately
$81,000 in 1995.
Dr. Howell, a director of the Company, entered into a consulting agreement
with the Company in November 1993 for a period of four years. The agreement was
subsequently amended in May 1995. Pursuant to the amended agreement, the Company
pays $35,000 per year to Dr. Howell for consulting services in connection with
which Dr. Howell will serve as the senior medical advisor to the Company's Board
and senior management. In addition, in November 1993, Dr. Howell received stock
options for 30,000 shares of common stock, at an exercise price of $0.80 per
share, vesting over four years. The amended agreement provides for continued
payments to Dr. Howell and continued vesting of the stock options for a period
of 12 months in the event the Company terminates the agreement. Dr. Howell also
received a grant of 6,000 options in connection with the amendment of the
agreement, and received an additional option grant of 600 shares in 1995. In
addition, Dr. Howell was granted 4,375 options in 1996 for his service to the
Company in 1995.
Certain holders of Common Stock are entitled to certain registration
rights. See "Description of Capital Stock -- Registration Rights."
50
<PAGE> 54
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 1, 1996, and as adjusted to reflect the
sale of the shares of the Common Stock offered hereby by the Company by (i) all
those known by the Company to be beneficial owners of more than 5% of its
outstanding Common Stock, (ii) each director and each of the Named Executive
Officers of the Company and (iii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(2)
NUMBER OF ----------------------------------
OFFICERS, DIRECTORS AND 5% SHAREHOLDERS SHARES(1) PRIOR TO OFFERING AFTER OFFERING
- ------------------------------------------------------ --------- ----------------- --------------
<S> <C> <C> <C>
Janus Capital Corp.(3)................................ 1,661,132 14.5% 12.3%
100 Fillmore Street, Suite 300
Denver, Colorado 80206
Sanderling Ventures(4)................................ 1,262,753 11.0% 9.4%
2730 Sand Hill Road, Suite 200
Menlo Park, California 94025
Funds affiliated with Burr, Egan, Deleage & Co. (5)... 584,295 5.1% 4.3%
One Embarcadero Center, Suite 4050
San Francisco, California 94111
Fred A. Middleton (6)................................. 1,320,459 11.5% 9.8%
Jean Deleage(7)....................................... 584,295 5.1% 4.3%
Stephen B. Howell(8).................................. 525,361 4.6% 3.9%
Sinil Kim, M.D.(9).................................... 432,043 3.7% 3.2%
Edward L. Erickson(10)................................ 208,572 1.8% 1.5%
Roger C. Davisson(11)................................. 196,396 1.7% 1.5%
Peter Preuss(12)...................................... 154,844 1.3% 1.1%
John P. Longenecker, Ph.D.(13)........................ 82,573 * *
David B. Thomas(14)................................... 36,093 * *
George W. Dunbar, Jr.................................. 833 * *
Pieter Strijkert, Ph.D.(15)........................... -0- * *
All directors and executive officers
as a group (13 persons)(16)......................... 3,572,518 30.0% 25.7%
</TABLE>
- ------------
* Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named
in the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them. Share ownership in each case
includes shares issuable upon exercise of certain outstanding options and
warrants as described in the footnotes below. The address for those individuals
for which an address is not otherwise indicated is: 10450 Science Center Drive,
San Diego, California 92121.
(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
(3) Information reported in the table is based on disclosures made in the
Schedule 13G filed on February 13, 1996 by Janus Capital Corp., as amended
through May 1996.
(4) Includes 724,936 shares and 7,500 shares issuable upon exercise of
warrants within 60 days of June 1, 1996 held by Sanderling Ventures Partners II,
L.P., 117,181 shares held by Sanderling Biomedical, L.P. and 408,731 shares and
4,405 shares issuable upon exercise of warrants within 60 days of June 1, 1996
held by Sanderling Ventures Limited, L.P. Mr. Middleton, a director of the
Company, is a general partner of Sanderling Ventures. Mr. Middleton disclaims
beneficial ownership of these shares other than to the extent of his individual
partnership interest, but exercises shared voting and investment power with
respect to all such shares.
(5) Includes 494,136 shares and 70,685 shares issuable upon exercise of
warrants within 60 days of June 1, 1996 beneficially owned by Alta V Limited
Partnership and 9,398 shares and 743 shares issuable upon exercise of warrants
within 60 days of June 1, 1996 beneficially owned by Customs House
51
<PAGE> 55
Partners. Also includes 9,333 shares issuable upon exercise of stock options
that are issuable upon exercise of stock options that are exercisable within 60
days of June 1, 1996. When the stock options are exercised, Mr. Deleage has
agreed to transfer the net profit after tax to Alta V Limited Partnership and
Customs House Partners. Burr, Egan, Deleage & Co. directly or indirectly
provides investment advisory services to Alta V Limited Partnership and Customs
House Partners. The respective general partners of Alta V Limited Partnership
and Customs House Partners exercise sole voting and investment power with
respect to the shares owned by such funds. The principals of Burr, Egan, Deleage
& Co., including Mr. Deleage, are general partners of Alta V Management
Partners, L.P. (which is the general partner of Alta V Limited Partnership) and
Customs House Partners. As general partners of such funds, they may be deemed to
share voting and investment power for the shares held by the funds. The
principals of Burr, Egan, Deleage & Co. disclaim beneficial ownership of these
shares, except to the extent of their proportionate pecuniary interests therein.
Effective June 27, 1996, Alta V Limited Partnership distributed 151,224 shares
of Common Stock and, as a result, currently beneficially owns 342,912 shares.
(6) Includes 724,936 shares and 7,500 shares issuable upon exercise of
warrants within 60 days of June 1, 1996 held by Sanderling Ventures Partners II,
L.P., 117,181 shares held by Sanderling Biomedical, L.P., 408,731 shares and
4,405 shares issuable upon exercise of warrants within 60 days of June 1, 1996
held by Sanderling Ventures Limited, L.P. Also includes 48,373 shares and 9,333
shares issuable upon exercise of stock options beneficially held by Mr.
Middleton and exercisable within 60 days of June 1, 1996. Mr. Middleton, a
director of the Company, is a general partner of Sanderling Ventures. Mr.
Middleton disclaims beneficial ownership of these shares other than to the
extent of his individual partnership interest, but exercises shared voting and
investment power with respect to these shares.
(7) Includes 503,534 shares owned by funds affiliated with Burr, Egan,
Deleage & Co. Also includes 71,428 shares and 9,333 shares issuable upon
exercise of warrants and stock options, respectively, that are exercisable
within 60 days of June 1, 1996. When the stock options are exercised, Mr.
Deleage has agreed to transfer the net profit after tax to Alta V Limited
Partnership and Customs House Partners. Mr. Deleage, a director of the Company,
is Vice President of Burr, Egan, Deleage & Co., and a general partner of Alta V
Management Partners, L.P. (which is the general partner of Alta V Limited
Partnership) and Customs House Partners. As a general partner of these funds, he
may be deemed to share voting and investment power for the shares held by the
fund. Mr. Deleage disclaims beneficial ownership of these shares except to the
extent of his proportionate pecuniary interest therein. Effective June 27, 1996,
a fund affiliated with Burr, Egan, Deleage & Co. distributed 151,224 shares of
Common Stock and, as a result, funds affiliated with Burr, Egan, Deleage & Co.
beneficially owns 423,738 shares.
(8) Includes 14,489 shares issuable upon exercise of stock options
exercisable within 60 days of June 1, 1996. Dr. Howell is a trustee of the
Howell Family Trust and two trusts for the benefit of his children.
(9) Includes 47,343 shares issuable upon exercise of stock options
exercisable within 60 days of June 1, 1996.
(10) Includes 135,072 shares issuable upon exercise of stock options
exercisable within 60 days of June 1, 1996.
(11) Includes 162,945 shares and 11,904 shares issuable upon exercise of
warrants exercisable within 60 days of June 1, 1996 held by Brentwood Associates
V, L.P. and 9,333 shares issuable upon exercise of stock options exercisable
within 60 days of June 1, 1996 held by Brentwood V Management Partners. Mr.
Davisson, a director of the Company, is a general partner of the general partner
of Brentwood Associates V, L.P. and a general partner of Brentwood V Management
Partners. Mr. Davisson disclaims beneficial ownership of these shares other than
to the extent of his individual partnership interest, but exercises shared
voting and investment power with respect to these shares. Also includes 12,214
shares beneficially held by Mr. Davisson.
52
<PAGE> 56
(12) Includes 4,761 shares and 49,646 shares issuable upon exercise of
warrants and stock options, respectively, exercisable within 60 days of June 1,
1996.
(13) Includes 15,803 shares issuable upon exercise of stock options
exercisable within 60 days of June 1, 1996.
(14) Includes 6,927 shares issuable upon exercise of stock options
exercisable within 60 days of June 1, 1996.
(15) Does not include 20,000 shares of stock options granted to Dr.
Strijkert upon his appointment to the Board on June 10, 1996, of which 417
shares were issuable upon exercise of stock options exercisable within 60 days
of June 1, 1996.
(16) Includes 3,151,009 shares and 322,511 and 99,998 shares issuable upon
exercise of stock options and warrants, respectively, exercisable within 60 days
of June 1, 1996.
53
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, no par value ("Common Stock"), and 5,000,000 shares of
Preferred Stock, no par value ("Preferred Stock").
COMMON STOCK
At June 1, 1996, there were 11,475,404 shares of Common Stock outstanding
and held of record by approximately 310 shareholders. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders. Subject to preferences that may be
applicable to any outstanding shares of Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared by the Board
out of funds legally available. See "Dividend Policy." All outstanding shares of
Common Stock are fully paid and nonassessable.
PREFERRED STOCK
The Board has the authority to issue up to 5,000,000 shares of the
Preferred Stock in one or more series and to fix the rights, priorities,
preferences, qualifications, limitations and restrictions, including the
dividend rates, conversion rights, voting rights, terms of redemption, terms of
sinking funds, liquidation preferences and the number of shares constituting any
series or the designation of such series, without any further vote or action by
the shareholders, which could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or adversely affect the
rights and powers, including voting rights, of the holders of the Common Stock.
The issuance of Preferred Stock may have the effect of delaying or preventing a
change in control of the Company and may adversely affect the rights of the
holders of Common Stock. There are no shares of Preferred Stock outstanding. The
Company has no present intention of issuing any shares of Preferred Stock. See
"-- Possible Anti-Takeover Effect of Certain Charter Provisions."
WARRANTS TO PURCHASE COMMON STOCK
At June 1, 1996, there were outstanding warrants to purchase 42,354 shares
of Common Stock at $2.75 per share, warrants to purchase 22,400 shares of Common
Stock at $6.25 per share and warrants to purchase 503,287 shares of Common Stock
at $7.00 per share. Each warrant contains provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon exercise of the
warrant under certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications or consolidations. Holders of the warrants
are entitled to certain registration rights with respect to the Common Stock
issued or issuable upon exercise thereof. See "Certain Transactions" and
"-- Registration Rights."
REGISTRATION RIGHTS
The holders of approximately 3,671,051 shares of Common Stock (assuming the
exercise of outstanding warrants) or their permitted transferees (the "Holders")
are entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under the terms of agreements between the Company and
such Holders, if the Company proposes to register any of its securities under
the Securities Act for its own account, such Holders are entitled to notice of
such registration and are entitled to include shares of such Common Stock
therein, provided, among other conditions, that the underwriters of any such
offering have the right to limit the number of shares included in such
registration. In addition, Holders of at least 40% of approximately 3,671,051
(assuming the exercise of outstanding warrants) shares of Common Stock with
demand registration rights may require the Company to prepare and file a
registration statement under the Securities Act with respect to the shares
entitled to demand registration rights, and the Company is required to use its
best efforts to effect such registration, subject to certain conditions and
limitations. The Company is not obligated to effect more than one of these
shareholder-initiated registrations nor to effect such a registration within
54
<PAGE> 58
90 days following an offering of the Company's securities, including the
Offering made hereby. The Holders of approximately 3,671,051 (assuming the
exercise of outstanding warrants) shares of Common Stock may also request the
Company to register such shares on Form S-3 provided the shares registered have
an aggregate market value of at least $500,000. Generally, the Company is
required to bear the expense of all such registrations. The registration rights
of the Holders expire on October 4, 1999.
In addition, Silicon Valley Bank is entitled to certain rights with respect
to the registration of shares of the Common Stock under the Securities Act. If
the Company proposes to register any of its securities under the Securities Act
for its own account, Silicon Valley Bank is entitled to notice of such
registration and is entitled to include shares of such Common Stock therein,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of shares included in such registration.
POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS
The holders of Common Stock are currently entitled to one vote for each
share held of record on all matters submitted to a vote of the shareholders
other than the election of directors, in which event any holder may demand
cumulative voting. Under cumulative voting, the holders of Common Stock are
entitled to cast for each share held the number of votes equal to the number of
directors to be elected, which is currently eight. A holder may cast all of his
or her votes for one nominee or distribute them among any number of nominees for
election. The Company's Articles of Incorporation provide that the shareholders'
right to cumulative voting will terminate when the Company's shares are
qualified for trading as a National Market security on the Nasdaq if the Company
has at least 800 shareholders as of the record date for the most recent annual
meeting of shareholders. The absence of cumulative voting may have the effect of
limiting the ability of minority shareholders to effect changes in the Board
and, as a result, may have the effect of deterring hostile takeovers or delaying
or preventing changes in control or management of the Company.
The Company's Articles of Incorporation also include, among other things,
the Fair Price Provision that requires the approval of the holders of two-thirds
of the Company's voting stock as a condition to a merger or certain other
business transactions with, or proposed by, a holder of 15% or more of the
Company's voting stock (an "Interested Shareholder"), except in cases where the
Continuing Directors approve the transaction or certain minimum price criteria
and other procedural requirements are met. A "Continuing Director" is a director
who is not affiliated with an Interested Shareholder and was elected prior to
the time such Interested Shareholder became an Interested Shareholder or any
successor chosen by a majority of the Continuing Directors. The minimum price
criteria generally require that, in a transaction in which shareholders are to
receive payments, holders of Common Stock must receive a value equal to the
highest price of either the price paid by the Interested Shareholder for Common
Stock during the prior two years, the Fair Market Value (as defined) at the time
or the amount paid in the transaction in which such person became an Interested
Shareholder, and that such payment be made in cash or in the type of
consideration paid by the Interested Shareholder for the greatest portion of its
shares. The Company's Board believes that the Fair Price Provision will help
assure that all of the Company's shareholders will be treated similarly if
certain kinds of business combinations are effected. However, the Fair Price
Provision may make it more difficult to accomplish certain transactions that
could be beneficial to shareholders but are opposed by the incumbent Board.
The Company's Articles of Incorporation also require that any action
required or permitted to be taken by shareholders of the Company must be
effected at a duly called annual or special meeting of shareholders and may not
be effected by a consent in writing. The Company's Bylaws, as amended, also
provide that the range of the authorized number of directors may be changed only
by resolution of holders of two-thirds of the Company's voting stock, and the
Company's Articles of Incorporation and Bylaws, as amended, provide that newly
created directorships resulting from any increase in the authorized number of
directors may only be filled by a majority vote of the directors then in office.
In
55
<PAGE> 59
addition, the Articles of Incorporation and Bylaws of the Company, as amended,
require that shareholders give advance notice to the Company's secretary of any
directorship nominations or other business to be brought by shareholders at any
shareholders' meeting. The Articles of Incorporation, as amended, also require
the approval of two-thirds of the Company's voting stock to amend certain
provisions of the Articles of Incorporation. These provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of the Company. See "Risk Factors -- Possible Anti-Takeover Effect of
Certain Charter Provisions" and "Management."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Wells Fargo Bank
N.A.
56
<PAGE> 60
UNDERWRITING
The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares which each has severally agreed to purchase
from the Company, subject to the terms and conditions specified in the
Underwriting Agreement, are as follows:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Dillon, Read & Co. Inc. .........................................................
UBS Securities LLC...............................................................
Vector Securities International, Inc. ...........................................
Total.......................................................................... 2,000,000
=========
</TABLE>
The Managing Underwriters are Dillon, Read & Co. Inc., UBS Securities LLC
and Vector Securities International, Inc.
The Underwriters are committed to purchase all of the shares of Common
Stock, if any are so purchased. The Underwriting Agreement contains certain
provisions whereby, if any Underwriter defaults in its obligation to purchase
such shares, and the aggregate obligations of the Underwriters so defaulting do
not exceed 10% of the shares offered hereby, some or all of the remaining
Underwriters must assume such obligations.
The Underwriters propose to offer the shares of Common Stock to the public
initially at the offering price per share set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share on sales to certain
other dealers. The offering of the shares is made for delivery when, as, and if
accepted by the Underwriters and subject to prior sale and withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any order for the purchase of the shares. After the
public offering of the Common Stock, the public offering price and the
concessions may be changed by the Managing Underwriters.
The Company has granted to the Underwriters an option for 30 days from the
date of this Prospectus to purchase up to 300,000 additional shares of Common
Stock. The Underwriters may exercise such option only to cover over-allotments
of the Common Stock offered hereby. To the extent the Underwriters exercise this
option, each Underwriter will be obligated, subject to certain conditions, to
purchase the number of additional shares of Common Stock proportionate to such
Underwriter's initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including any liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company, its executive officers and directors and certain shareholders
of the Company have agreed not to offer, sell, contract to sell, grant any
option to purchase, transfer or otherwise dispose of, directly or indirectly,
any shares of Common Stock or securities convertible into or exchangeable for
Common Stock, or warrants or other rights to purchase Common Stock for a period
of 90 days from the date of this Prospectus without the prior written consent of
Dillon, Read & Co. Inc.
The Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Vector Securities International, Inc. ("Vector") is serving as financial
advisor to the Company in connection with establishing certain collaborative
arrangements with potential corporate partners. For
57
<PAGE> 61
its services, Vector will receive from the Company a cash retainer and certain
fees based on the aggregate consideration received by the Company, its
shareholders or employees in a transaction.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Brobeck, Phleger & Harrison LLP, San Diego, California. A partner of
such firm owns 1,868 shares of the Common Stock. Certain legal matters will be
passed upon for the Underwriters by Cooley Godward Castro Huddleson & Tatum, San
Diego, California. A member of such firm and affiliated investment partnerships
own an aggregate of 29,977 shares of the Common Stock and warrants to purchase
100 shares of the Common Stock. An opinion with respect to certain government
regulations will be provided to the Underwriters by Hyman, Phelps & McNamara,
P.C., Washington, D.C.
EXPERTS
The financial statements of DepoTech Corporation at December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
The statements in this Prospectus under the caption "Risk
Factors -- Patents and Proprietary Technology," "Business -- Product Research
and Development Programs" and "Business -- Patents and Proprietary Rights" and
other references therein to intellectual property have been reviewed and
approved by Fish & Richardson, P.C., patent counsel for the Company, as experts
in such matters and are included herein in reliance upon that review and
approval.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
Common Stock offered hereby. This Prospectus, which is part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed therewith. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to such Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or other document are not necessarily complete, and in
each instance reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the principal
office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of all or any part thereof may be obtained at prescribed rates from the
Commission's Public Reference Section at the same address.
58
<PAGE> 62
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (unaudited)........... F-3
Statements of Operations for each of the three years in the period ended December 31,
1995, and the three months ended March 31, 1995 and 1996 (unaudited)................ F-4
Statements of Shareholders' Equity for each of the three years in the period ended
December 31, 1995, and the three months ended March 31, 1996 (unaudited)............ F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1995, and the three months ended March 31, 1995 and 1996 (unaudited)................ F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 63
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
DepoTech Corporation
We have audited the accompanying balance sheets of DepoTech Corporation as
of December 31, 1994 and 1995, and the related statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DepoTech Corporation at
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California
February 16, 1996
F-2
<PAGE> 64
DEPOTECH CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
----------- ----------- MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 4,624,340 $ 5,883,911 $ 6,373,076
Short-term investments............................. 5,358,706 32,777,623 24,172,490
Accounts receivable from Chiron collaboration...... 243,877 400,000 1,145,654
Other current assets............................... 128,384 566,924 855,913
----------- ----------- -----------
Total current assets....................... 10,355,307 39,628,458 32,547,133
Property and equipment, net.......................... 4,326,742 8,610,978 12,508,819
Restricted cash...................................... 437,600 420,860 420,860
Deposits and other assets............................ 227,005 317,277 336,083
----------- ----------- -----------
Total assets............................... $15,346,654 $48,977,573 $45,812,895
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 848,599 $ 1,741,724 $ 565,490
Other accrued liabilities.......................... 222,202 705,868 665,512
Facilities payable................................. 237,569 -- --
Current portion of obligations under capital leases
and loans....................................... 516,367 1,805,494 1,502,668
----------- ----------- -----------
Total current liabilities.................. 1,824,737 4,253,086 2,733,670
Deferred revenue from Chiron collaboration........... 1,000,000 -- --
Deferred rent........................................ 112,345 387,947 601,293
Obligations under capital leases, less current
portion............................................ 1,274,381 2,831,010 3,592,219
Note payable......................................... 231,938 -- --
Commitments
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized in 1995 and 1996 and 7,400,000 shares
authorized in 1994; 5,982,991 shares issued and
outstanding at December 31, 1994................ 26,560,830 -- --
Common stock, no par value; 11,600,000 authorized
in 1994 and 30,000,000 shares authorized in 1995
and 1996; 1,531,263, 11,285,630 and 11,364,978
shares issued and outstanding at December 31,
1994 and 1995 and March 31, 1996,
respectively.................................... 82,486 67,133,738 67,190,282
Deferred compensation related to stock options,
net............................................. -- (214,448) (201,326)
Unrealized gain on short-term investments.......... 26,928 206,172 6,924
Accumulated deficit................................ (15,766,991) (25,619,932) (28,110,167)
----------- ----------- -----------
Total shareholders' equity................. 10,903,253 41,505,530 38,885,713
----------- ----------- -----------
Total liabilities and shareholders'
equity................................... $15,346,654 $48,977,573 $45,812,895
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 65
DEPOTECH CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue....... $ 69,500 $ 582,120 $ 5,825,784 $3,154,540 $ 1,200,654
Marketing rights fee... -- -- 1,000,000 1,000,000 --
----------- ----------- ----------- ---------- -----------
Total revenues........... 69,500 582,120 6,825,784 4,154,540 1,200,654
Costs and expenses:
Research and
development......... 3,231,169 7,426,815 12,699,247 2,411,589 3,271,404
General and
administration...... 827,250 1,880,861 2,826,538 463,431 786,261
----------- ----------- ----------- ---------- -----------
Total costs and
expenses............... 4,058,419 9,307,676 15,525,785 2,875,020 4,057,665
Income (loss) from
operations............. (3,988,919) (8,725,556) (8,700,001) 1,279,520 (2,857,011)
Interest income.......... 128,652 286,984 1,084,244 207,375 511,359
Interest expense......... (36,639) (122,915) (404,790) (52,417) (144,583)
----------- ----------- ----------- ---------- -----------
Net income (loss)........ $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235)
=========== =========== =========== ========== ===========
Net income (loss) per
share.................. $ (0.78) $ (1.26) $ (0.92) $ 0.17 $ (0.22)
=========== =========== =========== ========== ===========
Shares used in computing
net income (loss) per
share.................. 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501
=========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 66
DEPOTECH CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFERRED
CONVERTIBLE NOTES COMPENSATION
PREFERRED STOCK COMMON STOCK RECEIVABLE RELATED
------------------------- ------------------------ FROM TO STOCK
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS OPTIONS
---------- ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993........ 3,333,127 $ 7,579,645 1,308,029 $ 13,080 $ (9,600) $ --
Issuance of common stock........ -- -- 1,082 11 -- --
Issuance of convertible
preferred stock............... 1,045,974 6,428,860 -- -- -- --
Net loss........................ -- -- -- -- -- --
---------- ----------- ---------- ----------- ------- ---------
Balance at December 31, 1993...... 4,379,101 14,008,505 1,309,111 13,091 (9,600) --
Issuance of common stock........ -- -- 222,152 69,395 -- --
Issuance of convertible
preferred stock............... 1,603,890 10,656,296 -- -- -- --
Accretion on convertible
preferred stock............... -- 1,896,029 -- -- -- --
Forgiveness of notes receivable
from shareholders............. -- -- -- -- 9,600 --
Unrealized gain on
investments................... -- -- -- -- -- --
Net loss........................ -- -- -- -- -- --
---------- ----------- ---------- ----------- ------- ---------
Balance at December 31, 1994...... 5,982,991 26,560,830 1,531,263 82,486 -- --
Issuance of common stock........ -- -- 78,908 36,306 -- --
Exercise of warrants............ -- -- 242,468 308,654 -- --
Deferred compensation related to
issuance of stock options..... -- -- -- 262,438 -- (262,438)
Amortization of deferred
compensation.................. -- -- -- -- -- 47,990
Accretion on convertible
preferred stock............... -- 1,832,394 -- -- -- --
Unrealized gain on
investments................... -- -- -- -- -- --
Issuance of common stock upon
initial public offering,
net........................... -- -- 3,450,000 38,050,630 -- --
Conversion of convertible
preferred stock upon initial
public offering............... (5,982,991) (28,393,224) 5,982,991 28,393,224 -- --
Net loss........................ -- -- -- -- -- --
---------- ----------- ---------- ----------- ------- ---------
Balance at December 31, 1995...... -- -- 11,285,630 67,133,738 -- (214,448)
Issuance of common stock
(unaudited)................... -- -- 79,348 56,544 -- --
Amortization of deferred
compensation (unaudited)...... -- -- -- -- -- 13,122
Unrealized loss on investments
(unaudited)................... -- -- -- -- -- --
Net loss (unaudited)............ -- -- -- -- -- --
---------- ----------- ---------- ----------- ------- ---------
Balance at March 31, 1996
(unaudited)..................... -- $ -- 11,364,978 $67,190,282 $ -- $ (201,326)
========== =========== ========== =========== ======= =========
<CAPTION>
UNREALIZED GAIN TOTAL
ON ACCUMULATED SHAREHOLDERS'
INVESTMENTS DEFICIT EQUITY
--------------- ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1993........ $ -- $ (1,412,569) $ 6,170,556
Issuance of common stock........ -- -- 11
Issuance of convertible
preferred stock............... -- -- 6,428,860
Net loss........................ -- (3,896,906) (3,896,906 )
--------- ------------ -----------
Balance at December 31, 1993...... -- (5,309,475) 8,702,521
Issuance of common stock........ -- -- 69,395
Issuance of convertible
preferred stock............... -- -- 10,656,296
Accretion on convertible
preferred stock............... -- (1,896,029) --
Forgiveness of notes receivable
from shareholders............. -- -- 9,600
Unrealized gain on
investments................... 26,928 -- 26,928
Net loss........................ -- (8,561,487) (8,561,487 )
--------- ------------ -----------
Balance at December 31, 1994...... 26,928 (15,766,991) 10,903,253
Issuance of common stock........ -- -- 36,306
Exercise of warrants............ -- -- 308,654
Deferred compensation related to
issuance of stock options..... -- -- --
Amortization of deferred
compensation.................. -- -- 47,990
Accretion on convertible
preferred stock............... -- (1,832,394) --
Unrealized gain on
investments................... 179,244 -- 179,244
Issuance of common stock upon
initial public offering,
net........................... -- -- 38,050,630
Conversion of convertible
preferred stock upon initial
public offering............... -- -- --
Net loss........................ -- (8,020,547) (8,020,547 )
--------- ------------ -----------
Balance at December 31, 1995...... 206,172 (25,619,932) 41,505,530
Issuance of common stock
(unaudited)................... -- -- 56,544
Amortization of deferred
compensation (unaudited)...... -- -- 13,122
Unrealized loss on investments
(unaudited)................... (199,248) -- (199,248 )
Net loss (unaudited)............ -- (2,490,235) (2,490,235 )
--------- ------------ -----------
Balance at March 31, 1996
(unaudited)..................... $ 6,924 $(28,110,167) $38,885,713
========= ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 67
DEPOTECH CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................. $(3,896,906) $(8,561,487) $(8,020,547) $ 1,434,478 $(2,490,235)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization................... 79,842 582,939 837,168 186,675 326,529
Deferred revenue from Chiron collaboration...... -- 1,000,000 (1,000,000) (1,000,000) --
Amortization of deferred compensation........... -- -- 47,990 -- 13,122
Deferred rent................................... 15,024 7,173 275,602 22,457 213,346
Issuance of note payable in exchange for
acquired technology........................... -- 231,938 -- -- --
Forgiveness of employee notes receivable........ -- 128,508 56,333 -- --
Changes in operating assets and liabilities:
Accounts receivable from Chiron
collaboration............................... -- (243,877) (156,123) (425,295) (745,654)
Other current assets.......................... (245,204) 22,662 (494,873) 160,556 (288,989)
Deposits and other assets..................... -- (162,064) (115,614) (13,244) (21,165)
Accounts payable and other accrued
liabilities................................. 383,065 592,537 1,376,791 (400,449) (1,216,589)
------------ ------------ ------------ ------------ ------------
Net cash used by operating activities............. (3,664,179) (6,401,671) (7,193,273) (34,822) (4,209,635)
INVESTING ACTIVITIES
Purchases of short-term investments............... -- (12,228,388) (38,410,705) (5,089,583) (5,227,801)
Proceeds from sale or maturities of short-term
investments..................................... -- 6,896,610 11,171,032 3,370,584 13,633,686
Purchases of property and equipment............... (675,669) (1,362,231) (1,419,044) (123,754) (3,419,548)
Restricted cash................................... (604,251) 166,651 16,740 59,200 --
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by investing
activities...................................... (1,279,920) (6,527,358) (28,641,977) (1,783,553) 4,986,337
FINANCING ACTIVITIES
Repayment on capital lease obligations............ (61,663) (300,842) (831,262) (136,568) (347,335)
Proceeds from issuance of common stock, net....... 11 69,395 38,163,652 2,656 56,544
Proceeds from issuances of convertible preferred
stock, net...................................... 6,428,860 10,678,720 -- 35 --
Reimbursement for assets refinanced as capital
leases.......................................... -- -- -- 173,129 3,254
Repayment of facilities payable................... -- (413,000) (237,569) -- --
Proceeds from bank borrowing...................... -- -- 4,000,000 -- --
Payment on bank borrowing......................... -- -- (4,000,000) -- --
------------ ------------ ------------ ------------ ------------
Net cash provided (used) by financing
activities...................................... 6,367,208 10,034,273 37,094,821 39,252 (287,537)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... 1,423,109 (2,894,756) 1,259,571 (1,779,123) 489,165
Cash and cash equivalents at the beginning of
period.......................................... 6,095,987 7,519,096 4,624,340 4,624,340 5,883,911
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at the end of period.... 7,519,096 4,624,340 5,883,911 2,845,217 6,373,076
Short-term investments at the end of period....... -- 5,358,706 32,777,623 7,085,876 24,172,490
------------ ------------ ------------ ------------ ------------
Cash, cash equivalents and short-term investments
at the end of period............................ $ 7,519,096 9,983,046 $38,661,534 $ 9,931,093 $30,545,566
============ ============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired through capital
leases and loans................................ $ 492,217 $ 1,661,036 $ 3,677,018 $ 493,529 $ 802,464
============ ============ ============ ============ ============
Facilities payable recorded for leasehold
improvements.................................... $ 413,000 $ 237,569 $ -- $ -- $ --
============ ============ ============ ============ ============
Issuance of common stock in exchange for note
payable......................................... $ -- $ -- $ 231,938 $ -- $ --
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid..................................... $ 35,639 $ 122,915 $ 404,790 $ 52,417 $ 144,582
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 68
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Activities
DepoTech Corporation (the "Company") was incorporated in California on
October 30, 1989. The Company is a drug delivery company engaged in the
development and manufacture of sustained-release therapeutic products based on
DepoFoam, an injectable, depot drug delivery technology.
Interim Financial Information
The financial statements as of March 31, 1996, and for the three months
ended March 31, 1995 and 1996, are unaudited, but in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments) which
the Company considers necessary for a fair statement of financial position as of
such date and the operating results and cash flows for such periods. Results for
the interim period are not necessarily indicative of results to be expected for
the entire year.
Cash, Cash Equivalents and Short-Term Investments
The Company invests its excess cash in deposit accounts, money market
accounts, commercial paper and U.S. Government securities. The Company has
established guidelines relative to diversification and maturities that maintain
safety and an adequate level of liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
The Company considers all highly liquid investments with a maturity of
three months or less from the date of purchase that are readily convertible into
cash to be cash equivalents. Short-term investments are classified as
available-for-sale, and are carried at market value, in accordance with
Financial Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The unrealized gain or loss on such
investments is reported as a separate component of shareholders' equity. Since
such unrealized gain or loss had no cash effect, it is not reflected in the
statements of cash flows.
Property and Equipment
Property and equipment consist primarily of manufacturing, laboratory and
office equipment and leasehold improvements and are stated at cost. Depreciation
and amortization are calculated using the straight-line method over the shorter
of the estimated useful life of the assets (ranging from three to fifteen years)
or the lease term.
Restricted Cash
Restricted cash consists of certificates of deposit maintained as
collateral for letters of credit securing certain lease agreements.
Patent Costs
Included in deposits and other assets are patent and trademark filing costs
totaling approximately $324,000 and $316,000 at December 31, 1995 and March 31,
1996, respectively, which are amortized over the estimated economic life of the
patents or trademarks when issued.
F-7
<PAGE> 69
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
Deferred Rent
Rent expense is recognized on a straight-line basis over the term of the
lease. Accordingly, rent expense incurred in excess of rent paid is recorded as
deferred rent.
Contract Revenues and Expenses
Contract revenue is recorded as earned based on the performance
requirements of the contract. Research and development costs are expensed as
incurred.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options is not less
than the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Accounting Standard on Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" (FAS 121), regarding the
impairment of long-lived assets, identifiable intangibles and goodwill related
to those assets. FAS 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. The adoption of FAS 121 during the three
months ended March 31, 1996 had no effect on the accompanying financial
statements.
Use of Estimates in the Preparation of Financial Statements
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.
Net Income (Loss) Per Share
For periods subsequent to the completion of the Company's initial public
offering ("IPO") in October 1995, loss per share information is computed using
the weighted average number of common shares outstanding. Common share
equivalents have not been included in computing net loss per share since the
effect would be antidilutive.
Prior to the IPO, net income (loss) per share is computed using the
weighted average number of common shares outstanding during the period, plus
dilutive common share equivalents for the three months ended March 31, 1995.
Pursuant to the requirements of the Securities and Exchange Commission ("SEC"),
common stock issued by the Company during the twelve months immediately
preceding the IPO, plus the number of common equivalent shares which were
granted during the same period pursuant to the grant of stock options and
warrants, have been included in the calculation of the shares used in computing
net income (loss) per share as if these shares were outstanding for all periods
presented using the treasury stock method. In addition, pursuant to SEC policy,
the calculation of the
F-8
<PAGE> 70
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
shares used in computing net income (loss) per share also includes convertible
preferred shares which converted into common shares upon the closing of the IPO
as if they were converted into common shares as of the original dates of
issuance.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
2. CHIRON COLLABORATION
In March 1994, the Company entered into a collaboration agreement ("the
Collaboration Agreement") with Chiron Corporation ("Chiron") to develop and
commercialize sustained release formulations of selected generic products and
certain Chiron proprietary products using the Company's drug delivery
technology. Under the agreement, Chiron purchased 400,000 shares of the
Company's Series C preferred stock for $6.25 per share and a warrant to purchase
365,000 shares of Series C preferred stock at an exercise price of $6.25 per
share for $1 million. The warrant was terminated and converted into a marketing
rights fee to the Company upon the achievement of a development milestone in
January 1995.
The Collaboration Agreement grants Chiron rights to market and sell the
Company's initial product, DepoCyt, in the United States, Canada and Europe.
Phase III clinical trial costs of DepoCyt incurred subsequent to June 1993 will
be shared equally by Chiron and the Company. Any additional clinical trials
required in Europe will be funded entirely by Chiron. Canadian registration
expenses will be funded by Chiron. The Company will manufacture DepoCyt, Chiron
will market, sell and distribute the product, and the parties will share all
profits equally. Chiron will make additional payments to the Company upon
achievement of certain milestones in the development of DepoCyt. Chiron also has
a right of first refusal to obtain a license to alternate DepoFoam formulations
of cytarabine under terms and conditions to be negotiated in the future.
Reimbursable clinical trial costs incurred by the Company totaled $708,082,
$1,790,460 and $2,541,847 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $576,441 and $990,403 for the three months ended March 31,
1995 and 1996, respectively. The cumulative amount due through December 31, 1994
became billable and was recognized as contract revenue upon the achievement of a
development milestone in January 1995.
The Collaboration Agreement also provides for the joint development of
DepoFoam formulations of certain compounds proprietary to Chiron ("Chiron
Products"). Feasibility studies on IGF-1 and IL-2 have been completed and
scale-up and preclinical development are currently underway to support an IND
filing for one of the compounds. In addition, Chiron and the Company have agreed
to initiate another feasibility study on an additional Chiron proprietary
compound or an additional indication for IGF-1 to begin in the second half of
1996. In 1997 and thereafter, Chiron must fund one feasibility program for a
Chiron Product per year or lose its option to develop DepoFoam formulations of
additional Chiron proprietary compounds. The agreement provides that Chiron will
pay the Company for its feasibility efforts, and that Chiron will be responsible
for all development costs thereafter. The agreement also provides for Chiron to
make payments to the Company upon achievement of certain development milestones
for the Chiron Products. Chiron will have exclusive, worldwide distribution
rights to all Chiron Products and will manufacture the bulk unencapsulated drug.
The Company will then encapsulate the bulk drug in DepoFoam creating the Chiron
Products, and Chiron will market, sell and distribute the Chiron Products.
Chiron will compensate the Company based on both manufacturing costs, including
a manufacturing profit, and a percentage of Chiron's sale of the Chiron
Products.
F-9
<PAGE> 71
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
Both the Company and Chiron have the ability to terminate a portion or all
of the collaboration at certain intervals and with advance notice. In addition,
Chiron has the ability to terminate the development of a Chiron Product with a
limited amount of advance notice.
3. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale short-term investments:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Government Securities...... $ 4,328,270 $ 25,442 $ (6,232) $ 4,347,480
Corporate Obligations........... 500,000 7,158 -- 507,158
Certificates of Deposit......... 503,508 560 -- 504,068
----------- ---------- -------- -----------
$ 5,331,778 $ 33,160 $ (6,232) $ 5,358,706
=========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
U.S. Government Securities...... $32,072,511 $205,047 $ -- $32,277,558
Certificates of Deposit......... 498,940 1,125 -- 500,065
----------- ---------- -------- -----------
$32,571,451 $206,172 $ -- $32,777,623
=========== ========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- -------- -------- -----------
<S> <C> <C> <C> <C>
MARCH 31, 1996
U.S. Government Securities...... $23,666,626 $ 61,836 $(55,922) $23,672,540
Certificates of Deposit......... 498,940 1,010 -- 499,950
----------- ---------- -------- -----------
$24,165,566 $ 62,846 $(55,922) $24,172,490
=========== ========== ======== ===========
</TABLE>
The amortized cost and estimated fair value of short-term investments at
December 31, 1995 and March 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
----------- -----------
<S> <C> <C>
DECEMBER 31, 1995
Due in one year or less................................. $ 9,067,985 $ 9,089,589
Due after one year through three years.................. 23,503,466 23,688,034
----------- -----------
$32,571,451 $32,777,623
=========== ===========
</TABLE>
F-10
<PAGE> 72
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
----------- -----------
<S> <C> <C>
MARCH 31, 1996
Due in one year or less................................. $ 1,974,751 $ 1,974,071
Due after one year through three years.................. 22,190,815 22,198,419
----------- -----------
$24,165,566 $24,172,490
=========== ===========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Manufacturing, laboratory and office
equipment............................... $3,358,696 $ 7,184,905 $ 8,097,738
Leasehold improvements.................... 1,308,810 1,989,257 1,996,778
Leasehold improvements under
construction............................ 350,602 939,853 4,241,510
---------- ----------- -----------
5,018,108 10,114,015 14,336,026
Less accumulated depreciation and
amortization............................ (691,366) (1,503,037) (1,827,207)
---------- ----------- -----------
$4,326,742 $ 8,610,978 $12,508,819
========== =========== ===========
</TABLE>
5. TECHNOLOGY ASSIGNMENT
In 1994, in connection with an assignment agreement under which the Company
was assigned exclusive rights to certain intellectual property, the Company
issued 108,029 shares of common stock and a warrant to purchase 154,327 shares
of Preferred Stock at $2.00 per share. During 1994, the Company also issued a
non-interest bearing note payable in the amount of $231,938, which was expensed
as acquired in-process research and development. Upon the completion of the IPO,
the warrant was exercised and the note and cash were exchanged for common stock.
Royalties or a percentage of royalties will be paid to the assignor on revenues
from the sale of DepoCyt or other products incorporating the acquired technology
or other consideration received by the Company from licensees.
The assignor has the right to terminate the agreement or to convert the
exclusive nature of the rights granted under the agreement into a nonexclusive
license in the event that the Company does not make certain minimum annual
payments or upon certain other events.
6. COMMITMENTS
The Company leases its facilities and certain equipment under operating and
capital leases and loans. Provisions of the facilities leases provide for
abatement of rent during certain periods and escalating rent payments during the
lease terms which extend to dates through August 1, 2015. Included in restricted
cash and deposits and other assets are $480,854, $449,107 and $465,076 related
F-11
<PAGE> 73
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
to these agreements at December 31, 1994 and 1995 and March 31, 1996,
respectively. Annual future minimum lease and loan payments as of December 31,
1995 are as follows:
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASES AND
LEASES LOANS
----------- -----------
<S> <C> <C>
Year Ending December 31:
1996.................................................. $ 2,828,159 $ 2,243,566
1997.................................................. 3,067,552 1,527,194
1998.................................................. 3,186,448 1,273,614
1999.................................................. 3,309,102 469,139
2000.................................................. 3,448,411 --
Thereafter.............................................. 55,119,881 --
----------- ------------
Total......................................... $70,959,553 5,513,513
===========
Less amount representing interest....................... (877,009)
------------
Present value of net minimum payments................... 4,636,504
Less current portion.................................... (1,805,494)
------------
Amounts due after one year.............................. $ 2,831,010
============
</TABLE>
The Company subleased certain of its existing laboratory and administrative
facilities. Rental income from the sublease agreement over the next five years
will range from $71,000 to $298,000 per year.
At December 31, 1995, the Company had short-term loans totaling $562,788
which were issued for progress payments on the purchase of manufacturing
equipment. Such loans will be converted into capital leases over a term of four
years.
Assets acquired under capital leases and loans consist of manufacturing,
laboratory and office equipment and leasehold improvements with an aggregate
cost of approximately $2.1 million, $5.8 million and $6.6 million at December
31, 1994 and 1995 and March 31, 1996, respectively. Accumulated amortization of
assets acquired under these arrangements is included in total depreciation and
amortization.
Rent expense was approximately $178,000, $583,000 and $1,467,000, during
the years ended December 31, 1993, 1994 and 1995, respectively, and $202,000 and
$817,000 for the three months ended March 31, 1995 and 1996, respectively.
7. SHAREHOLDERS' EQUITY
Deferred Compensation
Pursuant to certain provisions of the SEC regulations, the Company recorded
and is amortizing over the related vesting periods deferred compensation
representing the difference between the exercise price of stock options granted
and the deemed fair value (for accounting purposes) of the Company's common
stock at the date of grant. Stock options generally vest over four to five
years. Shares included in the computation of deferred compensation include
option grants to employees and officers of the Company from July 1994 through
June 1995.
F-12
<PAGE> 74
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
Stock Purchase Warrants
In connection with various stock purchase or lease financing transactions,
the Company has issued warrants to purchase 42,354, 22,400 and 503,287 shares of
common stock at prices of $2.75, $6.25 and $7.00 per share, respectively. The
warrants are generally exercisable through 2001, and all remain outstanding at
December 31, 1995 and March 31, 1996.
Stock Option Plans
The 1995 Stock Option/Stock Issuance Plan ("the Plan") provides for both
incentive and nonqualified stock options to be granted to employees, directors
and consultants of the Company. The Plan provides that incentive stock options
will be granted at no less than the fair value of the Company's common stock (no
less than 85% of the fair value for nonqualified stock options) at the date of
the grant. In May 1996, the Company's shareholders approved increasing shares
issuable under the Plan to 2,000,000 shares. No options granted under the Plan
have a term in excess of ten years.
The stock option activity for the three years ended December 31, 1995 and
for the three months ended March 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES PRICE
--------- ---------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1993...................... 308,700 $ .01 - .10
Options granted................................... 454,650 $ .10 - .80
Options exercised................................. (1,082) $ .01
Options cancelled................................. (3,418) $ .01 - .25
----------
Outstanding at December 31, 1993.................... 758,850 $ .01 - .80
Options granted................................... 389,650 $ .80 - 2.50
Options exercised................................. (222,152) $ .01 - 2.00
Options cancelled................................. (9,034) $ .01 - 1.25
----------
Outstanding at December 31, 1994.................... 917,314 $ .01 - 2.50
Options granted................................... 258,300 $ 3.00 - 15.25
Options exercised................................. (48,908) $ .01 - 4.00
Options cancelled................................. (24,267) $ .01 - 12.00
----------
Outstanding at December 31, 1995.................... 1,102,439 $ .01 - 15.25
Options granted................................... 114,319 $19.625 - 21.1135
Options exercised................................. (79,348) $ .01 - 12.00
Options cancelled................................. (15,037) $ 2.00 - 12.00
----------
Outstanding at March 31, 1996....................... 1,122,373 $ .01 - 21.113
==========
</TABLE>
At December 31, 1995, options for 415,790 shares were exercisable and
375,419 shares were available for future grant. At March 31, 1996, options for
422,953 shares were exercisable and 276,137 shares were available for future
grant.
Employee Stock Purchase Plan
In June 1995, the Company adopted an Employee Stock Purchase Plan ("the
ESPP") whereby employees, at their option, can purchase shares of Company common
stock through payroll deductions at the lower of 85% of fair market value on the
ESPP offering date or on certain other predetermined
F-13
<PAGE> 75
DEPOTECH CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED
MARCH 31, 1995 AND 1996, IS UNAUDITED
exercise dates. The Company has reserved 250,000 shares of common stock for
issuance under the ESPP.
8. INCOME TAXES
At December 31, 1995, the Company has federal and California tax net
operating loss carryforwards of approximately $22,300,000 and $6,500,000,
respectively. The difference between the federal and California tax loss
carryforwards is primarily attributable to the capitalization of research and
development expenses for California franchise tax purposes and the fifty-percent
limitation on California loss carryforwards.
The federal and California tax loss carryforwards will begin expiring in
2005 and 1997, respectively, unless previously utilized. The Company also has
federal and California research and development tax credit carryforwards
totaling $684,000 and $351,000, respectively, which will being expiring in 2005
unless previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the
Company's net operating loss and credit carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within any three year
period.
Significant components of the Company's deferred tax assets and liabilities
are shown below. A valuation allowance of $9,900,000, of which $3,770,000 is
related to 1995, has been recognized to offset the deferred tax assets as
realization of such assets is uncertain.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
---------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $4,779,000 $ 8,192,000
Research and development credit carryforwards.......... 809,000 912,000
Capitalized research expenses.......................... 626,000 826,000
Other.................................................. 39,000 272,000
---------- -----------
Net deferred tax assets.................................. 6,253,000 10,202,000
Valuation allowance for deferred tax assets.............. (6,130,000) (9,900,000)
---------- -----------
Total deferred tax assets................................ 123,000 302,000
Deferred tax liabilities:
Depreciation........................................... (123,000) (302,000)
---------- -----------
Net deferred tax assets................................ $ -- $ --
========== ===========
</TABLE>
9. SUBSEQUENT EVENT (UNAUDITED)
During April 1996, the Company entered into an agreement to expand an
existing lease line from $2.6 million to $5.1 million. The incremental borrowing
amount of $2.5 million was used to finance certain tenant improvement and
equipment costs incurred in the first quarter of 1996.
During June 1996, the Company established a credit line with a bank for
borrowing up to $9 million to finance certain capital equipment expenditures.
Borrowings under the credit line will bear interest at either a floating rate
equal to prime plus .5% per annum or a fixed rate equal to the treasury rate, as
defined, plus 4% per annum, as elected by the Company. The credit line expires
on June 30, 2001.
F-14
<PAGE> 76
[PHOTOGRAPH SHOWING THE COMPANY'S DEPOFOAM 10X MANUFACTURING FACILITY]
[PHOTOGRAPH SHOWING THE COMPANY'S HEADQUARTERS]
[PHOTOGRAPH SHOWING VIALS OF CLIINICAL TRIAL MATERIALS]
<PAGE> 77
------------------------------------------------------------
------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF
COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO ANY
MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 2
The Company................................ 5
Risk Factors............................... 6
Use of Proceeds............................ 15
Price Range of Common Stock................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Selected Financial Data.................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 22
Management................................. 40
Certain Transactions....................... 50
Principal Shareholders..................... 51
Description of Capital Stock............... 54
Underwriting............................... 57
Legal Matters.............................. 58
Experts.................................... 58
Additional Information..................... 58
Index to Financial Statements.............. F-1
</TABLE>
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
[DEPOTECH CORPORATION LOGO]
------------------------
2,000,000 Shares
Common Stock
PROSPECTUS
, 1996
------------------------
DILLON, READ & CO. INC.
UBS SECURITIES
VECTOR SECURITIES INTERNATIONAL,
INC.
------------------------------------------------------------
------------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates,
except for the registration fee, the Nasdaq National Market filing fee and the
NASD fee.
<TABLE>
<S> <C>
Registration fee......................................................... 17,944
Nasdaq National Market fee............................................... 17,500
NASD fee................................................................. 5,704
Blue Sky fees and expenses............................................... 10,000
Printing and engraving expenses.......................................... 90,000
Legal fees and expenses.................................................. 100,000
Accounting fees and expenses............................................. 50,000
Transfer Agent and Registrar fees........................................ 5,000
Miscellaneous expenses................................................... 28,852
----------
TOTAL.......................................................... $ 325,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
(a) Section 317 of the California General Corporation Law provides for the
indemnification of officers and directors of the Company against expenses,
judgments, fines and amounts paid in settlement under certain conditions and
subject to certain limitations.
(b) Article VI of the Bylaws of the Company provides that the Company shall
have power to indemnify any person who is or was an agent of the Company as
provided in Section 317 of the California General Corporation Law. The rights to
indemnity thereunder continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of the person. In addition, expenses incurred by a
director or officer in defending a civil or criminal action, suit or proceeding
by reason of the fact that he or she is or was a director or officer of the
Company (or was serving at the Company's request as a director or officer of
another corporation) shall be paid by the Company in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of such director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
Company as authorized by the relevant section of the California General
Corporation Law.
(c) Article IV of the Company's Articles of Incorporation provides that the
liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under California law. Accordingly,
a director will not be liable for monetary damages for breach of duty to the
Company or its shareholders in any action brought by or in the right of the
Company. However, a director remains liable to the extent required by law (i)
for acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law, (ii) for acts or omissions that a director believes
to be contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv) for
acts or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Company or its shareholders, (v) for
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the Company or its
shareholders, (vi) for any act or omission occurring prior to the date when the
exculpation provision became effective and (vii) for any act or omission as an
officer, notwithstanding that the officer is also a director or that his or her
actions, if negligent or improper, have been ratified by the directors. The
effect of the provisions
II-1
<PAGE> 79
in the Articles of Incorporation is to eliminate the rights of the Company and
its shareholders (through shareholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of duty as a
director, including breaches resulting from negligent behavior in the context of
transactions involving a change of control of the Company or otherwise, except
in the situations described in clauses (i) through (vii) above. These provisions
will not alter the liability of directors under federal securities laws.
(d) Pursuant to authorization provided under the Articles of Incorporation,
the Company has entered into indemnification agreements with each of its
directors and officers. Generally, the indemnification agreements attempt to
provide the maximum protection permitted by California law as it may be amended
from time to time. Moreover, the indemnification agreements provide for certain
additional indemnification. Under such additional indemnification provisions,
however, an individual will not receive indemnification for judgments,
settlements or expenses if he or she is found liable to the Company (except to
the extent the court determines he or she is fairly and reasonably entitled to
indemnity for expenses), for settlements not approved by the Company or for
settlements and expenses if the settlement is not approved by the court. The
indemnification agreements provide for the Company to advance to the individual
any and all reasonable expenses (including legal fees and expenses) incurred in
investigating or defending any such action, suit or proceeding. In order to
receive an advance of expenses, the individual must submit to the Company copies
of invoices presented to him or her for such expenses. Also, the individual must
repay such advances upon a final judicial decision that he or she is not
entitled to indemnification. The Company's Bylaws contain a provision of similar
effect relating to advancement of expenses to a director or officer, subject to
an undertaking to repay if it is ultimately determined that indemnification is
unavailable.
(e) There is directors and officers liability insurance now in effect which
insures directors and officers of the Company.
(f) The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by
which the Underwriters have agreed to indemnify the Company, each person, if
any, who controls the Company within the meaning of Section 15 of the Securities
Act, each director of the Company, and each officer of the Company who signs
this Registration Statement, with respect to information furnished in writing by
or on behalf of the Underwriters for use in the Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1993, the Company has sold and issued the following
unregistered securities:
(1) From June 30, 1993 to June 30, 1996, the Company issued an
aggregate of 718,600 options to purchase shares of Common Stock under the
Prior Plans and an aggregate of 466,122 shares of Common Stock were issued
through the exercise of options granted under the Prior Plans. For
additional information concerning these transactions, reference is made to
the information contained under the caption "Management -- Benefit Plans"
in the form of the Prospectus included herein.
(2) On December 31, 1993, the Company issued an aggregate of 1,020,974
shares of Series C Preferred Stock to various venture capital funds and
certain other investors for an aggregate consideration of $6,381,088.
(3) On January 1, 1994, the Company issued warrants to purchase an
aggregate 22,400 shares of Series C Preferred Stock to Phoenix Leasing
Incorporated ("PLI") in consideration of PLI having entered into a Master
Lease Agreement with the Company.
(4) On January 21, 1994, the Company issued an aggregate of 37,400
shares of Series C Preferred Stock to various investors for an aggregate
consideration of $233,750.
(5) On January 25, 1994, the Company issued an aggregate of 200,000
shares of Series C Preferred Stock to various venture capital funds for an
aggregate consideration of $1,250,000.
(6) On March 31, 1994, the Company issued an aggregate of 501,626
shares of Series C Preferred Stock to various venture capital funds and
certain other institutional investors for an aggregate consideration of
$3,135,163.
II-2
<PAGE> 80
(7) On March 31, 1994, the Company issued warrants to Chiron
Corporation to purchase an aggregate of 365,000 shares of Series C
Preferred Stock for an aggregate consideration of $1,000,000.
(8) On December 16, 1994, the Company issued an aggregate of 864,864
shares of Series D Preferred Stock and warrants to purchase 288,288 shares
of Series D Preferred Stock to various venture capital funds and certain
other investors for an aggregate consideration of $6,082,878.
(9) On December 16, 1994, the Company issued warrants to purchase an
aggregate of 214,285 shares of Series D Preferred Stock to its landlord and
certain affiliates.
(10) On August 16, 1995, the Company issued 30,000 shares of Series D
Preferred Stock and warrants to purchase 714 shares of Series D Preferred
Stock to various venture capital funds and certain other investors.
The sales and issuances of securities in the above transactions were deemed
to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D
and Rule 701 promulgated thereunder as transactions not involving any public
offering. The purchasers in each case represented their intention to acquire the
securities for investment only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. Similar representations of investment intent were obtained and
similar legends imposed in connection with any subsequent transfers of any such
securities. The Company believes that all recipients had adequate access,
through employment or other relationships, to information about the Company to
make an informed investment decision.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
1.1 Form of Underwriting Agreement.
3.1(1) Fourth Restated Articles of Incorporation of the Company (Exhibit 3.2).
3.2(1) Amended and Restated Bylaws of the Company (Exhibit 3.4).
4.1(1) Form of Certificate for Common Stock.
5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being
registered.
10.1(1) Form of Written Consent of Holders of Series A, Series B, Series C and Series D
Preferred Stock to conversion.
10.3(1) Amended and Restated Investors' Rights Agreement among the Company and certain
shareholders of the Company, dated December 16, 1994, as amended pursuant to the
Amendment to the Investors' Rights Agreement dated May 24, 1995.
10.7(1) Series D Preferred Stock and Warrant Purchase Agreement among the Company and the
purchasers identified on Schedule 1 to the Agreement, dated December 16, 1994.
10.8(1) Master Equipment Lease Agreement dated March 30, 1992 between the Company and
Western Technology Investment.
10.9(1) Warrant to Purchase a Maximum of 10,909 Shares of Series B Preferred Stock issued
to Western Technology Investment.
10.10(1) Master Equipment Lease Agreement dated October 1, 1993 between the Company and
Phoenix Leasing Incorporated.
10.12(1) Master Equipment Lease dated March 20, 1995 between the Company and Phoenix
Leasing Incorporated.
10.13(1) Master Lease Agreement Number 10476 dated December 21, 1994, between the Company
and and Lease Management Services, Inc.
</TABLE>
II-3
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
10.14(1) Addendum to Master Lease Agreement 10476 dated December 21, 1994, between the
Company and Lease Management Services, Inc.
10.15(1) Negative Covenant Pledge Agreement dated December 21, 1994, between the Company
and Lease Management Services, Inc.
10.16(1) Equipment Financing Agreement 10776 dated December 21, 1994, between the Company
and Lease Management Services, Inc.
10.17(1) Addendum to Equipment Financing Agreement 10776 dated January 5, 1995, between the
Company and Lease Management Services, Inc.
10.18(1) Lease for the Company's facilities at 11025 North Torrey Pines Road dated April 2,
1992, as amended.
10.19(1) Industrial Real Estate Triple Net Lease for the Company's facilities at 11011
North Torrey Pines Road dated August 17, 1993
10.20(1) Torrey Pines Science Center Industrial Real Estate Lease, dated December 8, 1994.
10.21(1) Sublease for the Company's facilities at 11025 North Torrey Pines Road dated July
9, 1993.
10.22(1) Sublease for the Company's industrial lease at 10933 North Torrey Pines Road dated
January 31, 1994.
10.27(1) Form of Series B Preferred Stock Purchase Warrant dated July 14, 1992, July 15,
1992, October 15, 1992 and October 27, 1992 between the Company and certain
individuals listed on the attached schedule.
10.30(1) Form of Series D Preferred Stock Purchase Warrant dated December 16, 1994 between
the Company and certain individuals listed on the attached schedule.
10.31(1) Series D Preferred Stock Purchase Warrant dated June 9, 1995 between the Company
and Lankford/DPI Limited Partnership, a California Limited Partnership.
10.32(1) Form of Amendment to Series B Warrant and Agreement to Exercise.
10.33(1) Assignment Agreement dated February 9, 1994 by and between the Company and
Research Development Foundation (with certain confidential portions omitted).
10.34(1) Credit Note dated February 9, 1994 created by the Company in favor of Research
Development Foundation.
10.35(1) Memorandum of Understanding dated December 2, 1993 between the Company and Merck &
Co., Inc. (with certain confidential portions omitted).
10.36(1) Collaboration Agreement dated March 31, 1994 between the Company and Chiron
Corporation (with certain confidential portions omitted).
10.38(1) Offer Letter dated May 25, 1993 between the Company and Edward L. Erickson.
10.39(1) Offer Letter dated June 2, 1994 between the Company and David B. Thomas.
10.40(1) Consulting Agreement dated November 1, 1993 between the Company and Stephen B.
Howell, M.D., as amended May 24, 1995.
10.41(1) The Company's 1991 Stock Option Plan, as amended.
10.42(1) 1991 Stock Option Plan Form of Incentive Stock Option Agreement, as amended.
10.43(1) 1991 Stock Option Plan Form of Nonstatutory Option Agreement.
10.44(1) 1991 Stock Option Plan Form of Notice of Exercise and Stock Purchase Agreement.
10.45(1) The Company's 1994 Stock Option Plan.
10.46(1) 1994 Stock Option Plan Form of Notice of Grant.
10.47(1) 1994 Stock Option Plan Form of Stock Option Agreement.
10.48(1) 1994 Stock Option Plan Form of Stock Purchase Agreement.
</TABLE>
II-4
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
<S> <C>
10.49(1) The Company's 1995 Stock Option Plan.
10.50(1) 1995 Stock Option Plan Form of Notice of Grant.
10.51(1) 1995 Stock Option Plan Form of Stock Option Agreement.
10.52(1) 1995 Stock Option Plan Form of Stock Purchase Agreement.
10.53 The Company's 1995 Stock Option/Stock Issuance Plan, as amended.
10.54(1) 1995 Employee Stock Purchase Plan.
10.55(1) Form of Employee Proprietary Information Agreement.
10.56(1) Form of Indemnification Agreements between the Company and each of its directors.
10.57(1) Form of Indemnification Agreement between the Company and each of its officers.
10.58(1) Research Agreement between the Company and Isis Pharmaceuticals, Inc. dated August
16, 1995 (with certain confidential portions omitted).
10.59(1) Loan and Security Agreement dated August 16, 1995 between the Company and Silicon
Valley Bank.
10.60(1) Series D Preferred Stock Purchase Warrant dated August 16, 1995 between the
Company and Silicon Valley Bank.
10.61(1) Registration Rights Agreement dated August 16, 1995 between the Company and
Silicon Valley Bank.
10.62(1) Commitment Agreement dated August 16, 1995 among the Company and the lenders
listed on attached Exhibit A.
10.63(1) Continuing Guaranty dated August 16, 1995 between the Company and funds affiliated
with Sanderling Ventures.
10.64(1) Subordination Agreement dated August 16, 1995 between the Company and the lenders
listed on Exhibit A to the Commitment Agreement.
10.65(2) Extension to Equipment Financing Agreement 10776 dated December 8, 1995 between
the Company and Lease Management Services, Inc.
10.66 Loan and Security Agreement dated June 18, 1996 between the Company and Silicon
Valley Bank.
11.1 Computation of net income (loss) per share.
14.1 List of Material Foreign Patents.
23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in its opinion filed as
Exhibit 5.1).
23.2 Consent of Ernst & Young LLP, Independent Auditors.
23.3 Consent of Fish & Richardson, P.C.
24.1 Power of Attorney (see pages II-7 and II-8).
</TABLE>
- ------------
(1) Incorporated by reference to the same-numbered exhibit (except as
otherwise indicated) to the Company's Registration Statement on Form S-1 (No.
33-95890), as amended.
(2) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
II-5
<PAGE> 83
(b) Financial Statement Schedules included separately in the Registration
Statement.
All schedules are omitted because they are not required, are not applicable
or the information is included in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of San
Diego, State of California, on the 10th day of July, 1996.
DEPOTECH CORPORATION
By /s/ Edward L. Erickson
--------------------------------------
Edward L. Erickson
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Edward L. Erickson and Dana S. McGowan, or either
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any registration statement
related to this Registration Statement and filed pursuant to Rule 462 under the
Securities Act of 1933, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------ --------------
<S> <C> <C>
/s/ Edward L. Erickson President, Chief Executive Officer July 10, 1996
- ------------------------------------------ and Director
(Edward L. Erickson) (Principal Executive Officer)
/s/ Dana S. McGowan Director of Finance and July 10, 1996
- ------------------------------------------ Administration, Chief Financial
(Dana S. McGowan) Officer and Treasurer (Principal
Financial and Accounting Officer)
/s/ Roger C. Davisson Director July 10, 1996
- ------------------------------------------
(Roger C. Davisson)
/s/ Jean Deleage Director July 10, 1996
- ------------------------------------------
(Jean Deleage)
/s/ George W. Dunbar, Jr. Director July 10, 1996
- ------------------------------------------
(George W. Dunbar, Jr.)
/s/ Stephen B. Howell Director July 10, 1996
- ------------------------------------------
(Stephen B. Howell)
</TABLE>
II-7
<PAGE> 85
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------ --------------
<S> <C> <C>
/s/ Fred A. Middleton Chairman of the Board, Director July 10, 1996
- ------------------------------------------
(Fred A. Middleton)
/s/ Peter Preuss Director July 10, 1996
- ------------------------------------------
(Peter Preuss)
/s/ Pieter Strijkert Director July 10, 1996
- ------------------------------------------
(Pieter Strijkert)
</TABLE>
II-8
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- --------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement. .......................................
3.1(1) Fourth Restated Articles of Incorporation of the Company (Exhibit
3.2). .................................................................
3.2(1) Amended and Restated Bylaws of the Company (Exhibit 3.4). .............
4.1(1) Form of Certificate for Common Stock. .................................
5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common
Stock being registered. ...............................................
10.1(1) Form of Written Consent of Holders of Series A, Series B, Series C and
Series D Preferred Stock to conversion. ...............................
10.3(1) Amended and Restated Investors' Rights Agreement among the Company and
certain shareholders of the Company, dated December 16, 1994, as
amended pursuant to the Amendment to the Investors' Rights Agreement
dated
May 24, 1995. .........................................................
10.7(1) Series D Preferred Stock and Warrant Purchase Agreement among the
Company and the purchasers identified on Schedule 1 to the Agreement,
dated December 16, 1994. ..............................................
10.8(1) Master Equipment Lease Agreement dated March 30, 1992 between the
Company and Western Technology Investment. ............................
10.9(1) Warrant to Purchase a Maximum of 10,909 Shares of Series B Preferred
Stock issued to Western Technology Investment. ........................
10.10(1) Master Equipment Lease Agreement dated October 1, 1993 between the
Company and Phoenix Leasing Incorporated. .............................
10.12(1) Master Equipment Lease dated March 20, 1995 between the Company and
Phoenix Leasing Incorporated. .........................................
10.13(1) Master Lease Agreement Number 10476 dated December 21, 1994, between
the Company and and Lease Management Services, Inc. ...................
10.14(1) Addendum to Master Lease Agreement 10476 dated December 21, 1994,
between the Company and Lease Management Services, Inc. ...............
10.15(1) Negative Covenant Pledge Agreement dated December 21, 1994, between the
Company and Lease Management Services, Inc. ...........................
10.16(1) Equipment Financing Agreement 10776 dated December 21, 1994, between
the Company and Lease Management Services, Inc. .......................
10.17(1) Addendum to Equipment Financing Agreement 10776 dated January 5, 1995,
between the Company and Lease Management Services, Inc. ...............
10.18(1) Lease for the Company's facilities at 11025 North Torrey Pines Road
dated April 2, 1992, as amended. ......................................
10.19(1) Industrial Real Estate Triple Net Lease for the Company's facilities at
11011 North Torrey Pines Road dated August 17, 1993....................
10.20(1) Torrey Pines Science Center Industrial Real Estate Lease, dated
December 8, 1994. .....................................................
10.21(1) Sublease for the Company's facilities at 11025 North Torrey Pines Road
dated July 9, 1993. ...................................................
10.22(1) Sublease for the Company's industrial lease at 10933 North Torrey Pines
Road dated January 31, 1994. ..........................................
</TABLE>
<PAGE> 87
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- --------- ------------
<S> <C> <C>
10.27(1) Form of Series B Preferred Stock Purchase Warrant dated July 14, 1992,
July 15, 1992, October 15, 1992 and October 27, 1992 between the
Company and certain individuals listed on the attached schedule. ......
10.30(1) Form of Series D Preferred Stock Purchase Warrant dated December 16,
1994 between the Company and certain individuals listed on the attached
schedule. .............................................................
10.31(1) Series D Preferred Stock Purchase Warrant dated June 9, 1995 between
the Company and Lankford/DPI Limited Partnership, a California Limited
Partnership. ..........................................................
10.32(1) Form of Amendment to Series B Warrant and Agreement to Exercise. ......
10.33(1) Assignment Agreement dated February 9, 1994 by and between the Company
and Research Development Foundation (with certain confidential portions
omitted). .............................................................
10.34(1) Credit Note dated February 9, 1994 created by the Company in favor of
Research Development Foundation. ......................................
10.35(1) Memorandum of Understanding dated December 2, 1993 between the Company
and Merck & Co., Inc. (with certain confidential portions omitted). ...
10.36(1) Collaboration Agreement dated March 31, 1994 between the Company and
Chiron Corporation (with certain confidential portions omitted). ......
10.38(1) Offer Letter dated May 25, 1993 between the Company and
Edward L. Erickson. ...................................................
10.39(1) Offer Letter dated June 2, 1994 between the Company and David B.
Thomas. ...............................................................
10.40(1) Consulting Agreement dated November 1, 1993 between the Company and
Stephen B. Howell, M.D., as amended May 24, 1995. .....................
10.41(1) The Company's 1991 Stock Option Plan, as amended. .....................
10.42(1) 1991 Stock Option Plan Form of Incentive Stock Option Agreement, as
amended. ..............................................................
10.43(1) 1991 Stock Option Plan Form of Nonstatutory Option Agreement. .........
10.44(1) 1991 Stock Option Plan Form of Notice of Exercise and Stock Purchase
Agreement. ............................................................
10.45(1) The Company's 1994 Stock Option Plan. .................................
10.46(1) 1994 Stock Option Plan Form of Notice of Grant. .......................
10.47(1) 1994 Stock Option Plan Form of Stock Option Agreement. ................
10.48(1) 1994 Stock Option Plan Form of Stock Purchase Agreement. ..............
10.49(1) The Company's 1995 Stock Option Plan. .................................
10.50(1) 1995 Stock Option Plan Form of Notice of Grant. .......................
10.51(1) 1995 Stock Option Plan Form of Stock Option Agreement. ................
10.52(1) 1995 Stock Option Plan Form of Stock Purchase Agreement. ..............
10.53 The Company's 1995 Stock Option/Stock Issuance Plan, as amended. ......
10.54(1) 1995 Employee Stock Purchase Plan. ....................................
10.55(1) Form of Employee Proprietary Information Agreement. ...................
10.56(1) Form of Indemnification Agreements between the Company and each of its
directors. ............................................................
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- --------- ------------
<S> <C> <C>
10.57(1) Form of Indemnification Agreement between the Company and each of its
officers. .............................................................
10.58(1) Research Agreement between the Company and Isis Pharmaceuticals, Inc.
dated August 16, 1995 (with certain confidential portions omitted). ...
10.59(1) Loan and Security Agreement dated August 16, 1995 between the Company
and Silicon Valley Bank. ..............................................
10.60(1) Series D Preferred Stock Purchase Warrant dated August 16, 1995 between
the Company and Silicon Valley Bank. ..................................
10.61(1) Registration Rights Agreement dated August 16, 1995 between the Company
and Silicon Valley Bank. ..............................................
10.62(1) Commitment Agreement dated August 16, 1995 among the Company and the
lenders listed on attached Exhibit A. .................................
10.63(1) Continuing Guaranty dated August 16, 1995 between the Company and funds
affiliated with Sanderling Ventures. ..................................
10.64(1) Subordination Agreement dated August 16, 1995 between the Company and
the lenders listed on Exhibit A to the Commitment Agreement. ..........
10.65(2) Extension to Equipment Financing Agreement 10776 dated December 8, 1995
between the Company and Lease Management Services, Inc. ...............
10.66 Loan and Security Agreement dated June 18, 1996 between the Company and
Silicon Valley Bank. ..................................................
11.1 Computation of net income (loss) per share. ...........................
14.1 List of Material Foreign Patents. .....................................
23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in its opinion
filed as
Exhibit 5.1). .........................................................
23.2 Consent of Ernst & Young LLP, Independent Auditors. ...................
23.3 Consent of Fish & Richardson, P.C. ....................................
24.1 Power of Attorney (see pages II-7 and II-8). ..........................
</TABLE>
- ------------
(1) Incorporated by reference to the same-numbered exhibit (except as
otherwise indicated) to the Company's Registration Statement on Form S-1 (No.
33-95890), as amended.
(2) Incorporated by reference to the same-numbered exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
<PAGE> 1
EXHIBIT 1.1
DEPOTECH CORPORATION
2,000,000 SHARES OF
COMMON STOCK
UNDERWRITING AGREEMENT
____________, 1996
<PAGE> 2
UNDERWRITING AGREEMENT
____________, 1996
DILLON, READ & CO. INC.
UBS SECURITIES LLC
VECTOR SECURITIES INTERNATIONAL, INC.
As Representatives of the
Several Underwriters
c/o Dillon, Read & Co. Inc.
535 Madison Avenue
New York, New York 10022
Dear Sirs:
DepoTech Corporation, a California company (the "Company") proposes to
issue and sell to the underwriters named in Schedule A annexed hereto (the
"Underwriters") an aggregate of 2,000,000 shares of Common Stock, no par value
(the "Common Stock"), of the Company (the "Firm Shares"). In addition, solely
for the purpose of covering over-allotments, the Company proposes to grant to
the Underwriters the option to purchase from the Company up to an additional
300,000 shares of Common Stock (the "Additional Shares"). The Firm Shares and
the Additional Shares are hereinafter collectively sometimes referred to as the
"Shares." The Shares are described in the Prospectus which is referred to below.
The Company has filed, in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively called the "Act"), with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1, including a prospectus,
relating to the Shares. The Company has furnished to you, for use by the
Underwriters and by dealers, copies of one or more preliminary prospectuses
(each thereof being herein called a "Preliminary Prospectus") relating to the
Shares. Except where the context otherwise requires, the registration statement,
as amended when it becomes effective, including all documents filed as a part
thereof, and including any information contained in a prospectus subsequently
filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430(A) under the Act, and, if applicable, any registration statement filed
pursuant to Rule 462(b) under the Act, is herein called the "Registration
Statement," and the prospectus, in the form filed by the Company with the
Commission pursuant to Rule 424(b) under the Act or, if no such filing is
required, the form of final prospectus included in the Registration Statement at
the time it became effective, is herein called the "Prospectus."
<PAGE> 3
Underwriting Agreement
Page 2
The Company and the Underwriters agree as follows:
1. SALE AND PURCHASE. Upon the basis of the warranties and
representations and the other terms and conditions herein set forth, the Company
agrees to sell to the respective Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company the aggregate
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule A attached hereto in each case at a purchase price of $____ per Share.
You shall release the Firm Shares for public sale promptly after this Agreement
becomes effective. You may from time to time increase or decrease the public
offering price after the initial public offering to such extent as you may
determine.
In addition, the Company hereby grants to the several Underwriters the
option to purchase, and, upon the basis of the warranties and representations
and the other terms and conditions herein set forth, the Underwriters shall have
the right to purchase, severally and not jointly, from the Company, ratably in
accordance with the number of Firm Shares to be purchased by each of them, all
or a portion of the Additional Shares as may be necessary to cover
over-allotments made in connection with the offering of the Firm Shares, at the
same purchase price per share to be paid by the Underwriters to the Company for
the Firm Shares. This option may be exercised at any time (but not more than
once) on or before the thirtieth day following the date hereof, by written
notice to the Company. Such notice shall set forth the aggregate number of
Additional Shares as to which the option is being exercised, and the date and
time when the Additional Shares are to be delivered (such date and time being
herein referred to as the additional time of purchase); provided, however, that
the additional time of purchase shall not be earlier than the time of purchase
(as defined below) nor earlier than the second business day* after the date on
which the option shall have been exercised nor later than the eighth business
day after the date on which the option shall have been exercised. The number of
Additional Shares to be sold to each Underwriter shall be the number which bears
the same proportion to the aggregate number of Additional Shares being purchased
as the number of Firm Shares set forth opposite the name of such Underwriter on
Schedule A hereto bears to the total number of Firm Shares (subject, in each
case, to such adjustment as you may determine to eliminate fractional shares).
2. PAYMENT AND DELIVERY. Payment of the purchase price for the Firm
Shares shall be made to the Company by certified or official bank check, in New
York Clearing House funds, at the office of Dillon, Read & Co. Inc. in New York
City, against
- --------------------
* As used herein, "business day" shall mean a day on which the New York Stock
Exchange is open for trading.
<PAGE> 4
Underwriting Agreement
Page 3
delivery of the certificates for the Firm Shares to you for the respective
accounts of the Underwriters. Such payment and delivery shall be made at 10:00
A.M., New York City time, on ______________, 1996 (unless another time shall be
agreed to by you and the Company or unless postponed in accordance with the
provisions of Section 8 hereof). The time at which such payment and delivery are
actually made is hereinafter sometimes called the "time of purchase."
Certificates for the Firm Shares shall be delivered to you in definitive form in
such names and in such denominations as you shall specify on the second business
day preceding the time of purchase. For the purpose of expediting the checking
of the certificates for the Firm Shares by you, the Company agrees to make such
certificates available to you for such purpose at least one full business day
preceding the time of purchase.
Payment of the purchase price for the Additional Shares shall be made
at the additional time of purchase in the same manner and at the same office as
the payment for the Firm Shares. Certificates for the Additional Shares shall be
delivered to you in definitive form in such names and in such denominations as
you shall specify on the second business day preceding the additional time of
purchase. For the purpose of expediting the checking of the certificates for the
Additional Shares by you, the Company agrees to make such certificates available
to you for such purpose at least one full business day preceding the additional
time of purchase.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each of the Underwriters that
(a) when the Registration Statement becomes effective and at
all times subsequent thereto up to the time of purchase and the additional time
of purchase, the Registration Statement and the Prospectus, and any supplements
or amendments thereto fully complied and will fully comply in all material
respects with the provisions of the Act, and the Registration Statement and the
Prospectus at all such times did not and will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the Company makes
no warranty or representation with respect to any statement contained in the
Registration Statement or the Prospectus in reliance upon and in conformity with
information concerning the Underwriters and furnished in writing by or on behalf
of any Underwriter through you to the Company expressly for use in the
Registration Statement or the Prospectus; provided further, that such
information furnished by or on behalf of the Underwriters shall be limited to
certain information in the section of the Registration Statement and Prospectus
entitled "Underwriting;"
<PAGE> 5
Underwriting Agreement
Page 4
(b) as of the date set forth herein, the Company has an
authorized capitalization as set forth under the heading entitled "Actual" in
the section of the Registration Statement and the Prospectus entitled
"Capitalization" and, as of the time of purchase and the additional time of
purchase, as the case may be, the Company will have an authorized capitalization
as set forth under the heading entitled "As Adjusted" in the section of the
Registration Statement and the Prospectus entitled "Capitalization"; all of the
issued and outstanding shares of capital stock of the Company have been duly
authorized and validly issued and are fully paid, nonassessable and free of any
preemptive rights; except as described in the Registration Statement and the
Prospectus, there are no outstanding rights, subscriptions, warrants, calls,
preemptive rights, options or other agreements (collectively, "Stock Rights") of
any kind issued by the Company with respect to its capital stock and, to the
best of the Company's knowledge, no outstanding Stock Rights issued by any other
party with respect to the Company's capital stock; the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of California, with full corporate power and authority to own
its properties and conduct its business as described in the Registration
Statement and the Prospectus, to execute and deliver this Agreement and to issue
and sell the Shares as herein contemplated;
(c) the Company does not have any subsidiaries;
(d) the Company is duly qualified or licensed to do business
by, and is in good standing in, each jurisdiction in which it owns or leases
property or conducts its business and in each other jurisdiction in which the
failure, individually or in the aggregate, to be so licensed or qualified could
have a material adverse effect on the properties, assets, operations, business
or condition (financial or otherwise) of the Company (a "Material Adverse
Effect"); and the Company is in compliance with all laws, orders, rules,
regulations and directives issued or administered by such jurisdictions, except
where the failure so to comply could not have a Material Adverse Effect;
(e) the Board of Directors of the Company has duly adopted
resolutions authorizing the issuance and sale of the Firm Shares and the
Additional Shares; and the Firm Shares and the Additional Shares, when issued
and delivered to and paid for by the Underwriters as contemplated hereby, will
be duly authorized, validly issued and fully paid and nonassessable, and free
and clear of any pledge, lien, encumbrance, security interest, preemptive right
or other claim;
(f) the Company is not in violation of any provision of the
Articles of Incorporation or Bylaws of the Company and is not in breach of, or
in default under (nor has any event occurred which with notice, lapse of time,
or both would constitute a
<PAGE> 6
Underwriting Agreement
Page 5
breach of, or default under), any provision of any obligation, agreement,
covenant or condition contained in any license, indenture, lease, mortgage, deed
of trust, bank loan, credit agreement or other material agreement or instrument
to which the Company is a party or by which it is bound and the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with, or result in any breach
of or constitute a default under (nor constitute any event which with notice,
lapse of time, or both would constitute a breach of, or default under), any
provisions of the Articles of Incorporation or Bylaws of the Company or under
any provision of any license, indenture, lease, mortgage, deed of trust, bank
loan, credit agreement or other material agreement or instrument to which the
Company is a party or by which it or its properties may be bound or affected, or
under any federal, state, local or foreign law, regulation or rule or any
decree, judgment or order applicable to the Company;
(g) this Agreement has been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement of the
Company enforceable in accordance with its terms, except as rights to indemnity
and contribution hereunder may be limited by federal or state securities laws
and except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or by general principles of equity, and each of the (i)
Collaboration Agreement, dated March 30, 1994, between the Company and Chiron
Corporation, and (ii) the Assignment Agreement, dated February 9, 1994, between
the Company and the Research Development Foundation is a legal, valid and
binding agreement of the Company enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by general principles of equity;
(h) the capital stock of the Company, including the Shares,
conforms in all material respects to the description thereof contained in the
Registration Statement and Prospectus, and the certificates for the Shares are
in due and proper form and the holders of the Shares will not be subject to
personal liability by reason of being such holders;
(i) no approval, authorization, consent or order of or filing
with any national, state, local or foreign governmental or regulatory
commission, board, body, authority or agency is required in connection with the
issuance and sale of the Shares as contemplated hereby other than registration
of the Shares under the Act and any necessary qualification under the securities
or blue sky laws of the various jurisdictions in which the Shares are being
offered by the Underwriters and the review of the fairness and
<PAGE> 7
Underwriting Agreement
Page 6
reasonableness of the proposed underwriting and other terms and arrangements by
the National Association of Securities Dealers, Inc. (the "NASD");
(j) except as described in the Registration Statement and the
Prospectus, no person has the right, contractual or otherwise, to cause the
Company to issue to it, or register pursuant to the Act, any shares of capital
stock of the Company upon the issue and sale of the Shares to the Underwriters
hereunder, nor does any person have preemptive rights, rights of first refusal
or other rights to purchase any of the Shares, which rights have not been
waived;
(k) Ernst & Young LLP, whose reports on the consolidated
financial statements of the Company are filed with the Commission as part of the
Registration Statement and Prospectus, are independent public accountants as
required by the Act;
(l) the Company has all permits, licenses, authorizations,
consents and approvals and has made all filings required under any federal,
state, local or foreign law, regulation or rule, and has obtained all
authorizations, consents and approvals from other persons, in order to conduct
its business as described in the Registration Statement and the Prospectus;
except where the failure to have such permit, license, authorization, consent or
approval, to make any such filing or to obtain such authorization consent or
approval could not have a Material Adverse Effect, and the Company is not in
violation of, or in default under, any such permit, license, authorization,
consent or approval or any federal, state, local or foreign law, regulation or
rule or any decree, order or judgment applicable to the Company the effect of
which could have a Material Adverse Effect;
(m) all legal or governmental proceedings, contracts or
documents of a character required to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration Statement
have been so described or filed as required;
(n) there are no actions, suits or proceedings pending or, to
the best of the Company's knowledge, threatened against the Company or any of
its properties, at law or in equity, or before or by any federal, state, local
or foreign governmental or regulatory commission, board, body, authority or
agency which could result in a judgment, decree or order having a Material
Adverse Effect;
(o) the audited financial statements included in the
Registration Statement and the Prospectus present fairly the financial position
of the Company as of the dates indicated and the results of operations and cash
flows of the Company for the periods specified, subject, in the case of the
Company's unaudited financial statements, to normal recurring year-end
adjustments; such financial statements have been prepared in
<PAGE> 8
Underwriting Agreement
Page 7
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved;
(p) subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as may be
otherwise stated in the Registration Statement and Prospectus, there has not
been (i) any material adverse change in the properties, assets, operations,
business, regulatory environment, prospects or condition (financial or
otherwise), present or prospective, of the Company, (ii) any transaction which
is, or the Company reasonably expects could be, material to the Company
contemplated or entered into by the Company, or (iii) any obligation, contingent
or otherwise, directly or indirectly incurred by the Company which is, or the
Company reasonably expects could be, material to the Company;
(q) the Company has obtained the agreement of each of its
directors and officers and certain of its shareholders designated by you not to
sell, contract to sell, grant any option to sell or otherwise dispose of,
directly or indirectly, any shares of the Common Stock or securities convertible
into or exchangeable for Common Stock or warrants or other rights to purchase
Common Stock for a period of 90 days after the date of the Prospectus without
the prior written consent of Dillon, Read & Co. Inc.;
(r) the business, operations and facilities of the Company
have been and are being conducted in compliance with all applicable laws,
ordinances, rules, regulations, licenses, permits, approvals, plans,
authorizations or requirements relating to occupational safety and health,
pollution, protection of health or the environment, or reclamation (including,
without limitation, those relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants or hazardous or toxic
substances, materials or wastes into ambient air, surface water, groundwater or
land, or relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of chemical substances, pollutants,
contaminants or hazardous or toxic substances, materials or wastes, whether
solid, gaseous or liquid in nature) or otherwise relating to remediating real
property in which the Company has any interest, whether owned or leased, of any
governmental department, commission, board, bureau, agency or instrumentality of
the United States, any state or political subdivision thereof or any foreign
jurisdiction and all applicable judicial or administrative agency or regulatory
decrees, awards, judgments and order relating thereto (collectively,
"Environmental Regulations"), except such failures to comply as would not in the
aggregate have a Material Adverse Effect; and the Company has not received any
notice from a governmental instrumentality or any third party alleging any
violation of any Environmental Regulation or liability thereunder (including,
without limitation, liability
<PAGE> 9
Underwriting Agreement
Page 8
for costs of investigating or remediating sites containing hazardous substances
or damages to natural resources);
(s) the Company is not and, upon the sale of the Shares to be
issued and sold in accordance herewith and the temporary investment of the net
proceeds of such sale as set forth under the caption "Use of Proceeds" in the
Registration Statement and Prospectus, will not be, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), and is not, and will not upon such sale be, subject
to regulation under the Investment Company Act;
(t) to the best of the Company's knowledge after reasonable
investigation, no valid United States patent issued to date is or would be
infringed by the activities of the Company in the manufacture, use or sale of
any drug or component thereof or other material as described in the Registration
Statement and Prospectus;
(u) the issued patents owned by or licensed to the Company and
described in the Registration Statement and Prospectus are valid and enforceable
patents and, except as described in the Registration Statement and Prospectus,
no other entity or individual has any right or claim in any of such issued
patents; the patent applications owned by or licensed to the Company and
described in the Registration Statement and Prospectus have been properly
prepared and filed and are being diligently pursued on behalf of the Company;
and each of such patent applications is owned or controlled by the Company, and
no other entity or individual has any right or claim in any of the patent
applications or any patent to be issued therefrom, except as described in the
Registration Statement and Prospectus; and each patent application owned by or
licensed to the Company and described in the Registration Statement and
Prospectus discloses patentable subject matter;
(v) except as described in the Registration Statement and
Prospectus, there are no judicial proceedings pending relating to patents,
patent applications or proprietary information to which the Company is a party
or of which any property of the Company is subject, and to the best of the
Company's knowledge, no such judicial proceedings are threatened by governmental
authorities or others;
(w) the Company owns or possesses sufficient licenses or other
rights to use all patents, patent applications, trademarks, copyrights, trade
names, trade secrets, technology and know-how necessary to conduct the Company's
business as described in the Registration Statement and Prospectus; and the
assignment of the patents and patent applications to which the Company has
exclusive rights under the Assignment Agreement, dated February 9, 1994, between
the Company and the Research
<PAGE> 10
Underwriting Agreement
Page 9
Development Foundation, as described in the Registration Statement and the
Prospectus, has been properly prepared and filed on behalf of the Company with
the appropriate governmental agency or agencies and is in full force and effect;
(x) except as described in the Registration Statement and
Prospectus, the Company is not aware of any pending or threatened action, suit,
proceeding or claim by others that the Company is infringing or otherwise
violating any patents or patent applications of others and is not aware of any
rights of third parties to any of the patents or patent applications owned by or
licensed to the Company which could have a material adverse effect on the use
thereof by the Company; and the Company is not aware of any pending or
threatened action, suit, proceeding or claim by others challenging the validity
or scope of any patents or patent applications owned by or licensed to the
Company;
(y) the Company has filed with the United States Food and Drug
Administration (the "FDA"), and all applicable state and local regulatory
bodies, for and received approval of all registrations, applications, licenses,
requests for exemptions, permits and other regulatory authorizations necessary
to conduct the Company's business as it is described in the Registration
Statement and Prospectus based on all available information provided to the
Company through the date hereof by applicable regulatory authorities; the
Company is in compliance with all such registrations, applications, licenses,
requests for exemptions, permits and other regulatory authorizations, and all
applicable FDA, state and local rules, regulations, guidelines and policies,
including, but not limited to, applicable FDA, state and local rules,
regulations and policies relating to current good manufacturing practice and
current good laboratory practice, except where the failure so to comply would
not have a Material Adverse Effect; and the Company has no reason to believe
that any party granting any such registration, application, license, request for
exemption, permit or other authorization is considering limiting, suspending or
revoking the same and knows of no basis for any such limitation, suspension or
revocation; and
(z) the human clinical trials, animal studies and other
preclinical tests conducted by the Company or in which the Company has
participated that are described in the Registration Statement and Prospectus or
the results of which are referred to in the Registration Statement and
Prospectus, and such studies and tests conducted on behalf of the Company, were
and, if still pending, are being conducted in accordance with experimental
protocols, procedures and controls pursuant to accepted professional scientific
standards for the preclinical or clinical study of new drugs; the descriptions
of the results of such studies, tests and trials contained in the Registration
Statement and Prospectus are accurate and complete in all material respects, and
the Company has no knowledge of any other trials, studies or tests, the results
of which reasonably call into
<PAGE> 11
Underwriting Agreement
Page 10
question the results described or referred to in the Registration Statement and
Prospectus; and the Company has not received any notices or correspondence from
the FDA or any other governmental agency requiring the termination, suspension
or modification of any animal studies, preclinical tests or clinical trials
conducted by or on behalf of the Company or in which the Company has
participated that are described in the Registration Statement and Prospectus or
the results of which are referred to in the Registration Statement and
Prospectus.
4. CERTAIN COVENANTS OF THE COMPANY. The Company hereby agrees:
(a) to furnish such information as may be required and
otherwise to cooperate in qualifying the Shares for offering and sale under the
securities or blue sky laws of such states as you may designate and to maintain
such qualifications in effect so long as required for the distribution of the
Shares, provided that the Company shall not be required to qualify as a foreign
corporation or to consent to the service of process under the laws of any such
state (except service of process with respect to the offering and sale of the
Shares); and to promptly advise you of the receipt by the Company of any
notification with respect to the suspension of the qualification of the Shares
for sale in any jurisdiction or the initiation or threatening of any proceeding
for such purpose;
(b) to make available to you in New York City, as soon as
practicable after the Registration Statement becomes effective, and thereafter
from time to time to furnish to the Underwriters, as many copies of the
Prospectus (or of the Prospectus as amended or supplemented if the Company shall
have made any amendments or supplements thereto after the effective date of the
Registration Statement) as the Underwriters may request for the purposes
contemplated by the Act;
(c) to advise you promptly and (if requested by you) to
confirm such advice in writing, (i) when the Registration Statement (including
any registration statement filed pursuant to Rule 462(b) under the Act) has
become effective and when any post-effective amendment thereto becomes
effective, and (ii) if Rule 430A under the Act is used, when the Prospectus is
filed with the Commission pursuant to Rule 424(b) under the Act (which the
Company agrees to file in a timely manner under such Rules);
(d) to advise you promptly, confirming such advice in writing,
of any request by the Commission for amendments or supplements to the
Registration Statement or Prospectus or for additional information with respect
thereto, or of notice of institution of proceedings for, or the entry of a stop
order suspending the effectiveness of the Registration Statement and, if the
Commission should enter a stop order suspending the effectiveness of the
Registration Statement, to make every reasonable effort to obtain the
<PAGE> 12
Underwriting Agreement
Page 11
lifting or removal of such order as soon as possible; to advise you promptly of
any proposal to amend or supplement the Registration Statement or Prospectus and
to file no such amendment or supplement to which you shall object in writing;
(e) to furnish to you and, upon request, to each of the other
Underwriters for a period of five years from the date of this Agreement (i)
copies of any reports or other communications which the Company shall send to
its shareholders generally or shall from time to time publish or publicly
disseminate, (ii) copies of all annual, quarterly and current reports filed with
the Commission on Forms 10-K, 10-Q and 8-K, or such other similar form as may be
designated by the Commission, (iii) copies of any document in the form filed
with the Commission by the Company pursuant to Sections 12, 13, 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (iv)
such other information as you may reasonably request regarding the Company;
(f) to advise the Underwriters promptly of the happening of
any event known to the Company within the time during which a Prospectus
relating to the Shares is required to be delivered under the Act which, in the
judgment of the Company, would require the making of any change in the
Prospectus then being used so that the Prospectus would not include an untrue
statement of material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they are
made, not misleading, and, during such time, to prepare and furnish, at the
Company's expense, to the Underwriters promptly such amendments or supplements
to such Prospectus as may be necessary to reflect any such change and to furnish
you a copy of such proposed amendment or supplement before filing any such
amendment or supplement with the Commission;
(g) to make generally available to its security holders, and
to deliver to you, an earnings statement of the Company (which will satisfy the
provisions of Section 11(a) of the Act) covering a period of twelve months
beginning after the effective date of the Registration Statement but ending not
later than fifteen months after the effective date of the Registration
Statement, as soon as is reasonably practicable after the termination of such
twelve-month period;
(h) to furnish to you or your counsel three signed copies of
the Registration Statement, as initially filed with the Commission, and of all
amendments thereto (including all exhibits thereto) and sufficient conformed
copies of the foregoing (other than exhibits) for distribution of a copy to each
of the other Underwriters;
<PAGE> 13
Underwriting Agreement
Page 12
(i) to furnish to you as early as practicable prior to the
time of purchase and the additional time of purchase, as the case may be, but
not later than two business days prior thereto, a copy of the latest available
unaudited interim financial statements, if any, of the Company which have been
read by the Company's independent certified public accountants, as stated in
their letter to be furnished pursuant to Section 6(b) of this Agreement;
(j) to apply the net proceeds from the sale of the Shares in
the manner set forth under the caption "Use of Proceeds" in the Prospectus;
(k) to use its best efforts to cause the Common Stock to be
authorized for listing by the Nasdaq National Market upon official notice of
issuance;
(l) to pay all out-of-pocket expenses, fees and taxes (other
than any transfer taxes and fees and disbursements of counsel for the
Underwriters except as set forth under Section 5 hereof and (iii) and (iv)
below) in connection with (i) the preparation and filing of the Registration
Statement, each Preliminary Prospectus, the Prospectus, and any amendments or
supplements thereto, and the printing and furnishing of copies of each thereof
to the Underwriters and to dealers (including costs of mailing and shipment),
(ii) the issue, sale and delivery of the Shares, (iii) the word processing
and/or printing of this Agreement, any Agreement Among Underwriters, any dealer
agreements, any Statements of Information and Powers of Attorney and the
reproduction and/or printing and furnishing of copies of each thereof to the
Underwriters and to dealers (including costs of mailing and shipment), (iv) the
qualification of the Shares for offering and sale under state laws and the laws
of any province of Canada and the determination of their eligibility for
investment under such law as aforesaid (including the legal fees and filing fees
and other disbursements of counsel for the Underwriters) and the printing and
furnishing of copies of any blue sky surveys or legal investment surveys to the
Underwriters and to dealers, (v) any listing of the Shares on any securities
exchange or qualification of the Shares to be included in the Nasdaq National
Market and any registration thereof under the Exchange Act, (vi) any filing for
review of the public offering of the Shares by the NASD and (vii) the
performance of the Company's other obligations hereunder; and
(m) not to sell, contract to sell, grant any option to sell or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
securities convertible into or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock or permit the registration under the Act
of any shares of Common Stock, except for (i) the registration of the Shares and
the sales to the Underwriters pursuant to this Agreement, (ii) issuances of
Common Stock upon the exercise of outstanding options,
<PAGE> 14
Underwriting Agreement
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warrants and debentures, and (iii) the grant of options or rights to purchase no
more than an aggregate of 200,000 shares of Common Stock to employees,
consultants and directors of the Company pursuant to the stock option plans of
the Company in effect on the date hereof as approved by the Board of Directors
of the Company, for a period of 90 days after the date hereof, without the prior
written consent of Dillon, Read & Co. Inc.
5. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the Shares are not
delivered for any reason other than the termination of this Agreement pursuant
to the first two paragraphs of Section 8 hereof or the default by one or more of
the Underwriters in its or their respective obligations hereunder, the Company
shall reimburse the Underwriters for all of their out-of-pocket expenses,
including the fees and disbursements of their counsel.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of
the Underwriters hereunder are subject to the accuracy of the representations
and warranties on the part of the Company on the date hereof and at the time of
purchase (and the several obligations of the Underwriters at the additional time
of purchase are subject to the accuracy of the representations and warranties on
the part of the Company on the date hereof and at the time of purchase (unless
previously waived) and at the additional time of purchase, as the case may be),
the performance by the Company of its obligations hereunder and to the following
conditions:
(a) The Company shall furnish to you at the time of purchase
and at the additional time of purchase, as the case may be, an opinion of
Brobeck, Phleger & Harrison, counsel for the Company, addressed to the
Underwriters, and dated the time of purchase or the additional time of purchase,
as the case may be, with reproduced copies for each of the other Underwriters
and in form satisfactory to Cooley Godward Castro Huddleson & Tatum, counsel for
the Underwriters, stating that:
(i) the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of California, with full corporate power and authority to own its properties and
conduct its business as described in the Registration Statement and the
Prospectus, execute and deliver this Agreement and issue, sell and deliver the
Shares as herein contemplated;
(ii) the Company is duly qualified to do business as a
foreign corporation, and is in good standing in each state or jurisdiction of
the United States where its failure, individually or in the aggregate, to do so
would have a material adverse effect on the properties, assets, operations,
business or condition (financial or otherwise) of the Company;
<PAGE> 15
Underwriting Agreement
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(iii) this Agreement has been duly authorized, executed and
delivered by the Company;
(iv) the Shares, when issued and delivered to and paid for by
the Underwriters in accordance with this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of any preemptive rights;
(v) the outstanding shares of capital stock of the Company
have been duly and validly authorized and issued, are, to the best of such
counsel's knowledge, fully paid and nonassessable;
(vi) the authorized capital stock of the Company, including
the Shares, conforms as to legal matters in all material respects to the
description thereof contained in the Registration Statement and Prospectus; the
certificates for the Shares are in due and proper form;
(vii) the Registration Statement and the Prospectus (except as
to the financial statements and schedules and other financial and statistical
data contained therein, as to which such counsel need express no opinion) comply
as to form in all material respects with the requirements of the Act;
(viii) the Registration Statement has become effective under
the Act, and, to the best of such counsel's knowledge, no stop order proceedings
suspending the effectiveness of the Registration Statement have been instituted
or threatened or are pending under the Act;
(ix) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will not
contravene any provision of applicable law or regulation or the articles of
incorporation or bylaws of the Company, or, to such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company or any of its property, or to such counsel's
knowledge, constitute a breach or default under (nor constitute any event
which, with notice, lapse of time or both, would constitute a breach or default
under) any agreement or other instrument filed as an exhibit to the
Registration Statement and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by the Company of its obligations under this Agreement, except such
as may be required by the securities or blue sky laws of the various states or
other jurisdictions (on which such counsel expresses no opinion) in connection
with the purchase and distribution of the Shares by the Underwriters.
<PAGE> 16
Underwriting Agreement
Page 15
Registration Statement or under any law, regulation or rule or any decree,
judgment or order applicable to the Company;
(x) such counsel is not aware of any legal or governmental
proceeding pending or threatened to which the Company is or may become a party
or to which any of the properties of the Company is or may become subject that
is required to be described in the Registration Statement or the Prospectus and
is not so described, or of any statute, regulation, contract or other document
that is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described or filed as required;
(xi) such counsel is not aware that there is any action,
proceeding or governmental investigation pending, against the Company or any of
its officers or directors, which are required to be described in the Prospectus
but are not so described;
(xii) to the best of such counsel's knowledge and except as
otherwise described in the Registration Statement and the Prospectus, no person
has the right, contractual or otherwise, to cause the Company to issue to it, or
register pursuant to the Act, any shares of capital stock of the Company upon
the sale of the Shares to the Underwriters, nor does any person have preemptive
rights, rights of first refusal or other rights to purchase any of the Shares;
and
(xiii) the description of the charter and bylaws of the
Company and of statutes and contracts contained in "Risk Factors -- Registration
Rights; Lockup," "Risk Factors -- Possible Anti-Takeover Effect of Certain
Charter Provisions," "Business -- Legal Proceedings," "Management," "Certain
Transactions" and "Description of Capital Stock" (other than the statements
under "--Transfer Agent and Registrar") and in Items 14 and 15 of Part II
of the Registration Statement are accurate and fairly present the information
required to be presented by the Act or the Rules and Regulations.
In addition, such counsel shall state that such counsel has participated
in conferences with officers and other representatives of the Company,
representatives of the independent public accountants of the Company and
representatives of the Underwriters at which the contents of the Registration
Statement and Prospectus were discussed and, although such counsel is not
passing upon and does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or
Prospectus (except as and to the extent stated in subparagraphs (vi), (vii),
(viii) and (xvi) above), on the basis of the foregoing nothing has come to the
attention of such counsel that causes it to believe that the Registration
Statement or any amendment thereto at the time such Registration Statement or
amendment became effective and at all
<PAGE> 17
Underwriting Agreement
Page 16
times up to and including the time of purchase or additional time of purchase,
as the case may be, contained an untrue statement of a material fact or omitted
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus or any supplement
thereto at the date of such Prospectus or such supplement, and at all times up
to and including the time of purchase or additional time of purchase, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no opinion
with respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or Prospectus).
(b) The Company shall furnish to you at the time of purchase and at
the additional time of purchase, as the case may be, an opinion of Hyman, Phelps
& McNamara, P.C., special FDA counsel for the Company, addressed to the
Underwriters, and dated the time of purchase or the additional time of purchase,
as the case may be, with reproduced copies for each of the other Underwriters
and in a form reasonably satisfactory to Cooley Godward Castro Huddleson &
Tatum, counsel for the Underwriters, stating that the statements in the
Registration Statement and Prospectus appearing under the captions "Risk Factors
- -- Government Regulation; Uncertainty of Obtaining Regulatory Approval,"
"Business -- Product Research and Development Programs" and "Business -
Government Regulation" and other statements and references in the Registration
Statement and Prospectus to United States Federal regulatory matters, insofar
as such statements and references constitute descriptions or summaries of
matters of the law arising out of the Orphan Drug Act, the Federal Food, Drug
and Cosmetic Act and applicable FDA regulations, are accurate and complete in
all material respects.
(c) The Company shall furnish to you at the time of purchase and at
the additional time of purchase, as the case may be, an opinion of Fish &
Richardson, P.C., patent counsel for the Company, addressed to the Underwriters,
and dated the time of purchase or the additional time of purchase, as the case
may be, with reproduced copies for each of the other Underwriters and in a form
reasonably satisfactory to Cooley Godward Castro Huddleson & Tatum, counsel for
the Underwriters, stating that:
(i) the statements in the Registration Statement and
Prospectus appearing under the captions "Risk Factors -- Patents and Proprietary
Technology" and "Business -- Patents and Proprietary Rights" and other
statements and references in the Registration Statement and Prospectus to
patents and patent applications owned by and licensed to the Company, insofar as
such statements and references constitute descriptions or summaries of patents
or patent applications owned by and licensed to the Company or
<PAGE> 18
Underwriting Agreement
Page 17
documents and proceedings relating thereto, are accurate and complete in all
material respects;
(ii) such counsel has reviewed the patents and patent
applications owned by the Company and filed or pending in the United States,
including, without limitation, those patents and patent applications assigned to
the Company by the Research Development Foundation, and based upon such review,
a review of the United States patents of record in the patents and patent
applications owned by the Company and discussions with Company scientific
personnel, such counsel is not aware of any valid United States patent that is
or would be infringed by the activities of the Company in the manufacture, use
or sale of any proposed product, drug or other material as described in the
Registration Statement and Prospectus and made or used according to the claims
of the United States patents and patent applications owned by the Company;
(iii) the assignment of the patents and patent applications to
which the Company has exclusive rights under the Assignment Agreement, dated
February 9, 1994, between the Company and the Research Development Foundation,
as described in the Registration Statement and Prospectus, has been properly
prepared and filed on behalf of the Company with the appropriate governmental
agency or agencies and is in full force and effect;
(iv) such counsel has reviewed the patent applications owned
by or licensed to the Company, including, without limitation, those patent
applications assigned to the Company by the Research Development Foundation,
have been properly prepared and filed on behalf of the Company and are being
diligently pursued on behalf of the Company; to such counsel's knowledge and
except as described in the Registration Statement and Prospectus, no other
entity or individual has any right or claim in any of such patents or patent
applications;
(v) to such counsel's knowledge, the Company owns or possesses
sufficient licenses or other rights to practice in the United States the
specific embodiments of technology disclosed and claimed in the patents and
patent applications of the Company described in the Registration Statement and
Prospectus; and
(vi) such counsel is not aware of (a) any pending or
threatened action, suit, proceeding or claim by others that the Company is
infringing or otherwise violating any patents of others or (b) any pending or
threatened action, suit, proceeding or claim by others challenging the validity
or scope of the patents and patent applications owned by or licensed to the
Company, including, without limitation, those patents and patent applications
assigned to the Company by the Research Development Foundation.
<PAGE> 19
Underwriting Agreement
Page 18
(d) You shall have received from Ernst & Young LLP letters dated,
respectively, the date of this Agreement and the time of purchase and additional
time of purchase, as the case may be, and addressed to the Underwriters (with
reproduced copies for each of the Underwriters) in the forms heretofore approved
by Dillon, Read & Co. Inc.
(e) You shall have received at the time of purchase and at the
additional time of purchase, as the case may be, the opinion of Cooley Godward
Castro Huddleson & Tatum, counsel for the Underwriters, dated the time of
purchase or the additional time of purchase, as the case may be, as to the
matters referred to in subparagraphs (iii), (iv), (v) (as to subclause (a)
only), (vi) and (vii) of paragraph (a) of this Section 6.
In addition, such counsel shall state that such counsel has participated
in conferences with officers and other representatives of the Company, counsel
for the Company, representatives of the independent public accountants of the
Company and representatives of the Underwriters at which the contents of the
Registration Statement and Prospectus and related matters were discussed and,
although such counsel is not passing upon and does not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in the
Registration Statement and Prospectus (except as to matters referred to under
subparagraph (vii) of paragraph (a) of this Section 6), on the basis of the
foregoing, no facts have come to the attention of such counsel which lead it to
believe that the Registration Statement or any amendment thereto at the time
such Registration Statement or amendment became effective contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus as of its date or any supplement thereto as of its date
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading (it
being understood that such counsel need express no comment with respect to the
financial statements and schedules and other financial and statistical data
included in the Registration Statement or Prospectus).
(f) No amendment or supplement to the Registration Statement or
Prospectus shall be filed prior to the time the Registration Statement becomes
effective to which you object in writing.
(g) The Registration Statement shall become effective at or before
5:00 P.M. on the date of this Agreement and, if Rule 430A under the Act is used,
the Prospectus shall have been filed with the Commission pursuant to Rule 424(b)
under the
<PAGE> 20
Underwriting Agreement
Page 19
Act at or before 5:00 P.M., New York City time, on the second full business day
after the date of this Agreement; provided, however, that the Company and you
and any group of Underwriters, including you, who have agreed hereunder to
purchase in the aggregate at least 50% of the Firm Shares may from time to time
agree on a later date.
(h) Prior to the time of purchase or the additional time of
purchase, as the case may be, (i) no stop order with respect to the
effectiveness of the Registration Statement shall have been issued under the Act
or proceedings initiated under Section 8(d) or 8(e) of the Act; (ii) the
Registration Statement and all amendments thereto, or modifications thereof, if
any, shall not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and (iii) the Prospectus and all amendments or
supplements thereto, or modifications thereof, if any, shall not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they are made, not misleading.
(i) Between the time of execution of this Agreement and the time of
purchase or the additional time of purchase, as the case may be, (i) no material
adverse change (other than as referred to in the Registration Statement and
Prospectus) in the properties, assets, operations, business, prospects or
condition (financial or otherwise) of the Company shall occur or become known
and (ii) no transaction which is material and unfavorable to the Company shall
have been entered into by the Company; and (iii) there has not been any
obligation, contingent or otherwise, directly or indirectly incurred by the
Company, which would have a Material Adverse Effect.
(j) The Company will, at the time of purchase or additional time of
purchase, as the case may be, deliver to you a certificate of two of its
executive officers to the effect that the representations and warranties of the
Company as set forth in this Agreement are true and correct and the Company has
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder at or prior to each such date.
(k) You shall have received signed letters, dated the date of this
Agreement, from each of the directors and officers of the Company and certain
shareholders of the Company designated by you as contemplated by Section 3(q) to
the effect set forth in such Section.
(l) The Company shall have furnished to you such other documents and
certificates as to the accuracy and completeness of any statement in the
Registration
<PAGE> 21
Underwriting Agreement
Page 20
Statement and the Prospectus as of the time of purchase and the additional time
of purchase, as the case may be, as you may reasonably request.
(m) The Company shall perform such of its obligations under this
Agreement as are to be performed by the terms hereof at or before the time of
purchase and at or before the additional time of purchase, as the case may be.
(n) The Shares shall have been approved for listing on the Nasdaq
National Market, subject only to notice of issuance at or prior to the time of
purchase.
7. EFFECTIVE DATE OF AGREEMENT; TERMINATION. This Agreement shall become
effective (i) if Rule 430A under the Act is not used, when you shall have
received notification of the effectiveness of the Registration Statement, or
(ii) if Rule 430A under the Act is used, when the parties hereto have executed
and delivered this Agreement.
The obligations of the several Underwriters hereunder shall be subject to
termination in the absolute discretion of you or any group of Underwriters
(which may include you) which has agreed to purchase in the aggregate at least
50% of the Firm Shares, if, at any time prior to the time of purchase or, with
respect to the purchase of any Additional Shares, the additional time of
purchase, as the case may be, trading in securities on the New York Stock
Exchange shall have been suspended or minimum prices shall have been established
on the New York Stock Exchange, or if a banking moratorium shall have been
declared either by the United States or New York State authorities, or if the
United States shall have declared war in accordance with its constitutional
processes or there shall have occurred any material outbreak or escalation of
hostilities or other national or international calamity or crisis of such
magnitude in its effect on the financial markets of the United States as, in
your judgment or in the judgment of such group of Underwriters, to make it
impracticable to market the Shares.
If you or any group of Underwriters elects to terminate this agreement as
provided in this Section 7, the Company and each other Underwriter shall be
notified promptly by letter or telegram.
If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted under
this Agreement or if such sale is not carried out because the Company shall be
unable to comply with any of the terms of this Agreement, the Company shall not
be under any obligation or liability under this Agreement (except to the extent
provided in Sections 4(l), 5 and 9 hereof), and the Underwriters shall be under
no obligation or liability to the Company under this Agreement (except to the
extent provided in Section 9 hereof) or to one another hereunder.
<PAGE> 22
Underwriting Agreement
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8. INCREASE IN UNDERWRITERS' COMMITMENTS. If any Underwriter shall default
in its obligation to take up and pay for the Firm Shares to be purchased by it
hereunder and if the number of Firm Shares which all Underwriters so defaulting
shall have agreed but failed to take up and pay for does not exceed 10% of the
total number of Firm Shares, the nondefaulting Underwriters shall take up and
pay for (in addition to the aggregate principal amount of Firm Shares they are
obligated to purchase pursuant to Section 1 hereof) the number of Firm Shares
agreed to be purchased by all such defaulting Underwriters, as hereinafter
provided. Such Shares shall be taken up and paid for by such non-defaulting
Underwriter or Underwriters in such amount or amounts as you may designate with
the consent of each Underwriter so designated or, in the event no such
designation is made, such Shares shall be taken up and paid for by all
non-defaulting Underwriters pro rata in proportion to the aggregate number of
Firm Shares set opposite the names of such non-defaulting Underwriters in
Schedule A.
Without relieving any defaulting Underwriter from its obligations
hereunder, the Company agrees with the non-defaulting Underwriters that it will
not sell any Firm Shares hereunder unless all of the Firm Shares are purchased
by the Underwriters (or by substituted Underwriters selected by you with the
approval of the Company or selected by the Company with your approval). If a new
Underwriter or Underwriters are substituted by the Underwriters or by the
Company for a defaulting Underwriter or Underwriters in accordance with the
foregoing provision, the Company or you shall have the right to postpone the
time of purchase for a period not exceeding five business days in order that any
necessary changes in the Registration Statement and Prospectus and other
documents may be effected. The term Underwriter as used in this agreement shall
refer to and include any Underwriter substituted under this Section 8 with like
effect as if such substituted Underwriter had originally been named in Schedule
A.
9. INDEMNITY BY THE COMPANY AND THE UNDERWRITERS.
(a) The Company agrees to indemnify, defend and hold harmless each
Underwriter and any person who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, and the agents,
employees, officers and directors of any Underwriter or any such controlling
person (collectively, the "Underwriter indemnified parties") from and against
any loss, expense, liability or claim (including the reasonable fees and
expenses of counsel and other expenses in connection with investigating,
defending or settling any such action or claim) which, jointly or severally,
such person may incur as they are incurred (and regardless of whether the
Underwriter indemnified party is a party to the litigation, if any), arising out
of or based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (or in the Registration Statement
as amended by any post-effective
<PAGE> 23
Underwriting Agreement
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amendment thereof by the Company) or in a Prospectus (the term Prospectus for
the purpose of this Section 9 being deemed to include any Preliminary
Prospectus, the Prospectus and the Prospectus as amended or supplemented by the
Company), or arising out of or based upon any omission or alleged omission to
state a material fact required to be stated in either such Registration
Statement or Prospectus or necessary to make the statements made therein not
misleading, except insofar as any such loss, expense, liability or claim arises
out of or is based upon any untrue statement or alleged untrue statement of a
material fact contained in and in conformity with information furnished in
writing by any Underwriter through you to the Company expressly for use with
reference to such Underwriter in such Registration Statement or such Prospectus
or arises out of or is based upon any omission or alleged omission to state a
material fact in connection with such information required to be stated in
either such Registration Statement or Prospectus or necessary to make such
information not misleading; provided, however, that the indemnity agreement
contained in this subsection (a) with respect to any Preliminary Prospectus or
amended Preliminary Prospectus shall not inure to the benefit of any Underwriter
indemnified party if the Prospectus corrected any such alleged untrue statement
or omission giving rise to such losses, expenses, liabilities or claims and you
or such Underwriter indemnified party failed to send or give a copy of the final
Prospectus (i.e., the Prospectus forming part of the Registration Statement
(including any registration statement filed pursuant to Rule 462(b) under the
Act) at the time of effectiveness under the Act or the Prospectus filed pursuant
to Rule 424(b) if Rule 430A under the Act is applicable) to the person in
respect of whom such losses, expenses, liabilities or claims arose at or prior
to the written confirmation of the corresponding sale of such Shares to such
person.
(b) If any action or proceeding (including any governmental or
regulatory investigation or proceeding) is brought against an Underwriter
indemnified party or parties in respect of which indemnity may be sought against
the Company pursuant to the foregoing paragraph, such Underwriter indemnified
party or parties shall promptly notify the Company in writing of the institution
of such action and the Company shall assume the defense of such action,
including the employment of counsel and payment of expenses. Such Underwriter
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such Underwriter indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the Company
in connection with the defense of such action, (ii) the Company shall not have
employed counsel to have charge of the defense of such action promptly after
having received notice of such action, or (iii) such Underwriter indemnified
party or parties shall have reasonably concluded that there may be defenses
available to it or them which are different from or additional to those
available to the Company (in which case the
<PAGE> 24
Underwriting Agreement
Page 23
Company shall not have the right to direct the defense of such action on behalf
of the Underwriter indemnified party or parties), in any of which events such
fees and expenses shall be borne by the Company and paid as incurred (it being
understood, however, that the Company shall not be liable for the expenses of
more than one separate counsel (other than local counsel) in any one action or
series of related actions in the same jurisdiction representing the Underwriter
indemnified party or parties who are parties to such action). Anything in this
paragraph to the contrary notwithstanding, the Company shall not be liable for
any settlement of any such claim or action effected without its written consent.
(c) Each Underwriter severally agrees to indemnify, defend and hold
harmless the Company, its directors, its officers who sign the Registration
Statement and any person who controls the Company within the meaning of Section
15 of the Act or Section 20 of the Exchange Act (collectively, the "Company
indemnified parties") from and against any loss, expense, liability or claim to
the same extent as the indemnity from the Company to the Underwriter indemnified
parties contained in Section 9(a) hereof, but only with respect to information
furnished in writing by the Underwriters through you to the Company expressly
for use in the Registration Statement, the Prospectus or any Preliminary
Prospectus. In case any action shall be brought against any Company indemnified
party based on the Registration Statement, the Prospectus or any Preliminary
Prospectus and in respect of which indemnity may be sought against the
Underwriters pursuant to this Section 9(c), the Underwriters shall have the
rights and duties given to the Company by Section 9(b) hereof (except that if
the Company shall have assumed the defense thereof, the Underwriters shall not
be required to do so, but may employ separate counsel therein and participate in
the defense thereof, provided that the fees and expenses of such counsel shall
be at the Underwriters' expense), and the Company indemnified parties shall have
the rights and duties given to the Underwriter indemnified parties by Section
9(b) hereof.
(d) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 9(a) or Section 9(c) in respect of any loss, expense, liability or claim
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such loss, expense, liability
or claim (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and of the
Underwriters on the other in connection with the statements or omissions which
resulted in such loss, expense, liability or claim, as well as any other
<PAGE> 25
Underwriting Agreement
Page 24
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company on the one hand and of the
Underwriters on the other shall be determined by reference to, among other
things, whether the untrue statement or alleged untrue statement of a material
fact or omission or alleged omission relates to information supplied by the
Company or by the Underwriters (such information so furnished by the
Underwriters shall be limited to certain information in the Underwriting section
of the Preliminary Prospectus and Prospectus) and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, expenses, liabilities and claims referred to above shall be deemed to
include any legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any claim or action.
(e) The Company and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 9 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 9(d). Notwithstanding the
provisions of this Section 9, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by such Underwriter and distributed to the public were offered to
the public exceeds the amount of any damages which such Underwriter has
otherwise been required to pay by reason of such untrue statement or alleged
untrue statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriter's obligations to contribute pursuant to this
Section 9 are several in proportion to their respective underwriting commitments
and not joint.
(f) The indemnity and contribution agreements contained in this
Section 9 and the covenants, warranties and representations of the Company
contained in this Agreement shall remain in full force and effect regardless of
any investigation made by or on behalf of any Underwriter indemnified party, or
by or on behalf of any Company indemnified party, and shall survive any
termination of this Agreement or the issuance and delivery of the Shares. The
Company and each Underwriter agree promptly to notify the others of the
commencement of any litigation or proceeding against it or a related
<PAGE> 26
Underwriting Agreement
Page 25
indemnified party in connection with the issuance and sale of the Shares, or in
connection with the Registration Statement or Prospectus.
10. NOTICES. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Dillon, Read & Co. Inc., 535 Madison Avenue, New York, NY 10022, Attention:
Syndicate Department; and, if to the Company, shall be sufficient in all
respects if delivered or sent to the Company at the offices of the Company at
10450 Science Center Drive, San Diego, CA 92121 Attention: President.
11. CONSTRUCTION. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York without regard to principles
of conflict or choice of law. The Section headings in this Agreement have been
inserted as a matter of convenience of reference and are not a part of this
Agreement.
12. PARTIES IN INTEREST. The Agreement herein set forth has been and is
made solely for the benefit of the Underwriters and the Company and the
controlling persons, directors and officers referred to in Section 9 hereof, and
their respective successors, assigns, executors and administrators. No other
person, partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.
13. COUNTERPARTS. This Agreement may be signed by the parties in
counterparts which together shall constitute one and the same agreement among
the parties.
14. SEVERABILITY. If any provision of this Agreement shall, for any
reason, be invalid, illegal or unenforceable, the validity, legality and
unenforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
If the foregoing correctly sets forth the understanding among the Company
and the Underwriters, please so indicate in the space provided below for the
purpose, whereupon
<PAGE> 27
Underwriting Agreement
Page 26
this letter and your acceptance shall constitute a binding agreement among the
Company and the Underwriters, severally.
Very truly yours,
DEPOTECH CORPORATION
By: ____________________________
Title: _________________________
Accepted and agreed to as of the date first above written, on behalf of
themselves and the other several Underwriters named in Schedule A
DILLON, READ & CO. INC.
UBS SECURITIES LLC
VECTOR SECURITIES INTERNATIONAL, INC.
By: DILLON, READ & CO. INC.
By: _________________________
Title: ______________________
<PAGE> 28
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SHARES
<S> <C>
Dillon, Read & Co. Inc.....................
UBS Securities LLC..........................
Vector Securities International, Inc........
TOTAL..................... 2,000,000
</TABLE>
<PAGE> 1
EXHIBIT 5.1
July 10, 1996
DepoTech Corporation
10450 Science Center Drive
San Diego, California 92121
Re: 2,300,000 Shares of Common Stock of DepoTech Corporation
Ladies and Gentlemen:
We have acted as counsel to DepoTech Corporation, a California corporation
(the "Company"), in connection with the proposed issuance and sale by the
Company of 2,300,000 shares of the Company's Common Stock (the "Shares"),
pursuant to the Company's Registration Statement on Form S-1 filed on July 10,
1996, as amended through its effective date.
In connection with this opinion, we have examined and relied upon the
Registration Statement and related Prospectus, the Company's Articles of
Incorporation as in effect on the date hereof, the Company's bylaws as in effect
on the date hereof, and originals, or copies certified to our satisfaction, of
such records, documents, certificates, memoranda and other instruments as in our
judgment are necessary or appropriate to enable us to render the opinion
expressed below.
On the basis of the foregoing, and in reliance thereon, we are of the
opinion that the Shares, if, as and when sold and issued in accordance with the
Registration Statement and Prospectus (as amended and supplemented through the
date of issuance), will be validly issued, fully paid and nonassessable.
We consent to the reference to our firm under the caption "Legal Matters"
in the Registration Statement and related Prospectus and to the filing of this
opinion as an exhibit to the Registration Statement.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE> 1
Exhibit 10.53
DEPOTECH CORPORATION
1995 STOCK OPTION/STOCK ISSUANCE PLAN
AMENDED AND RESTATED AS OF JANUARY 16, 1996
ARTICLE ONE
GENERAL
I. PURPOSE OF THE PLAN
This 1995 Stock Option/Stock Issuance Plan ("Plan") is
intended to promote the interests of DepoTech Corporation, a California
corporation (the "Corporation"), by providing (i) key employees (including
officers) of the Corporation (or its parent or subsidiary corporations) who are
responsible for the management, growth and financial success of the Corporation
(or its parent or subsidiary corporations), (ii) Directors and (iii) consultants
and other independent contractors who provide valuable services to the
Corporation (or its parent or subsidiary corporations) with the opportunity to
acquire or increase their proprietary interest in the Corporation as an
incentive for them to remain in the service of the Corporation (or its parent or
subsidiary corporations).
II. GENERAL
A. Effective Date. The Plan shall become effective on the
first date on which shares of the Corporation's common stock are registered
under Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"). Such date is hereby designated as the "Effective Date" of this
Plan.
B. Predecessor Plans. This Plan shall serve as the successor
to the Corporation's 1991 Stock Option Plan, 1994 Stock Option Plan and 1995
Stock Option Plan (together, the "Predecessor Plans"), and no further option
grants or share issuances shall be made under the Predecessor Plans from and
after the Effective Date. Each outstanding option or share issuances under the
Predecessor Plans immediately prior to the Effective Date are hereby
incorporated into this Plan and shall accordingly be treated as outstanding
options or share issuances under this Plan. However, each such option or share
issuance shall continue to be governed solely by the terms and conditions of the
instrument evidencing such grant or issuance, and, except as otherwise expressly
provided herein, no provision of this Plan shall affect or otherwise modify the
rights or obligations of the holders of such incorporated options or shares with
respect to their acquisition of shares of the Corporation's common stock or
otherwise modify the rights or obligations of the holders of such options or
shares.
<PAGE> 2
C. Definitions. For purposes of this Plan, the following
provisions shall be applicable in determining the parent and subsidiary
corporations of the Corporation:
Any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation shall be
considered to be a PARENT of the Corporation, provided each such
corporation in the unbroken chain (other than the Corporation) owns, at
the time of the determination, stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
Each corporation (other than the Corporation) in an
unbroken chain of corporations beginning with the Corporation shall be
considered to be a SUBSIDIARY of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
D. No Limitation on Corporate Action. Neither the grant of
options nor the issuance of any shares pursuant to this Plan shall in any way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
E. No Rights as Shareholder. The holder of an option grant
under this Plan shall have none of the rights of a shareholder with respect to
any shares subject to such option until such individual shall have exercised the
option, paid the exercise price for the purchased shares and been issued a stock
certificate for such shares.
III. STRUCTURE OF THE PLAN
A. Components of Plan. The Plan shall be divided into three
separate components: the Discretionary Option Grant Program specified in Article
Two; the Automatic Option Grant Program specified in Article Three; and the
Stock Issuance Program specified in Article Four. Under the Discretionary Option
Grant Program, eligible individuals may be granted options to purchase shares of
the Corporation's common stock at not less than 85% of the fair market value of
such shares on the grant date. Under the Automatic Option Grant Program,
non-employee Directors will automatically be granted options to purchase Common
Stock of the Corporation at 100% of the fair market value on the grant date.
Under the Stock Issuance Program, eligible individuals may be allowed to
purchase shares of the Corporation's common stock at discounts from the fair
market value of such shares of up to 15%. Such shares may be issued as
fully-vested shares or as shares to vest over time.
-2-
<PAGE> 3
B. Application of Certain Articles. The provisions of Articles
One and Five of the Plan, except as otherwise expressly provided, shall apply to
the Discretionary Option Grant Program, the Automatic Option Grant Program and
the Stock Issuance Program, and shall accordingly govern the interests of all
individuals in the Plan.
IV. ADMINISTRATION OF THE PLAN
A. Plan Administrator. This Plan shall be administered by a
committee ("Committee") of two (2) or more non-employee Board members who assume
full responsibility for the administration of the Plan (the "Plan
Administrator"). No member of the Committee shall have either been eligible for
or received any discretionary grant pursuant to Article Two of the Plan within
one (1) year prior to their appointment to the Committee. Members of the
Committee shall serve for such period of time as the Board may determine and
shall be subject to removal by the Board at any time.
B. Authority. The Plan Administrator shall have full power and
authority (subject to the express provisions of the Plan) to establish such
rules and regulations as it may deem appropriate for the proper administration
of the Plan and to make such determinations under, and issue such
interpretations of, the Plan and any outstanding option grants or stock
issuances as it may deem necessary or advisable. Decisions of the Plan
Administrator shall be final and binding on all parties who have an interest in
the Plan or any outstanding option or stock issuance.
C. Restriction on Discretion. Notwithstanding the above, the
administration of the Automatic Option Grant Program under Article Three shall
be self executing in accordance with the terms and conditions thereof and the
Plan Administrator shall not exercise any discretionary functions in respect to
matters governed by Article Three.
V. OPTION GRANTS AND STOCK ISSUANCES
A. Eligible Persons. The persons eligible to receive stock
issuances under the Stock Issuance Program ("Participant") and/or option grants
pursuant to the Discretionary Option Grant Program ("Optionee") are as follows:
(i) officers and other key employees of the
Corporation (or its parent or subsidiary corporations) who render services which
contribute to the management, growth and financial success of the Corporation
(or its parent or subsidiary corporations);
(ii) Directors, provided that no non-employee
Director shall be eligible to be an Optionee after the last day of the first
full calendar month following such Director's election to the Board; and
-3-
<PAGE> 4
(iii) those consultants or other independent
contractors who provide valuable services to the Corporation (or its parent or
subsidiary corporations).
B. Limitations on Grants to Directors. Notwithstanding any
other provision of this Plan, no option grants under the Discretionary Option
Grant Program or stock issuances under the Stock Issuance Program shall be made
to any director hereunder unless, at the time of such option or issuance, the
Plan Administrator is a Committee composed entirely of non-employee Board
members none of whom have received an option grant or stock issuance under this
Plan or any other stock plan of the Corporation (or any parent or subsidiary
corporation), other than under the Automatic Option Grant Program, during the
preceding one year period. No member of a committee serving as Plan
Administrator shall be eligible to receive any option grant under the
Discretionary Grant Program or any stock issuances under the Stock Issuance
Program.
C. Eligible Directors. The individuals who will receive option
grants under the Automatic Option Grant Program are (i) those individuals who
are elected, re-elected or appointed as non-employee Board members on or after
the Effective Date of this Plan, provided they have not otherwise been in the
prior employ of the Corporation (or any parent or subsidiary corporation) within
the preceding two-year period.
D. Plan Administrator Authority. The Plan Administrator shall
have full authority to determine, (I) with respect to the option grants made
under the Discretionary Option Grant Program, which eligible individuals are to
receive option grants, the number of shares to be covered by each such grant,
whether the granted option is to be an incentive stock option ("Incentive
Option") which satisfies the requirements of Section 422 of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code") or a non-statutory option
not intended to meet such requirements, the time or times at which and the
circumstances under which each granted option is to become exercisable and the
maximum term for which the option may remain outstanding and (II) with respect
to stock issuances under the Stock Issuance Program, the number of shares to be
issued to each Participant, the vesting schedule and conditions to vesting (if
any) to be applicable to the issued shares, and the consideration to be paid by
the individual for such shares. The Plan Administrator shall have no discretion
with regard to the Automatic Option Grant Program. The Plan Administrator shall
not have the discretion to affect in material fashion any option grants or the
terms of any option under the Automatic Option Grant Program.
-4-
<PAGE> 5
E. Limitation on Option Grants. Notwithstanding any other
provision of this Plan, no individual shall be granted options to acquire more
than one million (1,000,000) shares of stock hereunder.
VI. STOCK SUBJECT TO THE PLAN
A. Shares Available. Shares of the Corporation's Common Stock
shall be available for issuance under the Plan and shall be drawn from either
the Corporation's authorized but unissued shares of Common Stock or from
reacquired shares of Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 2,000,000 shares,
subject to adjustment from time to time in accordance with the provisions of
this Section VI. As of June 1, 1995, such authorized number of shares is
comprised of (i) 226,859 shares issued under the Predecessor Plans, (ii)
1,037,369 shares reserved for issuance under the options granted under the
Predecessor Plans, (iii) 235,772 shares which would have been available for
future option grant or share issuance under the Predecessor Plans as last
approved by the shareholders, plus (iv) an additional increase of 500,000
shares. Such number will be subject to further adjustment prior to the Effective
Date as a result of additional grants of options, exercises of outstanding
options and option terminations.
B. Additional Available Shares. Should one or more outstanding
options under this Plan (including outstanding options under the Predecessor
Plans incorporated into this Plan) expire or terminate for any reason prior to
exercise in full (including any option cancelled in accordance with the
cancellation-regrant provisions of Section III of Article Two of the Plan), then
the shares subject to the option not so exercised shall be available for
subsequent option grant or share issuance under this Plan. Shares subject to any
option or portion thereof surrendered or cancelled in accordance with Section
I.D of Article Five and all share issuances under the Plan, whether or not such
shares are subsequently repurchased by the Corporation pursuant to repurchase
rights, shall reduce on a share-for-share basis the number of shares of Common
Stock available for subsequent option grant or stock issuance under the Plan. In
addition, should the exercise price of an outstanding option under the Plan be
paid with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Corporation in satisfaction of the
withholding taxes incurred in connection with the exercise of an outstanding
option under the Plan, then the number of shares of Common Stock available for
issuance under the Plan shall be reduced by the gross number of shares for which
the option is exercised.
C. Adjustments. In the event any change is made to the Common
Stock issuable under the Plan by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares, conversion or other
change affecting the outstanding Common Stock, or any class of Common Stock as a
class, without the Corporation's receipt of consideration, then appropriate
adjustments shall be made to (i) the number and/or class of shares issuable
under the Plan, (ii) the number and/or class of shares and price per share in
effect under each outstanding option under
-5-
<PAGE> 6
this Plan (including outstanding options incorporated into this Plan from the
Predecessor Plans). Such adjustments to the outstanding options are to be
effected in a manner which shall preclude the enlargement or dilution of rights
and benefits under such options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
D. Additional Possible Restrictions. Common Stock issuable
under the Discretionary Option Grant Program or the Stock Issuance Program may
be subject to such restrictions on transfer, repurchase rights or such other
restrictions as determined by the Plan Administrator.
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted to employees of the Corporation (or its parent
or subsidiary corporations) pursuant to this Article Two shall be authorized by
action of the Plan Administrator and may, at the Plan Administrator's
discretion, be either Incentive Options or non-statutory options. Individuals
who are not employees of the Corporation or its parent or subsidiary
corporations may only be granted non-statutory options. Each granted option
shall be evidenced by one or more instruments in a form approved by the Plan
Administrator; provided, however, that each such instrument shall comply with
the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.
A. Option Price.
(i) In General. The option price per share shall be
fixed by the Plan Administrator. In no event, however, shall the option price
for any share be less than eighty-five percent (85%) of the fair market value of
that share on the date of the option grant.
(ii) 10% Shareholder. If any individual to whom an
option is granted is the owner of stock (as determined under Section 424(d) of
the Internal Revenue Code) possessing 10% or more of the total combined voting
power of all classes of stock of the Corporation (or any one of its parent or
subsidiary corporations), then the option price per share shall not be less than
one hundred and ten percent (110%) of the fair market value per share of Common
Stock on the grant date.
(iii) How Payable. The option price shall become
immediately due upon exercise of the option and, subject to the provisions of
Article Five, Section III and the instrument evidencing the grant, shall be
payable in one of the following alternative forms specified below:
-6-
<PAGE> 7
- full payment in cash or check drawn to the
Corporation's order;
- full payment in shares of Common Stock held for at
least six (6) months and valued at fair market value on the Exercise
Date (as such term is defined below);
- full payment in a combination of shares of Common
Stock held for at least six (6) months and valued at fair market value
on the Exercise Date and cash or check; or
- full payment through a broker-dealer sale and
remittance procedure pursuant to which the Optionee (I) shall provide
irrevocable written instructions to a designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate option price payable for the
purchased shares plus all applicable Federal and State income and
employment taxes required to be withheld by the Corporation in
connection with such purchase and (II) shall provide written directives
to the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale
transaction.
For purposes of this subparagraph (iii), the Exercise Date
shall be the date on which written notice of the option exercise is delivered to
the Corporation. Except to the extent the sale and remittance procedure is
utilized in connection with the exercise of the option, payment of the option
price for the purchased shares must accompany such notice.
B. Term and Exercise of Options. Each option granted under
this Article Two shall have such term as may be fixed by the Plan Administrator,
be exercisable at such time or times and during such period, and on such
conditions, as is determined by the Plan Administrator and set forth in the
stock option agreement evidencing the grant. No such option, however, shall have
a maximum term in excess of ten (10) years from the grant date and no option
granted to a 10% shareholder shall have a maximum term in excess of five (5)
years from the grant date. During the lifetime of the Optionee, the option
(together with any related stock appreciation right) shall be exercisable only
by the Optionee and shall not be assignable or transferable by the Optionee
otherwise than by will or by the laws of descent and distribution following the
Optionee's death.
C. Termination of Service.
(i) Except to the extent otherwise provided pursuant
to Section V of this Article Two, the following provisions shall govern the
exercise period applicable
-7-
<PAGE> 8
to any outstanding options under this Article Two which are held by the Optionee
at the time of his or her cessation of Service or death.
- Should an Optionee's Service terminate for any
reason (including death or permanent disability as defined in Section
22(e)(3) of the Internal Revenue Code) while the holder of one or more
outstanding options under the Plan, then none of those options shall
(except to the extent otherwise provided pursuant to Section V of this
Article Two) remain exercisable beyond the later of (i) the limited
post-Service period designated by the Plan Administrator at the time
of the option grant and set forth in the option agreement; or (ii) (A)
ninety (90) days from the date of termination if termination was caused
by other than the death or disability (as defined in Section 22(e)(3)
of the Internal Revenue Code) of such Optionee or (B) twelve (12)
months from the date of termination if termination was caused by death
or disability of Optionee.
- Any option granted to an Optionee under this
Article Two and exercisable in whole or in part on the date of the
Optionee's death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to
whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution, provided and only
if such exercise occurs prior to the earlier of (i) the first
anniversary of the date of the Optionee's death or (ii) the specified
expiration date of the option term. Upon the occurrence of the earlier
event, the option shall terminate and cease to be exercisable.
- Notwithstanding the above, under no circumstances
will any option be exercisable after the specified expiration date of
the option term.
- During the limited post-Service period of
exercisability, the option may not be exercised for more than the
number of shares for which the option was exercisable on the date the
Optionee's Service terminates. Upon the expiration of such limited
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be exercisable.
(ii) The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to permit one or more options held by the Optionee
under this Article Two to be exercised, during the limited period of
exercisability provided under subparagraph (1) above, not only with respect to
the number of shares for which each such option is exercisable at the time of
the Optionee's cessation of Service but also with respect to one or more
subsequent installments of purchasable shares for which the option would
otherwise have become exercisable had such cessation of Service not occurred.
-8-
<PAGE> 9
(iii) For purposes of the foregoing provisions of this Section
I.C of Article Two (and for all other purposes under the Plan):
- The Optionee shall (except to the extent otherwise
specifically provided in the applicable option or issuance agreement)
be deemed to remain in the SERVICE of the Corporation for so long as
such individual renders services on a periodic basis to the Corporation
(or any parent or subsidiary corporation) in the capacity of an
employee, a non-employee member of the Board or an independent
consultant or advisor.
- The Optionee shall be considered to be an EMPLOYEE
for so long as he or she remains in the employ of the Corporation or
one or more parent or subsidiary corporations, subject to the control
and direction of the employer entity not only as to the work to be
performed but also as to the manner and method of performance.
II. INCENTIVE OPTIONS
The terms and conditions specified below shall be applicable
to all Incentive Options granted under this Article Two. Incentive Options may
only be granted to individuals who are employees of the Corporation. Options
which are specifically designated as "non-statutory" options when issued under
the Plan shall not be subject to such terms and conditions.
A. Option Price. The option price per share of any share of
Common Stock subject to an Incentive Option shall in no event be less than one
hundred percent (100%) of the fair market value of such share of Common Stock on
the grant date.
B. Dollar Limitation. The aggregate fair market value
(determined as of the respective date or dates of grant) of the Common Stock for
which one or more Incentive Options granted to any employee after December 31,
1986, under this Plan (or any other option plan of the Corporation or its parent
or subsidiary corporations) may for the first time become exercisable as
Incentive Options under the Federal tax laws during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
employee holds two or more such options which become exercisable for the first
time in the same calendar year, the foregoing limitation on the exercisability
of such options as Incentive Options under the Federal tax laws shall be applied
on the basis of the order in which such options are granted.
C. Application of Certain Articles. Except as modified by the
preceding provisions of this Section II, the provisions of Articles One, Two and
Five of the Plan shall apply to all Incentive Options granted hereunder. Any
option designated as an Incentive Option but which fails to meet any requirement
of this Section II or of the Internal Revenue Code for qualification as an
Incentive Option shall nevertheless be a valid and outstanding option under the
Plan and shall be treated as a non-statutory option.
-9-
<PAGE> 10
III. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at
any time and from time to time, with the consent of the affected Optionees, the
cancellation of any or all outstanding options under this Article Two (including
outstanding options under the Predecessor Plans incorporated into this Plan) and
to grant in substitution new options under this Article Two covering the same or
different numbers of shares of Common Stock but having an option price for each
share which is not less than (i) eighty-five percent (85%) of the fair market
value of such share on the new grant date or (ii) one hundred percent (100%) of
such fair market value in the case of an Incentive Option.
IV. STOCK APPRECIATION RIGHTS
A. Provided and only if the Plan Administrator determines in
its discretion to implement the stock appreciation right provisions of this
Section IV, one or more Optionees under the Discretionary Option Grant Program
may be granted the right, exercisable upon such terms and conditions as the Plan
Administrator may establish, to surrender all or part of an unexercised option
under this Article Two in exchange for a distribution from the Corporation in an
amount equal to the excess of (i) the fair market value (on the option surrender
date) of the number of shares in which the Optionee is at the time vested under
the surrendered option (or surrendered portion thereof) over (ii) the aggregate
option price payable for such vested shares.
B. No surrender of an option shall be effective hereunder
unless it is approved by the Plan Administrator. If the surrender is so
approved, then the distribution to which the Optionee shall accordingly become
entitled under this Section IV may be made in shares of any class of Common
Stock valued at fair market value on the option surrender date, in cash, or
partly in shares and partly in cash, as the Plan Administrator shall in its sole
discretion deem appropriate.
C. If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee had
under the surrendered option (or surrendered portion thereof) on the option
surrender date and may exercise such rights at any time prior to the later of
(i) five (5) business days after the receipt of the rejection notice or (ii) the
last day on which the option is otherwise exercisable in accordance with the
terms of the instrument evidencing such option, but in no event may such rights
be exercised after the specified expiration date for the option.
D. One or more officers of the Corporation subject to the
short-swing profit restrictions of the Federal securities laws may, in the Plan
Administrator's sole discretion, be granted limited stock appreciation rights in
tandem with their outstanding options under this Article Two. Upon the
occurrence of a Hostile Take-Over (as defined in Section II.B of Article Five)
effected at any time when the Corporation's outstanding Common Stock is
registered under Section 12(g) of the 1934 Act, each outstanding option with
such a limited stock appreciation right in effect for at
-10-
<PAGE> 11
least six (6) months shall automatically be cancelled, to the extent such option
is at the time exercisable for fully-vested shares of Common Stock. The Optionee
shall in return be entitled to a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price of the vested shares of
Common Stock at the time subject to the cancelled option (or cancelled portion
of such option) over (ii) the aggregate exercise price payable for such shares.
The cash distribution payable upon such cancellation shall be made within five
(5) days following the consummation of the Hostile Take-Over. Neither the
approval of the Plan Administrator nor the consent of the Board shall be
required in connection with such option cancellation and cash distribution. The
balance of the option (if any) shall continue to remain outstanding and
exercisable in accordance with the terms of the instrument evidencing such
grant.
E. The shares of Common Stock subject to any option
surrendered or cancelled for an appreciation distribution pursuant to this
Section IV shall NOT be available for subsequent option grant under the Plan.
V. EXTENSION OF EXERCISE PERIOD
The Plan Administrator shall have full power and authority to
extend the period of time for which any option granted under this Article Two is
to remain exercisable following the Optionee's cessation of Service or death
from the limited period in effect under Section I.C.(i) of this Article Two to
such greater period of time as the Plan Administrator shall deem appropriate;
provided, however, that in no event shall such option be exercisable after the
specified expiration date of the option term.
ARTICLE THREE
AUTOMATIC OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant of Options. Beginning at the annual meeting of
shareholders held in 1997, nonstatutory option grants to purchase 4,000 shares
of Common Stock shall be made automatically to each non-employee Board member
annually as of the date of the annual shareholder meeting commencing with the
first such meeting following such member's initial election or appointment to
the Board. The number of shares granted pursuant to this Automatic Grant Program
shall be subject to periodic adjustment pursuant to the applicable provisions of
Section VI.C of Article One.
B. Exercise Price. The exercise price per share of each
automatic option grant made under this Article Three shall be equal to one
hundred percent (100%) of the fair market value per share of Common Stock on the
grant date.
C. Payment. The exercise price shall be payable in one of the
alternative forms specified below:
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(i) full payment in cash or check drawn to the
Corporation's order;
(ii) full payment in shares of Common Stock held for
at least six (6) months and valued at fair market value on the Exercise
Date (as such term is defined below);
(iii) full payment in a combination of shares of
Common Stock held for at least six (6) months and valued at fair market
value on the Exercise Date and cash or check; or
(iv) full payment through a broker-dealer sale and
remittance procedure pursuant to which the non-employee Board member
(A) shall provide irrevocable written instructions to a designated
brokerage firm to effect the immediate sale of the purchased shares and
remit to the Corporation, out of the sale proceeds available on the
settlement date, sufficient funds to cover the aggregate option price
payable for the purchased shares plus all applicable Federal and state
income taxes required to be withheld by the Corporation in connection
with such purchase and (B) shall provide written directives to the
Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale
transaction.
For purposes of this Section I.C. of Article Three,
the Exercise Date shall be the date on which written notice of the option
exercise is delivered to the Corporation, and the fair market value per share of
Common Stock on any relevant date shall be determined in accordance with the
provisions of Section II.A of Article Five. Except to the extent the sale and
remittance procedure is utilized in connection with the exercise of the option,
payment of the option price for the purchased shares must accompany such notice.
D. Option Term. Each automatic grant under this Article Three
shall have a term of ten (10) years measured from the automatic grant date.
E. Exercisability. Each option granted pursuant to this
automatic option grant program shall become exercisable in a series of four (4)
equal annual installments during the optionee's period of service on the Board,
with the first such installment to become exercisable one year after the
automatic grant date. No option shall become exercisable for any additional
option shares following the optionee's cessation of Board service for any
reason.
F. Non-Transferability. During the lifetime of the optionee,
each automatic option grant, together with the limited stock appreciation right
pertaining to such option, if any, shall be exercisable only by the optionee and
shall not be assignable or transferable by the optionee other than a transfer of
the option effected by will or by the laws of descent and distribution following
optionee's death.
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G. Effect of Termination of Board Membership. Should the
optionee cease to serve as a Board member for any reason (other than death)
while holding one or more automatic option grants under this Article Three, such
optionee shall have a six (6) month period following the date of such cessation
of Board membership in which to exercise each such option for any or all of the
shares of Common Stock for which the option was exercisable at the time of such
cessation of Board service. Each such option shall immediately terminate and
cease to be outstanding at the time of such cessation of Board service with
respect to any shares for which the option is not then exercisable.
Should the optionee die while serving as a member of
the Board or within six (6) months after cessation of Board service, then each
outstanding automatic option grant held by the optionee at the time of death may
subsequently be exercised, for any or all of the shares of Common Stock for
which the option is exercisable at the time of the optionee's cessation of Board
service (less any option shares subsequently purchased by the optionee prior to
death), by the personal representative of the optionee's estate or by the person
or persons to whom the option is transferred pursuant to the optionee's will or
in accordance with the laws of descent and distribution. Any such exercise must
occur within twelve (12) months after the date of the optionee's death. However,
each such automatic option grant shall immediately terminate and cease to be
outstanding, at the time of the optionee's cessation of Board service, with
respect to any option shares for which it is not otherwise at such time
exercisable.
In no event shall any automatic grant under this
Article Three remain exercisable after the specified expiration date of the ten
(10)-year option term. Upon the expiration of the applicable exercise period in
accordance with this paragraph G or (if earlier) upon the expiration of the ten
(10) year option term, the automatic grant shall terminate and cease to be
outstanding for any unexercised shares for which the option was exercisable at
the time of the optionee's cessation of Board service.
II. LIMITED STOCK APPRECIATION RIGHT.
A. Upon the occurrence of a Hostile Take-Over (as defined in
Section II.B of Article Five), each non-employee Board member holding an
automatic option grant which has been outstanding under this Article Three for a
period of at least six (6) months shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile Take-Over) to
surrender such option in return for a cash distribution from the Corporation in
an amount equal to the excess of (i) the Take-Over Price of the shares of Common
Stock at the time subject to the surrendered option (whether or not the option
is otherwise at the time exercisable for such shares) over (ii) the aggregate
exercise price payable for such shares. Such cash distribution shall be paid
within five (5) days following the option surrender date. Neither the approval
of the Plan Administrator nor the consent of the Board shall be required in
connection with such option surrender and cash distribution.
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B. The shares of Common Stock subject to each option
surrendered in connection with the Hostile Take-Over shall NOT be available for
subsequent issuance under this Plan.
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate purchases without any intervening stock
option grants. The issued shares shall be evidenced by a Stock Issuance
Agreement ("Issuance Agreement") that complies with the terms and conditions of
this Article Four.
A. Consideration. Shares of Common Stock shall be issued under
the Plan for one or more of the following items of consideration, which the Plan
Administrator may deem appropriate in each individual instance:
(i) cash or cash equivalents (such as a personal
check or bank draft) paid to the Corporation;
(ii) in common stock of the Corporation valued at
fair market value on the date of issuance;
(iii) a promissory note payable to the Corporation's
order in one or more installments, which may be subject to cancellation
in whole or in part upon terms and conditions established by the Plan
Administrator;
(iv) past services rendered to the Corporation or any
parent or subsidiary corporation;
(v) any combination of the above approved by the Plan
Administrator.
Shares may, in the absolute discretion of the Plan
Administrator, be issued for consideration with a value less than one-hundred
percent (100%) of the fair market value of such shares, but in no event less
than eighty-five percent (85%) of such fair market value. Notwithstanding the
foregoing, in the case of 10% shareholders, Shares must be issued at one hundred
percent (100%) of fair market value of such shares.
B. Vesting Provisions.
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1. Shares of Common Stock issued under this Article
Four may, in the absolute discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service (as such term is defined in Section
I.C.(iii) of Article Two); provided, that such vesting must be at a rate of at
least 20% per year over no more than five years from the date such shares are
issued. The elements of the vesting schedule applicable to any unvested shares
of Common Stock issued under the Plan, namely:
(i) the Service period to be completed by the
Participant or the performance objectives to be achieved by the
Corporation,
(ii) the number of installments in which the shares
are to vest,
(iii) the interval or intervals (if any) which are to
lapse between installments,
(iv) any conditions or contingencies to vesting, and
(v) the effect which death, disability or other
events designated by the Plan Administrator are to have upon the
vesting schedule,
shall be determined by the Plan Administrator and incorporated into the Issuance
Agreement executed by the Corporation and the Participant at the time such
unvested shares are issued.
2. The Participant shall have full shareholder rights
with respect to any shares of Common Stock issued to him or her under this
Article Four, whether or not his or her interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares. Any new, additional or
different shares of stock or other property (including money paid other than as
a regular cash dividend) which the Participant may have the right to receive
with respect to his or her unvested shares by reason of any stock dividend,
stock split, reclassification of Common Stock or other similar change in the
Corporation's capital structure or by reason of any Corporate Transaction under
Section I of Article Five shall be issued, subject to (i) the same vesting
requirements applicable to his or her unvested shares and (ii) such escrow
arrangements as the Plan Administrator shall deem appropriate.
3. Should the Participant cease to remain in Service
while holding one or more unvested shares of Common Stock under this Article
Four, then those shares shall be immediately surrendered to the Corporation for
cancellation, and the Participant shall have no further shareholder rights with
respect to those shares. The Corporation shall repay to the Participant the cash
consideration paid for the
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surrendered shares and shall cancel the principal balance of any outstanding
purchase- money note of the Participant to the extent attributable to such
surrendered shares. The surrendered shares may, at the Plan Administrator's
discretion, be retained by the Corporation as Treasury Shares or may be retired
to authorized but unissued share status.
4. The Plan Administrator may in its discretion elect
to waive the surrender and cancellation of one or more unvested shares of Common
Stock (or other assets attributable thereto) which would otherwise occur upon
the non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
II. TRANSFER RESTRICTIONS/SHARE ESCROW
A. Escrow Arrangements and Legends. Unvested shares under this
Article Four may, in the Plan Administrator's discretion, be held in escrow by
the Corporation until the Participant's interest in such shares vests or may be
issued directly to the Participant with restrictive legends on the certificates
evidencing such unvested shares. To the extent an escrow arrangement is
utilized, the unvested shares and any securities or other assets issued with
respect to such shares (other than regular cash dividends) shall be delivered in
escrow to the Corporation to be held until the Participant's interest in such
shares (or other securities or assets) vests. Alternatively, if the unvested
shares are issued directly to the Participant, the restrictive legend on the
certificates for such shares shall read substantially as follows:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND
ARE ACCORDINGLY SUBJECT TO (I) CERTAIN TRANSFER RESTRICTIONS
AND TO (II) CANCELLATION OR REPURCHASE IN THE EVENT THE
REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) CEASES
TO REMAIN IN THE CORPORATION'S SERVICE. SUCH TRANSFER
RESTRICTIONS AND THE TERMS AND CONDITIONS OF SUCH CANCELLATION
OR REPURCHASE ARE SET FORTH IN A STOCK ISSUANCE AGREEMENT
BETWEEN THE CORPORATION AND THE REGISTERED HOLDER (OR HIS/HER
PREDECESSOR IN INTEREST) DATED __________, 19__, A COPY OF
WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION."
B. Limited Transferability. The Participant shall have no
right to transfer any unvested shares of Common Stock issued to him or her under
this Article
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<PAGE> 17
Four. For purposes of this restriction, the term "transfer" shall include
(without limitation) any sale, pledge, assignment, encumbrance, gift, or other
disposition of such shares, whether voluntary or involuntary. Upon any such
attempted transfer, the unvested shares shall immediately be cancelled, and
neither the Participant nor the proposed transferee shall have any rights with
respect to those shares. However, the Participant shall have the right to make a
gift of unvested shares acquired under the Plan to his or her spouse or issue,
including adopted children, or to a trust established for such spouse or issue,
provided the donee of such shares delivers to the Corporation a written
agreement to be bound by all the provisions of the Plan and the Issuance
Agreement applicable to the gifted shares.
ARTICLE FIVE
MISCELLANEOUS
I. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Assumption of Options. Each outstanding option which is
assumed in connection with a Corporate Transaction (as defined below) or is
otherwise to continue in effect following a Corporate Transaction shall be
appropriately adjusted, immediately after such Corporate Transaction, to apply
and pertain to the number and class of securities which would be issuable, in
consummation of such Corporate Transaction, to an actual holder of the same
number of shares of Common Stock as are subject to such option immediately prior
to such Corporate Transaction, and appropriate adjustments shall also be made to
the option price payable per share, provided the aggregate option price payable
for such securities shall remain the same. Appropriate adjustments shall also be
made to the class and number of securities available for issuance under the Plan
following the consummation of such Corporate Transaction.
B. Acceleration of Options. In the event of any Corporate
Transaction the exercisability of each option grant at the time outstanding
under this Plan which is not continued under paragraph A above shall
automatically accelerate so that each such option shall, immediately prior to
the specified effective date for the Corporate Transaction, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares. Upon the consummation of the Corporate Transaction, all option grants
under this Plan shall terminate and cease to be outstanding. The Plan
Administrator may, in its discretion, extend the provisions of this paragraph B
to options outstanding under the Predecessor Plans.
C. Corporate Transaction. A Corporate Transaction means:
(i) a merger or consolidation in which the
Corporation is not the surviving entity, except for a transaction the
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principal purpose of which is to change the State of the Corporation's
incorporation,
(ii) the sale, transfer or disposition of all or
substantially all of the assets of the Corporation, or
(iii) any reverse merger in which the Corporation is
the surviving entity but in which the holders of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities (as measured immediately prior to
such merger) transfer ownership of those securities to person or
persons not otherwise part of the transferor group.
D. Change in Control. Except as otherwise provided by the Plan
Administrator in agreements governing the grant of discretionary option grants
or stock issuances, in connection with any Change in Control of the Corporation,
the exercisability of each option grant at the time outstanding under this Plan
shall automatically accelerate so that each such option shall, immediately prior
to the specified effective date for the Change in Control, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares. Similarly, all unvested shares issued under the Plan shall automatically
vest immediately prior to the effective date of the Change in Control. For
purposes of this Article Five, a Change in Control shall be deemed to occur in
the event:
(i) a Hostile Take-Over (as defined below)
(ii) there is a change in the composition of the
Board over a period of twenty-four (24) consecutive months or less such
that a majority of the Board members (rounded up to the next whole
number) cease, by reason of one or more proxy contests for the election
of Board members, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time such election or
nomination was approved by the Board.
The provisions of this paragraph D shall apply to option grants and/or stock
issuances under the Predecessor Plans only to the extent expressly extended
thereto by the Plan Administrator.
II. CERTAIN DEFINITIONS
A. Fair Market Value. The FAIR MARKET VALUE of a share of
Common Stock shall be determined in accordance with the following provisions:
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- If shares of the Class of Common Stock to be valued are not
at the time listed or admitted to trading on any national stock
exchange but is traded on the Nasdaq National Market, the fair market
value shall be the closing selling price per share of a share of that
class on the date in question, as such price is reported by the
National Association of Securities Dealers through the Nasdaq National
Market or any successor system. If there is no reported closing selling
price for the series on the date in question, then the closing selling
price on the last preceding date for which such quotation exists shall
be determinative of fair market value.
- If shares of the class of common stock to be valued are at
the time listed or admitted to trading on any national stock exchange,
then the fair market value of a share of that class shall be the
closing selling price per share on the date in question on the stock
exchange determined by the Plan Administrator to be the primary market
for the Common Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no
reported sale of a share of the class on such exchange on the date in
question, then the fair market value shall be the closing selling price
on the exchange on the last preceding date for which such quotation
exists.
- If shares of the series of common stock to be valued at the
time are neither listed nor admitted to trading on any stock exchange
nor traded on the Nasdaq National Market, then the fair market value
shall be determined by the Plan Administrator after taking into account
such factors as the Plan Administrator shall deem appropriate, which
may include independent professional appraisals.
B. Hostile Take-Over. A HOSTILE TAKE-OVER shall be deemed to
occur in the event (i) any person or related group of persons (other than the
Corporation or a person that directly or indirectly controls, is controlled by,
or is under common control with, the Corporation) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended) of securities possessing more than
fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's shareholders which the Board does not recommend such
shareholders to accept.
C. Take-Over Price. The TAKE-OVER PRICE per share shall be
deemed to be equal to the greater of (a) the fair market value per share on the
option surrender date, as determined pursuant to the valuation provisions of
Section II.A of this Article Five, or (b) the highest reported price per share
paid by the tender offeror in effecting such Hostile Take-Over.
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III. LOANS OR GUARANTEE OF LOANS
A. Loans or Guarantees. The Plan Administrator may, in its
discretion, assist any Optionee or Participant (including an Optionee or
Participant who is an officer of the Corporation) in the exercise of one or more
options granted to such Optionee under the Article Two Discretionary Option
Grant Program or the purchase of one or more shares issued to such Participant
under the Article Four Stock Issuance Program, including the satisfaction of any
Federal and State income and employment tax obligations arising therefrom by (i)
authorizing the extension of a loan from the Corporation to such Optionee or
Participant or (ii) permitting the Optionee or Participant to pay the option
price or purchase price for the purchased Common Stock in installments over a
period of years. The terms of any loan or installment method of payment
(including the interest rate and terms of repayment) will be upon such terms as
the Plan Administrator specifies in the applicable option or issuance agreement
or otherwise deems appropriate under the circumstances. Loans and installment
payments may be granted with or without security or collateral (other than to
individuals who are consultants or independent contractors, in which event the
loan must be adequately secured by collateral other than the purchased shares).
However, the maximum credit available to the Optionee or Participant may not
exceed the option or purchase price of the acquired shares (less the par value
of such shares) plus any Federal and State income and employment tax liability
incurred by the Optionee or Participant in connection with the acquisition of
such shares.
B. Discretion of Plan Administrator. The Plan Administrator
may, in its absolute discretion, determine that one or more loans extended under
this financial assistance program shall be subject to forgiveness by the
Corporation in whole or in part upon such terms and conditions as the Plan
Administrator may deem appropriate.
IV. TAX WITHHOLDING
A. Withholding. The Company's obligation to deliver shares or
cash upon the exercise of stock options or stock appreciation rights granted
under the Discretionary Option Grant Program or the Automatic Option Grant
Program or upon direct issuance under the Stock Issuance Program shall be
subject to the satisfaction of all applicable Federal, State and local income
and employment tax withholding requirements.
B. Withholding of Shares Otherwise Issuable. The Plan
Administrator may, in its discretion and upon such terms and conditions as it
may deem appropriate (including the applicable safe-harbor provisions of SEC
Rule 16b-3), provide any or all holders of outstanding option grants under the
Discretionary Option Grant Program with the election to have the Company
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such options, a portion of such shares with an aggregate fair market value
equal to the designated percentage (up to 100% as specified by the optionee) of
the Federal and State income taxes ("Taxes") incurred in connection with the
acquisition of such shares. In lieu of such direct withholding, one or more
option
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holders may also be granted the right to deliver shares of Common Stock to the
Company in satisfaction of such Taxes. The withheld or delivered shares shall be
valued at the fair market value on the applicable determination date for such
Taxes or such other date required by the applicable safe-harbor provisions of
SEC Rule 16b-3.
V. AMENDMENT OF THE PLAN AND AWARDS
A. Amendment. Except as herein provided, the Board has
complete and exclusive power and authority to amend or modify the Plan (or any
component thereof) in any or all respects whatsoever. No amendment or
modification may adversely affect the rights and obligations of an Optionee with
respect to options at the time outstanding under the Plan, nor adversely affect
the rights of any Participant with respect to Common Stock issued under the Plan
prior to such action, unless the Optionee or Participant consents to such
amendment. In addition, the Board may not, without the approval of the
Corporation's shareholders, amend the Plan to (i) materially increase the
maximum number of shares issuable under the Plan (except for permissible
adjustments under Article One, Section VI) or (ii) materially modify the
eligibility requirements for participation in the Plan or materially increase
the benefits accruing to Optionees or Participants under the Plan.
B. Limitation on Amendment of Options. Notwithstanding Article
Five, Section V.A, neither the provisions of the Automatic Option Grant Program
nor the options outstanding under Article Three may be amended at intervals more
frequently than once every six (6) months, other than to the extent necessary to
comport with changes in the Internal Revenue Code, the Employee Retirement
Income Security Act or any rules thereunder.
C. Escrow Prior to Shareholder Approval. (i) Options to
purchase shares of Common Stock may be granted under the Discretionary Option
Grant Program and (ii) shares of Common Stock may be issued under the Stock
Issuance Program, which are in both instances in excess of the number of shares
then available for issuance under the Plan, provided any excess shares actually
issued under the Discretionary Option Grant Program or the Stock Issuance
Program are held in escrow until shareholder approval is obtained for a
sufficient increase in the number of shares available for issuance under the
Plan. If such shareholder approval is not obtained within twelve (12) months
after the date the first such excess option grants or excess share issuances are
made, then (I) any unexercised excess options shall terminate and cease to be
exercisable and (II) the Corporation shall promptly refund the purchase price
paid for any excess shares actually issued under the Plan and held in escrow,
together with interest (at the applicable Short Term Federal Rate) for the
period the shares were held in escrow.
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VI. EFFECTIVE DATE AND TERM OF PLAN
A. Effective Date. This Plan, as successor to the Company's
Predecessor Plans, shall become effective as of the Effective Date, and no
further option grants shall be made under the Predecessor Plans after such
Effective Date. If shareholder approval of this Plan is not obtained within
twelve (12) months after the date this Plan is adopted by the Board, then each
option granted under this Plan from and after the Effective Date shall terminate
without ever becoming exercisable for the option shares and all shares issued
hereunder shall be repurchased by the Corporation at the purchase price paid,
together with interest (at the applicable Short Term Federal Rate). However, in
the event such shareholder approval is not obtained, the Predecessor Plans shall
continue in effect in accordance with the terms and provisions last approved by
the Corporation's shareholders, and all outstanding options and unvested stock
issuances under the Predecessor Plans shall remain in full force and effect in
accordance with the instruments evidencing such options and issuances.
B. Predecessor Plans. Each outstanding option and share
issuance under the Predecessor Plans immediately prior to the Effective Date of
this Plan are hereby incorporated into this Plan and shall accordingly be
treated as an outstanding option or share issuance under this Plan. However,
each such option or share issuance shall continue to be governed solely by the
terms and conditions of the instrument evidencing such grant or issuance, and
except as otherwise expressly provided in this Plan, no provision of this Plan
shall affect or otherwise modify the rights or obligations of the holders of
such options or shares with respect to their acquisition of shares of Common
Stock, or otherwise modify the rights or obligations of the holders of such
options or shares.
C. Applicability of Certain Procedures to Predecessor Plans.
The sale and remittance procedure authorized for the exercise of outstanding
options under this Plan shall be available for all options granted under this
Plan on or after the Effective Date and for all non-statutory options
outstanding under the Predecessor Plans and incorporated into this Plan. The
Plan Administrator may also allow such procedure to be utilized in connection
with one or more disqualifying dispositions of Incentive Option shares effected
after the Effective Date, whether such Incentive Options were granted under this
Plan or the Predecessor Plans.
D. Termination. The Plan shall terminate upon the earlier of
(i) the tenth anniversary of the Effective Date or (ii) the date on which all
shares available for issuance under the Plan shall have been issued or cancelled
pursuant to the exercise, surrender or cash-out of the options granted under the
Discretionary Option Grant Program or the issuance of shares (whether vested or
unvested) under the Stock Issuance Program. If the date of termination is
determined under clause (i) above, then all option grants and unvested stock
issuances outstanding on such date shall thereafter continue to have force and
effect in accordance with the provisions of the instruments evidencing such
grants or issuances.
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VII. USE OF PROCEEDS
Cash proceeds received by the Company from the sale of shares
under the Plan shall be used for general corporate purposes.
VIII. REGULATORY APPROVALS
A. Regulatory Approvals. The implementation of the Plan, the
granting of any option under the Discretionary Option Grant Program, the
issuance of any shares under the Stock Issuance Program, and the issuance of
Common Stock upon the exercise or surrender of the option grants made hereunder
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the
options granted under it, and the Common Stock issued pursuant to it.
B. Federal and State Securities Laws. No shares of Common
Stock or other assets shall be issued or delivered under this Plan unless and
until there shall have been compliance with all applicable requirements of
Federal and State securities laws, including the filing and effectiveness of the
Form S-8 registration statement for the shares of Common Stock issuable under
the Plan, and all applicable listing requirements of any securities exchange on
which stock of the same class is then listed.
IX. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing the
Plan, nor any action taken by the Plan Administrator hereunder, nor any
provision of the Plan shall be construed so as to grant any individual the right
to remain in the employ or service of the Corporation (or any parent or
subsidiary corporation) for any period of specific duration, and the Corporation
(or any parent or subsidiary corporation retaining the services of such
individual) may terminate such individual's employment or service at any time
and for any reason, with or without cause.
X. MISCELLANEOUS PROVISIONS
A. Assignment. The right to acquire Common Stock or other
assets under the Plan may not be assigned, encumbered or otherwise transferred
by any Optionee or Participant.
B. Successors. The provisions of the Plan shall inure to the
benefit of, and be binding upon, the Corporation and its successors or assigns,
whether by Corporate Transaction or otherwise, and the Participants and
Optionees, the legal representatives of their respective estates, their
respective heirs or legatees and their permitted assignees.
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[NOTE: TEXT IN BRACKETS IS STRICKEN IN THE ORIGINAL.]
Exhibit 10.66
[LOGO] SILICON VALLEY BANK
LOAN AND SECURITY AGREEMENT
BORROWER: DEPOTECH CORPORATION
ADDRESS: 10450 SCIENCE CENTER DRIVE
SAN DIEGO, CALIFORNIA 92121
DATE: JUNE 18, 1996
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa
Clara, California 95054 and the borrower named above (the "Borrower"), whose
chief executive office is located at the above address ("Borrower's Address").
1. LOANS.
1.1 LOANS. Silicon, in its reasonable discretion, will make loans to the
Borrower (the "Loans") in amounts determined by Silicon in its reasonable
discretion up to the amount (the "Credit Limit") shown on the Schedule to this
Agreement (the "Schedule"), provided no Event of Default and no event which,
with notice or passage of time or both, would constitute an Event of Default
has occurred. The Borrower is responsible for monitoring the total amount of
Loans and other Obligations outstanding from time to time, and Borrower shall
not permit the same, at any time, to exceed the Credit Limit. If at any time
the total of all outstanding Loans and all other Obligations exceeds the Credit
Limit, the Borrower shall immediately pay the amount of the excess to Silicon,
without notice or demand.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule hereto. Interest shall be payable
monthly, on the due date shown on the monthly billing from Silicon to the
Borrower. Silicon may, in its discretion, charge interest to Borrower's
deposit accounts maintained with Silicon.
1.3 FEES. The Borrower shall pay to Silicon a loan origination fee in the
amount shown on the Schedule hereto concurrently herewith. This fee is in
addition to all interest and other sums payable to Silicon and is not
refundable.
2. GRANT OF SECURITY INTEREST.
2.1 OBLIGATIONS. The term "Obligations" as used in this Agreement means
the following: the obligation to pay all Loans and all interest thereon when
due, and to pay and perform when due all other present and future indebtedness,
liabilities, obligations, guarantees, covenants, agreements, warranties and
representations of the Borrower to Silicon, whether joint or several, monetary
or non-monetary, and whether created pursuant to this Agreement or any other
present or future agreement or otherwise. Silicon may, in its discretion,
require that Borrower pay monetary Obligations in cash to Silicon, or charge
them to Borrower's Loan account, in which event they will bear interest at the
same rate applicable to the Loans. Silicon may also, in its discretion, charge
any monetary Obligations to Borrower's deposit accounts maintained with
Silicon.
2.2 COLLATERAL. As security for all Obligations, the Borrower hereby
grants Silicon a continuing security interest in all of the Borrower's interest
in the types of property described below, whether now owned or hereafter
acquired, and wherever located (collectively, the "Collateral"): [(a) All
accounts, contract rights, chattel paper, letters of credit, documents,
securities, money, and instruments, and all other obligations now or in the
future owing to the Borrower; (b) All inventory, goods, merchandise, materials,
raw materials, work in process, finished goods, farm products, advertising,
packaging and shipping materials, supplies, and all other tangible personal
property which is held for sale or lease or furnished under contracts of
service or consumed in the Borrower's business, and all warehouse receipts and
other documents;] and (c) All equipment, including without limitation all
machinery, fixtures, trade fixtures, vehicles, furnishings, furniture,
materials, tools, machine tools, office equipment, computers and peripheral
devices, appliances, apparatus, parts, dies, and jigs; [(d) All general
intangibles including, but not limited to, deposit accounts, goodwill, names,
trade names, trademarks and the goodwill of the business symbolized thereby,
trade secrets, drawings, blueprints, customer lists, patents, patent
applications, copyrights, security deposits, loan commitment fees, federal,
state and]
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<PAGE> 2
[local tax refunds and claims, all rights in all litigation presently or
hereafter pending for any cause or claim (whether in contract, tort or
otherwise), and all judgments now or hereafter arising therefrom, all claims of
Borrower against Silicon, all rights to purchase or sell real or personal
property, all rights as a licensor or licensee of any kind, all royalties,
licenses, processes, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance), and all other rights,
privileges and franchises of every kind; (e) All books and records, whether
stored on computers or otherwise maintained;] and (f) All substitutions,
additions and accessions to any of the foregoing, and all [products], proceeds
and insurance proceeds of the foregoing, and all guaranties of and security for
the foregoing; and all books and records relating to any of the foregoing.
[Silicon's security interest in any present or future technology (including
patents, trade secrets, and other technology) shall be subject to any licenses
or rights now or in the future granted by the Borrower to any third parties in
the ordinary course of Borrower's business; provided that if the Borrower
proposes to sell, license or grant any other rights with respect to any
technology in a transaction that, in substance, conveys a major part of the
economic value of that technology, Silicon shall first be requested to release
its security interest in the same, and Silicon may withhold such release in its
discretion.] *
*FOLLOWING THE EARLIER OF (A) THE END OF THE SECOND DISBURSEMENT PERIOD (AS
DEFINED IN THE SCHEDULE) OR (B) THE DATE OF THE COMPLETE DRAWDOWN OF THE
AVAILABLE LOANS HEREUNDER, SILICON AGREES, ON REQUEST OF BORROWER, TO RELEASE
ITS SECURITY INTEREST IN EQUIPMENT OF THE BORROWER WHICH DOES NOT CONSTITUTE
FINANCED EQUIPMENT (AS DEFINED IN THE SCHEDULE), UPON CONFIRMATION THAT SILICON
HAS A FIRST-PRIORITY, PERFECTED SECURITY INTEREST IN ALL OF THE FINANCED
EQUIPMENT AND THAT NO EVENT OF DEFAULT AND NO EVENT WHICH, WITH NOTICE OR
PASSAGE OF TIME OR BOTH, WOULD CONSTITUTE AN EVENT OF DEFAULT HAS OCCURRED AND
IS CONTINUING.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
The Borrower represents and warrants to Silicon as follows, and the Borrower
covenants that the following representations will continue to be true, and that
the Borrower will comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. The Borrower, if a corporation, is
and will continue to be, duly authorized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation. The Borrower is and
will continue to be qualified and licensed to do business in all jurisdictions
in which any failure to do so would have a material adverse effect on the
Borrower. The execution, delivery and performance by the Borrower of this
Agreement, and all other documents contemplated hereby have been duly and
validly authorized, are enforceable against the Borrower in accordance with
their terms, and do not violate any law or any provision of, and are not
grounds for acceleration under, any agreement or instrument which is binding
upon the Borrower.
3.2 NAME; TRADE NAMES AND STYLES. The name of the Borrower set forth in
the heading to this Agreement is its correct name. Listed on the Schedule
hereto are all prior names of the Borrower and all of Borrower's present and
prior trade names. The Borrower shall give Silicon 15 days' prior written
notice before changing its name or doing business under any other name. The
Borrower has complied, and will in the future comply, with all laws relating to
the conduct of business under a fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is the Borrower's chief executive office. In
addition, the Borrower has places of business and Collateral is located only at
the locations set forth on the Schedule to this Agreement. The Borrower will
give Silicon at least 15 days prior written notice before changing its chief
executive office or locating the Collateral at any other location.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. The Borrower is now, and will
at all times in the future be, the sole owner of all the Collateral, except for
items of equipment which are leased by the Borrower. The Collateral now is and
will remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for the following ("Permitted Liens"):
(i) purchase money security interests in specific items of equipment; (ii)
leases of specific items of equipment; (iii) liens for taxes not yet payable;
(iv) additional security interests and liens consented to in writing by Silicon
in its reasonable discretion, which consent shall not be unreasonably withheld;
and (v) security interests being terminated substantially concurrently with
this Agreement. [Silicon will have the right to require, as a condition to its
consent under subparagraph (iv) above, that the holder of the additional
security interest or lien sign an intercreditor agreement on Silicon's then
standard form, acknowledge that the security interest is subordinate to the
security interest in favor of Silicon, and agree not to take any action to
enforce its subordinate security interest so long as any Obligations remain
outstanding, and that the Borrower agree that any uncured default in any
obligation secured by the subordinate security interest shall also constitute
an Event of Default under this Agreement.] Silicon now has, and will continue
to have, a perfected and enforceable security interest in all of the
Collateral, subject only to the Permitted Liens, and the Borrower will at all
times defend Silicon and the Collateral against all claims of others. [None of
the Collateral now is or will be affixed to any real property in such a manner,
or with such intent, as to become a fixture.]
3.5 MAINTENANCE OF COLLATERAL. The Borrower will maintain the Collateral
in good working condition, and the Borrower will not use the Collateral for any
unlawful purpose. The Borrower will immediately advise Silicon in writing of
any material loss or damage to the Collateral.
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<PAGE> 3
3.6 BOOKS AND RECORDS. The Borrower has maintained and will maintain at
the Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or
in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of the
Borrower, at the times and for the periods therein stated. Since the last date
covered by any such statement, there has been no material adverse change in the
financial condition or business of the Borrower. The Borrower is now and will
continue to be solvent. The Borrower will provide Silicon: (i) within 30 days
after the end of each month, a monthly financial statement prepared by the
Borrower, and a Compliance Certificate in such form as Silicon shall reasonably
specify, signed by the Chief Financial Officer of the Borrower, certifying that
as of the end of such month the Borrower was in full compliance with all of the
terms and conditions of this Agreement, and setting forth calculations showing
compliance with the financial covenants set forth on the Schedule and such
other information as Silicon shall reasonably request; and (ii) within 120 days
following the end of the Borrower's fiscal year, complete annual financial
statements, certified by independent certified public accountants acceptable to
Silicon and accompanied by the unqualified report thereon by said independent
certified public accountants.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. The Borrower has
timely filed, and will timely file, all tax returns and reports required by
foreign, federal, state and local law, and the Borrower has timely paid, and
will timely pay, all foreign, federal, state and local taxes, assessments,
deposits and contributions now or in the future owed by the Borrower. The
Borrower may, however, defer payment of any contested taxes, provided that the
Borrower (i) in good faith contests the Borrower's obligation to pay the taxes
by appropriate proceedings promptly and diligently instituted and conducted,
(ii) notifies Silicon in writing of the commencement of, and any material
development in, the proceedings, and (iii) posts bonds or takes any other steps
required to keep the contested taxes from becoming a lien upon any of the
Collateral. The Borrower is unaware of any claims or adjustments proposed for
any of the Borrower's prior tax years which could result in additional taxes
becoming due and payable by the Borrower. The Borrower has paid, and shall
continue to pay all amounts necessary to fund all present and future pension,
profit sharing and deferred compensation plans in accordance with their terms,
and the Borrower has not and will not withdraw from participation in, permit
partial or complete termination of, or permit the occurrence of any other event
with respect to, any such plan which could result in any liability of the
Borrower, including, without limitation, any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
3.9 COMPLIANCE WITH LAW. The Borrower has complied, and will comply, in
all material respects, with all provisions of all foreign, federal, state and
local laws and regulations relating to the Borrower, including, but not limited
to, those relating to the Borrower's ownership of real or personal property,
conduct and licensing of the Borrower's business, and environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of the
Borrower's knowledge) threatened by or against or affecting the Borrower in any
court or before any governmental agency (or any basis therefor known to the
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in the financial condition or business of the Borrower,
or in any material impairment in the ability of the Borrower to carry on its
business in substantially the same manner as it is now being conducted. The
Borrower will promptly inform Silicon in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or
against the Borrower involving amounts in excess of $250,000.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes.
4. ADDITIONAL DUTIES OF THE BORROWER.
4.1 FINANCIAL AND OTHER COVENANTS. The Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule to this
Agreement.
[4.2 OVERADVANCE; PROCEEDS OF ACCOUNTS. If for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit, without
limiting Silicon's other remedies, and whether or not Silicon declares an Event
of Default, Borrower shall remit to Silicon all checks and other proceeds of
Borrower's accounts and general intangibles, in the same form as received by
Borrower, within one day after Borrower's receipt of the same, to be applied to
the Obligations in such order as Silicon shall determine in its discretion.]
4.3 INSURANCE. The Borrower shall, at all times insure all of the
tangible personal property Collateral and carry such other business insurance,
with insurers reasonably acceptable to Silicon, in such form and amounts as
Silicon may reasonably require. All such insurance policies shall name Silicon
as an additional loss payee, and shall contain a lenders loss payee endorsement
in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any
such insurance, Silicon shall apply such proceeds in reduction of the
Obligations as Silicon shall determine in its sole and absolute discretion,
except that, provided no Event of Default has occurred, Silicon shall release
to the Borrower insurance proceeds with respect to equipment totaling less than
[$100,000]*, which shall be utilized by the Borrower for the replacement of the
equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If the Borrower fails to provide or pay for any insurance, Silicon may,
but is not obligated to, obtain the same at the Borrower's expense.
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<PAGE> 4
The Borrower shall promptly deliver to Silicon copies of all reports made to
insurance companies.
* $250,000
4.4 REPORTS. The Borrower shall provide Silicon with such written reports
with respect to the Borrower (including without limitation budgets, sales
projections, operating plans and other financial documentation), as Silicon
shall from time to time reasonably specify *.
* SUBJECT, HOWEVER, TO SILICON ENTERING INTO A CONFIDENTIALITY AGREEMENT
REGARDING THE USE AND DISCLOSURE OF BORROWER'S CONFIDENTIAL INFORMATION, WHICH
SHALL BE SUBSTANTIALLY SIMILAR IN FORM AND SUBSTANCE TO THE EXISTING
CONFIDENTIALITY AGREEMENT (AS DEFINED IN SECTION 7.3 HEREOF) AND SUBJECT TO THE
RIGHTS TO DISCLOSURE UNDER SECTION 4.5 HEREOF
4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times, and
upon one business day notice, Silicon, or its agents, shall have the right to
inspect the Collateral, and the right to audit and copy the Borrower's
accounting books and records and Borrower's books and records relating to the
Collateral. Silicon shall take reasonable steps to keep confidential all
information obtained in any such inspection or audit, but Silicon shall have
the right to disclose any such information to its auditors, regulatory
agencies, and attorneys, and pursuant to any subpoena or other legal process.
[The foregoing audits shall be at Silicon's expense, except that the Borrower
shall reimburse Silicon for its reasonable out of pocket costs for semi-annual
accounts receivable audits by third parties retained by Silicon, and Silicon
may debit Borrower's deposit accounts with Silicon for the cost of such
semi-annual accounts receivable audits (in which event Silicon shall send
notification thereof to the Borrower)]. Notwithstanding the foregoing, after
the occurrence of an Event of Default all audits shall be at the Borrower's
expense *.
* , WITH REASONABLE COSTS AND EXPENSES TO BE CHARGED TO THE BORROWER IN
CONNECTION THEREWITH
4.6 NEGATIVE COVENANTS. Except as may be permitted in the Schedule
hereto, the Borrower shall not, without Silicon's prior written consent, do any
of the following: (i) merge or consolidate with another corporation, except
that the Borrower may merge or consolidate with another corporation if the
Borrower is the surviving corporation in the merger and the aggregate value of
the assets acquired in the merger do not exceed 25% of Borrower's Tangible Net
Worth (as defined in the Schedule) as of the end of the month prior to the
effective date of the merger, and the assets of the corporation acquired in the
merger are not subject to any liens or encumbrances, except Permitted Liens;
(ii) acquire any assets outside the ordinary course of business for an
aggregate purchase price exceeding 25% of Borrower's Tangible Net Worth (as
defined in the Schedule) as of the end of the month prior to the effective date
of the acquisition; (iii) enter into any other transaction outside the ordinary
course of business (except as permitted by the other provisions of this
Section); (iv) sell or transfer any Collateral, [except for the sale of finished
inventory in the ordinary course of the Borrower's business,] and except for the
sale of obsolete or unneeded equipment in the ordinary course of business*; (v)
make any loans of any money or any other assets **; (vi) incur any debts,
outside the ordinary course of business, which would have a material, adverse
effect on the Borrower or on the prospect of repayment of the Obligations;
(vii) guarantee or otherwise become liable with respect to the obligations of
another party or entity; (viii) pay or declare any dividends on the Borrower's
stock (except for dividends payable solely in stock of the Borrower); (ix)
redeem, retire, purchase or otherwise acquire, directly or indirectly, any of
the Borrower's stock; (x) make any change in the Borrower's capital structure
which has a material adverse effect on the Borrower or on the prospect of
repayment of the Obligations; or (xi) dissolve or elect to dissolve ***.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Event of Default and no event which (with notice or passage of
time or both) would constitute an Event of Default would occur as a result of
such transaction.
* (OTHER THAN EQUIPMENT SPECIFICALLY FINANCED BY SILICON)
** EXCEPT AS PERMITTED IN THE SCHEDULE HERETO
*** PROVIDED THAT NOTHING IN THIS SECTION SHALL PREVENT BORROWER FROM
EFFECTING A PUBLIC OFFERING OF BORROWER'S STOCK
4.7 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any
manner relating to the Borrower, the Borrower shall, without expense to
Silicon, make available the Borrower and its officers, employees and agents and
the Borrower's books and records to the extent that Silicon may deem them
reasonably necessary in order to prosecute or defend any such suit or
proceeding.
[4.8 VERIFICATION. Silicon may, from time to time, following prior
notification to Borrower, verify directly with the respective account debtors
the validity, amount and other matters relating to the Borrower's accounts, by
means of mail, telephone or otherwise, either in the name of the Borrower or
Silicon or such other name as Silicon may reasonably choose, provided that no
prior notification to Borrower shall be required following an Event of Default.]
4.9 EXECUTE ADDITIONAL DOCUMENTATION. The Borrower agrees, at its
expense, on request by Silicon, to execute all documents in form satisfactory
to Silicon, as Silicon, may deem reasonably necessary or useful in order to
perfect and maintain Silicon's perfected security interest in the Collateral,
and in order to fully consummate all of the transactions contemplated by this
Agreement.
5. TERM.
5.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule hereto (the "Maturity Date").
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<PAGE> 5
5.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by the Borrower, effective three business days
after written notice of termination is given to Silicon; or (ii) by Silicon at
any time after the occurrence of an Event of Default, without notice, effective
immediately.
5.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, the Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether
or not all or any part of such Obligations are otherwise then due and payable.
[Without limiting the generality of the foregoing, if on the Maturity Date, or
on any earlier effective date of termination, there are any outstanding letters
of credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an
amount equal to the face amount of all such letters of credit plus all
interest, fees and cost due or to become due in connection therewith, to secure
all of the Obligations relating to said letters of credit, pursuant to
Silicon's then standard form cash pledge agreement.] Notwithstanding any
termination of this Agreement, all of Silicon's security interests in all of
the Collateral and all of the terms and provisions of this Agreement shall
continue in full force and effect until all Obligations have been paid and
performed in full; provided that, without limiting the fact that Loans are
subject to the reasonable discretion of Silicon, Silicon may, in its sole
discretion, refuse to make any further Loans after termination. No termination
shall in any way affect or impair any right or remedy of Silicon, nor shall any
such termination relieve the Borrower of any Obligation to Silicon, until all
of the Obligations have been paid and performed in full. Upon payment and
performance in full of all the Obligations, Silicon shall promptly deliver to
the Borrower termination statements, requests for reconveyances and such other
documents as may be required to fully terminate any of Silicon's security
interests.
6. EVENTS OF DEFAULT AND REMEDIES.
6.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and the Borrower
shall give Silicon immediate written notice thereof: (a) Any warranty,
representation, statement, report or certificate made or delivered to Silicon
by the Borrower or any of the Borrower's officers, employees or agents, now or
in the future, shall be untrue or misleading in any material respect; or (b)
the Borrower shall fail to pay when due any Loan or any interest thereon or any
other monetary Obligation; or (c) the total Loans and other Obligations
outstanding at any time exceed the Credit Limit; or (d) the Borrower shall fail
to comply with any of the financial covenants set forth in the Schedule or
shall fail to perform any other non-monetary Obligation which by its nature
cannot be cured; or (e) the Borrower shall fail to pay or perform any other
non-monetary Obligation, which failure is not cured within 5 business days
after the date due; or (f) Any levy, assessment, attachment, seizure, lien or
encumbrance is made on all or any part of the Collateral which is not cured
within [10]* days after the occurrence of the same; or (g) Dissolution,
termination of existence, insolvency or business failure of the Borrower; or
appointment of a receiver, trustee or custodian, for all or any part of the
property of, assignment for the benefit of creditors by, or the commencement of
any proceeding by the Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, now or in the future in effect; or (h) the
commencement of any proceeding against the Borrower or any guarantor of any of
the Obligations under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 30 days after the date commenced; (i) revocation or
termination of, or limitation or denial of liability upon, any guaranty of the
Obligations or any attempt to do any of the foregoing; or commencement of
proceedings by any guarantor of any of the Obligations under any bankruptcy or
insolvency law; or (j) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all
of the Obligations, or any attempt to do any of the foregoing; or commencement
of proceedings by or against any such third party under any bankruptcy or
insolvency law; or (k) the Borrower makes any payment on account of any
indebtedness or obligation which has been subordinated to the Obligations other
than as permitted in the applicable subordination agreement or if any person
who has subordinated such indebtedness or obligations terminates or in any way
limits his subordination agreement; or (l) there shall be a change in the
record or beneficial ownership of an aggregate of more than [20%]** of the
outstanding shares of stock of the Borrower, in one or more transactions,
compared to the ownership of outstanding shares of stock of the Borrower in
effect on the date hereof, without the prior written consent of Silicon; or (m)
the Borrower shall generally not pay its debts as they become due; or the
Borrower shall conceal, remove or transfer any part of its property, with
intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law***. Silicon may cease making any Loans
hereunder during any of the above cure periods, and thereafter if an Event of
Default has occurred.
*20
**49%
***OR (N) BORROWER RECEIVES A NON-APPROVABLE LETTER FROM THE FOOD AND DRUG
ADMINISTRATION REGARDING DEPOCYT AND SUCH LETTER CONTAINS CORRECTIVE ACTIONS
NOT CAPABLE OF BEING CURED WITHIN ONE YEAR AFTER THE DATE OF SUCH LETTER
6.2 REMEDIES. Upon the occurrence of any Event of Default, and at any
time thereafter, Silicon, at its option,
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<PAGE> 6
and without notice or demand of any kind (all of which are hereby expressly
waived by the Borrower), may do any one or more of the following: (a) Cease
making Loans or otherwise extending credit to the Borrower under this Agreement
or any other document or agreement; (b) Accelerate and declare all or any part
of the Obligations to be immediately due, payable, and performable,
notwithstanding any deferred or installment payments allowed by any instrument
evidencing or relating to any Obligation; (c) Take possession of any or all of
the Collateral wherever it may be found, and for that purpose the Borrower
hereby authorizes Silicon without judicial process to enter onto any of the
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of
any or all of the Collateral by Court process, the Borrower hereby irrevocably
waives: (i) any bond and any surety or security relating thereto required by
any statute, court rule or otherwise as an incident to such possession; (ii)
any demand for possession prior to the commencement of any suit or action to
recover possession thereof; and (iii) any requirement that Silicon retain
possession of and not dispose of any such Collateral until after trial or final
judgment; (d) Require the Borrower to assemble any or all of the Collateral and
make it available to Silicon at places designated by Silicon which are
reasonably convenient to Silicon and the Borrower, and to remove the Collateral
to such locations as Silicon may deem advisable; (e) [Require Borrower to
deliver to Silicon, in kind, all checks and other payments received with
respect to all accounts and general intangibles, together with any necessary
indorsements, within one day after the date received by the Borrower;] (f)
Complete the processing, manufacturing or repair of any Collateral prior to a
disposition thereof and, for such purpose and for the purpose of removal,
Silicon shall have the right to use the Borrower's premises, vehicles, hoists,
lifts, cranes, equipment and all other property without charge; (g) Sell, lease
or otherwise dispose of any of the Collateral in its condition at the time
Silicon obtains possession of it or after further manufacturing, processing or
repair, at any one or more public and/or private sales, in lots or in bulk, for
cash, exchange or other property, or on credit, and to adjourn any such sale
from time to time without notice other than oral announcement at the time
scheduled for sale. Silicon shall have the right to conduct such disposition
on the Borrower's premises without charge, for such time or times as Silicon
deems reasonable, or on Silicon's premises, or elsewhere and the Collateral
need not be located at the place of disposition. Silicon may directly or
through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve the
Borrower of any liability the Borrower may have if any Collateral is defective
as to title or physical condition or otherwise at the time of sale; [(h) Demand
payment of, and collect any accounts and general intangibles comprising
Collateral and, in connection therewith, the Borrower irrevocably authorizes
Silicon to endorse or sign the Borrower's name on all collections, receipts,
instruments and other documents, to take possession of and open mail addressed
to the Borrower and remove therefrom payments made with respect to any item of
the Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant
extensions of time to pay, compromise claims and settle accounts and the like
for less than face value]; (i) Offset against any sums in any of Borrower's
general, special or other deposit accounts with Silicon; and [(j) Demand and
receive possession of any of the Borrower's federal and state income tax
returns and the books and records utilized in the preparation thereof or
referring thereto]. All reasonable attorneys' fees, expenses, costs,
liabilities and obligations incurred by Silicon with respect to the foregoing
shall be added to and become part of the Obligations, shall be due on demand,
and shall bear interest at a rate equal to the highest interest rate applicable
to any of the Obligations. Without limiting any of Silicon's rights and
remedies, from and [after]* the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional four
percent per annum.
*DURING
6.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. The Borrower and
Silicon agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to the
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by
Silicon, with or without the Collateral being present; (iv) The sale commences
at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price
in cash or by cashier's check or wire transfer is required; (vi) With respect
to any sale of any of the Collateral, Silicon may (but is not obligated to)
direct any prospective purchaser to ascertain directly from the Borrower any
and all information concerning the same. Silicon may employ other methods of
noticing and selling the Collateral, in its discretion, if they are
commercially reasonable.
6.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default,
without limiting Silicon's other rights and remedies, the Borrower grants to
Silicon an irrevocable power of attorney coupled with an interest, authorizing
and permitting Silicon (acting through any of its employees, attorneys or
agents) at any time, at its option, but without obligation, with or without
notice to the Borrower, and at the Borrower's expense, to do any or all of the
following, in the Borrower's name or otherwise: (a) Execute on behalf of the
Borrower any documents that
-6-
<PAGE> 7
Silicon may, in its sole and absolute discretion, deem advisable in order to
perfect and maintain Silicon's security interest in the Collateral, or in order
to exercise a right of the Borrower or Silicon, or in order to fully consummate
all the transactions contemplated under this Agreement, and all other present
and future agreements; (b) Execute on behalf of the Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property
which is part of Silicon's Collateral or in which Silicon has an interest; [(c)
Execute on behalf of the Borrower, any invoices relating to any account, any
draft against any account debtor and any notice to any account debtor, any
proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's,
materialman's or other lien, or assignment or satisfaction of mechanic's,
materialman's or other lien]; (d) Take control in any manner of any cash or
non-cash items of payment or proceeds of Collateral; endorse the name of the
Borrower upon any instruments, or documents, evidence of payment or Collateral
that may come into Silicon's possession; (e) Endorse all checks and other forms
of remittances received by Silicon; (f) Pay, contest or settle any lien,
charge, encumbrance, security interest and adverse claim in or to any of the
Collateral, or any judgment based thereon, or otherwise take any action to
terminate or discharge the same; [(g) Grant extensions of time to pay,
compromise claims and settle accounts and general intangibles for less than
face value and execute all releases and other documents in connection
therewith;] (h) Pay any sums required on account of the Borrower's taxes or to
secure the release of any liens therefor, or both; (i) Settle and adjust, and
give releases of, any insurance claim that relates to any of the Collateral and
obtain payment therefor; (j) Instruct any third party having custody or control
of any books or records belonging to, or relating to, the Borrower to give
Silicon the same rights of access and other rights with respect thereto as
Silicon has under this Agreement; and (k) Take any action or pay any sum
required of the Borrower pursuant to this Agreement and any other present or
future agreements. Silicon shall exercise the foregoing powers in a
commercially reasonable manner. Any and all reasonable sums paid and any and
all reasonable costs, expenses, liabilities, obligations and attorneys' fees
incurred by Silicon with respect to the foregoing shall be added to and become
part of the Obligations, shall be payable on demand, and shall bear interest at
a rate equal to the highest interest rate applicable to any of the Obligations.
In no event shall Silicon's rights under the foregoing power of attorney or any
of Silicon's other rights under this Agreement be deemed to indicate that
Silicon is in control of the business, management or properties of the
Borrower.
6.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Silicon first to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due
upon any of the Obligations, and third to the principal of the Obligations, in
such order as Silicon shall determine in its sole discretion. Any surplus
shall be paid to the Borrower or other persons legally entitled thereto; the
Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in
its [sole]* discretion, directly or indirectly enters into a deferred payment or
other credit transaction with any purchaser at any sale or other disposition of
Collateral, Silicon shall have the option, exercisable at any time, in its
[sole]* discretion, of either reducing the Obligations by the principal amount
of purchase price or deferring the reduction of the Obligations until the actual
receipt by Silicon of the cash therefor.
*REASONABLE
6.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Silicon shall have all the other rights and remedies
accorded a secured party under the California Uniform Commercial Code and under
all other applicable laws, and under any other instrument or agreement now or
in the future entered into between Silicon and the Borrower, and all of such
rights and remedies are cumulative and none is exclusive. Exercise or partial
exercise by Silicon of one or more of its rights or remedies shall not be
deemed an election, nor bar Silicon from subsequent exercise or partial
exercise of any other rights or remedies. The failure or delay of Silicon to
exercise any rights or remedies shall not operate as a waiver thereof, but all
rights and remedies shall continue in full force and effect until all of the
Obligations have been fully paid and performed.
7. GENERAL PROVISIONS.
7.1 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by regular first-class mail, or
certified mail return receipt requested, addressed to Silicon or the Borrower
at the addresses shown in the heading to this Agreement, or at any other
address designated in writing by one party to the other party. All notices
shall be deemed to have been given upon delivery in the case of notices
personally delivered to the Borrower or to Silicon, or at the expiration of two
business days following the deposit thereof in the United States mail, with
postage prepaid.
7.2 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
7.3 INTEGRATION. This Agreement* and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between the Borrower and Silicon and
supersede all prior and contemporaneous negotiations and oral representations
and agreements, all of which are merged and integrated in this Agreement.
There are no oral understandings, representations or agreements between the
parties which are not set forth in this Agreement or in other written
agreements signed by the parties in connection herewith.
-7-
<PAGE> 8
*,THE DEPOTECH CORPORATION CONFIDENTIAL DISCLOSURE AGREEMENT DATED JUNE 10,
1996 BETWEEN SILICON AND BORROWER (THE "EXISTING CONFIDENTIALITY AGREEMENT")
(SUBJECT TO THE RIGHT OF SILICON TO DISCLOSE CONFIDENTIAL INFORMATION IN
ACCORDANCE WITH SECTION 4.5 HEREOF),
7.4 WAIVERS. The failure of Silicon at any time or times to require the
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between the Borrower and Silicon shall not
waive or diminish any right of Silicon later to demand and receive strict
compliance therewith. Any waiver of any default shall not waive or affect any
other default, whether prior or subsequent thereto. None of the provisions of
this Agreement or any other agreement now or in the future executed by the
Borrower and delivered to Silicon shall be deemed to have been waived by any
act or knowledge of Silicon or its agents or employees, but only by a specific
written waiver signed by an officer of Silicon and delivered to the Borrower.
The Borrower waives demand, protest, notice of protest and notice of default or
dishonor, notice of payment and nonpayment, release, compromise, settlement,
extension or renewal of any commercial paper, instrument, account, general
intangible, document or guaranty at any time held by Silicon on which the
Borrower is or may in any way be liable, and notice of any action taken by
Silicon, unless expressly required by this Agreement.
7.5 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other person
affiliated with or representing Silicon shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred or
suffered by the Borrower or any other party through the ordinary negligence of
Silicon, or any of its directors, officers, employees, agents, attorneys or any
other person affiliated with or representing Silicon.
7.6 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by the Borrower and a duly
authorized officer of Silicon.
7.7 TIME OF ESSENCE. Time is of the essence in the performance by the
Borrower of each and every obligation under this Agreement.
7.8 ATTORNEYS FEES AND COSTS. The Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, account debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of the Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to the Borrower. In satisfying Borrower's
obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for
convenience, issue checks directly to Silicon's attorneys, Levy, Small &
Lallas, but Borrower acknowledges and agrees that Levy, Small & Lallas is
representing only Silicon and not Borrower in connection with this Agreement.
If either Silicon or the Borrower files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such action
shall be entitled to recover its reasonable costs and attorneys' fees,
including (but not limited to) reasonable attorneys' fees and costs incurred in
the enforcement of, execution upon or defense of any order, decree, award or
judgment. All attorneys' fees and costs to which Silicon may be entitled
pursuant to this Paragraph shall immediately become part of the Borrower's
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations*.
*PROVIDED THAT THE BORROWER SHALL NOT BE DEEMED TO HAVE EXCEEDED THE CREDIT
LIMIT HEREUNDER SOLELY BY VIRTUE OF THE ADDITION OF THE AMOUNT OF SUCH
ATTORNEYS' FEES AND COSTS TO THE OBLIGATIONS IF BORROWER OTHERWISE WOULD NOT
HAVE EXCEEDED THE CREDIT LIMIT HAD THE AMOUNT OF SUCH ATTORNEYS' FEES AND COSTS
NOT BEEN ADDED TO THE OBLIGATIONS
7.9 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of the parties hereto; provided, however,
that the Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Silicon, and any prohibited
assignment shall be void. No consent by Silicon to any assignment shall
release the Borrower from its liability for the Obligations.
7.10 JOINT AND SEVERAL LIABILITY. If the Borrower consists of more than one
person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
-8-
<PAGE> 9
7.11 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. The Borrower acknowledges that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. This Agreement has been
fully reviewed and negotiated between the parties and no uncertainty or
ambiguity in any term or provision of this Agreement shall be construed
strictly against Silicon or the Borrower under any rule of construction or
otherwise.
7.12 MUTUAL WAIVER OF JURY TRIAL. THE BORROWER AND SILICON EACH HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT
OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND THE BORROWER, OR ANY
CONDUCT, ACTS OR OMISSIONS OF SILICON OR THE BORROWER OR ANY OF THEIR
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH SILICON OR THE BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
7.13 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and the
Borrower shall be governed by, and in accordance with, the laws of the State of
California. Any undefined term used in this Agreement that is defined in the
California Uniform Commercial Code shall have the meaning assigned to that term
in the California Uniform Commercial Code. As a material part of the
consideration to Silicon to enter into this Agreement, the Borrower (i) agrees
that all actions and proceedings relating directly or indirectly hereto shall,
at Silicon's option, be litigated in courts located within California, and that
the exclusive venue therefor shall be San Diego County; (ii) consents to the
jurisdiction and venue of any such court and consents to service of process in
any such action or proceeding by personal delivery or any other method
permitted by law; and (iii) waives any and all rights the Borrower may have to
object to the jurisdiction of any such court, or to transfer or change the
venue of any such action or proceeding.
BORROWER:
DEPOTECH CORPORATION
BY /s/ Edward L. Erickson
_______________________________
PRESIDENT OR VICE PRESIDENT
BY /s/ Faye H. Russell
_______________________________
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY /s/ RITA PERKL
_______________________________
TITLE Senior Vice President
____________________________
44,531-2
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<PAGE> 10
SILICON VALLEY BANK
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: DEPOTECH CORPORATION
ADDRESS: 10450 SCIENCE CENTER DRIVE
SAN DIEGO, CALIFORNIA 92121
DATE: JUNE 18, 1996
THIS SCHEDULE is an integral part of the Loan and Security Agreement
between Silicon Valley Bank ("Silicon") and the above-named borrower
("Borrower") of even date.
CREDIT LIMIT
(Section 1.1): An amount not to exceed the lesser of
(a) $9,000,000 at any one time
outstanding, or
(b) 100% of the net purchase price
of new equipment purchased by
Borrower (the "Financed Equipment")
during the Purchase Period (as
defined below, which is general
purpose, scientific, laboratory,
manufacturing and test equipment and
associated software components, or
office furniture and equipment, and
which is acceptable to Silicon in
its discretion. The net purchase
price of Financed Equipmentmeans the
purchase price thereof, as shown on
the applicable invoice, net of all
charges for taxes, freight,
delivery, insurance, set-up,
training, manuals, fees, service
charges and other similar items.
The "Purchase Period" is the period
from 30 days prior to the date of
this Agreement through June 30,
1997.
DISBURSEMENT AND
LOAN REPAYMENT
(Section 1.1): Loans shall be made only during the
following two disbursement periods (the
"Disbursement Periods"):
The date hereof to and including
December 31, 1996 (the "First
Disbursement Period"); and
January 1, 1997 to and including
June 30, 1997 (the "Second
Disbursement Period").
There shall be no more than one
disbursement in any one calendar month.
Requests for disbursement shall be in
writing and shall be accompanied by the
following:
(1) A list of the Financed
Equipment being purchased.
-1-
<PAGE> 11
(2) For each piece of Financed
Equipment being purchased, the
name and address of the vendor,
the invoice number, the serial
number of the equipment, the
total purchase price, and the
net purchase price (as defined
above); and
(3) A copy of the invoice
relating to the Financed
Equipment.
Silicon will prepare a UCC-1 Financing
Statement incorporating the list of the
Financed Equipment and will send the
completed UCC-1 to Borrower for
signature. Borrower, in turn, agrees to
return forthwith the signed UCC-1 to
Silicon for filing with the appropriate
governmental office.
Loans shall be repaid as follows:
For each Disbursement Period,
Borrower shall at the time of the
making of the first Loan in each
Period notify Silicon in writing
whether it elects to begin
amortizing the Loans made in
each Period in the month
immediately following the making
of each Loan ("Immediate
Amortization") or to begin
amortization of all Loans made
in each Disbursement Period at
the end of such Disbursement
Period ("Delayed Amortization").
Once Borrower has elected
Immediate Amortization or
Delayed Amortization, Borrower
may not change its election for
such Disbursement Period. If
Borrower fails to notify Silicon
in writing of whether it has
elected Immediate Amortization
or Delayed Amortization at the
time of the making of the first
Loan for each Disbursement
Period, then the Immediate
Amortization method shall be
presumed for all Loans made in
such Disbursement Period.
If Immediate Amortization
applies to a Disbursement Period,
each Loan made during such Period
shall be repaid as follows: (i)
if the "Fixed Rate" is selected
(as provided below), then
principal and interest shall be
paid in 48 equal monthly
installments of principal and
interest, commencing on first day
of the month following the making
of such Loan and continuing on
the first day of each of the
succeeding 47 months, until such
Loan and related interest are
paid in full; (ii) if the
"Floating Rate" is selected (as
provided below), then the
principal amount of such Loan
shall be paid in 48 equal monthly
installments of principal,
commencing on first day of the
month following the making of
such Loan and continuing on the
first day of each of the
succeeding 47 months, until paid
in full, and accrued interest
shall be paid monthly on the
first day of each month.
If Delayed Amortization applies
to a Disbursement Period, the
aggregate amount of the Loans
made during each Disbursement
Period and outstanding on the
last day of such Disbursement
Period shall be repaid as
follows: (i) if the "Fixed Rate"
is selected (as provided below),
then the principal and interest
relating to the aggregate amount
of all such Loans shall be paid
in 48 equal monthly installments
of principal and interest,
commencing on January 1, 1997,
with respect to the First
Disbursement Period, and July 1,
1997, with respect to the Second
Disbursement Period, and
continuing on the first day of
each succeeding month, until the
aggregate amount of such
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<PAGE> 12
Loans and related interest are
paid in full; (ii) if the
"Floating Rate" is selected (as
provided below), then the
aggregate principal amount of
such Loans shall be paid in 48
equal monthly installments of
principal, commencing on January
1, 1997, with respect to the
First Disbursement Period, and
July 1, 1997, with respect to the
Second Disbursement Period, and
continuing on the first day of
each of the succeeding 47 months,
until paid in full, and accrued
interest shall be paid monthly on
the first day of each month.
Notwithstanding the foregoing,
all outstanding Loans and all
other outstanding Obligations
shall be due and payable on the
Maturity Date.
INTEREST RATE (Section 1.2): If Immediate Amortization applies to a
Disbursement Period, the interest rate
applicable to the Loans for such
Disbursement Period is determined as
follows: Borrower shall elect, by
written notice to Silicon delivered on or
before the making of the first Loan in
the First Disbursement Period and on or
before the making of the first Loan in
the Second Disbursement Period, whether
Loans disbursed during such periods will
bear interest at the Floating Rate or the
Fixed Rate, and such election shall
remain in effect for all Loans made
during such Disbursement Period until
they are repaid in full. In the event
Borrower fails to give written notice to
Silicon of whether Borrower elects the
Floating Rate or the Fixed Rate by said
date, the interest rate in effect shall
be the Floating Rate. Borrower
understands that if it elects the Fixed
Rate option, the Fixed Rate for each Loan
will be based on the Fixed Rate as in
effect on the date of the making of such
Loan.
If Delayed Amortization applies to a
Disbursement Period, Loans relating to
such Disbursement Period shall bear
interest at the "Floating Rate" (as
defined below) during such Disbursement
Period. On and after the end of such
Disbursement Period, the interest rate
applicable to such Loans shall be
determined as follows: Borrower shall
elect, by written notice to Silicon
delivered on or before the last day of
the First Disbursement Period and on or
before the last day of the Second
Disbursement Period, whether Loans
disbursed during such periods will bear
interest at the Floating Rate or the
Fixed Rate, and such election shall
remain in effect for such Loans until
they are repaid in full. In the event
Borrower fails to give written notice to
Silicon of whether Borrower elects the
Floating Rate or the Fixed Rate by said
date, the interest rate in effect shall
be the Floating Rate.
As used herein, "Floating Rate" shall
mean: A rate equal to the "Prime Rate"
in effect from time to time plus 0.50%
per annum. "Prime Rate" means the rate
announced from time to time by Silicon as
its "prime rate;" it is a base rate upon
which other rates charged by Silicon are
based, and it is not necessarily the best
rate available at Silicon. The interest
rate applicable to the Obligations shall
change on each date there is a change in
the Prime Rate.
As used herein, "Fixed Rate" shall mean:
A rate equal to the "Treasury Rate" plus
4% per annum "Treasury Rate" shall mean
the most recent four-year U.S. Treasury
Note rate, at the date the Fixed Rate is
to go into effect, published in the most
current edition of the
-3-
<PAGE> 13
Federal Reserve Statistical Release H.15
(519), provided that if, for any reason,
such information is not available,
Silicon may base the Treasury Rate on
quotations (with whatever adjustments or
averaging it may deem necessary) of the
most recent four-year Treasury Note rate
received by Silicon from one or more
leading primary U.S. government
securities dealers selected by Silicon.
In either case, interest shall be
calculated on the basis of a 360-day year
for the actual number of days elapsed.
LOAN ORIGINATION FEE
(Section 1.3): $45,000. (The $25,000 previously paid by
Borrower shall be applied to this fee.)
MATURITY DATE
(Section 5.1): JUNE 30, 2001
PREPAYMENT FEE
(Section 5.2): In the event this Agreement is terminated
prior to the Maturity Date, while the
Fixed Rate is in effect as to any portion
of the outstanding Loans, Borrower agrees
to pay Silicon a termination fee in an
amount equal to the following percentage
of the principal amount of the Loans
which are prepaid prior to the Maturity
Date:
<TABLE>
<CAPTION>
Date of Prepayment Percentage of Amount Prepaid
------------------ ----------------------------
<S> <C>
Date hereof to and including December
31, 1997 3%
January 1, 1998 to and including
December 31, 1998 2%
January 1, 1999 to and including
December 31, 1999 1%
January 1, 2000 and thereafter 0%
</TABLE>
PRIOR NAMES OF BORROWER
(Section 3.2): NONE
TRADE NAMES OF BORROWER
(Section 3.2): NONE
OTHER LOCATIONS AND ADDRESSES
(Section 3.3): 11011 North Torrey Pines Road, La Jolla,
7396 Trade Street, San Diego, CA; and
11025 North Torrey Pines Road,
Suite 100, La Jolla, CA 92037
MATERIAL ADVERSE LITIGATION
(Section 3.10): NONE
NEGATIVE COVENANTS-EXCEPTIONS
(Section 4.6): Without Silicon's prior written consent,
Borrower may do the following, provided
that, after giving effect thereto, no
Event of Default has occurred and no
event has occurred which, with notice or
-4-
<PAGE> 14
passage of time or both, would constitute
an Event of Default, and provided that
the following are done in compliance with
all applicable laws, rules and
regulations: (i) repurchase shares of
Borrower's stock pursuant to any employee
stock purchase or benefit plan, provided
that the total amount paid by Borrower
for such stock does not exceed $500,000
in any fiscal year; (ii) make employee
loans strictly for relocation purposes
provided that the aggregate amount of
such loans does not exceed $500,000
outstanding at any time; and (iii) enter
into joint venture transactions with
other entities relating to the
development of products which may involve
the issuance of shares of stock of
Borrower to such other entity (subject to
Section 6.1(l) hereof), provided that
such transactions do not materially
adversely affect the Borrower, provided,
further, that Borrower does not merge or
combine with such other entity as part of
such transaction, and provided, further,
that Borrower gives prior written notice
to Silicon of such transactions together
with delivering to Silicon such
documentation relating thereto as Silicon
may reasonably request.
FINANCIAL COVENANT
(Section 4.1): Borrower shall comply with the following
covenant. Compliance shall be determined
as of the end of each month.
MINIMUM CASH Borrower shall maintain "Cash" (as
defined below) in an amount not less than
167% multiplied by the following amounts
during the following periods:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
Date hereof through and including
June 30, 1997: $9,000,000
From and after July 1, 1997: An amount equal to the unpaid
principal balance of the Loans
</TABLE>
For purposes of the foregoing, "Cash"
means cash on hand or on deposit in
banks, readily marketable securities
issued by the United States, readily
marketable commercial paper rated "A-1"
by Standard & Poor's Corporation (or a
similar rating by a similar rating
organization), certificates of deposit
and banker's acceptances less restricted
cash, as such term is reflected on
Borrower's audited financial statements,
including, without limitation, the amount
of restricted cash relating to Borrower's
lease obligations.
MATURITY DATE
(Section 5.1): JUNE 30, 2001
OTHER COVENANTS
(Section 4.1): Borrower shall at all times comply with
all of the following additional covenants:
1. BANKING RELATIONSHIP. At such time
that DepoTech Advanced Technology is
established as a separate legal entity,
Borrower shall cause DepoTech Advanced
Technology to open future bank accounts
and maintain its bank accounts and
primary banking relationship with
Silicon.
-5-
<PAGE> 15
2. PROVIDING SEC FILINGS/INFORMATION TO
SILICON. Without limitation of the other
terms and conditions hereof, Borrower
agrees to provide Silicon with copies of
all reports and filings made with the
Securities and Exchange Commission, if
any, within 5 days after the date such
filings are made or are otherwise due.
3. INTELLECTUAL PROPERTY. Borrower
covenants that all of Borrower's present
and future patents, patent applications,
copyrights, trade secrets, drawings,
blueprints, processes, proprietary
information, license rights and all other
intellectual property now is and will at
all times during the term hereof remain
free and clear of any and all liens,
charges, security interests,
encumbrances, licenses, and adverse
claims, voluntary and involuntary, and
that Borrower will not transfer or permit
the transfer of any of the foregoing or
any interest therein, except for the
following: (i) rights under the
Assignment Agreement dated February 9,
1994 between Research Development
Foundation and Borrower and under the
Collaboration Agreement dated March 30,
1994 between Chiron Corporation and
Borrower; (ii) licenses in the ordinary
course of business for research,
development, manufacturing and
distribution.
BORROWER:
DEPOTECH CORPORATION
BY /s/ Edward L. Erickson
-------------------------------
PRESIDENT OR VICE PRESIDENT
BY /s/ Faye H. Russell
--------------------------------
SECRETARY OR ASS'T SECRETARY
SILICON:
SILICON VALLEY BANK
BY /s/ Rita Perkl
-------------------------------
TITLE Senior Vice President
---------------------------
-6-
<PAGE> 1
EXHIBIT 11.1
DEPOTECH CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)....................... $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235)
=========== =========== =========== =========== ============
Calculation of shares outstanding for
computing net income (loss) per
share:
Weighted average common shares
outstanding used in calculating net
income (loss) per share in
accordance with generally accepted
accounting principles.............. 1,308,562 1,422,478 4,005,468 1,531,262 11,320,501
Common stock equivalents.............. -- -- -- 775,716 --
Adjustments to reflect requirements of
the SEC:
Effects of SAB 83..................... 332,175 332,175 224,839 303,094 --
Conversion of preferred
stock -- weighted average shares... 3,348,595 5,018,525 4,487,243 5,982,991 --
----------- ----------- ----------- ----------- ------------
Shares used in computing net income
(loss) per share...................... 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501
=========== =========== =========== =========== ============
Net income (loss) per share............. $ (0.78) $ (1.26) $ (0.92) $ 0.17 $ (0.22)
=========== =========== =========== =========== ============
</TABLE>
<PAGE> 1
EXHIBIT 14.1
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
=========================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Staffing Filing Date Issue Date
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
002001 M. Sankaram et al. ABANDONED 08/153,657 SYNTHETIC MEMBRANE VESICLES WITH
PD-3177 JRW.JRW.JXL 11/16/93 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002AU1 Depotech Corporation PENDING 10535/95 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002BG1 Depotech Corporation PENDING 100596 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002BR1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002CA1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002CN1 Depotech Corporation UNFILED SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002EP1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002FI1 Depotech Corporation PENDING 962048 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 1
<PAGE> 2
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
=========================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Staffing Filing Date Issue Date
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002HU1 Depotech Corporation PENDING P9601316 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002IL1 Depotech Corporation PENDING 111628 SYNTHETIC MEMBRANE VESICLES WITH
FD-3177 ISRAEL JRW.JRW.JXL 11/14/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002JP1 Depotech Corporation PENDING 07-514500 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002KR1 Depotech Corporation PENDING 702583/96 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002MX1 Depotech Corporation PENDING 948858 SYNTHETIC MEMBRANE VESICLES WITH
FD-3177 MEXICO JRW.JRW.JXL 11/15/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002NO1 Depotech Corporation PENDING 962024 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002NZ1 Depotech Corporation PENDING 276305 SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002PL1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 2
<PAGE> 3
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
=========================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Staffing Filing Date Issue Date
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002RO1 Depotech Corporation UNFILED SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002RU1 Depotech Corporation UNFILED SYNTHETIC MEMBRANE VESICLES WITH
OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002WO1 Depotech Corporation NAT'L PHASE US94/12957 SYNTHETIC MEMBRANE VESICLES WITH
FD-3177 PCT JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
002ZA1 Depotech Corporation PENDING 94/9063 94/9063 SYNTHETIC MEMBRANE VESICLES WITH
FD-3177 S. AFRICA JRW.JRW.JXL 11/15/94 11/29/95 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- -------------------------------------------------------------------------------------------------------------------------
008001 Sinil Kim et al. ISSUED 08/062,799 5,455,044 METHOD FOR TREATING NEUROLOGICAL
PD-2764 JRW.JRW.JXL 05/14/93 10/03/95 DISORDERS
- -------------------------------------------------------------------------------------------------------------------------
008002 Sinil Kim et al. ALLOWED 08/484,501 METHOD FOR TREATING NEUROLOGICAL
NEUROLOGICAL DISORDERS JRW.JRW.JXL 06/07/95 DISORDERS
- -------------------------------------------------------------------------------------------------------------------------
008CA1 DepoTech Corporation PENDING 2162854 METHOD FOR TREATING NEUROLOGICAL
PD-2764 CANADA JRW.JRW.JXL 05/14/93 DISORDERS
- -------------------------------------------------------------------------------------------------------------------------
008JP1 DepoTech Corporation PENDING 6-525365 METHOD FOR TREATING NEUROLOGICAL
PD-2764 JAPAN JRW.JRW.JXL 05/14/93 DISORDERS
- -------------------------------------------------------------------------------------------------------------------------
008WO1 Depotech Corporation NAT'L PHASE US93/04645
FD-2764 PCT JRW.JRW.LAH 05/14/93
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 3
<PAGE> 4
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
=========================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Staffing Filing Date Issue Date
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
009001 Stephen B. Howell et al. ISSUED 07/514,665 5,173,219 UNIFORM SPHERICAL MULTILAMELLAR
PD-3135 JRW.JRW.JRW 04/25/90 12/22/92 LIPOSOMES OF DEFINED AND
ADJUSTABLE SIZE DISTRIBUTION
- -------------------------------------------------------------------------------------------------------------------------
010001 Stephen B. Howell et al. ABANDONED 07/151,553 MULTIVESICULAR LIPOSOMES HAVING A
PD-3136 JRW.JRW.JXL 02/18/88 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010AT1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 AUSTRIA JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010AU1 Depotech Corporation ISSUED 12055/88 602190 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 AUSTRALIA JRW.JRW.JXL 02/23/88 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010BE1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 BELGIUM JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010CA1 Depotech Corporation ISSUED 559596 1323568 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 CANADA JRW.JRW.JXL 02/23/88 10/26/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010CH1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 SWITZERLAND JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010DE1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 GERMANY JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 4
<PAGE> 5
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
=========================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Staffing Filing Date Issue Date
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010DK1 Depotech Corporation PENDING 0939/88 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 DENMARK JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010EP1 Depotech Corporation GRANTED 88301512.5 280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 EPC JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010ES1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 SPAIN JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010FI1 Depotech Corporation ISSUED 880841 95439 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 FINLAND JRW.JRW.JXL 02/23/88 02/12/96 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010FR1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 FRANCE JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010GB1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 GREAT BRITAIN JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010GR1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 GREECE JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 5
<PAGE> 6
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
=========================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Staffing Filing Date Issue Date
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
010IE1 Depotech Corporation ISSUED 486/88 62221 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 IRELAND JRW.JRW.JXL 02/23/88 01/11/95 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010IL1 Depotech Corporation ISSUED 85509 85509 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 ISRAEL JRW.JRW.JXL 02/23/88 06/30/92 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010IT1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 ITALY JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010JP1 Depotech Corporation PENDING 40522/1988 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 JAPAN JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010KR1 Depotech Corporation PENDING 88-1859 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 S. KOREA JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010LU1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 LUXEMBOURG JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010NL1 Depotech Corporation GRANTED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 NETHERLANDS JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010NO1 Depotech Corporation ISSUED 880768 174087 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 NORWAY JRW.JRW.JXL 02/22/88 03/16/94 BIOLOGICALLY ACTIVE SUBSTANCE
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 6
<PAGE> 7
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
=========================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Staffing Filing Date Issue Date
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010NZ1 Depotech Corporation ISSUED 223599 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 NEW ZEALAND JRW.JRW.JXL 02/23/88 01/25/91 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010PT1 Depotech Corporation ISSUED 86805 86805 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 PORTUGAL JRW.JRW.JXL 02/23/88 11/13/91 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010SE1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 SWEDEN JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010TW1 Depotech Corporation ISSUED 77101015 39083 MULTIVESICULAR LIPOSOMES HAVING A
FD-3136 TAIWAN JRW.JRW.JXL 02/23/88 05/01/90 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
010ZA1 Depotech Corporation ISSUED 88/1241 88/1241 MULTIVESICULAR LIPOSOMES HAVING A
FD3136 SOUTH AFRICA JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
011001 Stephen B. Howell et al. PENDING 07/563,365 MULTIVESICULAR LIPOSOMES HAVING A
PD-3137 (CIP OF PD-3136) . .JXL 08/06/90 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
012001 Stephen B. Howell et al. ABANDONED 07/709,744 MULTIVESICULAR LIPOSOMES HAVING A
PD-3138 . .JXL 06/03/91 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 7
<PAGE> 8
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
====================================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Filing Date Issue Date
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
013001 Stephen B. Howell et al. ABANDONED 08/352,342 MULTIVESICULAR LIPOSOMES HAVING A
PD-3139 JRW.JRW.JXL 12/07/94 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- ------------------------------------------------------------------------------------------------------------------------------------
014001 Sinil Kim ABANDONED 07/196,590 HETEROVESICULAR LIPOSOMES
PD-3140 . .JXL 05/20/88
- ------------------------------------------------------------------------------------------------------------------------------------
015001 Sinil Kim ABANDONED 07/496,846 HETEROVESICULAR LIPOSOMES
PD-3141 (CIP/PD3140) JRW.JXL.JXL 03/21/90
- ------------------------------------------------------------------------------------------------------------------------------------
015AT1 DepoTech Corporation ISSUED E123412 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 AUSTRIA JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015AU1 DepoTech Corporation ISSUED 75806/91 655177 HETEROVESICULAR LIPOSOMES
FD-3141 AUSTRALIA JRW.JXL.JXL 03/20/91 06/08/95
- ------------------------------------------------------------------------------------------------------------------------------------
015BE1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 BELGIUM JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015CA1 DepoTech Corporation PENDING 2078666 HETEROVESICULAR LIPOSOMES
FD-3141 CANADA JRW.JXL.JXL 03/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
015CH1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 SWITZERLAND JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015CN1 DepoTech Corporation PENDING 91102478.6 HETEROVESICULAR LIPOSOMES
FD-3141 CHINA JRW.JXL.JXL 03/21/91
- ------------------------------------------------------------------------------------------------------------------------------------
015DE1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 GERMANY JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015DK1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 DENMARK JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015EP1 DepoTech Corporation GRANTED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 EPC JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015ES1 DepoTech Corporation ISSUED 91906733.0 2073164 T3 HETEROVESICULAR LIPOSOMES
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 8
<PAGE> 9
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
====================================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Filing Date Issue Date
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
FD-3141 SPAIN JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015FI1 DepoTech Corporation PENDING 924193 HETEROVESICULAR LIPOSOMES
FD-3141 FINLAND JRW.JXL.JXL 03/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
015FR1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 FRANCE JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015GB1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 GREAT BRITIAN JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015GR1 DepoTech Corporation ISSUED 91906733.0 950401499 HETEROVESICULAR LIPOSOMES
FD-3141 GREECE JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015IE1 DepoTech Corporation ISSUED 911/91 62772 HETEROVESICULAR LIPOSOMES
FD-3141 IRELAND JRW.JXL.SRY 03/19/91 02/06/95
- ------------------------------------------------------------------------------------------------------------------------------------
015IL1 DepoTech Corporation ISSUED 97615 97615 HETEROVESICULAR LIPOSOMES
FD-3141 ISRAEL JRW.JXL.JXL 03/20/91 10/01/95
- ------------------------------------------------------------------------------------------------------------------------------------
015IT1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 ITALY JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015JP1 DepoTech Corporation PENDING 507280/1991 HETEROVESICULAR LIPOSOMES
FD-3141 JAPAN JRW.JXL.JXL 03/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
015KR1 DepoTech Corporation PENDING 92-702302 HETEROVESICULAR LIPOSOMES
FD-3141 S. KOREA JRW.JXL.JXL 03/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
015KW1 DepoTech Corporation PENDING 12 PA/91 HETEROVESICULAR LIPOSOMES
FD-3141 KUWAIT JRW.JXL.JXL 06/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
015LU1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 LUXEMBOURG JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015NL1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 HOLLAND JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015NO1 DepoTech Corporation PENDING P923624 HETEROVESICULAR LIPOSOMES
FD-3141 NORWAY JRW.JXL.JXL 03/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 9
<PAGE> 10
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
====================================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Filing Date Issue Date
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
015NZ1 DepoTech Corporation ISSUED 237464 237464 HETEROVESICULAR LIPOSOMES
FD-3141 NEW ZEALAND JRW.JXL.JXL 03/18/91 06/08/95
- ------------------------------------------------------------------------------------------------------------------------------------
015NZ2 DepoTech Corporation ISSUED 247547 247547 HETEROVESICULAR LIPOSOMES
FD-3442 (Div/PD3141) NEW JRW.JXL.SRY 03/18/91 05/14/96
ZEALAND
- ------------------------------------------------------------------------------------------------------------------------------------
015PT1 DepoTech Corporation PENDING 97101 HETEROVESICULAR LIPOSOMES
FD-3141 PORTUGAL JRW.JXL.JXL 03/21/91
- ------------------------------------------------------------------------------------------------------------------------------------
015RU1 DepoTech Corporation PENDING 5053129/081 HETEROVESICULAR LIPOSOMES
FD-3141 RUSSIA JRW.JXL.JXL 03/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
015SA1 DepoTech Corporation PENDING 93130496 HETEROVESICULAR LIPOSOMES
FD-3141 SAUDI ARABIA JRW.JXL.JXL 04/27/93
- ------------------------------------------------------------------------------------------------------------------------------------
015SE1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES
FD-3141 SWEDEN JRW.JXL.JXL 03/20/91 06/07/95
- ------------------------------------------------------------------------------------------------------------------------------------
015TW1 DepoTech Corporation PENDING 80102163 HETEROVESICULAR LIPOSOMES
FD-3141 TAIWAN JRW.JXL.JXL 03/19/91
- ------------------------------------------------------------------------------------------------------------------------------------
015WO1 DepoTech Corporation NAT'L PHASE US91/01849 HETEROVESICULAR LIPOSOMES
FD-3141 PCT JRW.JXL.JXL 03/20/91
- ------------------------------------------------------------------------------------------------------------------------------------
015ZA1 DepoTech Corporation ISSUED 91/1974 91/1974 HETEROVESICULAR LIPOSOMES
FD-3141 S. AFRICA JRW.JXL.JXL 03/18/91 09/28/94
- ------------------------------------------------------------------------------------------------------------------------------------
016001 Sinil Kim ISSUED 08/078,701 5,422,120 HETEROVESICULAR LIPOSOMES
CIP/PD3141 JRW.JRW.JXL 06/16/93 06/06/95
- ------------------------------------------------------------------------------------------------------------------------------------
017001 Sinil Kim ABANDONED 08/051,135 CYCLODEXTRIN LIPOSOMES
PD-3403 JRW.JRW.JXL 04/22/93 ENCAPSULATING PHARMACOLOGIC
COMPOUNDS AND METHODS FOR THEIR
USE
- ------------------------------------------------------------------------------------------------------------------------------------
017CA1 DepoTech Corporation PENDING 2161225 CYCLODEXTRIN LIPOSOMES
CYCLODEXTRIN JRW.JRW.JXL 04/22/94 ENCAPSULATING PHARMACOLOGIC
COMPOUNDS AND METHODS FOR THEIR
USE
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 10
<PAGE> 11
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
====================================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Filing Date Issue Date
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
017EP1 DepoTech Corporation PENDING 94916558.3 CYCLODEXTRIN LIPOSOMES
CYCLODEXTRIN JRW.JRW.SRY 04/22/94 ENCAPSULATING PHARMACOLOGIC
COMPOUNDS AND METHODS FOR THEIR
USE
- ------------------------------------------------------------------------------------------------------------------------------------
017JP1 DepoTech Corporation PENDING 6-523593 CYCLODEXTRIN LIPOSOMES
CYCLODEXTRIN JRW.JRW.JXL 04/22/94 ENCAPSULATING PHARMACOLOGIC
COMPOUNDS AND METHODS FOR THEIR
USE
- ------------------------------------------------------------------------------------------------------------------------------------
017TW1 Depotech Corporation PENDING 82107009 CYCLODEXTRIN LIPOSOMES
FD-3403 TAIWAN JRW.JRW.JXL 08/28/93 ENCAPSULATING PHARMACOLOGIC
COMPOUNDS AND METHODS FOR THEIR
USE
- ------------------------------------------------------------------------------------------------------------------------------------
017WO1 Depotech Corporation NAT'L PHASE US94/04490 CYCLODEXTRIN LIPOSOMES
FD-3536 PCT (CIP/PD3403) JRW.JRW.JXL 04/22/94 ENCAPSULATING PHARMACOLOGIC
COMPOUNDS AND METHODS FOR THEIR
USE
- ------------------------------------------------------------------------------------------------------------------------------------
018001 Mantripragada B. Sankaram ABANDONED 08/227,776 PREPARATION OF MULTIVESICULAR
PD-3481 JRW.JRW.JXL 04/13/94 LIPOSOMES FOR CONTROLLED RELEASE
OF ENCAPSULATED BIOLOGICALLY
ACTIVE SUBSTANCES
- ------------------------------------------------------------------------------------------------------------------------------------
019001 M. Sankaram et al. PENDING 08/305,158 PREPARATION OF MULTIVESICULAR
PD-3636 JRW.JRW.JXL 09/13/94 LIPOSOMES FOR CONTROLLED RELEASE
OF ENCAPSULATED BIOLOGICALLY
ACTIVE SUBSTANCES
- ------------------------------------------------------------------------------------------------------------------------------------
019WO1 Depotech Corporation INT'L PHASE US95/11609 PREPARATION OF MULTIVESICULAR
FD-3636 - PCT JRW.JRW.JXL 09/13/95 LIPOSOMES FOR CONTROLLED RELEASE
OF ENCAPSULATED BIOLOGICALLY
ACTIVE SUBSTANCES
- ------------------------------------------------------------------------------------------------------------------------------------
020001 Sinil Kim ALLOWED 08/393,724 HETEROVESICULAR LIPOSOMES
PD-4140 (CIP/PD3142) JRW.JRW.JXL 02/23/95
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 11
<PAGE> 12
DEPOTECH CORPORATION (07333)
PATENTS AND APPLICATIONS
<TABLE>
<CAPTION>
====================================================================================================================================
Matter Inventors Status Serial No. Patent No. Title of Application
Number Matter Name Filing Date Issue Date
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
021001 Sinil Kim PENDING 08/502,569 EPIDURAL ADMINISTRATION OF
EPIDURAL . .JXL 07/14/95 THERAPEUTIC
- ------------------------------------------------------------------------------------------------------------------------------------
022001 Mantripragada Sankaram et PENDING 08/473,013 MULTIVESICULAR LIPOSOMES WITH
ACIDS JRW.JRW.JXL 06/06/95 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- ------------------------------------------------------------------------------------------------------------------------------------
023001 Mantripragada Sankaram et PENDING 08/486,272 MULTIVESICULAR LIPOSOMES WITH
ACIDS JRW.JRW.JXL 06/06/95 CONTROLLED RELEASE OF
ENCAPSULATED BIOLOGICALLY ACTIVE
SUBSTANCES
- ------------------------------------------------------------------------------------------------------------------------------------
024001 Sinil Kim et al. PENDING 08/473,019 MULTIVESICULAR LIPOSOMES HAVING A
HYDROCHLORIDE JRW.JRW.JXL 06/06/95 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- ------------------------------------------------------------------------------------------------------------------------------------
025001 Sinil Kim et al. PENDING 08/472,126 MULTIVESICULAR LIPOSOMES HAVING A
HYDROCHLORIDE JRW.JRW.JXL 06/06/95 BIOLOGICALLY ACTIVE SUBSTANCE
ENCAPSULATED THEREIN IN THE
PRESENCE OF A HYDROCHLORIDE
- ------------------------------------------------------------------------------------------------------------------------------------
027001 Sinil Kim PENDING 08/535,256 CYCLODEXTRIN LIPOSOMES
CYCLODEXTRIN CIP JRW.JRW.JXL 10/23/95 ENCAPSULATING PHARMACOLOGIC
COMPOUNDS AND METHODS FOR THEIR
USE
- ------------------------------------------------------------------------------------------------------------------------------------
030001 UNFILED
ENCAPSULATION EFFICIENCY IN JRW.JRW.JXL
LIPOSOMES
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Generated: July 8, 1996 Page: 12
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 16, 1996,
in the Registration Statement (Form S-1 No. 333- ) and related
Prospectus of DepoTech Corporation for the registration of 2,000,000 shares of
its common stock.
ERNST & YOUNG LLP
San Diego, California
July 10, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name and the statement
with respect to us that appears under the heading "Experts" in the Registration
Statement.
FISH & RICHARDSON P.C.
BY: /s/ John Wetherell
John Wetherell
July 10, 1996
