<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION NOVEMBER 26, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
PHARMAPRINT INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 33-0640125
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation) Number)
</TABLE>
4 PARK PLAZA, SUITE 1900, IRVINE, CALIFORNIA 92614
(714) 794-7778
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
JAMES R. WODACH,
CHIEF FINANCIAL OFFICER
4 PARK PLAZA, SUITE 1900,
IRVINE, CALIFORNIA 92614 (714) 794-7778
(Name, Address and Telephone Number of Agent for Service)
------------------------------
WITH COPIES TO:
Barry J. Siegel Brian W. Copple
Cynthia Wong Monte M. Brem
Klehr, Harrison, Harvey, Branzburg & Gibson, Dunn & Crutcher LLP
Ellers LLP
1401 Walnut Street 4 Park Plaza, Suite 1700
Philadelphia, PA 19102 Irvine, California 92614
(215) 568-6060 (714) 451-3800
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING EFFECTIVENESS OF THIS REGISTRATION STATEMENT.
------------------------------
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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
<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SECURITY(3) PRICE(3) FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.001 per share......... 2,587,500(1) $13.19 $34,129,125 $10,343
Common Stock, par value $.001 per share......... 112,500(2) $15.83 $1,780,875 $540(4)
Warrants to Purchase Shares of Common Stock..... 112,500(2) $0.01 $1,000 $ -- (5)
</TABLE>
(1) Includes 337,500 shares subject to the Underwriter's over-allotment option.
(2) Warrants to purchase 112,500 shares of Common Stock issued to the
Underwriters and the shares of Common Stock issuable upon exercise thereof.
(3) Estimated solely for the purpose of calculating the registration fee.
(4) Pursuant to Rule 457(g), the fee calculation is based upon the price at
which the Warrants may be exercised and the registration fee covers both the
Warrants and the Common Stock issuable upon exercise thereof.
(5) None pursuant to Rule 457(g). See footnote 4.
------------------------
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CROSS-REFERENCE SHEET: INFORMATION REQUIRED IN PROSPECTUS
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM SB-2 CAPTION OR LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Front of Registration Statement and Outside Front Front of Registration Statement; Outside Front Cover
Cover of Prospectus Page
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages
Prospectus
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price N/A
6. Dilution Dilution
7. Selling Security Holders Principal and Selling Stockholders
8. Plan of Distribution Outside Front Cover Page; Underwriting
9. Legal Proceedings Business--Legal Proceedings
10. Directors, Executive Officers, Promoters and Control Management
Persons
11. Security Ownership of Certain Beneficial Owners and Principal and Selling Stockholders; Certain
Management Transactions
12. Description of Securities Outside Front Cover Page; Description of Capital
Stock; Price Range of Common Stock
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification Liabilities Management--Limitation of Liability and
For Securities Act Indemnification Matters
15. Organization Within The Last Five Years Certain Transactions
16. Description of Business Business
17. Management's Discussion and Analysis or Plan of Management's Discussion and Analysis of Financial
Operation Condition and Results of Operations
18. Description of Property Business--Facilities
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Outside Front Cover Page; Risk Factors; Price Range
Matters of Common Stock
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes In and Disagreements with Accountants on N/A
Accounting and Financial Disclosures
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER , 1997
2,250,000 SHARES
[LOGO]
COMMON STOCK
--------------
All of the shares of common stock ("Common Stock") offered hereby (the
"Offering") are being sold by PharmaPrint Inc. (the "Company" or "PharmaPrint").
The Common Stock is listed on the Nasdaq National Market under the symbol
"PPRT." On November 25, 1997, the last reported sale price of the Common Stock
on the Nasdaq National Market was $13.75 per share. See "Price Range of Common
Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
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Per Share................... $ $ $
Total(3).................... $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $325,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 337,500 additional shares of
Common Stock at the Price to Public per share, less the Underwriting
Discount for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
-------------------
The shares of Common Stock are offered severally by the Underwriters when,
as and if delivered to and accepted by them, subject to their right to withdraw,
cancel or reject orders in whole or part and subject to certain other
conditions. It is expected that delivery of certificates representing the shares
will be made against payment on or about December , 1997 at the office of CIBC
Oppenheimer Corp., CIBC Oppenheimer Tower, One World Financial Center, New York,
New York 10281.
-------------------
CIBC OPPENHEIMERCCRUTTENDEN ROTH
INCORPORATED
The date of this Prospectus is , 1997
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of Section 13(a) of
the Securities Exchange Act of 1934 as amended (the "Exchange Act") and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the SEC Regional Offices and can be reviewed through
the Commission's Electric Data Gathering Analysis and Retrieval System ("EDGAR")
which is publicly available through the Commission's web site
(http://www.sec.gov). The Company's Common Stock is traded on the Nasdaq
National Market. Reports and other information concerning the Company can also
be inspected at Nasdaq.
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933 , as amended (the
"Securities Act") with respect to the shares of Common Stock offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission thereunder. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to such Registration Statement, exhibits and schedules. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. A copy of the Registration Statement, including the exhibits
and schedules thereto, may be inspected without charge at the Commissions'
public reference facilities at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549, at the Pacific Regional Office located at 5670
Wilshire Boulevard, 11th Floor, Los Angeles, California 90036-3648, the New York
Regional Office located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and the Chicago Regional Office located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 ("SEC
Regional Offices") and copies of all or any part thereof may be obtained at
prescribed rates from the Public Reference Section of the Commission. Such
reports and other information can be reviewed through EDGAR.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ NATIONAL
MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS (AND NOTES THERETO) APPEARING ELSEWHERE
IN THIS PROSPECTUS. EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE
OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION
PROVIDED UNDER "RISK FACTORS."
THE COMPANY
PharmaPrint Inc. ("PharmaPrint" or the "Company") is applying its
proprietary development and manufacturing process technologies (the "PharmaPrint
Process") to develop pharmaceutical-grade dietary supplement products and
pharmaceuticals from natural plant extracts. The Company is focusing its
development efforts on certain plants and plant extracts that are widely used
throughout the United States and Europe to treat a variety of diseases and
physical conditions. The PharmaPrint Process enables the Company to identify and
quantify the active molecules (referred to as "bioactives") within plant sources
that are believed to provide therapeutic or other health benefits and to produce
dietary supplements and pharmaceuticals having consistent batch-to-batch
quantities and ratios of these bioactives. The Company believes that its dietary
supplement products will deliver more consistent results than currently
available dietary supplement products and that its pharmaceutical products may
qualify for regulatory approval.
The Company believes that its PharmaPrint Process technology represents a
new paradigm in the development of therapeutic products from botanical sources.
Traditional drug development has focused on identifying, isolating and
synthesizing single molecules from plant sources that demonstrate activity in
certain IN VITRO assays. However, most single molecules derived from plant
sources cannot be developed into viable drugs. The Company's core technologies
were developed based on empirical data that suggests that the health benefits
and safe usage of certain plant-derived therapeutics might be the result of the
natural combination of multiple molecules found in the plant extract and that
single molecules, in isolation, may not replicate the natural plant's
effectiveness.
The worldwide market for multi-molecule, plant-derived products is
substantial. In 1996 approximately $3 billion was spent in the United States for
non-prescription, plant-derived dietary supplements, with sales having increased
approximately 25% annually in the last few years. In addition, approximately $6
billion was spent in Europe for prescription and over-the-counter ("OTC")
multi-molecule, plant-derived products.
The Company has implemented a dual commercialization strategy for its
PharmaPrint Process technology. The first element of this strategy entails the
development of consistent, pharmaceutical-grade dietary supplement products. In
the United States, dietary supplements are considered food products under the
Dietary Supplement Health and Education Act of 1994 ("DSHEA") and, as such, are
not regulated as drugs by the United States Food and Drug Administration (the
"FDA") and do not require FDA approval prior to commercialization. The Company
has commenced development of 12 of the most commonly used dietary supplements
(derived from agnus castus, bilberry, black cohosh, echinacea, garlic, ginger,
ginkgo biloba, ginseng, milk thistle, saw palmetto, St. John's wort and
valerian).
On October 7, 1997 the Company entered into several agreements (the "AHP
Agreements") with American Home Products Corporation ("AHP") whereby the Company
will apply the PharmaPrint Process in the production of a line of
pharmaceutical-grade dietary supplement products to be marketed by AHP under the
Centrum brand name (the "AHP Products"). In exchange for the exclusive right to
use the PharmaPrint Process in the production of dietary supplements, AHP paid
the Company $2.5 million in an up-front licensing fee and is required to pay
additional fees upon the achievement of certain product and patent milestones.
AHP has agreed, in the first two years following product launch, to spend at
least the lesser of $40 million or an amount equal to 50% of net sales of the
AHP Products in advertising and other marketing expenditures. AHP has also
agreed to purchase the AHP Products under a Supply Agreement
3
<PAGE>
at specified prices. In addition, if the Company succeeds in securing a patent
containing a claim or claims comprising the PharmaPrint Process, AHP will pay
royalties to the Company on net sales of AHP products covered by the patent. AHP
plans to commence marketing seven of the Company's dietary supplement products
under development in 1998. AHP and the Company will examine from time to time
the opportunity to increase or modify this product line.
The second element of the Company's strategy is to apply the PharmaPrint
Process to the development of FDA-approvable pharmaceuticals from natural plant
sources. PharmaPrint is focusing its pharmaceutical development efforts
initially on certain plants and plant extracts (such as saw palmetto, St. John's
wort and ginkgo biloba, among others) that have shown indications of clinical
effectiveness in treating a variety of diseases and physical conditions.
Although these multi-molecule, plant-derived products are widely sold in many
European countries on a prescription or OTC basis, they currently are available
only as dietary supplements in the United States. The Company believes that
these products have not been approved as pharmaceuticals under FDA guidelines
primarily due to the difficulties of identifying the bioactives and
manufacturing the compounds to FDA standards.
PharmaPrint believes that the PharmaPrint Process will, for the first time,
make it feasible to develop multi-molecule, plant-derived drug candidates with
sufficient quality and consistency of bioactives to potentially qualify for FDA
approval. Because of the well-documented history of safe usage of products
derived from the same plant sources as the Company's drug candidates, the
Company believes that, in certain cases, the FDA may allow the Company to
commence clinical trials at the Phase II stage while concurrently performing
toxicology studies. The Company received such FDA clearance for its initial
pharmaceutical product candidate, PPRT-321. The Company also plans to use its
United States clinical data to apply for regulatory approvals to market its
products in the prescription and OTC markets in Europe and other international
markets.
In September 1997, the Company commenced Phase II clinical trials in four
medical centers in the United States for PPRT-321, a saw palmetto-derived drug
that is being developed for the treatment of symptoms associated with benign
prostatic hyperplasia ("BPH"). In early 1998, the Company intends to file an
Investigational New Drug ("IND") application for PPRT-152, its anti-depressant
drug candidate derived from St. John's wort. In addition, the Company is
applying the PharmaPrint Process to the development of pharmaceutical versions
of four other plant-derived drug candidates that have long histories of human
use and indications of effectiveness: ginkgo biloba (to treat cognitive
disorders), valerian (to treat insomnia), black cohosh (to reduce certain
post-menopausal symptoms) and agnus castus (to reduce premenstrual symptoms).
The Company is in discussions with several major pharmaceutical companies for
the development and distribution of the Company's potential pharmaceutical
products, including AHP, to whom the Company has granted a limited option.
The Company has filed with the United States Patent and Trademark Office
(the "PTO") an application for a broad process patent covering a method for
making pharmaceutical-grade botanicals, including 29 botanical compositions,
that incorporates the steps that make up the PharmaPrint Process, as well as
additional applications covering the application of this method to the
manufacture of 11 specific botanical compositions.
The Company's principal executive offices are located at 4 Park Plaza, Suite
1900, Irvine, CA 92614 and its telephone number is (714) 794-7778.
PHARMAPRINT-TM- AND THE THREE-LEAF LOGO ARE TRADEMARKS OF THE COMPANY.
CENTRUM-REGISTERED TRADEMARK- IS A REGISTERED TRADEMARK OF AHP. THIS PROSPECTUS
ALSO INCLUDES TRADEMARKS OF COMPANIES OTHER THAN THE COMPANY AND AHP.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company......................... 2,250,000 shares
Common Stock outstanding after the
Offering........................ 13,303,684 shares(1)
Use of proceeds................... To fund formulation, toxicology and clinical testing of
the Company's pharmaceutical products, formulation and
manufacturing of the AHP Products pursuant to the AHP
Agreements, potential acquisitions of research and
manufacturing facilities and working capital and general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol..... PPRT
</TABLE>
- ------------------------
(1) Excludes (i) 1,980,378 shares reserved for issuance upon exercise of
outstanding options granted under the Company's 1995 Stock Option Plan, at a
weighted average exercise price of $5.26 per share and (ii) 412,500 shares
issuable upon exercise of warrants, including the Underwriters' Warrants.
See "Description of Capital Stock" and "Underwriting."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED SEPTEMBER
(SEPTEMBER 15, YEAR ENDED MARCH 31, 30,
1994) TO MARCH ----------------------------- ----------------------------
31, 1995 1996 1997 1996 1997
-------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................ $ -- $ -- $ -- $ -- $ --
Expenses:
Research and development
expenses.......................... 378,456 386,878 2,980,064 786,495 2,717,402
General and administrative
expenses.......................... 105,552 653,557 2,919,351 1,640,497 1,863,712
Stock compensation expense........ -- 303,750 5,333,437 4,585,000 3,623,540
-------------- ------------- -------------- ------------- -------------
Loss from operations................ (484,008) (1,344,185) (11,232,852) (7,011,992) (8,204,654)
-------------- ------------- -------------- ------------- -------------
Net loss............................ $ (484,008) $ (1,344,185) $ (11,232,852) $ (7,011,992) $ (8,204,654)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Net loss per share.................. $ (0.06) $ (0.16) $ (1.10) $ (0.79) $ (0.73)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Weighted average common and common
share equivalents outstanding..... 7,635,474 8,297,103 10,193,131 8,893,702 11,223,072
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
AS
ACTUAL ADJUSTED(1)
------------ -------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 3,281,188 $31,728,063
Working capital..................................................................... 2,719,293 31,166,168
Total assets........................................................................ 4,052,964 32,499,839
Total liabilities................................................................... 891,754 891,754
Stockholders' equity................................................................ 3,161,210 31,608,085
</TABLE>
- ------------------------
(1) As adjusted to give effect to the sale of the 2,250,000 shares of Common
Stock offered hereby and the application of the net proceeds therefrom at an
assumed public offering price of $13.75 per share. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN EVALUATING
THE COMPANY AND ITS BUSINESS PROSPECTS AND AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS,
INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING THE APPLICATION OF THE
PHARMAPRINT PROCESS, THE COMMENCEMENT AND COMPLETION OF TOXICOLOGY STUDIES AND
CLINICAL TRIALS, THE TIMING OF PLANNED REGULATORY FILINGS, PLANNED ACTIVITIES OF
EXISTING AND POTENTIAL COLLABORATIVE PARTNERS, THE COMPANY'S STRATEGIC PLANS,
THE SCOPE OF THE COMPANY'S PATENT COVERAGE, ANTICIPATED EXPENDITURES, THE NEED
FOR ADDITIONAL FUNDS AND OTHER EVENTS AND CIRCUMSTANCES DESCRIBED IN TERMS OF
THE COMPANY'S EXPECTATIONS OR INTENTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THIS PROSPECTUS AS A RESULT OF VARIOUS
FACTORS, INCLUDING, BUT NOT LIMITED TO, THE UNCERTAINTY OF PATENT ISSUANCE AND
PROTECTION, MARKET AND REGULATORY ACCEPTANCE OF THE COMPANY'S TECHNOLOGY,
PRODUCT REVENUE AND THE OTHER RISKS DISCUSSED UNDER "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS" AS WELL AS IN THIS PROSPECTUS GENERALLY.
EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTIES
The Company is a development stage company and has a limited operating
history. The Company's prospects must be considered in light of the risks,
expenses and difficulties frequently encountered in establishing a business in
the consumer products and pharmaceutical industries, which are characterized by
a large number of market entrants, intense competition and a high failure rate.
To date, the Company has been engaged primarily in research and development
activities and has generated no revenue from product sales. To achieve
profitable operations, the Company, alone or with others, must successfully
develop, introduce and market products. No assurance can be given that the
Company's product development efforts will be successfully completed, that
required regulatory approvals will be obtained, or that any product, if
introduced, will be successfully marketed or will achieve customer acceptance.
The Company currently has no dietary supplement or pharmaceutical products
available for sale and its research and development programs for its
pharmaceutical products are at an early stage. There can be no assurance that
the Company's research will lead to the development of any commercially feasible
product. Research and development activities, by their nature, preclude
definitive statements as to the time required and costs involved in reaching
certain objectives. Actual research and development costs could exceed budgeted
amounts and estimated time frames may require extension. Cost overruns due to
unanticipated clinical or regulatory delays or demands, unexpected adverse side
effects, insufficient therapeutic efficacy or competitive or technological
developments would prevent or substantially deter development efforts and
ultimately could have a material adverse effect on the Company. The Company's
existing pharmaceutical product candidates, and any potential additional
pharmaceutical products that may be developed, require significant additional
research and development, including toxicology and clinical testing, regulatory
approval and commitments of resources prior to commercialization. There can be
no assurance that any such potential pharmaceutical products will be
successfully developed or capable of being produced in commercial quantities at
acceptable costs, or that any pharmaceutical product will prove to be safe and
effective in clinical trials or otherwise, or meet applicable regulatory
standards. Furthermore, clinical trials of the Company's initial pharmaceutical
products may be viewed as a test of the Company's PharmaPrint Process. If these
clinical trials encounter problems or are otherwise unsuccessful, the
applicability of the PharmaPrint Process to other drug development candidates
may be uncertain.
DEPENDENCE ON AHP
The Company granted AHP an exclusive license to market and sell in the
United States and certain other countries the AHP Products developed or to be
developed using the PharmaPrint Process. The Company is relying upon sales of
its dietary supplement products to AHP and, through AHP, to
7
<PAGE>
consumers, under the AHP Agreements, as its only sources of product revenues in
the near future. Prior to the initial launch date of the AHP Products, the AHP
Agreements are terminable by AHP in its sole discretion upon thirty days notice.
Subsequent to such launch date, AHP can terminate the AHP Agreements with
respect to specific products in its sole discretion upon ninety days notice and
can terminate the AHP Agreements in their entirety in its sole discretion with
one year's notice. If the AHP Agreements are terminated in whole or part, the
Company may not be able to enter into comparable agreements for the distribution
and sale of its products or establish its own marketing and sales force to
market potential products, which events could have a material adverse effect on
the Company's business, financial condition and results of operations.
AHP is not obligated to pay royalties to the Company on sales of any AHP
Products that are not covered by a patent containing a claim or claims
comprising the PharmaPrint Process. The Company does not currently possess any
such patents for any of its products, and there can be no assurance that patents
will be obtained for any of the AHP Products. The Company's business, financial
condition and results of operations will be materially adversely affected if AHP
does not make such royalty payments to the Company.
The AHP Agreements limit AHP's obligation to provide marketing support for
the AHP Products during the first two years following the initial launch date of
the licensed products to an annual amount of the lesser of fifty percent of net
sales of the AHP Products or $20,000,000. Accordingly, poor initial sales could
result in the marketing support required of AHP being significantly less than
$20,000,000 per year. After the first two years following the initial launch
date, AHP is not required to provide any marketing support for the AHP Products.
If AHP does not dedicate sufficient funds to marketing the AHP Products, sales
of these products and the Company's business, financial condition and results of
operations may be adversely affected.
AHP has made an initial payment of $2,500,000 to the Company. However, if
(i) AHP reasonably concludes, prior to the first commercial sale of an AHP
Product, that a license under a third party's patent is required in order to
sell the AHP Products and (ii) AHP and the Company are unable to obtain such a
license, then the Company must return all or a portion of such payment to AHP
(as well as two other milestone payments, if AHP makes such payments). If a
license to a third party's patent is required and obtained, any payments and
royalties that are paid by AHP for the license will be deducted from any royalty
payments or other payments due to the Company under the AHP Agreements. There
can be no assurance that the Company will not be required to obtain a license of
a third party's patent in order to sell any single or all of the AHP Products.
Reimbursement of any payment made by AHP to the Company or a reduction in the
amount of the royalty payments could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects to enter into collaborative agreements with other
partners for the development and marketing of products not subject to the AHP
Agreements. There can be no assurance that the Company's collaboration with AHP
or any other potential partner will result in product revenues or profits. In
addition, there can be no assurance that AHP or any such corporate partner or
licensee will not pursue alternative technologies or develop alternative
therapeutics, either on its own or in collaboration with others, targeted at the
same diseases as those developed and commercialized by the Company. The
commercial value of such products, even if successfully developed, will depend
on the ability of AHP and any other partner to market and commercialize such
products.
UNCERTAINTIES RELATED TO THE PHARMAPRINT PROCESS
The Company believes its competitive advantage is its unique ability,
through application of the PharmaPrint Process, to assess and standardize the
bioactive composition and potency of plant-derived dietary supplements and
pharmaceuticals. There can be no assurance, however, that consumers in the
dietary supplement market will value this standardization highly, particularly
in light of the fact that these products cannot be marketed through any claims
for the treatment or prevention of disease. Accordingly,
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there can be no assurance that the Company's dietary supplement products will
compete effectively or achieve commercial success.
In the pharmaceutical market, the Company is dependent upon regulatory
approval for its plant-derived multi-molecule drug candidates. The Company does
not believe that the FDA and other regulatory authorities have ever approved
multi-molecule, botanical pharmaceuticals, and there can be no assurance that
regulators will begin approving these compounds in general, or accept the
PharmaPrint Process as an appropriate method of standardizing botanical
compounds for clinical testing and approval of the Company's drug candidates in
particular. Unavailability of regulatory review and approval would prevent the
Company from achieving its pharmaceutical development plans, in which case the
Company's only potential business would be dietary supplements.
DEPENDENCE ON PATENTS AND OTHER PROPRIETARY RIGHTS; UNCERTAINTY OF PATENT
PROTECTION AND
PROPRIETARY RIGHTS
The Company's success will depend on its ability to obtain and maintain
patent protection for its technologies and dietary supplement and pharmaceutical
products, preserve its trade secrets, and operate without infringing on the
proprietary rights of third parties. The Company plans to achieve a competitive
advantage as the only provider of botanical dietary supplements and
multi-molecule, pharmaceuticals that can market its products on the basis of
consistent composition, presence of at least one bioactive and their proven
bioactivity. This depends upon its ability to obtain a patent covering the
PharmaPrint Process that is broad enough to prevent competitors from making such
claims. The Company has filed with the PTO an application for a broad process
patent covering a method for making pharmaceutical-grade botanicals, including
29 botanical compositions, that incorporates the steps that make up the
PharmaPrint Process, as well as additional patent applications covering the
application of this method to the manufacture of 11 specific botanical
compositions. The Company intends to file additional patent applications as it
develops additional products or enhances its technologies. To date, the Company
has not received any patents or notice of allowance of any patent application
for any products it currently intends to commercialize. If the Company does not
obtain a patent covering the PharmaPrint Process, it will not be able to protect
its pharmaceutical products and its ability to compete successfully in the
dietary supplements market will be impaired.
There can be no assurance that the Company will obtain any patents covering
the Company's technology or the products the Company plans to market or that any
patents that may be issued to the Company will provide substantial protection or
be of commercial benefit to the Company. The issuance of a patent is not
conclusive as to its validity or enforceability, and competitors may be able to
design around any patent the Company obtains, including by finding ways to
substantiate claims about the composition or bioactivity of competing products
without utilizing the process used by the Company. Any patent covering the
PharmaPrint Process may be vulnerable to challenge on various grounds, including
lack of nonobviousness, and there can be no assurance that any patent issued to
the Company will not be invalidated, or that the Company will not be forced to
narrow, through reexamination, the scope of such a patent claim to avoid its
invalidation. In addition, there can be no assurance that any application of the
Company's technology will not infringe patents or proprietary rights of others
or that licenses that might be required as a result of such infringement for the
Company's processes or products would be available on commercially reasonable
terms, if at all.
Litigation, which could result in substantial cost to the Company, and
diversion of effort by the Company's management and technical personnel may be
necessary to enforce the Company's patent and proprietary rights and/or to
determine the scope and validity of others' proprietary rights. The Company may
participate in interference proceedings that may in the future be declared by
the PTO to determine priority of invention, which could result in substantial
cost to the Company. There can be no assurance that the outcome of any
litigation or interference proceedings will be favorable to the Company and an
unfavorable outcome in any proceeding could have a material adverse effect on
the Company's business, financial condition and results of operations.
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The patent position of biotechnology and biopharmaceutical firms generally
is highly uncertain and involves complex legal and factual questions. To date,
no consistent policy has emerged regarding the breadth of claims allowed in
biotechnology and biopharmaceutical patents. Accordingly, there can be no
assurance that any patent applications owned or licensed by the Company will
result in patents being issued or that, if issued, the patents will afford
protection against competitors with similar technology.
Many of the processes and much of the know-how of importance to the
Company's technology depend upon the non-patentable skills, knowledge, and
experience of its scientific and technical personnel and collaborators. To help
protect its rights, the Company requires employees, collaborators, and
significant consultants and advisors with access to confidential information, to
enter into confidentiality agreements with the Company. There can be no
assurance, however, that these agreements will provide adequate protection for
the Company's trade secrets, know-how or proprietary information in the event of
any unauthorized use or disclosure.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
In order to obtain marketing approval from the FDA, the Company must
demonstrate through toxicology testing and clinical trials that PPRT-321, its
only drug candidate for which the FDA has allowed clinical trials to date, is
safe and effective for use in its target indication. The results from initial
clinical trials of PPRT-321 and any other drug candidates may not be indicative
of the results that may be obtained in further clinical trials. Many companies
have suffered significant setbacks in advanced clinical trials, even after
promising results in earlier trials. The rate of completion of the Company's
clinical trials may be delayed by many factors including, but not limited to,
slower than anticipated patient enrollment, a slower than anticipated timetable
as determined by the Company or any collaborative partner, or any other adverse
event. During the course of clinical trials, patients can die or suffer other
adverse medical effects for reasons that may not be related to the drug being
tested, but which can nonetheless affect clinical trial results. There can be no
assurance that the Company will be permitted by regulatory authorities to
undertake additional clinical trials of PPRT-321 or to initiate clinical trials
of any other drug candidates, or that any clinical trials undertaken by the
Company will be completed successfully within a particular time period, if at
all. Any delays in or termination of the Company's clinical trial efforts would
have a material adverse effect on the business and financial condition of the
Company. There can also be no assurance that PPRT-321 or any other drug
candidate will be safe or effective in clinical trials, that PPRT-321 or any
other drug candidate will receive regulatory approval for any indication or that
any clinical trials undertaken by the Company will result in marketable
products. If PPRT-321 or other drug candidates are not shown to be safe and
effective in clinical trials, the Company's business, financial condition and
results of operations would be materially adversely affected.
OUTSOURCING OF MANUFACTURING, RESEARCH AND DEVELOPMENT AND REGULATORY ACTIVITIES
The Company has no experience in the manufacturing, sale, marketing,
distribution and clinical testing of pharmaceutical products or dietary
supplements and will have to rely on collaborative arrangements or license and
distribution agreements with third parties. The Company does not have the
facilities or capability to manufacture, and has not yet manufactured on a
commercial scale, its potential products. The Company has entered into an
agreement with Hauser, Inc. to manufacture PPRT-321 for use in clinical tests,
to supply certain herbal extracts to the Company and to provide analytical tests
for each manufactured batch. To be successful, if approved by the FDA, the
Company's pharmaceutical products must be manufactured, at an acceptable cost,
in commercial quantities under the FDA's current good manufacturing practices
("cGMP") and/or other standards prescribed by the appropriate regulatory agency
in the country of use. On an ongoing basis, the Company will depend on its
ability to develop such manufacturing capabilities or contract with other
manufacturers. In addition, pursuant to the Supply Agreement entered into
between AHP and the Company (the "Supply Agreement"), the Company will be the
exclusive supplier to AHP of the herbal products sold by AHP pursuant to the AHP
Agreements and must produce such products under applicable cGMP. The Company is
currently in discussions with various
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third parties to manufacture products for delivery to AHP under the Supply
Agreement. In the event the Company is unable to manufacture or obtain contract
manufacturing on acceptable terms, its ability to commercialize or deliver
products at acceptable cost in a timely manner may be adversely affected. See
"Business--Business Strategy."
Additionally, the Company has the exclusive right to supply AHP with 100% of
the AHP Products. If the Company fails to supply certain commercial quantities
of the AHP Products for a period of 60 consecutive days for any reason, AHP has
the right to manufacture such products itself, or retain a third party
manufacturer. There can be no assurance that the Company will be able to meet
its obligation to supply the AHP Products in sufficient commercial quantities.
The loss by the Company of manufacturing rights to AHP or a third party would
have a material adverse effect on the business, financial condition and results
of operations of the Company.
Most of the Company's research and development activities currently are
performed by various third party laboratories and manufacturing facilities.
Although the Company believes that its partners have and will continue to have
an economic motivation to perform their duties in a timely and effective manner,
the amount and timing of the resources devoted by such parties to performing
their duties may vary. Any failure to perform such duties may result in a delay
in the Company's ability to continue its product development activities and to
commercialize its products. Any such failure or delay could also result in the
Company breaching its obligations under the AHP Agreement and any other
collaborative arrangement it may enter into and could have a material adverse
effect on the business, financial condition and results of operations of the
Company.
Most of the Company's regulatory activities are currently being performed in
conjunction with Advanced Bioresearch Associates ("ABA") of San Diego,
California. In the event that ABA does not continue to provide regulatory
guidance to the Company, the Company would have to further develop its own
regulatory expertise or contract with others for regulatory guidance. There can
be no assurance that the Company, either on its own or with third parties, would
be able to further develop this regulatory expertise.
In connection with any future collaborative arrangements, the Company may be
required to transfer control of toxicology studies and clinical trials, the
preparation and submission of regulatory approvals and the manufacture of
products. In the event the Company does transfer such control, it would be
dependent upon its partners' efforts to effectively and efficiently develop such
drug candidates. Additionally, by outsourcing the manufacturing of drug
candidates, the Company may lose the opportunity to generate profits from
manufacturing.
COST AND AVAILABILITY OF BOTANICAL EXTRACTS
The Company procures the botanical extracts necessary for development of its
products from various sources in the United States, Europe and Asia. The Company
has agreed, and has the exclusive right, to supply AHP with 100% of AHP's
requirements of the products licensed to AHP by the Company. The Company will
have to purchase a significant amount of botanical extract in the near future to
meet these obligations. Many of the botanical extracts contained in the
Company's products are not commodities, so price risk cannot be hedged with
traditional futures contracts. In addition, some of these plants are picked in
the wild, rather than farm cultivated, resulting in a highly unstable supply.
This uncertain supply, in combination with the possibility of continued
increases in demand, could result in significant increases in the price of the
botanical extracts used in the Company's products. In addition, if due to supply
shortages AHP is unable to meet the demand of its customers, even if for a short
time, the result could be a long-term decrease in sales of the AHP Products.
Although the Company can increase the price of its licensed products to AHP to
adjust for increases in raw material costs under certain limited circumstances,
there can be no assurance that an adequate supply of botanical extracts will be
available to the Company and on terms commercially viable to the Company in
order for it to meet its supply obligations to AHP. While the Company has
secured sufficient quantities of botanical extracts for its near term research
and development
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activities and believes there are numerous alternative suppliers throughout the
world from which the Company can obtain these botanical extracts, any
curtailment in the availability of such botanical extracts could be accompanied
by delays as well as increased materials costs that could have a material
adverse effect on the business, financial condition and results of operations of
the Company. There can be no assurance that botanical extracts will continue to
be available to the Company on terms commercially reasonable to the Company.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to
particular statutory and regulatory provisions currently in effect. Any change
in applicable laws or regulations may have a material adverse effect on the
Company's business, financial condition and results of operations. The
manufacturing, processing, formulation, packaging, labeling, advertising and
sale of dietary supplements are regulated by DSHEA, and by various federal
agencies, including the FDA and the United States Federal Trade Commission (the
"FTC"). The Company's activities are also regulated by various agencies of the
states, provinces, localities and countries in which the Company's products are
sold. DSHEA (i) defines dietary supplements, (ii) permits "structure/ function"
statements and (iii) permits the use of published literature in the sale of
herbal products. Dietary supplements do not require approval by FDA prior to
marketing but are nevertheless subject to various regulatory requirements
concerning their composition, permissible claims (including substantiation of
any claims), manufacturing procedures and other elements. DSHEA prohibits
marketing dietary supplements through claims for the treatment or prevention of
diseases and there can be no assurance that the Company's dietary supplement
products can be identified and differentiated from competing products
sufficiently enough on the basis of permissible claims regarding composition to
compete successfully. The Company cannot determine what effect current or future
regulations will have on its business, financial condition or results of
operations.
The Company's development of pharmaceuticals is subject to extensive, costly
and rigorous regulation by the FDA and foreign regulatory authorities. Drugs
that have not been demonstrated to be safe and effective according to FDA
standards are typically classified as "new drugs" and require FDA approval prior
to marketing. In order to initiate a clinical trial for a new drug an IND
application must be submitted to the FDA. The process of obtaining required
regulatory approvals from the FDA and other regulatory authorities often takes
many years, is expensive and can vary substantially based on the type,
complexity and novelty of the pharmaceutical product. As with any investigative
new drug or device, additional governmental regulations may be promulgated that
could delay regulatory approval of the Company's pharmaceutical products. While
the Company believes, based upon histories of safe human use of botanical
therapeutics, that it may be able to pursue a less time-consuming approval
process with the FDA and that the Company may be able to obtain expedited
approval in certain foreign jurisdictions, the Company nevertheless will be
required to engage in extensive toxicology studies and clinical testing in order
to demonstrate the safety and efficacy of its pharmaceutical products for human
use and there can be no assurance of quick, or any, approval. Requests for
additional data and delays in obtaining regulatory approvals by the Company, its
collaborators or licensees would adversely affect the marketing of
pharmaceutical products developed by the Company and the Company's ability to
generate pharmaceutical product revenues or royalties.
As mentioned above, clinical testing of a pharmaceutical product is subject
to regulation by government authorities, which includes acceptance of an IND
application by the FDA. No assurance can be given that the Company will be
permitted by regulatory authorities in the United States or elsewhere to carry
out further testing or that, if permitted, additional clinical testing will
prove that such pharmaceutical products are safe and effective to the extent
necessary to permit the Company to obtain marketing approvals for these products
from regulatory authorities. Additionally, the results of any initial toxicology
and clinical testing are not necessarily predictive of results that will be
obtained from subsequent or more extensive toxicology and clinical testing, and
there can be no assurance that further trials will be successful.
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Companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials. The
failure to adequately demonstrate the safety and efficacy of a pharmaceutical
product under development would delay or prevent regulatory approval of the
product and would have a materially adverse effect on the business, financial
condition and results of operations of the Company. Delays in obtaining U.S. or
foreign approvals could adversely affect the marketing of the Company's
pharmaceutical products and diminish any competitive advantage the Company may
attain. In addition, delays in regulatory approvals that may be encountered by
corporate collaborators or other licensees of the Company, if any, could
adversely affect the Company's ability to receive royalties. There can be no
assurance that if clinical trials are completed, they will be successful or that
the Company will be able to submit any New Drug Application ("NDA") on its
anticipated schedule or that any such applications will be reviewed and approved
by the FDA or foreign regulatory agencies in a timely manner, or at all. See
"Business--Business Strategy" and "Business--Government Regulation."
Although the FDA has established a "botanical" committee to provide
regulatory guidelines, including guidelines for approval of botanicals as
pharmaceuticals, the Company believes that the FDA has never approved for sale a
pharmaceutical version of a multi-molecule, botanical medicine. FDA approval of
botanicals that qualify as pharmaceuticals would presumably be evaluated under
the same statutory standards as are applied to all new drugs. However, FDA
review and approval practices adopted for botanical medicines under these
statutory standards could result in competitive natural medicines that are not
manufactured based on the Company's PharmaPrint Process technology. Adverse
governmental regulation that might arise from future legislative or
administrative action cannot be predicted.
If regulatory approval is obtained, such approval may involve limitations
and restrictions on the marketing of the Company's pharmaceutical products. In
addition, any marketed pharmaceutical product and its manufacture are subject to
continuous governmental review and post-market evaluation of approved
pharmaceutical products could result in withdrawal, suspension or limitation of
approvals. Any subsequent discovery of previously unrecognized problems could
result in restrictions on the pharmaceutical product or its manufacture,
including withdrawal of the pharmaceutical product from the market. Failure of
the Company to comply with applicable regulatory requirements can, among other
things, result in fines, suspension of regulatory approvals, pharmaceutical
product recalls, seizure of products, operating restrictions or criminal
prosecution. See "Business--Government Regulation."
The Company cannot predict whether new legislation or regulations governing
the Company's activities will be enacted by legislative bodies or promulgated by
agencies regulating the Company's products, or what the effect of any such
legislation or regulation on the Company's operations would be. There can be no
assurance that new legislation or regulation, including changes to existing laws
or regulations, will not materially adversely affect the business, financial
condition and results of operations of the Company.
NO ASSURANCE OF MARKET ACCEPTANCE
Although the Company believes there is a significant market for the
Company's proposed dietary supplement and pharmaceutical products, the Company's
success will depend significantly on acceptance by consumers and the medical
community of the efficacy of such products. In the United States, dietary
supplements have been available for many years, but many physicians have shown
reluctance to recommend them to their patients. While the Company believes that
the PharmaPrint Process, together with the successful results of clinical
trials, if any, will enable it to produce pharmaceuticals that address the
concerns that physicians and patients traditionally have had with dietary
supplements, there can be no assurance that multi-molecule, plant-derived
pharmaceuticals in general, or the Company's products in particular, will gain
any significant degree of market acceptance, even if toxicology and clinical
testing demonstrate safety and efficacy and the necessary regulatory approvals
are obtained. There also can be no assurance that AHP will be able to
successfully gain market acceptance of the Company's proposed dietary supplement
products.
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NEED FOR ADDITIONAL FUNDING; UNCERTAIN ACCESS TO CAPITAL
The Company's current capital resources, together with the net proceeds from
this Offering, are expected to last at least 24 months, and thereafter the
Company is likely to need substantial additional funds to support its long-term
pharmaceutical product development programs. The Company has no established bank
financing arrangement. The Company's future capital requirements will depend on
many factors, including the revenues generated under the AHP Agreements,
continued scientific progress in its research and development programs, progress
with toxicology testing and clinical trials, the time and cost involved in
obtaining regulatory approvals, patent costs, competing technological and market
developments, changes in existing collaborative relationships, the Company's
ability to establish development, sales and marketing arrangements, and the cost
of establishing manufacturing capabilities. To the extent the Company's capital
resources, including the net proceeds of this Offering, are insufficient to meet
its operating requirements, the Company will seek additional funds through
equity or debt financings, collaborative or other arrangements with corporate
partners, licensees and others and additional funds may be required sooner than
anticipated. The Company has no current arrangements with respect to, or sources
of, such additional financing. Any additional financing may have the effect of
substantially diluting the Company's book value per share and the ownership
percentage of the Company's then existing stockholders. No assurance can be
given that additional financing will be available when needed or upon terms
acceptable to the Company. The Company's ability to raise additional funds will
be adversely affected if the Company is unable to obtain patent protection for
its technologies. If adequate funds are not available, the Company may be
required to delay or terminate expenditures for certain or all of its programs
or to license to third parties the rights to commercialize products or
technologies that the Company would otherwise seek to develop and commercialize
itself, any of which could have a material adverse effect on the business,
financial condition and results of operations of the Company. See "Use of
Proceeds."
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES
The Company has incurred net operating losses since its inception. The
continued development of the Company's products will require the commitment of
substantial and increasing resources to conduct toxicology and clinical
development programs and to establish additional quality control, regulatory and
administrative capabilities. The Company is likely to incur substantial and
increasing operating losses as it continues its research and development efforts
and until such time, if ever, as product sales, royalties and development.
license and other fees can generate sufficient revenue to fund its continuing
operations. The Company's ability to achieve profitability depends in part on
the revenues generated from the AHP Agreements, its ability to obtain regulatory
approvals for its pharmaceutical product candidates, and, alone or with others,
successfully develop, introduce and market products. The amount of net losses
and the time required by the Company to reach profitability are highly uncertain
and there can be no assurance that the Company will ever generate revenue from
product sales or royalties or operate profitably.
COMPETITION AND TECHNOLOGICAL CHANGE
The pharmaceutical, consumer products and biotechnology industries are
subject to intense competition and rapid technological change. Competitors of
the Company in the United States and abroad are numerous, and include, among
others, pharmaceutical, consumer products, herbal products, biotechnology and
chemical companies, as well as universities and other research organizations.
Industry-wide interest in the AHP Agreements and the use of the Company's
PharmaPrint Process technology may accelerate as the technology becomes more
widely understood and, therefore, competitors may have additional incentive to
develop technologies and products that compete with those of the Company. There
can be no assurance that these competitors will not succeed in developing
technologies and products that are more effective than any that have been or may
be developed by the Company or that would render the Company's PharmaPrint
Process and products obsolete and non-competitive.
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Many of the Company's potential competitors have substantially greater
capital resources, research and development staffs and facilities than the
Company and significantly greater experience than the Company in conducting
toxicology testing and human clinical trials on new pharmaceutical products, in
obtaining FDA and other regulatory approvals of products and in manufacturing
and marketing products. Accordingly, a certain number of the Company's
competitors may succeed in obtaining regulatory approval for products more
rapidly or effectively than the Company. Moreover, there can be no assurance
that the Company will have sufficient resources to undertake the continuing
research and development necessary to remain competitive. See
"Business--Competition."
UNCERTAINTIES RELATED TO PHARMACEUTICAL PRICING AND REIMBURSEMENT
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means may have a material
adverse effect on the Company's business, financial condition and results of
operations. For example, in certain foreign markets, pricing and/or
profitability of pharmaceutical products are subject to government control. In
the United States, the Company expects that there will continue to be a number
of federal and state proposals to implement similar government control. In
addition, increasing emphasis on managed care in the United States will continue
to put pressure on pharmaceutical pricing. Cost control initiatives could
decrease the price the Company receives for any product it may develop and sell
in the future and have a material adverse effect on the business, financial
condition and results of operations of the Company. Additionally, to the extent
that cost control initiatives have a material adverse effect on the Company's
commercial partners, the Company's ability to commercialize any of its products
may be adversely affected.
Sales of the Company's pharmaceutical products will be dependent, in part,
on the extent to which consumers will be able to obtain reimbursement for the
cost of such products from third-party payors, such as government health
administration authorities, private health coverage insurers and other
organizations. The reimbursement status of newly approved health care products
is uncertain, and third-party payors are increasingly challenging the prices
charged for medical products. Accordingly, there can be no assurance that such
reimbursement will be available at levels that would allow the Company to
maintain profitable prices for its products, if at all. In the United States,
consumers are not typically reimbursed for the cost of non-prescription
products, including dietary supplements.
POTENTIAL PRODUCT LIABILITY; UNCERTAINTIES RELATED TO INSURANCE COVERAGE
The testing, marketing and sale of health care products entail an inherent
risk of allegations of product liability. There can be no assurance that product
liability claims, relating to either pharmaceutical or dietary supplement
products, will not be asserted against the Company, its collaborators or its
licensees. The Company has obtained limited product liability insurance coverage
for its clinical trials and intends to obtain additional product liability
insurance in connection with the AHP Agreements. There can be no assurance that
the Company will be able to maintain such product liability insurance or obtain
additional insurance, during clinical trials or upon commercialization of any
product, on acceptable terms, if at all, or that such insurance will provide
adequate coverage against any potential pharmaceutical or dietary supplement
claims. A product liability claim or product recall, relating to either
pharmaceutical or dietary supplement products, could adversely affect the
business, financial condition or results of operations of the Company.
DEPENDENCE ON KEY EMPLOYEES
The business of the Company is dependent upon the continuing services of
Elliot P. Friedman, its Chairman of the Board and Chief Executive Officer and
Robert Burgess, its President and Chief Operating Officer. The unavailability or
loss of the services of Mr. Friedman or Mr. Burgess could be detrimental to the
development of and would adversely affect the conduct of the Company's business.
The Company has obtained key-man life insurance in the amount of $1,000,000 on
the life of Mr. Friedman. The success of the Company is also dependent upon its
ability to attract and retain highly qualified scientific and
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managerial personnel. The Company faces competition for such personnel from
other companies, research and academic institutions, government entities and
other organizations, many of which have significantly greater resources than the
Company. There can be no assurance that the Company will be able to recruit and
retain such personnel. See "Management--Directors and Executive Officers."
VOLATILITY OF COMMON STOCK PRICE
The market prices of securities of emerging growth companies have
historically been highly volatile and the stock market from time to time has
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. Future announcements
concerning the Company or its competitors, including the results of toxicology
testing and clinical trials, termination or modification of agreements with
collaborative partners, failures or unexpected delays in manufacturing or in
obtaining regulatory approvals, technological innovations, statements or
recommendations by the FDA or FDA advisory panels, loss of key personnel,
government regulations, developments or disputes concerning proprietary rights,
litigation or public concern as to the safety or commercial value of the
Company's technologies or products could result in the Company's failure to meet
the expectations of securities analysts and investors and could cause the market
price of the Common Stock to fluctuate significantly. In addition, market
conditions for emerging growth companies and pharmaceutical companies, economic
conditions and general stock market movements, even if unrelated specifically to
the Company's operations, may have a significant impact on the price of the
Common Stock. In the past, following significant drops in the price of a
company's common stock, securities class action litigation has often been
instituted against such company. Such litigation against the Company could
result in substantial costs and a diversion of management's attention and
resources, which may have a material adverse effect on the business, financial
condition and results of operations of the Company.
DILUTION
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution in the net tangible book value per share. Based on the net
tangible book value per share of Common Stock on September 30, 1997 and an
assumed offering price of $13.75, dilution in net tangible book value for
purchasers in the Offering will be $11.38 per share. See "Dilution."
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT
Following completion of this Offering, the current executive officers,
directors and other significant stockholders of the Company will own
approximately 49.7% of the issued and outstanding shares of Common Stock.
Accordingly, such persons should be able to continue to control the Board of
Directors of the Company and to direct the affairs of the Company. See "Security
Ownership of Certain Beneficial Owners and Management."
POTENTIAL ADVERSE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 13,303,684 shares of
Common Stock outstanding (13,641,184 shares if the over-allotment option is
exercised in full). Officers and directors of the Company have entered into
lock-up agreements restricting each such person from selling any shares of
Common Stock of the Company beneficially held by such person for a period of 180
days (and with respect to 200,000 shares only, 120 days) from the date of the
Underwriting Agreement. These lock-up agreements cover approximately 6,606,318
issued shares, of which 910,150 shares may be subject to sale notwithstanding
the lock-up agreements pursuant to margin agreements and lines of credit between
two officers of the Company and an investment bank, and 1,318,438 shares
issuable upon exercise of outstanding options. These lock-up agreements may be
waived at any time by CIBC Oppenheimer Corp. See "Underwriting." In addition, in
connection with the Company's August 1996 initial public offering, certain
officers, directors and stockholders of the Company entered into lock-up
arrangements with the underwriter of the Company's initial public offering,
which prohibited each of them from selling or
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transferring, except in certain limited circumstances, their shares of Common
Stock until August 16, 1998 and, in certain instances, until August 16, 2001.
Such lock-up agreements currently cover 3,168,433 shares (and any additional
shares acquired by persons bound by such agreements) and may be released at any
time in the sole discretion of the underwriter of the company's initial public
offering and will be released in certain additional circumstances.
Following this Offering, approximately 56.2% of the Company's outstanding
shares of Common Stock will be "restricted securities" and may, subject to the
provisions of the Underwriting Agreement, in the future be sold in compliance
with Rule 144 adopted under the Act ("Rule 144"). Rule 144 generally provides
that beneficial owners of common stock who have held such common stock for one
year may sell within a three-month period a number of shares not exceeding the
greater of 1% of the total outstanding shares or the average weekly trading
volume of the shares during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least two years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above. Future sales of restricted Common Stock under Rule 144 or
otherwise could negatively impact the market price of the Common Stock.
As of the date of this Prospectus, there are an aggregate of 1,980,378
shares of Common Stock reserved for issuance upon exercise of outstanding stock
options under the Company's 1995 Stock Option Plan at exercise prices ranging
from $0.96 to $16.00 per share, options to purchase an additional 219,622 shares
of Common Stock available for issuance under the Company's 1995 Stock Option
Plan, and 300,000 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants exercisable at $5.50 per share and the shares of Common
Stock reserved for issuance upon exercise of the Underwriters' Warrants. The
Company has not to date provided any registration of the employee options, which
has limited the optionees' ability to exercise and sell the underlying common
stock. The Company intends to provide such a registration soon after the date of
this Prospectus. When and if such a registration is provided, optionees should
be expected to exercise and sell, possibly resulting in reduction in the trading
price of the Company's shares. The Company expects that as of March 31, 1998
options to purchase approximately 1,470,000 shares of Common Stock will be
outstanding and vested approximately 1,265,000 shares which will be subject to
the lock-up agreements described above.
ANTI-TAKEOVER PROVISIONS; POSSIBLE ISSUANCES OF PREFERRED STOCK
Certain provisions of the Delaware General Corporation Law may have the
effect of deterring hostile takeovers or delaying or preventing changes in the
control or management of the Company, including transactions in which
stockholders may otherwise receive a premium for their shares over then-current
market prices. The Company may also issue shares of Preferred Stock without
stockholder approval and upon such terms as the Company's Board of Directors may
determine. The issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire a majority of the Company's
outstanding stock and the holders of such Preferred Stock could have voting,
dividend, liquidation and other rights superior to those of holders of Common
Stock. See "Description of Capital Stock--Preferred Stock" and "Certain
Provisions of the Delaware Anti-Takeover Law."
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on its Common Stock and does
not intend to do so for the foreseeable future. The Company intends to retain
any future earnings for use in the Company's business operations. Investors who
anticipate a need for immediate income from their investments should refrain
from purchasing the Common Stock offered hereby.
17
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,250,000 shares of Common Stock offered hereby are estimated to be
approximately $28,446,875 ($32,762,656 if the underwriters' over-allotment
option is exercised in full), at an assumed public offering price of $13.75 per
share and after deducting estimated underwriting discounts and commissions and
other estimated offering expenses.
The net proceeds from this Offering will be used to fund formulation,
toxicology and clinical testing of the Company's pharmaceutical products,
formulation and manufacturing of the AHP Products pursuant to the AHP
Agreements, potential acquisitions of research and manufacturing facilities and
working capital and general corporate purposes. The Company is not a party to
any agreements, understandings or commitments with respect to any such
acquisition.
The amounts and timing of expenditures for each purpose may vary
significantly depending on numerous factors, including, without limitation, the
progress of the Company's research, drug discovery and development programs, the
progress and results of toxicology studies and clinical trials, the timing and
costs involved in obtaining regulatory approvals, the costs of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments, changes in the
Company's existing research relationships, the ability of the Company to
establish collaborative arrangements, the initiation of commercialization
activities, the purchase of capital equipment and the availability of other
financing. The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that the Company's available cash and
short-term investments, the proceeds of this Offering and cash flow from
operations, if any, will be adequate to satisfy its capital needs for at least
24 months following consummation of this Offering.
Pending such uses, the net proceeds of this Offering will be invested in
short-term, investment-grade, interest-bearing securities.
PRICE RANGE OF COMMON STOCK
PharmaPrint's Common Stock has been traded on the Nasdaq National Market
under the symbol "PPRT" since the Company's initial public offering in August
1996. The following table sets forth the range of high and low sales prices for
the Common Stock as reported by Nasdaq for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1998 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Third Quarter (through November 25, 1997)...................................................... $ 18.13 $ 12.25
Second Quarter................................................................................. 14.50 6.00
First Quarter.................................................................................. 7.62 4.00
FISCAL YEAR ENDED MARCH 31, 1997
- -----------------------------------------------------------------------------------------------
Fourth Quarter................................................................................. 5.50 3.88
Third Quarter.................................................................................. 5.50 4.50
Second Quarter (from August 16, 1996).......................................................... 6.50 4.63
</TABLE>
On November 25, 1997, the last reported sales price as reported by Nasdaq
was $13.75 per share. As of October 31, 1997, there were approximately 152
holders of record of the Company's Common Stock. The Company believes that the
actual number of shareholders of the Common Stock substantially exceeds this
number.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not intend to do so for the foreseeable future.
18
<PAGE>
DILUTION
As of September 30, 1997, the net tangible book value of the Company's
Common Stock was $2,936,045, or $0.27 per share of Common Stock, based upon
11,005,202 shares outstanding. "Net tangible book value" per share represents
the amount of total tangible assets of the Company reduced by the total
liabilities and divided by the number of shares of Common Stock outstanding.
After giving effect to the sale of 2,250,000 shares of Common Stock being
offered by the Company hereby, less underwriting discounts and commissions and
estimated offering expenses payable by the Company, the Company's pro forma net
tangible book value at September 30, 1997 would have been $31,382,920, or $2.37
per share of Common Stock, based upon 13,255,202 shares outstanding. This
represents an immediate increase in net tangible book value of $2.10 per share
to existing stockholders and an immediate dilution per share of $11.38 to new
investors purchasing shares in this Offering. "Dilution per share to new
investors" represents the difference between the price per share of Common Stock
paid for shares issued in this Offering and the pro forma net tangible book
value per share at September 30, 1997, as adjusted to give effect to this
Offering.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share(1)................................. $ 13.75
Net tangible book value per share before Offering...................... 0.27
Increase per share attributable to new investors....................... 2.10
Pro forma net tangible book value per share after Offering................. 2.37
---------
Dilution per share to new investors................................ $ 11.38
---------
---------
</TABLE>
- ------------------------
(1) Before deduction of underwriting discounts and commissions and estimated
offering expenses payable by the Company.
The foregoing computations exclude (i) 48,482 shares of Common Stock issued
subsequent to September 30, 1997; (ii) an aggregate of 1,980,378 shares of
Common Stock reserved for issuance upon exercise of outstanding stock options
under the Company's 1995 Stock Option Plan, as amended at a weighted average
exercise price of $5.26 per share; and (iii) 412,500 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants, including the
Underwriters' Warrants. Any exercise of such options or warrants may result in
further dilution to new investors.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, and as adjusted for the sale of 2,250,000 shares of Common
Stock offered hereby at an assumed offering price of $13.75 per share and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the Company's financial statements and the notes thereto
included in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
<S> <C> <C>
Stockholders' Equity (1):
Preferred stock, par value $0.001--1,000,000 shares authorized, no shares issued
or outstanding................................................................ $ -- $ --
Common stock, without par value--19,000,000 shares authorized, 11,005,202 shares
issued and outstanding actual, 13,255,202 issued and outstanding as
adjusted(2)................................................................... 23,410,972 51,857,847
Additional paid-in capital...................................................... 1,130,370 1,130,370
Deferred compensation........................................................... (114,433) (114,433)
Deficit accumulated during the development stage................................ (21,265,699) (21,265,699)
-------------- --------------
Total stockholders' equity.................................................... $ 3,161,210 $ 31,608,085
-------------- --------------
-------------- --------------
Total capitalization.......................................................... $ 3,161,210 $ 31,608,085
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Does not reflect changes in the number and par value of shares of authorized
Common Stock resulting from the Company's October 2, 1997 reincorporation in
Delaware. See "Description of Capital Stock."
(2) Does not include (i) 48,482 shares issued subsequent to September 30, 1997;
(ii) an aggregate of 1,980,378 shares of Common Stock reserved for issuance
upon exercise of outstanding stock options under the Company's 1995 Stock
Option Plan, as amended, at a weighted average exercise price of $5.26; and
(iii) 412,500 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants, including the Underwriters' Warrants.
20
<PAGE>
SELECTED FINANCIAL DATA
THE FOLLOWING SELECTED HISTORICAL FINANCIAL DATA FOR THE PERIOD FROM
INCEPTION (SEPTEMBER 15, 1994) TO MARCH 31, 1995 AND FOR THE FISCAL YEARS ENDED
MARCH 31, 1996 AND 1997 HAVE BEEN DERIVED FROM THE COMPANY'S AUDITED FINANCIAL
STATEMENTS. THE FINANCIAL DATA FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND
1997 HAVE BEEN DERIVED FROM THE UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY
AND, IN THE OPINION OF THE COMPANY, REFLECT ALL ADJUSTMENTS (CONSISTING ONLY OF
NORMAL RECURRING ADJUSTMENTS) NECESSARY FOR A FAIR PRESENTATION OF THE FINANCIAL
POSITION AND RESULTS OF OPERATIONS OF THE COMPANY FOR SUCH PERIODS. THE SELECTED
HISTORICAL FINANCIAL DATA SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH THE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND THE FINANCIAL STATEMENTS AND NOTES THERETO, WHICH ARE SET FORTH
ELSEWHERE IN THIS PROSPECTUS.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION SIX MONTHS ENDED SEPTEMBER
(SEPTEMBER 15, YEAR ENDED MARCH 31, 30,
1994) TO MARCH ----------------------------- ----------------------------
31, 1995 1996 1997 1996 1997
-------------- ------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................ $ -- $ -- $ -- $ -- $ --
Expenses:
Research and development
expenses.......................... 378,456 386,878 2,980,064 786,495 2,717,402
General and administrative
expenses.......................... 105,552 653,557 2,919,351 1,640,497 1,863,712
Stock compensation expense........ -- 303,750 5,333,437 4,585,000 3,623,540
-------------- ------------- -------------- ------------- -------------
Loss from operations................ (484,008) (1,344,185) (11,232,852) (7,011,992) (8,204,654)
-------------- ------------- -------------- ------------- -------------
Net loss............................ $ (484,008) $ (1,344,185) $ (11,232,852) $ (7,011,992) $ (8,204,654)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Net loss per share.................. $ (0.06) $ (0.16) $ (1.10) $ (0.79) $ (0.73)
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
Weighted average common and common
share equivalents outstanding..... 7,635,474 8,297,103 10,193,131 8,893,702 11,223,072
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------- SEPTEMBER 30,
1995 1996 1997 1997
---------- ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 130,387 $ 889,740 $ 8,170,072 $ 3,281,188
Working capital........................................... 234,381 585,726 7,413,069 2,719,293
Total assets.............................................. 248,881 1,155,604 8,831,920 4,052,964
Total liabilities......................................... 14,500 515,792 1,094,596 891,754
Stockholders' equity...................................... 234,381 639,812 7,737,324 3,161,210
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING, BUT NOT LIMITED
TO, STATEMENTS CONCERNING THE APPLICATION OF THE PHARMAPRINT PROCESS,
COMMENCEMENT AND COMPLETION OF TOXICOLOGY STUDIES AND CLINICAL TRIALS, THE
TIMING OF PLANNED REGULATORY FILINGS, PLANNED ACTIVITIES OF EXISTING AND
POTENTIAL COLLABORATIVE PARTNERS, THE COMPANY'S STRATEGIC PLANS, THE SCOPE OF
THE COMPANY'S PATENT COVERAGE, ANTICIPATED EXPENDITURES, THE NEED FOR ADDITIONAL
FUNDS AND OTHER EVENTS AND CIRCUMSTANCES DESCRIBED IN TERMS OF THE COMPANY'S
EXPECTATIONS OR INTENTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THIS PROSPECTUS AS A RESULT OF VARIOUS FACTORS INCLUDING, BUT
NOT LIMITED TO, THE UNCERTAINTY OF PATENT ISSUANCE AND PROTECTION, MARKET AND
REGULATORY ACCEPTANCE OF THE COMPANY'S TECHNOLOGY, PRODUCT REVENUE AND THE OTHER
RISKS DISCUSSED UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AS WELL AS IN THE
PROSPECTUS GENERALLY.
OVERVIEW
PharmaPrint uses its PharmaPrint Process technology to develop
pharmaceutical-grade dietary supplement and pharmaceutical products from
botanical sources. The Company believes that its PharmaPrint Process technology
represents a new paradigm in the development of therapeutic products from
botanical sources. Unlike the traditional drug development process of
identifying and synthesizing single bioactive molecules from plant sources, the
Company's core technology is predicated on the concept that certain
plant-derived multi-molecule extracts that exhibit therapeutic or other activity
do so because of multi-molecules present in the plant extract. The PharmaPrint
Process technology enables the Company to identify and quantify the bioactives
within plant sources that are believed to provide therapeutic or other health
benefits and produce dietary supplements and pharmaceuticals having consistent
batch-to-batch quantities and ratios of these bioactives.
Since its inception in 1994, the Company has engaged only in research and
development activities and intends to continue research, development and testing
of its proprietary technologies and dietary supplement and pharmaceutical
products. The Company has not received any royalties or revenues from product
sales.
On October 7, 1997 the Company entered into the AHP Agreements whereby the
Company will apply the PharmaPrint Process in the production of a line of
pharmaceutical-grade dietary supplement products to be marketed by AHP under the
Centrum brand name. In exchange for the exclusive right to use the PharmaPrint
Process in the production of dietary supplements, AHP paid the Company $2.5
million in an up-front licensing fee and is required to pay additional fees upon
the achievement of certain product and patent milestones. AHP has agreed, in the
first two years following product launch, to spend at least the lesser of $40
million or an amount equal to 50% of net sales of the AHP Products in
advertising and other marketing expenditures. AHP has also agreed to purchase
the AHP Products under a Supply Agreement at specified prices. In addition, if
the Company succeeds in securing a patent containing a claim or claims
comprising the PharmaPrint Process, AHP will pay royalties to the Company on net
sales of AHP products covered by the patent. AHP plans to commence marketing
seven of the Company's dietary supplement products under development in 1998.
AHP and the Company will examine from time to time the opportunity to increase
or modify this product line.
The Company is also developing pharmaceuticals from natural plant sources
for the purpose of seeking FDA approval. Products derived from the same
botanical sources as those used in the Company's product development programs
historically have been widely used as medicines and dietary supplements. Because
of the well-documented history of safe usage of dietary supplements derived from
the same plant source as the Company's drug candidates, the Company believes
that, in certain cases, the FDA may allow the Company, or its prospective
partners, to commence clinical trials at the Phase II stage and perform
toxicology studies concurrently with its Phase II studies. The Company has
received such FDA permission for its initial pharmaceutical candidate, PPRT-321.
The Company anticipates filing IND applications for at least two other drug
candidates within the next 12 months. As a result of these anticipated filings,
and the clinical development program for PPRT-321, the Company believes that its
research and development expenses will substantially increase over the next 12
months.
22
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER
30, 1996
Research and development expenses for the six months ended September 30,
1997 increased $1,930,907, or 246%, to $2,717,402 from $786,495 for the six
months ended September 30, 1996. The increase was primarily attributable to
increased development efforts for both the Company's pharmaceutical and dietary
supplement products. The Company's development efforts with respect to its
pharmaceutical products included preparation and completion of regulatory
filings, preparation for and commencement of certain toxicology studies and
clinical trials and other research and development expenses. The Company's
development efforts with respect to its dietary supplement products included the
application of the Company's PharmaPrint Process to several products, including
products that are expected to be marketed by AHP. The Company's research and
development expenses are expected to increase in the next 12 months due to the
responsibilities set forth in the AHP Agreements, preparation and completion of
additional regulatory filings and overall clinical development programs for its
pharmaceutical candidates. Additionally, the Company plans to selectively add
personnel in research and development in order to accomplish its research and
development plans.
General and administrative expenses for the six months ended September 30,
1997 increased $223,215, or 13.6%, to $1,863,712 from $1,640,497 for the six
months ended September 30, 1996. The increase was primarily attributable to
additional staff, Company marketing efforts, increased professional fees and
increased office rent and general office expenses. The Company's general and
administrative expenses are expected to increase in the next 12 months in
support of its research and development activities and its product
commercialization efforts.
Stock compensation expense for the six months ended September 30, 1997 was
$3,623,540. Of this amount, $3,563,540 related to the release of an officer of
the Company from a lock-up agreement and $60,000 represented compensation
expense relating to certain options to purchase Common Stock granted to a
consultant of the Company. Stock compensation expense for the six months ended
September 30, 1996 was $4,585,000 and related to conditions that were met on
Common Stock granted to D-RAM Industries Pty. Ltd.
As a result of the foregoing factors, the Company's net loss for the six
months ended September 30, 1997 increased $1,192,662, or 17%, to $8,204,654 from
$7,011,992 for the six months ended September 30, 1996.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996
Research and development expenses for the year ended March 31, 1997
increased $2,593,186, or 670%, to $2,980,064 from $386,878 for the year ended
March 31, 1996. The increase was primarily attributable to increased development
efforts related to the Company's pharmaceutical products. The Company's
development efforts with respect to its pharmaceutical products included
preparation and completion of regulatory filings, preparation for and
commencement of certain toxicology studies and clinical trials and other
research and development expenses.
General and administrative expenses for the year ended March 31, 1997
increased $2,265,794, or 347%, to $2,919,351 from $653,557 for the year ended
March 31, 1996. The increase was primarily attributable to additional staff,
Company marketing efforts, increased professional fees and increased office rent
and general office expenses.
Stock compensation expense for the year ended March 31, 1997 was $5,333,437.
Of this amount, $4,585,000 related to conditions that were met on Common Stock
granted to D-RAM Industries Pty. Ltd., $648,437 related to the fair value of
stock transferred by a major shareholder to third parties as compensation for
services and $100,000 related to stock compensation expense for options to
purchase Common Stock of the Company that were granted to consultants. Stock
compensation expense for the year ended March 31, 1996, was $303,750. The
compensation expense represented certain options to purchase Common Stock of the
Company that were granted at an exercise price below the fair market value of
the Company's Common Stock on the date of grant.
As a result of the foregoing factors, the Company's net loss for the year
ended March 31, 1997 increased $9,888,667, or 736%, to $11,232,852 from
$1,344,185 for the year ended March 31, 1996.
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of equity
securities. From inception (September 15, 1994) through May 1996, the Company
had raised an aggregate net amount of approximately $2,100,000 through private
sales of equity securities. In August 1996, the Company completed an initial
public offering of 3,000,000 shares of its Common Stock at $5.00 per share,
raising net proceeds of approximately $12,705,000.
During the six months ended September 30, 1997 the Company increased its
staff of full-time employees and consultants from 12 to 17. During fiscal 1998,
the Company expects to continue to significantly increase its staffing levels.
In November 1997, the Company entered into a commitment to purchase
$18,000,000 of raw materials over the next three years in order to supply
certain dietary supplements under the AHP Supply Agreement.
The Company has incurred net operating losses since its inception and
expects substantial net operating losses in the near term as it continues its
research and development efforts. The Company will incur additional net
operating losses until such time the Company can generate sufficient revenue
from product sales, royalties, development, license and other fees to fund
continuing operations. The Company's ability to generate revenues are dependent
upon many factors, including, but not limited to its ability to develop,
introduce and market products, enter into collaborative arrangements and obtain
regulatory approvals.
While the Company has not had any operating profits, the Company believes
that its current capital resources and the proceeds of this Offering will enable
it to maintain its current and planned operations for at least 24 months.
However, no assurance can be given that there will be no change in the Company's
operations that would consume available resources more rapidly than anticipated.
The Company will need substantial funds to support its long term pharmaceutical
product development programs. The Company has no established bank financing
arrangement and it is unlikely that the Company will establish a bank financing
arrangement in the foreseeable future. The Company's future capital requirements
will depend on many factors, including, without limitation, the progress of the
Company's research, drug discovery and development programs, the progress and
results of toxicology studies and clinical trials, the timing and costs involved
in obtaining regulatory approvals, the costs of filing, prosecuting, defending
and enforcing any patent claims and other intellectual property rights,
competing technological and market developments, changes in the Company's
existing research relationships, the ability of the Company to establish
collaborative arrangements, the initiation of commercialization activities, the
purchase of capital equipment and the availability of other financing. To the
extent that the Company's capital resources, including the net proceeds from
this Offering, are insufficient to meet its operating requirements, the Company
will seek additional funds through equity or debt financings, collaborative or
other arrangements with corporate partners, licensees and others. The Company
has no current arrangements with respect to, or sources of, such additional
financing, and the Company does not anticipate that existing stockholders will
provide any portion of the Company's future financing requirements. Any
additional financing may have the effect of substantially diluting the Company's
book value per share and the ownership percentage of the Company's then existing
stockholders. Additionally, no assurance can be given that additional financing
will be available when needed or upon terms acceptable to the Company. If
adequate funds are not available, the Company may be required to delay or
terminate expenditures for certain or all of its programs or to license to third
parties the rights to commercialize products or technologies that the Company
would otherwise seek to develop and commercialize itself, any of which could
have a materially adverse effect on the business, financial condition or results
of operations of the Company. See "Use of Proceeds."
At March 31, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $5,100,000 and
$2,550,000, respectively; such carryforwards expire in various years through
2012.
24
<PAGE>
BUSINESS
OVERVIEW
PharmaPrint uses its PharmaPrint Process technology to develop
pharmaceutical-grade dietary supplements and pharmaceuticals from botanical
sources. The Company believes that its PharmaPrint Process technology represents
a new paradigm in the development of therapeutic products from botanical
sources. Unlike the traditional drug development process of identifying and
synthesizing single bioactive molecules from plant sources, the Company's core
technologies were developed based on empirical data that suggests that the
health benefits and safe usage of certain plant-derived therapeutics might be
the result of the natural combination of multiple molecules found in the plant
extract and that single molecules, in isolation, may not replicate the natural
plant's effectiveness. The PharmaPrint Process technology enables the Company to
identify and quantify the bioactives within plant sources that are believed to
provide therapeutic benefits and produce products having consistent
batch-to-batch quantities and ratios of these bioactives.
The Company is applying a dual commercialization strategy with its
PharmaPrint Process technology. The first application of the PharmaPrint Process
is for the development of high quality, herbal dietary supplements. On October
7, 1997, the Company entered into several agreements with AHP whereby AHP will
market the Company's dietary supplements under AHP's Centrum brand name.
Pursuant to the terms of the agreement, AHP paid to the Company $2.5 million in
an up-front licensing fee and is required to pay an additional fee upon the
achievement of certain product and patent milestones. Additionally, AHP has
agreed to spend at least the lesser of $40 million or an amount equal to 50% of
net sales of the AHP Products in advertising and other marketing expenditures
during the two years following product launch. AHP has also agreed to purchase
the AHP Products under a Supply Agreement at specified prices. In addition, if
the Company succeeds in securing a patent containing a claim or claims
comprising the PharmaPrint Process, AHP will pay royalties to the Company on net
sales of AHP Products covered by the patent.
The second application of the PharmaPrint process is the development of
FDA-approvable pharmaceuticals from natural plant sources. The Company's initial
pharmaceutical product candidate, PPRT-321, a saw palmetto-derived drug that is
being developed for the treatment of symptoms associated with BPH, is currently
in Phase II clinical trials. In addition, the Company has begun development of
five additional plant-derived medicines that have long histories of safe use and
indications of efficacy.
HERBAL MEDICINES
Herbal medicines are multi-molecule compositions extracted or otherwise
derived from plants. Herbal products have been used for centuries throughout the
world to treat a variety of diseases and physical conditions. In recent years,
health consciousness and the increasing popularity of "all natural" products
have contributed to a growth in public interest in herbal therapies.
In many European countries, such as Germany, France and Italy, treatment
with multi-molecule, plant-derived medicines is well established and regulated
by federal authorities and is often reimbursed by health insurance plans. In
1996 approximately $6 billion was spent in Europe for multi-molecule, plant-
derived prescription and OTC products. In Germany, 80% of physicians regularly
prescribe these plant-derived products and every medical student is required to
take courses in traditional herbal medicines. The leading herbal medicines in
Europe include ginkgo biloba, which accounted for approximately $200 million in
sales (manufacturer's wholesale price) in 1996, and St. John's wort, which has
generated approximately $70 million (manufacturers wholesale price) in sales
this year and outsells Prozac in Germany four to one.
Dietary supplements are categorized as food products under DSHEA, and as
such, are not approved by the FDA prior to marketing. In 1996 approximately $3
billion was spent in the United States for non-prescription, herbal products,
with sales having increased approximately 25% a year in the last few years.
25
<PAGE>
These products are now commonly sold in drugstores, supermarkets, convenience
stores and discount department stores. A nationwide survey found that one-third
of American adults surveyed use herbs to treat various conditions such as
insomnia, premenstrual syndrome, depression, menopause, allergies and colds.
Two-thirds of adults surveyed thought herbal remedies are just as safe or safer
than traditional drugs and 53% said herbal remedies are at least as effective as
traditional drugs.
PHARMAPRINT PROCESS
The PharmaPrint Process technology is a multi-faceted proprietary process
that combines drug screening capabilities with biologically-driven
fractionation. The PharmaPrint Process enables the Company to identify and
quantify the bioactive molecules within plant sources that are believed to
provide therapeutic or other health benefits. This allows the Company to produce
dietary supplements and pharmaceuticals with consistent batch-to-batch
quantities and ratios of these bioactives.
The PharmaPrint Process begins by developing a detailed profile of the
active components of a potential product based upon an extensive review of
available bioassays and clinical data from previous studies. The Company also
analyzes, on the basis of current medical knowledge, the relationship between
the active components and the targeted disease. The compound is screened against
a series of relevant bioassays to analyze the relationship between its aggregate
bioactivity and clinically relevant endpoints.
A sample of the botanical is then separated using conventional chemical
separation techniques into groups of fractions selected for their potential
biological activity or contribution to biological activity. The bioactivity of
each fraction is determined through an iterative application of a series of
selected bioassays. This process of biologically-driven fractionation enables
the Company to identify the components having the desired bioactivity as well as
the components that are less active or essentially inactive. The bioactivity of
individual components is compared to the bioactivity of the aggregate compound
and correlated with clinically relevant endpoints.
The compound is also analyzed using conventional chemistry to determine the
quantity of each component present in the compound and the results of this
quantitative analysis are combined with the bioactivity profiles of the various
components to develop chemical and bioactivity specifications. This results in a
composition that has a precise chemical and bioactivity profile that is the
compound's "pharmaprint."
Once a compound's pharmaprint has been established, the Company manufactures
successive batches to conform to that pharmaprint. Various batches of raw plant
material for the same compound can vary significantly in composition and
bioactivity so, if necessary, the Company conforms the raw plant material to the
pharmaprint through the addition of various fractions or selective batch mixing.
However, raw plant material that is significantly outside the pharmaprint's
quantitative and bioactivity ranges is rejected. Drug batches manufactured to
the specifications for that compound should have consistent bioactive
compositions and potencies. Accordingly, the Company believes that compounds
produced through the PharmaPrint Process, unlike previously available versions
of botanicals, can be expected to deliver consistent pharmacological results
and, in the case of pharmaceuticals, to qualify for potential FDA approval.
The Company has filed with the PTO an application for a broad process patent
covering a method for making pharmaceutical-grade botanicals that incorporates
the steps that make up the PharmaPrint Process. However, there can be no
assurance that the Company will receive any patents covering the PharmaPrint
Process or any products it intends to commercialize. See "Intellectual
Property."
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BUSINESS STRATEGY
The Company intends to use the PharmaPrint Process as a platform technology
to develop and produce multi-molecule, botanical-derived products for sale in
both the dietary supplement and pharmaceutical markets. The Company believes
that its PharmaPrint Process will enable it to make claims of bioactivity and
potency that cannot be made about existing botanical products.
The Company is applying its PharmaPrint Process to the development of
pharmaceutical-grade dietary supplements. The Company believes that the
PharmaPrint Process will enable the Company to manufacture dietary supplement
products with standardized compositions and amounts of bioactives, and,
therefore, the Company believes its products will have a competitive advantage.
Additionally, because dietary supplements are regulated under DSHEA and do not
require FDA approval prior to commercialization, the Company expects to receive
revenue from these product sales sooner than from pharmaceutical products.
The Company is also applying its PharmaPrint Process to the development of
pharmaceuticals derived from botanical products that have long histories of safe
use and have demonstrated indications of efficacy. The Company believes that the
PharmaPrint Process will enable it to produce multi-molecule, plant-derived
compounds that, for the first time, will have sufficient consistency of
composition and potency to qualify for clinical testing and potential FDA
approval as a pharmaceutical. The Company intends to pursue a regulatory
strategy whereby it will seek to begin its clinical trials at the Phase II
stage, while concurrently performing toxicology studies.
The Company expects to commercialize its products through collaborative
arrangements in the United States and Europe. In the United States, the
Company's dietary supplement products will be distributed through AHP. The
Company intends to use the data from its United States clinical trials to seek
approval to market its products in Europe, particularly in Germany, France and
Italy, where both prescription and OTC botanical therapeutics are widely used.
While the Company is developing dietary supplements and pharmaceutical
products from the same plant sources, the products will differ in several
important respects. Because of differing regulatory requirements, the Company
expects that the products will have different formulations and that the
advertising and labeling of its pharmaceuticals will include approved claims to
treat or prevent a disease while its dietary supplements must be marketed
without such claims. Additionally, consumers should typically be entitled to
insurance reimbursement for the cost of the Company's pharmaceutical products
while such reimbursement will not likely be available for its dietary supplement
products.
DIETARY SUPPLEMENTS BUSINESS
The Company is applying its PharmaPrint Process technology to the
development of high quality herbal dietary supplements. The Company has
commenced development of 12 of the most commonly used dietary supplements
(derived from agnus castus, bilberry, black cohosh, echinacea, garlic, ginger,
ginkgo biloba, ginseng, milk thistle, saw palmetto, St. John's wort and
valerian).
PharmaPrint's testing has indicated that different manufacturers' versions
of currently marketed dietary supplements vary widely in terms of product
composition and bioactive molecules and some contain no bioactives. The variance
in bioactive molecules creates differing levels of benefit to the consumer. The
Company believes that because the PharmaPrint Process provides for a
standardization of the bioactive composition of the dietary supplement,
consumers should have greater confidence in its products. The Company intends to
include on each product a label containing the amount of the significant
bioactive molecules present in the supplement.
On October 7, 1997, the Company entered into several agreements with AHP
whereby AHP will market the Company's line of dietary supplement products under
AHP's Centrum brand name. Pursuant to the terms of the agreements, AHP will
commence marketing in 1998 seven of the Company's products
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under development, and will examine additional product candidates from time to
time in order to increase or modify its product line. In exchange for rights to
market the Company's products under the Centrum brand name, AHP paid to the
Company $2.5 million in licensing fees and is required to pay additional fees
upon the achievement of certain product and patent milestones. Additionally, AHP
has agreed, during the two years following product launch, to spend at least the
lesser of $40 million or an amount equal to 50% of net sales of the AHP Products
in advertising and other marketing expenditures. PharmaPrint will manufacture
all of the AHP Products and sell such products to AHP under a Supply Agreement
at specified prices. In addition, if the Company succeeds in securing a patent
containing a claim or claims comprising the PharmaPrint Process, AHP will pay
royalties to the Company on net sales of AHP Products covered by the patent of
4% in the first year and 6% thereafter.
AHP is a publicly traded pharmaceutical and consumer products company. For
the fiscal year ended December 31, 1996 AHP had sales of $14.1 billion, of which
the Centrum product line contributed approximately $300 million. The Company
considers AHP an ideal marketing partner due to their recognized leadership
position in the consumer products/dietary supplements area. Additionally, the
Company believes that its dietary supplement products will achieve accelerated
market penetration due to the recognition of the Centrum brand name.
PHARMACEUTICAL BUSINESS
Although botanicals are source material for many pharmaceuticals available
in the U.S. market, the Company does not believe that any multi-molecule, plant
extract has ever received approval by the FDA to be marketed as a
pharmaceutical. While formal FDA guidelines for these plant extracts have not
yet been issued, the FDA has allowed clinical trials to be commenced for certain
botanical compounds, including the Company's Phase II study on PPRT-321 (its saw
palmetto-derived drug candidate). At recent Drug Information Association
meetings, FDA officials provided participants informal guidance as to certain
requirements for the testing of botanical pharmaceuticals, particularly those
with well-documented histories of safe use.
The Company has and will continue to incorporate this informal guidance, as
well as its experience with PPRT-321, into its regulatory strategy to begin
clinical trials at the Phase II stage, while performing concurrent toxicology
studies. While the historical human safety data for each drug candidate will be
evaluated by the FDA on an individual basis, drug candidates for which the FDA
permits the sponsor to proceed directly to Phase II clinical trials will have
the potential for more rapid approval with accompanying cost savings as compared
to traditional drugs for which historical safety data is not as extensive. Based
upon an IND application that documented the extensive historical safety of saw
palmetto, the FDA permitted the Company to proceed directly to Phase II clinical
studies for PPRT-321, while concurrently conducting toxicology studies.
The Company selects its drug candidates based on an extensive review of
available scientific and clinical literature to determine whether a particular
candidate has a history of safety and demonstrated indications of efficacy.
While the clinical trials described in such literature, including the clinical
trials described below, have not been conducted to FDA parameters and may not
have used standardized products, or had well defined end points or protocols,
controls and procedures typical of FDA reviewed clinical trials, the Company
believes that these trials, and, in particular the safety data from such
studies, provide a useful starting point for examining potential drug
candidates. The Company also analyzes the targeted indication to evaluate
whether recognizable end points to study are available and whether the
indication is appropriate for treatment with a prescription or OTC product. In
addition, the Company assesses the potential market for such product by
evaluating the number of individuals afflicted with the specific disease or
physical condition and the potential for product sales.
The Company intends to develop its drug candidates in collaboration with
other companies. The Company is currently in discussions with several
pharmaceutical companies regarding the joint development of its botanical
pharmaceuticals. The application of the PharmaPrint Process to a potential drug
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candidate and the preparation of an IND for such drug should typically take six
to 12 months. The particular drug candidates that the Company will focus its
attention on at any given time are dependent upon many factors, including the
interest of the Company's partners or potential partners and the Company's
available resources.
CURRENT PHARMACEUTICAL PRODUCT CANDIDATES
The following table sets forth the Company's pharmaceutical product
candidates, the plant source of each, the indication each is currently
anticipated to address and the status of the development process:
<TABLE>
<CAPTION>
PRODUCT PLANT SOURCE ANTICIPATED INDICATION STATUS
- ----------- ----------------- ------------------------------ ----------------------------------
<S> <C> <C> <C>
PPRT-321 Saw palmetto BPH symptoms Phase II
PPRT-152 St. John's wort Antidepressant IND expected in early 1998
PPRT-424 Ginkgo biloba Cognitive disorders Applying PharmaPrint Process
PPRT-211 Valerian Insomnia Applying PharmaPrint Process
PPRT-195 Black cohosh Post-menopausal symptoms Applying PharmaPrint Process
PPRT-550 Agnus castus Pre-menstrual symptoms Applying PharmaPrint Process
</TABLE>
PPRT-321 (SAW PALMETTO)
The Company is currently developing a pharmaceutical product derived from
the SERENOA REPENS plant, more commonly known as saw palmetto. Saw palmetto has
been used to treat the symptoms associated with BPH, a non-cancerous enlargement
of the innermost part of the prostate. BPH frequently results in a gradual
squeezing of the part of the urethra that runs through the prostate and an
inability to completely empty the bladder. This causes patients to experience a
frequent urge to urinate and a burning sensation or similar discomfort during
urination.
Most males will eventually suffer from BPH. The incidence of BPH for men in
their fifties is 50% and rises to 80% by the age of 80. Worldwide there are
approximately 118 million men over the age of 50. In the United States, an
estimated 30 million men aged 50 and over have enlarged prostates, and about
one-half of this population will visit a urologist for the relief of their
symptoms. The general aging of the population and increasing life expectancies
are anticipated to contribute to the continued growth in the number of BPH
sufferers.
Currently, three drugs are approved by the FDA to treat the symptoms of BPH:
Proscar (sold by Merck & Co.), Hytrin (sold by Abbott Laboratories) and Cardura
(sold by Pfizer), with estimated combined sales of $1.5 billion in 1996. Proscar
is designed to treat BPH by shrinking the prostate, while Hytrin and Cardura are
alpha blockers, which treat BPH by relaxing the muscles in the prostate and
bladder neck to relieve urethral obstruction.
Numerous clinical studies have been performed using saw palmetto. An example
of one such study, performed between October 1990 and May 1991, included 1,334
males from 323 urology practices and outpatient clinics in Germany. Four outcome
parameters were measured and included residual urine volume, urine frequency,
night time urine frequency and difficulty or pain in urination ("dysuria"). The
results of this trial showed statistically significant improvements in all of
the aforementioned outcome parameters. Residual urine volume, on average,
dropped 30% after four weeks of treatment and 50% after twelve weeks. Forty-six
percent of the patients who had pathologically elevated residual volumes at the
start of the treatment normalized over the observation period. Average urine
frequency was reduced by 30% in comparison with the starting level after four
weeks and 37% after 12 weeks. At the start of the treatment, only 12.2% of the
patients reported no night time urine frequency, or only once per night,
compared with 61.0% at the end of the treatment. Finally, dysuria symptoms
decreased from 22.2% of the patients at the beginning of treatment to 1.0% of
patients at the end of the treatment. Less than 1% of the subjects reported any
side effects.
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Another study, conducted in 87 urology centers in nine European countries
from April 1993 through June 1994, compared the efficacy of a saw palmetto based
extract (Permixon) with finasteride (Proscar) in 1,098 men. Six outcome
parameters were measured and included the International Prostate Symptom Score
("IPSS"), quality of life, peak urinary flow rate, residual urine volume,
prostate size and Prostate Specific Antigen ("PSA"). Both Permixon and
finasteride decreased the IPSS (-37% and -39%, respectively), improved quality
of life (by 38% and 41%) and increased peak urinary flow rate (+25% and +30%).
Finasteride markedly decreased prostate volume (-18%) and serum PSA levels
(-41%), while Permixon improved symptoms with little effect on volume (-6%) and
no change in serum PSA levels. Finally, patients that received finasteride
experienced a statistically significant deterioration in a sexual function score
compared to those that received Permixon.
The Company has applied its PharmaPrint Process to develop a standardized
version of PPRT-321 and in July 1997 filed an IND application with the FDA to
begin clinical trials. Based upon an IND application that documented the
extensive historical safety of saw palmetto, the FDA permitted the Company to
proceed directly to Phase II clinical studies for PPRT-321, while concurrently
conducting toxicology studies. The objective of the trial is to identify the
most efficacious of three doses of PPRT-321. The clinical trial, which is
double-blinded, randomized and placebo controlled, involves 56 patients and is
being conducted in four medical centers in the United States.. The primary
efficacy variables for the trial are peak urinary flow rate and the American
Urological Association Sympton Index score. The Company is currently in the
process of recruiting patients for this trial and expects results to be
available in mid-1998. Additionally, concurrent with its Phase II studies, the
Company has commenced toxicology testing.
PPRT-152 (ST. JOHN'S WORT)
The Company is developing a pharmaceutical candidate derived from HYPERICUM
PERFORATUM, more commonly known as St. John's wort. St. John's wort has been
used to treat mild to moderate depression, which is estimated to affect
approximately 18 million people in the United States.
Among the most widely prescribed antidepressants in the United States are
Prozac (Eli Lilly), Zoloft (Pfizer) and Paxil (SmithKline Beecham). The total
worldwide sales for the top selling antidepressants are approximately $4.8
billion.
The Company has reviewed many clinical studies of St. John's wort and found
that almost all reports concluded that St. John's wort helped to improve
patients with mild to moderate depression. A 1994 German study of 3,250 patients
with primarily mild to moderate depression was conducted with patients receiving
4 weeks of treatment with 900 mg of HYPERICUM extract. Outcome measures included
the Depression Scale of von Zerssen ("D-S") and medical and patient assessment
of treatment success. The mean D-S score was reduced from 23.2 to 11.8 following
treatment. At the end of treatment, 79% of patients were either improved or
symptom-free by self-assessment, and 82% were either improved or symptom-free as
assessed by a physician. Furthermore, as evidence of HYPERICUM'S excellent
tolerability, only 79, or 2.4%, of patients reported adverse effects, which
included gastrointestinal irritation, allergic reaction, fatigue and
restlessness.
In a comparative study between a St. John's wort extract (Jarsin 300) and
imipramine, conducted from October 1992 to May 1993 as a randomized,
double-blind study in 20 centers, 135 patients with varying degrees of
depression were evaluated. The main assessment criteria for this trial were the
Hamilton Depression Scale ("HAMD"), the D-S and the Clinical Global Impressions
("CGI"). In both treatment groups, a parallel reduction of the HAMD was observed
(56.4% for Jarsin 300 and 44.8% for imipramine) and a reduction in the
transformed D-S point values (31.3% for Jarsin 300 and 25.1% for imipramine) was
also observed. Patients using Jarsin 300 appeared to benefit from greater
changes in severity of illness, a measurement criterion of CGI, than did
patients using imipramine: 81.8% of patients were classified as having improved
on Jarsin 300 against 62.5% of patients on imipramine. Undesired side effects
were reported in 11.9% of patients on Jarsin 300 versus 16.2% of patients using
imipramine.
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The Company has completed a standardized version of St. John's wort and
intends to file an IND application in early 1998. If the planned application is
allowed, the Company expects to proceed directly into Phase II clinical trials
and perform toxicology studies shortly thereafter.
PPRT-424 (GINKGO BILOBA)
PPRT-424, the Company's GINKGO BILOBA derived pharmaceutical candidate, is
under development for the treatment of a range of cognitive disorders. The
Company believes there are very few products currently available to treat this
indication.
Several clinical studies have been performed to evaluate the effect of
GINKGO BILOBA extract on cognitive performance. In one such study performed in
the United States, as reported in October 1997 in the JOURNAL OF THE AMERICAN
MEDICAL ASSOCIATION, EGB 761, A GINKGO BILOBA extract, was evaluated in a
52-week, randomized, double-blind, placebo-controlled multicenter clinical study
of 202 mildly to severely demented patients age 45 years or older with Alzheimer
disease or multi-infarct dementia, without other significant medical conditions.
Patients were randomly assigned to receive EGb (120mg/day) or placebo. Primary
outcome measures were: Alzheimer's Disease Assessment Scale--Cognitive subscale
("ADAS-- Cog"), Geriatric Global Impression of Change ("GERRI") and Clinical
Global Impression of Change ("CGIC"). At 52 weeks, statistically significant
improvements were observed in the ADAS--Cog and GERRI for the patients treated
with EGb: 27% achieved at least a 4-point improvement on the ADAS-- Cog,
compared with 14% of patients taking placebo. Thirty-seven percent of patients
treated with EGb improved on the GERRI, as opposed to 23% taking placebo. No
significant difference was observed between treatment groups in the CGIC. No
significant difference was observed between groups in the number of patients
reporting adverse events or in the severity of events.
The Company is currently applying the PharmaPrint Process to develop a
standardized version of PPRT-424.
PPRT-211 (VALERIAN)
PPRT-211, the Company's VALERIAN derived pharmaceutical candidate, is under
development for the treatment of insomnia. Approximately 50 million Americans
experience a significant sleep problem each year and approximately 60% of such
people have a chronic sleep disorder. The top selling sleep aid products
accounted for approximately $700 million of sales in 1996 and include Ambien
(G.D. Searle), Stilnox (Synthelabo) and Imovane (Rhone Poulenc Rhorer).
Several clinical studies have been performed in Europe to evaluate the
effect of valerian on sleep disorders, specifically sleep latency and sleep
quality. In one such study, reported in 1982, the effect of a valerian extract
on subjective sleep measures was studied in 128 healthy volunteers. Each subject
received both valerian and placebo. The samples were taken by the volunteers in
random order on non-consecutive nights. A statistically significant reduction in
sleep latency (time taken to fall asleep), as well as improvement in sleep
quality was reported with valerian compared with placebo. Marked effects of
valerian were observed among older people and those who considered themselves to
be habitually poor or irregular sleepers, in whom 49% and 43%, respectively,
reported reduced sleep latency with valerian. No adverse effects were reported.
The Company is currently applying the PharmaPrint Process to develop a
standardized version of PPRT-211.
PPRT-195 (BLACK COHOSH)
PPRT-195, the Company's BLACK COHOSH derived pharmaceutical candidate, is
under development to reduce post menopausal symptoms. In woman, cessation of
ovarian function is associated with various somatic and emotional disorders that
are summarized as "menopausal symptoms." The most characteristic
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and frequent symptom is "hot flashes," which are experienced by 78% of
menopausal women. About 50% of the women suffer from emotional disorders such as
depression, nervousness, irritability and insomnia. Approximately 40 million
women in the United States are currently in menopause. Of this population,
approximately 15%-25% will seek out hormone replacement therapy ("HRT"). The
top-selling HRT products accounted for approximately $1.4 billion in worldwide
sales in 1996 and include Premarin (American Home Products) and Estraderm
(Novartis). The Company is currently applying the PharmaPrint Process to develop
a standardized version of PPRT-195.
PPRT-550 (AGNUS CASTUS)
PPRT-550, the Company's AGNUS CASTUS derived pharmaceutical candidate, is
under development to treat symptoms of premenstrual syndrome ("PMS").
Approximately 85% of menstruating women in the United States experience symptoms
of PMS on a consistent basis, including cramps, irritability, depression, water
retention and fatigue. While there are no current prescription products
available in the United States to treat symptoms of PMS, ibuprofen-based OTC
products such as Advil, Motrin and Excedrin are typically used to address such
symptoms. The Company is currently applying the PharmaPrint Process to develop a
standardized version of PPRT-550.
ADDITIONAL PHARMACEUTICAL CANDIDATES
From time to time, the Company expects to evaluate additional botanical
products for development as pharmaceutical products. In June 1997, the Company
completed Phase I clinical trials for its test-case, mistletoe-derived
pharmaceutical product intended to treat immunosuppression related to HIV and
cancer. Because this product is administered by injection and because the
Company believes that the FDA is more likely to approve in a shorter time frame
herbal products intended to treat non-life threatening diseases, the Company is
focusing its near-term drug development efforts on PPRT-321, PPRT-152 and the
other candidates described above.
OUTSOURCING RELATIONSHIPS
Most of the Company's current research and development activities and a
significant amount of its regulatory activities are performed in conjunction
with the following third party laboratories, manufacturing facilities and
service providers.
ADVANCED BIORESEARCH ASSOCIATES
Advanced Bioresearch Associates ("ABA") provides the Company with guidance
in various clinical, scientific and regulatory matters. ABA assists the Company
in developing and drafting IND applications, including clinical trial protocols,
overseeing and monitoring toxicology studies and clinical trials, gathering and
reviewing existing literature regarding drug candidates, and monitoring certain
research and development activities performed by third party laboratories. ABA
is a clinical research organization that provides FDA strategic consulting and
professional services.
HAUSER, INC.
Hauser, Inc. ("Hauser") provides analytical development guidance to the
Company with a focus on biologically driven fractionation as part of the
PharmaPrint Process. Hauser also provides validated analytical support in
accordance with cGMP in connection with the Company's saw palmetto based dietary
supplement and pharmaceutical products and is a major supplier of herbal extract
to the Company. The Company has also engaged Hauser to prepare the initial
batches of PPRT-321 for use in clinical tests. Hauser is a nationally recognized
laboratory research organization with approximately 300 employees.
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NOVASCREEN
NOVASCREEN ("NOVASCREEN") provides biological screening services to test the
activity of individual components, fractions and extracts as part of the
PharmaPrint Process. NOVASCREEN is a research organization that provides
research and development services to the pharmaceutical and biotechnology
industries. NOVASCREEN pioneered the concept of PROFILE, which entails testing
potential new drug candidates through a broad panel of receptor binding assays
as a tool to determine secondary therapeutic activities and/or potential side
effects of candidate compounds.
COMPETITION
The pharmaceutical and biotechnology industries are subject to intense
competition and rapid technological change. The Company believes that
industry-wide interest in the PharmaPrint Process and resulting products will
accelerate as the technology becomes more widely recognized and that competitors
may commit additional resources to develop technologies and products that
compete with those of the Company. Competitors of the Company in the United
States and abroad are numerous, and include, among others, pharmaceutical,
consumer products, herbal products, biotechnology and chemical companies as well
as universities and other research organizations. There can be no assurance that
these competitors will not succeed in developing technologies and products that
are more effective than any that have been or may be developed by the Company or
that would render the Company's technology and products obsolete and
noncompetitive. In addition, if the Company is not successful in obtaining
patent protection for its technology and products, competitors may be able to
replicate its products.
Many of the Company's potential competitors have substantially greater
capital resources, research and development staffs and facilities than the
Company and significantly greater experience than the Company in conducting
toxicology testing and human clinical trials on new pharmaceutical products, in
obtaining FDA and other regulatory approvals of products and in manufacturing
and marketing pharmaceutical products. Accordingly, a certain number of the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly or effectively than the Company. Moreover, there can be no
assurance that the Company will have sufficient resources to undertake the
continuing research and development necessary to remain competitive.
GOVERNMENT REGULATION
To the extent that the following information describes statutory or
regulatory provisions, it is qualified in its entirety by reference to
particular statutory and regulatory provisions currently in effect. Any change
in applicable laws or regulations may have a material adverse effect on the
business, financial condition and results of operations of the Company. Dietary
supplements are categorized as food and are regulated by the FDA pursuant to the
Dietary Supplement Health Education Act of 1994 ("DSHEA"). DSHEA (i) defines
dietary supplements, (ii) permits certain "structure/function" statements and
(iii) permits under certain conditions the use of published literature in the
sale of herbal products. Dietary supplements do not require approval by FDA
prior to marketing but are nevertheless subject to various regulatory
requirements concerning their composition, permissible claims (including
substantiation of any claims), manufacturing procedures approval and other
elements. The FDA has issued regulations to implement certain labeling
requirements of DSHEA.
The Company's present activities relating to therapeutic pharmaceuticals,
including toxicology testing and clinical trials, are subject to regulation by
the FDA and other governmental authorities in the United States and other
countries. The process of obtaining required regulatory approvals from the FDA
and other authorities often takes many years, is expensive and can vary
substantially based on the type, complexity and novelty of the product. While
the Company believes that it may be able to pursue a less time consuming
approval process with the FDA and that the Company may be able to obtain
expedited
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approval in certain foreign jurisdictions, the Company nevertheless will be
required to engage in extensive clinical testing in order to demonstrate the
safety and efficacy of its pharmaceutical products for human use and there can
be no assurance of quick approval or any approval. Requests for additional data,
or failure to or delays in obtaining regulatory approvals by the Company, its
collaborators or licensees, would adversely affect the sales of pharmaceutical
products developed by the Company and the Company's ability to generate
pharmaceutical product revenues or royalties.
Development of a pharmaceutical for human use is generally a multi-step
process. In general, animal and IN VITRO testing must establish the potential
safety and efficacy of the experimental product in a given disease. Once a
product has been found to be reasonably safe and potentially efficacious in
animals, suggesting that human testing would be appropriate, an IND application
is submitted to the FDA. FDA acceptance typically is granted or denied within 30
days of an IND submission, but may, in some circumstances, involve substantial
delays.
Generally, clinical investigations involve three phases. FDA regulated Phase
I clinical studies are conducted to evaluate the safety of the experimental
product in humans, various routes, dosages and schedules of product
administration, and if possible, to gain early evidence of effectiveness. The
demonstration of therapeutic benefit is not generally required in order to
complete Phase I studies successfully. If acceptable product safety is
demonstrated, Phase II studies are initiated. The FDA has stated in seminars
that it may permit companies to proceed directly to Phase II clinical studies,
while concurrently performing toxicology studies, for botanical drugs that have
demonstrated safety through prior use and has permitted the Company to proceed
directly with Phase II studies for its PPRT-321. Phase II trials are designed to
evaluate the effectiveness of the product in the treatment of a given disease
and, typically, are well-controlled, closely monitored studies conducted on a
relatively small number of patients. The optimal routes, dosages and schedules
of administration are determined in these studies. When the Phase II trials are
successfully completed, Phase III studies are typically commenced. Phase III
studies are expanded, controlled trials that are intended to gather pivotal
information about safety and efficacy in order to evaluate the overall
risk/benefit relationship of the experimental product and provide an adequate
basis for physician labeling. These studies may also compare the safety and
efficacy of the experimental product with currently available products. It is
not possible to estimate the time in which FDA regulated Phase I, II and III
studies will be completed with respect to a given product, although the time
period could be lengthy.
The results of initial toxicology and clinical testing are not necessarily
predictive of results that will be obtained from subsequent or more extensive
toxicology and clinical testing, and there can be no assurance that further
trials will be successful. Companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. Although the FDA has established a "botanical"
committee to provide regulatory guidelines, including guidelines for approval of
herbal medicines as pharmaceuticals, the Company believes that the FDA has never
approved a multi-molecule, herbal pharmaceutical. Standards approved by the FDA
for approval of herbal medicines that qualify as pharmaceuticals could result in
competitive herbal medicines that are not developed using the PharmaPrint
Process.
Following the successful completion of clinical investigations, the
toxicology and clinical evidence that has been accumulated is submitted to the
FDA as part of a NDA. Approval of a NDA is necessary before a company may market
a new drug product. The approval, if any, of a NDA can take several years and
depends upon the time it takes the FDA to review the submitted data, the FDA's
comments on the application and the time required to provide satisfactory
answers or additional data when requested.
Continued compliance with cGMP is required to be eligible to continue to
manufacture and market the products once they are approved. Failure to comply
with cGMP regulations, or to comply with other applicable legal requirements,
can lead to federal seizure of violative products, injunctive actions brought
34
<PAGE>
by the federal government, and potential criminal liability on the part of the
Company and of the officers and employees of the Company who are responsible for
the activities that lead to the violations.
In addition to the regulatory framework for pharmaceutical product
approvals, the Company is and may be subject to regulation under local, state,
federal and foreign law, including requirements regarding occupational safety,
laboratory practices and environmental protection, waste and water disposal, and
hazardous substance control. There can be no assurance that the Company will not
be required to incur significant costs to comply with such regulations as
manufacturing is increased to commercial volumes, or that the operations,
business, or assets of the Company will not be materially and adversely affected
by current or future laws, rules, regulations and policies.
INTELLECTUAL PROPERTY
The Company's policy is to protect its technology by, among other things,
filing patent applications in the United States and internationally, for
technology which it considers important to the development of its business. The
Company intends to file additional patent applications, when appropriate,
relating to new developments or improvements in its technology and other
specific products that it develops. The Company also relies on trade secrets and
improvements, unpatented know-how and/or continuing technological innovation to
develop and maintain its competitive position.
The Company plans to achieve a competitive advantage as the only provider of
botanical dietary supplements and pharmaceuticals that can market its products
on the basis of consistent composition, the presence of at least one bioactive
and their proven bioactivity. This depends upon its ability to obtain a patent
covering the PharmaPrint Process that is broad enough to prevent competitors
from making such claims. The Company has filed with the PTO an application for a
broad process patent covering a method for making pharmaceutical-grade
botanicals, including 29 specific botanical compositions, that incorporates the
steps that make up the PharmaPrint Process, as well as additional applications
covering the application of this method to the manufacture of 11 specific
botanical compositions. To date, the Company has not received any patents or
notice of allowance of any patent application for any products it currently
intends to commercialize. There can be no assurance that the Company will
receive a patent covering the PharmaPrint Process, and lack of such a patent
will impair the Company's ability to protect its pharmaceutical products and
compete successfully in the dietary supplements market.
Many of the processes and much of the know-how of importance to the
Company's technology depend upon the non-patentable skills, knowledge and
experience of its scientific and technical personnel and collaborators. In
addition, certain of the Company's proprietary technology is held by the Company
as trade secrets. The Company's success will depend in part on its ability to
protect such trade secrets. To help protect its rights, the Company employs
various methods, such as requiring all employees, collaborators and significant
consultants and advisors to enter into confidentiality agreements with the
Company. There can be no assurance, however, that these agreements will provide
adequate protection for the Company's trade secrets, know-how or proprietary
information in the event of any unauthorized use or disclosure or that other
companies will not acquire or independently develop information the Company
considers to be proprietary.
The Company's success will depend, in part, on its ability to continue to
obtain patent protection for its technologies and products, to preserve its
trade secrets and to operate without infringing on the proprietary rights of
third parties.
RAW MATERIALS
The Company procures the botanical extracts necessary for development of its
dietary supplements and pharmaceuticals products primarily from Hauser and
Indena SpA. The Company believes that there
35
<PAGE>
are numerous alternative sources throughout the United States, Europe and Asia
from which the Company can obtain these botanical extracts.
EMPLOYEES
As of November 15, 1997, the Company had 20 employees, of which eight are
engaged in research and development activities and 12 are engaged in general and
administrative functions. The Company contracts with external entities for many
of the services it requires, including research and development, regulatory and
manufacturing services.
FACILITIES
The Company's headquarters currently occupy approximately 6,800 square feet
in Irvine, California. The Company leases its headquarters facility for
approximately $14,500 per month, pursuant to a lease agreement that expires in
December 1998. The Company does not have any laboratory, research or
manufacturing facilities of its own.
LEGAL PROCEEDINGS
The Company is not presently involved in any legal proceeding.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officer of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
Elliot P. Friedman................. 44 Chairman of the Board of Directors and Chief Executive Officer
Robert J. Burgess.................. 49 President and Chief Operating Officer
Tasneem A. Khwaja, Ph.D............ 61 Chief Scientific Officer, Corporate Secretary and Director
Joel Bresser, Ph.D................. 43 Senior Vice President--DSHEA Products
Paul Johnston, Ph.D................ 47 Senior Vice President of Development
Michael Tempesta, Ph.D............. 45 Senior Vice President of Research
Phillip G. Trad.................... 49 Senior Vice President, General Counsel and Director
James R. Wodach.................... 36 Senior Vice President and Chief Financial Officer
John H. Abeles, M.D................ 52 Director
Lyle Anderson...................... 42 Director
Howard R. Asher.................... 50 Director
Nathan F. Troum, M.D............... 77 Director
</TABLE>
ELLIOT P. FRIEDMAN joined the Company as Chief Financial Officer and a
Director in November 1994 and became President and Chief Executive Officer in
October 1995 and Chairman of the Board of Directors in April 1997. From July
1990 to July 1994, Mr. Friedman was co-founder and Chief Executive Officer of
BioTek Solutions, a provider of monoclonal antibody and DNA-based systems used
by pathologists for the diagnosis of cancer. Mr. Friedman received a Science of
Management degree from the Massachusetts Institute of Technology.
ROBERT J. BURGESS joined the Company as Executive Vice President and Chief
Operating Officer in May 1996 and became President and Chief Operating Officer
in April 1997. From April 1995 to April 1996, Mr. Burgess provided full-time
consulting services to the Company. From April 1994 to April 1995, Mr. Burgess
served as Chief Operating Officer of Dimension Memory, Inc. ("Dimension Memory")
a company that trades in computer microchips. From February 1993 to April 1994,
Mr. Burgess served as Chief Executive Officer of J. Micro Trading, an Australian
company that trades in computer microchips. From January 1991 to January 1993,
he was Chief Operating Officer of Integrated Memory Systems, which manufactured
computer memory modules.
TASNEEM A. KHWAJA, PH.D. is a founder of the Company and has served as
Secretary of the Company since its inception in 1994 and Chief Scientific
Officer since October 1995. From September 1994 to April 1997, Dr. Khwaja served
as Chairman of the Board of Directors and from November 1994 to October 1995
served as President and Chief Executive Officer of the Company. Dr. Khwaja has
been an Associate Professor of Pathology at the USC School of Medicine since
1973. Dr. Khwaja received a Ph.D. in Organic Chemistry and Chemistry of Nucleic
Acids from Cambridge University.
JOEL BRESSER, PH.D. joined the Company as Senior Vice President of DSHEA
Products in October 1997. From October 1995 to October 1997, Dr. Bresser was the
founder and owner of Intellihance, Inc., a consulting company that provides
strategic, marketing and technical services to healthcare and biotechnology
companies. From January 1989 to October 1995, Dr. Bresser served in various
executive capacities at Aprogenex, Inc., including President and Chief Executive
Officer from April 1992 to October 1995. Dr. Bresser received a Ph.D. in
Molecular Biology from Rice University.
PAUL JOHNSTON, PH.D. joined the Company as Vice President of Development in
March 1997. From February 1995 to March 1997, Dr. Johnston was an independent
consultant to a number of biotechnology
37
<PAGE>
start-up companies. From July 1993 to February 1995, Dr. Johnston served as the
Vice President of the Product Development Division of NeXstar Pharmaceuticals,
Inc. From September 1990 to July 1993, he was Senior Director of Pharmaceutical
Development of Amylin Pharmaceutical, Inc. and prior to that held senior
positions at Molecular Devices Corporation and Genentech Incorporated. Dr.
Johnston received a Ph.D. in Biochemistry from Brandeis University.
MICHAEL TEMPESTA, PH.D. joined the Company as Senior Vice President of
Research in March 1997. Immediately prior to joining the Company, Dr. Tempesta
was the Chief Scientific Officer of Larex, Inc., a biotechnology company, from
February 1995 to February 1997 and was also an independent consultant of NatProd
Consulting Services from January 1995 to February 1997. From 1990 to 1994, Dr.
Tempesta served as Chief Scientific Officer and in various executive positions
at Shaman Pharmaceuticals, Inc. Dr. Tempesta received his Ph.D. in Organic
Chemistry from the University of Arizona.
PHILLIP G. TRAD has been a Director of the Company since November 1995 and
Senior Vice President and General Counsel since November 1997. From 1988 to
November 1997, Mr. Trad operated his own law practice in California. Mr. Trad
has more than 17 years of experience in general, civil and commercial
litigation.
JAMES R. WODACH, CPA joined the Company as Senior Vice President and Chief
Financial Officer in December 1996. From April 1996 to December 1996, Mr. Wodach
was Director of Finance for Paragon Biomedical, Inc. From October 1995 to April
1996, he was an independent consultant. From April 1994 to October 1995, Mr.
Wodach was Senior Vice President Finance, from April 1993 to April 1994 Senior
Vice President and Chief Financial Officer, from July 1992 to April 1993 Vice
President Finance, and from November 1989 to July 1992 Controller for Regency
Health Services, Inc.
JOHN H. ABELES, M.D. has been a Director of the Company since August 1996.
Dr. Abeles has served as President of MedVest, Inc., a venture capital and
consulting firm, since 1980. He serves as a director of Encore Medical Corp.,
I-Flow Corporation, DUSA Pharmaceuticals, Inc. and Oryx Technology, Inc.
LYLE ANDERSON has been a Director of the Company since August 1996. Mr.
Anderson has been a private investor and financial consultant for the past 17
years. He serves as a principal in several privately held entities and provides
financial consulting to a large number and variety of ventures.
HOWARD R. ASHER has been a Director of the Company since August 1996. Mr.
Asher is the founder and serves as Chairman and CEO of ABA, a clinical research
organization that provides FDA strategic consulting and professional services.
He served as President of ABA from 1979 to 1996, and Chief Executive Officer of
ABA since 1996. Mr. Asher is Regulatory Affairs Certified by the Regulatory
Affairs Professional Society for Regulatory Affairs.
NATHAN F. TROUM, M.D. has been a Director of the Company since August 1996.
Since 1946, Dr. Troum has engaged in private medical practice specializing in
general medicine and rheumatology.
Each Director is elected for a period of one year at the Company's Annual
Meeting of Shareholders. Officers are elected by and serve at the discretion of
the Board of Directors.
Each non-employee Director of the Company receives $2,500 for each Board
meeting attended in person and $1,750 for any telephonic meeting of the Board of
Directors. In addition, pursuant to the Company's 1995 Stock Option Plan, each
non-employee Director annually receives options to purchase 10,000 shares of
Common Stock, although Dr. Abeles and Mr. Asher have agreed that in connection
with their initial appointment to the Board of Directors in August 1996, the
Company would issue each of them options to purchase 75,000 shares of Common
Stock, such options to vest over three years, in lieu of an additional grant of
options to purchase 10,000 shares pursuant to the 1995 Stock Option Plan in
years two and three of their services, if elected. In addition, non-employee
Directors who expend significant amounts of time in service of the Compensation
Committee and/or the Audit Committee are entitled to receive an additional grant
of options to purchase 20,000 shares of Common Stock. The options to purchase
Common
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<PAGE>
Stock are granted at the fair market value of the Common Stock on the date of
grant. The options are subject to certain vesting requirements and expire ten
years from the date of grant.
BOARD OF SCIENTIFIC ADVISORS
The Company's Board of Scientific Advisors, comprised of distinguished
physicians and research scientists, provides advice to the Company in connection
with the Company's research and development and clinical trials.
IVOR RALPH EDWARDS, M.D. Dr. Edwards has been a member of the Board of
Scientific Advisors of the Company since July 1995. As professor and Director of
Drug Monitoring for the World Health Organization's ("WHO's) Collaborating
Centre for International Drug Monitoring in Uppsala, Sweden, Dr. Edwards is
responsible for worldwide monitoring of adverse effects of pharmaceuticals and
natural medicines. Using information collected from physicians, hospital and
worldwide regulatory agencies, he has created a data archive of 1.5 million
records, which is used by regulatory agencies around the world. Additionally,
Dr. Edwards reviews pharmaceutical product applications as a consultant to the
Swedish Medical Products Agency. Dr. Edwards was trained in general internal
medicine and clinical pharmacology and holds FRCP (London, United Kingdom) and
FRACP qualifications. Prior to being appointed Director of Drug Monitoring at
WHO's Collaborating Centre for International Drug Monitoring, Dr. Edwards
chaired the Advisory Group to the Centre. He has also been a Medical Assessor
for Adverse Drug Reactions for the New Zealand Ministry of Health and External
Examiner in Clinical Pharmacology at the University of Zimbabwe and at the
University of Capetown in South Africa.
TOSHIKAZU OKI, PH.D. Dr. Oki has been a member of the Board of Scientific
Advisors of the Company since April 1995. From 1981 to 1993, Dr. Oki held senior
leadership positions in Pfizer and Bristol-Meyers pharmaceutical corporations,
and was Senior Vice President of Bristol-Meyers Research Institute and President
and Director of Bristol-Meyers Research Institute in Japan from December 1989 to
May 1993. He has nearly 40 years of pharmaceutical industry experience in
preclinical pharmacology and drug development of novel anti-cancer agents
obtained from natural and fermentation sources. Dr. Oki has more than 260
publications and holds 90 patents. He currently is a Professor of Exploratory
Biotechnology Research at Toyama Prefectural University in Toyama, Japan.
RANDOLPH C. STEER, M.D., PH.D. Dr. Steer has been a member of the Board of
Scientific Advisors of the Company since October 1996. Dr. Steer has been an
independent pharmaceutical and biotechnology consultant since 1989 and has a
broad background in business development, medical marketing, and regulatory and
clinical affairs, having served as a consultant to many corporations in the
United States and abroad. In addition, he has advised numerous venture capital
firms and investment banks on the development of drugs, biologics, diagnostics
and medical devices. Dr. Steer received his M.D. from the Mayo Medical School
and his Ph.D. from the University of Minnesota. He completed a residency and
subspecialty fellowship in clinical and chemical pathology at the University of
Minnesota Hospitals in Minneapolis. He has served as associate director of
medical affairs at Marion Laboratories; medical director at Ciba Consumer
Pharmaceuticals, Ciba-Geigy Corporation; senior vice president at the Physicians
World Communications group and Chairman, President and Chief Executive Officer
of Advanced Therapeutics Communications International, a leading drug regulatory
group serving the United States, Europe and Japan. Dr. Steer serves on the Board
of Directors of BioCryst Pharmaceuticals, Techne Corporation, Maret, Inc.,
Kimeragen, Inc., and IgX Ltd. and on the scientific advisory boards of Osiris
Therapeutics, Inc., Geltex Pharmaceuticals, and NaPro Biotherapeutics.
CLIVE R. TAYLOR, M.D., PH.D. Dr. Taylor has been a member of the Board of
Scientific Advisors of the Company since April 1995. Dr. Taylor is currently a
Professor and Chairman of the Department of Pathology and Laboratory Medicine at
the USC School of Medicine. Dr. Taylor is the Director of Laboratories and
Pathological Services at the Los Angeles County-USC Medical Center. He is also
the President of the American Association of Pathologists, which is comprised of
the Pathology Department
39
<PAGE>
Chairmen of all the medical centers in the United States, was President of the
Biological Stain Commission and is responsible for advising the FDA on
guidelines for reagents used in diagnosing biopsies. Dr. Taylor has written over
270 articles and 12 books, many of which have been translated for foreign
distribution. Prior to joining USC in 1976, he was a lecturer in the Department
of Pathology at Oxford University in the United Kingdom. He holds a Ph.D. in
immunopathology from Oxford University and an M.D. from Cambridge University.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
LIMITATION OF DIRECTOR'S LIABILITY.
The Company's Certificate of Incorporation eliminates the liability of
directors to the fullest extent permissible under Delaware law. Delaware law
permits a corporation to limit the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of certain
fiduciary duties as a director, provided, that the director's liability may not
be eliminated or limited for (a) breaches of the director's duty of loyalty to
the corporation or its shareholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; or (d)
transactions in which the director received an improper personal benefit. A
director's liability may also not be limited for violation of, or otherwise
relieve the corporation or its directors from the necessity of complying with,
federal or state securities laws or affect the availability of non-monetary
remedies such as injunctive relief or rescission.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's bylaws relating to indemnification require that the Company
indemnify its directors and its executive officers to the fullest extent
permitted under Delaware law, provided, that the Company may modify the extent
of such indemnification by individual contracts with its directors and executive
officers, and provided, further, that the Company will not be required to
indemnify any director or executive officer in connection with a proceeding
initiated by such person, with certain exceptions. Delaware corporate law, the
Company's bylaws, as well as any indemnity agreements, may also permit
indemnification for liabilities arising under the Securities Act or the
Securities Exchange Act of 1934, as amended. Without limiting any right an
indemnity may have under Delaware corporate law and the Company's bylaws, the
Board of Directors have adopted an Indemnification and Hold Harmless Agreement
("Indemnity Agreement") to provide additional indemnification and reimbursement
to all qualified directors and officers of the Company, and to hold such
directors and officers harmless from certain liabilities, judgments and related
expenses. Any individual who is a duly elected or appointed member of the Board
of Directors, a corporate officer of the Company or any employee or agent as
approved by the Board of Directors is deemed a person who qualifies as an
indemnity under the Indemnity Agreement.
The Board of Directors has been advised that, in the opinion of the
Securities and Exchange Commission, indemnification of liabilities arising under
the Securities Act of 1933, as amended, is contrary to 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 or officer of
the Company in the successful defense of any action, suit or proceeding) is
asserted by such director or officer in connection with the shares being
registered hereby, 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.
40
<PAGE>
EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
The Summary Compensation Table below sets forth information for services in
all capacities paid or accrued for the fiscal years ended March 31, 1997 and
1996 and the period from inception (September 15, 1994) to March 31, 1995 by the
Company to its Chief Executive Officer and the other executive officers whose
total annual compensation exceeded $100,000 for such fiscal years and period
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------- LONG-TERM
FISCAL COMPENSATION AWARDS
YEAR AND ---------------------------
PERIOD SECURITIES ALL OTHER
ENDED UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION MARCH 31 SALARY($) BONUS($) OPTIONS ($)
-------- ---------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Elliot Friedman............................. 1997 $ 170,663(1) $ 50,000(2) -- $ --
Chairman of the Board of Directors 1996 89,333 -- 712,708(3) --
and Chief Executive Officer 1995 22,500 -- --
Robert J. Burgess........................... 1997 163,335(4) 50,000(2) 712,708(5) --
President and Chief Operating 1996 87,687 -- -- --
Officer 1995 -- -- -- --
Tasneem A. Khwaja, Ph.D..................... 1997 167,163(6) -- -- --
Chief Scientific Officer and 1996 87,633(6) -- -- --
Secretary 1995 23,000(6) -- -- --
</TABLE>
- ------------------------
(1) Amount includes payments representing deferred salary pursuant to Employment
Agreements between the Company and each of Mr. Friedman and Dr. Khwaja. As
regards to Mr. Friedman and Dr. Khwaja, such deferred payments were $39,863
each, and were paid upon consummation of the Company's initial public
offering. See "Employment and Personal Services Agreements."
(2) Amount represents payments made pursuant to a discretionary bonus.
(3) Pursuant to an Agreement between the Company, Dr. Khwaja and Mr. Friedman
dated as of May 8, 1996, these options were canceled in connection with the
issuance of 712,708 shares of Common Stock to Mr. Friedman.
(4) Represents amounts paid by the Company to Dimension Memory which, from May
1996 to September 1997, provided the services of Robert J. Burgess as
President and Chief Operating Officer pursuant to a Personal Services
Agreement between the Company and Dimension Memory. In December 1996, the
Company amended its agreement with Dimension Memory. The amended agreement
provided for the accelerated payment by the Company of all amounts due under
the Personal Services Agreement in exchange for Dimension Memory agreeing to
provide additional services to the Company. As a result, the Company paid
Dimension Memory the sum of $312,000. Of the $312,000 paid to Dimension
Memory, $35,000 relating to services provided by Dimension Memory to the
Company for the period January 1997 through March 1997 is included, and
$277,000 paid for services to be provided from April 1997 through December
1998 is not included. This amount also includes $50,000 of deferred payments
pursuant to such Personal Services Agreement, were paid upon
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<PAGE>
consummation of the Company's initial public offering. See "Employment and
Personal Services Agreements."
(5) These options were granted to Dimension Memory pursuant to a consulting
agreement between the Company and Dimension Memory and were canceled in
connection with the issuance of 712,708 shares of Common Stock to Dimension
Memory for services to be rendered by Dimension Memory pursuant to the
Personal Service Agreement.
(6) Does not include approximately $70,000 annual salary paid by USC to Dr.
Khwaja as a professor. Approximately $30,000 of such salary was paid
indirectly through payment by the Company to USC of the amount required by a
Research Agreement between the Company and USC, which agreement has been
terminated.
EMPLOYMENT AND PERSONAL SERVICE AGREEMENTS
The Company has entered into an employment agreement with Elliot P.
Friedman, effective September 1, 1997, that agreement expires on August 30,
2000. The agreement provides for an annual base salary of $182,000 and if Mr.
Friedman's employment is terminated without cause or by Mr. Friedman on the
basis of a breach by the Company, the Company is obligated to pay Mr. Friedman
the salary and benefits earned or accrued through the date of termination, and
within 30 days after termination, a lump sum of the present value of the salary
provided for by the agreement for the 12 months immediately following
termination. In the event of death or disability or if the agreement is
voluntarily terminated by Mr. Friedman, or terminated for cause by the Company,
the Company is obligated to pay only salary and benefits earned or accrued
through the date of termination.
The Company has entered into an employment agreement with Robert J. Burgess,
effective October 1, 1997, that has substantially similar terms as Mr.
Friedman's agreement described above, except that the agreement expires on
October 1, 2000. Prior to entering into such employment agreement, the Company
was party to a personal services agreement with Dimension Memory whereby,
Dimension Memory agreed to provide the services of Robert Burgess as an
executive officer of the Company. Such agreement has been deemed satisfied as of
October 1, 1997 and as a result the Company will recognize $190,000 of
compensation expense in the nine months ended December 31, 1997.
The Company has entered into an employment agreement with Tasneem A. Khwaja,
effective September 1, 1997, that expires on August 30, 2000. The agreement
provides for an annual base salary of $152,000 and if Dr. Khwaja's employment is
terminated without cause or if the termination is by Dr. Khwaja on the basis of
a breach by the Company, the Company is obligated to pay Dr. Khwaja the salary
and benefits earned or accrued through the date of termination and, within 30
days after termination, a lump sum of the present value of the salary provided
for by the agreement for the 12 months immediately following termination. In the
event of death or disability or if the agreement is voluntarily terminated by
Dr. Khwaja or terminated for cause by the Company, the Company is obligated to
pay only salary and benefits earned and accrued through the date of termination.
The Company also has entered into employment agreements with each of its
Senior Vice Presidents that provide for base salaries, the potential for the
payment of bonuses and severance payments of three months salary upon certain
terminations.
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan") provides for the
grant of options to directors, officers, key employees, consultants, scientific
advisors and other personnel working directly or indirectly for the Company. A
maximum of 2,200,000 shares of Common Stock is authorized for issuance under the
1995 Plan. The 1995 Plan is administered by the Board of Directors or a
committee of the Board of Directors (the "Plan Committee") comprised of
disinterested directors, i.e., directors who, during the
42
<PAGE>
one year prior to service on the Plan Committee were not granted or awarded
equity securities of the Company under the 1995 Plan or any other plan of the
Company, other than an automatic annual grant to each non-employee director of
the Company of options to purchase 10,000 shares of Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date of the
grant. These automatic options vest over a one-year period. The options granted
under the 1995 Plan may be "incentive stock options" as defined in Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
options. As determined by the Plan Committee, payment upon exercise of options
may be in cash or in the form of unrestricted Common Stock already owned by the
optionee, or, in the case of the exercise of a nonqualified option, in the form
of restricted stock. However, in the case of an incentive stock option, the
right to make payment in the form of already owned shares may be authorized only
at the time of grant.
Generally, the vesting, exercise and termination schedules of options other
than automatic non-employee director options are determined by the Board of
Directors or the Plan Committee at the time of grant, exercise price, but in no
event may the term of an option exceed ten years or the exercise price be less
than 100% of the fair market value of the Common Stock on the date of grant, and
in no event may the term of an incentive stock option granted under the 1995
Plan to a shareholder owning more than 10% of the combined voting power of all
classes of stock of the Company on the date of grant exceed five years and its
exercise price may not be less than 110% of the fair market value of the Common
Stock on the date of grant. Options may be exercised in whole or in part as
determined by the Plan Committee. Vesting generally ceases upon termination of
employment and vested options generally expire 12 months after termination of
employment, if not exercised.
As of the date of this Prospectus, the Company has granted options with
respect to an aggregate of 1,980,378 shares under the 1995 Plan, which options
have terms ranging from four to ten years and are currently exercisable at
exercise prices ranging from $0.96 to $16.00. The 1995 Plan was approved by the
Board of Directors of the Company on April 14, 1995, and was amended on August
19, 1997, and, unless sooner terminated by the Board of Directors or Plan
Committee, will terminate on April 14, 2005.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of November 15, 1997, certain information
known to the Company regarding the ownership of shares of Common Stock by (i)
each person known to the Company to be a beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) each director, (iii) each Named
Executive Officers; and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP(3)
SHARES --------------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME(1) OWNED(2) OFFERING OFFERING
- --------------------------------------------------------------- -------------------- ------------- -----------
<S> <C> <C> <C>
Tasneem A. Khwaja, Ph.D........................................ 2,699,822(4) 24.4% 20.3%
Elliot P. Friedman............................................. 2,095,248(5) 18.7% 15.6%
Robert J. Burgess.............................................. 2,111,248(6) 18.8% 15.7%
JadiJo, Inc.(7)................................................ 115,270(8) 1.0% *
D-RAM Industries Pty. Ltd.(9).................................. 624,270(8) 5.6% 4.7%
Dimension Memory, Inc.(10)..................................... 712,708(8) 6.4% 5.4%
Phillip G. Trad................................................ 225,938(11) 2.0% 1.7%
John H. Abeles, M.D.(12)....................................... 47,188(13) * *
Lyle Anderson(14).............................................. 37,500(15) * *
Howard R. Asher(16)............................................ 67,188(17) * *
Nathan F. Troum, M.D.(18)...................................... 12,500(19) * *
All directors and executive officers as a group (12 people).... 7,470,589(20) 62.7% 52.7%
</TABLE>
The Company had 152 holders of record of its Common Stock as of October 31,
1997.
- ------------------------
* Less than one percent (1%).
(1) The address of each person listed in this table, except as otherwise noted,
is c/o PharmaPrint Inc., 4 Park Plaza, Suite 1900, Irvine, California 92614.
(2) As of November 15, 1997, the Company had 11,053,684 shares of Common Stock
issued and outstanding. Includes the beneficial ownership of shares that the
person has a right to acquire within sixty (60) days of November 15, 1997.
(3) Assumes 13,303,684 shares of Common Stock issued and outstanding after the
Offering and no exercise of the Underwriters' over-allotment option.
(4) Includes 104,045 shares to be transferred to John Kirch on August 14, 1998.
Also includes call options (obligations to sell) granted by Dr. Khwaja in
the amount of 200,000, 200,000, and 30,000 to Elliot P. Friedman, Robert J.
Burgess, and Dr. Khwaja's son, respectively.
(5) Includes options to purchase 150,000 shares of Common Stock. Does not
include 200,000 call options (options to purchase) granted to Mr. Friedman
by Dr. Khwaja. See footnote 4.
(6) Consists of 509,000, 115,270, 624,270, and 712,708 shares of Common Stock
owned of record by Mr. Burgess, JadiJo, Inc., D-RAM Industries Pty. Ltd.,
and Dimension Memory, respectively, also shown separately in this table.
Also includes options to purchase 150,000 shares of Common Stock. Does not
include 200,000 call options (options to purchase) granted to Mr. Burgess by
Dr. Khwaja. See footnote 4.
(7) The address of JadiJo, Inc. is 32, EDIF, J.J. Vallarino, 1st Floor, Office
3, Panama City, Panama.
(8) These shares are also included in the shares shown as beneficially owned by
Robert J. Burgess. These entities are controlled by various of the children
and/or sons-in-law of Mr. Burgess.
44
<PAGE>
(9) The address of D-RAM Industries Pty. Ltd. ("D-RAM") is 98 Edinborough
Street, Benowa Waters, Gold Coast, 4217, Queensland, Australia.
(10) The address of Dimension Memory, Inc. is 17 Baycove Lane, Newport Beach,
California 92661.
(11) Consists solely of options to purchase 225,938 shares of Common Stock.
(12) The address of Dr. Abeles is c/o MedVest, Inc., 2365 N.W. 41st Street, Boca
Raton, Florida 33431.
(13) Consists solely of options to purchase 47,188 shares of Common Stock.
(14) The address of Mr. Anderson is 900 Appolo, Suite 4, Houston, Texas 77058.
(15) Consists solely of options to purchase 37,500 shares of Common Stock.
(16) The address of Mr. Asher is c/o Advanced Bioresearch Associates, One
American Plaza, 600 West Broadway, Suite 900, San Diego, California 92101.
(17) Consists solely of options to purchase 67,188 shares of Common Stock.
(18) The address of Dr. Troum is 3878 43rd Street, San Diego, California 92105.
(19) Consists solely of options to purchase 12,500 shares of Common Stock.
(20) Includes beneficial ownership of Common Stock as follows: Tasneem A.
Khwaja, Ph.D.--2,699,822 shares; Elliot P. Friedman--1,945,248 shares; and
Robert J. Burgess--1,961,248 shares. Also includes options held by directors
and executive officers of the Company to purchase the following number of
shares of Common Stock: John H. Abeles, M.D.--47,188 shares; Lyle
Anderson--37,500 shares; Howard R. Asher--67,188 shares; Joel Bresser,
Ph.D.--0 shares; Elliot P. Friedman--150,000 shares; Phillip G.
Trad--225,938 shares; Nathan F. Troum--12,500 shares; Robert
Burgess--150,000 shares; Paul Johnston, Ph.D.--20,000 shares; Michael
Tempesta, Ph.D.--85,000 shares; and James R. Wodach--68,958 shares.
CERTAIN TRANSACTIONS
As of March 22, 1996, Mr. Friedman, JadiJo, Inc., a California corporation,
Dr. Khwaja, Mr. Burgess, Dimension Memory, and D-RAM entered into a shareholders
agreement whereby Dr. Khwaja contributed 1,336,978 shares of Common Stock to the
Company as a capital contribution and the Company agreed to issue 624,270 shares
of Common Stock to D-RAM, as nominee of Mr. Burgess, the Company's then
Executive Vice President and Chief Operating Officer, and options to acquire
712,708 shares of Common Stock to Mr. Friedman, at an exercise price of $0.96
per share. Subsequently, pursuant to an agreement dated as of May 8, 1996 among
the Company, Dr. Khwaja, and Mr. Friedman, the options granted to Mr. Friedman
were canceled and he was issued 712,708 shares of Common Stock. In September
1997, the underwriter of the Company's initial public offering released a
lock-up agreement between Mr. Friedman covering such shares.
In December, 1996, the Company amended its Personal Services Agreement with
Dimension to provide for the immediate payment by the Company of all amounts due
under the Personal Services Agreement in exchange for Dimension agreeing to
provide additional services to the Company. As a result of this amended
agreement, the Company paid Dimension $312,000. In 1997, Dimension agreed to
provide the services of Mr. Burgess as the Company's President and the Company
agreed to pay Dimension, effective March 1, 1997, at the rate of $36,000 per
year. In October 1997, the parties deemed that such Personal Services Agreement
was satisfied.
ABA is a clinical research organization that provides FDA strategic
consulting and professional services and provides guidance to the Company in
connection with various clinical, scientific, and regulatory matters. Mr. Howard
R. Asher, a member of the Company's Board of Directors, is the Chairman and
Chief Executive Officer and a controlling shareholder of ABA. The Company paid
approximately $880,000 for the year ended March 31, 1997 for services rendered
by ABA.
There are no family relationships among the executive officers or directors
of the Company.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The following description of the Common Stock of the Company is subject to
the Delaware General Corporation Law and to the provisions contained in the
Company's Certificate of Incorporation, as amended, and bylaws, as amended,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
On October 2, 1997 the Company effected a reincorporation in Delaware. As a
result of this reincorporation, the Company increased its number of shares of
authorized Common Stock from 19,000,000 shares, without par value, to 24,000,000
shares, par value $0.001 per share. Currently there are 11,053,684 shares of the
Company's Common Stock outstanding; 300,000 shares of Common Stock are reserved
for issuance upon the exercise of a warrant held by the underwriter of the
Company's initial public offering; 2,200,000 shares of Common Stock are reserved
for issuance upon the exercise of options under the 1995 Plan; and 100,000
shares of Common Stock are reserved for issuance upon the exercise of the
Underwriters' Warrant.
Each outstanding share of Common Stock is entitled to one vote, either in
person or by proxy, on all matters that may be voted upon by the registered
holders thereof at meetings of the shareholders.
The holders of Common Stock (i) have equal ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of the affairs of the Company; (iii) do
not have preemptive, subscription or conversion rights, or redemption or sinking
fund provisions applicable thereto; and (iv) are entitled to one non-cumulative
vote per share on all matters on which shareholders may vote. All of the
outstanding shares of Common Stock are, and the shares offered hereby, when
issued against payment therefor in accordance with this Prospectus, will be
fully paid and nonassessable.
The Company has never declared or paid cash dividends on its capital stock,
and currently intends to retain any future earnings for use in the development
and operation of its business. Accordingly, the Company does not expect to pay
cash dividends in the foreseeable future.
PREFERRED STOCK
The Board of Directors has the authority, subject to any limitations
prescribed by law, without further action by the stockholders, to issue up to an
aggregate of 1,000,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series. The shares noted
above constitute "blank check" Preferred Stock, and, as of the date of this
Offering, the Board of Directors has not yet designated any series thereof or
any rights, preferences, privileges or restrictions attaching thereto. The
issuance of Preferred Stock could adversely affect the voting power of the
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation and may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any Preferred Stock.
UNDERWRITERS' WARRANTS; REGISTRATION RIGHTS
The Company has agreed to sell to the Representatives of the Underwriters
warrants (the "Underwriters' Warrants") to purchase up to a number of shares of
Common Stock equal to 5% of the number of shares to be sold by the Company in
this Offering (excluding any shares sold pursuant to the Underwriter's
over-allotment option) at an exercise price per share equal to 120% of the Price
to Public in this Offering. The Underwriters' Warrants are exercisable for a
period of four years commencing one year after the
46
<PAGE>
effective date of the Registration Statement of which this Prospectus forms a
part, and will contain certain demand and piggyback registration rights. In
addition, the holders of the Underwriters' Warrants have the right to include
them or the underlying Common Stock in any registration statement (other than on
a Form S-4 or S-8) filed by the Company while such warrants are exercisable. See
"Underwriting."
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the Delaware General Corporation Law (the "DGCL")
prohibits a publicly held Delaware corporation from engaging in a broad range of
"business combinations" with an "interested stockholder" (defined generally as a
person owning 15% or more of the corporation's outstanding voting stock) for
three years following the date such person became an interested stockholder
unless (i) before the person becomes an interested stockholder, the transaction
resulting in such person becoming an interested stockholder or the business
combination is approved by the board of directors of the corporation, (ii) upon
consummation of the transaction resulting in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation (excluding shares owned by directors
who are also officers of the corporation or shares held by employee stock plans
that do not provide employees with the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender offer or exchange
offer) or (iii) on or after such date on which such person became an interested
stockholder, the business combination is approved by the board of directors and
authorized at an annual or special meeting, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock excluding
shares owned by the interested stockholders. The restrictions of Section 203 do
not apply, among other reasons, if a corporation, by action of its stockholders,
adopts an amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by Section 203, provided that, in addition to any
other vote required by law, such amendment to the certificate of incorporation
or bylaws must be approved by the affirmative vote of a majority of the shares
entitled to vote. Moreover, an amendment so adopted is not effective until
twelve months after its adoption and does not apply to any business combination
between the corporation and any person who became an interested stockholder of
such corporation on or prior to such adoption. The Company's Certificate of
Incorporation and Bylaws do not currently contain any provisions electing not to
be governed by Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Common Stock. This could have
the effect of inhibiting changes in management and may also prevent temporary
fluctuations in the Common Stock that often result from takeover attempts.
Section 228 of the DGCL allows any action that is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
of such corporation does not contain a provision to the contrary. The Company's
Certificate of Incorporation contains no such provision, and therefore
stockholders holding a majority of the voting power of the Common Stock will be
able to approve a broad range of corporate actions requiring stockholder
approval without the necessity of holding a meeting of stockholders.
Certain provisions of the Company's Bylaws may have the affect of
discouraging certain types of transactions that may involve an actual or
threatened change of control of the Company and encouraging any person who might
seek to acquire control of the Company to negotiate with the Company's Board of
Directors.
TRANSFER AGENT AND REGISTRAR
The Company's transfer agent is Continental Stock Transfer & Trust Company.
The transfer agent is responsible for all record keeping and administrative
functions in connection with the Common Stock.
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom CIBC Oppenheimer Corp. and Cruttenden Roth
Incorporated (collectively, the "Representatives") are acting as
Representatives, have severally agreed to purchase from the Company, and the
Company has agreed to sell to each Underwriter, the respective number of shares
of Common Stock set forth opposite the name of each Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
CIBC Oppenheimer Corp............................................................
Cruttenden Roth Incorporated.....................................................
----------
Total........................................................................ 2,250,000
----------
----------
</TABLE>
The Underwriters propose to offer the shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and in part to certain securities dealers at such price less a
concession of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other brokers
and dealers. After the shares of Common Stock are released for sale to the
public, the offering price and other selling terms may from time to time be
varied by the Representatives. The Underwriters are obligated to take and pay
for all of the shares of Common Stock offered hereby (other than those covered
by the over-allotment option described below) if any are taken.
The Company has granted to the Underwriters an option, exercisable for up to
30 days after the date of this Prospectus, to purchase up to an aggregate of
337,500 additional shares of Common Stock at the price to the public less the
underwriting discount set forth on the cover page of this Prospectus to cover
over-allotments, if any. If the Underwriters exercise such option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them bears to the 2,250,000 shares of Common Stock offered
hereby. The Underwriters may exercise such option only to cover over-allotments
made in connection with the sale of the shares of Common Stock offered hereby.
The Company has also agreed to sell to the Representatives or their
designees, for nominal consideration, warrants (the "Underwriters' Warrants") to
purchase a number of shares of Common Stock equal to 5% of the number of shares
initially sold by the Company hereunder, at a price per share equal to 120% of
the public offering price. The exercise price may be paid in cash or on a
cashless net issuance basis by foregoing receipt of a number of shares otherwise
issuable upon exercise having a fair market value equal to the aggregate
exercise price. The Underwriters' Warrants will be exercisable for a period of
four years, commencing one year following the effective date of the Registration
Statement of which this Prospectus forms a part. Holders of the Underwriters'
Warrants will have certain demand and piggyback registration rights with respect
to the shares of Common Stock issuable upon exercise thereof. The Underwriters'
Warrant will be restricted from sale, transfer or hypothecation for a period of
one year from the effective date, except to officers and partners of the
Representatives. The exercise price and the number of shares issuable upon
exercise may, under certain circumstances, be subject to adjustment pursuant to
antidilution provisions.
48
<PAGE>
The Company has agreed to indemnify the Representatives and the several
Underwriters against certain liabilities, including, without limitations,
liabilities under the Securities Act, and to contribute to certain payments that
the Underwriters may be required to make in respect thereof.
In connection with this Offering, the Underwriters and other group members
and their respective affiliates may engage in transactions that stabilize,
maintain or otherwise affect the market price of the Common Stock. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriters
also may create a short position for the account of the Underwriters by selling
more Common Stock in connection with the Offering than they are committed to
purchase from the Company, and in such case may purchase Common Stock in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriters may also cover all or a portion of such
short position, up to 337,500 shares of Common Stock, by exercising the
Underwriters' over-allotment option referred to above. In addition, CIBC
Oppenheimer Corp., on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim from
an Underwriter (or dealer participating in the Offering) for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Company's executive officers and directors, who after giving effect to
the Offering will collectively own an aggregate of approximately 6,606,318
issued shares, of which 910,150 shares may be subject to sale pursuant to margin
agreements and lines of credit between the officers of the Company and an
investment bank, and 1,318,438 shares issuable upon exercise of outstanding
options, have agreed that they will not directly or indirectly sell, offer,
contract to sell, assign, transfer, encumber, grant an option to purchase, or
otherwise dispose of any shares of Common Stock beneficially owned (within the
meaning of Rule 13d-3 of the Exchange Act) by them, for 180 days (and with
respect to 200,000 shares, 120 days) after the date of the Underwriting
Agreement, without the prior written consent of CIBC Oppenheimer Corp., subject
to certain limited exceptions. The Company has also agreed not to issue, sell or
register with the Commission, or otherwise dispose of directly or indirectly,
any equity securities of the Company (or any securities convertible into or
exercisable or exchangeable for equity securities of the Company) for a period
of 180 days after the date of the Underwriting Agreement, without the prior
written consent of CIBC Oppenheimer Corp., subject to certain limited
exceptions. CIBC Oppenheimer Corp. may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-up
agreements.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Klehr, Harrison, Harvey, Branzburg & Ellers LLP, Philadelphia,
Pennsylvania. Certain legal matters are being passed upon for the Underwriters
by Gibson, Dunn & Crutcher LLP, Orange County, California.
EXPERTS
The balance sheet of the Company as of March 31, 1997, and the related
statements of operations, shareholders' equity and cash flows for the years
ended March 31, 1996 and 1997 and the period from inception (September 15, 1994)
to March 31, 1997 included in this Prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
in reliance upon the authority of said firm as experts in giving said report.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accounts...................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Shareholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of PharmaPrint Inc.:
We have audited the accompanying balance sheet of PharmaPrint Inc. (a
California corporation in the development stage) as of March 31, 1997 and the
related statements of operations, shareholders' equity, and cash flows for the
years ended March 31, 1996 and 1997 and for the period from inception (September
15, 1994) to March 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above represent fairly,
in all material respects, the financial position of PharmaPrint Inc. as of March
31, 1997 and the results of its operations and its cash flows for the years
ended March 31, 1996 and 1997 and for the period from inception (September 15,
1994) to March 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
May 2, 1997
F-2
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------- SEPTEMBER 30,
1997
--------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 8,170,072 $ 3,281,188
Other current assets............................................................ 337,593 329,859
-------------- --------------
Total current assets.......................................................... 8,507,665 3,611,047
EQUIPMENT, NET.................................................................... 185,571 216,752
OTHER ASSETS, net of accumulated amortization of $8,110 at March 31, 1997 and
$47,269 at September 30, 1997................................................... 138,684 225,165
-------------- --------------
Total assets.................................................................. $ 8,831,920 $ 4,052,964
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 927,773 $ 674,570
Accrued expenses................................................................ 166,823 217,184
-------------- --------------
Total current liabilities..................................................... 1,094,596 891,754
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTE 5)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value--1,000,000
shares authorized, no shares issued or outstanding............................ -- --
Common stock, without par value--19,000,000 shares authorized, 11,000,000 and
11,005,202 shares issued and outstanding as of March 31, 1997 and September
30, 1997, respectively........................................................ 22,826,898 23,410,972
Additional paid in capital...................................................... 1,130,370 1,130,370
Deferred compensation........................................................... (3,158,899) (114,433)
Deficit accumulated during the development stage................................ (13,061,045) (21,265,699)
-------------- --------------
Total shareholders' equity.................................................... 7,737,324 3,161,210
-------------- --------------
Total liabilities and shareholders' equity.................................... $ 8,831,920 $ 4,052,964
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
MARCH 31, PERIOD FROM INCEPTION SEPTEMBER 30,
-------------------------- (SEPTEMBER 15, 1994) --------------------------
1996 1997 THROUGH MARCH 31, 1997 1996 1997
----------- ------------- ---------------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $ -- $ -- $ -- $ -- $ --
EXPENSES:
Research and development...... 386,878 2,980,064 3,745,398 786,495 2,717,402
General and administrative.... 653,557 2,919,351 3,678,460 1,640,497 1,863,712
Stock compensation............ 303,750 5,333,437 5,637,187 4,585,000 3,623,540
----------- ------------- ------------ ----------- -------------
1,344,185 11,232,852 13,061,045 7,011,992 8,204,654
----------- ------------- ------------ ----------- -------------
LOSS FROM OPERATIONS............ (1,344,185) (11,232,852) (13,061,045) (7,011,992) (8,204,654)
----------- ------------- ------------ ----------- -------------
NET LOSS........................ $(1,344,185) $ (11,232,852) $ (13,061,045) $(7,011,992) $ (8,204,654)
----------- ------------- ------------ ----------- -------------
----------- ------------- ------------ ----------- -------------
LOSS PER SHARE.................. $ (.16) $ (1.10) $ (1.47) $ (0.79) $ (0.73)
----------- ------------- ------------ ----------- -------------
----------- ------------- ------------ ----------- -------------
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS
OUTSTANDING................... 8,297,103 10,193,131 8,897,833 8,893,702 11,223,072
----------- ------------- ------------ ----------- -------------
----------- ------------- ------------ ----------- -------------
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30,
1997
----------------------
(UNAUDITED)
<S> <C>
REVENUES........................ $ --
EXPENSES:
Research and development...... 6,462,800
General and administrative.... 5,542,172
Stock compensation............ 9,260,727
------------
21,265,699
------------
LOSS FROM OPERATIONS............ (21,265,699)
------------
NET LOSS........................ $ (21,265,699)
------------
------------
LOSS PER SHARE.................. $ (2.30)
------------
------------
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS
OUTSTANDING................... 9,228,395
------------
------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
(INFORMATION WITH RESPECT TO THE SIX MONTHS
ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL STOCK
NUMBER OF PAID-IN DEFERRED SUBSCRIPTION
SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
----------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, September 15, 1994 (inception)............ -- $ -- $ -- $ -- $ --
Issuance of common stock at $.001 per share to
officer in November 1994 for cash and
receivable....................................... 4,265,845 4,100 -- -- (4,000)
Issuance of common stock at $.004 per share to
officer in November 1994 for cash and
receivable....................................... 1,248,540 5,000 -- -- (2,500)
Issuance of common stock at $.001 per share in
November 1994 for receivable..................... 104,045 100 -- -- (100)
Issuance of common stock at $.96 per share in
December 1994 for cash and receivable............ 624,270 600,000 -- -- (200,000)
Issuance of common stock at $.96 per share in March
1995 for technology rights....................... 328,563 315,789 -- -- --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, March 31, 1995............................ 6,571,263 924,989 -- -- (206,600)
Fair value of options granted (based upon estimated
fair values of common stock of $1.68 to $2.40 per
share):
July 1, 1995 (67,629 options).................... -- -- 48,750 -- --
November 1, 1995 (88,438 options)................ -- -- 127,500 -- --
January 1, 1996 (88,438 options)................. -- -- 127,500 -- --
March 22, 1996 (712,708 options)................. -- -- 1,027,500 (1,027,500) --
Issuance of common stock in private placements in
December 1995 at $2.40 per share, net of
expenses......................................... 618,034 1,314,616 -- -- (100,000)
Stock issued for services in March 1996............ 624,270 1,500,000 -- (1,500,000) --
Fair value of warrants issued with notes payable... -- -- 31,250 -- --
Payments on stock subscription receivable.......... -- -- -- -- 200,000
Contribution of shares by shareholder in March
1996............................................. (1,336,978) -- -- -- --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, March 31, 1996............................ 6,476,589 3,739,605 1,362,500 (2,527,500) (106,600)
Issuance of common stock in private placements in
April 1996 at $2.40 per share, net of expenses
and repurchased shares........................... 97,995 185,342 -- -- --
Payments on stock subscription receivable.......... -- -- -- -- 106,600
Common stock issued upon cancellation of options in
May 1996......................................... 712,708 1,712,500 (127,500) -- --
Restricted shares issued for services upon
cancellation of options in May 1996.............. 712,708 2,984,466 (1,027,500) (1,956,966) --
Issuance of common stock in initial public offering
in August 1996, net of expenses.................. 3,000,000 12,704,985 -- -- --
Remeasurement of stock issued in March 1996........ -- 1,500,000 -- (1,500,000) --
Amortization of deferred compensation.............. -- -- -- 3,000,000 --
Fair value of options granted to consultants in
October 1996..................................... -- -- 274,433 (174,433) --
Fair value of stock transferred by a major
shareholder to third parties as compensation for
services in December 1996........................ -- -- 648,437 -- --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, March 31, 1997............................ 11,000,000 22,826,898 1,130,370 (3,158,899) --
Remeasurement of restricted shares issued for
services in May 1996............................. -- 579,074 -- (579,074) --
Exercise of stock options.......................... 5,202 5,000 -- -- --
Amortization of deferred compensation.............. -- -- -- 3,623,540 --
Net loss........................................... -- -- -- -- --
----------- ------------ ----------- ------------- ------------
BALANCE, September 30, 1997 (Unaudited)............ 11,005,202 $ 23,410,972 $ 1,130,370 $ (114,433) $ --
----------- ------------ ----------- ------------- ------------
----------- ------------ ----------- ------------- ------------
<CAPTION>
DEFICIT
ACCUMULATED DURING
DEVELOPMENT STAGE TOTAL
------------------- ------------
<S> <C> <C>
BALANCE, September 15, 1994 (inception)............ $ -- $ --
Issuance of common stock at $.001 per share to
officer in November 1994 for cash and
receivable....................................... -- 100
Issuance of common stock at $.004 per share to
officer in November 1994 for cash and
receivable....................................... -- 2,500
Issuance of common stock at $.001 per share in
November 1994 for receivable..................... -- --
Issuance of common stock at $.96 per share in
December 1994 for cash and receivable............ -- 400,000
Issuance of common stock at $.96 per share in March
1995 for technology rights....................... -- 315,789
Net loss........................................... (484,008) (484,008)
------------------- ------------
BALANCE, March 31, 1995............................ (484,008) 234,381
Fair value of options granted (based upon estimated
fair values of common stock of $1.68 to $2.40 per
share):
July 1, 1995 (67,629 options).................... -- 48,750
November 1, 1995 (88,438 options)................ -- 127,500
January 1, 1996 (88,438 options)................. -- 127,500
March 22, 1996 (712,708 options)................. -- --
Issuance of common stock in private placements in
December 1995 at $2.40 per share, net of
expenses......................................... -- 1,214,616
Stock issued for services in March 1996............ -- --
Fair value of warrants issued with notes payable... -- 31,250
Payments on stock subscription receivable.......... -- 200,000
Contribution of shares by shareholder in March
1996............................................. -- --
Net loss........................................... (1,344,185) (1,344,185)
------------------- ------------
BALANCE, March 31, 1996............................ (1,828,193) 639,812
Issuance of common stock in private placements in
April 1996 at $2.40 per share, net of expenses
and repurchased shares........................... -- 185,342
Payments on stock subscription receivable.......... -- 106,600
Common stock issued upon cancellation of options in
May 1996......................................... -- 1,585,000
Restricted shares issued for services upon
cancellation of options in May 1996.............. -- --
Issuance of common stock in initial public offering
in August 1996, net of expenses.................. -- 12,704,985
Remeasurement of stock issued in March 1996........ -- --
Amortization of deferred compensation.............. -- 3,000,000
Fair value of options granted to consultants in
October 1996..................................... -- 100,000
Fair value of stock transferred by a major
shareholder to third parties as compensation for
services in December 1996........................ -- 648,437
Net loss........................................... (11,232,852) (11,232,852)
------------------- ------------
BALANCE, March 31, 1997............................ (13,061,045) 7,737,324
Remeasurement of restricted shares issued for
services in May 1996............................. -- --
Exercise of stock options.......................... -- 5,000
Amortization of deferred compensation.............. -- 3,623,540
Net loss........................................... (8,204,654) (8,204,654)
------------------- ------------
BALANCE, September 30, 1997 (Unaudited)............ $ (21,265,699) $ 3,161,210
------------------- ------------
------------------- ------------
</TABLE>
- ----------------------------------
* No shares of Preferred Stock issued.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 15, SIX MONTHS ENDED (SEPTEMBER 15,
YEAR ENDED MARCH 31, 1994) SEPTEMBER 30, 1994)
----------------------- THROUGH MARCH 31, ---------------------- THROUGH
1996 1997 1997 1996 1997 SEPTEMBER 30, 1997
---------- ----------- ------------------- ---------- ---------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss..................... $(1,344,185) $(11,232,852) $ (13,061,045) $(7,011,992) $(8,204,654) $ (21,265,699)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation............... -- 9,188 9,188 -- 38,914 48,102
Amortization of discount on
notes payable............ -- 31,250 31,250 31,250 -- 31,250
Stock issued for technology
licensing rights......... -- -- 315,789 -- -- 315,789
Stock and options issued
for services............. 303,750 5,333,437 5,637,187 4,585,000 3,623,540 9,260,727
(Increase) decrease in
prepaid research
services................. (5,000) 88,333 -- -- -- --
(Increase) decrease in
other current assets..... -- (308,351) (337,593) 94,203 7,734 (329,859)
(Increase) decrease in
other non-current
assets................... (48,167) (84,598) (138,684) 17,848 (92,287) (230,971)
Increase (decrease) in
amount due to USC........ 166,000 (176,000) -- -- -- --
Increase (decrease) in
accounts payable and
accrued expenses......... 116,542 973,554 1,094,596 445,306 (202,842) 891,754
---------- ----------- ------------------- ---------- ---------- -------------------
Net cash used in
operating activities... (811,060) (5,366,039) (6,449,312) (1,838,385) (4,829,595) (11,278,907)
---------- ----------- ------------------- ---------- ---------- -------------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equipment........ -- (194,759) (194,759) (56,910) (64,289) (259,048)
---------- ----------- ------------------- ---------- ---------- -------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds from issuance of
common stock............... 1,214,616 12,890,327 14,507,543 12,724,101 5,000 14,512,543
(Increase) decrease in
deferred offering costs.... (94,203) 94,203 -- -- -- --
Proceeds from stock
subscription receivable.... 200,000 106,600 306,600 100,000 -- 306,600
Proceeds from notes
payable.................... 250,000 20,000 270,000 270,000 -- 270,000
Repayment of notes payable... -- (270,000) (270,000) (250,000) -- (270,000)
---------- ----------- ------------------- ---------- ---------- -------------------
Net cash provided by
financing activities... 1,570,413 12,841,130 14,814,143 12,844,101 5,000 14,819,143
---------- ----------- ------------------- ---------- ---------- -------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS......... 759,353 7,280,332 8,170,072 10,948,806 (4,888,884) 3,281,188
CASH AND CASH EQUIVALENTS,
beginning of period.......... 130,387 889,740 -- 889,740 8,170,072 --
---------- ----------- ------------------- ---------- ---------- -------------------
CASH AND CASH EQUIVALENTS, end
of period.................... $ 889,740 $ 8,170,072 $ 8,170,072 $11,838,546 $3,281,188 $ 3,281,188
---------- ----------- ------------------- ---------- ---------- -------------------
---------- ----------- ------------------- ---------- ---------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
1. ORGANIZATION, NARRATIVE DISCUSSION OF THE BUSINESS AND RISK FACTORS
ORGANIZATION
PharmaPrint Inc. (the "Company" or "PharmaPrint"), a development stage
company, was incorporated in the State of California in September 1994. In April
1997, the Board of Directors approved a resolution to change the Company's state
of incorporation from California to Delaware, such resolution was approved at
the August 19, 1997 Annual Meeting of Shareholders. The Company was formed in
order to complete the development and commercialization of the research
initiated by Dr. Tasneem A. Khwaja, a founder and major shareholder of the
Company, over a 20 year period at the University of Southern California ("USC")
School of Medicine.
NARRATIVE DESCRIPTION OF THE BUSINESS
PharmaPrint uses its PharmaPrint Process technology to develop
pharmaceutical-grade dietary supplement products and pharmaceuticals from
botanical sources. Unlike the traditional drug development process of
identifying and synthesizing single bioactive molecules from plant sources, the
Company's core technologies were developed based on empirical data that suggests
that the health benefits and safe usage of certain plant-derived therapeutics
might be the result of the natural combination of multiple molecules found in
the plant extract and that single molecules, in isolation, may not replicate the
natural plants' effectiveness. The PharmaPrint Process technology enables the
Company to identify and quantify the bioactives within plant sources that are
believed to provide therapeutic benefits and produce dietary supplements and
pharmaceuticals having consistent batch-to-batch quantities and ratios of these
bioactives.
The Company is applying a dual commercialization strategy with its
PharmaPrint Process technology. The first application of the PharmaPrint Process
is for the development of high quality, herbal dietary supplements. The second
application of the PharmaPrint process is the development of FDA-approvable
pharmaceuticals from natural plant sources. The Company's initial pharmaceutical
product candidate, PPRT-321, a saw palmetto-derived drug that is being developed
for the treatment of symptoms associated with benign prostatic hyperplasia
("BPH") is currently in Phase II clinical trials. In addition, the Company has
begun development of five additional plant-derived medicines that have long
histories of safe use and indications of efficacy.
DEVELOPMENT STAGE COMPANY AND RISK FACTORS
PharmaPrint is considered to be a development stage company. Since inception
(September 15, 1994), the Company has engaged only in research and development
activities and intends to continue research, development and testing of its
proprietary technologies and dietary supplement and pharmaceutical products. The
Company has not received any royalties or revenues from product sales.
The Company, as a development stage enterprise, has yet to generate revenues
and has no assurance of future revenues. There can be no assurance that the
Company will obtain FDA approval or be able to successfully market its
PharmaPrint Process. The Company is likely to incur substantial and increasing
F-7
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
1. ORGANIZATION, NARRATIVE DISCUSSION OF THE BUSINESS AND RISK FACTORS
(CONTINUED)
operating losses as it continutes its research and development efforts and until
such time, if ever, as product sales, royalties, and license and development and
other fees can generate sufficient revenue to fund its continuing operations.
The Company's future capital requirements will depend on many factors, including
but not limited to the Company's ability to successfully market its PharmaPrint
Process to third parties, overall product development costs including the cost
of toxicology testing and clinical trials, the length of time required to obtain
FDA approval, if any, competing technological and market developments, changes
in existing collaborative relationships, sales and marketing arrangements and
the costs of establishing subcontracts for research and development.
Additionally, no assurance can be given that additional capital, if needed, will
be available when required or upon terms acceptable to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For financial reporting purposes, the Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
EQUIPMENT
Equipment is stated at cost and consisted of the following at March 31,
1997:
<TABLE>
<S> <C>
Equipment......................................................... $ 119,252
Furniture......................................................... 75,507
Less accumulated depreciation..................................... (9,188)
---------
Equipment, net.................................................... $ 185,571
---------
---------
</TABLE>
Depreciation is provided using the straight-line method over the estimated
useful life for equipment of three years and furniture for five years.
OTHER LONG-TERM ASSETS
Organization costs are amortized on a straight-line basis over five years.
Patent costs are amortized on a straight-line basis over 10 years.
F-8
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOSS PER SHARE
Loss per share is computed based on the weighted average number of shares
outstanding for the period. Common equivalent shares are excluded from the
computation as their effect is antidulutive, except that, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common and common
equivalent shares (stock options, warrants and preferred stock) issued during
the period commencing 12 months prior to the initial filing of the Company's
initial public offering (the "Offering") at prices below the public offering
price have been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method).
INCOME TAXES
The Company accounts for income taxes using the liability method as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax basis of assets and liabilities using enacted tax rules that will be in
effect when the differences are expected to reverse.
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
During fiscal 1997, the Company adopted SFAS No. 123 "Accounting for
Stock-Based Compensation." As permitted under SFAS No. 123, the Company will
continue to account for employee stock options in accordance with APB Opinion
No. 25 and has made the necessary pro forma disclosures mandated by SFAS No.
123. Additionally, all non-employee stock options will be accounted for in
accordance with SFAS No. 123. Compensation expense related to such non-employee
stock options will be calculated using the fair market value of the stock option
on the date of grant. (See Note 6.)
The Company also adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" in fiscal 1997.
The adoption of this pronouncement did not have a material impact on the
financial position and results of operations of the Company.
PENDING ACCOUNTING PRONOUNCEMENTS
In fiscal 1998, the Company will be required to adopt SFAS No. 128 "Earnings
Per Share" and SFAS No. 129 "Disclosure of Information About Capital Structure."
SFAS No. 128 establishes standards for computing and presenting earnings (loss)
per share by simplifying the standards previously found in APB Opinion No. 15,
and makes them comparable to international standards. SFAS No. 129 establishes
standards for disclosing information about an entity's capital structure. The
adoption of either of these Statements will not have a significant impact on its
financial position or reported results of operations.
F-9
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications were made to prior period amounts, enabling them
to conform to current period presentation.
INTERIM RESULTS (UNAUDITED)
The accompanying balance sheet as of September 30, 1997 and the statements
of operations, cash flows and shareholders' equity for the six months ended
September 30, 1996 and 1997 and for the period from inception (September 15,
1994), through September 30, 1997 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of the interim
periods. The results of operations are not necessarily indicative of the results
that may be expected for an entire year.
3. AGREEMENTS WITH USC
LICENSE AGREEMENT
In March 1995, the Company entered into a license agreement with USC (the
"USC License Agreement") that grants the Company an exclusive, worldwide license
to: (1) the PharmaPrint Process; (2) use certain therapeutic compounds; and (3)
other related products developed by Dr. Khwaja's laboratory at USC. USC has also
agreed to grant the Company the right to sublicense certain products and a right
of first refusal to obtain a license for any improvements to certain products
developed by USC. The term of the USC License Agreement began March 1, 1995, and
ends on the later of February 28, 2010, or the expiration of the last issued
patent under the USC License Agreement.
In exchange for the license, the Company agreed to pay USC: (1) royalty
payments of 3% of the Company's net sales of pharmaceutical products developed
using the PharmaPrint Process; (2) after the first patent issues, an annual
minimum royalty of $15,000, which shall increase by $5,000 annually for the
following two years and be $25,000 annually thereafter; (3) an annual license
fee of $10,000 payable until a patent issues; and (4) 328,563 shares of the
Company's common stock at the time of the exchange. During fiscal 1996, USC and
Dr. Khwaja were party to a Distribution of Royalty Income Agreement pursuant to
which USC agreed to pay Dr. Khwaja 50% of the net royalties received by USC
under the USC License Agreement. During fiscal 1997, Dr. Khwaja waived his right
to such consideration. The cost of the USC License Agreement, approximately
$316,000, recorded as research and development expense in the fiscal 1995
statement of operations, is also included in the accompanying statement of
operations for the period from inception (September 15, 1994) through March 31,
1997.
In September 1997, the USC License Agreement was amended to change the
royalty percentage to 1% from the original 3% described above.
F-10
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
3. AGREEMENTS WITH USC (CONTINUED)
RESEARCH AGREEMENT
Effective March 1, 1995, the Company and USC entered into a five year
research agreement (the "Research Agreement") that required USC to perform
certain research, as defined under the Research Agreement, from March 1, 1995
through February 29, 2000. Due to the completion of the work performed on the
Company's initial pharmaceutical and the underlying science relating to the
PharmaPrint Process, effective March 31, 1997, the Company and USC mutually
agreed to cancel the Research Agreement. Total expenses incurred relating to the
Research Agreement for the year ended March 31, 1996, were $201,000. During the
year ended March 31, 1997, the Company reimbursed USC $116,000 of the $176,000
amount outstanding as of March 31, 1996. The remaining $60,000 was recorded as a
reduction of research and development expense during fiscal 1997.
4. INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses through March 31, 1997. At March 31,
1997, the Company has net operating loss carryforwards available to offset
future taxable income for federal and state income tax purposes of approximately
$5,100,000 and $ 2,550,000, respectively; such carryforwards expire in various
years through 2012. Other deferred tax assets include the timing of certain
expenses for book and tax purposes. The Company has provided a valuation
allowance to offset all deferred tax assets due to the uncertainty of
realization.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating losses carried forward may be impaired or limited in certain
circumstances. Events that may cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not limited
to, a cumulative ownership change of more than 50% over a three year period. At
March 31, 1997, the effect of such limitation, if imposed, has not been
determined.
5. COMMITMENTS AND CONTINGENCIES
LEASE
The Company leases its corporate headquarters under an operating lease that
expires in December 1998. Rent expense for the current and the previous
(expired) office lease was approximately $10,000 and $86,000 for the years ended
March 31, 1996 and 1997, respectively. At March 31, 1997, future minimum lease
payments under the noncancelable operating lease are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 AMOUNT
- ------------------------------------------ ----------
<S> <C>
1998...................................... $ 160,000
1999...................................... 129,000
----------
$ 289,000
----------
----------
</TABLE>
F-11
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
At March 31, 1997, the Company had employment agreements (the "Employment
Agreements") with its Chief Executive Officer and its Chief Scientific Officer.
The Employment Agreements provide for base salaries in the aggregate of
$334,000, plus certain benefits. The Employment Agreements were effective
November 1, 1995, and were subsequently modified in May 1996 and March 1997. The
Employment Agreements expire in October 1998.
PERSONAL SERVICES AGREEMENT
The Company entered into an agreement (the "Personal Services Agreement")
with Dimension Memory, Inc. ("Dimension Memory") in May 1996. Pursuant to the
Personal Services Agreement, which expires on December 31, 1998, Dimension
Memory is to provide the services of Robert J. Burgess as Executive Vice
President and Chief Operating Officer of the Company. Under the terms of the
Personal Services Agreement, the Company is to provide annual compensation to
Dimension Memory of $140,000, to be paid at a rate of $11,667 monthly, and
certain other benefits. The Company also issued 712,708 shares of its common
stock to Dimension Memory. As a result of the issuance of common stock, the
Company recorded compensation expense of $1,585,000 for the year ended March 31,
1997.
In December 1996, the Company amended the Personal Services Agreement with
Dimension Memory. The amended agreement provides for the immediate payment by
the Company of all amounts due under the Personal Services Agreement in exchange
for Dimension Memory agreeing to provide additional services to the Company. As
a result of this amended agreement, in December 1996 the Company paid and
capitalized an amount to Dimension Memory of $312,000 and will amortize such
amounts through December 1998. The unamortized amount, $266,000 at March 31,
1997, has been recorded in other current assets in the accompanying balance
sheet.
Effective April 15, 1997, Dimension Memory agreed to provide the services of
Mr. Burgess as the Company's President and Chief Operating Officer and the
Company agreed to pay Dimension Memory at a rate of $36,000 per year, effective
March 1, 1997.
6. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company's Board of Directors is authorized, subject to applicable law,
to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to fix or alter the rights, preferences, privileges and restrictions,
including voting, conversion, liquidation, dividend and redemption of the shares
of each wholly unissued series and any restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without further action of the
shareholders. As of March 31, 1997, the Company has not issued any of the
1,000,000 shares of authorized preferred stock.
F-12
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK
Subject to the rights of any Preferred Stock that may be outstanding,
holders of common stock are entitled to receive dividends as determined by the
Company's Board of Directors. Each shareholder is entitled to one vote for each
share of common stock held. The common stock is not entitled to either
preemptive rights or redemption. In the event of liquidation, the holders of
common stock will be entitled to receive a pro rata basis all of the remaining
net assets of the Company available for distribution.
In July 1996, the Company's Board of Directors approved a 1.04045 for 1
stock split of the Company's common stock. All references in the accompanying
financial statements to the number of shares and per share amounts, unless
otherwise noted, have been restated to reflect the effect of this action.
In August 1996, the Company completed the Offering of 3,000,000 shares of
its common stock at $5.00 per share. The Company received net proceeds from this
sale of approximately $12,705,000.
During the fiscal year ended March 31, 1997, Dr. Khwaja, the Company's then
Chairman and a majority shareholder, agreed to transfer 125,000 shares of his
common stock to third parties for services rendered on behalf of the Company. As
a result of this transfer, compensation expense of approximately $648,000 was
recorded and included in stock compensation expense during fiscal 1997 and
additional paid-in capital at March 31, 1997.
In May 1997, the Company's Board of Directors approved an increase in the
number of authorized shares of common stock from 19,000,000 to 24,000,000, such
increase was approved by the Company's shareholders in August 1997.
PRIVATE PLACEMENT
In December 1995, the Company sold 618,034 shares of its common stock at
$2.40 per share in a private placement. The Company received proceeds from this
sale of approximately $1,315,000.
During 1996, the Company offered (the "Repurchase Offer") to certain private
placement shareholders of the Company's common stock two alternatives, either
(i) the right to receive an additional one share of common stock for each share
purchased in certain private placements, thus effectively reducing the price by
half, or (ii) the right to cause the Company to repurchase the shares of common
stock for $5.00 per share (the original purchase price), plus interest from the
date of purchase. By its terms, the Repurchase Offer remained open for 30 days
and terminated on July 3, 1996. The Repurchase Offer resulted in the Company
repurchasing 35,600 shares (pre-split) for $91,000 in cash and the cancellation
of $87,000 of stock subscriptions receivable.
In April 1996, the Company sold 97,995 shares of its common stock at $2.40
per share in a private placement. The Company received net proceeds from this
sale of approximately $185,000, net of fees and repurchased shares.
F-13
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
1995 STOCK OPTION PLAN
On April 14, 1995, the Company adopted the 1995 Stock Option Plan, as
Amended (the "1995 Plan"), pursuant to which directors, officers, key employees,
consultants, scientific advisors and other personnel working directly with the
Company are eligible to receive stock options as defined in the 1995 Plan. The
1995 Plan is administered by a designated committee (the "Committee") of the
Board of Directors, which is empowered to determine the terms and conditions of
each option, as defined by the 1995 Plan. The Company can grant either
nonqualified or incentive stock options, as defined, under the 1995 Plan that
vest as determined by the Committee. The 1995 Plan, unless terminated sooner by
the Board of Directors, will terminate on April 14, 2005.
Option activity from adoption of the 1995 Plan (April 15, 1995) to March 31,
1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1996 MARCH 31, 1997
-------------------------- ---------------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE PRICE OPTIONS AVERAGE PRICE
--------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period....... -- -- 997,097 $ 0.96
Granted.............................. 997,097 $ 0.96 409,251 $ 5.08
Exercised............................ -- -- -- --
Cancelled............................ -- -- (624,270) $ 0.96
--------- ----------
Outstanding at end of period............. 997,097 $ 0.96 782,078 $ 3.11
--------- ----------
--------- ----------
Exercisable at end of period............. 997,097 $ 0.96 577,566 $ 2.37
--------- ----------
--------- ----------
</TABLE>
The 782,078 options to purchase common stock outstanding at March 31, 1997,
have exercise prices between $0.96 and $5.88 and a weighted average remaining
option period of approximately 5.3 years.
During the year ended March 31, 1996, the Company granted certain options to
purchase common stock at an exercise price below the estimated fair value of the
Company's common stock on the date of grant. As a result, the Company recorded
approximately $304,000 as stock compensation expense during fiscal 1996.
F-14
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
During the year ended March 31, 1996, the Company granted two individuals
options to purchase 801,147 shares of common stock at a price of $0.96 per share
outside of the 1995 Plan. During the year ended March 31, 1997, these options
were canceled.
During the year ended March 31, 1997, the Company granted to consultants,
options to purchase 86,800 shares of common stock, at the fair market value on
the date of grant. Of such grants, 10,000 options were granted under the 1995
Plan and vested immediately and 76,800 options were granted outside the 1995
Plan (see below) and vest over two years. In accordance with SFAS No. 123, the
Company recorded compensation expense of approximately $100,000 during fiscal
1997. Additionally, the Company has recorded $174,000 as deferred compensation
relating to the 76,800 options at March 31, 1997, such amount to be amortized
over the remaining vesting period (18 months) of the options and has included
$274,000 in additional paid-in-capital at March 31, 1997.
During the year ended March 31, 1997, the Company also granted options to
purchase 141,800 shares of common stock, at the fair market value on the date of
grant, outside of the 1995 Plan. Additionally, the Company's then Chairman of
the Board of Directors and a majority shareholder, granted certain individuals
options to purchase 430,000 shares of his common stock at fair value on the date
of grant.
On August 19, 1997, the shareholders voted to increase the number of shares
of common stock available for grant under the 1995 Plan from 800,000 to
2,200,000 shares. During the six month period ended September 30, 1997 the
Company granted 1,031,500 additional options to purchase common stock to
employees at a weighted average exercise price of $6.19 per share. Additionally,
during the six months ended September 30, 1997 options to purchase 141,800
shares of common stock, at an average exercise price of $4.60, that were
originally granted outside the 1995 Plan were incorporated into the 1995 Plan.
At September 30, 1997, the Company has granted options to purchase common stock
for an aggregate of 1,955,378 shares under the 1995 Plan.
During fiscal 1997, the Company adopted the provisions of SFAS No. 123. As
permitted under SFAS No. 123, the Company will continue to account for employee
stock options in accordance with APB Opinion No. 25. Accordingly, no
compensation expenses has been recognized in the accompanying statements of
operations, other than compensation expense recognized for options granted to
employees below fair value of the Company's common stock on the date of grant
and options granted to consultants of the Company. Had compensation expense
related to employee stock options been determined under the provisions of SFAS
No. 123, the Company's net loss and loss per share would have been as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR YEARS ENDED INCEPTION
------------------------------ (SEPTEMBER 15, 1994),
MARCH 31, 1996 MARCH 31, 1997 THROUGH MARCH 31, 1997
-------------- -------------- ---------------------------
<S> <C> <C> <C>
NET LOSS
As reported.................. $ (1,344,185) $(11,232,852) $ (13,061,045)
Pro forma.................... $ (1,407,998) $(12,183,608) $ (14,075,614)
LOSS PER SHARE
As reported.................. $ (.16) $ (1.10) $ (1.47)
Pro forma.................... $ (.17) $ (1.20) $ (1.58)
</TABLE>
F-15
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
The weighted average fair value of options granted was $1.37 and $2.65 for
the years ended March 31, 1996 and 1997, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions used for grants in fiscal years
1996 and 1997, respectively: weighted average risk free interest rates of 5.99%
and 5.67%; expected dividend yields of 0% for each year; expected lives of 3
years and 4 years; and expected volatility of approximately 0% and 65%.
SHAREHOLDERS AGREEMENT
The Company entered into a shareholders agreement (the "Shareholders
Agreement") in March 1996, with Elliot P. Friedman, the Company's Chief
Executive Officer, Tasneem Khwaja, the Company's then Chairman, and certain
individuals and entities. Pursuant to the Shareholders Agreement: (1) Dr. Khwaja
contributed 1,336,978 shares of common stock to the Company as a capital
contribution; (2) the Company issued 624,270 shares of common stock to D-RAM
Industries Pty. Ltd. ("D-RAM"), as nominee of Robert J. Burgess for consulting
services; and (3) the Company granted stock options to purchase 712,708 shares
of common stock at a price of $0.96 per share to Mr. Friedman.
The common stock options granted to Mr. Friedman and the common stock issued
to D-RAM were subject to cancellation if the Company did not raise a minimum
amount of proceeds in the Offering prior to August 16, 1997, as defined. In
addition, the options granted to Mr. Friedman were to vest on the earlier of the
date: (1) the Company received approval of the FDA for the public sale of any
pharmaceutical product; (2) the Company consummated a merger or other
transaction or the Company sold substantially all of its assets; (3) the Company
generated net pretax earnings of $0.50 per share for two consecutive years, as
defined; or (4) certain shares of common stock of each of Mr. Friedman and Dr.
Khwaja, the sale of which is restricted until August 14, 2001 pursuant to a
lock-up agreement with the underwriter of the Offering, are released from such
lock-up agreement.
In May 1996, the Shareholders' Agreement was revised and the stock options
to purchase 712,708 shares of common stock granted to Mr. Friedman were canceled
and the Company issued 712,708 shares of common stock to Mr. Friedman. Such
shares are subject to the same conditions as the aforementioned options to
purchase common stock.
In August 1996, due to the successful completion of the Offering, the
conditions placed upon the common stock issued to D-RAM were met and thus the
Company recorded $3,000,000 of compensation expense in the accompanying
statement of operations for the year ended March 31, 1997, based upon the
estimated fair market value of the stock at the time the conditions were met.
In September 1997, the underwriter of the Company's initial public offering
agreed to release Mr. Friedman from the lock-up agreement discussed above and
thereby accelerated the vesting. Accordingly, the Company recorded approximately
$3,564,000 of stock compensation expense during the six months ended September
30, 1997.
F-16
<PAGE>
PHARMAPRINT INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT SEPTEMBER 30, 1997, FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1997,
AND FOR THE PERIOD FROM INCEPTION (SEPTEMBER 15, 1994)
THROUGH SEPTEMBER 30, 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
WARRANTS
At March 31, 1997, a shareholder had a warrant outstanding for the purchase
of 52,203 shares of common stock at a purchase price of $0.96. The warrant is
exercisable through March 31, 2001.
At March 31, 1997, the underwriter of the Offering had a warrant outstanding
for the purchase of 300,000 shares of common stock at a purchase price of $8.25
per share. The warrant is exercisable through August 2001. In May 1997, the
underwriter agreed that any shares of common stock purchased pursuant to the
warrant would not be sold for an additional year (until August 20, 1998) and the
Company agreed to reduce the purchase price of the warrant to $5.50 per share.
7. RELATED-PARTY TRANSACTIONS
Advanced Bioresearch Associates ("ABA") is a clinical research organization
that provides FDA strategic consulting and professional services and provides
guidance to the Company in connection with various clinical, scientific and
regulatory matters. ABA has offices in San Diego and San Francisco, California
and Washington, D.C. Mr. Howard R. Asher, a member of the Company's Board of
Directors, is the President and Chief Executive Officer and a controlling
shareholder of ABA. The Company incurred approximately $98,000, and $1,069,000
of research and development expenses relating to the services provided by ABA
for the years ended March 31, 1996 and 1997, respectively. At March 31, 1997,
the Company included in accounts payable approximately $172,000 relating to
amounts owed to ABA.
During the year ended March 31, 1997, the Company utilized the services of
Mr. Phillip G. Trad, a member of the Company's Board of Directors, for various
legal and business development matters. The Company incurred approximately
$50,000 of general and administrative expenses for the year ended March 31,
1997, relating to the services provided by Mr. Trad. At March 31, 1997, the
Company included in accounts payable $10,000 relating to amounts owed to Mr.
Trad.
8. SUBSEQUENT EVENTS (UNAUDITED)
In October 1997, the Company entered into several agreements with American
Home Products Corporation ("AHP") whereby AHP will market the Company's dietary
supplements under AHP's Centrum brand name. Pursuant to the terms of the
agreement, AHP paid the Company $2.5 million in an up-front licensing fee and is
required to pay an additional fee upon the achievement of certain product and
patent milestones. Additionally, AHP has agreed to spend at least the lesser of
$40 million or an amount equal to 50% of net sales of the AHP Products in
advertising and other marketing expenditures during the two years following
product launch. AHP has also agreed to purchase the dietary supplements under a
Supply Agreement at specified prices. In addition, if the Company succeeds in
securing a patent containing a claim or claims comprising the PharmaPrint
Process covering the production of one or more of the AHP Products, AHP will pay
royalties to the Company on sales of those products.
In November 1997, the Company entered into a commitment to purchase
$18,000,000 of raw materials over the next three years in order to supply
certain dietary supplements under the AHP Supply Agreement.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF
WHICH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 18
Price Range of Common Stock............................................... 18
Dividend Policy........................................................... 18
Dilution.................................................................. 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 22
Business.................................................................. 25
Management................................................................ 37
Executive Compensation.................................................... 41
Principal Stockholders.................................................... 44
Certain Transactions...................................................... 45
Description of Capital Stock.............................................. 46
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Index to Financial Statements............................................. F-1
</TABLE>
2,250,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
CIBC OPPENHEIMER
CRUTTENDEN ROTH
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
LIMITATION OF DIRECTOR'S LIABILITY.
The Company's Certificate of Incorporation eliminates the liability of
directors to the fullest extent permissible under Delaware law. Delaware law
permits a corporation to limit the personal liability of a director to the
corporation or its shareholders for monetary damages for breach of certain
fiduciary duties as a director, provided, that the director's liability may not
be eliminated or limited for; (a) breaches of the director's duty of loyalty to
the corporation or its shareholders; (b) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (c) the payment
of unlawful dividends or unlawful stock repurchases or redemptions; or (d)
transactions in which the director received an improper personal benefit. A
director's liability may also not be limited for violation of, or otherwise
relieve the corporation or its directors from the necessity of complying with,
federal or state securities laws or affect the availability of non-monetary
remedies such as injunctive relief or rescission.
INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Company's Bylaws relating to indemnification require that the Company
indemnify its directors and its executive officers to the fullest extent
permitted under Delaware law, provided, that the Company may modify the extent
of such indemnification by individual contracts with its directors and executive
officers, and provided, further, that the Company will not be required to
indemnify any director or executive officer in connection with a proceeding
initiated by such person, with certain exceptions. Delaware corporate law, the
Company's Bylaws, as well as any indemnity agreements, may also permit
indemnification for liabilities arising under the Securities Act or the
Securities Exchange Act of 1934, as amended. Without limiting any right an
indemnitee may have under Delaware corporate law and the Company's Bylaws, the
Board of Directors have adopted an Indemnification and Hold Harmless Agreement
("Indemnity Agreement") to provide additional indemnification and reimbursement
to all qualified directors and officers of the Company, and to hold such
directors and officers harmless from certain liabilities, judgments and related
expenses. Any individual who is a duly elected or appointed member of the Board
of Directors, a corporate officer of the Company or any employee or agent as
approved the Board of Directors is deemed a person who qualifies as an
indemnitee under the Indemnity Agreement.
The Board of Directors has been advised that, in the opinion of the
Securities and Exchange Commission, indemnification of liabilities arising under
the Securities Act is contrary to 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 or officer of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director or officer in connection with the Shares being registered hereby, 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.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the Offering other than underwriting discounts and commissions.
All amounts are estimates except the filing fees payable to the SEC and the
NASD.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee.............................................................. $ 12,500
NASD Filing Fee................................................................... $ 5,000
Printing, Engraving and Mailing Expenses.......................................... $ 100,000
Legal Fees and Expenses........................................................... $ 125,000
Accounting Fees and Expenses...................................................... $ 50,000
Blue Sky Fees and Expenses........................................................ $ 10,000
Transfer Agent Fees............................................................... $ 10,000
Miscellaneous Expenses............................................................ $ 12,500
----------
Total......................................................................... $ 325,000
----------
----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth all sales of unregistered securities by the
Registrant within the past three years.
<TABLE>
<CAPTION>
DATE ISSUED SECURITY HOLDER SECURITIES SHARES CONSIDERATION
- ------------------------ ----------------------------------- ---------------- --------- ---------------------
<S> <C> <C> <C> <C>
November 10, 1994 Tasneem A. Khwaja, Ph.D. Common Stock 4,265,845 $4,100
November 10, 1994 Elliot P. Friedman Common Stock 1,248,540 $5,000
November 10, 1994 John Kirch Common Stock 104,045 $100
December 6, 1994 Dimension Memory, Inc. Common Stock 624,270 $600,000
March 16, 1995 USC Common Stock 328,563 grant of exclusive
license for patents
March 22, 1996 D-RAM Industries Pty Ltd., as the Common Stock 624,270 for services rendered
nominee of Robert Burgess
March 31, 1996 Luther Family Trust Warrant 50,000 consideration for
Bridge loan
December 1995 through Private Placement Purchasers Common Stock 715,980 $1,898,360
April 30, 1996
May 8, 1996 Elliot Friedman Common Stock 712,708 for services rendered
May 8, 1996 Dimension Memory, Inc. Common Stock 712,708 for services rendered
August 1, 1997 Yu Hu Common Stock 5,202 $5,202
November 5, 1997 Luther Family Trust Common Stock 48,482 delivery of Common
Stock upon cashless
exercise of Warrant
</TABLE>
With regard to the foregoing transactions, the Company relied upon Section
4(2) of the Act as an exemption from the registration requirements of the
Securities Act and upon Section 25102(f) of the California Corporate Securities
Law of 1968, as an exemption from the qualification requirements of that
statute.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
1.1(1) Underwriting Agreement
2.1(2) Certificate of Ownership and Merger
3.1(2) Amended and Restated Articles of Incorporation of the Company
3.2(2) Bylaws of the Company as amended to date
4.1(3) Form of Common Stock certificate
4.2(1) Form of Underwriters' Warrant
5.1(1) Opinion of Klehr, Harrison, Harvey, Branzburg & Ellers LLP
10.1(4) 1995 Stock Option Plan, as amended, and Form of Incentive Stock Option Agreement
10.2(4) Form of Non-Qualified Stock Option Agreement
10.3(5) Elliot P. Friedman Employment Agreement
10.4(5) Tasneem A. Khwaja Employment Agreement
10.5(5) Robert Burgess Employment Agreement
10.6(2) Form of Confidentiality Agreement
10.7(6) Lease dated October 28, 1997 for Company's headquarter facility
10.8(3) License Agreement dated March 1, 1995 between the Company and USC, as amended, and related Registration
Rights Agreement and Stock Waiver
10.9(3) Letter of Engagement between Company and Advanced Bioresearch Associates
10.10(3) Bridge Note and related Warrant
10.11(3) Shareholders Agreement
10.12(3) Agreement Among Certain Shareholders
10.13(3) Agreement Among Elliot Friedman, Tasneem Khwaja, and the Company
10.14(3) Registration Rights Agreement with D-RAM Industries PTY, Ltd.
10.15(3) Registration Rights Agreement with JadiJo, Inc.
10.16(4) Warrant Agreement between the Company and M.H. Meyerson & Company
10.17(2) American Home Products License Agreement (U.S.)
10.18(2) American Home Products License Agreement (Foreign)
10.19(2) American Home Products Supply Agreement
23.1(5) Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP (included in Exhibit 5.1)
23.2(5) Consent of Arthur Andersen LLP
24.1(5) Power of Attorney (included on signature page)
</TABLE>
- ------------------------
(1) To be filed by amendment.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the six months ended September 30, 1997.
(3) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (No. 333-4912-LA).
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1997.
(5) Filed herewith.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the nine months ended December 31, 1998.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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 a registration
statement in reliance upon Rule 430A and contained in the form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the 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.
(3) With respect to the warrants and the shares of Common Stock issuable
upon exercise of the warrants issued (or to be issued) to the Underwriter, that
(1) any prospectus revised to show the terms of offering of such warrants and
shares (other than a transaction on a national securities exchange), and (2) any
prospectus revised to comply with the requirements of Section 10(a) (3) of the
Securities Act, will be filed as a post-effective amendment to the registration
statement prior to any offering thereof; and that the effective date of each
such amendment shall be deemed the effective date of the registration statement
with respect to securities sold after such amendment shall have become
effective.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, this
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Irvine,
State of California, on November 26, 1997.
<TABLE>
<S> <C> <C>
PHARMAPRINT INC.
By: /s/ ELLIOT P. FRIEDMAN
-----------------------------------------
Elliot P. Friedman,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Elliot P. Friedman and James R. Wodach with full
power to act 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 (until revoked in writing) to sign any and all
amendments to this Registration Statement (including post-effective amendments
and amendments thereto), 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; or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board of
/s/ ELLIOT P. FRIEDMAN Directors and Chief
- ------------------------------ Executive Officer November 26, 1997
Elliot P. Friedman (Principal Executive
Officer)
Senior Vice President and
/s/ JAMES R. WODACH Chief Financial Officer
- ------------------------------ (Principal Accounting November 26, 1997
James R. Wodach Officer)
/s/ JOHN H. ABELES
- ------------------------------ Director November 26, 1977
John H. Abeles
/s/ LYLE ANDERSON
- ------------------------------ Director November 26, 1997
Lyle Anderson
/s/ HOWARD R. ASHER
- ------------------------------ Director November 26, 1997
Howard R. Asher
/s/ TASNEEM A. KHWAJA
- ------------------------------ Director November 26, 1997
Tasneem A. Khwaja
/s/ PHILLIP G. TRAD
- ------------------------------ Director November 26, 1997
Phillip G. Trad
/s/ NATHAN F. TROUM
- ------------------------------ Director November 26, 1997
Nathan F. Troum, M.D.
II-5
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") made as of September 1, 1997
by and between PHARMAPRINT INC., a Delaware corporation (the "COMPANY"), and
Elliott P. Friedman, an individual residing at 2160 Veloz, Monticeto,
California, ("EXECUTIVE").
In consideration of the mutual promises and covenants set forth below, the
COMPANY and EXECUTIVE hereby agree as follows:
ARTICLE I - EMPLOYMENT
Section 1.1 - EMPLOYMENT AND POSITION.
The COMPANY shall employ EXECUTIVE as Chief Executive Officer. During his
employment hereunder, EXECUTIVE shall devote his full energies, experience,
skills, abilities, knowledge and productive time to the performance of his
duties under this AGREEMENT.
Section 1.2 - RESPONSIBILITIES, DUTIES AND AUTHORITY.
The responsibilities, duties and authority of EXECUTIVE shall be as
designated from time to time by the Board of Directors of the COMPANY and/or the
COMPANY and EXECUTIVE shall perform such additional functions and duties that
are reasonable and customary for the position designated in this AGREEMENT.
Section 1.3 - NO CONFLICT.
The COMPANY has entered into this AGREEMENT in reliance on EXECUTIVE's
representation and warranty that this AGREEMENT and the employment of EXECUTIVE
by the COMPANY will not violate or conflict with any AGREEMENT he may have with
any other entity or by which EXECUTIVE may be bound.
Section 1.4 - PLACE OF EMPLOYMENT.
EXECUTIVE's primary place of employment shall be at the COMPANY's
headquarters in Orange County, California; it being understood that the scope of
EXECUTIVE's duties hereunder may require a substantial amount of travel.
Section 1.5 - TERM
The term of this AGREEMENT shall be for three years unless earlier
terminated as provided herein.
<PAGE>
ARTICLE II - TERMINATION OF EMPLOYMENT
Section 2.1 - TERMINATION OF AGREEMENT BY THE COMPANY.
(a) CAUSE. The COMPANY may terminate this AGREEMENT:
(1) at any time without advance notice in the event EXECUTIVE
commits any act of fraud, gross misconduct or is convicted of a felony, or
(2) in the event EXECUTIVE, in the reasonable opinion of the
Board of Directors, materially fails to fulfill his duties under this AGREEMENT
and such failure remains uncured, in the reasonable opinion of the Board of
Directors, thirty days after the COMPANY shall have given EXECUTIVE written
notice thereof.
Any termination pursuant to this Section 2.1(a) shall be deemed
to be for cause ("CAUSE").
(b) WITHOUT CAUSE. The COMPANY may terminate this AGREEMENT at any
time without Cause upon one hundred eighty (180) days' notice delivered to
EXECUTIVE.
Section 2.2 - TERMINATION OF AGREEMENT BY DISABILITY OF EXECUTIVE.
If, for a period of ninety (90) consecutive days or one hundred fifty (150)
days in any one year period, EXECUTIVE has been, in the opinion of a physician
selected by the COMPANY and reasonably acceptable to EXECUTIVE, disabled, and
during such period or periods is unable to substantially perform his duties
hereunder (an "EVENT OF DISABILITY"), this AGREEMENT shall then be terminated.
Section 2.3 - TERMINATION OF AGREEMENT BY DEATH OF EXECUTIVE.
This AGREEMENT shall be terminated without notice automatically upon
EXECUTIVE's death. In such case, the Termination Date shall be the date of
death.
Section 2.4 - TERMINATION OF AGREEMENT BY EXECUTIVE.
EXECUTIVE may terminate this AGREEMENT (a) if the COMPANY materially
changes EXECUTIVE's duties or authority as provided in this AGREEMENT,
including assignment to duties materially inconsistent with those set forth
herein, material reduction in EXECUTIVE's duties or authority, or material
interference by the Board of Directors which adversely affects EXECUTIVE's
ability to perform his duties hereunder, (b) if the COMPANY materially breaches
this AGREEMENT, including, without limitation, reducing EXECUTIVE's then
current Salary or failing to make any Salary or bonus payment when due and owing
or (c) upon ninety (90) days' advance notice.
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Section 2.5 - SEVERANCE COMPENSATION.
Upon termination of this AGREEMENT, EXECUTIVE shall be entitled to the
following severance compensation:
(a) TERMINATION BY THE COMPANY WITHOUT CAUSE. Upon termination by
the COMPANY without Cause, EXECUTIVE shall be entitled to receive:
(i) Salary (as defined below) and Benefits earned or accrued
through the date of termination (the "TERMINATION DATE");
(ii) a lump sum, paid in cash within thirty (30) calendar days
after the Termination Date of the Salary expected to be received during the
twelve (12) months immediately following the Termination Date (without taking
into account any expected future inflation adjustments);
(iii) a sum equal to any bonus earned or accrued by EXECUTIVE
(and unpaid) to which EXECUTIVE would have been entitled pursuant to Section
3.2 hereof had EXECUTIVE's employment continued for a period of three months
after the Termination Date; and
(iv) in the event that EXECUTIVE is not eligible for insurance
through COBRA coverage on the Termination Date, the COMPANY shall, for a period
ending six months after the Termination Date, either provide EXECUTIVE with
continued medical, dental, disability, and health insurance at then existing or
reasonably comparable levels under the COMPANY's insurance plan(s) or pay for
comparable medical, dental, disability, and health insurance coverage providing
EXECUTIVE is insurable.
EXECUTIVE shall have no right to any other compensation or benefit.
(b) TERMINATION FOR CAUSE OR IN THE EVENT OF DEATH OR DISABILITY.
Upon termination (i) by the COMPANY for Cause, (ii) in the event of EXECUTIVE's
death, or (iii) by the COMPANY in an Event of Disability, EXECUTIVE (or his
estate, as the case may be) shall be entitled to Salary and Benefits earned or
accrued through the Termination Date. EXECUTIVE shall have no right to any
other compensation or benefit (including, without limitation, any expected
bonus).
(c) TERMINATION OF AGREEMENT BY EXECUTIVE. Upon termination by
EXECUTIVE, EXECUTIVE shall be entitled to:
(i) If the termination is voluntary, Salary and Benefits earned
or accrued through Termination Date pursuant to Section 2.5(a); or,
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(ii) If the termination is because of the occurrence of an event
described in Section 2.4(a) or 2.4(b) hereof, EXECUTIVE shall receive
compensation under Section 2.5(a) as if such termination were a termination by
the COMPANY without Cause.
(d) NO DUTY TO MITIGATE. Severance compensation shall be paid to
EXECUTIVE in accordance with the terms and conditions of this Section 2.5
regardless of whether EXECUTIVE obtains gainful employment after the
Termination Date.
ARTICLE III - COMPENSATION
Section 3.1 - BASE SALARY.
The COMPANY shall pay EXECUTIVE a base salary of one hundred eighty-two
thousand dollars ($182,000.00) per annum (the "SALARY"), payable in accordance
with the COMPANY's normal payroll periods. In the event this AGREEMENT is
extended, then the Salary shall be reviewed at least annually during such
extension periods by the Board of Directors and may be increased, but not
decreased, by the Board of Directors in its sole discretion.
Section 3.2 - BONUSES.
Bonuses shall be established by the COMPANY and payable to the EXECUTIVE
upon terms and conditions to be established by the COMPANY for benefit of
EXECUTIVE.
Section 3.3 - BENEFITS.
EXECUTIVE shall be entitled to the benefits generally made available by
the COMPANY from time to time to its EXECUTIVES, including, without limitation,
medical, dental, life, pension and retirement and disability insurance.
EXECUTIVE shall be entitled to four (4) weeks of paid vacation each year of
this AGREEMENT.
Section 3.4 - REIMBURSEMENT OF EXPENSES.
During the term of this AGREEMENT, the COMPANY shall reimburse EXECUTIVE
for reasonable and properly documented out-of-pocket expenses incurred in
connection with the business of the COMPANY, subject to such policies as the
COMPANY may from time to time reasonably establish.
Section 3.5 - STOCK OPTIONS.
In addition to the Salary and Bonus paid to EXECUTIVE by the COMPANY, the
COMPANY may grant EXECUTIVE non-qualified stock options (the "STOCK OPTIONS")
to purchase shares of the COMPANY's common stock, without par value (the "COMMON
STOCK")
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subject to the terms, conditions and restrictions of or related to the COMPANY's
Option Plan and any relevant vesting schedule contained in the option AGREEMENT
covering said grant.
ARTICLE IV - MAINTENANCE OF CONFIDENTIAL INFORMATION,
NON-COMPETITION AND HIRING OF EMPLOYEES
Section 4.1 - TRADE SECRETS AND CONFIDENTIAL INFORMATION.
EXECUTIVE acknowledges that the success of the COMPANY depends and will
depend in large part on its development of, and continued ability to protect,
its trade secrets and confidential information. EXECUTIVE understands that it
is the duty of every person employed by the COMPANY to preserve and protect the
COMPANY's trade secrets, consisting of formulas, patterns, devices, secret
inventions, processes and compilations of information, records and
specifications in connection with pharmaceutical drugs and drug development
technologies (the "TRADE SECRETS") and other related data, information or
technologies of the COMPANY considered by it to be confidential or proprietary
(collectively with Trade Secrets, the "CONFIDENTIAL INFORMATION"). During the
term of this AGREEMENT and at all times thereafter, EXECUTIVE shall not use for
his personal benefit, or disclose, communicate or divulge to, or use for the
direct or indirect benefit of any person or entity other than the COMPANY or its
affiliates, any Confidential Information.
Section 4.2 - COMPANY PROPERTY.
All Confidential Information and other materials, information and data of
any kind furnished by the COMPANY to EXECUTIVE, or developed by EXECUTIVE on
behalf of the COMPANY or at the COMPANY's direction or for the COMPANY's use or
otherwise in connection with the provision of services hereunder, are and shall
remain the sole and confidential property of the COMPANY. In the event that the
COMPANY requests the return of such materials at any time during the term of
this AGREEMENT or at or after the termination of this AGREEMENT, EXECUTIVE
shall immediately surrender such materials to the COMPANY.
Section 4.3 - TECHNOLOGY TRANSFER.
EXECUTIVE will promptly advise the COMPANY of each invention, discovery,
idea, or improvement (collectively hereafter referred to as "Invention"),
whether or not patentable, that is made or conceived by EXECUTIVE, either
alone or with others, during the term of his employment and directly or
indirectly related to EXECUTIVE's work and investigations or resulting from or
suggested by any work done for the COMPANY at its request. EXECUTIVE will
promptly submit to the President of the COMPANY a written disclosure of each
Invention describing its nature, use, and operation. To this end, EXECUTIVE
will maintain a record of all work of an important character, including each
Invention. EXECUTIVE, without further consideration, hereby assigns to the
COMPANY all right, title and interest in and to each and every Invention, which
EXECUTIVE may possess, whether or not patentable, and will, at all times during
the term hereof and thereafter its termination for any reason, assist the
COMPANY in every proper way with perfecting the
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COMPANY's interest in such invention. The COMPANY may obtain, for its own
benefit, patents or other forms of protection for each Invention in any and all
countries. From time to time on request, EXECUTIVE will execute all papers and
do all proper things that may reasonably be required to protect and maintain the
rights of the COMPANY in an Invention, whether or not patented.
Section 4.4 - NON-COMPETITION.
Without limiting the foregoing, during the term of this AGREEMENT and for
one (1) year thereafter, EXECUTIVE shall not directly or indirectly engage or
participate (as an employee, owner, partner, shareholder, joint venturer, agent,
representative or independent contractor, or in any other capacity calling for
the making of any investment or the rendering of any services or any acts of
management, operation or control) in any business that is the same as, similar
to or competitive with the business of the COMPANY as it has been or is being
conducted during the term of this AGREEMENT, including, but not limited to, the
development, manufacture and marketing of pharmaceuticals or dietary supplements
from natural medicines; provided, however, that EXECUTIVE may own up to one
percent (1%) of any class of securities of an entity engaged in such a
competitive business if such securities are (i) listed on a national securities
exchange or market or (ii) registered under the Securities Act.
Section 4.5 - HIRING OF EMPLOYEES.
During the term of this AGREEMENT and for a period of one (1) year
thereafter, EXECUTIVE will not, directly or indirectly, either for himself or
for any other person, firm, COMPANY or other entity, materially alter the
COMPANY's relationship with, take away or employ, or attempt to materially alter
the COMPANY's relationship with, solicit, divert, take away or employ any of the
customers, business or employees of the COMPANY or any of its affiliates;
provided, however, EXECUTIVE may employ during such period former employees of
the COMPANY or its affiliates whose employment has been terminated by the
COMPANY or such affiliates.
ARTICLE V - GENERAL PROVISIONS
Section 5.1 - ASSIGNMENT; AGREEMENT TO SURVIVE DISSOLUTION OR MERGER.
This AGREEMENT shall not be terminated by the voluntary or involuntary
dissolution of the COMPANY or by any merger where the COMPANY is not the
surviving or resulting corporation, or upon any transfer of all or substantially
all of the business or assets of the COMPANY. In the event of any such merger
or transfer, the provisions of this AGREEMENT shall be binding on and shall
inure to the benefit of the surviving entity or the entity to which such
business or assets shall be transferred. This AGREEMENT may not be assigned by
EXECUTIVE.
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Section 5.2 - REMEDIES.
EXECUTIVE is obligated under this AGREEMENT to render services of a
special, unique, unusual, extraordinary and intellectual character, thereby
giving this AGREEMENT peculiar value. EXECUTIVE is also obligated, under
Article IV hereof, to protect the Confidential Information of the COMPANY. Any
loss resulting from a breach of EXECUTIVE's obligations to render services or
protect Confidential Information could not be reasonably or adequately
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law or this AGREEMENT, the COMPANY shall have the right to
obtain injunctive relief, in the appropriate court, against the performance
elsewhere by EXECUTIVE of services in direct or indirect competition with the
COMPANY, and, at any time, against the dissemination by EXECUTIVE of
Confidential Information, or the use of such information by EXECUTIVE in
violation of Article IV hereof.
Section 5.3 - CHOICE OF LAW.
The formation, construction and performance of this AGREEMENT shall be in
accordance with the laws of the State of California.
Section 5.4 - NOTICES.
Any notice to the COMPANY required or permitted hereunder shall be given in
writing, either by personal service, by facsimile, or by certified mail, postage
prepaid, duly addressed to the General Counsel of the COMPANY at the COMPANY's
then principal place of business. Any such notice to EXECUTIVE shall be given
in a like manner, and if mailed, shall be addressed to EXECUTIVE at his
residence then shown in the files of the COMPANY. For the purpose of
determining compliance with any time limit herein, a notice sent by mail shall
be deemed given four days after the postmark date. Any other notice shall be
deemed given upon receipt of the notice.
Section 5.5 - SOLE AND ENTIRE AGREEMENT.
This AGREEMENT constitutes the sole and entire existing employment
AGREEMENT between the parties and completely and correctly expresses all of the
rights and obligations of the parties. All prior AGREEMENTS, conditions,
practices, customs, usages and obligations are completely superseded and revoked
insofar as any such prior AGREEMENT, conditions, practice, custom, usage or
obligations might have given rise to any enforceable right.
Section 5.6 - WAIVERS.
The waiver in any particular instance or series of instances of any term or
condition of this AGREEMENT or any breach hereof by either party shall not
constitute a waiver of such term or condition or of any breach thereof in any
other instance.
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Section 5.7 - AMENDMENT.
This AGREEMENT is subject to amendment only by subsequent written AGREEMENT
between, and executed by, the parties hereto. Commencement or continuation of
any custom, practice or usage by the COMPANY shall not constitute an amendment
hereof or otherwise give rise to enforceable rights or create obligations of the
COMPANY.
Section 5.8 - SEPARABILITY.
In the event any Article or portion thereof is declared illegal, the
remainder of this AGREEMENT shall remain in full force and effect.
Section 5.9 - DURATION OF RIGHTS.
The provisions of Section 2.5, Article III and Article IV of this AGREEMENT
shall survive the termination of this AGREEMENT. All other rights and
obligations created by or arising under this AGREEMENT shall terminate
automatically upon termination of this AGREEMENT except as otherwise expressly
provided herein.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT at Irvine,
California as of the date first above written.
EXECUTIVE PHARMAPRINT INC.
By:
- ----------------------------- ------------------------------------
Elliot P. Friedman Title:
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EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") made as of September 1, 1997
by and between PHARMAPRINT INC., a Delaware corporation (the "COMPANY"), and Dr.
Tasneem Khwaja, an individual residing at 7 Monterey Circle, Corona Del Mar,
California, ("EXECUTIVE").
In consideration of the mutual promises and covenants set forth below, the
COMPANY and EXECUTIVE hereby agree as follows:
ARTICLE I- EMPLOYMENT
Section 1.1 - EMPLOYMENT AND POSITION.
The COMPANY shall employ EXECUTIVE as Chief Science Officer. During his
employment hereunder, EXECUTIVE shall devote his full energies, experience,
skills, abilities, knowledge and productive time to the performance of his
duties under this AGREEMENT.
Section 1.2 - RESPONSIBILITIES, DUTIES AND AUTHORITY.
The responsibilities, duties and authority of EXECUTIVE shall be as
designated from time to time by the Chief Executive Officer and the
President/Chief Operating Officer and EXECUTIVE shall perform such additional
functions and duties that are reasonable and customary for the position
designated in this AGREEMENT.
Section 1.3 - NO CONFLICT.
The COMPANY has entered into this AGREEMENT in reliance on EXECUTIVE's
representation and warranty that this AGREEMENT and the employment of EXECUTIVE
by the COMPANY will not violate or conflict with any AGREEMENT he may have with
any other entity or by which EXECUTIVE may be bound.
Section 1.4 - PLACE OF EMPLOYMENT.
EXECUTIVE's primary place of employment shall be at the COMPANY's
headquarters in Orange County, California; it being understood that the scope of
EXECUTIVE's duties hereunder may require a substantial amount of travel.
Section 1.5 - TERM
The term of this AGREEMENT shall be for three years unless earlier
terminated as provided herein.
<PAGE>
ARTICLE II - TERMINATION OF EMPLOYMENT
Section 2.1 - TERMINATION OF AGREEMENT BY THE COMPANY.
(a) CAUSE. The COMPANY may terminate this AGREEMENT:
(1) at any time without advance notice in the event EXECUTIVE
commits any act of fraud, gross misconduct or is convicted of a felony, or
(2) in the event EXECUTIVE, in the reasonable opinion of the
Board of Directors, materially fails to fulfill his duties under this AGREEMENT
and such failure remains uncured, in the reasonable opinion of the Board of
Directors, thirty days after the COMPANY shall have given EXECUTIVE written
notice thereof.
Any termination pursuant to this Section 2.1(a) shall be deemed
to be for cause ("CAUSE").
(b) WITHOUT CAUSE. The COMPANY may terminate this AGREEMENT at any
time without Cause upon one hundred eighty (180) days' notice delivered to
EXECUTIVE.
Section 2.2 - TERMINATION OF AGREEMENT BY DISABILITY OF EXECUTIVE.
If, for a period of ninety (90) consecutive days or one hundred fifty
(150) days in any one year period, EXECUTIVE has been, in the opinion of a
physician selected by the COMPANY and reasonably acceptable to EXECUTIVE,
disabled, and during such period or periods is unable to substantially perform
his duties hereunder (an "EVENT OF DISABILITY"), this AGREEMENT shall then be
terminated.
Section 2.3 - TERMINATION OF AGREEMENT BY DEATH OF EXECUTIVE.
This AGREEMENT shall be terminated without notice automatically upon
EXECUTIVE's death. In such case, the Termination Date shall be the date of
death.
Section 2.4 - TERMINATION OF AGREEMENT BY EXECUTIVE.
EXECUTIVE may terminate this AGREEMENT (a) if the COMPANY materially
changes EXECUTIVE's duties or authority as provided in this AGREEMENT,
including assignment to duties materially inconsistent with those set forth
herein, material reduction in EXECUTIVE's duties or authority, or material
interference by the Board of Directors which adversely affects EXECUTIVE 's
ability to perform his duties hereunder, (b) if the COMPANY materially breaches
this AGREEMENT, including, without limitation, reducing EXECUTIVE's then
current Salary or failing to make any Salary or bonus payment when due and owing
or (c) upon ninety (90) days' advance notice.
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Section 2.5 - SEVERANCE COMPENSATION.
Upon termination of this AGREEMENT, EXECUTIVE shall be entitled to the
following severance compensation:
(a) TERMINATION BY THE COMPANY WITHOUT CAUSE. Upon termination by
the COMPANY without Cause, EXECUTIVE shall be entitled to receive:
(i) Salary (as defined below) and Benefits earned or accrued
through the date of termination (the "TERMINATION DATE");
(ii) a lump sum, paid in cash within thirty (30) calendar days
after the Termination Date of the Salary expected to be received during the
twelve (12) months immediately following the Termination Date (without taking
into account any expected future inflation adjustments);
(iii) a sum equal to any bonus earned or accrued by EXECUTIVE
(and unpaid) to which EXECUTIVE would have been entitled pursuant to Section
3.2 hereof had EXECUTIVE's employment continued for a period of three months
after the Termination Date; and
(iv) in the event that EXECUTIVE is not eligible for insurance
through COBRA coverage on the Termination Date, the COMPANY shall, for a period
ending six months after the Termination Date, either provide EXECUTIVE with
continued medical, dental, disability, and health insurance at then existing or
reasonably comparable levels under the COMPANY's insurance plan(s) or pay for
comparable medical, dental, disability, and health insurance coverage providing
EXECUTIVE is insurable.
EXECUTIVE shall have no right to any other compensation or benefit.
(b) TERMINATION FOR CAUSE OR IN THE EVENT OF DEATH OR DISABILITY.
Upon termination (i) by the COMPANY for Cause, (ii) in the event of EXECUTIVE's
death, or (iii) by the COMPANY in an Event of Disability, EXECUTIVE (or his
estate, as the case may be) shall be entitled to Salary and Benefits earned or
accrued through the Termination Date. EXECUTIVE shall have no right to any
other compensation or benefit (including, without limitation, any expected
bonus).
(c) TERMINATION OF AGREEMENT BY EXECUTIVE. Upon termination by
EXECUTIVE, EXECUTIVE shall be entitled to:
(i) If the termination is voluntary, Salary and Benefits earned
or accrued through Termination Date pursuant to Section 2.5(a); or,
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(ii) If the termination is because of the occurrence of an event
described in Section 2.4(a) or 2.4(b) hereof, EXECUTIVE shall receive
compensation under Section 2.5(a) as if such termination were a termination by
the COMPANY without Cause.
(d) NO DUTY TO MITIGATE. Severance compensation shall be paid to
EXECUTIVE in accordance with the terms and conditions of this Section 2.5
regardless of whether EXECUTIVE obtains gainful employment after the
Termination Date.
ARTICLE III - COMPENSATION
Section 3.1 - BASE SALARY.
The COMPANY shall pay EXECUTIVE a base salary of one hundred fifty-two
thousand dollars ($152,000.00) per annum (the "SALARY"), payable in accordance
with the COMPANY's normal payroll periods. In the event this AGREEMENT is
extended, then the Salary shall be reviewed at least annually during such
extension periods by the Board of Directors and may be increased, but not
decreased, by the Board of Directors in its sole discretion.
Section 3.2 - BONUSES.
Bonuses shall be established by the COMPANY and payable to the EXECUTIVE
upon terms and conditions to be established by the COMPANY for benefit of
EXECUTIVE.
Section 3.3 - BENEFITS.
EXECUTIVE shall be entitled to the benefits generally made available by
the COMPANY from time to time to its EXECUTIVES, including, without limitation,
medical, dental, life, pension and retirement and disability insurance.
EXECUTIVE shall be entitled to four (4) weeks of paid vacation each year of
this AGREEMENT.
Section 3.4 - REIMBURSEMENT OF EXPENSES.
During the term of this AGREEMENT, the COMPANY shall reimburse EXECUTIVE
for reasonable and properly documented out-of-pocket expenses incurred in
connection with the business of the COMPANY, subject to such policies as the
COMPANY may from time to time reasonably establish.
Section 3.5 - STOCK OPTIONS.
In addition to the Salary and Bonus paid to EXECUTIVE by the COMPANY, the
COMPANY may grant EXECUTIVE non-qualified stock options (the "STOCK OPTIONS")
to purchase shares of the COMPANY's common stock, without par value (the "COMMON
STOCK")
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subject to the terms, conditions and restrictions of or related to the COMPANY's
Option Plan and any relevant vesting schedule contained in the option AGREEMENT
covering said grant.
ARTICLE IV - MAINTENANCE OF CONFIDENTIAL INFORMATION,
NON-COMPETITION AND HIRING OF EMPLOYEES
Section 4.1 - TRADE SECRETS AND CONFIDENTIAL INFORMATION.
EXECUTIVE acknowledges that the success of the COMPANY depends and will
depend in large part on its development of, and continued ability to protect,
its trade secrets and confidential information. EXECUTIVE understands that it
is the duty of every person employed by the COMPANY to preserve and protect the
COMPANY's trade secrets, consisting of formulas, patterns, devices, secret
inventions, processes and compilations of information, records and
specifications in connection with pharmaceutical drugs and drug development
technologies (the "TRADE SECRETS") and other related data, information or
technologies of the COMPANY considered by it to be confidential or proprietary
(collectively with Trade Secrets, the "CONFIDENTIAL INFORMATION"). During the
term of this AGREEMENT and at all times thereafter, EXECUTIVE shall not use for
his personal benefit, or disclose, communicate or divulge to, or use for the
direct or indirect benefit of any person or entity other than the COMPANY or its
affiliates, any Confidential Information.
Section 4.2 - COMPANY PROPERTY.
All Confidential Information and other materials, information and data of
any kind furnished by the COMPANY to EXECUTIVE, or developed by EXECUTIVE on
behalf of the COMPANY or at the COMPANY's direction or for the COMPANY's use or
otherwise in connection with the provision of services hereunder, are and shall
remain the sole and confidential property of the COMPANY. In the event that the
COMPANY requests the return of such materials at any time during the term of
this AGREEMENT or at or after the termination of this AGREEMENT, EXECUTIVE
shall immediately surrender such materials to the COMPANY.
Section 4.3 - TECHNOLOGY TRANSFER.
EXECUTIVE will promptly advise the COMPANY of each invention, discovery,
idea, or improvement (collectively hereafter referred to as "Invention"),
whether or not patentable, that is made or conceived by EXECUTIVE, either
alone or with others, during the term of his employment and directly or
indirectly related to EXECUTIVE's work and investigations or resulting from or
suggested by any work done for the COMPANY at its request. EXECUTIVE will
promptly submit to the President of the COMPANY a written disclosure of each
Invention describing its nature, use, and operation. To this end, EXECUTIVE
will maintain a record of all work of an important character, including each
Invention. EXECUTIVE, without further consideration, hereby assigns to the
COMPANY all right, title and interest in and to each and every Invention, which
EXECUTIVE may possess, whether or not patentable, and will, at all times during
the term hereof and thereafter its termination for any reason, assist the
COMPANY in every proper way with perfecting the
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COMPANY's interest in such invention. The COMPANY may obtain, for its own
benefit, patents or other forms of protection for each Invention in any and all
countries. From time to time on request, EXECUTIVE will execute all papers and
do all proper things that may reasonably be required to protect and maintain the
rights of the COMPANY in an Invention, whether or not patented.
Section 4.4 - NON-COMPETITION.
Without limiting the foregoing, during the term of this AGREEMENT and for
one (1) year thereafter, EXECUTIVE shall not directly or indirectly engage or
participate (as an employee, owner, partner, shareholder, joint venturer, agent,
representative or independent contractor, or in any other capacity calling for
the making of any investment or the rendering of any services or any acts of
management, operation or control) in any business that is the same as, similar
to or competitive with the business of the COMPANY as it has been or is being
conducted during the term of this AGREEMENT, including, but not limited to, the
development, manufacture and marketing of pharmaceuticals or dietary supplements
from natural medicines; provided, however, that EXECUTIVE may own up to one
percent (1%) of any class of securities of an entity engaged in such a
competitive business if such securities are (i) listed on a national securities
exchange or market or (ii) registered under the Securities Act.
Section 4.5 - HIRING OF EMPLOYEES.
During the term of this AGREEMENT and for a period of one (1) year
thereafter, EXECUTIVE will not, directly or indirectly, either for himself or
for any other person, firm, COMPANY or other entity, materially alter the
COMPANY's relationship with, take away or employ, or attempt to materially alter
the COMPANY's relationship with, solicit, divert, take away or employ any of the
customers, business or employees of the COMPANY or any of its affiliates;
provided, however, EXECUTIVE may employ during such period former employees of
the COMPANY or its affiliates whose employment has been terminated by the
COMPANY or such affiliates.
ARTICLE V - GENERAL PROVISIONS
Section 5.1 - ASSIGNMENT; AGREEMENT TO SURVIVE DISSOLUTION OR MERGER.
This AGREEMENT shall not be terminated by the voluntary or involuntary
dissolution of the COMPANY or by any merger where the COMPANY is not the
surviving or resulting corporation, or upon any transfer of all or substantially
all of the business or assets of the COMPANY. In the event of any such merger
or transfer, the provisions of this AGREEMENT shall be binding on and shall
inure to the benefit of the surviving entity or the entity to which such
business or assets shall be transferred. This AGREEMENT may not be assigned by
EXECUTIVE.
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Section 5.2 - REMEDIES.
EXECUTIVE is obligated under this AGREEMENT to render services of a
special, unique, unusual, extraordinary and intellectual character, thereby
giving this AGREEMENT peculiar value. EXECUTIVE is also obligated, under
Article IV hereof, to protect the Confidential Information of the COMPANY. Any
loss resulting from a breach of EXECUTIVE's obligations to render services or
protect Confidential Information could not be reasonably or adequately
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law or this AGREEMENT, the COMPANY shall have the right to
obtain injunctive relief, in the appropriate court, against the performance
elsewhere by EXECUTIVE of services in direct or indirect competition with the
COMPANY, and, at any time, against the dissemination by EXECUTIVE of
Confidential Information, or the use of such information by EXECUTIVE in
violation of Article IV hereof.
Section 5.3 - CHOICE OF LAW.
The formation, construction and performance of this AGREEMENT shall be in
accordance with the laws of the State of California.
Section 5.4 - NOTICES.
Any notice to the COMPANY required or permitted hereunder shall be given in
writing, either by personal service, by facsimile, or by certified mail, postage
prepaid, duly addressed to the General Counsel of the COMPANY at the COMPANY's
then principal place of business. Any such notice to EXECUTIVE shall be given
in a like manner, and if mailed, shall be addressed to EXECUTIVE at his
residence then shown in the files of the COMPANY. For the purpose of
determining compliance with any time limit herein, a notice sent by mail shall
be deemed given four days after the postmark date. Any other notice shall be
deemed given upon receipt of the notice.
Section 5.5 - SOLE AND ENTIRE AGREEMENT.
This AGREEMENT constitutes the sole and entire existing employment
AGREEMENT between the parties and completely and correctly expresses all of the
rights and obligations of the parties. All prior AGREEMENTS, conditions,
practices, customs, usages and obligations are completely superseded and revoked
insofar as any such prior AGREEMENT, conditions, practice, custom, usage or
obligations might have given rise to any enforceable right.
Section 5.6 - WAIVERS.
The waiver in any particular instance or series of instances of any term or
condition of this AGREEMENT or any breach hereof by either party shall not
constitute a waiver of such term or condition or of any breach thereof in any
other instance.
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Section 5.7 - AMENDMENT.
This AGREEMENT is subject to amendment only by subsequent written AGREEMENT
between, and executed by, the parties hereto. Commencement or continuation of
any custom, practice or usage by the COMPANY shall not constitute an amendment
hereof or otherwise give rise to enforceable rights or create obligations of the
COMPANY.
Section 5.8 - SEPARABILITY.
In the event any Article or portion thereof is declared illegal, the
remainder of this AGREEMENT shall remain in full force and effect.
Section 5.9 - DURATION OF RIGHTS.
The provisions of Section 2.5, Article III and Article IV of this AGREEMENT
shall survive the termination of this AGREEMENT. All other rights and
obligations created by or arising under this AGREEMENT shall terminate
automatically upon termination of this AGREEMENT except as otherwise expressly
provided herein.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT at Irvine,
California as of the date first above written.
EXECUTIVE PHARMAPRINT INC.
By:
- ------------------------------ -------------------------------------
Dr. Tasneem Khwaja Title:
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EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") made as of October 1, 1997 by
and between PHARMAPRINT INC., a Delaware corporation (the "COMPANY"), and Robert
Burgess, an individual residing at 17 Baycove Lane, Newport Beach, California,
("EXECUTIVE").
In consideration of the mutual promises and covenants set forth below, the
COMPANY and EXECUTIVE hereby agree as follows:
ARTICLE I - EMPLOYMENT
Section 1.1 - EMPLOYMENT AND POSITION.
The COMPANY shall employ EXECUTIVE as President and Chief Operating
Officer. During his employment hereunder, EXECUTIVE shall devote his full
energies, experience, skills, abilities, knowledge and productive time to the
performance of his duties under this AGREEMENT.
Section 1.2 - RESPONSIBILITIES, DUTIES AND AUTHORITY.
The responsibilities, duties and authority of EXECUTIVE shall be as
designated from time to time by the Board of Directors of the COMPANY and/or the
COMPANY and EXECUTIVE shall perform such additional functions and duties that
are reasonable and customary for the position designated in this AGREEMENT.
Section 1.3 - NO CONFLICT.
The COMPANY has entered into this AGREEMENT in reliance on EXECUTIVE's
representation and warranty that this AGREEMENT and the employment of EXECUTIVE
by the COMPANY will not violate or conflict with any AGREEMENT he may have with
any other entity or by which EXECUTIVE may be bound.
Section 1.4 - PLACE OF EMPLOYMENT.
EXECUTIVE's primary place of employment shall be at the COMPANY's
headquarters in Orange County, California; it being understood that the scope of
EXECUTIVE's duties hereunder may require a substantial amount of travel.
Section 1.5 - TERM
The term of this AGREEMENT shall be for three years unless earlier
terminated as provided herein.
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ARTICLE II - TERMINATION OF EMPLOYMENT
Section 2.1 - TERMINATION OF AGREEMENT BY THE COMPANY.
(a) CAUSE. The COMPANY may terminate this AGREEMENT:
(1) at any time without advance notice in the event EXECUTIVE
commits any act of fraud, gross misconduct or is convicted of a felony, or
(2) in the event EXECUTIVE, in the reasonable opinion of the
Board of Directors, materially fails to fulfill his duties under this AGREEMENT
and such failure remains uncured, in the reasonable opinion of the Board of
Directors, thirty days after the COMPANY shall have given EXECUTIVE written
notice thereof.
Any termination pursuant to this Section 2.1(a) shall be deemed
to be for cause ("CAUSE").
(b) WITHOUT CAUSE. The COMPANY may terminate this AGREEMENT at any
time without Cause upon one hundred eighty (180) days' notice delivered to
EXECUTIVE.
Section 2.2 - TERMINATION OF AGREEMENT BY DISABILITY OF EXECUTIVE.
If, for a period of ninety (90) consecutive days or one hundred fifty (150)
days in any one year period, EXECUTIVE has been, in the opinion of a physician
selected by the COMPANY and reasonably acceptable to EXECUTIVE, disabled, and
during such period or periods is unable to substantially perform his duties
hereunder (an "EVENT OF DISABILITY"), this AGREEMENT shall then be terminated.
Section 2.3 - TERMINATION OF AGREEMENT BY DEATH OF EXECUTIVE.
This AGREEMENT shall be terminated without notice automatically upon
EXECUTIVE's death. In such case, the Termination Date shall be the date of
death.
Section 2.4 - TERMINATION OF AGREEMENT BY EXECUTIVE.
EXECUTIVE may terminate this AGREEMENT (a) if the COMPANY materially
changes EXECUTIVE's duties or authority as provided in this AGREEMENT,
including assignment to duties materially inconsistent with those set forth
herein, material reduction in EXECUTIVE's duties or authority, or material
interference by the Board of Directors which adversely affects EXECUTIVE 's
ability to perform his duties hereunder, (b) if the COMPANY materially breaches
this AGREEMENT, including, without limitation, reducing EXECUTIVE's then
current Salary or failing to make any Salary or bonus payment when due and owing
or (c) upon ninety (90) days' advance notice.
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Section 2.5 - SEVERANCE COMPENSATION.
Upon termination of this AGREEMENT, EXECUTIVE shall be entitled to the
following severance compensation:
(a) TERMINATION BY THE COMPANY WITHOUT CAUSE. Upon termination by
the COMPANY without Cause, EXECUTIVE shall be entitled to receive:
(i) Salary (as defined below) and Benefits earned or accrued
through the date of termination (the "TERMINATION DATE");
(ii) a lump sum, paid in cash within thirty (30) calendar days
after the Termination Date of the Salary expected to be received during the
twelve (12) months immediately following the Termination Date (without taking
into account any expected future inflation adjustments);
(iii) a sum equal to any bonus earned or accrued by EXECUTIVE
(and unpaid) to which EXECUTIVE would have been entitled pursuant to Section
3.2 hereof had EXECUTIVE's employment continued for a period of three months
after the Termination Date; and
(iv) in the event that EXECUTIVE is not eligible for insurance
through COBRA coverage on the Termination Date, the COMPANY shall, for a period
ending six months after the Termination Date, either provide EXECUTIVE with
continued medical, dental, disability, and health insurance at then existing or
reasonably comparable levels under the COMPANY's insurance plan(s) or pay for
comparable medical, dental, disability, and health insurance coverage providing
EXECUTIVE is insurable.
EXECUTIVE shall have no right to any other compensation or benefit.
(b) TERMINATION FOR CAUSE OR IN THE EVENT OF DEATH OR DISABILITY.
Upon termination (i) by the COMPANY for Cause, (ii) in the event of EXECUTIVE's
death, or (iii) by the COMPANY in an Event of Disability, EXECUTIVE (or his
estate, as the case may be) shall be entitled to Salary and Benefits earned or
accrued through the Termination Date. EXECUTIVE shall have no right to any
other compensation or benefit (including, without limitation, any expected
bonus).
(c) TERMINATION OF AGREEMENT BY EXECUTIVE. Upon termination by
EXECUTIVE, EXECUTIVE shall be entitled to:
(i) If the termination is voluntary, Salary and Benefits earned
or accrued through Termination Date pursuant to Section 2.5(a); or,
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(ii) If the termination is because of the occurrence of an event
described in Section 2.4(a) or 2.4(b) hereof, EXECUTIVE shall receive
compensation under Section 2.5(a) as if such termination were a termination by
the COMPANY without Cause.
(d) NO DUTY TO MITIGATE. Severance compensation shall be paid to
EXECUTIVE in accordance with the terms and conditions of this Section 2.5
regardless of whether EXECUTIVE obtains gainful employment after the
Termination Date.
ARTICLE III - COMPENSATION
Section 3.1 - BASE SALARY.
The COMPANY shall pay EXECUTIVE a base salary of one hundred eighty-two
thousand dollars ($182,000.00) per annum (the "SALARY"), payable in accordance
with the COMPANY's normal payroll periods. In the event this AGREEMENT is
extended, then the Salary shall be reviewed at least annually during such
extension periods by the Board of Directors and may be increased, but not
decreased, by the Board of Directors in its sole discretion.
Section 3.2 - BONUSES.
Bonuses shall be established by the COMPANY and payable to the EXECUTIVE
upon terms and conditions to be established by the COMPANY for benefit of
EXECUTIVE.
Section 3.3 - BENEFITS.
EXECUTIVE shall be entitled to the benefits generally made available by
the COMPANY from time to time to its EXECUTIVES, including, without limitation,
medical, dental, life, pension and retirement and disability insurance.
EXECUTIVE shall be entitled to four (4) weeks of paid vacation each year of
this AGREEMENT.
Section 3.4 - REIMBURSEMENT OF EXPENSES.
During the term of this AGREEMENT, the COMPANY shall reimburse EXECUTIVE
for reasonable and properly documented out-of-pocket expenses incurred in
connection with the business of the COMPANY, subject to such policies as the
COMPANY may from time to time reasonably establish.
Section 3.5 - STOCK OPTIONS.
In addition to the Salary and Bonus paid to EXECUTIVE by the COMPANY, the
COMPANY may grant EXECUTIVE non-qualified stock options (the "STOCK OPTIONS")
to purchase shares of the COMPANY's common stock, without par value (the "COMMON
STOCK")
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subject to the terms, conditions and restrictions of or related to the COMPANY's
Option Plan and any relevant vesting schedule contained in the option AGREEMENT
covering said grant.
ARTICLE IV - MAINTENANCE OF CONFIDENTIAL INFORMATION,
NON-COMPETITION AND HIRING OF EMPLOYEES
Section 4.1 - TRADE SECRETS AND CONFIDENTIAL INFORMATION.
EXECUTIVE acknowledges that the success of the COMPANY depends and will
depend in large part on its development of, and continued ability to protect,
its trade secrets and confidential information. EXECUTIVE understands that it
is the duty of every person employed by the COMPANY to preserve and protect the
COMPANY's trade secrets, consisting of formulas, patterns, devices, secret
inventions, processes and compilations of information, records and
specifications in connection with pharmaceutical drugs and drug development
technologies (the "TRADE SECRETS") and other related data, information or
technologies of the COMPANY considered by it to be confidential or proprietary
(collectively with Trade Secrets, the "CONFIDENTIAL INFORMATION"). During the
term of this AGREEMENT and at all times thereafter, EXECUTIVE shall not use for
his personal benefit, or disclose, communicate or divulge to, or use for the
direct or indirect benefit of any person or entity other than the COMPANY or its
affiliates, any Confidential Information.
Section 4.2 - COMPANY PROPERTY.
All Confidential Information and other materials, information and data of
any kind furnished by the COMPANY to EXECUTIVE, or developed by EXECUTIVE on
behalf of the COMPANY or at the COMPANY's direction or for the COMPANY's use or
otherwise in connection with the provision of services hereunder, are and shall
remain the sole and confidential property of the COMPANY. In the event that the
COMPANY requests the return of such materials at any time during the term of
this AGREEMENT or at or after the termination of this AGREEMENT, EXECUTIVE
shall immediately surrender such materials to the COMPANY.
Section 4.3 - TECHNOLOGY TRANSFER.
EXECUTIVE will promptly advise the COMPANY of each invention, discovery,
idea, or improvement (collectively hereafter referred to as "Invention"),
whether or not patentable, that is made or conceived by EXECUTIVE, either
alone or with others, during the term of his employment and directly or
indirectly related to EXECUTIVE's work and investigations or resulting from or
suggested by any work done for the COMPANY at its request. EXECUTIVE will
promptly submit to the President of the COMPANY a written disclosure of each
Invention describing its nature, use, and operation. To this end, EXECUTIVE
will maintain a record of all work of an important character, including each
Invention. EXECUTIVE, without further consideration, hereby assigns to the
COMPANY all right, title and interest in and to each and every Invention, which
EXECUTIVE may possess, whether or not patentable, and will, at all times during
the term hereof and thereafter its termination for any reason, assist the
COMPANY in every proper way with perfecting the
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COMPANY's interest in such invention. The COMPANY may obtain, for its own
benefit, patents or other forms of protection for each Invention in any and all
countries. From time to time on request, EXECUTIVE will execute all papers and
do all proper things that may reasonably be required to protect and maintain the
rights of the COMPANY in an Invention, whether or not patented.
Section 4.4 - NON-COMPETITION.
Without limiting the foregoing, during the term of this AGREEMENT and for
one (1) year thereafter, EXECUTIVE shall not directly or indirectly engage or
participate (as an employee, owner, partner, shareholder, joint venturer, agent,
representative or independent contractor, or in any other capacity calling for
the making of any investment or the rendering of any services or any acts of
management, operation or control) in any business that is the same as, similar
to or competitive with the business of the COMPANY as it has been or is being
conducted during the term of this AGREEMENT, including, but not limited to, the
development, manufacture and marketing of pharmaceuticals or dietary supplements
from natural medicines; provided, however, that EXECUTIVE may own up to one
percent (1%) of any class of securities of an entity engaged in such a
competitive business if such securities are (i) listed on a national securities
exchange or market or (ii) registered under the Securities Act.
Section 4.5 - HIRING OF EMPLOYEES.
During the term of this AGREEMENT and for a period of one (1) year
thereafter, EXECUTIVE will not, directly or indirectly, either for himself or
for any other person, firm, COMPANY or other entity, materially alter the
COMPANY's relationship with, take away or employ, or attempt to materially alter
the COMPANY's relationship with, solicit, divert, take away or employ any of the
customers, business or employees of the COMPANY or any of its affiliates;
provided, however, EXECUTIVE may employ during such period former employees of
the COMPANY or its affiliates whose employment has been terminated by the
COMPANY or such affiliates.
ARTICLE V - GENERAL PROVISIONS
Section 5.1 - ASSIGNMENT; AGREEMENT TO SURVIVE DISSOLUTION OR MERGER.
This AGREEMENT shall not be terminated by the voluntary or involuntary
dissolution of the COMPANY or by any merger where the COMPANY is not the
surviving or resulting corporation, or upon any transfer of all or substantially
all of the business or assets of the COMPANY. In the event of any such merger
or transfer, the provisions of this AGREEMENT shall be binding on and shall
inure to the benefit of the surviving entity or the entity to which such
business or assets shall be transferred. This AGREEMENT may not be assigned by
EXECUTIVE.
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Section 5.2 - REMEDIES.
EXECUTIVE is obligated under this AGREEMENT to render services of a
special, unique, unusual, extraordinary and intellectual character, thereby
giving this AGREEMENT peculiar value. EXECUTIVE is also obligated, under
Article IV hereof, to protect the Confidential Information of the COMPANY. Any
loss resulting from a breach of EXECUTIVE's obligations to render services or
protect Confidential Information could not be reasonably or adequately
compensated in damages in an action at law. Therefore, in addition to other
remedies provided by law or this AGREEMENT, the COMPANY shall have the right to
obtain injunctive relief, in the appropriate court, against the performance
elsewhere by EXECUTIVE of services in direct or indirect competition with the
COMPANY, and, at any time, against the dissemination by EXECUTIVE of
Confidential Information, or the use of such information by EXECUTIVE in
violation of Article IV hereof.
Section 5.3 - CHOICE OF LAW.
The formation, construction and performance of this AGREEMENT shall be in
accordance with the laws of the State of California.
Section 5.4 - NOTICES.
Any notice to the COMPANY required or permitted hereunder shall be given in
writing, either by personal service, by facsimile, or by certified mail, postage
prepaid, duly addressed to the General Counsel of the COMPANY at the COMPANY's
then principal place of business. Any such notice to EXECUTIVE shall be given
in a like manner, and if mailed, shall be addressed to EXECUTIVE at his
residence then shown in the files of the COMPANY. For the purpose of
determining compliance with any time limit herein, a notice sent by mail shall
be deemed given four days after the postmark date. Any other notice shall be
deemed given upon receipt of the notice.
Section 5.5 - SOLE AND ENTIRE AGREEMENT.
This AGREEMENT constitutes the sole and entire existing employment
AGREEMENT between the parties and completely and correctly expresses all of the
rights and obligations of the parties. All prior AGREEMENTS, conditions,
practices, customs, usages and obligations are completely superseded and revoked
insofar as any such prior AGREEMENT, conditions, practice, custom, usage or
obligations might have given rise to any enforceable right.
Section 5.6 - WAIVERS.
The waiver in any particular instance or series of instances of any term or
condition of this AGREEMENT or any breach hereof by either party shall not
constitute a waiver of such term or condition or of any breach thereof in any
other instance.
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Section 5.7 - AMENDMENT.
This AGREEMENT is subject to amendment only by subsequent written AGREEMENT
between, and executed by, the parties hereto. Commencement or continuation of
any custom, practice or usage by the COMPANY shall not constitute an amendment
hereof or otherwise give rise to enforceable rights or create obligations of the
COMPANY.
Section 5.8 - SEPARABILITY.
In the event any Article or portion thereof is declared illegal, the
remainder of this AGREEMENT shall remain in full force and effect.
Section 5.9 - DURATION OF RIGHTS.
The provisions of Section 2.5, Article III and Article IV of this AGREEMENT
shall survive the termination of this AGREEMENT. All other rights and
obligations created by or arising under this AGREEMENT shall terminate
automatically upon termination of this AGREEMENT except as otherwise expressly
provided herein.
IN WITNESS WHEREOF, the parties have executed this AGREEMENT at Irvine,
California as of the date first above written.
EXECUTIVE PHARMAPRINT INC.
By:
- -------------------------------- -------------------------------------
Robert Burgess Title:
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
Orange County, California
November 25, 1997
