<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION JANUARY 12, 1998
REGISTRATION NO. 333-41129
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------
PHARMAPRINT INC.
(Name of Small Business Issuer in Its Charter)
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<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
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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. / /
------------------------
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
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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
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<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 12, 1998
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>
1,500,000 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 January 8, 1998, the last reported sale price of the Common Stock on
the Nasdaq National Market was $10.75 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 7.
-----------------
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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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 $475,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 225,000 shares of Common Stock, at the Price to Public per
share, less the Underwriting Discount, solely 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 February , 1998 at the office of CIBC
Oppenheimer Corp., CIBC Oppenheimer Tower, One World Financial Center, New York,
New York 10281.
-------------------
[LOGO]
The date of this Prospectus is , 1998
<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 including
related exhibits and schedules (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. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement. 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 Commission's 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 and 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 and other 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 suggesting 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. According to NUTRITION BUSINESS JOURNAL, in 1996 approximately $3
billion was spent in the United States for non-prescription, plant-derived
dietary supplements, with sales, according to the BOSTON GLOBE, having increased
over 20% annually in the last few years. In addition, according to THE WALL
STREET JOURNAL EUROPE, 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).
In October 1997 the Company entered into several agreements (the "AHP
Agreements") with American Home Products Corporation ("AHP") whereby the Company
will apply the PharmaPrint Process to produce a line of pharmaceutical-grade
dietary supplement products to be marketed by AHP under its 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 as an up-front licensing fee and is required to pay additional fees of
$500,000 upon each of (i) the issuance of a patent covering the PharmaPrint
Process and (ii) receipt and acceptance by AHP of the initial AHP Products in
sufficient time to permit AHP to meet its proposed launch date. AHP has agreed,
in the first two years following shipment by AHP of commercial quantities of the
initial AHP Products, to spend annually at least the lesser of $20 million or an
amount equal to 50% of net sales of the AHP Products in
3
<PAGE>
advertising and other marketing expenditures. AHP has also agreed to purchase
the AHP Products from the Company 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 applied generally or on a
product-by-product basis, AHP will pay royalties to the Company on net sales of
such patented AHP products of 4% in the first year and 6% thereafter. 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 an option to develop
with the Company potential FDA regulated pharmaceutical products, including
products for sale in the OTC market.
The Company has filed with the United States Patent and Trademark Office
(the "PTO") applications for a broad process patent covering a method for making
pharmaceutical-grade botanicals 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......................... 1,500,000 shares
Common Stock outstanding after the
Offering........................ 12,553,684 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>
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(1) Excludes (i) 2,010,378 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 $5.23 per share and (ii) 375,000 shares
issuable upon exercise of warrants, including warrants issued to the
representative of the Underwriters (the "Representative's 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)
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-------------- ------------- -------------- ------------- -------------
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 $17,802,438
Working capital..................................................................... 2,719,293 17,240,543
Total assets........................................................................ 4,052,964 18,574,214
Total liabilities................................................................... 891,754 891,754
Stockholders' equity................................................................ 3,161,210 17,682,460
</TABLE>
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(1) As adjusted to give effect to the sale of the 1,500,000 shares of Common
Stock offered hereby and the application of the net proceeds therefrom at an
assumed public offering price of $10.75 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, Canada and Mexico (and any other countries specified by AHP
within three years of the initial product launch) the AHP Products developed or
to be developed by the Company as dietary supplements using the
7
<PAGE>
PharmaPrint Process. The AHP Agreements restrict sales by the Company of dietary
supplements other than through AHP, and the Company is relying upon sales of its
dietary supplement products to AHP and, through AHP, to consumers, under the AHP
Agreements, as its only sources of product revenues in the near future. Prior to
the initial launch date of the first AHP Product, 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.
AHP could elect to terminate the AHP Agreements for many reasons, including
shifts in its strategic focus, poor market reaction to Centrum-branded dietary
supplements, lack of patent protection for the PharmaPrint Process or a
determination to pursue alternative methods of producing dietary supplements. 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.
The Company is obligated to conduct, at its own expense, the research and
development and regulatory work necessary to produce the AHP Products for sale
to AHP. This will require significant expenditures by the Company which may not
be recovered if AHP terminates the AHP Agreements in whole or part or sales of
AHP Products are lower than anticipated. The prices at which the Company will
supply the AHP Products are fixed in the first two years following product
launch, therefore increases in material or production costs will reduce the
profitability to the Company of the AHP supply arrangements.
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 applied generally or on a product-by-product
basis. The Company does not currently have 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 after the initial launch date of the
first AHP Product 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. While AHP is obligated to devote to the AHP Products the
efforts and resources it normally uses to market non-prescription products of
its own discovery and of similar market potential at a similar stage of product
life, after the first two years following the initial launch date AHP is not
required to provide any specific monetary level of 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. Additionally, the
Company's sole remedy if AHP fails to meet its minimum monetary marketing
support commitments, provided that AHP has not otherwise breached its
obligations under the AHP Agreements (including its obligation to market the AHP
Products consistent with the efforts it uses to market similar products) is to
sell its dietary supplement products under a national or regional brand through
one additional party.
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
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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, although AHP has an option to develop with the Company FDA regulated
pharmaceutical products, including products for sale in the OTC market. The
commercial value of the AHP Products and any other products, even if
successfully developed, will depend on the ability of AHP and any other partner
to market and commercialize such products. 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 markets or diseases as those developed and
commercialized by the Company. This risk may increase if the Company is not
successful in obtaining and maintaining patent protection for the PharmaPrint
Process.
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. In addition, the PharmaPrint Process
itself does not assure efficacy of the Company's products and claims of efficacy
can be made only after successful clinical trials, which will not be conducted
with respect to the Company's dietary supplement products. Accordingly, 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.
While the Company has successfully applied the PharmaPrint Process to
produce multi-molecule compounds with batch-to-batch consistency in test
production and for development purposes, it has not yet commenced
commercial-scale production. Accordingly, there is a risk that the Company will
encounter unexpected difficulties in applying the PharmaPrint Process to
manufacture on a commercial-scale. Such difficulties could slow production or
increase the Company's costs.
DEPENDENCE ON PATENTS AND OTHER PROPRIETARY RIGHTS; UNCERTAINTY OF PATENT
PROTECTION AND
PROPRIETARY RIGHTS
The Company's success will depend to a significant degree 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, the presence of at least one bioactive and
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
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has filed with the PTO applications for a broad process patent covering a method
for making pharmaceutical-grade botanicals 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 the PharmaPrint Process or any products it currently intends to
commercialize. If the Company is not successful in obtaining and maintaining
adequate patent protection for 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. Furthermore, AHP is not
obligated to pay royalties on sales of any AHP Products not covered by a patent
containing claims comprising the PharmaPrint Process applied generally or on a
product-by-product basis.
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. Any patent covering the
PharmaPrint Process may be vulnerable to challenge on various grounds, including
lack of nonobviousness or novelty. A great deal of research and development work
has taken place in botanicals, including efforts focused on single-molecule
bioactivity and analysis of multiple botanical components. The Company believes
the PharmaPrint Process is unique and patentable because of its focus on
determining pharmaceutical grade botanicals by identifying bioactive components
having activity relevant to clinical indications and establishing manufacturing
standards covering the range of bioactivity of the total of said components, but
it is arguable that prior work on bioactivity relating to the development of
single molecule drugs or multi-molecule chemical composition analysis could
contradict novelty or nonobviousness of the Company's invention. The PTO's
initial response to one of the Company's patent applications covering the
PharmaPrint Process was an office action dated November 1997 in which the patent
examiner questioned the patentability of the claims set forth in the
application, asserting that they are anticipated by prior art focused on
separation of plant extracts into components and identification of biologically
active components, and also reflect the well-known process of preparation of
standardized extracts to ensure product consistency. A search by the European
Patent Office in response to a related patent application produced similar
results. Many patent applications encounter similar office actions and
ultimately result in issuance of a patent, and the Company believes that the
cited prior art can be adequately distinguished on the basis of the Company's
focus on determining pharmaceutical grade botanicals through bioactivity as
described above. The Company intends to pursue its patent claims and believes
that it will overcome the examiner's issues. However, there can be no assurance
that a patent covering the PharmaPrint Process will issue or that prior art will
not support a challenge to any patent that issues. 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. 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 is
currently involved in litigation with a former employee who has asserted, among
other things, ownership rights in the Company's pending patent applications. The
Company does not believe his claims have merit. See "Business--Legal
Proceedings." 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
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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.
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, financial condition and results
of operations 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
agreements with Hauser, Inc. to, among other things, 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
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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 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. The
Company's ability to increase the price of its licensed
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products to AHP to adjust for increases in raw material costs is limited and
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 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 the Federal Food, Drug and Cosmetic
Act, as amended, inter alia, 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 under certain conditions and (iii) permits under certain conditions
the use of published literature in connection with the sale of herbal products.
Dietary supplements do not require approval by the 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, or with intended uses in, the treatment or
prevention of diseases. 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
investigational 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
documentation in medical literature of histories of safe human use of botanical
therapeutics, that it may be able to pursue a less time-consuming development
process in the U.S. and 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
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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. 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 material 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, herbal 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 will enable it to produce products that address the
concerns that physicians, patients and other consumers traditionally
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have had with herbal dietary supplements, there can be no assurance that
multi-molecule, plant-derived products in general, or the Company's products in
particular, will gain any significant degree of market acceptance. There also
can be no assurance that AHP will be able to successfully gain market acceptance
of the Company's proposed dietary supplement products.
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 18 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. 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
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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. If the Company is not successful in obtaining and maintaining
adequate patent protection for the PharmaPrint Process, competitors may be able
to duplicate or exceed the Company's efforts and capabilities.
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, some 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 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 have a material adverse effect on the
business, financial condition or results of operations of the Company.
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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 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."
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 and decline 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 $10.75, dilution in net tangible book value for
purchasers in the Offering will be $9.35 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 51.5% 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
"Principal Stockholders."
POTENTIAL ADVERSE EFFECTS OF SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 12,553,684 shares of
Common Stock outstanding (12,778,684 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
17
<PAGE>
to 200,000 shares only, 120 days) from the date of the Underwriting Agreement.
These lock-up agreements cover approximately 6,461,318 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 1,388,438 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 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 approximately
693,906 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 59.5% of the Company's outstanding
shares of Common Stock will be "restricted securities" and may, subject to the
provisions of the lock-up agreements described herein, 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 2,010,378
shares of Common Stock reserved for issuance upon exercise of outstanding vested
and non-vested 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 189,622 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 75,000 shares of Common Stock reserved for issuance upon exercise of
the Representative's 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 applicable prohibitions on Company registration
expire approximately 180 days from the date of this Prospectus (or such earlier
date as CIBC Oppenheimer Corp. may in its discretion allow). 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
1,450,000 shares of Common Stock will be outstanding and vested, approximately
1,264,000 shares of which will be subject to the lock-up agreements described
above.
The Company also has an aggregate of approximately 3,351,518 shares of
Common Stock subject to registration rights agreements. The Company has not to
date provided any registration to the holders of such shares, which has limited
such holders' ability to exercise and sell the underlying stock. See
"Description of Capital Stock--Warrants; Registration Rights."
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
18
<PAGE>
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 income from their investments should refrain from
purchasing the Common Stock offered hereby.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,500,000 shares of Common Stock offered hereby are estimated to be
approximately $14,521,250 ($16,770,688 if the Underwriters' over-allotment
option is exercised in full), at an assumed public offering price of $10.75 per
share and after deducting estimated underwriting discounts and commissions and
other estimated offering expenses.
The Company expects to use a majority of the net proceeds of this Offering
to fund formulation, toxicology and clinical testing of the Company's
pharmaceutical products and the remainder of the net proceeds of this Offering
to fund 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
18 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>
Fourth Quarter (through January 8, 1998)....................................................... $ 12.25 $ 10.50
Third Quarter.................................................................................. 18.13 8.25
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 January 8, 1998, the last reported sales price as reported by Nasdaq was
$10.75 per share. As of December 31, 1997, there were approximately 164 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.
20
<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 1,500,000 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 $17,457,295, or $1.40
per share of Common Stock, based upon 12,505,202 shares outstanding. This
represents an immediate increase in net tangible book value of $1.13 per share
to existing stockholders and an immediate dilution per share of $9.35 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).................................. $ 10.75
Net tangible book value per share before Offering....................... 0.27
Increase per share attributable to new investors........................ 1.13
Pro forma net tangible book value per share after Offering.................. 1.40
---------
Dilution per share to new investors................................. $ 9.35
---------
---------
</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 2,010,378 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 $5.23 per share; and (iii) 375,000 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants, including the
Representative's Warrants. Any exercise of such options or warrants may result
in further dilution to new investors.
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997, and as adjusted for the sale of 1,500,000 shares of Common
Stock offered hereby at an assumed offering price of $10.75 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, 12,505,202 issued and outstanding as
adjusted(2)................................................................... 23,410,972 37,932,222
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 $ 17,682,460
-------------- --------------
-------------- --------------
Total capitalization.......................................................... $ 3,161,210 $ 17,682,460
-------------- --------------
-------------- --------------
</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 2,010,378 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 $5.23; and
(iii) 375,000 shares of Common Stock reserved for issuance upon exercise of
outstanding warrants, including the Representative's Warrants.
22
<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>
23
<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, isolating and synthesizing single bioactive molecules from plant
and other sources, the Company's core technologies were developed based on
empirical data that suggest 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 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.
In October 1997 the Company entered into the AHP Agreements whereby the
Company will apply the PharmaPrint Process to produce a line of
pharmaceutical-grade dietary supplement products to be marketed in the U.S.,
Canada and Mexico exclusively 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 as an up-front licensing
fee and is required to pay additional fees of $500,000 upon each of (i) the
issuance of a patent containing claims covering the PharmaPrint Process and (ii)
receipt and acceptance of the initial AHP Products in sufficient time to permit
AHP to meet its proposed product launch date. AHP has agreed, in the first two
years following shipment by AHP of commercial quantities of the first AHP
Product, to spend annually at least the lesser of $20 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 from the Company
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 applied generally or on a product-by-product basis, AHP will
pay royalties to the Company on net sales of such patented AHP products of 4% in
the first year and 6% thereafter. 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.
24
<PAGE>
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, while concurrently
performing toxicology studies. The Company has received such FDA permission for
its initial pharmaceutical candidate, PPRT-321. The Company anticipates filing
investigational new drug ("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.
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. and Dimension Memory, Inc.
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
25
<PAGE>
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. and Dimension Memory, Inc., $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.
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 18. During fiscal 1998,
the Company expects to continue to significantly increase its staffing levels.
In November 1997, the Company entered into a commitment with Hauser, Inc. to
purchase $20,000,000 of raw materials over the next three years in order to
supply certain dietary supplements under the AHP Supply Agreement. The Company
does not presently have any material commitments for capital expenditures.
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 as 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 18 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
26
<PAGE>
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.
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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,
isolating and synthesizing single bioactive molecules from plant and other
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. In October
1997, the Company entered into several agreements with AHP whereby the Company
will apply the PharmaPrint Process to produce pharmaceutical-grade dietary
supplement products to be marketed in the U.S., Canada and Mexico exclusively by
AHP under its 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 of $500,000 upon each of (i) the issuance of a patent
containing claims covering the PharmaPrint Process and (ii) receipt and
acceptance by AHP of the initial AHP Products in sufficient time to permit AHP
to meet its proposed product launch date. Additionally, AHP has agreed to spend
annually at least the lesser of $20 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 shipment by AHP of commercial quantities of the first
AHP Product. 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 applied
generally or on a product-by-product basis, AHP will pay royalties to the
Company on net sales of such patented AHP products of 4% in the first year and
6% thereafter.
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
additional plant-derived medicines that are documented in medical literature as
having 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, regulated by
governmental authorities and is often reimbursed by health insurance plans.
According to THE WALL STREET JOURNAL EUROPE, in 1996 approximately $6 billion
was spent in Europe for multi-molecule, plant-derived prescription and OTC
products. The leading herbal medicines in Europe include ginkgo biloba, which,
according to an independent consultant, accounted for approximately $200 million
in sales (manufacturer's wholesale price) in 1996, and St. John's wort, which
according to THE NEW YORK TIMES, has generated approximately $70 million,
(manufacturers' wholesale price) in sales this year and outsells Prozac in
Germany four to one.
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Dietary supplements are categorized as food products under DSHEA, and as
such, are not approved by the FDA prior to marketing. According to NUTRITION
BUSINESS JOURNAL, in 1996 approximately $3 billion was spent in the United
States for non-prescription, herbal products, with sales, according to the
BOSTON GLOBE, having increased over 20% a year in the last few years. These
products are now commonly sold in drugstores, supermarkets, convenience stores
and discount department stores. A nationwide survey conducted by PREVENTION
magazine found that one-third of American adults surveyed use herbs to treat
various conditions such as insomnia, premenstrual syndrome, depression,
menopause, allergies and colds. The same survey found that two-thirds of adults
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 potential product is
screened in 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 botanical is also analyzed using conventional chemistry to determine the
quantity of each component present 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."
The PharmaPrint Process itself does not assure efficacy of the Company's
products and claims of efficacy may be made only after successful clinical
trials, which will not be conducted with respect to the Company's dietary
supplement products.
Once a compound's pharmaprint has been established, the Company tests
successive batches for conformity 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 may conform 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. Product 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 United States Patent and Trademark Office
(the "PTO") applications for a broad process patent covering a method for making
pharmaceutical-grade botanicals 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. However, there
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can be no assurance that the Company will receive any patents comprising the
PharmaPrint Process or any products it intends to commercialize. See
"Intellectual Property."
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 it to manufacture dietary supplement products
with standardized compositions and amounts of bioactives that will have a
competitive advantage over currently available products, which vary widely in
terms of composition. 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 are documented in medical
literature as having 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.
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In October 1997, the Company entered into several agreements with AHP
whereby the Company will apply its PharmaPrint Process to produce pharmaceutical
grade dietary supplement products to be marketed in the U.S., Canada and Mexico
exclusively by AHP under its Centrum brand name. AHP has the right to expand its
territory to any other countries at any time within three years of the launch of
the AHP Products. Pursuant to the terms of the agreements, in 1998 AHP will
commence marketing seven of the Company's products 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 of $500,000 upon each of (i) the
issuance of a patent containing claims covering the PharmaPrint Process and (ii)
receipt and acceptance by AHP of the initial AHP Products in sufficient time to
permit AHP to meet its proposed product launch date. Additionally, AHP has
agreed, during the two years following shipment by AHP of commercial quantities
of the first AHP Product, to spend annualy at least the lesser of $20 million or
an amount equal to 50% of net sales of the AHP Products in advertising and other
marketing expenditures and AHP is obligated to devote to the AHP Products the
efforts and resources it normally uses to market non-prescription products of
its own discovery and of similar market potential at a similar stage of product
life. If AHP fails to meet this monetary commitment (and does not otherwise
breach its obligations under the AHP Agreement), the Company's sole remedy is to
sell dietary supplements under a national and regional brand through one third
party. 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 applied generally or on a product-by-product
basis, AHP will pay royalties to the Company on net sales of such patented AHP
products of 4% in the first year and 6% thereafter. The prices at which the AHP
Products will be offered to consumers will be determined by AHP, although the
Company expects that such prices will be competitive with the prices of other
dietary supplement products derived from the same botanical sources.
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 single chemical entity
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 the FDA in the development of 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 investigational new drug (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.
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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 the 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
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. The price at which any of the Company's pharmaceutical
products which are approved by the FDA for sale will be sold will be determined
by the Company and any of its partners at such time based upon, among other
things, market factors and the costs incurred to develop and manufacture such
products.
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 PharmaPrint Process Complete
PPRT-211 Valerian Insomnia PharmaPrint Process Complete
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
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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.
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.
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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.
The Company has applied its PharmaPrint Process to develop a standardized
version of PPRT-152 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 has applied its 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
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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 has applied its 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 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.
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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 clinical and regulatory strategies and submitting 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 contract
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.
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.
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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
Federal Food, Drug and Cosmetics Act, as amended by, inter alia, the Dietary
Supplement Health Education Act of 1994 ("DSHEA"). DSHEA (i) defines dietary
supplements, (ii) permits "structure/function" statements, under certain
conditions and (iii) permits under certain conditions the use of published
literature in connection with 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. DSHEA prohibits marketing dietary supplements
through claims for, or with intended uses in, the treatment or prevention of
disease. 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
development process in the U.S. and 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 investigational
new drug (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. Based upon documentation in
medical literature of safe use of botanical products derived from the same
botanical sources as the Company's products, the Company anticipates conducting
concurrently with clinical trials certain development steps that are
traditionally "pre-clinical."
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 pre-IND
meetings with the Company 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 safety and 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
should be 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
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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
clinical trials or toxicology studies 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 new drug application (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 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
multi-molecule botanical dietary supplements and pharmaceuticals that can market
its products on the basis of consistent composition, the presence of at least
one bioactive and 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
applications for a broad process patent covering a method for making
pharmaceutical-grade botanicals that incorporates the steps that make up the
PharmaPrint Process, as well as additional applications covering the application
of this method to the
38
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manufacture of 11 specific botanical compositions. To date, the Company has not
received any patents or notice of allowance of any patent application for the
PharmaPrint Process or any products it currently intends to commercialize. A
great deal of research and development work has taken place in botanicals,
including efforts focused on single-molecule bioactivity and analysis of
multiple botanical components. The Company believes the PharmaPrint Process is
unique and patentable because of its focus on determining pharmaceutical grade
botanicals by identifying bioactive components having activity relevant to
clinical indications and establishing manufacturing standards covering the range
of bioactivity of the total of said components, but it is arguable that prior
work on bioactivity relating to the development of single molecule drugs or
multi-molecule chemical composition analysis could contradict novelty or
nonobviousness of the Company's invention. The PTO's initial response to one of
the Company's patent applications covering the PharmaPrint Process was an office
action dated November 1997 in which the patent examiner questioned the
patentability of the claims set forth in the application, asserting that they
are anticipated by prior art focused on separation of plant extracts into
components and identification of biologically active components, and also
reflect the well-known process of preparation of standardized extracts to ensure
product consistency. A search by the European Patent Office in response to a
related patent application produced similar results. Many patent applications
encounter similar office actions and ultimately result in issuance of a patent,
and the Company believes that the cited prior art can be adequately
distinguished on the basis of the Company's focus on determining pharmaceutical
grade botanicals through bioactivity as described above. The Company intends to
pursue its patent claims and believes that it will overcome the examiner's
issues. However, there can be no assurance that a patent covering the
PharmaPrint Process will issue or that prior art will not support a challenge to
any patent that issues. 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.
In March 1995, the Company entered into a license agreement (the "License
Agreement") with the University of Southern California ("USC") that grants the
Company an exclusive, worldwide license to its rights in the PharmaPrint
Process. 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 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 License Agreement. In
exchange for the license, the Company agreed to pay USC: (i) royalty payments of
1% of the Company's net sales of pharmaceutical products developed using the
PharmaPrint Process, (ii) 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, (iii) an annual license fee of
$10,000 payable until a patent issues, and (iv) 328,563 shares of the Company's
common stock at the time of the exchange.
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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 are numerous alternative sources
throughout the United States, Europe and Asia from which the Company can obtain
these botanical extracts.
EMPLOYEES
As of January 1, 1998, the Company had 21 employees, of which eight are
engaged in research and development activities and 13 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
Other than as described below, the Company is not presently involved in any
legal proceeding.
The Company filed an action against Costas Loullis, Ph.D., the Company's
former Group Senior Vice President of Research and Development, in December
1997, in Superior Court in the County of Orange, State of California. The
Company's action alleges, among other things, conversion and misappropriation of
Company property, fraud, breach of fiduciary obligations and related damages and
stems from Dr. Loullis' employment with the Company from September 1996 through
October 1997 and the termination of that employment. Dr. Loullis filed a
response and a cross-complaint to the Company's action. The cross-complaint
contains claims for unpaid wages, accrued benefits, stock option rights, breach
of contract, wrongful termination and ownership rights in the Company's pending
patent applications. The Company believes that the claims asserted by Dr.
Loullis have limited merit, if any, and intends to dispute any and all claims
raised by Dr. Loullis vigorously. The Company does not believe this matter
represents a significant risk of material liability to the Company.
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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 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
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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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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
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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 has 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.
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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(1)(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
$266,000 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
45
<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
46
<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 2,010,378 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.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 31, 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% 21.5%
Elliot P. Friedman............................................. 2,105,248(5) 18.8% 16.6%
Robert J. Burgess.............................................. 1,956,248(6) 17.5% 15.4%
JadiJo, Inc.(7)................................................ 115,270(8) 1.0% *
D-RAM Industries Pty. Ltd.(9).................................. 624,270(8) 5.6% 5.0%
Dimension Memory, Inc.(10)..................................... 557,708(8) 5.0% 4.4%
Phillip G. Trad................................................ 233,438(11) 2.1% 1.8%
John H. Abeles, M.D.(12)....................................... 56,875(13) * *
Lyle Anderson(14).............................................. 45,000(15) * *
Howard R. Asher(16)............................................ 76,875(17) * *
Nathan F. Troum, M.D.(18)...................................... 15,000(19) * *
All directors and executive officers as a group (12 people).... 7,370,589(20) 61.6% 54.7%
</TABLE>
The Company had 164 holders of record of its Common Stock as of December 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 December 31, 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 December 31, 1997.
(3) Assumes 12,553,684 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 557,708 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.
48
<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 233,438 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 56,875 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 45,000 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 76,875 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 15,000 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--1,955,248 shares; and
Robert J. Burgess--1,806,248 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.--56,875 shares; Lyle
Anderson--45,000 shares; Howard R. Asher--76,875 shares; Joel Bresser,
Ph.D.--5,833 shares; Elliot P. Friedman--150,000 shares; Phillip G.
Trad--233,438 shares; Nathan F. Troum--15,000 shares; Robert
Burgess--150,000 shares; Paul Johnston, Ph.D.--20,000 shares; Michael
Tempesta, Ph.D.--85,000 shares; and James R. Wodach--71,250 shares.
CERTAIN TRANSACTIONS
As of March 22, 1996, Mr. Friedman, JadiJo, Inc., a California corporation
("JadiJo"), 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 with 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
49
<PAGE>
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.
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 75,000 shares
of Common Stock are reserved for issuance upon the exercise of the
Representative's Warrants.
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.
50
<PAGE>
WARRANTS; REGISTRATION RIGHTS
The Company has agreed to sell to the Representative of the Underwriters
warrants (the "Representative's 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 Representative's Warrants are exercisable for a
period of four years commencing one year after the effective date of the
Registration Statement of which this Prospectus forms a part, and will contain
certain demand and piggyback registration rights. See "Underwriting." In
connection with the Company's initial public offering, the Company sold to the
underwriter thereof warrants to purchase 300,000 shares of Common Stock at an
exercise price of $5.50 per share.
In addition, the Company has granted to holders of approximately 2,702,326
shares of Common Stock demand registration rights and piggyback registration
rights pursuant to which such holders may, under certain circumstances, (i)
require the Company to register such shares under the Act and (ii) have such
shares included in certain registration statements filed by the Company. The
Company has also granted the holders of approximately 649,192 additional shares
of Common Stock similar piggyback registration rights as those described above.
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
51
<PAGE>
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.
52
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, each of
the Underwriters named below, for whom CIBC Oppenheimer Corp. (the
"Representative") is acting as Representative, has 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 such
Underwriter below.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
CIBC Oppenheimer Corp............................................................
----------
Total........................................................................ 1,500,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to certain other conditions. 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 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 not in excess 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 Representative.
The Company has granted to the Underwriters a 30-day option to purchase up
to an aggregate of 225,000 shares of Common Stock at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus
solely 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 of the over-allotment shares as
the number of original shares to be purchased by each of them bears to the
1,500,000 shares of Common Stock offered hereby.
The Company has also agreed to sell to the Representative or its designees,
for nominal consideration, warrants (the "Representative's Warrants") to
purchase a number of shares of Common Stock equal to 5% of the number of shares
sold by the Company in this Offering (excluding any shares sold pursuant to the
Underwriters' over-allotment option), at an exercise 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 Representative's Warrants are exercisable for a
period of four years, commencing one year after the effective date of the
Registration Statement of which this Prospectus forms a part. Holders of the
Representative's Warrant will have certain demand and piggyback registration
rights with respect to the shares of Common Stock issuable upon exercise
thereof. The Representative's Warrants 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 Representative. The exercise price and the number
of shares issuable upon exercise may, under certain circumstances, be subject to
adjustment pursuant to antidilution provisions.
53
<PAGE>
The Company has agreed to indemnify the Representative and the several
Underwriters against certain liabilities, including, without limitation,
liabilities under the Securities Act, and to contribute to certain payments that
the Underwriters may be required to make in respect thereof. The Company has
also agreed to reimburse the Underwriter for certain out-of-pocket expenses
incurred in connection with the Offering.
In connection with this Offering, the Underwriters and other selling 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 under the Exchange Act, 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 225,000 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.
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act. Passive market
making consists of displaying bids on the Nasdaq National Market limited by the
bid prices of independent market makers and making purchases limited by such
prices. Net purchases by a passive market maker are limited to a specific
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified period and must be discontinued when such limit
is reached.
Any of the stabilization or passive market making transactions described
above 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, although no
representation is made regarding the direction or magnitude of any effect that
these transactions may have on the market price of the Common Stock. None of the
stabilization or passive market making transactions described above is required,
and, if they are undertaken, they may be discontinued at any time.
The Company's executive officers and directors, who collectively own an
aggregate of approximately 6,461,318 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 1,388,438 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.
54
<PAGE>
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.
55
<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 suggest
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
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)
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>
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
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)
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.
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.
F-17
<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)
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 of $500,000 upon the achievement of each of
(i) the issuance of a patent containing claims covering the PharmaPrint Process
and (ii) receipt and approval by AHP of the initial AHP Products in sufficient
time to permit AHP to meet its proposed launch date. The Company will record the
$2.5 million licensing fee as revenue during the period that the related
development expenditures are incurred. Additionally, AHP has agreed to spend at
least the lesser of $20 million or an amount equal to 50% of net sales of the
AHP Products in advertising and other marketing expenditures during each of 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 applied generally or on a product-by-product basis
covering the production of one or more of the AHP Products, AHP will pay
royalties to the Company on sales of those products of 4% in the first year and
6% thereafter.
In November 1997, the Company entered into a commitment to purchase
$20,000,000 of raw materials over the next three years in order to supply
certain dietary supplements under the AHP Supply Agreement.
F-18
<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........................................................... 20
Price Range of Common Stock............................................... 20
Dividend Policy........................................................... 20
Dilution.................................................................. 21
Capitalization............................................................ 22
Selected Financial Data................................................... 23
Management Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 24
Business.................................................................. 28
Management................................................................ 41
Executive Compensation.................................................... 45
Principal Stockholders.................................................... 48
Certain Transactions...................................................... 49
Description of Capital Stock.............................................. 50
Underwriting.............................................................. 53
Legal Matters............................................................. 55
Experts................................................................... 55
Index to Financial Statements............................................. F-1
</TABLE>
1,500,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
[LOGO]
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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........................................................... $ 225,000
Accounting Fees and Expenses...................................................... $ 50,000
Blue Sky Fees and Expenses........................................................ $ 10,000
Transfer Agent Fees............................................................... $ 10,000
Miscellaneous Expenses............................................................ $ 62,500
----------
Total......................................................................... $ 475,000
----------
----------
</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. All of the security holders listed above were either accredited
investors or were sophisticated. The Company made this determination based upon
representations made by such holders and their contacts with and involvement in
the business of the Company. All sophisticated investors had access to
information on the Company necessary to make an informed investment decision.
The services rendered for the issuance of securities on March 22, 1996 to D-RAM
Industries Pty. Ltd. and on May 8, 1996 to Dimension Memory, Inc. consisted of
Robert Burgess' activities as Chief Operating Officer of the Company. The
services rendered for the issuance of securities to Elliot Friedman on May 8,
1996 consisted of Mr. Friedman's activities as President of the Company.
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 Representative's 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(3) Dimension Memory, Inc. Personal Services Agreement
10.7(6) Amendment No. 1 to Dimension Memory, Inc. Personal Services Agreement
10.8(2) Form of Confidentiality Agreement
10.9(6) Lease dated October 28, 1997 for Company's headquarter facility
10.10(3) License Agreement dated March 1, 1995 between the Company and USC, as amended, and related Registration
Rights Agreement and Stock Waiver
10.11(3) Letter of Engagement between Company and Advanced Bioresearch Associates
10.12(3) Bridge Note and related Warrant
10.13(3) Shareholders Agreement
10.14(3) Agreement Among Certain Shareholders
10.15(3) Agreement Among Elliot Friedman, Tasneem Khwaja, and the Company
10.16(3) Registration Rights Agreement with D-RAM Industries PTY, Ltd.
10.17(3) Registration Rights Agreement with JadiJo, Inc.
10.18(4) Warrant Agreement between the Company and M.H. Meyerson & Co., Inc.
10.19(2) American Home Products License Agreement (U.S.)
10.20(2) American Home Products License Agreement (Foreign)
10.21(2) American Home Products Supply Agreement
10.22(7) Herbal Products Supply Agreement with Hauser, Inc.
10.23(7) Master Service Agreement with Hauser, Inc.
10.24(7) Saw Palmetto Supply Agreement with Hauser, Inc.
10.25(2) Second Amendment to USC License Agreement
23.1(5) Consent of Klehr, Harrison, Harvey, Branzburg & Ellers LLP (included in Exhibit 5.1)
23.2(7) 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) Previously filed.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the nine months ended December 31, 1996.
(7) Filed herewith.
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 January 12, 1997.
<TABLE>
<S> <C> <C>
PHARMAPRINT INC.
By: /s/ ELLIOT P. FRIEDMAN
-----------------------------------------
Elliot P. Friedman,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on this 12th day of January, 1998.
SIGNATURES TITLE
- ------------------------------ --------------------------
Chairman of the Board of
/s/ ELLIOT P. FRIEDMAN Directors and Chief
- ------------------------------ Executive Officer January 12, 1998
Elliot P. Friedman (Principal Executive
Officer)
Senior Vice President and
/s/ JAMES R. WODACH Chief Financial Officer
- ------------------------------ (Principal Accounting January 12, 1998
James R. Wodach Officer)
*
- ------------------------------ Director January 12, 1998
John H. Abeles
*
- ------------------------------ Director January 12, 1998
Lyle Anderson
*
- ------------------------------ Director January 12, 1998
Howard R. Asher
*
- ------------------------------ Director January 12, 1998
Tasneem A. Khwaja
*
- ------------------------------ Director January 12, 1998
Phillip G. Trad
*
- ------------------------------ Director January 12, 1998
Nathan F. Troum, M.D.
* Attorney-in-fact pursuant to power of attorney filed as part of the original
filing of this Registration Statement.
/s/ JAMES R. WODACH
- ------------------------------
James R. Wodach
II-5
<PAGE>
HERBAL PRODUCTS SUPPLY AGREEMENT
THIS AGREEMENT is entered into effective as of the 19th day of November,
1997, by and between PharmaPrint Inc., a corporation of the State of Delaware
having its principal place of business at 4 Park Plaza, Suite 1900, Irvine,
California 92614 ("PharmaPrint") and Hauser Inc., a corporation of the State of
Colorado, having offices at 5555 Airport Blvd., Boulder, Colorado 80301
("Hauser").
WITNESSETH, THAT:
WHEREAS:
A. Hauser has developed special processes, know-how, technologies, and trade
secrets giving rise to a specific expertise in the extraction, isolation,
and purification of a variety of herbal products.
B. Hauser's expertise enables it to produce bulk quantities of desired herbal
extracts which provides competitive advantages to Hauser, and which are
very valuable to Hauser, as Hauser supplies herbal extracts to many
customers.
C. PharmaPrint desires to secure a coordinated and continuous commercial
supply of certain herbal extracts.
D. Hauser represents that it has or will have by no later than December 31,
1997 the ability to manufacture and sell to PharmaPrint certain herbal
extracts, identified below, in commercial quantities utilizing Hauser's
"Good Manufacturing Process."
E. PharmaPrint furthermore has developed proprietary technological
information, know-how, trade secrets, and obtained patents and filed patent
applications relating to and/or covering the subjects of Paragraph F below.
F. PharmaPrint has furthermore developed a process for the identification,
characterization of and standardization of the amounts of bioactive
components in herbal extracts (hereinafter referred to as the
"PharmaPrint-Registered Trademark- Process") and is seeking to
commercialize certain herbal extracts upon further characterization and
standardization utilizing the PharmaPrint-Registered Trademark- Process.
G. PharmaPrint further desires to secure a coordinated and continuous
commercial supply of herbal extracts that have been identified,
characterized and standardized using the PharmaPrint-Registered Trademark-
Process.
H. PharmaPrint recognizes and acknowledges the advantages and value of
Hauser's expertise and desires Hauser to utilize the PharmaPrint-Registered
Trademark- Process to manufacture herbal extracts (hereinafter referred to
as "PharmaPrint-Registered Trademark- Herbal Products").
I. Hauser represents that it has or will have the ability to manufacture and
sell to PharmaPrint, PharmaPrint-Registered Trademark- Herbal Products in
commercial quantities utilizing Hauser's "Good Manufacturing Process".
NOW, THEREFORE, in consideration of the foregoing and of the covenants,
hereinafter set forth, the parties hereto agree as follows:
<PAGE>
ARTICLE I
DEFINITIONS
Terms defined in this Article I shall for all purposes of this Agreement,
as the same may be amended or supplemented from time to time, have the meaning
herein specified.
1.1 The term "Effective Date" shall mean the date first written herein above.
1.2 The term "FDA" shall mean the Federal Food and Drug Administration of the
United States Department of Health and Human Services or any successor agency
thereto as well as any governmental agencies of comparable jurisdiction in the
Territory and elsewhere.
1.3 The term "GMP" means the good manufacturing practice regulations of the
FDA as described in the United States Code of Federal Regulations or any
successor regulations in the United States and as may be described in comparable
regulations in force in countries within the Territory. For DSHEA Licensed
Products, "GMP" shall mean compliance with the regulations of the United States
Dietary Supplement Health and Education Act of 1994 and comparable regulations
in force in countries within the Territory, and elsewhere as applicable.
1.4 The term "Government Approvals" shall mean any approvals, licenses,
registrations or authorizations, howsoever called, of any United States federal,
state or local regulatory agency, department, bureau or other governmental
entity, including the FDA, and similar Government Approvals in the other
countries within the Territory and elsewhere, necessary for the manufacture,
use, storage, transport or sale, both interstate and intrastate, in the United
States, its territories, possessions and Puerto Rico as well as the other
countries within the Territory and elsewhere. In the case of DSHEA Licensed
Products, the term "Government Approvals" shall mean compliance with the
applicable sections of the United States Dietary Supplement Health and Education
Act of 1994.
1.5 The term "Specifications" shall mean the specifications for the Herbal
Products, PANAX GINSENG, ECHINACEA PURPUREA and VALERIANRIS OFFICINALIS, as
represented in Attachments A, B, and C, respectively, attached hereto.
1.6 The term "PharmaPrint-Registered Trademark- Specifications" shall mean
the specifications as defined from the "Validation Agreement," to be
incorporated into this Agreement at a later date, for the PharmaPrint-Registered
Trademark- Herbal Products, PANAX GINSENG, ECHINACEA PUPUREA and VALERIANRIS
OFFICINALIS.
1.7 The term "PharmaPrint Affiliate" shall mean any company which directly or
indirectly through stock ownership or through other contractual arrangement
either controls, or is controlled by, or is under common control with
PharmaPrint.
1.8 The term "Patent Rights" shall mean any and all issued patents in the
United States, Canada and or Mexico and any and all patent applications for
letters patent pending in the above countries (until such time as such
applications or any of them are denied, abandoned, or issued into patents)
listed in Attachment D attached hereto, any patents issuing from such
applications, all divisionals, continuations, continuations-in-part and all
patents granted thereon, as well as all other patents in the Territory,
including any re-issues, renewals, or extensions thereof, which are owned by
PharmaPrint, a PharmaPrint Affiliate or under which PharmaPrint or a PharmaPrint
Affiliate shall
2
<PAGE>
have the right to grant rights, and which claim a PharmaPrint-Registered
Trademark- Process for identifying, characterizing, and standardizing the
amounts of bioactive components in herbal extracts or any Improvements, which
claim has not lapsed, become abandoned or been declared invalid or unenforceable
by a final non-appealed or unappealable decision or judgment of a court or
tribunal of competent jurisdiction.
1.9 The term "Herbal Product(s)" shall mean only the herbal extracts which
are the subject of this Agreement and are or will be produced by Hauser in the
open market; namely extracts of PANAX GINSENG, ECHINACEA PURPUREA, VALERIANRIS
OFFICINALIS, or any other herbal extracts mutually agreed upon in the future.
1.10 The term "PharmaPrint-Registered Trademark- Herbal Product(s)" shall mean
only extracts of PANAX GINSENG, ECHINACEA PURPUREA, VALERIANRIS OFFICINALIS or
any other herbal extracts mutually agreed to in the future that are manufactured
according to the PharmaPrint-Registered Trademark- Process and the
PharmaPrint-Registered Trademark- Specifications that are to be developed and
supplied to Hauser by PharmaPrint.
1.11 The term "Improvements" shall mean any and all new and useful processes,
improvements, manufactures, devices, compositions of matter (except as limited
below) or methods of use first conceived, reduced to practice or developed after
the Effective Date and during the term of this Agreement by PharmaPrint, or a
PharmaPrint Affiliate, Hauser or any employees, consultants or other persons
under their direction or control of said entities which increase the
performance, efficacy or safety of the PharmaPrint-Registered Trademark- Herbal
Product, reduce the cost of manufacture, harmful side-effects or adverse
reactions of the PharmaPrint-Registered Trademark- Herbal Product, or the
practice of the method(s) claimed in any of the patents and/or patent
applications within the Patent Rights. For the avoidance of doubt, the defined
term "Improvements" does not include the PharmaPrint-Registered Trademark-
Herbal Product PER SE.
1.12 The term "Additional Supply Agreement" means the Agreement for the sale
and supply of the herbal extract Saw Palmetto by Hauser to PharmaPrint as
executed by the parties concurrently with this Agreement.
1.13 The term "Territory" shall mean the United States, its territories,
possessions, Puerto Rico, Canada and Mexico.
1.14 The term "Contract Year" shall mean the year that initially commences on
the Effective Date of this Agreement and running through December 31, 1998.
Subsequent Contract Years will commence on January 1st of each subsequent year
and run through December 31st of that year.
3
<PAGE>
ARTICLE II
PURCHASE AND SALE
2.1 Hauser agrees to and shall manufacture and provide to PharmaPrint and
PharmaPrint agrees to and shall purchase from Hauser the PharmaPrint-Registered
Trademark- Herbal Products listed below in at least the amounts indicated for
the years there identified, subject to the other provisions of this Agreement.
PharmaPrint-Registered Trademark- Contract Year
Herbal Products
1998 1999 2000
- --------------------------------------------------------------------------------
ECHINACEA PURPUREA
Quantity (Kilograms) 15,000 19,000 24,000
PANAX GINSENG
Quantity (Kilograms) 7,500 10,000 12,500
VALERIANRIS OFFICINALIS
Quantity (Kilograms) 7,500 10,000 12,500
2.2 In the future Hauser may supply PharmaPrint with the PharmaPrint
- -Registered Trademark- Herbal Products according to the PharmaPrint
- -Registered Trademark- Specifications that are to be determined and mutually
agreed upon between the parties at a future date. Hauser agrees not to
supply any third party with or itself market for sale any of the PharmaPrint
- -Registered Trademark- Herbal Products developed in accordance with the
PharmaPrint "Validation Agreement."
2.3 Hauser is obligated to supply to PharmaPrint one-hundred percent (100%)
of PharmaPrint's requirements for each of the PharmaPrint-Registered Trademark-
Herbal Products in the Territory; however, nothing in this Agreement shall
preclude Hauser from supplying or continuing to supply the Herbal Products to
customer's other than PharmaPrint.
2.4 In the 1998 Calendar year Hauser agrees to manufacture and deliver to
PharmaPrint and PharmaPrint agrees to and shall purchase at least 3,000 kgs
of each PharmaPrint -Registered Trademark- Herbal Product by January 1, 1998,
3,000 kgs of each PharmaPrint -Registered Trademark- Herbal Product by April
15, 1998, and the remaining minimum product requirements listed in Paragraph
2.1, prior to December 31, 1998. By January 30, 1998, PharmaPrint shall
provide Hauser with a forecast prepared in good faith of its quarterly
requirements of all PharmaPrint -Registered Trademark- Herbal Products for
the following eighteen (18) month period, the initial six (6) month period
thereof being known as the "Initial Forecast". Purchase orders will be
placed by PharmaPrint corresponding to the first three (3) months of the
Initial Forecast. Throughout the term of the Agreement, PharmaPrint shall
further provide Hauser with a rolling monthly forecast of PharmaPrint's
anticipated requirements of all PharmaPrint -Registered Trademark- Herbal
Products for the subsequent three (3) month period ("Updated Forecast"). The
forecasted requirements of all PharmaPrint -Registered Trademark- Herbal
Products in each Updated, three (3) month, Forecast shall be binding upon
PharmaPrint. After the first Contract Year of this Agreement each subsequent
Updated Forecast shall bind PharmaPrint only to the minimum forecasted
requirements as outlined in Paragraph 2.1, and will be used for the purpose
of assisting Hauser to procure raw materials and manufacture the PharmaPrint
- -Registered Trademark- Herbal Products for the applicable period. PharmaPrint
agrees to purchase a minimum of one-half (1/2) of the yearly purchase
requirements within six (6) months of the second and third Contract Years.
4
<PAGE>
2.5 PharmaPrint shall place purchase orders for each of the
PharmaPrint-Registered Trademark- Herbal Products with Hauser from time to time
specifying the quantities of each of the PharmaPrint-Registered Trademark-
Herbal Products desired, and the places in which and the manner and dates by
which delivery is to be made; said delivery dates are to be no earlier than
ninety (90) days from the date of the purchase order unless otherwise requested
by PharmaPrint and agreed to by Hauser.
2.6 Hauser shall acknowledge all purchase orders within ten (10) business
days of their receipt. Hauser shall execute all accepted purchase orders by
delivery of all ordered quantities of the PharmaPrint-Registered Trademark-
Herbal Products no later than the delivery dates provided in the purchase orders
of PharmaPrint to the destination recited therein, unless otherwise requested by
PharmaPrint and agreed to by Hauser.
2.7 To the extent that the terms of any purchase order or acknowledgment
thereof are inconsistent with the terms of this Agreement, the terms of this
Agreement shall control.
2.8 Title and risk of loss will pass to PharmaPrint upon delivery of the
PharmaPrint-Registered Trademark- Herbal Products to the designated carrier of
PharmaPrint at Hauser's manufacturing facility or its storage facility. The
parties agree that Hauser's facilities shall be domestically located unless
otherwise agreed.
2.9 All PharmaPrint-Registered Trademark- Herbal Products supplied by Hauser
to PharmaPrint in response to purchase orders placed by PharmaPrint will conform
to the Specifications and/or the PharmaPrint-Registered Trademark-
Specifications, respectively, and shall be accompanied by the applicable
certificate of analysis. Hauser shall manufacture all PharmaPrint-Registered
Trademark- Herbal Products under approved Good Manufacturing Procedures
conforming with GMP regulations. Further, Hauser shall have the sole
responsibility for obtaining all Government Approvals and meeting DSHEA statutes
and rules.
2.10 Should the minimum yearly quantities not be purchased in the applicable
Contract Year then, subject to the provisions and terms of this Agreement,
PharmaPrint agrees to and shall pay Hauser fifteen percent (15%) of the then per
kilogram price of each of the PharmaPrint-Registered Trademark- Herbal Products
not purchased from Hauser, up to the total of the minimum kilograms per six (6)
months volume requirements set forth above. PharmaPrint agrees to pay Hauser
15% of the per kilogram price of each of the PharmaPrint-Registered Trademark-
Herbal Products not purchased from Hauser within sixty (60) days of
communicating to Hauser of its intention not to purchase. Both parties reserve
the right, using due diligence, to offset excess finished goods inventory by
purchasing or selling inventory. PharmaPrint agrees to reimburse Hauser for any
excess inventory up to 15% maximum penalty. In the event PharmaPrint does not
purchase the minimum yearly amounts or terminates the agreement prior to the
fourth (4th) year of supply PharmaPrint agrees to reimburse Hauser the cost of
all outstanding raw material inventory. This raw material reimbursement is
predicated on the third (3rd) year annual eighteen (18) month product forecast
volumes outlined in 2.4 of the agreement. Both parties have the right using due
diligence to offset excess raw material inventories by purchasing or selling
excess inventory. PharmaPrint agrees to reimburse Hauser for any excess
inventory beyond these efforts.
5
<PAGE>
2.11 The prices for each Herbal Product for the first Contract Year are set
forth in the table below. All prices for Herbal Products are freight on board
("FOB") Hauser's manufacturing or storage facility, depending on the location
from which Hauser ships, or as may be agreed to by the parties.
Herbal Products 1st and 2nd Contract Year Price (except
as referenced below)
- --------------------------------------------------------------------------------
ECHINACEA PURPUREA $185.00 per Kg
- --------------------------------------------------------------------------------
PANAX GINSENG $171.00 per Kg
- --------------------------------------------------------------------------------
VALERIANRIS OFFICINALIS $65.00 per Kg
- --------------------------------------------------------------------------------
The prices for each PharmaPrint-Registered Trademark- Herbal Product are based
upon herbal product specifications. Any increase in cost due to new PharmaPrint
Herbal Product specifications will be mutually agreed to and negotiated if
necessary. After the second Contract Year, Hauser may adjust the price of each
PharmaPrint-Registered Trademark- Herbal Product not more than once per Contract
Year upon not less than ninety (90) days written notice to PharmaPrint with
written agreement from PharmaPrint, to adjust for increases in Hauser's
manufacturing costs ("Manufacturing Costs"). Any price adjustment hereunder
shall apply only to the PharmaPrint-Registered Trademark- Herbal Products sold
in response to orders placed after the date on which such adjustment becomes
effective. Such increase in price for each PharmaPrint-Registered Trademark-
Herbal Product shall be based on the increase in Manufacturing Cost for that
PharmaPrint-Registered Trademark- Herbal Product but only upon mutual agreement
shall the increase for Manufacturing Cost be greater than that set forth in the
Consumer Price Index applicable at the time the price adjustment is negotiated.
Product price increases may also reflect increases in raw material costs. Raw
material cost increases may not be reflective of the Consumer Price Index costs,
therefore increases in the PharmaPrint-Registered Trademark- Herbal Product
prices due to raw material increases will not be subject to Consumer Price Index
restrictions provided, however, that Herbal Product prices remain competitive
with the world market. PharmaPrint and Hauser agree that upon written
submission from Hauser of evidence of adjustments in raw material costs the
PharmaPrint-Registered Trademark- Herbal Product prices may be adjusted once per
year after the first year to reflect such changes. Hauser shall keep complete
and accurate records of all Manufacturing Costs incurred in the manufacture of
each PharmaPrint-Registered Trademark- Herbal Product to PharmaPrint. Hauser
shall provide access to said records during reasonable business hours to a
certified public accountant selected by PharmaPrint and reasonably acceptable to
Hauser, who shall, at PharmaPrint's expense, have access to such records deemed
by such accountant as reasonably necessary in verifying for PharmaPrint, not
more than once each calendar year, such costs incurred by Hauser.
2.12 With regard to the PharmaPrint-Registered Trademark- Herbal Product
VALERIANRIS OFFICINALIS, due to the current uncertainty of raw material costs
the parties agree to a one time review of the price of that
PharmaPrint-Registered Trademark- Herbal Product following the delivery of the
initial 3,000 Kilograms by January 1, 1998. All other price reviews for
Valerian will be limited to and in accordance with the terms listed above.
6
<PAGE>
2.13 PharmaPrint shall randomly inspect all shipments of all
PharmaPrint-Registered Trademark- Herbal Product to determine whether or not the
PharmaPrint-Registered Trademark- Herbal Products are in conformity with the
Specifications and/or the PharmaPrint-Registered Trademark- Specifications,
respectively. In the event that any portion of the shipment of
PharmaPrint-Registered Trademark- Herbal Products received by PharmaPrint fails
to conform to the Specifications and/or the PharmaPrint-Registered Trademark-
Specifications, respectively, as mutually agreed upon, PharmaPrint may reject
the non-conforming PharmaPrint-Registered Trademark- Herbal Product shipment by
giving written notice to Hauser within sixty (60) days of PharmaPrint's receipt
of the PharmaPrint-Registered Trademark- Herbal Products, which notice shall
specify the manner in which the PharmaPrint-Registered Trademark- Herbal Product
failed to meet the Specifications and/or the PharmaPrint-Registered Trademark-
Specifications, respectively. Failing such notification, PharmaPrint will be
deemed to have accepted the PharmaPrint-Registered Trademark- Herbal Product,
and Hauser shall not thereafter be required to indemnify PharmaPrint for breach
of its warranties under Paragraph 5.2 as to such PharmaPrint-Registered
Trademark- Herbal Product, except for defects not reasonably discoverable by
PharmaPrint in such inspection.
2.14 In the event Hauser does not agree that any such PharmaPrint-Registered
Trademark- Herbal Product failed to meet the Specifications and/or the
PharmaPrint-Registered Trademark- Specifications, respectively, and PharmaPrint
and Hauser cannot reach agreement with respect to such PharmaPrint-Registered
Trademark- Herbal Product, Hauser will submit the question of whether the
PharmaPrint-Registered Trademark- Herbal Product failed to meet the
Specifications and/or the PharmaPrint-Registered Trademark- Specifications,
respectively, to an independent laboratory selected by Hauser and approved by
PharmaPrint for determination. The findings of such laboratory shall be binding
upon PharmaPrint and Hauser and the cost of such determination shall be paid by
the party in error.
2.15 Should the analysis of the independent laboratory, chosen in accordance
with Paragraph 2.14, confirm that Hauser was at fault, Hauser shall replace any
PharmaPrint-Registered Trademark- Herbal Product not conforming to the
Specifications and/or the PharmaPrint-Registered Trademark- Specifications,
respectively, forthwith, at its expense, or if it is unable to make prompt
replacement, Hauser shall either credit PharmaPrint's account or refund any
payment made on the non-accepted PharmaPrint-Registered Trademark- Herbal
Product, depending on PharmaPrint's account balance, within forty-five (45) days
of the independent laboratory's written notification of non-conforming
PharmaPrint-Registered Trademark- Herbal Product. PharmaPrint shall return, at
Hauser's expense, the non-accepted PharmaPrint-Registered Trademark- Herbal
Product to Hauser.
2.16 Following the signing of required confidentiality agreements Hauser shall
secure access for PharmaPrint, employees of the Government regarding
Governmental Agencies and PharmaPrint's distributors to the operations and
facilities of Hauser wherein the PharmaPrint-Registered Trademark- Herbal
Products are manufactured, packaged, tested, labeled, stored and/or shipped.
PharmaPrint and such other entities shall have the right to inspect such
operations or facilities for, INTER ALIA, GMP purposes and on reasonable prior
notice.
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ARTICLE III
RIGHT TO MANUFACTURE
3.1 In the event that Hauser is unable at any time to supply commercial
quantities of PharmaPrint-Registered Trademark- Herbal Products for a period of
sixty (60) consecutive days for any reason, including acts of FORCE MAJEURE,
PharmaPrint shall have the right to have a third party manufacture the
PharmaPrint-Registered Trademark- Herbal Products for PharmaPrint. The time of
such manufacture by such third party shall be for a finite duration of
reasonable length in view of the complexity and costs of arranging such change
in the PharmaPrint-Registered Trademark- Herbal Product manufacturing. As used
herein, commercial quantities of PharmaPrint-Registered Trademark- Herbal
Product shall mean total units of PharmaPrint-Registered Trademark- Herbal
Product equal to seventy five percent (75%) of PharmaPrint's quarterly orders of
the preceding two (2) quarters.
3.2 Recognizing that a third party manufacturer ("TPM"), under Paragraph 3.1,
may require technical assistance in manufacturing the PharmaPrint-Registered
Trademark- Herbal Products, if requested by PharmaPrint:
3.2.1 Hauser shall assist TPM in determining and acquiring machinery
and equipment necessary to manufacture the PharmaPrint-Registered Trademark-
Herbal Products by TPM. Upon request by PharmaPrint Hauser will assist TPM in
discussions between TPM and equipment manufacturers, subject to the terms and
conditions of subparagraph 3.2.3.
3.2.2 If technical assistance is requested by TPM at the time of
installation of equipment in TPM's plant, one Hauser engineer will be sent to
TPM's plant, for a maximum period of thirty (30) calendar days, subject to the
terms and conditions of subparagraph 3.3.
3.2.3 PharmaPrint may request the assistance of Hauser's engineers at
TPM's plant whenever necessary during the term of Paragraph 3.4 to solve some
particular problems or complete the training of TPM's engineers. PharmaPrint
will notify Hauser thirty (30) calendar days in advance of the start-up date of
TPM's plant, and Hauser shall extend its technical assistance for such start-up
under the terms and conditions set forth below:
3.2.3.1 Hauser will designate one or more highly qualified
specialists to stay at TPM's plant for a continuous or an interrupted period of
up to a total of thirty (30) calendar days according to the reasonable needs of
TPM. Should a given specialist not be acceptable, TPM may, at any time, upon
fourteen (14) calendar days notice, ask for a replacement of the specialist sent
by Hauser with someone more qualified, and Hauser agrees to make a reasonable
effort to furnish such a replacement within this fourteen (14) day period in
order to provide uninterrupted technical assistance.
3.2.3.2 In addition to the assistance mentioned in 3.2.3.1
above, Hauser will provide, at TPM's request, one highly qualified specialist
for ninety (90) calendar day periods, with or without interruption, until the
technical assistance extended reaches a total of twelve man-months, but in no
event for periods beyond the term of this Agreement.
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3.3 Hauser's remuneration for technical assistance at TPM's plant shall be as
follows:
3.3.1 PharmaPrint shall pay directly or reimburse upon appropriate
justification the travel and living expenses of Hauser's specialists. In
addition, PharmaPrint shall pay Hauser an amount equal to three times the Gross
Salary of the specialist divided by 365 days for each working day of each
specialist's absence from Hauser's premises for the purpose of extending
assistance to TPM; and
3.3.2 Such remuneration shall be made within one (1) month after Hauser
invoices PharmaPrint for such reimbursement payments.
3.4 If the procedure of Paragraph 3.1 is implemented, the manufacture of the
PharmaPrint-Registered Trademark- Herbal Products by the third party and its
supply to PharmaPrint shall revert to Hauser upon, (a) notification to
PharmaPrint from Hauser that Hauser is again able to manufacture and supply the
PharmaPrint-Registered Trademark- Herbal Products, and (b) termination of any
third party obligations incurred by PharmaPrint in obtaining supply of the
PharmaPrint-Registered Trademark- Herbal Products pursuant to Paragraph 3.1
hereof. Upon such reversion, the third party manufacturer's right to use the
manufacturing know-how shall terminate within sixty (60) days.
3.5 Hauser agrees that as to the PharmaPrint-Registered Trademark- Herbal
Products identified in this Agreement and those herbal extracts identified in
the Additional Supply Agreement contemporaneously entered into between the
parties, if PharmaPrint so desires, it may have herbal extracts other than those
identified in the aforementioned Agreements manufactured and sold to it by a
third party manufacturer of PharmaPrint's choice. PharmaPrint agrees to offer
Hauser first right of refusal to manufacture and supply other herbal extracts as
long as Hauser's herbal extracts meet PharmaPrint's quality and price
requirements.
ARTICLE IV
RECALLS AND RETURNS
4.1 In the event of a recall of any of the PharmaPrint-Registered Trademark-
Herbal Products required by a governmental agency or authority of competent
jurisdiction or if a recall of any PharmaPrint-Registered Trademark- Herbal
Product is reasonably deemed advisable by PharmaPrint, such recall shall be
promptly implemented and administered by PharmaPrint in a manner which is
appropriate and reasonable under the circumstances and in conformity with
accepted trade practices. In the event that a recall is required as a result of
Hauser's breach of its obligations hereunder, all costs and expenses incurred in
connection therewith shall be borne by Hauser. PharmaPrint shall bear all costs
associated with such recalls not borne by Hauser.
4.2 The provisions and obligations of this Article IV shall survive any
termination or expiration of this Agreement.
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ARTICLE V
WARRANTIES, COVENANTS AND REPRESENTATIONS
5.1 PharmaPrint represents and warrants to Hauser that the execution of this
Agreement and the full performance and enjoyment of the rights of PharmaPrint
under this Agreement will not breach or in any way be inconsistent with the
terms and conditions of any license, contract, understanding or agreement,
whether express, implied, written, or oral between PharmaPrint and any third
party. Hauser represents and warrants to PharmaPrint that the execution of this
Agreement and the full performance and enjoyment of the rights of Hauser under
this Agreement will not breach or in any way be inconsistent with the terms and
conditions of any license, contract, understanding or agreement, whether
express, implied, written, or oral between Hauser and any third party.
5.2 Hauser warrants that the PharmaPrint-Registered Trademark- Herbal
Products supplied by Hauser pursuant to Paragraph 2.1 of this Agreement shall
conform to the Specifications and/or the PharmaPrint-Registered Trademark-
Specifications, respectively, be manufactured in accordance with GMP and shall
comply with all applicable laws in the Territory. Provided, however, that
Hauser does not make any such warranty as to any matters or processes (including
the Specifications and/or the PharmaPrint-Registered Trademark- Specifications)
specified or established by PharmaPrint. Pursuant to the "Validation
Agreement," the specifications will be reviewed and altered if necessary as
agreed by both parties.
5.3 Hauser shall indemnify, defend and hold harmless PharmaPrint from all
actions, losses, claims, demands, damages, costs and liabilities (including
reasonable attorneys' fees) except as arising from events listed here below in
paragraph 5.4 to which PharmaPrint is or may become subject insofar as they
arise out of or are alleged or claimed to arise out of:
(i) personal injury, death or property damage sustained by any
person(s) resulting from the use of the PharmaPrint-Registered
Trademark- Herbal Products defectively manufactured by Hauser.
(ii) any material breach by Hauser of any covenants or warranties of
Hauser, or
(iii) any grossly negligent or willful act or omission by Hauser or its
employees, agents or subcontractors
5.4 PharmaPrint shall indemnify, defend and hold harmless Hauser, its
subsidiaries, and employees from all actions, losses, claims, demands, costs and
liabilities (including reasonable attorneys' fees) to which Hauser is or may
become subject insofar as they arise out of or are alleged or claimed to arise
out of:
(i) any grossly negligent or willful act or omission by PharmaPrint or
its employees, agent or subcontractors,
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(ii) personal injury, death or property damage sustained by any
person(s) resulting from the (A) use of the PharmaPrint-Registered
Trademark- Herbal Product manufactured by PharmaPrint or by a third
party in accordance with Paragraph 3.1 or (B) any matter or process
(including the Specifications and/or the PharmaPrint-Registered
Trademark- Specifications) specified by PharmaPrint or (C) any
changes to or adulteration of the PharmaPrint-Registered Trademark-
Herbal Product after shipment by Hauser or (D) the
PharmaPrint-Registered Trademark- Herbal Product manufactured by
Hauser if Hauser has followed the matters or processes (including
the PharmaPrint-Registered Trademark- Specifications) specified and
established by PharmaPrint and in other respects has manufactured
in accordance with GMP and all applicable laws in the Territory,
(iii) any labeling, advertising or promotional materials used by
PharmaPrint, or
(iv) any material breach by Hauser of any covenants or warranties of
Hauser.
5.5 PharmaPrint represents and warrants that to the best of its knowledge and
belief, the manufacture of the PharmaPrint-Registered Trademark- Herbal Products
hereunder does not infringe any third party patents in the United States or
anywhere in the Territory. PharmaPrint undertakes to indemnify and hold
harmless Hauser against all judgments, decrees, costs and expenses, including
attorney's fees, resulting from any alleged infringement and shall make its best
efforts to defend, upon written request of Hauser, any claim of patent
infringement in the use and/or sale of the PharmaPrint-Registered Trademark-
Herbal Product manufactured by Hauser under this Agreement. Hauser shall
provide prompt notice to PharmaPrint of any such claim of patent infringement
and PharmaPrint shall have complete control over any defense or settlement of
such claim.
5.6 Hauser shall maintain, during the term of this Agreement, comprehensive
general liability insurance with an insurance carrier reasonably acceptable to
PharmaPrint, which insurance policy or policies shall maintain the full products
hazards provisions with the PharmaPrint-Registered Trademark- Herbal Products
hazards limits subject to deductibles not in excess of $10,000 in the aggregate,
and with at least $2,500,000 per occurrence and at least $2,500,000 overall
coverage for claims of bodily injury and property damage arising out of any
loss. Such policy or policies shall extend coverage with respect to occurrence
during a policy period, regardless of the dates on which claims arising for such
occurrences are made, and shall include PharmaPrint as named insured in such
policy or policies. Both parties shall provide notice to the other of any loss,
whether actual or threatened, promptly upon receipt of notice thereof.
5.7 PharmaPrint shall maintain, during the term of this Agreement,
comprehensive general liability insurance with an insurance carrier reasonably
acceptable to Hauser, which insurance policy or policies shall maintain the full
products hazards provisions with the PharmaPrint-Registered Trademark- Herbal
Product hazards limits subject to deductibles not in excess of $10,000 in the
aggregate, and with at least $2,500,000 per occurrence and at least $2,500,000
overall coverage for claims of bodily injury and property damage arising out of
any loss. Such policy or policies shall extend coverage with respect to
occurrence during a policy period, regardless of the dates on which claims
arising for such occurrences are made, and shall include Hauser as named insured
in such policy or policies. Both parties shall provide notice to the other of
any loss, whether actual or threatened, promptly upon receipt of notice thereof.
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5.8 A party entitled to indemnification hereunder agrees to give prompt
written notice (in no event later than ten (10) business days following its
receipt) to the indemnifying party after the receipt by such party of any
written notice of the commencement of any action, suit, proceeding or
investigation or threat thereof made in writing for which such party will claim
indemnification pursuant to this Agreement. Unless, in the reasonable judgment
of the indemnifying party a conflict of interest may exist between the
indemnified party and the indemnifying parry with respect to a claim, the
indemnifying party may assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If the indemnifying party is not
entitled to, or elects not to, assume the defense of a claim, it will not be
obligated to pay the fees and expenses of more than one counsel with respect to
such claim. The indemnifying party will not be subject to any liability for any
settlement made without its consent, which shall not be unreasonably withheld.
5.9 The provisions and obligations of this Article V shall survive any
termination or expiration of this Agreement.
ARTICLE VI
CONFIDENTIALITY AND PUBLICITY
6.1 In connection with prior related disclosures and work, pursuant to the
Confidential Disclosure Agreement between the parties of January 24, 1997, which
Agreement is incorporated herein by reference, and with the negotiation,
execution and performance of this Agreement, Hauser and PharmaPrint have had and
will have access to certain confidential and proprietary information of each
other, including, but not limited to, financial data, know-how, trade secrets,
technology, PharmaPrint's Patent Rights relating to the PharmaPrint process and
certain mutual information concerning the identification, characterization and
standardization of the biological active components, their biological activity
and their percent in the composition of the PharmaPrint-Registered Trademark-
Herbal Products of this Agreement. Recognizing that such information is all
confidential and represents valuable assets and property to both parties, and
the harm that may befall such parties if any of such information is disclosed,
Hauser and PharmaPrint agree that for a period of ten (10) years after the
execution of the January 24, 1997, Confidential Disclosure Agreement between the
parties, referred to above, to hold all such information in confidence and not
to use or otherwise disclose any such information to third parties without the
prior written consent of the other party: PROVIDED, HOWEVER, that the
obligations of confidentiality created herein shall cease to apply to
information: (a) that can be demonstrated through documentary evidence to be in,
or to come into, the public domain through no fault of Hauser or PharmaPrint;
(b) that can be demonstrated through documentary evidence to have been in either
parties possession prior to its disclosure, or can be demonstrated through
documentary evidence to have been later disclosed to either party by a third
party who, to the receiving party's knowledge, was under no obligation to keep
such information confidential; and (c) which, in the written opinion of legal
counsel for either party, is required to be disclosed by law or regulation or by
the rules of any stock exchange on which Hauser's PharmaPrint's securities are
listed, but only to the extent so required and only upon five (5) business days
written notice to and followed by consultation with the other party.
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6.2 Hauser shall submit to PharmaPrint and PharmaPrint shall submit to Hauser
all advertising, herbal product labeling, herbal product literature, written
sales promotions, press releases and other publicity matters relating in any way
to this agreement or its general subject matter in which Hauser's trademarks,
and/or PharmaPrint's trademarks, the PharmaPrint-Registered Trademark- Process,
or the Herbal Product produced by said process is mentioned or that contains
language from which the connection of said name, trademark,
PharmaPrint-Registered Trademark- Process or the PharmaPrint-Registered
Trademark- Herbal Product made thereby may be implied or inferred and neither
party shall not publish or use such advertising, sales promotion, press release
or publicity matters without either parties prior written consent.
6.3 In the event Hauser or PharmaPrint or any of their officers, employees or
consultants is requested or required by subpoena, order, discovery request or
similar process or by applicable law or regulation or the rules of any stock
exchange on which such Hauser or PharmaPrint securities are listed to disclose
any information that is required to be held in confidence pursuant to paragraph
6.1 of this Agreement, and Hauser or PharmaPrint is required to disclose such
information the disclosing party shall provide advance notice and a copy of the
proposed disclosure to the other party and will consult with the other party
with respect to taking legally available steps to resist or narrow such request
or disclosure. If disclosure of such information is required and Hauser or
PharmaPrint is required to disclose such information, it shall furnish only
that portion of the information that, in the written opinion of the disclosing
parties counsel, such party is legally required to disclose and shall cooperate
with any action by the non-disclosing party (at the non-disclosing party's
expense) to obtain an appropriate protective order or written or equally
reliable assurance that confidential treatment shall be accorded the information
ARTICLE VII
NON-COMPETITION
7.1 During the term of this Agreement (or until termination) and for a period
of three (3) years thereafter, Hauser will not engage in the PharmaPrint
- -Registered Trademark- Process and/or the production of the
PharmaPrint-Registered Trademark- Herbal Products, as described herein, for
itself or for third parties for marketing and sale.
7.2 Hauser admits and agrees that no right or license is granted to it or its
customers or clients (by implication or otherwise) by PharmaPrint under its
proprietary technology, know how, or trade secrets or Patent Rights and/or
Trademarks or by the performing of Hauser's obligations to PharmaPrint under and
pursuant to the Development and Verification Agreement, this Agreement or the
Additional Supply Agreements contemporaneously entered into between the parties.
ARTICLE VIII
PAYMENT SCHEDULE
8.1 Payments by PharmaPrint for the PharmaPrint-Registered Trademark- Herbal
Products delivered by Hauser shall be due and payable thirty (30) days after
such PharmaPrint-Registered Trademark- Herbal Products are received by
PharmaPrint, or PharmaPrint's designated contract manufacturer unless otherwise
agreed to in writing by the parties. In such an event the net thirty (30) day
payments are not met and Hauser has provided PharmaPrint with due correspondence
of intention and complied with the termination provisions contained herein,
Hauser retains the right to revoke the supply terms.
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ARTICLE IX
DURATION AND TERMINATION
9.1 This Agreement shall continue in full force and effect until December 31,
2000 unless terminated by either party pursuant to the provisions set forth in
this Article X. Further, Hauser hereby grants PharmaPrint an option to extend
this Agreement on substantially the same terms of this Agreement on a
year-to-year basis if PharmaPrint gives written notice to Hauser that it is
exercising the option herein granted on or before July 1st of the year in which
this Agreement would otherwise expire by its terms.
9.2 PharmaPrint and Hauser may terminate this Agreement in its entirety, upon
mutual agreement, at any time upon thirty (30) days written notice to the other
party. At the sole discretion of PharmaPrint, this Agreement can be terminated
per the termination terms and conditions of their AHP DSHEA Herbal Products
Agreement. In such event, PharmaPrint shall remain obligated to purchase under
the terms of purchase orders received or scheduled to be received by Hauser or
PharmaPrint for at least ninety (90) days herein such quantities of the
PharmaPrint-Registered Trademark- Herbal Product ordered prior to the date
termination becomes effective.
9.3 Either party hereto shall be entitled to terminate this Agreement upon
thirty (30) days written notice to the other party if the other party shall
commit a breach of any material provision hereof and shall not within thirty
(30) days from receipt of notice of such breach by the complaining party remedy
the same (if capable of remedy).
9.4 Insofar as is lawful and legally permissible, this Agreement may be
terminated with immediate effect by a party upon giving written notice to the
other if the other is insolvent or has committed any act of bankruptcy or an
order is made or resolution passed for the winding up of the other party.
9.5 Failure on the part of either party to exercise or enforce any right
conferred upon it hereunder shall neither be deemed to be a waive of any such
right nor operate to bar the exercise or enforcement thereof at any time
thereafter.
ARTICLE X
MISCELLANEOUS
10.1 Any notice required or permitted under this agreement shall be in writing
and deemed to have been sufficiently provided and effectively made as of the
delivery date if hand-delivered with written acknowledge thereof, or as of the
date received if mailed by registered or certified mail, postage pre-paid, and
addressed to the receiving party at its respective address, as follows:
HAUSER, INC.
5555 Airport Boulevard
Boulder, Colorado 80301
Attn: President
PHARMAPRINT, INC.
4 Park Plaza
Suite 1900
Irvine, California 92614
Attn: President
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10.2 The relationship of the parties under this Agreement is that of
independent contractors and not as agents of each other or partners or joint
ventures, and neither party shall have the power to bind the other in any way
with respect to any obligation to any third party unless a specific power of
attorney is provided for such purpose. Each party shall be solely and
exclusively responsible for its own employees and operations.
10.3 In the event that the performance of this Agreement or of any obligation
hereunder, other than payment of money as herein provided by either party hereto
is prevented, restricted or interfered with by reason of any cause not within
the control of the respective party, and which could not by reasonable diligence
have been avoided by such party, the party so affected, upon giving prompt
notice to the other party, as to the nature and probable duration of such event
shall be excused from such performance to the extent and for the duration of
such prevention, restriction or interference, provided that the party so
affected shall use its reasonable efforts to avoid or remove such cause of
non-performance and shall fulfill and continue performance hereunder with the
utmost dispatch whenever and to the extent such cause or causes are removed.
10.4 For the purpose of the preceding paragraph but without limiting the
generality hereof, the following shall be considered as not within the control
of the respective party; acts of God, acts or omissions of a governmental
agency, compliance with requests, recommendations, rules regulations or orders
of any governmental authority or any officer, department, agency or instrument
thereof, flood, storms, earthquake, fire, war, riots, insurrection, accidents,
acts of the public enemy, invasion, quarantine restrictions, strike, lockout,
embargoes, delays or failure in transportation and acts of a similar nature.
10.5 Should one of the provisions of this Agreement become or prove to be null
and void, such will be without effect on the validity of this Agreement as a
whole. Both parties will, however, endeavor to replace the void provision by a
valid one which in its economic effect is most consistent with void provision.
10.6 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflicts of laws.
10.7 This Agreement and the rights and obligations hereunder shall not be
assignable by Hauser without the previous written consent of PharmaPrint which
consent will not be unreasonably withheld. PharmaPrint may assign this
Agreement (i) in connection with the transfer of all or substantially all of the
business to which it relates without any such consent, and (ii) in whole or in
part to a PharmaPrint Affiliate without any such consent.
10.8 The rights, duties and obligations of Paragraph 2.10 and Articles V, VI,
VII and VIII shall survive the termination or expiration of this Agreement.
10.9 This Agreement and the Agreements referenced herein constitutes the
entire understanding between the parties regarding the subject matter hereof in
the Territory and no party has relied on any representation not expressly set
forth or referred to in this Agreement. No amendment, variation, waiver or
modification of any of the terms or provisions of this Agreement shall be
effected unless set forth in writing, specifically referencing this Agreement,
and duly signed on behalf of the parties hereto.
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10.10 No press release or other public announcement concerning this Agreement
shall be made by either party without the prior written approval of the other
party hereto, which approval shall not be unreasonably withheld, except as
otherwise required by law according to the written opinion of outside legal
counsel. Press releases or other public announcements reasonably required by
law according to the opinion as aforementioned shall be reviewed with the other
party and their comments given due consideration.
IN WITNESS WHEREOF, the duly authorized representatives of the parties
hereto have caused this Agreement to be executed effective as of the date set
forth above.
HAUSER, INC. PHARMAPRINT INCORPORATED
By: /s/ Martin Wehr By: /s/ R.J. Burgess
--------------------------- -------------------------------
Title: COO Title: COO
------------------------ ----------------------------
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MASTER SERVICES AGREEMENT
THIS AGREEMENT is entered into effective as of the 19th day of November,
1997, by and between PharmaPrint Inc., a corporation of the State of Delaware
having its principal place of business at 4 Park Plaza, Suite 1900, Irvine,
California 92614 ("PharmaPrint") and Hauser Inc., a corporation of the State of
Colorado, having offices at 5555 Airport Blvd., Boulder, Colorado 80301
("Hauser").
RECITALS:
A. WHEREAS, PharmaPrint has developed a process for the identification,
characterization of and standardization of the amounts of bioactive components
in herbal extracts (the "PharmaPrint-Registered Trademark- Process") and is
seeking to commercialize certain herbal extracts upon further characterization
and standardization utilizing the PharmaPrint-Registered Trademark- Process;
B. WHEREAS, PharmaPrint has developed proprietary technological
information, know-how, trade secrets, and obtained patents and filed patent
applications relating to and/or covering the subjects of Paragraph A above;
C. WHEREAS, Hauser has developed special processes, know-how,
technologies, and trade secrets that give rise to considerable experience and
expertise in the extraction, isolation, purification, analysis and manufacture
of various herbal products;
D. WHEREAS, PharmaPrint recognizes and acknowledges the advantages and
value of Hauser's experience and expertise and desires to contract with Hauser
for certain chemistry and other services related to the PharmaPrint-Registered
Trademark- Process and PharmaPrint is willing to pay for the services of Hauser
in accordance with the terms of this Agreement;
E. WHEREAS, PharmaPrint desires to secure a coordinated and continuous
commercial supply of herbal products that have been identified, characterized
and standardized using the PharmaPrint -Registered Trademark- Process.
F. WHEREAS, Hauser is willing to provide the services requested and
provide services for the further development, characterization, and
standardization of certain herbal extracts utilizing the PharmaPrint-Registered
Trademark- Process and Hauser's "Good Manufacturing Practice";
G. WHEREAS, the parties intend to enter into various Work Orders for
chemistry and other services under the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the covenants,
agreements, and conditions hereinafter set forth, the parties hereto agree as
follows:
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ARTICLE I
DEFINITIONS
The terms defined in this Article I shall for all purposes of this
Agreement have the following meanings unless the context requires otherwise.
1.1 "Agreement" shall mean this document as the same may be amended,
modified, or supplemented from time to time in accordance with the provisions
hereof.
1.2 "Effective Date" shall mean the date first written hereinabove.
1.3 "FDA" shall mean the Federal Food and Drug Administration of the
United States Department of Health and Human Services or any successor agency
thereto as well as governmental agencies of comparable jurisdiction in the
Territory and elsewhere.
1.4 "GMP" means the good manufacturing practice regulations of the FDA as
described in the United States Code of Federal Regulations or any successor
regulations in the United States and as may be described in comparable
regulations in force in countries within the Territory and elsewhere. For DSHEA
Licensed Products, "GMP" shall mean minimal compliance with the regulations of
the United States Dietary Supplement Health and Education Act of 1994 and
comparable regulations in force in countries within the Territory, or other
requirements as defined by PharmaPrint or other as applicable as mutually agreed
upon by Hauser.
1.5 "Government Approvals" shall mean any approvals, licenses,
registrations, or authorizations, howsoever called, of any United States
federal, state, or local regulatory agency, department, bureau, or other
governmental entity, including the FDA, and similar Government Approvals in the
other countries within the Territory and elsewhere, necessary for the
manufacture, use, storage, transport, or sale, both interstate and intrastate,
in the United States, its territories, possessions, and Puerto Rico, as well as
the other countries within the Territory and elsewhere. In the case of DSHEA
Licensed Products, the term "Government Approvals" shall mean compliance with
the applicable sections of the United States Dietary Supplement Health and
Education Act of 1994 or other as defined by PharmaPrint and as mutually agreed
upon by Hauser.
1.6 "Herbal Product(s)" shall mean only the herbal extracts that are
listed and identified in the various individual Work Orders that are entered
into and performed in accordance with this Agreement.
1.7 "Improvements" shall mean any and all new and useful processes,
methods, manufactures, devices, compositions of matter (except as limited
below), or methods of use first conceived, reduced to practice, or developed
after the Effective Date and during the term of this Agreement by PharmaPrint,
or a PharmaPrint Affiliate, Hauser or any employees, consultants or other
persons under the direction or control of PharmaPrint or Hauser which increases
the performance, efficacy, or safety of an Herbal Product(s),
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reduce the cost of manufacture, harmful side-effects or adverse reactions of
Herbal Product(s), or otherwise relates to the manufacture or use of Herbal
Product(s), or the practice of the method(s) claimed in any of the patents
and/or patent applications within the Patent Rights. For the avoidance of
doubt, the defined term "Improvement" does not include Herbal Products PER SE.
1.8 "Patent Rights" shall mean any and all issued patents in the United
States, Canada, and/or Mexico and any and all patent applications for letters
patent pending in the above countries (until such time as such applications or
any of them are denied, abandoned, or issued into patents) listed in Schedule A
and attached hereto, any patents issuing from such application, all divisionals,
continuations, continuations-in-part, and all patents granted thereon, as well
as all other patents in the Territory, including any re-issues, renewals, or
extensions thereof, which are owned by PharmaPrint, a PharmaPrint Affiliate, any
successors, purchasers, assignees of PharmaPrint, or under which PharmaPrint or
a PharmaPrint Affiliate shall have the right to grant rights, and which claim a
PharmaPrint-Registered Trademark- Process for identifying, characterizing and
standardizing the amounts of bioactive components in herbal extracts or
Improvements, which claim has not lapsed, become abandoned, or been declared
invalid or unenforceable by a final non-appealed or unappealable decision or
judgment of a court or tribunal of competent jurisdiction.
1.9 "PharmaPrint Affiliate" shall mean any company which directly or
indirectly through stock ownership or through other contractual arrangement
either controls, or is controlled by, or is under common control with
PharmaPrint.
1.10 "PharmaPrint-Registered Trademark- Process" shall mean the methods,
analysis, and results, as described in Schedule B, for the identification,
characterization and standardization of bioactive components in the Herbal
Product(s).
1.11 "Territory" shall mean the United States, its territories,
possessions, Puerto Rico, Canada, and Mexico.
1.12 "Work Order" shall mean the chemistry services that are requested by
PharmaPrint, on a per project basis, during the term of this Agreement. Each
Work Order, identified in Schedule C and its amended counterparts, will be a
separate agreement that is controlled by the terms and conditions of this
Agreement.
ARTICLE II
HAUSER'S CHEMISTRY SERVICES
2.1 Hauser agrees to provide and PharmaPrint agrees to purchase and pay
for chemistry services that may be requested from time to time by PharmaPrint
during the term of this Agreement. The price for these services, including
labor, supplies and equipment fees shall be determined by Hauser's prevailing
fee schedule in effect at the time the Work Order is entered into. The
chemistry services may consist of:
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2.1.1 Characterizing and standardizing the biologically active
components and the amounts thereof in each of the Herbal Products utilizing the
PharmaPrint -Registered Trademark- Process;
2.1.2 Detecting the presence of, characterizing and standardizing
other significant components present in the Herbal Products utilizing the
PharmaPrint -Registered Trademark- Process;
2.1.3 Development of a scaled-up process for manufacturing the
Herbal Products;
2.1.4 Conducting the services in subparagraphs 2.1.1 - 2.1.3
utilizing GMP methods in accordance with the attached Schedule B;
2.1.5 Providing written reports;
2.1.6 Providing written updates;
2.1.7 Manufacturing and supplying PharmaPrint with the Herbal
Products; and
2.1.8 Other services as mutually agreed upon between the parties.
2.2 The parties agree that the minimal Hauser personnel or equivalent
personnel, their areas of expertise and the minimal percentage of their time
necessary to meet Hauser's obligations under paragraph 2.1 may be set forth in
an addendum to the specific Work Order listed in Schedule C.
2.3 PharmaPrint shall reimburse Hauser for the time spent by the personnel
listed in the Work Order addendum, at their normal rate, in effect at the time
the Work Order is entered into, for project contract work according to and
within the time percentages listed. Should additional personnel and/or
additional time be deemed necessary by Hauser to accomplish Hauser's obligations
pursuant to paragraph 2.1 hereinabove, whether due to (i) unforseen technical
difficulties experienced by Hauser, or (ii) failure or delays by PharmaPrint or
its separately contracted suppliers or advisors in providing Hauser with
information, data, samples, materials, directions and decisions related to this
Agreement, Hauser shall immediately so advise and notify PharmaPrint in writing
with a brief description of the reason(s) for such additional personnel and/or
time required. PharmaPrint's agreement to the same shall not be unreasonably
withheld and PharmaPrint shall provide Hauser with written agreement to said
additional time or personnel within three (3) business days after receipt of
Hauser's above identified notification. In the event PharmaPrint does not
respond to Hauser's written request within three (3) business days, PharmaPrint
will have been deemed to have accepted Hauser's request.
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ARTICLE III
PROVISION OF EQUIPMENT
3.1 It is agreed by the parties that the equipment necessary for Hauser to
meet its obligations under paragraph 2.1 of this Agreement are set forth in
attached Schedule D and must be in place on or about the Effective Date of this
Agreement. Hauser agrees that it has the obligation to obtain and set up the
equipment in working order as soon as reasonably possible by or very shortly
after the Effective Date of this Agreement and maintain the equipment throughout
the term of this Agreement. PharmaPrint, to the degree requested by Hauser,
will render reasonable assistance to Hauser in obtaining the equipment set forth
in Schedule D.
ARTICLE IV
PAYMENTS
4.1 PharmaPrint will be invoiced on all Work Orders on a monthly basis and
payment terms will be net thirty (30) days unless otherwise specified in each
Work Order.
4.2 Hauser has or is in the process of purchasing six (6) new analytical
HPLCs and two (2) preparatory HPLCs (hereinafter referred to as the Equipment)
which will be charged to PharmaPrint at a guaranteed use of two thousand two
hundred (2,200) hours per individual piece of Equipment over a two (2) year
period at a rate of twenty-five ($25.00) dollars per hour per piece of
Equipment. Any and all time and usage of each piece of Equipment or other HPLC
instruments within any of Hauser's facilities owned and operated in the state of
Colorado for any project commenced under any agreement with PharmaPrint as
listed in Schedule C will be applied to this committment and charged to
PharmaPrint.
4.3 If Hauser chooses (i) at the end of the term of this Agreement, (ii)
during the term of this Agreement, or (iii) upon early termination of this or
any other agreement(s), which includes Work Orders, with PharmaPrint requiring
the use of the Equipment for the completion of any PharmaPrint project, to use
any of the Equipment in work totally unrelated to any of the agreements with
PharmaPrint, notwithstanding the provisions in Paragraph 4.5, then the remainder
of the guaranteed time use charge for each piece of Equipment will no longer be
chargeable to or payable by PharmaPrint. Insofar as any of these events have
occurred, at PharmaPrint's sole discretion, PharmaPrint has the right to
renegotiate the payment terms, related to PharmaPrint's hourly guaranteed use of
the Equipment in order to continue access to and use of any or all of the
Equipment.
4.4 Should PharmaPrint discontinue or terminate further work under this
Agreement, the full hourly guaranteed use of two thousand two hundred (2,200)
hours per piece of Equipment less the actual hourly use per piece of Equipment
will be due and payable by PharmaPrint to Hauser within thirty (30) days of such
discontinuance or termination.
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4.5 Notwithstanding the foregoing provisions, should any or all of the
Equipment stand idle for a consecutive sixty (60) day peroid period pursuant
to PharmaPrint's instructions or requirements, Hauser may give notice to
PharmaPrint that Hauser intends to move or use the idle Equipment in work
totally unrelated to any agreements with PharmaPrint. At such time as
PharmaPrint may elect, at their sole discretion, to continue to reserve the idle
Equipment by paying the normal use charge of twenty-five ($25) dollars per hour
for a forty (40) hour work week for each piece of Equipment that PharmaPrint
chooses to remain dedicated to existing or future PharmaPrint work. Should
PharmaPrint elect not to make such payment(s), Hauser has the right to use any
or all of the idle Equipment for work unrelated to any PharmaPrint agreement.
PharmaPrint still retains the right to exclusive future use of the Equipment
providing that PharmaPrint gives Hauser two (2) weeks written notice of its
intent to exercise its use of the Equipment.
4.6 Upon expiration of the lease of the six (6) analytical HPLCs and the
Nova preparatory HPLC Hauser shall have the first option to pay the residual and
thus own these pieces of equipment. Upon expiration of the lease of the Delta
prepartory HPLC PharmaPrint shall have the first option to pay the residual and
thus own this piece of equipment.
4.7 Hauser may dedicate some facilities, including laboratories, office
space, phone lines, for the sole exclusive use to PharmaPrint. Should any or
all of these facilities stand idle for a consecutive sixty (60) day period
pursuant to PharmaPrint's instructions or requirements, Hauser may give notice
to PharmaPrint that Hauser intends to use the facilities for work totally
unrelated to any agreements with PharmaPrint. At such time as PharmaPrint may
elect, at their sole discretion, to continue to reserve the idle facilities by
paying a reasonable fee, mutally agreed upon by PharmaPrint and Hauser that
PharmaPrint chooses to remain dedicated to existing or future PharmaPrint work.
Should PharmaPrint elect not to make such payment(s), Hauser has the right to
use any or all of the idle facilities for work unrelated to any PharmaPrint
agreement. PharmaPrint still retains the right to exclusive future use of the
Equipment providing that PharmaPrint gives Hauser 60 days written notice of its
intent to exercise its use of the facilities.
ARTICLE V
CONFIDENTIALITY AND PUBLICITY
5.1 In connection with prior related disclosures and work, pursuant to the
Confidential Disclosure Agreement between the parties of January 24, 1997, which
agreement is incorporated herein by reference, and with the negotiation,
execution and performance of this Agreement, Hauser and PharmaPrint have had and
will have access to certain confidential and proprietary information of each
other, including, but not limited to, financial data, know-how, trade secrets,
technology, PharmaPrint's Patent Rights relating to the PharmaPrint -Registered
Trademark- Process, and certain mutual information concerning the
identification, characterization of and standardization of the biological active
components, their biological activity, and their percent of the composition of
the Herbal Product(s) of
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this Agreement. Recognizing that such information is all confidential and
represents valuable assets and property to both parties, and the harm that may
befall such party if any of such information is disclosed, Hauser and
PharmaPrint agree that for a period of ten (10) years after the execution of the
January 24, 1997 Confidential Disclosure Agreement between the parties, referred
to above, to hold all such information in confidence and not to use or otherwise
disclose any of such information to third parties without the prior written
consent of the other party PROVIDED, HOWEVER, that the obligations of
confidentiality created herein shall cease to apply to information: (a) that can
be demonstrated through documentary evidence to be in, or to come into, the
public domain through no fault of Hauser or PharmaPrint; (b) that can be
demonstrated through documentary evidence to have been in either parties
possession prior to its disclosure, or can be demonstrated through documentary
evidence to have been later disclosed to either party by a third party who, to
the receiving party's knowledge, was under no obligation to keep such
information confidential; and (c) which, in the written opinion of Hauser's or
PharmaPrint's legal counsel, is required to be disclosed by law or regulation or
by the rules of any stock exchange on which Hauser's or PharmaPrint's securities
are listed, but only to the extent so required and only upon five (5) business
days written notice to and followed by consultation with the other party.
5.2 Hauser shall submit to PharmaPrint and PharmaPrint shall submit to
Hauser all advertising, herbal product labeling, herbal product literature,
written sales promotions, press releases, and other publicity matters relating
in any way to this Agreement or its general subject matter in which Hauser's
trademarks, and/or the PharmaPrint trademarks, the PharmaPrint -Registered
Trademark- Process, or the Herbal Product(s) produced in accordance with said
process is mentioned or that contains language from which the connection of said
name, trademark, PharmaPrint -Registered Trademark- Process, or the Herbal
Product(s) identified, characterized or standardized thereby may be implied or
inferred and neither party shall publish or use such advertising, sales
promotion, press release or publicity matters without either parties prior
written consent.
5.3 In the event Hauser or PharmaPrint or any of its officers, employees
or consultants is requested or required by subpoena, order, discovery request,
or similar process or by applicable law or regulation or the rules of any stock
exchange on which such Hauser or PharmaPrint securities are listed to disclose
any information that is required to be held in confidence pursuant to paragraph
5.1 of this Agreement, and Hauser or PharmaPrint is required to disclose such
information the disclosing party shall provide advanced notice and a copy of the
proposed disclosure to the other party and will consult with the other party
with respect to taking legally available steps to resist or narrow such request
or disclosure. If disclosure of such information is required and Hauser or
PharmaPrint is required to disclose such information, it shall furnish only that
portion of the information that, in the written opinion of the disclosing
party's counsel, such party is legally required to disclose and shall cooperate
with any action by the non-disclosing party (at the disclosing party's expense)
to obtain an appropriate protective order or written or equally reliable
assurance that confidential treatment shall be accorded the information.
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ARTICLE VI
NON-COMPETITION
6.1 During the term of this Agreement (or until termination) and for a
period of three (3) years thereafter, Hauser will not engage in the use of the
PharmaPrint-Registered Trademark- Process and/or the production of the herbal
products utilizing the PharmaPrint-Registered Trademark- Process, as described
in Patent Rights and/or as developed by Hauser for PharmaPrint under and
pursuant to this Agreement, for itself or for third parties for marketing and
sale or for purposes of comparison with herbal products, either existing or
developed, hereafter, of third parties.
6.2 Hauser admits and agrees that no right or license is granted to it or
its customers or clients (by implication or otherwise) by PharmaPrint under its
proprietary technology, know how, trade secret, or Patent Rights and/or
Trademarks or by the performing of Hauser's obligations to PharmaPrint under and
pursuant to this Agreement.
ARTICLE VII
IMPROVEMENTS
7.1 Hauser hereby agrees to disclose to PharmaPrint any Improvements,
whether believed to be patentable or unpatentable, made or discovered in
connection with performing its duties and obligations to PharmaPrint under
paragraph 2.1 of this Agreement. Such disclosure shall be made within sixty
(60) days after the Improvement is first reduced to writing.
7.2 In the event any Improvements, as described in Paragraph 7.1, above,
comprise a patentable invention conceived and reduced to practice independently
by Hauser or jointly by Hauser or PharmaPrint the parties shall own undivided
equal interests in such inventions as tenants in common with no obligation to
account to each other for the use thereof, except as specifically provided
elsewhere in this Agreement and the parties shall cooperate in and share equally
any and all expenses for the preparation, filing and prosecution of any patent
applications therefor.
ARTICLE VIII
WARRANTIES, COVENANTS AND REPRESENTATIONS
8.1 PharmaPrint represents and warrants to Hauser that the execution of
this Agreement and the full performance and enjoyment of the rights of
PharmaPrint under this Agreement will not breach or in any way be inconsistent
with the terms and conditions of any license, contract, understanding or
agreement, whether express, implied, written, or oral between PharmaPrint and
any third party. Hauser represents and warrants to PharmaPrint that the
execution of this Agreement and the full performance and enjoyment of the rights
of Hauser under this Agreement will not breach or in any way be inconsistent
with the terms and conditions of any license, contract, understanding or
agreement, whether express, implied, written, or oral between Hauser and any
third party.
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8.2 Hauser warrants that the Herbal Product supplied by Hauser pursuant to
Paragraph 2.1.7 of this Agreement shall conform to the Specifications identified
in the applicable Work Orders, be manufactured in accordance with GMP as
referenced in 1.4 and shall comply with all applicable laws in the Territory.
Provided, however, that Hauser does not make any such warranty as to any matters
or processes (including the Specifications) specified or established by
PharmaPrint.
8.3 Hauser shall indemnify, defend and hold harmless PharmaPrint from all
actions, losses, claims, demands, damages, costs and liabilities (including
reasonable attorneys' fees) except as arising from events listed here below in
paragraph 8.4 to which PharmaPrint is or may become subject insofar as they
arise out of or are alleged or claimed to arise out of:
(i) personal injury, death or property damage sustained by any person(s)
resulting from the use of the Herbal Product defectively manufactured by Hauser,
(ii) any material breach by Hauser of any covenants or warranties of
Hauser, or
(iii) any grossly negligent or willful act or omission by Hauser or its
employees, agents or subcontractors.
8.4 PharmaPrint shall indemnify, defend and hold harmless Hauser, its
subsidiaries, and employees from all actions, losses, claims, demands, costs and
liabilities (including reasonable attorneys' fees) to which Hauser is or may
become subject insofar as they arise out of or are alleged or claimed to arise
out of:
(i) any grossly negligent or willful act or omission by PharmaPrint
or its employees, agent or subcontractors,
(ii) personal injury, death or property damage sustained by any
person(s) resulting from the (A) use of the Herbal Product manufactured by
PharmaPrint or by a third party in accordance with the specific provisions set
forth in the applicable Work Order or (B) any matter or process (including the
Specifications) specified by PharmaPrint or (C) any changes to or adulteration
of the Herbal Product after shipment by Hauser or (D) the Herbal Product
manufactured by Hauser if Hauser has followed the matters or processes
(including the Specifications) specified and established by PharmaPrint and in
other respects has manufactured in accordance with GMP and all applicable laws
in the Territory,
(iii) any labeling, advertising or promotional materials used by
PharmaPrint, or
(iv) any material breach by PharmaPrint of any covenants or warranties of
PharmaPrint.
8.5 PharmaPrint represents and warrants that to the best of its knowledge
and belief, the manufacture of the Herbal Product hereunder shall not infringe
any third party patents in the United States or anywhere in the Territory.
PharmaPrint undertakes to indemnify and hold harmless Hauser against all
judgments, decrees, costs and expenses, including attorney's fees, resulting
from any alleged infringement and shall make its best efforts to defend, upon
written request of Hauser, any claim of patent infringement in the use and/or
sale of the Herbal Product manufactured by Hauser under this Agreement.
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Hauser shall provide prompt notice to PharmaPrint of any such claim of patent
infringement and PharmaPrint shall have complete control over any defense or
settlement of such claim.
8.6 Hauser represents and warrants that to the best of its knowledge and
belief, the services provided and the manufacture of the Herbal Products
hereunder shall not infringe any third party patents in the United States or
anywhere in the Territory. Hauser undertakes to indemnify and hold harmless
PharmaPrint against all judgments, crees, costs and expenses, including
attorney's fees, resulting from any alleged infringement and shall make its best
efforts to defend, upon written request of PharmaPrint, any claim of patent
infringement in the services provided by Hauser and in the use and/or sale of
the Herbal Product manufactured by Hauser under this Agreement. PharmaPrint
shall provide prompt notice to Hauser of any such claim of patent infringement
and Hauser shall have complete control over any defense or settlement of such
claim.
8.7 Hauser shall maintain, during the term of this Agreement,
comprehensive general liability insurance with an insurance carrier reasonably
acceptable to PharmaPrint, which insurance policy or policies shall maintain the
full products hazards provisions with the Herbal Product hazards limits subject
to deductibles not in excess of $10,000 in the aggregate, and with at least
$2,500,000 per occurrence and at least $2,500,000 overall coverage for claims of
bodily injury and property damage arising out of any loss. Such policy or
policies shall extend coverage with respect to occurrence during a policy
period, regardless of the dates on which claims arising for such occurrences are
made, and shall include PharmaPrint as named insured in such policy or policies.
Both parties shall provide notice to the other of any loss, whether actual or
threatened, promptly upon receipt of notice thereof.
8.8 PharmaPrint shall maintain, during the term of this Agreement,
comprehensive general liability insurance with an insurance carrier reasonably
acceptable to Hauser, which insurance policy or policies shall maintain the full
products hazards provisions with the Herbal Product hazards limits subject to
deductibles not in excess of $10,000 in the aggregate, and with at least
$2,500,000 per occurrence and at least $2,500,000 overall coverage for claims of
bodily injury and property damage arising out of any loss. Such policy or
policies shall extend coverage with respect to occurrence during a policy
period, regardless of the dates on which claims arising for such occurrences are
made, and shall include Hauser as named insured in such policy or policies.
Both parties shall provide notice to the other of any loss, whether actual or
threatened, promptly upon receipt of notice thereof.
8.9 A party entitled to indemnification hereunder agrees to give prompt
written notice (in no event later than ten (10) business days following its
receipt) to the indemnifying party after the receipt by such party of any
written notice of the commencement of any action, suit, proceeding or
investigation or threat thereof made in writing for which such party will claim
indemnification pursuant to this Agreement.
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Unless, in the reasonable judgment of the indemnifying party a conflict of
interest may exist between the indemnified party and the indemnifying parry with
respect to a claim, the indemnifying party may assume the defense of such claim
with counsel reasonably satisfactory to the indemnified party. If the
indemnifying party is not entitled to, or elects not to, assume the defense of a
claim, it will not be obligated to pay the fees and expenses of more than one
counsel with respect to such claim. The indemnifying party will not be subject
to any liability for any settlement made without its consent, which shall not be
unreasonably withheld.
8.10 The provisions and obligations of this Article VIII shall survive any
termination or expiration of this Agreement.
ARTICLE IX
DURATION AND TERMINATION
9.1 This Agreement shall continue in full force and effect for three (3)
years from the Effective Date of this Agreement, unless terminated by either
party pursuant to the provisions set forth in this Article IX.
9.2 PharmaPrint and Hauser may terminate this Agreement in its entirety,
upon mutual agreement, at any time upon thirty (30) days written notice to the
other party. In such event, PharmaPrint shall remain obligated to make the
payments due under Article IV.
9.3 Either party hereto shall be entitled to terminate this Agreement
upon thirty (30) days written notice to the other party if the other party shall
commit a breach of any material provision hereof and shall not within thirty
(30) days from receipt of notice of such breach by the complaining party remedy
the same (if capable of remedy).
9.4 Insofar as is lawful and legally permissible, this Agreement may be
terminated with immediate effect by a party upon giving written notice to the
other if the other is insolvent or has committed any act of bankruptcy or an
order is made or resolution passed for the winding up of the other party.
9.5 Failure on the part of either party to exercise or enforce any right
conferred upon it hereunder shall neither be deemed to be a waive of any such
right nor operate to bar the exercise or enforcement thereof at any time
thereafter.
ARTICLE X
MISCELLANEOUS
10.1 Any notice required or permitted under this Agreement shall be in
writing and deemed to have been sufficiently provided and effectively made as of
the delivery date if hand-delivered with written acknowledge thereof, or as of
the date received if mailed by
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registered or certified mail, postage pre-paid, and addressed to the receiving
party at its respective address, as follows:
HAUSER, INC.
5555 Airport Boulevard
Boulder, Colorado 80301
Attn: President
PHARMAPRINT, INC.
4 Park Plaza
Suite 1900
Irvine, California 92614
Attn: President
10.2 The relationship of the parties under this Agreement is that of
independent contractors and not as agents of each other or partners or joint
ventures, and neither party shall have the power to bind the other in any way
with respect to any obligation to any third party unless a specific power of
attorney is provided for such purpose. Each party shall be solely and
exclusively responsible for its own employees and operations.
10.3 In the event that the performance of this Agreement or of any
obligation hereunder, other than payment of money as herein provided by either
party hereto is prevented, restricted or interfered with by reason of any cause
not within the control of the respective party, and which could not by
reasonable diligence have been avoided by such party, the party so affected,
upon giving prompt notice to the other party, as to the nature and probable
duration of such event shall be excused from such performance to the extent and
for the duration of such prevention, restriction or interference, provided that
the party so affected shall use its reasonable efforts to avoid or remove such
cause of non-performance and shall fulfill and continue performance hereunder
with the utmost dispatch whenever and to the extent such cause or causes are
removed.
10.4 For the purpose of the preceding paragraph but without limiting the
generality hereof, the following shall be considered as not within the control
of the respective party; acts of God, acts or omissions of a governmental
agency, compliance with requests, recommendations, rules regulations or orders
of any governmental authority or any officer, department, agency or instrument
thereof, flood, storms, earthquake, fire, war, riots, insurrection, accidents,
acts of the public enemy, invasion, quarantine restrictions, strike, lockout,
embargoes, delays or failure in transportation and acts of a similar nature.
10.5 Should one of the provisions of this Agreement become or prove to be
null and void, such will be without effect on the validity of this Agreement as
a whole. Both parties will, however, endeavor to replace the void provision by
a valid one which in its economic effect is most consistent with void provision.
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10.6 This Agreement shall be governed by and construed in accordance with
the laws of the State of Colorado without regard to principles of conflicts of
laws.
10.7 This Agreement and the rights and obligations hereunder shall not be
assignable by Hauser without the previous written consent of PharmaPrint which
consent will not be unreasonably withheld. PharmaPrint may assign this
Agreement (i) in connection with the transfer of all or substantially all of the
business to which it relates without any such consent, and (ii) in whole or in
part to a PharmaPrint Affiliate without any such consent.
10.8 The rights, duties and obligations of Paragraphs 5.1 and 5.3, and
Articles IV, VI, VII, and VIII along with the continuing payments obligations,
rights, and duties of Article IV shall survive the termination or expiration of
this Agreement.
10.9 This Agreement and the Work Orders referenced herein constitute the
entire understanding between the parties regarding the subject matter hereof in
the Territory and no party has relied on any representation not expressly set
forth or referred to in this Agreement. No amendment, variation, waiver or
modification of any of the terms or provisions of this Agreement shall be
effected unless set forth in writing, specifically referencing this Agreement,
and duly signed on behalf of the parties hereto.
10.10 No press release or other public announcement concerning this
Agreement shall be made by either party without the prior written approval of
the other party hereto, which approval shall not be unreasonably withheld,
except as otherwise required by law according to the written opinion of outside
legal counsel. Press releases or other public announcements reasonably required
by law according to the opinion as aforementioned shall be reviewed with the
other party and their comments given due consideration.
IN WITNESS WHEREOF, the duly authorized representatives of the parties
hereto have caused this Agreement to be executed effective as of the date set
forth above.
HAUSER, INC. PHARMAPRINT INCORPORATED
By: Dean P. Stults By: R. J. Burgess
------------------------- ---------------------------
Title: CEO Title: COO
----------------------- ------------------------
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SAW PALMETTO SUPPLY AGREEMENT
THIS AGREEMENT is entered into effective as of the 4th day of November,
1997, by and BETWEEN PharmaPrint Inc., a corporation of the State of Delaware
having its principal place of business at 4 Park Plaza, Suite 1900, Irvine,
California 92614 ("PharmaPrint") and Hauser, Inc., a corporation of the State of
Colorado, having offices at 5555 Airport Blvd., Boulder, Colorado 80301
("Hauser").
WITNESSETH, THAT:
WHEREAS :
A. PharmaPrint has developed a process for the identification,
characterization of and standardization of the amounts of bioactive components
in herbal products (hereinafter referred to as the "PharmaPrint -Registered
Trademark- Process") and is seeking to commercialize certain of the herbal
products identified and now being further characterized and standardized
utilizing said process.
B. PharmaPrint has developed proprietary technological information, know-
how, trade secrets, and obtained patents and filed patent applications relating
to and/or covering the subjects of paragraph A above.
C. Hauser has developed special processes, know-how, technologies, and trade
secrets giving rise to a specific expertise in the extraction, isolation, and
purification of a variety of herbal products.
D. Hauser's expertise enables it to produce bulk quantities of desired
herbal products which provides competitive advantages to Hauser, and which are
very valuable to Hauser.
E. PharmaPrint desires to secure a coordinated and continuous commercial
supply of Saw Palmetto herbal product that has been identified, characterized
and standardized using the PharmaPrint -Registered Trademark- Process.
F. PharmaPrint recognizes and acknowledges the advantages and value of
Hauser's expertise and desires Hauser to utilize the PharmaPrint -Registered
Trademark- Process to manufacture Saw Palmetto as further defined below.
G. Hauser represents that it has or will have by no later than December 31,
1997 the ability to manufacture and sell to PharmaPrint, Herbal Products in
commercial quantities utilizing the PharmaPrint -Registered Trademark- Process
and Hauser's "Good Manufacturing Process".
H. Hauser and PharmaPrint are negotiating in good faith an agreement
entitled: "Development and GMP Manufacturing of Saw Palmetto Extracts."
NOW, THEREFORE, in consideration of the foregoing and of the covenants,
hereinafter set forth, the parties hereto agree as follows:
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ARTICLE I
DEFINITIONS
Terms defined in this Article I shall for all purposes of this Agreement,
as the same may be amended or supplemented from time to time, have the meaning
herein specified.
1.1 The term "Effective Date" shall mean the date first written herein above.
1.2 The term "FDA" shall mean the Federal Food and Drug Administration of the
United States Department of Heath and Human Services or any successor agency
thereto as well as governmental agencies of comparable jurisdiction in the
Territory and elsewhere.
1.3 The term "GMP" means the good manufacturing practice regulations of the
FDA as described in the United States Code of Federal Regulations or any
successor regulations in force regulations in the United States and as may be
described in comparable regulations in force in countries within the Territory.
For DSHEA Licensed Products, "GMP" shall mean compliance with the regulations of
the United States Dietary Supplement Health and Education Act of 1994 and
comparable regulations in force in countries within the Territory and elsewhere,
as applicable.
1.4 The term "Government Approvals" shall mean any approvals, licenses,
registrations or authorizations, howsoever called, of any United States federal,
state or local bureau or other governmental entity, including the FDA, and
similar Government Approvals in the other countries within the Territory and
elsewhere, necessary for the manufacture, use, storage, transport or sale, both
interstate and intrastate, in the United States, its territories, possessions
and Puerto Rico as well as the other countries within the Territory. In the
case of DSHEA Licensed products, the term "Government Approvals" shall mean
compliance with the applicable sections of the United States Dietary Supplement
Health and Education Act of 1994.
l.5 The term "Specifications" shall mean the specifications for the Herbal
Product of this Agreement, agreed upon between the parties and set out in
Schedule A of the Development and GMP Manufacturing Agreement.
1.6 The term "PharmaPrint Affiliate" shall mean any company which directly or
indirectly through stock ownership or through other contractual arrangement
either controls, or is controlled by, or is under common control with
PharmaPrint.
1.7 The term "Patent Rights" shall mean any and all issued patents in the
United States, Canada and or Mexico and any and all patent applications for
letters patent pending in the above countries (until such time as such
applications or any of them are
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denied, abandoned, or issued into patents) listed in Schedule B attached
hereto, any patents issuing from such applications, all divisionals,
continuations, continuations-in-part and all patents granted thereon, as well
as all other patents in the Territory, including any re-issues, renewals, or
extensions thereof, which are owned by PharmaPrint, a PharmaPrint Affiliate or
under which PharmaPrint or a PharmaPrint Affiliate shall have the right to grant
rights, and which claim a PharmaPrint-Registered Trademark- Process for
identifying, characterizing, and standardizing the amounts of bioactive
components in herbal extracts or any Improvements, which claim has not lapsed,
become abandoned or been declared invalid or unenforceable by a final non-
appealed or unappealable decision or judgment of a court or tribunal of
competent jurisdiction.
1.8 The term "Herbal Product" shall mean only Saw Palmetto herbal products
manufactured according to the PharmaPrint -Registered Trademark- Process and the
Specifications set forth in this Agreement which have been developed and defined
under the Agreement entitled "Development and GMP Manufacturing of Saw Palmetto
Extracts".
1.9 The term "Additional Supply Agreement" means the "Herbal Products Supply
Agreement" for the sale and supply of the herbal products Valerian, Echinacea,
and Ginseng by Hauser to PharmaPrint, as executed by the parties concurrently
with this Agreement.
1.10 The term "Improvements" shall mean any and all new and useful processes,
improvements, manufactures, devices, compositions of matter (except as limited
below) or methods of use first conceived, reduced to practice or developed after
the Effective Date and during the term of this Agreement by PharmaPrint, or a
PharmaPrint Affiliate, Hauser or any employees, consultants or other persons
under their direction or control of said entities which increase the
performance, efficacy or safety of the Herbal Product, reduce the cost of
manufacture, harmful side-effects or adverse reactions of the Herbal Product, or
the practice of the method(s) claimed in any of the patents and/or patent
applications within the Patent Rights. For the avoidance of doubt, the defined
term "Improvements" does not include the Herbal Product PER SE.
1.11 The term "Territory" shall mean the United States, its territories,
possessions, Puerto Rico, Canada and Mexico.
1.12 The term "Contract Year" shall mean the year that initially commences on
the Effective Date of this Agreement and running through December 31, 1998.
Subsequent Contract Years will commence on January 1st of each subsequent year
and run through December 31st of that year.
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ARTICLE II
PURCHASE AND SALE
2.1 Hauser agrees to and shall manufacture and provide to PharmaPrint and
PharmaPrint agrees to and shall purchase from Hauser the Herbal Product listed
below in at least the amounts indicated for the years there identified, subject
to the other provisions of this Agreement.
- --------------------------------------------------------------------------------
Contract Year 1998 1999 2000
- --------------------------------------------------------------------------------
Herbal Product
Quantity (Kilograms) 8,000 10,000 12,500
- --------------------------------------------------------------------------------
2.2 Hauser is obligated to supply to PharmaPrint one-hundred percent (100%)
of PharmaPrint's requirements for the Herbal Product in the Territory. Hauser
agrees not to supply any third party with or itself market for sale the Herbal
Product.
2.3 In the 1998 Contract Year Hauser agrees to manufacture and deliver to
PharmaPrint and PharmaPrint agrees to and shall purchase at least 2,000 kgs of
the Herbal Product by January 1, 1998, 3,000 kgs of the Herbal Product by April
15, 1998 and the remaining 3,000 kgs prior to December 31, 1998. By January 30,
1998, PharmaPrint shall provide Hauser with a forecast prepared in good faith of
its quarterly requirements of all Herbal Product for the following eighteen (18)
month period, the initial six (6) month thereof being known as the "Initial
Forecast". Purchase orders will be placed by PharmaPrint corresponding to the
first three (3) months of the Initial Forecast. Throughout the term of the
Agreement, PharmaPrint shall further provide Hauser with a rolling monthly
forecast of PharmaPrint's anticipated requirements of all Herbal Product for the
subsequent three (3) month period ("Updated Forecast"). The forecasted
requirements of the Herbal Product in each Updated, three (3) month, Forecast
shall be binding upon PharmaPrint. After the first Contract Year of this
Agreement each subsequent Updated Forecast shall bind PharmaPrint only to the
minimum forecasted requirements as outlined in paragraph 2.1 and to assist
Hauserin planning its manufacture of the Herbal Product for the applicable
period. PharmaPrint agrees to purchase a minimum of one third of the yearly
purchase requirements outlined in paragraph 2.1 within six (6) months of the
calendar year. The price schedule for the Herbal Product is set forth in
paragraph 2.12.
2.4 Within three (3) business days after the last party to execute this
Agreement has done so, PharmaPrint shall make an initial payment to Hauser in
the amount of two hundred and seventy one thousand nine hundred and thirty four
dollars ($271,934.00). Such initial payment shall be used by Hauser solely to
design, purchase necessary equipment and build the initial manufacturing
facility.
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2.4(a) All equipment purchased for use in connection with this Agreement
shall be the property of Hauser.
2.4(b) PharmaPrint shall also pay Hauser for all incremental
expenditures associated with any and all expedited equipment deliveries made to
Hauser and installation penalty costs necessary for Hauser to meet the initial
delivery schedule of Herbal Product by January 1, 1998 to PharmaPrint in
accordance with this Agreement; provided, however, that Hauser can justify such
expenditures to PharmaPrint in writing in advance and PharmaPrint accepts and
agrees to such additional expenditures in writing within three (3) business days
of receipt of Hauser's notice and justification.
2.5 PharmaPrint shall place purchase orders for the Herbal Product with
Hauser from time to time specifying the quantities of the Herbal Product
desired, and the places to which and the manner and dates by which delivery is
to be made; said delivery dates to be no earlier than ninety (90) days from the
date of the purchase order unless otherwise requested by PharmaPrint and agreed
to by Hauser.
2.6 Hauser shall acknowledge all purchase orders within ten (10) business
days of their receipt. Hauser shall execute all accepted purchase orders by
delivery of all ordered quantities of the Herbal Product no later than the
delivery dates provided in the purchase orders of PharmaPrint to the destination
recited therein, unless otherwise requested by PharmaPrint and agreed to by
Hauser.
2.7 To the extent that the terms of any purchase order or acknowledgment
thereof are inconsistent with the terms of this Agreement, the terms of this
Agreement shall control.
2.8 Title and risk of loss of the Herbal Product will pass to PharmaPrint
upon delivery of the Herbal Product to the designated carrier of PharmaPrint at
Hauser's manufacturing facility or its storage facility. The parties agree that
Hauser's facilities shall be domestically located unless otherwise agreed.
2.9 All Herbal Product supplied by Hauser to PharmaPrint in response to
purchase orders placed by PharmaPrint will conform to the Specifications and
shall be accompanied by the applicable certificate of analysis. Hauser shall
manufacture the Herbal Product under approved Good Manufacturing Procedures
conforming with GMP regulations. Further Hauser shall have the sole
responsibility for meeting DSHEA statutes and rules.
2.10 PharmaPrint shall procure all raw material extract necessary to obtain
the Herbal Product. Title in all such materials shall reside in PharmaPrint
until said raw material extracts are delivered to Hauser's designated carrier.
Hauser reserves the right and PharmaPrint honors the right of Hauser to provide
the raw material extract to fulfill needs not already committed to by
PharmaPrint according to PharmaPrint's specifications at any time during this
Agreement.
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2.11 Should the minimum yearly quantities not be purchased in the applicable
Contract Year then, subject to the provisions and terms of this Agreement,
PharmaPrint agrees to and shall pay Hauser 15% of the then per kilogram
processing price of the Herbal Product not purchased from Hauser, up to the
total of the forecasted kilogram per six (6) month quantity requirements set
forth in this Agreement.
2.12 The prices for the Herbal Product during the initial Contract Year are
set forth below. All prices for the Herbal Product are freight on board ("FOB")
Hauser's manufacturing or storage facility, depending on the location from which
Hauser ships, or as may be agreed to by the parties. The price for the Herbal
Product will be $65 per kilogram based on a process yield of 85%. Any process
yield between 80% and 85% Hauser and PharmaPrint agree to share (50/50) in the
additional raw material costs. Any process yield greater than 90% Hauser and
PharmaPrint agree to share (50/50) in the additional cost savings.
2.13 After one (1) calendar year Hauser may adjust the price of the Herbal
Product not more than once per Contract Year upon not less than ninety (90) days
written notice to PharmaPrint with written agreement from PharmaPrint, to adjust
for increases or decreases in manufacturing costs ("Manufacturing Costs"). Any
price adjustment hereunder shall apply only to the Herbal Product sold in
response to orders placed after the date on which such adjustment becomes
effective. Such price adjustment, if an increase, for the Herbal Product shall
be based on the increase in the Manufacturing Cost for the Herbal Product, but
only upon mutual agreement shall the increase for Manufacturing Cost be greater
than that set forth in the Consumer Price Index applicable at the time the price
adjustment is negotiated as long as Hauser's responsibility remains only that of
processing the Herbal Product extract. Should Hauser's responsibility increase
beyond this any prices within this Agreement will be subject to mutual review.
Hauser shall keep complete and accurate records of all Manufacturing Costs
incurred in the manufacture of the Herbal Product to PharmaPrint, following the
signing of required Hauser Confidentiality Agreements. Hauser shall provide
access to said records during reasonable business hours to a certified public
accountant selected by PharmaPrint and reasonably acceptable to Hauser, who
shall, at PharmaPrint's expense, have access to such records deemed by such
accountant as reasonably necessary in verifying for PharmaPrint, not more than
once each calendar year, such costs incurred by Hauser.
2.14 PharmaPrint shall randomly inspect all shipments of the Herbal Product to
determine whether or not said products are in conformity with the
Specifications. In the event that any portion of the shipment of the Herbal
Product received by PharmaPrint fails to conform to the Specifications as
mutually agreed upon, PharmaPrint may reject the non-conforming Herbal Product
shipment by giving written notice to Hauser within sixty (60) days of
PharmaPrint's receipt of the Herbal Product, which notice shall specify the
manner in which the Herbal Product failed to meet the Specifications. Failing
such
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notification, PharmaPrint will be deemed to have accepted the Herbal Product,
and Hauser shall not thereafter be required to indemnify PharmaPrint for breach
of its warranties under Paragraph 5.2 as to such Herbal Product, except for
defects not reasonably discoverable by PharmaPrint in such inspection.
2.15 In the event Hauser does not agree that any such Herbal Product failed to
meet the Specifications and PharmaPrint and Hauser cannot reach agreement with
respect to such Herbal Product, Hauser will submit the question of whether the
Herbal Product failed to meet the Specifications to an independent laboratory
selected by Hauser and approved by PharmaPrint for determination. The findings
of such laboratory shall be binding upon PharmaPrint and Hauser and the cost of
such determination shall be paid by the party in error.
2.16 Should the analysis of the independent laboratory, chosen in accordance
with Paragraph 2.15, confirm that Hauser was at fault, Hauser shall be required
to replace the Herbal Product identified as not conforming to the Specifications
forthwith, at its expense, or if it is unable to make prompt replacement, Hauser
shall either credit PharmaPrint's account or refund any payment made on the non-
accepted Herbal Product, depending on PharmaPrint's account balance, within
forty-five (45) days of the independent laboratory's written notification of
non-conforming Herbal Product. PharmaPrint shall return, at Hauser's expense,
the non-accepted Herbal Products to Hauser.
2.17 Hauser agrees, if reasonably required of PharmaPrint and if requested by
PharmaPrint, to modify the process for the manufacture of the Herbal Product.
PharmaPrint shall provide all necessary documentation to Hauser as requested by
PharmaPrint's distributors and the FDA or other Governmental Agency and all such
documents shall be treated as and maintained in confidence by each of the above
entities pursuant to the requirements of Article VI. Hauser retains the right
to modify product prices based on additional costs associated with any
implemented modifications to the Herbal Product.
2.18 Hauser shall secure access for PharmaPrint, employees of the Government
regarding governmental agencies and PharmaPrint distributors to the operations
and facilities of Hauser wherein the Herbal Product is manufactured, packaged,
tested, labeled, stored and/or shipped. PharmaPrint and such other entities
shall have the right to inspect such operations or facilities for, INTER ALIA,
GMP purposes and on reasonable prior notice.
2.19 As a condition of supplying product, Hauser will supply to PharmaPrint a
copy of the Manufacturing SOP's and DMF, if applicable.
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ARTICLE III
RIGHT TO MANUFACTURE
3.1 In the event that Hauser is unable at any time to supply commercial
quantities of the Herbal Product for a period of sixty (60) consecutive days for
any reason including acts of force majeure, PharmaPrint shall have the right to
have a third party manufacture the Herbal Products for PharmaPrint. The time of
such manufacture by such third party shall be for a finite duration of
reasonable length in view of the complexity and costs of arranging such change
in the Herbal Product manufacturing. As used herein, commercial quantities of
the Herbal Product shall mean total units of the Herbal Product equal to seventy
five percent (75%) of PharmaPrint's quarterly orders for the preceding two (2)
quarters.
3.2 Recognizing that a third party manufacturer ("TPM"), under Paragraph 3.1,
may require technical assistance in manufacturing the Herbal Product, if
requested by PharmaPrint:
3.2.1 Hauser shall assist TPM in determining and acquiring machinery
and equipment necessary to manufacture the Herbal Product by TPM. Upon request
by PharmaPrint Hauser will assist TPM in discussions between TPM and equipment
manufacturers, subject to the terms and conditions of subparagraph 3.2.3.
3.2.2 If technical assistance is requested by TPM at the time of
installation of equipment in TPM's plant, one Hauser engineer will be sent to
TPM's plant, for a maximum period of thirty (30) calendar days, subject to the
terms and conditions of subparagraph 3.3.
3.2.3 PharmaPrint may request the assistance of Hauser's engineers at
TPM's plant whenever necessary during the term of Paragraph 3.4 to solve some
particular problems or complete the training of TPM's engineers. PharmaPrint
will notify Hauser thirty (30) calendar days in advance of the start-up date of
TPM's plant, and Hauser shall extend its technical assistance for such start-up
under the terms and conditions set forth below:
3.2.3.1 Hauser will designate one or more highly qualified
specialists to stay at TPM's plant for a continuous or an interrupted period of
up to a total of thirty (30) calendar days according to the reasonable needs of
TPM. Should a given specialist not be acceptable, TPM may, at any time, upon
fourteen (14) calendar days notice, ask for a replacement of the specialist sent
by Hauser with someone more qualified, and Hauser agrees to make a reasonable
effort to furnish such a replacement within this fourteen (14) day period in
order to provide uninterrupted technical assistance.
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3.2.3.2 In addition to the assistance mentioned in 3.2.3.1
above, Hauser will provide, at TPM's request, one highly qualified specialist
for ninety (90) calendar day periods, with or without interruption, until the
technical assistance extended reaches a total of twelve man-months, but in no
event for periods beyond the term of this Agreement.
3.3 Hauser's remuneration for technical assistance at TPM's plant shall be as
follows:
3.3.1 PharmaPrint shall pay directly or reimburse upon appropriate
justification the travel and living expenses of Hauser's specialists. In
addition, PharmaPrint shall pay Hauser an amount equal to three times the Gross
Salary of the specialist divided by 365 days for each working day of each
specialist's absence from Hauser's premises for the purpose of extending
assistance to TPM; and
3.3.2 Such remuneration shall be made within one (1) month after Hauser
invoices PharmaPrint for such reimbursement payments.
3.4 If the procedure of Paragraph 3.1 is implemented, the manufacture of the
Herbal Product by the third party and its supply to PharmaPrint shall revert to
Hauser upon, (a) notification to PharmaPrint from Hauser that Hauser is again
able to manufacture and supply the Herbal Product, and (b) termination of any
third party obligations incurred by PharmaPrint in obtaining supply of the
Herbal Product pursuant to Paragraph 3.1 hereof. Upon such reversion, the third
party manufacturer's right to use the Manufacturing Know-how shall terminate
within sixty (60) days.
ARTICLE IV
RECALLS AND RETURNS
4.1 In the event of a recall of any of the Herbal Product required by a
governmental agency or authority of competent jurisdiction or if a recall of the
Herbal Product is reasonably deemed advisable by PharmaPrint, such recall shall
be promptly implemented and administered by PharmaPrint in a manner which is
appropriate and reasonable under the circumstances and in conformity with
accepted trade practices. In the event that a recall is required as a result of
Hauser's breach of its obligations hereunder, all costs and expenses incurred in
connection therewith shall be borne by Hauser. PharmaPrint shall bear all costs
associated with such recalls not borne by Hauser.
4.2 The provisions and obligations of this Article IV shall survive any
termination or expiration of this Agreement.
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4.3 Hauser agrees that as to the Herbal Product identified in this Agreement
and those herbal products identified in the Additional Supply Agreement
contemporaneously entered into between the parties, if PharmaPrint so desires,
it may have herbal products other than those identified in the aforementioned
Agreements manufactured and sold to it by a third party manufacturer of
PharmaPrint's choice.
ARTICLE V
WARRANTIES, COVENANTS AND REPRESENTATIONS
5.1 PharmaPrint represents and warrants to Hauser that the execution of this
Agreement and the full performance and enjoyment of the rights of PharmaPrint
under this Agreement will not breach or in any way be inconsistent with the
terms and conditions of any license, contract, understanding or agreement,
whether express, implied, written, or oral between PharmaPrint and any third
party. Hauser represents and warrants to PharmaPrint that the execution of this
Agreement and the full performance and enjoyment of the rights of Hauser under
this Agreement will not breach or in any way be inconsistent with the terms and
conditions of any license, contract, understanding or agreement, whether
express, implied, written, or oral between Hauser and any third party.
5.2 Hauser warrants that the Herbal Product supplied by Hauser pursuant to
Paragraph 2.1 of this Agreement shall conform to the Specifications, be
manufactured in accordance with GMP and shall comply with all applicable laws in
the Territory. Provided, however, that Hauser does not make any such warranty
as to any matters or processes (including the Specifications) specified or
established by PharmaPrint, pursuant to the "Development and GMP Manufacturing
of Saw Palmetto Extracts Agreement," the specifications will be reviewed and
altered if necessary as agreed by both parties.
5.3 Hauser shall indemnify, defend and hold harmless PharmaPrint from all
actions, losses, claims, demands, damages, costs and liabilities (including
reasonable attorneys' fees) except as arising from events listed here below in
paragraph 5.4 to which PharmaPrint is or may become subject insofar as they
arise out of or are alleged or claimed to arise out of:
(i) personal injury, death or property damage sustained by any
person(s) resulting from the use of the Herbal Product defectively manufactured
by Hauser,
(ii) any material breach by Hauser of any covenants or warranties of
Hauser, or
(iii) any grossly negligent or willful act or omission by Hauser or its
employees, agents or subcontractors.
5.4 PharmaPrint shall indemnify, defend and hold harmless Hauser, its
subsidiaries, and employees from all actions, losses, claims, demands, costs and
liabilities (including reasonable attorneys' fees) to which Hauser is or may
become subject insofar as they arise out of or are alleged or claimed to arise
out of:
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(i) any grossly negligent or willful act or omission by PharmaPrint
or its employees, agent or subcontractors,
(ii) personal injury, death or property damage sustained by any
person(s) resulting from the (A) use of the Herbal Product manufactured by
PharmaPrint or by a third party in accordance with Paragraph 3.1 or (B) any
matter or process (including the Specifications) specified by PharmaPrint or (C)
any changes to or adulteration of the Herbal Product after shipment by Hauser or
(D) the Herbal Product manufactured by Hauser if Hauser has followed the matters
or processes (including the Specifications) specified and established by
PharmaPrint and in other respects has manufactured in accordance with GMP and
all applicable laws in the Territory,
(iii) any labeling, advertising or promotional materials used by
PharmaPrint, or
(iv) any material breach by Hauser of any covenants or warranties of
Hauser.
5.5 PharmaPrint represents and warrants that to the best of its knowledge and
belief, the manufacture of the Herbal Product hereunder does not infringe any
third party patents in the United States or anywhere in the Territory.
PharmaPrint undertakes to indemnify and hold harmless Hauser against all
judgements, decrees, costs and expenses, including attorney's fees, resulting
from any alleged infringement and shall make its best efforts to defend, upon
written request of Hauser, any claim of patent infringement in the use and/or
sale of the Herbal Product manufactured by Hauser under this Agreement. Hauser
shall provide promt notice to PharmaPrint of any such claim of patent
infringement and PharmaPrint shall have complete control over any defense or
settlement of such claim.
5.6 Hauser shall maintain, during the term of this Agreement, comprehensive
general liability insurance with an insurance carrier reasonably acceptable to
PharmaPrint, which insurance policy or policies shall maintain the full products
hazards provisions with the Herbal Product hazards limits subject to deductibles
not in excess of $10,000 in the aggregate, and with at least $2,500,000 per
occurrence and at least $2,500,000 overall coverage for claims of bodily injury
and property damage arising out of any loss. Such policy or policies shall
extend coverage with respect to occurrence during a policy period, regardless of
the dates on which claims arising for such occurrences are made, and shall
include PharmaPrint as named insured in such policy or policies. Both parties
shall provide notice to the other of any loss, whether actual or threatened,
promptly upon receipt of notice thereof.
5.7 PharmaPrint shall maintain, during the term of this Agreement,
comprehensive general liability insurance with an insurance carrier reasonably
acceptable to Hauser, which insurance policy or policies shall maintain the full
products hazards provisions with the Herbal Product hazards limits subject to
deductibles not in excess of $10,000 in the aggregate, and with at least
$2,500,000 per occurrence and at least $2,500,000 overall coverage for claims of
bodily injury and property damage arising out of any loss. Such policy or
policies shall extend coverage with respect to occurrence during a policy
period,
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regardless of the dates on which claims arising for such occurrences are made,
and shall include Hauser as named insured in such policy or policies. Both
parties shall provide notice to the other of any loss, whether actual or
threatened, promptly upon receipt of notice thereof.
5.8 A party entitled to indemnification hereunder agrees to give prompt
written notice (in no event later than ten (10) business days following its
receipt) to the indemnifying party after the receipt by such party of any
written notice of the commencement of any action, suit, proceeding or
investigation or threat thereof made in writing for which such party will claim
indemnification pursuant to this Agreement. Unless, in the reasonable judgment
of the indemnifying party a conflict of interest may exist between the
indemnified party and the indemnifying parry with respect to a claim, the
indemnifying party may assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If the indemnifying party is not
entitled to, or elects not to, assume the defense of a claim, it will not be
obligated to pay the fees and expenses of more than one counsel with respect to
such claim. The indemnifying party will not be subject to any liability for any
settlement made without its consent, which shall not be unreasonably withheld.
5.9 The provisions and obligations of this Article V shall survive any
termination or expiration of this Agreement.
ARTICLE VI
CONFIDENTIALITY AND PUBLICITY
6.1 In connection with prior related disclosures and work, pursuant to the
Confidential Disclosure Agreement between the parties of January 24, 1997, which
Agreement is incorporated herein by reference, and with the negotiation,
execution and performance of this Agreement, Hauser and PharmaPrint have had and
will have access to certain confidential and proprietary information of each
other, including, but not limited to, financial data, know-how, trade secrets,
technology, PharmaPrint's Patent Rights relating to the PharmaPrint process and
certain mutual information concerning the identification, characterization and
standardization of the biological active components, their biological activity
and their percent in the composition of the Herbal Products of this Agreement.
Recognizing that such information is all confidential and represents valuable
assets and property to both parties, and the harm that may befall such parties
if any of such information is disclosed, Hauser and PharmaPrint agree that for a
period of ten (10) years after the execution of the January 24, 1997,
Confidential Disclosure Agreement between the parties, referred to above, to
hold all such information in confidence and not to use or otherwise disclose any
such information to third parties without the prior written consent of the other
party: PROVIDED, HOWEVER, that the obligations of confidentiality created herein
shall cease to apply to information: (a) that can be demonstrated through
documentary evidence to be in, or to come into, the public domain through no
fault of Hauser or
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PharmaPrint; (b) that can be demonstrated through documentary evidence to have
been in either parties possession prior to its disclosure, or can be
demonstrated through documentary evidence to have been later disclosed to either
party by a third party who, to the receiving party's knowledge, was under no
obligation to keep such information confidential; and (c) which, in the written
opinion of legal counsel for either party, is required to be disclosed by law or
regulation or by the rules of any stock exchange on which Hauser's PharmaPrint's
securities are listed, but only to the extent so required and only upon five (5)
business days written notice to and followed by consultation with the other
party.
6.2 Hauser shall submit to PharmaPrint and PharmaPrint shall submit to Hauser
all advertising, herbal product labeling, herbal product literature, written
sales promotions, press releases and other publicity matters relating in any way
to this agreement or its general subject matter in which Hauser's trademarks,
and/or PharmaPrint's trademarks, the PharmaPrint-Registered Trademark- Process,
or the Herbal product produced by said process is mentioned or that contains
language from which the connection of said name, trademark, PharmaPrint
- -Registered Trademark- Process or the Herbal Product made thereby may be implied
or inferred and neither party shall not publish or use such advertising, sales
promotion, press release or publicity matters without either parties prior
written consent.
6.3 In the event Hauser or PharmaPrint or any of their officers, employees or
consultants is requested or required by subpoena, order, discovery request or
similar process or by applicable law or regulation or the rules of any stock
exchange on which such Hauser or PharmaPrint securities are listed to disclose
any information that is required to be held in confidence pursuant to paragraph
6.1 of this Agreement, and Hauser or PharmaPrint is required to disclose such
information the disclosing party shall provide advance notice and a copy of the
proposed disclosure to the other party and will consult with the other party
with respect to taking legally available steps to resist or narrow such request
or disclosure. If disclosure of such information is required and Hauser or
PharmaPrint is required to disclose such information, it shall furnish only
that portion of the information that, in the written opinion of the disclosing
parties counsel, such party is legally required to disclose and shall cooperate
with any action by the non-disclosing party (at the non-disclosing party's
expense) to obtain an appropriate protective order or written or equally
reliable assurance that confidential treatment shall be accorded the information
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ARTICLE VII
NON-COMPETITION
7.1 During the term of this Agreement (or until termination) and for a period
of three (3) years thereafter, Hauser will not engage in the PharmaPrint
- -Registered Trademark- Process and/or the production of the Herbal Product, as
described herein, for itself or for third parties for marketing and sale.
7.2 Hauser admits and agrees that no right or license is granted to it or its
customers or clients (by implication or otherwise) by PharmaPrint under its
proprietary technology, know how, or trade secrets or Patent Rights and/or
Trademarks or by the performing of Hauser's obligations to PharmaPrint under and
pursuant to the Development and Verification Agreement, this Agreement or the
Additional Supply Agreements contemporaneously entered into between the parties.
ARTICLE VIII
PAYMENT SCHEDULE
8.1 Payments by PharmaPrint for the Herbal Product delivered by Hauser shall
be due and payable thirty (30) days after such Herbal Products are received by
PharmaPrint, or PharmaPrint's designated contract manufacturer unless otherwise
agreed to in writing by the parties. In such an event the net thirty (30) day
payments are not met and Hauser has provided PharmaPrint with due correspondence
of intention and complied with the termination provisions contained herein,
Hauser retains the right to revoke the supply terms.
ARTICLE IX
DURATION AND TERMINATION
9.1 This Agreement shall continue in full force and effect until December 31,
2000 unless terminated by either party pursuant to the provisions set forth in
this Article X. Further, Hauser hereby grants PharmaPrint an option to extend
this Agreement on substantially the same terms of this Agreement on a year-to-
year basis if PharmaPrint gives written notice to Hauser that it is exercising
the option herein granted on or before July 1st of the year in which this
Agreement would otherwise expire by its terms.
9.2 PharmaPrint and Hauser may terminate this Agreement in its entirety, upon
mutual agreement, at any time upon thirty (30) days written notice to the other
party. At the sole discretion of PharmaPrint, this agreement can be terminated
per the termination terms and conditions of their "AHP DSHEA Product Agreement"
as consistent with Para. 2.11.
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9.3 Either party hereto shall be entitled to terminate this Agreement upon
thirty (30) days written notice to the other party if the other party shall
commit a breach of any material provision hereof and shall not within thirty
(30) days from receipt of notice of such breach by the complaining party remedy
the same (if capable of remedy).
9.4 Insofar as is lawful and legally permissible, this Agreement may be
terminated with immediate effect by a party upon giving written notice to the
other if the other is insolvent or has committed any act of bankruptcy or an
order is made or resolution passed for the winding up of the other party.
9.5 Failure on the part of either party to exercise or enforce any right
conferred upon it hereunder shall neither be deemed to be a waive of any such
right nor operate to bar the exercise or enforcement thereof at any time
thereafter.
ARTICLE X
MISCELLANEOUS
10.1 Any notice required or permitted under this Agreement shall be in writing
and deemed to have been sufficiently provided and effectively made as of the
delivery date if hand-delivered with written acknowledge thereof, or as of the
date received if mailed by registered or certified mail, postage pre-paid, and
addressed to the receiving party at its respective address, as follows:
HAUSER, INC.
5555 Airport Boulevard
Boulder, Colorado 80301
Attn: President
PHARMAPRINT, INC.
4 Park Plaza
Suite 1900
Irvine, California 92614
Attn: President
10.2 The relationship of the parties under this Agreement is that of
independent contractors and not as agents of each other or partners or joint
ventures, and neither party shall have the power to bind the other in any way
with respect to any obligation to any third party unless a specific power of
attorney is provided for such purpose. Each party shall be solely and
exclusively responsible for its own employees and operations.
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10.3 In the event that the performance of this Agreement or of any obligation
hereunder, other than payment of money as herein provided by either party hereto
is prevented, restricted or interfered with by reason of any cause not within
the control of the respective party, and which could not by reasonable diligence
have been avoided by such party, the party so affected, upon giving prompt
notice to the other party, as to the nature and probable duration of such event
shall be excused from such performance to the extent and for the duration of
such prevention, restriction or interference, provided that the party so
affected shall use its reasonable efforts to avoid or remove such cause of non-
performance and shall fulfill and continue performance hereunder with the utmost
dispatch whenever and to the extent such cause or causes are removed.
10.4 For the purpose of the preceding paragraph but without limiting the
generality hereof, the following shall be considered as not within the control
of the respective party; acts of God, acts or omissions of a governmental
agency, compliance with requests, recommendations, rules regulations or orders
of any governmental authority or any officer, department, agency or instrument
thereof, flood, storms, earthquake, fire, war, riots, insurrection, accidents,
acts of the public enemy, invasion, quarantine restrictions, strike, lockout,
embargoes, delays or failure in transportation and acts of a similar nature.
10.5 Should one of the provisions of this Agreement become or prove to be null
and void, such will be without effect on the validity of this Agreement as a
whole. Both parties will, however, endeavor to replace the void provision by a
valid one which in its economic effect is most consistent with void provision.
10.6 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflicts of laws.
10.7 This Agreement and the rights and obligations hereunder shall not be
assignable by Hauser without the previous written consent of PharmaPrint which
consent will not be unreasonably withheld. PharmaPrint may assign this
Agreement (i) in connection with the transfer of all or substantially all of the
business to which it relates without any such consent, and (ii) in whole or in
part to a PharmaPrint Affiliate without any such consent.
10.8 The rights, duties and obligations of Paragraph 2.11 and Articles V, VI,
VII and VIII shall survive the termination or expiration of this Agreement.
10.9 This Agreement and the Agreements referenced herein constitutes the
entire understanding between the parties regarding the subject matter hereof in
the Territory and no party has relied on any representation not expressly set
forth or referred to in this Agreement. No amendment, variation, waiver or
modification of any of the terms or provisions of this Agreement shall be
effected unless set forth in writing, specifically referencing this Agreement,
and duly signed on behalf of the parties hereto.
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10.10 No press release or other public announcement concerning this Agreement
shall be made by either party without the prior written approval of the other
party hereto, which approval shall not be unreasonably withheld, except as
otherwise required by law according to the written opinion of outside legal
counsel. Press releases or other public announcements reasonably required by
law according to the opinion as aforementioned shall be reviewed with the other
party and their comments given due consideration.
IN WITNESS WHEREOF, the duly authorized representatives of the parties
hereto have caused this Agreement to be executed effective as of the date set
forth above.
HAUSER, INC. PHARMAPRINT INCORPORATED
By: /s/ Martin Wehr By: /s/ R. J. Burgess
--------------------------- ----------------------------
Title: COO Title: COO
------------------------ -------------------------
NOVEMBER 4, 1997, 10:47 AM
<PAGE>
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
January 5, 1998
