<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
-------------- ------------
Commission File Number 000-21141
PHARMAPRINT INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0640125
(State or jurisdiction of (I.R.S. employer identification No.)
incorporation or organization)
4 PARK PLAZA, SUITE 1900, IRVINE,
CALIFORNIA 92614
(Address of principal executive offices) (Zip code)
REGISTRANTS TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 794-7778
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Number of shares outstanding as of August 14, 1998: Common Stock: 13,651,589
Total number of pages: 16
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PHARMAPRINT INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
FACING SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheet as of June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the three months
ended June 30, 1997 and 1998, and for the
period from inception (September 15, 1994)
through June 30, 1998 (unaudited) . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 1997 and 1998 and for
the period from inception (September 15, 1994)
through June 30, 1998 (unaudited) . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Plan of Operation. . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains "forward-looking" statements. The Company is
including this statement for the express purpose of availing itself of
protections of the safe harbor provided by the Private Securities Litigation
Reform Act of 1995 with respect to all such forward-looking statements.
Examples of forward-looking statements include, but are not limited to: (a)
projections of revenues, capital expenditures, growth, prospects, dividends,
capital structure and other financial matters; (b) statements of plans and
objectives of the Company or its management or Board of Directors; (c)
statements of future economic performance; (d) statements of assumptions
underlying other statements and statements about the Company and its business
relating to the future; and (e) any statements using the words "anticipate,"
"expect," "may," "project," "intend" or similar expressions.
The Company's ability to predict projected results or the effect of
certain events on the Company's operating results is inherently uncertain.
Therefore, the Company wishes to caution each reader of this report to
carefully consider the following factors and certain other factors discussed
herein and in the Company's March 31, 1998, Annual Report on Form 10-KSB, any
or all of which have in the past and could in the future affect the ability
of the Company to achieve its anticipated results and could cause actual
results to differ materially than those discussed herein: ability to obtain
and enforce patents, dependence on third parties, uncertainties related to
the PharmaPrint-TM- Process, government regulation and uncertainty of product
approvals, ability to commercialize and market products, results of research
and development and clinical and toxicology studies, technological advances
by third parties and competition, cost and availability of botanical
extracts, cost and availability of manufacturing service contractors, future
capital needs of the Company, history of operating losses, dependence upon
key personnel, uncertainty regarding health care reimbursement and reform,
limited manufacturing and marketing experience, control by existing
stockholders and general economic and business conditions.
PHARMAPRINT-TM- IS A TRADEMARK OF THE COMPANY AND CENTRUM-Registered
Trademark-IS A REGISTERED TRADEMARK OF AMERICAN HOME PRODUCTS CORPORATION
("AHP").
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PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED BALANCE SHEET - JUNE 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,976,176
Accounts receivable 225,956
Inventories 4,107,027
Other current assets 1,050,739
------------
Total current assets 18,359,898
FIXED ASSETS, NET 353,528
OTHER ASSETS, net of amortization of $55,210 440,103
------------
Total assets $ 19,153,529
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,812,833
Accrued expenses 1,369,976
Deferred revenue 2,500,000
------------
Total current liabilities 5,682,809
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value - 1,000,000 shares
authorized, no shares issued or outstanding 0
-
Common stock, $.001 par value - 24,000,000 shares
authorized, 13,651,589 shares issued and outstanding 13,652
Additional paid-in-capital 49,086,527
Deferred compensation (24,433)
Deficit accumulated during the development stage (35,605,026)
------------
Total stockholders' equity 13,470,720
------------
Total liabilities and stockholders' equity $ 19,153,529
------------
------------
</TABLE>
The accompanying notes are an integral part of this condensed consolidated
balance sheet.
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PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from inception
Three months Three months (September 15, 1994)
ended ended through
June 30, 1997 June 30, 1998 June 30, 1998
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<S> <C> <C> <C>
REVENUES $ --- $ 225,956 $ 225,956
COST OF SALES --- 174,267 174,267
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GROSS PROFIT --- 51,689 51,689
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OPERATING EXPENSES:
Research and development 1,029,818 3,302,679 16,833,283
General and administrative 773,986 1,147,589 9,360,692
Stock compensation 30,000 30,000 9,462,740
----------- ----------- ------------
Total operating expenses 1,833,804 4,480,268 35,656,715
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NET LOSS $(1,833,804) $(4,428,579) $(35,605,026)
----------- ----------- ------------
----------- ----------- ------------
BASIC/DILUTED LOSS PER
COMMON SHARE $ (0.17) $ (0.32) $ (3.65)
----------- ----------- ------------
----------- ----------- ------------
BASIC/DILUTED WEIGHTED
AVERAGE COMMON
SHARES OUTSTANDING 11,000,000 13,644,500 9,762,250
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from inception
Three months Three months (September 15, 1994)
ended ended through
June 30, 1997 June 30, 1998 June 30, 1998
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<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,833,804) $ (4,428,579) $ (35,605,026)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 18,931 44,964 165,261
Amortization of discount on notes payable - - 31,250
Stock issued for licensing rights - - 315,789
Stock and options issued for services 30,000 30,000 9,462,740
Changes in assets and liabilities:
Increase in accounts receivable - (225,956) (225,956)
Increase in inventories - (1,923,745) (4,107,027)
Increase in other current assets (5,882) (151,015) (1,050,739)
Increase in other assets (8,978) (10,455) (495,313)
(Decrease) increase in accounts payable and
accrued expenses (491,015) (1,896,964) 3,182,809
Increase in deferred revenue - - 2,500,000
----------- ------------ ------------
Net cash used in operating activities (2,290,748) (8,561,750) (25,826,212)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (32,496) (29,979) (463,579)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 9,989 38,959,367
Proceeds from stock subscription receivables - - 306,600
Proceeds from notes payable - - 270,000
Repayment of notes payable - - (270,000)
----------- ------------ ------------
Net cash provided by financing activities - 9,989 39,265,967
----------- ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,323,244) (8,581,740) 12,976,176
CASH AND CASH EQUIVALENTS, beginning of period 8,170,072 21,557,916 -
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 5,846,828 $ 12,976,176 $ 12,976,176
----------- ------------ ------------
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have not been presented. The
accompanying unaudited financial statements and related notes should be read
in conjunction with the financial statements and related notes included in
the PharmaPrint Inc. March 31, 1998, Annual Report on Form 10-KSB.
In the opinion of the Company, all material adjustments (consisting of
normal recurring items) considered necessary to present fairly the Company's
financial condition, results of operations, and changes in financial position
have been made. The results of operations for the three month period ended
June 30, 1998, are not necessarily indicative of the results that may be
expected for the year ending March 31, 1999.
2. ORGANIZATION, NARRATIVE DISCUSSION OF THE BUSINESS AND RISK FACTORS
ORGANIZATION
PharmaPrint Inc. (the "Company" or "PharmaPrint"), a development stage
company, was originally incorporated in the State of California in September
1994. In October 1997, the Company's state of incorporation was changed from
California to Delaware. The Company was formed in order to complete the
development of and commercialize the research initiated by Dr. Tasneem A.
Khwaja, a founder and significant stockholder 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-TM- Process technology to develop high
quality dietary supplement products and pharmaceutical candidates from
botanical sources. Unlike the traditional drug development process of
identifying and synthesizing single bioactive molecules from plant sources,
the Company's core technologies were developed based on empirical data that
suggests that the health benefits and safe usage of certain plant-derived
therapeutics might be the result of the natural combination of multiple
molecules found in the plant extract and that single molecules, in isolation,
may not replicate the natural plants' effectiveness. The PharmaPrint-TM-
Process technology enables the Company to identify, quantify and standardize
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-TM- Process technology. The first application of the
PharmaPrint-TM- Process is for the development of high quality, herbal
dietary supplements. The second application of the PharmaPrint-TM- 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 is currently
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PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 a development stage company. Since inception (September
15, 1994), the Company has engaged primarily 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 significant revenues from
products sales.
The Company has yet to generate significant revenues and has no assurance
of significant future revenues. There can be no assurance that the Company
will receive royalties from potential sales of its dietary supplements,
obtain FDA approval for its pharmaceutical candidates or be able to further
market its PharmaPrint-TM- Process. The Company is likely to continue to
incur operating losses as it continues 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
further market its PharmaPrint-TM- Process to third parties, overall product
development costs including the cost of toxicology testing and clinical
trials, cost and availability of botanical extracts, cost and availability of
manufacturing service contractors, the ability to obtain certain patent
approvals, 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. The Company
believes that its current capital resources will enable it to maintain its
current and planned operations for at least the next 12 months. However, no
assurance can be given that additional capital, if needed, will be available
when required or upon terms acceptable to the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary PharmaPrint B.V. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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.
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PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
LOSS PER SHARE
During fiscal 1998, the Company adopted SFAS No. 128 "Earnings Per
Share." As required pursuant to SFAS No. 128, basic loss per share is
computed based on the weighted average number of common shares outstanding
for the period assuming no dilution from outstanding stock options and
diluted loss per share is computed assuming dilution from stock options and
warrants. Prior period net loss per share data have been restated for all
periods presented. The Company excluded all outstanding stock options and
warrants from the diluted computation as their effect is antidulutive.
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," which establishes standards
for the reporting and display of comprehensive income and its components in
financial statements. Comprehensive income generally represents all changes in
stockholders' equity except those resulting from investments by and
distributions to owners. Currently, no difference exists between the Company's
net loss and its comprehensive net loss.
The Company will adopt in the fiscal year ending March 31, 1999 SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report information about
operating segments in interim financial reports. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
RECLASSIFICATIONS
Certain reclassifications were made to prior period amounts, enabling
them to conform to current period presentation.
INVENTORIES
Inventories are stated at lower of cost (determined on the first-in,
first-out method) or market, and consisted of the following at June 30, 1998:
<TABLE>
<S> <C>
Raw materials........................... $ 406,099
Work-in-process......................... 3,700,928
----------
Total inventories....................... $4,107,027
----------
----------
</TABLE>
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<PAGE>
PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
FIXED ASSETS
Fixed assets are stated at cost and consisted of the following at June
30, 1998:
<TABLE>
<S> <C>
Equipment...................................... $ 285,926
Furniture...................................... 177,653
Less accumulated depreciation.................. (110,051)
----------
Fixed assets, net............................... $ 353,528
----------
----------
</TABLE>
Depreciation is provided using the straight-line method over the
estimated useful life for equipment of three years and furniture for five
years.
4. AGREEMENTS
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-Registered Trademark- 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 additional fees
of $500,000 upon each of (i) the issuance of a patent containing claims
covering the PharmaPrint-TM- 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. At the time of the first commercial sales by AHP of AHP
Products the Company will have completed all research and development efforts
relating to the $2.5 million licensing fee and will record such licensing fee
as revenue in the period such fee was earned and at such time as it is no
longer forfeitable. 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-TM- 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.
5. COMMITMENTS AND CONTINGENCIES
The Company leases its corporate headquarters under an operating lease
that expires in December 1998. Future minimum lease payments under this
lease, as of June 30, 1998, are approximately $118,000 payable through March
31, 1999. Rent expense for the three months ended June 30, 1998, totaled
approximately $59,000.
In November 1997, the Company entered into a $20 million purchase
commitment with a vendor to purchase raw materials to be used for three
herbal products and to provide processing services for an additional herbal
product over the next three years. All of the aforementioned products were
anticipated to be used by the Company to meet its obligations under the AHP
Agreements. Subsequently, the Company determined that one of the raw
materials to be supplied by the vendor did not meet its specifications and
that another raw material contained a certain fungicide. The Company has
since sourced each of these raw materials from different suppliers. However,
due to the uncertainties surrounding the quality
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PHARMAPRINT INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of the raw materials discussed above, the Company is unable to determine
whether it will be required to fulfill its $20 million purchase commitment in
the future.
In June 1998, the Company entered into a service agreement with a
vendor. Under the terms of the agreement, effective July 1, 1998, the vendor
will provide certain manufacturing services for the Company at agreed upon
prices based upon production volume. The Company is committed to reimburse
the vendor a minimum of $300,000 per quarter. The Company is also subject to
the following termination fees: (i) $1,000,000 if the agreement is
terminated within 6 months of effective date; (ii) $700,000 if the agreement
is terminated within 6 to 12 months of effective date; (iii) $200,000 if
the agreement is terminated within 12 to 24 months of effective date and;
(iv) $100,000 if the agreement is terminated after 24 months of the
effective date.
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<PAGE>
ITEM 2. MANAGEMENT'S PLAN OF OPERATION
OVERVIEW
PharmaPrint uses its PharmaPrint-TM- Process technology to develop high
quality dietary supplement products and pharmaceutical candidates from
botanical sources. The Company believes that its PharmaPrint-TM- 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-TM- Process technology enables the Company to identify,
quantify and standardize 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
of these bioactives.
Since its inception in 1994, the Company has engaged primarily 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 significant revenues from product sales.
In October 1997, the Company entered into the AHP Agreements whereby the
Company will apply its PharmaPrint-TM- Process to produce a line of high
quality dietary supplement products to be marketed in the U.S., Canada and
Mexico exclusively by AHP under the Centrum-Registered Trademark- brand name.
In exchange for the exclusive right to use the PharmaPrint-TM- 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-TM- Process and (ii) receipt and acceptance of the initial AHP
Products in sufficient time to permit AHP to meet its proposed product launch
date. At the time of the first commercial sales by AHP of AHP Products the
Company will have completed all research and development efforts relating to
the $2.5 million licensing fee and will record such licensing fee as revenue
in the period such fee was earned and at such time as it is no longer
forfeitable. Additionally, 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 lessor 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-TM- 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 six of the Company's dietary supplement products under development
in 1998. AHP and the Company will examine from time to time the opportunity
to increase or modify this product line.
The Company is also developing pharmaceuticals from natural plant
sources for the purpose of seeking FDA approval. Products derived from the
same botanical sources as those used in the Company's product development
programs historically have been widely used as medicines and dietary
-11-
<PAGE>
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 for its pharmaceutical candidates will substantially
increase over the next 12 months.
The Company incurred approximately $1,030,000 and $3,303,000 of
research and development expenses relating to its dietary supplement products
and pharmaceutical candidates for the quarters ended March 31, 1997 and 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through the sale of
quity securities. From inception (September 15, 1994) through May 1996, the
Company had raised an aggregate net amount of approximately $2.1 million
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 $12.7 million. In
February 1998, the Company completed a public offering of 2,587,500 shares of
its common stock at $10.50 per share. The net proceeds from this public
offering were approximately $24.4 million.
As of June 30, 1998, the Company's staff of full-time employees and
consultants was 24. The Company expects to significantly increase its
staffing levels in the next 12 months.
In November 1997, the Company entered into a $20 million purchase
commitment with a vendor to purchase raw materials to be used for three
herbal products and to provide processing services for an additional herbal
product over the next three years. All of the aforementioned products were
anticipated to be used by the Company to meet its obligations under the AHP
Agreements. Subsequently, the Company determined that one of the raw
materials to be supplied by the vendor did not meet its specifications and
that another raw material contained a certain fungicide. The Company's
supplier has agreed to take back the raw materials that did not meet
specifications, however, the supplier has not admitted any problems with the
raw materials. The Company has since sourced each of these raw materials from
different suppliers. However, due to the uncertainties surrounding the
quality of the raw materials discussed above, the Company is unable to
determine whether it will be required to fulfill its $20 million purchase
commitment in the future. The Company does not presently have any material
commitments for capital expenditures.
In June 1998, the Company entered into a service agreement with a
vendor. Under the terms of the agreement, effective July 1, 1998, the vendor
will provide certain manufacturing services for the Company at agreed upon
prices based upon production volume. The Company is committed to reimburse
the vendor a minimum of $300,000 per quarter. The Company is also subject to
the following termination fees: (i) $1,000,000 if the agreement is
terminated within 6
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<PAGE>
months of effective date; (ii) $700,000 if the agreement is terminated within
6 to 12 months of effective date; (iii) $200,000 if the agreement is
terminated within 12 to 24 months of effective date and; (iv) $100,000 if the
agreement is terminated after 24 months of the effective date.
The Company increased its inventories from $2,183,000 at March 31, 1998
to $4,107,000 at June 30, 1998 in order to supply certain dietary supplement
products to AHP pursuant to the Supply Agreement. The Company anticipates
that its inventories will significantly increase in the next 12 months.
The Company has incurred net operating losses since its inception and
expects net operating losses in the near term as it continues its
manufacturing efforts with respect to the AHP Agreements and as it continues
its research and development efforts. The Company will incur additional net
operating losses until such time as product or service sales can generate
sufficient revenue to fund continuing operations. The Company's ability to
generate revenues is dependent upon many factors, including its ability to
develop, introduce and market products and obtain regulatory approvals.
The Company believes that its current capital resources, the proceeds
from its offering completed in February, 1998, and its expected manufacturing
revenue will enable it to maintain its current and planned operations for at
least the next 12 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.
Currently, the Company has no established bank financing arrangement. The
amount and type of 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 cost and availability of
botanical extracts, the cost and availability of manufacturing service
contractors, the timing and costs involved in obtaining regulatory approvals,
the costs of filing, prosecuting, defending and enforcing any patent claims
and other intellectual property rights, competing technological and market
developments, changes in the Company's existing research relationships, the
ability of the Company to establish collaborative arrangements, the
initiation of commercialization activities, the purchase of capital equipment
and the availability of other financing. To the extent that the Company's
capital resources, including the net proceeds from its public offering
completed in February, 1998, 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 financings 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 itself, any of which could have a materially
adverse effect on the business, financial
-13-
<PAGE>
condition or results of operations of the Company.
At March 31, 1998, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $27.2 million; such
carryforwards expire in various years through 2013.
YEAR 2000
The Company is currently addressing a universal situation commonly
referred to as the "Year 2000 Problem." The Year 2000 Problem relates to the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to the year 2000 and beyond.
During the year ended March 31, 1998, the Company developed a plan to devote
the necessary resources to identify and modify systems impacted by the Year
2000 Problem, or implement new systems to become year 2000 compliant in a
timely manner. The cost of executing this plan is not expected to have a
material impact on the Company's results of operations or financial
condition. In addition, the Company has contacted its major suppliers and
vendors to ensure their awareness of the Year 2000 Problem. If the Company,
its suppliers or vendors are unable to resolve issues related to the Year
2000 Problem on a timely basis, it could have a material adverse effect on
the financial condition or results of operations of the Company.
-14-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
10.25 Manufacturing Services Agreement with Applied Analytical
Industries
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMAPRINT INC.
Registrant
Date: August 14, 1998 /s/ James R. Wodach
----------------------------
James R. Wodach
Senior Vice President and
Chief Financial Officer
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<PAGE>
MANUFACTURING AGREEMENT
THIS AGREEMENT, entered into as of the 11th day of June, 1998, by and
between PHARMAPRINT INC. (hereinafter referred to as "PHARMAPRINT"), a
corporation duly formed and existing under the laws of the State of Delaware,
having a place of business at 4 Park Plaza, Suite 1900, Irvine, California
92614, and APPLIED ANALYTICAL INDUSTRIES, INC. (hereinafter referred to as
"AAI"), a corporation duly formed and existing under the laws of the State of
Delaware, having a place of business at 1206 North 23rd Street, Wilmington,
North Carolina 28405.
WITNESSETH
WHEREAS, PHARMAPRINT possesses certain proprietary rights to certain
dietary supplement products and intends to market several dietary supplement
products manufactured under GOOD MANUFACTURING PRACTICES (as defined below);
WHEREAS, AAI and PHARMAPRINT have or will enter into contractual
arrangements wherein AAI will perform certain analytical testing related to
dietary supplement products; and
WHEREAS, AAI desires to manufacture such products for PHARMAPRINT, and
PHARMAPRINT desires to have such products manufactured for it by AAI, subject
to the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and conditions herein contained, the parties, intending to be
legally bound, do hereby agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Manufacturing Agreement (hereinafter the
"Agreement") the following terms shall have the definitions set forth below:
1.1 "ACTIVE INGREDIENT" shall mean one or more coated intermediary
dietary supplements as defined in DSHEA supplied by PHARMAPRINT and which
have been prepared in accordance with CURRENT GOOD MANUFACTURING PRACTICES.
1.2 "AGNI"' shall mean that third party designated by PHARMAPRINT to
accept or inspect PRODUCT on its behalf.
1.3 "CALENDAR QUARTER" shall mean any of the three-month periods
beginning January 1, April 1, July 1 and October 1 of any calendar year.
1.4 "CURRENT GOOD MANUFACTURING PRACTICES" or "cGMP" shall mean those
recommended CURRENT GOOD MANUFACTURING MANUFACTURING PRACTICES set forth in
the most current version of the USP/NF, as amended, for nutritional
supplements.
1.5 "CONFIDENTIAL INFORMATION" shall have the meaning set forth in
Section 7.1.
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MANUFACTURING AGREEMENT
Page 2 of 14
1.6 "DSHEA" shall mean the Dietary Supplement Health and Education Act
of 1994, as amended.
1.7 "FDA" shall mean the United States Food and Drug Administration.
1.8 "FIRM PURCHASE ORDER" shall mean the binding orders to be delivered
by PHARMAPRINT to AAI no later than sixty (60) days prior to the commencement
of each CALENDAR QUARTER setting forth the quantity of each PRODUCT to be
purchased by PHARMAPRINT and other information set forth in Section 2.1.B.
1.9 "INITIAL MANUFACTURING SCHEDULE" shall mean the manufacturing
schedule covering the period of the time from the commencement date of the
Agreement through September 30, 1998. INITIAL MANUFACTURING SCHEDULE shall be
attached hereto as Exhibit "E". The PRODUCT quantity specified in this
schedule shall be fixed and binding on the parties.
1.10 "MANUFACTURING MATERIALS" shall mean ACTIVE INGREDIENT in bulk or
semi-finished state, inactive materials, ingredients, excipients, capsules,
shipping materials, etc., furnished by PHARMAPRINT directly, or,
manufactured, acquired, supplied, provided or segregated by AAI for
PHARMAPRINT as herein provided, for use in the PREPARATION of PRODUCT.
1.11 "MANUFACTURING SCHEDULE" shall mean an agreed upon schedule
establishing the following material terms: (i) the minimum and maximum
quarterly quantities of PRODUCTS which AAI is obligated to produce and
PHARMAPRINT is obligated to purchase; (ii) the intended twelvemonth
MANUFACTURING SCHEDULE of PRODUCT; and (iii) the minimum purchase order
quality for PRODUCT. The MANUFACTURING SCHEDULE shall be attached hereto and
incorporated as Exhibit "C".
1.12 "MINIMUM QUARTERLY FEE" shall mean the amount set forth on Exhibit
"D" specifying the minimum dollar amount of PRODUCT PHARMAPRINT is committed
to purchase in each CALENDAR QUARTER of this Agreement.
1.13 "PREPARATION", "PREPARED" and/or "PREPARE" shall mean any and all
steps and operations required in the blending and/or encapsulation of the
PRODUCTS.
1.14 "PRODUCT" and/or "PRODUCTS" shall mean one-or more of the
nutritional compounds set forth on Exhibit "A" attached hereto, as may be
amended, PREPARED in bulk according to the SPECIFICATIONS at the unit prices
set forth therein.
1.15 "QUARTERLY SHORTFALL" shall mean the difference between the MINIMUM
QUARTERLY FEE and the dollar amount of PRODUCTS purchased, less any AAI
out-of-pocket savings for MANUFACTURING MATERIALS, during any CALENDAR
QUARTER in which the MINIMUM QUARTERLY FEE exceeded the dollar amount of
PRODUCTS purchased.
1.16 "SPECIFICATIONS" shall mean those blending, manufacturing,
encapsulation, sampling, shipping, container, storage, etc. SPECIFICATIONS
including, but not limited to, relevant notification provisions established
and provided by PHARMAPRINT and agreed upon by AAI for each PRODUCT. Said
SPECIFICATIONS shall be attached hereto as Exhibit "B".
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MANUFACTURING AGREEMENT
Page 3 of 14
1.17 "TERM YEAR" shall mean a twelve-month period beginning on July 1
and ending the following June 30.
ARTICLE II
SALE AND DELIVERY OF PRODUCT
2.1 SALE AND PURCHASE. Subject to the terms and conditions set forth in
this Agreement, AAI agrees to PREPARE and sell, and PHARMAPRINT agrees to
purchase from AAI, the PRODUCTS as follows:
A. MANUFACTURING SCHEDULE. PHARMAPRINT shall provide to AAI,
no less than sixty (60) days prior to the first day of each CALENDAR
QUARTER, a forecast of PHARMAPRINT's PRODUCT requirements for the four
(4) CALENDAR QUARTERS beginning with such CALENDAR QUARTER with the
first three-month forecast being binding on the parties as establishing
the minimum volume requirements for each PRODUCT. Forecasts shall be
updated as provided in Section 2.1.B. herein. Each MANUFACTURING
SCHEDULE will be attached as a new Exhibit "C" hereto. The first
MANUFACTURING SCHEDULE shall be delivered to AAI no later than July 1,
1998. Production forecasts prior to October 1, 1998 shall be
incorporated in the INITIAL MANUFACTURING SCHEDULE attached hereto as
Exhibit "E".
B. FIRM PURCHASE ORDERS. Not less than sixty (60) days prior to the
commencement of each CALENDAR QUARTER and subject to the other
provisions of this Agreement, PHARMAPRINT shall place its FIRM PURCHASE
ORDER for each PRODUCT to be delivered during such CALENDAR QUARTER,
specifying the quantity of each PRODUCT to be prepared for shipping,
requested delivery dates (which delivery dates will be no sooner than
sixty (60).days after the date of the order), and the destination of
each shipment. AAI will manufacture up to one hundred twenty percent
(120%) of the CALENDAR QUARTER quantities provided under section 2.1.A.
above. AAI will use reasonable efforts, but will not be obligated to,
manufacture for delivery during any CALENDAR QUARTER quantities of
PRODUCT in excess of one hundred twenty percent (120%) of the
quantities of PRODUCT FORECASTED for such CALENDAR QUARTER in
PHARMAPRINT's most recent forecast provided hereunder. Upon receipt of
a PHARMAPRINT FIRM PURCHASE ORDER, AAI shall confirm in writing (the
"AAI Confirmation") within fourteen (14) calendar days said purchase
order and fix the manufacturing and shipping dates which dates shall be
satisfactory to PHARMAPRINT by written confirmation to PHARMAPRINT.
Once fixed in the AAI Confirmation, the dates shall be binding on the
parties under the terms and conditions of this Agreement. AAI will
commence manufacturing within thirty (30) days of the manufacturing
date specified in the AAI Confirmation.
Except as herein provided, the use of any purchase order shall not
serve to vary, alter, modify or add to the terms and provisions of this
Agreement; nor will the acceptance of any such purchase order have the
effect of substituting the provisions set forth on such form for the
provisions contained in this Agreement.
The unit price for each PRODUCT set forth in Exhibit "A" shall be
fixed based
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MANUFACTURING AGREEMENT
Page 4 of 14
upon the quantities established in each FIRM PURCHASE ORDER for the
respective CALENDAR QUARTER. The PRODUCT commitments set forth in the
INITIAL MANUFACTURING SCHEDULE (Exhibit "E") shall be considered a FIRM
PURCHASE ORDER
C. PAYMENT TERMS. PHARMAPRINT shall pay one-half (1/2) of the
established purchase price of the PRODUCT ordered upon AAI's tender of
the PRODUCT for shipment. The residual amount of the purchase price
shall be paid within thirty (30) days of acceptance by PHARMAPRINT, as
set forth in Section 3.5. Such last payment shall be subject to
adjustment, which adjustment shall be calculated to equal actual unit
contract price (as set forth in Exhibit "A") of PRODUCT delivered less
any payments previously received for such PRODUCT.
D. MINIMUM QUARTERLY FEE. Sales for any CALENDAR QUARTER shall be
no less than the MINIMUM QUARTERLY FEE set forth in Exhibit E attached
hereto. In the event PHARMAPRINT fails to purchase PRODUCT sufficient
to equal or exceed the QUARTERLY FEE in any CALENDAR QUARTER, it agrees
to pay AAI the QUARTERLY SHORTFALL. In such event, PHARMAPRINT shall
receive a credit equal to the lesser of the QUARTERLY SHORTFALL or
twenty percent (20%) of the MINIMUM QUARTERLY FEE (the "CREDIT").
Thereafter, in the event the dollar value of actual purchases exceed
the MIN QUARTERLY FEE in any subsequent CALENDAR QUARTER in the same
TERM YEAR (a "SURPLUS"), any CREDIT previously granted in that TERM
YEAR shall be applied against the SURPLUS for such subsequent CALENDAR
QUARTER, until the CREDIT is exhausted. Unused CREDITS shall expire at
the end of the respective TERM YEAR. A CREDIT will only be netted
against SURPLUS in the CALENDAR QUARTER in which the SURPLUS was
generated. For purposes of this Section 2.1.D., purchases shall mean
the dollar amount of PRODUCTS actually produced in the CALENDAR QUARTER.
E. RESCHEDULING. PHARMAPRINT recognizes that AAI must commit
facilities, personnel and resources to meet PHARMAPRINT's production
requirements; therefore, any change to the FIRM PURCHASE ORDER will be
by mutual consent of the parties.
2.2 SHIPMENT TERMS. AAI shall exercise reasonable and necessary efforts
to ship PRODUCT in the desired quantities and on the agreed upon dates. AAI
shall ship PRODUCT to distribution centers approved by PHARMAPRINT via the
carrier of PHARMAPRINT's choice. Shipment terms shall be Freight on Board,
Wilmington, North Carolina. Once PRODUCT is tendered for shipment Freight on
Board, Wilmington, North Carolina, the parties agree that AAI shall have no
further responsibility or liability for shipment or delivery of PRODUCT, or
any damages incurred to the PRODUCT.
ARTICLE III
MANUFACTURE AND SPECIFICATIONS
3.1 MANUFACTURE. Prior to the PREPARATION of the PRODUCTS, PHARMAPRINT
shall provide to AAI copies of PHARMAPRINT's SPECIFICATIONS for the
<PAGE>
MANUFACTURING AGREEMENT
Page 5 of 14
manufacture of the PRODUCTS. Subject to AAI's agreeing to said
SPECIFICATIONS, the PREPARATION of the PRODUCTS shall be carried out by AAI
in accordance with the SPECIFICATIONS, as then revised. The PRODUCTS shall
also be manufactured in accordance with AAI's internal standard operating
procedures, applicable regulatory requirements, and in accordance with
applicable cGMPs. PHARMAPRINT shall provide AAI with all revisions to the
SPECIFICATIONS in a timely manner, and AAI shall respond to such proposed
revisions in a timely manner.
3.2 SPECIFICATION OR CGMP CHANGES. Modifications to SPECIFICATIONS shall
be made only by mutual agreement of the parties as indicated by a signed
writing. The party receiving a proposed modification shall have ten (10)
working days to respond. In the event such modifications have been agreed
upon, the parties will determine the anticipated costs, if any, to AAI for
such modification, and agree upon such amount prior to implementing the
modification. In addition, changes to cGMP requirements may affect the
PREPARATION of the PRODUCTS and result in an increase to the unit prices set
forth on Exhibit "A" as may be mutually agreed upon by the parties.
3.3 MANUFACTURING MATERIALS ANS EQUIPMENT. AAI shall supply all
necessary equipment and shipping container supplies for the manufacture of
PRODUCT. PHARMAPRINT shall provide AAI with all requirements of capsules,
excipients and the ACTIVE INGREDIENT. AAI warrants that the equipment used in
the PREPARATION of the PRODUCTS will (i) meet applicable SPECIFICATIONS and
regulations, (ii) be properly calibrated and maintained, (iii) match the
equipment required as specified in the applicable master batch record, (iv)
be utilized under GMP conditions sufficient to ensure that PRODUCTS shall not
be contaminated or adulterated by other products. AAI further warrants that
it has the necessary plant, equipment and manufacturing facilities to PREPARE
the PRODUCTS. In the event AAI does not have the necessary plant, equipment
and manufacturing facilities necessary to PREPARE the PRODUCT, PHARMAPRINT
shall have the right to utilize independent manufacturers not related to AAI,
to manufacture PHARMAPRINT's production requirements in excess of AAI's
manufacturing capabilities until such time as AAI can PREPARE PHARMAPRINT's
requirements in excess of its then cured capabilities. Further, PHARMAPRINT
shall only use such third party manufacturing for the requirements which AAI
cannot manufacture pursuant to the MANUFACTURING SCHEDULE. PHARMAPRINT
warrants that the PHARMAPRINT provided MANUFACTURING MATERIALS will (i) meet
applicable regulations, including purity standards, (ii) be properly labeled
and unadulterated, (iii) be manufactured and delivered in compliance with all
agreed upon SPECIFICATIONS, and (iv) be accompanied by an appropriate
certificate of analysis. PHARMAPRINT agrees that it shall release all
MANUFACTURING MATERIALS used in the PREPARATION of the PRODUCT provided by
PHARMAPRINT to AAI and further warrants that all MANUFACTURING MATERIALS
provided to AAI are dietary supplements as defined by DSHEA.
3.4 MANUFACTURING RECORDS. AAI shall prepare documentation with regard
to the manufacture of PRODUCT which will include, but not be limited to: (i)
testing of appropriate components, in-process and finished PRODUCT and (iii)
batch records for processing PRODUCT. Such documentation shall be consistent
with a format previously approved by
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MANUFACTURING AGREEMENT
Page 6 of 14
PHARMAPRINT, and shall be prepared with respect to the manufacture of each
batch of PRODUCT. Documentation with regard to each batch shall be delivered
to PHARMAPRINT no later than twenty-one working (21) days after completion of
manufacture of such batch. The cost and requirements of providing in-process
and finished PRODUCT testing shall be codified in a separate agreement.
3.5 INSPECTION OF PRODUCT. PHARMAPRINT shall authorize its AGENT to
inspect each shipment of PRODUCT upon receipt to determine whether the
PRODUCT included in such shipment conforms to the SPECIFICATIONS. If any
production batches of the PRODUCT fail to meet the SPECIFICATIONS,
PHARMAPRINT shall have the right to refuse delivery of or to return such
batches. The AGENT shall immediately notify AAI in writing of the reasons for
such rejection. The cost of the rejected batches (including raw materials,
labor, manufacturing overhead and quality control) or, if applicable, the
cost of any rework (which rework must be approved by PHARMAPRINT) will be
borne by AAI unless such failure is caused by PHARMAPRINT MANUFACTURING
MATERIALS which fail to meet SPECIFICATIONS, spoilage of PHARMAPRINT
MANUFACTURING MATERIALS due to stability issues or conditions of shipping. In
the event of a disagreement pertaining to a PRODUCT rejection, a third party,
independent testing laboratory jointly selected by the parties will determine
whether the PRODUCT meets SPECIFICATIONS. Neither party shall have the burden
of proof in such determination. In the event that PHARMAPRINT rightfully
rejects or returns any batch of PRODUCT pursuant to this paragraph, it shall
receive a full credit for payments made with respect to such batch, or at its
option, AAI will undertake commercially reasonable best efforts to replace
such batch in a timely manner. If AAI cannot reproduce the batch or batches
within the timelines set for delivery of such PRODUCT, PHARMAPRINT may
utilize independent manufacturers not related to AAI to satisfy its
production and delivery requirements for such batch or batches until such
time as AAI can resume PREPARATION of PRODUCT to meet the timeline for
delivery of the rejected batch or batches. In no event shall PHARMAPRINT's
damages for rejected PRODUCT batches exceed the amount paid to AAI by
PHARMAPRINT for said batches plus PHARMAPRINT's out-of-pocket costs for
materials supplied. If PHARMAPRINT does not notify AAI of its rejection of
any PRODUCT within five (5) business days of receipt of analytical testing
performed by AAI intended for PHARMAPRINT's release of that PRODUCT, then
such PRODUCT will be conclusively deemed accepted by PHARMAPRINT.
3.6 ACCESS TO INFORMATION. AAI shall provide reasonable access to
information and support needed during investigations addressing customer
complaints and/or recalls.
<PAGE>
MANUFACTURING AGREEMENT
Page 7 of 14
ARTICLE IV
STORAGE
4.1 STORAGE AND SECURITY. AAI shall visually inspect MANUFACTURING
MATERIALS when received to determine conformance with mutually agreed upon
acceptable quality limits and store and secure such materials used for the
PREPARATION of the PRODUCT by means which meet cGMP requirements. Storage
shall comply with relevant SPECIFICATIONS. Once determined by AAI that
MANUFACTURING MATERIALS meet mutually agreed upon SPECIFICATIONS, AAI will
store such MANUFACTURING MATERIALS pursuant to the SPECIFICATIONS until such
MANUFACTURING MATERIAL is required for use in PREPARATION.
4.2 QUARANTINE. Prior to shipment of PRODUCT to distributors designated
by PHARMAPRINT, AAI shall hold in quarantine all individual batches of
PRODUCT.
4.3 WAREHOUSE PRICE ADJUSTMENT. The unit prices set forth in Exhibit "A"
were based upon cumulative required warehouse space for all MANUFACTURING
MATERIALS and PRODUCTS covered by this Agreement of 1,500 square feet. In the
event more or less warehouse space is required to store MANUFACTURING
MATERIALS and PRODUCTS, based upon an analysis of current and future peak
quarterly requirements, the adjustment to the required warehouse space shall
be credited or charged as a separate invoice item on a quarterly basis to
PHARMAPRINT.
ARTICLE V
QUALITY CONTROL
5.1 QUALITY REVIEW. Quality review of the PRODUCT manufacturing process
on an individual batch basis shall be the subject of another agreement
between the parties and is beyond the scope of this Agreement. AAI and
PHARMAPRINT agree to enter into a contract, or series of contracts, covering
the requisite analytical testing of MANUFACTURING MATERIALS, including
identification, -in-process and finished PRODUCT testing (collectively, the
"Analytical Contracts"). Such review shall include, but not be limited to,
manufacturing and in-process PRODUCT testing. PHARMAPRINT agrees that it
shall be responsible for releasing all PRODUCT which AAI PREPARES for
PHARMAPRINT. AAI acknowledges that it will PREPARE the PRODUCTS in accordance
with the agreed upon SPECIFICATIONS.
5.2 CONCURRENT TESTING. The parties agree that testing of MANUFACTURING
MATERIALS provided for in the SPECIFICATIONS or otherwise by separate
agreement shall be performed concurrently (unless otherwise mutually agreed)
with the PREPARATION of the PRODUCTS. If a PRODUCT must be rejected or
otherwise reworked, for conditions not related to the PREPARATION of the
PRODUCT, as a result of the data provided by the concurrent testing of the
MANUFACTURING MATERIALS, PHARMAPRINT shall pay AAI for the PREPARATION of the
PRODUCT as if it were accepted. AAI shall use commercially reasonable best
efforts to schedule the PREPARATION of replacement PRODUCT
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MANUFACTURING AGREEMENT
Page 8 of 14
to ensure PHARMAPRINT shipment schedules are maintained. If a PRODUCT is
rejected or reworked for failing to meet SPECIFICATIONS related to the
improper PREPARATION of the PRODUCT by AAI, then PHARMAPRINT will have the
options set forth in Section 3.5 above.
5.3 SAMPLES. AAI shall, at PHARMAPRINT's request, provide PHARMAPRINT
with samples from each production batch of the PRODUCT in the course of
manufacture, said quantities of samples to be designated by PHARMAPRINT.
Costs of such PRODUCT withdrawn for testing purposes will be paid by
PHARMAPRINT. The cost of sampling (excluding related analytical testing)
required by the batch records is included in the PRODUCT unit price.
5.4 AUDIT. PHARMAPRINT, through its authorized representatives, may
examine the quality control employed by AAI to ascertain that the PRODUCT
manufactured by AAI is being PREPARED in accordance with the SPECIFICATIONS.
All expenses of these tests, including transport and freight, will be paid by
PHARMAPRINT. PHARMAPRINT warrants that all vendors providing MANUFACTURING
MATERIALS have or will be audited. AAI shall have the right, at its election
and expense, to audit and certify PHARMAPRINT vendors. If a vendor refuses to
allow AAI to audit it in a reasonably timely manner, AAI and PHARMAPRINT
shall mutually agree upon how to proceed. Summaries of the results of vendor
audits whether performed by AAI or PHARMAPRINT will be made available to the
other party.
5.5 FDA INTERACTIONS. All documents and updates with regard to the
PREPARATION of the PRODUCT which are required by the FDA shall be provided by
AAI, and AAI shall submit to all inquiries and inspections by the FDA. AAI
shall promptly notify PHARMAPRINT of any FDA interactions relating to AAI
operations that could involve the PRODUCT. AAI shall provide PHARMAPRINT with
copies of all documents received from FDA which relate in any way to AAI's
PREPARATION of the PRODUCT and all AAI documents responding to such FDA
documents.
5.6 DISTRIBUTION. PHARMAPRINT warrants that the PRODUCTS manufactured
hereunder and distributed to American Home Products ("AHP") are dietary
supplement products, only, as defined in DSHEA.
ARTICLE VI
INSURANCE
For the term of this Agreement and for six years thereafter, each party
shall maintain, or cause to be maintained, at its own expense, general
liability insurance (including, without limitation, product liability
insurance, liability for property damage, personal injury, and contractual
liability) in combined single limits of not less than five million dollars
(35,000,000). In addition, each party shall maintain workers compensation
with limits not less than one million dollars ($1,000,000), and property,
inventory, and business interruption insurance as it reasonably determines.
Upon the written request of the other party, the requested party shall
deliver to the requesting party one or more Certificates of Insurance
providing evidence that the above general liability insurance has been
obtained. Such policy or policies shall provide for delivery of not less than
thirty (30) days prior written notice to the other party of cancellation or
non-renewal. Upon a
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MANUFACTURING AGREEMENT
Page 9 of 14
party's written request from time to time, each party shall furnish to the
other party one or more Certificates of Insurance reflecting coverage under
such insurance.
ARTICLE VII
CONFIDENTIALITY
7.1 NONDISCLOSURE. PHARMAPRINT states and AAI agrees that all data
disclosed to AAI by PHARMAPRINT pursuant to this Agreement or otherwise
related to the manufacture or distribution of the PRODUCTS, except as stated
below, is of a most highly confidential nature (the "CONFIDENTIAL
INFORMATION"), and in accepting such data for its internal use, AAI further
agrees to use such CONFIDENTIAL INFORMATION for no other purpose except in
furtherance of this Agreement and to protect and maintain such data in strict
confidence and not disclose such data, or any part thereof, to any person,
firm or other entity, including but not limited to affiliates and
subsidiaries of AAI, except to (i) employees of AAI who are bound by legally
enforceable written agreements to keep said data confidential and who have a
need to have access to said data; or (ii) any government agency if required
by law or regulation in connection with the performance of the terms of this
Agreement. The foregoing limitation shall not apply to any data that is in
the public domain or is legally disclosed by any third party (other than
AAI's affiliates or subsidiaries, or any of their officers, directors,
employees or agents) through no fault of such persons or entities.
7.2 RETURN OF INFORMATION. Upon expiration or termination of this
Agreement, upon PHARMAPRINT's request, AAI shall return to PHARMAPRINT all
originals and copies of manuals, correspondence, documents, records, or other
confidential written instructions it may have received concerning the
PREPARATION of PRODUCT except that AAI's Legal Department may retain one set
of copies of such materials in its secured records for purposes of meeting
its obligations of confidentiality hereunder, except as otherwise may be
required by regulatory agencies. If equipment was purchased by PHARMAPRINT
for projects under this Agreement, said equipment will be returned to
PHARMAPRINT upon termination of this Agreement unless otherwise specified.
7.3 PRESS RELEASES. Neither party may issue a press release or otherwise
publicly disclose the nature of this Agreement except as may be required by
law or disclosures to third parties under confidentiality agreements, without
the prior written consent of the other party.
ARTICLE VIII
WARRANTIES AND INSPECTION
8.1 WARRANTIES. AAI warrants that it will PREPARE the PRODUCT in
accordance with the requirements established for PRODUCT in the
SPECIFICATIONS.
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MANUFACTURING AGREEMENT
Page 10 of 14
AAI'S WARRANTIES SET FORTH IN THIS SECTION 8.1 ARE ITS EXCLUSIVE WARRANTIES
TO PHARMAPRINT WITH RESPECT TO THE PRODUCT, AND ARE GIVEN AND ACCEPTED IN
LIEU OF ANY AND ALL OTHER WARRANTIES, GUARANTEES, CONDITIONS AND
REPRESENTATIONS, EXPRESS OR IMPLIED, CONCERNING THE PRODUCT, INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE
8.2 INSPECTION. PHARMAPRINT, upon reasonable notice, shall have the
right, at its sole cost and expense, to conduct periodic inspections of AAI's
facilities to inspect and observe AAI's manufacturing, quality control and
quality assurance procedures. AAI shall make available to PHARMAPRINT during
on-site inspection all records and documentation addressing the PREPARATION
and quality control of the PRODUCT. AAI shall also provide PHARMAPRINT, at
PHARMAPRINT's request, copies of such records during such inspection at
PHARMAPRINT's sole cost and expense.
ARTICLE IX
FORCE MAJEURE
Neither party shall be liable for failure to perform or for delay in
performing any provision of this Agreement that such party is required to
perform, if such failure or delay is caused by labor disputes, an act of God,
riot, fire, explosion, flood, hostilities of war, executive legislation or
administrative order, restriction or controls of any governmental agency, or
other conditions reasonably beyond the control of such party. However, if any
such cause results in a delay in performance of this Agreement by either
party by more than sixty (60) days, the parties shall meet .and discuss what,
if any, modification of the terms of the Agreement may be required in order
to arrive at an equitable solution.
ARTICLE X
INDEMNIFICATION AND LIMITATION OF LIABILITY
10.1 PHARMAPRINT INDEMNITY. PHARMAPRINT shall indemnify and hold AAI
and its employees and directors harmless from any and all costs, expenses,
damages, judgments and liabilities (including attorneys' fees and the cost of
any recalls) incurred by or rendered against AAI, employees or directors
arising from any third party claim made or suit brought against AAI related
to or arising from its performance of this Agreement, except as specifically
provided in Section 10.2, and any and all claims made or suit brought against
AAI for patent, trademark, and/or copyright infringement and/or
misappropriation of trade secrets relative to the PRODUCT. AAI shall give
PHARMAPRINT prompt written notice of any such claim or suit, and PHARMAPRINT
shall undertake the defense thereof, at PHARMAPRINT's expense. AAI shall
cooperate in such defense to the extent reasonably requested by PHARMAPRINT,
at PHARMAPRINT's expense. AAI shall have the right to participate in such
defense, at its own expense, to the extent that in its judgment, AAI may be
prejudiced thereby. In any claim made or suit brought for which AAI seeks
indemnification under this Section 10.1, AAI shall not settle, offer to
settle, or admit liability or damages without the prior written consent of
PHARMAPRINT.
<PAGE>
MANUFACTURING AGREEMENT
Page 11 of 14
10.2 AAI INDEMNITY. AAI shall indemnify and hold PHARMAPRINT and its
employees or directors harmless from any and all costs, expenses, damages,
judgments and liabilities (including attorneys' fees) incurred by or rendered
against PHARMAPRINT or its employees or directors in any third party claim
made or suit brought to the extent resulting tom the negligence or willful
misconduct of AAI in PREPARING the PRODUCTS. PHARMAPRINT shall give prompt
written notice of any such claim or suit, and AAI shall undertake the defense
thereof, at AAI's expense. PHARMAPRINT shall cooperate in such defense, to
the extent reasonably requested by AAI, at AAI's expense. PHARMAPRINT shall
have the right to participate in such defense, at its own expense, to the
extent that in its judgment PHARMAPRINT may be prejudiced thereby. In any
claim made or suit brought for which PHARMAPRINT seeks indemnification under
this Section 10.2, PHARMAPRINT shall not settle, offer to settle, or admit
liability or damages without the prior written consent of AAI.
10.3 LIMITATION OF LIABILITY. In the event AAI does not PREPARE a batch
of PRODUCT according to the SPECIFICATIONS or applicable regulatory standards
for DSHEA products, AAI's liability to PHARMAPRINT shall be limited to either
the replacement of the PRODUCT or the refund of the payments received for
such batch.
10.4 NO CONSEQUENTIAL DAMAGES. In no event will AAI or PHARMAPRINT be
liable for lost profits or special or consequential damages of the other
party.
10.5 MITIGATION. In the event of any occurrence which may result in
either party becoming liable under Section 10.1 or 10.2, each party shall use
its reasonable efforts to take such actions as may be reasonably necessary to
mitigate the damages payable by the other party under Sections 10.1 or 10.2,
as the case may be.
ARTICLE XI
TERM AND TERMINATION OF AGREEMENT
11.1 TERM. Unless earlier terminated or cancelled in accordance with the
provisions hereof, the initial term of this Agreement shall commence upon the
execution of the Agreement and shall automatically terminate on June 30,
2001. PHARMAPRINT may terminate this Agreement upon thirty (30) days notice
if the FDA promulgates new regulations or procedures which regulate the
PRODUCTS as a drug instead of a dietary or food supplement and such change
prohibits the commercial sale of the PRODUCTS without filing a New Drug
Application with FDA. Further, either party may elect to terminate this
Agreement at any time by providing six (6) months prior written notice to the
other party as provided herein subject to Sections 11.2 and 11.2.1 below.
11.2 PHARMAPRINT TERMINATION. In the event PHARMAPRINT terminates this
Agreement pursuant to Section 11.1, PHARMAPRINT shall pay the following
contract termination fee:
<PAGE>
MANUFACTURING AGREEMENT
Page 12 of 14
(i) $ 1,000,000 if notice of termination is received within six months of
the date of execution of the Agreement; or
(ii) $700,000 if notice of termination is received within six to twelve
months of the date of execution of the Agreement; or
(iii) $200,000 if notice of termination is received within twelve to
twenty-four months of the date of execution of the Agreement; or
(iv) $ 100,000 if notice of termination is received after twenty-four
months of the date of execution of the Agreement.
In the event PHARMAPRINT exercises its notice to terminate the Agreement
pursuant to 11.2.(i) or 11.2.(ii) above, AAI shall transfer the equipment
listed on Exhibit G to PHARMAPRINT. AAI will assign its ownership rights to
PHARMAPRINT upon receipt of payment.
11.2.1 AAI TERMINATION. In the event AAI terminates the Agreement
pursuant to Section 11.1 above, PHARMAPRINT at its option and sole discretion
may purchase the Equipment listed on Exhibit 6 for the price set forth on
Exhibit G.
11.3 TERMINATION FOR BREACH. Either party may termite this Agreement
upon the material breach of this Agreement by the other party if such
material breach is not cured within sixty (60) days of receipt of notice from
the non-breaching party.
11.4 PURCHASE OF MATERIALS. Upon termination of the Agreement,
PHARMAPRINT shall purchase from AAI, at cost, all raw materials and packaging
materials purchased by AAI for use in manufacturing the PRODUCT. Finished
goods shall be purchased by PHARMAPRINT from AAI at the price established
pursuant to Paragraph 2.1.A. Any PRODUCT in the process of manufacture by AAI
on the termination date shall be completed and delivered to PHARMAPRINT in
accordance with the terms of this Agreement.
ARTICLE XII
MISCELLANEOUS
12.1 NOTICES. All notices given or requests made under this Agreement
shall be in writing and shall be delivered or mailed by certified or
registered mail with a return receipt requested or by a reputable express
delivery service-to the party for which it is intended at its address as set
forth below, or at such other address as the addressee may have designated to
the other party in writing. Any notice shall be deemed given only upon actual
delivery thereof at the proper address.
<PAGE>
MANUFACTURING AGREEMENT
Page 13 of 14
All notices to PHARMAPRINT shall be addressed to:
PHARMAPRINT INC.
4 Park Plaza
Suite 1900
Irvine, California 92614
(attention: General Counsel)
All notices to AAI shall be addressed to:
Applied Analytical Industries, Inc.
1206 North 23rd Street
Wilmington, North Carolina 28405
(attention: General Counsel)
12.2 ARBITRATION. In the event of any dispute arising out of or in any
way relating to this Agreement or the rights or obligations of either party
hereto, then such dispute shall be settled by arbitration to be held in
Wilmington, North Carolina, in accordance with the rules of the American
Arbitration Association then prevailing. The prevailing party shall be
entitled to reimbursement of attorneys' fees and costs associated with the
proceeding.
12.3 ASSIGNMENT. This Agreement shall inure to the benefit of and be
binding upon the undersigned parties, their respective legal successors and
assigns.
12.4 MODIFICATION. This Agreement may not be changed, waived,
discharged, or terminated orally, but only by an instrument in writing signed
by the parties.
12.5 PAROL AGREEMENTS. The parties agree that the provisions of this
Agreement and the Confidentiality Agreement dated November 13, 1997 (the
"Confidentiality Agreement"), together with any amendments, schedules and
attachments hereto, represent the entire agreement between them with respect
to the subject matter thereof and supersede any other agreements or
understandings they may have with respect thereto. In the event any term in
this Agreement conflicts with a term in the Confidentiality Agreement, the
terms of the Confidentiality Agreement shall be controlling.
12.6 JURISDICTION. This Agreement shall be governed by and construed,
interpreted, enforced and applied in accordance with the laws of the State of
North Carolina.
12.7 SEVERABILITY. The invalidity of one or more provisions of this
Agreement shall not affect the validity of the Agreement as a whole, unless
the invalid provisions are of such essential importance to this Agreement
that it is to be reasonably assumed that the parties would not have entered
into this Agreement without the invalid provision.
12.8 SCOPE OF RELATIONSHIP. Nothing herein contained shall be deemed to
create any relationship in the nature of agency, joint venture, partnership
or similar relationship between PHARMAPRINT and AAI.
12.9 EXECUTION. This Agreement shall be executed in duplicate originals
with each party retaining one original for its files.
<PAGE>
MANUFACTURING AGREEMENT
Page 14 of 14
WITNESS the signatures on behalf of the parties hereto by their duly
authorized representatives as of the date first set forth above.
PHARMAPRINT
By: /s/ PHILLIP G. TRAD
-------------------------------------------
PHILLIP G. TRAD, SENIOR VICE-PRESIDENT
& GENERAL COUNSEL
APPLIED ANALYTICAL INDUSTRIES, INC.
By:
--------------------------------------------
FREDERICK D. SANCILIO,
CHIEF EXECUTIVE OFFICER
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