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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (Fee Required)
For the Fiscal year ended December 31, 1996
Commission File No. 0-26534
VION PHARMACEUTICALS, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 13-3671221
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4 Science Park
New Haven, Connecticut 06511
(Address of principal executive (Zip Code)
offices)
Issuer's telephone number, including area code: (203) 498-4210
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class
-------------------
Units
Common Stock, $0.01 par value
Class A Warrants
Class B Warrants
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 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 | |
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB or any amendment to this form 10-KSB. |X|
The Registrant's revenues for the most recent fiscal year were: $51,779.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of December 31, 1996 based upon of the last sale price of such
stock on that date as reported by the NASDAQ SmallCap(SM) Market was
$20,095,815. The number of shares of the Registrant's Common Stock outstanding
as of December 31, 1996 was 8,017,961.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of registrant's Proxy Statement for its Annual Meeting of Stockholders
to be held on April 16, 1997 are incorporated by reference in Part III of this
Report. Except as expressly incorporated by reference, registrant's Proxy
Statement shall not be deemed to be part of this Form 10-KSB.
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PART I
Item 1: DESCRIPTION OF BUSINESS
General
Vion Pharmaceuticals, Inc. (the 'Company') is an early stage
biopharmaceutical company which has sponsored research projects and is engaged
primarily in research and development of therapeutic products for the treatment
of cancer. Pursuant to a license agreement entered into with Yale University
('Yale') in August 1994 (the 'Yale/OncoRx Agreement'), the Company has acquired
the rights to certain oncology and antiviral related patents and technology. The
Company believes that the licensed rights include several novel technologies
which provide a broad technology base for the future development of therapeutic
products.
Research and Development. The Company's strategy is two-fold. First, the
Company intends to engage principally in research and development with respect
to anticancer and antiviral technologies through in-house research and through
collaborative and sponsored research agreements. The Company's initial research
and development will focus on the following core technologies: (i) porfiromycin
(Promycin(TM)), a hypoxic cancer cell therapeutic which targets oxygen-depleted
cells that are otherwise resistant to radiation therapy, (ii) alkylating agent
prodrugs, which are designed to be activated in cancer cells or the surrounding
area and destroy cancer cells, (iii) novel nucleoside analogs which inhibit the
Hepatitis B virus, (iv) ribonucleotide reductase inhibitors, which may block the
formation of the precursors of DNA and thereby inhibit the replication of cancer
cells and (v) Tumor Amplified Protein Expression Therapy, or TAPET(TM), a novel
gene therapy vector for the treatment of cancer. In addition to its core
technologies, the Company has rights to several additional product candidates,
including (i) Melasyn(TM), a synthetic form of melanin, and (ii) a
microfiltration and drug delivery technology being developed at the University
of California, Berkeley ('Berkeley'). The Company's early research and
development efforts were performed by academic collaborators. Since its initial
public offering in August, 1995, the Company has recruited a scientific staff
which is engaged directly in research and development although the Company also
expects to continue to sponsor academic collaborators.
The Company has developed small molecular weight, pharmaceutical agents
with known mechanisms of activity. The Company initially intends to target
projects for such agents based upon (i) the likelihood that commercially-viable
products can successfully be developed using technology currently available to
the Company with no additional acquisition or licensing costs, (ii) the
potential commercial market for the product and (iii) the projected time to
market of the product. If the Company's TAPET program proves its ability to
deliver growth-inhibiting therapy to tumor tissue, the Company intends to
further develop TAPET as a platform technology in several ways. The Company
intends to select existing effective anti-cancer agents for delivery using
TAPET, and the Company may also contract with other pharmaceutical companies to
use TAPET to deliver new, proprietary anti-cancer agents.
In-licensing. Second, the Company intends to seek, generally through
in-licensing, therapeutic products and medical devices which are
oncology-related and can be marketed without significant additional development
activities to selected segments of the oncology market. The Company intends to
seek products which can be marketed within 24-36 months in order to provide the
Company with a source of revenues prior to the time when revenues can be
expected to be realized from pharmaceutical products which may result from the
Company's research and development efforts, if successful. The objective of this
strategy is to generate near-term revenues which can help support the Company's
infrastructure and reduce the risks associated with early-
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stage research and development. The Company believes that there should be
product candidates available for its in-licensing program, including medical
devices aimed at the oncology market and prescription and non-prescription
oncology products currently producing or expected to produce relatively small
sales volume and which do not have the market potential to be actively promoted
by large pharmaceutical companies.
In connection with its in-licensing program, the Company intends to
establish a sales force targeting the oncology market. The Company believes that
this sales force will facilitate the marketing of oncology-related products
obtained through in-licensing, and may also enable the Company to seek
co-marketing arrangements with other pharmaceutical companies.
Overview of Cancer
Cancer is characterized by uncontrolled cell division resulting in the
development of a mass of cells, commonly known as a tumor, and invasion and
spread (metastasis) of the cells. Cancerous tumors can arise in almost any
tissue or organ within the human body. Cancer is believed to occur as a result
of a number of factors, such as genetic predisposition, chemical agents, viruses
and irradiation. These factors may result in genetic changes affecting the
ability of cells to normally regulate their growth and differentiation. When a
normal cell becomes cancerous it can spread (metastasize) to various sites in
the body. Cancer is a devastating disease with tremendous unmet medical needs.
It has been estimated by the American Cancer Society that there were 1.2 million
new cases of cancer in 1994 in the United States, 60% of which are expected to
result in death within five years. The market for cancer therapeutics was
approximately $6 billion in 1992 and is projected to total approximately $14
billion by the year 2000.
Although several types of tumors can now be effectively treated with
drugs, it is only in recent years that we have begun to see improvement in the
survival rates for the most common tumors. The Company believes that recent
developments in the understanding of the processes that regulate the
proliferation and metastasis of malignant cells provides opportunities to
discover and develop innovative products and approaches to treat cancer.
The three most common methods of treating patients with cancer are
surgery, radiation therapy and chemotherapy. A cancer patient often receives a
combination of two or all three of these modalities. Surgery and radiation
therapy are particularly effective in patients in which the disease is localized
and has not yet spread to other tissues or organs. Surgery involves the removal
of the tumor and adjacent tissue. In many cases where metastases have not yet
occurred, however, surgery still cannot be performed because of the inaccessible
location of the tumor or the danger of removing too much normal tissue along
with the cancerous tissue.
Radiation therapy involves the exposure of the tumor and surrounding
tissue to ionizing radiation. The objective of radiation therapy is to kill the
cancer cells with certain ionized molecules (free radicals) that are created in
the parts of the body exposed to the ionizing radiation. Radiation, however,
also kills or damages normal cells. Radiation therapy can result in varying
levels of effectiveness, as well as in patient weakness, loss of appetite,
nausea and vomiting, and loss of normal body functions, which may include bone
marrow depression, gastrointestinal complications, kidney damage and damage to
the peripheral nervous system. In some cases, radiation-induced mutations in
bone marrow cells can lead to new secondary cancers, such as leukemia, years
after treatment for other forms of cancer.
Chemotherapy is the principal approach used for tumors that have
metastasized. Chemotherapy seeks to interfere with the molecular and cellular
processes that control the development, growth and survival of malignant tumor
cells. Chemotherapy involves the administration of cytotoxic drugs designed to
kill cancer cells or the administration of hormone
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analogs to either reduce the production of, or block the action of, certain
hormones such as estrogens and androgens which affect the growth of certain
tumors. In many cases, chemotherapy consists of the administration of several
different drugs in combination.
In recent years, there have been significant advances in molecular
biology, immunology and other related fields of biotechnology which have led to
a better understanding of how malfunctioning genes can result in the formation
of tumors. It is anticipated that these advances in biotechnology will lead to
better ways to diagnose cancer and to prevent tumors from forming or becoming
malignant. Ultimately, these emerging technologies may lead to genetic-based
therapies aimed specifically at the genes which have malfunctioned and caused
the cancer to form or spread.
The Company believes, however, that a considerable amount of additional
research and development will be necessary before such biotechnology-based
pharmaceutical products to prevent cancer will have a significant impact on
methods of treating cancer. Additionally, the Company believes that these
emerging technologies will be initially incorporated into protocols using
chemotherapy and radiation therapy until it has been shown that
biotechnology-based products are effective as single agents. The Company
believes that, for the foreseeable future, the principal means of combating
cancer will continue to be through the surgical removal of tumors and the
destruction of malignant cells through radiation therapy and chemotherapy, and
that new chemically defined small molecules may be developed based upon unique
cellular targets discovered through biotechnology. Therefore, the Company
intends to initially focus its research and development efforts on the
identification and development of small molecule chemotherapeutics with known
molecular mechanisms of action.
Research and Development
The Company is currently focusing on the following principal areas of
research: (i) hypoxic cancer cell therapeutics, (ii) alkylating agent prodrugs,
(iii) novel nucleoside analogs, (iv) ribonucleotide reductase inhibitors and (v)
Tumor Amplified Protein Expression Therapy, or TAPET. All of these technologies
were licensed by the Company pursuant to the Yale/OncoRx Agreement and are in
the early development stage and require significant further research,
development, testing and regulatory clearances. The Company's current research
and development efforts were initiated by academic collaborators at Yale
University and are being pursued at the Company and Yale with Company
sponsorship.
Hypoxic Cancer Cell Therapeutics. Solid tumors have been shown to contain
cells with severe oxygen depletion known as hypoxic cells. The Company believes
that one possible explanation for the failure of radiation therapy is the
existence within tumors of hypoxic cells, although there is no direct proof in
humans. The hypoxic tumor cells can often constitute 1-15% of the malignant
cells contained in a tumor. Because radiation therapy requires oxygenation of
the tissue in order to be effective, hypoxic cells are less susceptible to
radiation therapy and tend to form a therapeutically resistant group within
solid tumors. Even small quantities of hypoxic cells within a tumor provide the
basis for tumor cells to survive and proliferate after most of the non-hypoxic
malignant cells in the tumor have been eradicated by radiation treatment.
Hypoxic cells also exhibit resistance to most standard chemotherapeutic agents.
Investigators in Dr. Alan C. Sartorelli's laboratory at Yale have sought
to develop chemotherapeutic agents which by virtue of their chemical and
metabolic properties could be selectively toxic to hypoxic cells. One such agent
identified by Dr. Sartorelli was Promycin, a bioreductive alkylating agent.
Laboratory studies indicated that Promycin destroyed a greater percentage of
hypoxic cells relative to oxygenated cells than other agents being tested. A
Phase I/II trial was conducted at Yale on a limited number of people. In this
initial study, of the 21 patients treated with radiation (and, in some cases,
surgery) in conjunction with Promycin for certain types
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of cancer of the head and neck, seven remain alive with no evidence of the
disease or the cancer after a median follow-up of 60 months. The Company
believes that these results are better than would have been expected without the
use of Promycin, although there can be no assurance that Promycin will prove to
be efficacious in a more extensive study. Based on these findings, a Phase III
trial has been initiated of Promycin in patients with head and neck cancer,
which is designed to determine the efficacy of Promycin as an adjunct to
radiation therapy for these conditions. The Phase III trial is initially being
conducted at Yale and the Company has expanded the Phase III trial to include
additional sites in Europe and the United States. The Company also plans to
evaluate Promycin in other tumor types.
The Company has obtained an exclusive license from Yale for the data
regarding Yale's research on Promycin and the clinical studies of
Promycinconducted by Yale. Because composition of matter patent protection is
unavailable for Promycin, the Company has received Orphan Drug status with
respect to Promycin.
Alkylating Agent Prodrugs. Alkylating agents are used to treat a variety
of cancers, with different alkylating agents being used to treat different
malignancies. These drugs are highly reactive (i.e., react with a number of
different types of cells) and, as a consequence, cause undesirable side effects.
This reactivity may be controlled by converting alkylating agents to prodrug
forms. This conversion is accomplished by the attachment of a prodrug component
to the alkylating agent so as to block the reactivity of the compound. The
prodrug component can be designed to be released by a variety of enzymes found
predominantly in tumors or in the area surrounding the tumor cells. Cleavage of
the prodrug component from the alkylating agent, so as to restore the reactivity
of the alkylating agent, occurs within the target tumor or in the area
surrounding the tumor, thus permitting greater tumor selectivity and activity
and lowering the potential for toxicity.
The Company has licensed several classes of alkylating agent prodrugs from
Yale, including certain prodrugs which are the subject of three issued patents.
Each of these alkylating agent prodrugs may target a unique property of a cancer
cell, thereby destroying it. The Company is in the process of evaluating several
lead candidates for development. Each of these alkylating prodrugs may target a
unique property of a cancer cell, thereby destroying it. The Company intends to
extend its preclinical studies, which will include analytical studies,
formulation and toxicological evaluation, and, if successful, intends to file an
Investigational New Drug Application (IND).
Novel Nucleoside Analogs. Antimetabolites are anticancer and antiviral
agents which resemble natural cellular metabolites and therefore interfere with
natural metabolic processes. Certain of the more significant antimetabolites
inhibit the function of enzymes which are necessary for the synthesis of
nucleotides (which are the building blocks of DNA and RNA) and therefore inhibit
cell growth. Pursuant to the Yale/OncoRx Agreement, the Company has licensed
from Yale a patent application relating to the nucleoside analog 3-TC and its
use as an anti-hepatitis B virus ('HBV') agent, and several patent applications
relating to the nucleoside analogs Beta-L-FddC and Beta-L-Fd4C and their use as
anti-HBV agents. These nucleoside analogs are antimetabolites and have shown, in
early preclinical studies, the ability to inhibit the replication of HBV. HBV is
a causative agent of both acute and chronic forms of hepatitis which affects
about 300 million people worldwide. HBV also predisposes its victims to the
development of liver cancer. At present, no clinically useful drug is on the
market for the treatment of HBV infections.
The Company is aware of numerous patent applications and/or patents owned
by third parties that also relate to 3-TC and Beta-L-FddC and/or their uses as
anti-HBV agents. The Company cannot predict whether its or its competitors'
patent applications will result in valid patents being issued. See '--Patents,
Licenses and Trade Secrets.' In October 1996 the U.S.
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Patent and Trademark Office issued a patent to Yale University covering the
composition of matter and method of use of Beta-L-Fd4C for treating HBV, and
Yale has licensed to the Company exclusive worldwide rights to the patent
including the use of Beta-L-Fd4C for the treatment of HBV and AIDS. Due to the
resources required, the Company intends to seek a strategic partner to further
develop these anti-HBV agents.
Ribonucleotide Reductase Inhibitors. The conversion of ribonucleotides to
deoxyribonucleotides, which is catalyzed by ribonucleotide reductase, is a
critical step in the synthesis of DNA in cells. If DNA is not synthesized, cells
cannot replicate. The Company believes that a strong inhibitor of ribonucleotide
reductase which targets cancer cells could act as a therapeutic agent. The
Company has initiated a program to develop inhibitors of ribonucleotide
reductase based on technology developed by Dr. Sartorelli and licensed under the
Yale/OncoRx Agreement. The Company has licensed from Yale patented technology
related to ribonucleotide reductase inhibitors. The Company has not yet
undertaken toxicity tests and additional research is necessary to determine if
the inhibitors tested have sufficient specificity in cancer cells. However,
preclinical evaluation has demonstrated broad spectrum activity in animal models
and one product candidate, 3-AP (OCX-0191) has been chosen for development. If
preclinical studies including analytical studies, formulation and toxicological
evaluation are successful, the Company will proceed to an IND filing.
TAPET. TAPET stands for Tumor Amplified Protein Expression Therapy, an
enabling platform technology featuring a novel gene therapy vector for the
treatment of cancer. Originated at Yale University and advanced at Vion and Yale
with Vion's sponsorship, the TAPET system uses genetically-engineered bacteria
as vectors to deliver prodrug converting enzymes and genes that are capable of
regulating cell growth in tumor tissue. Screened for their significant activity
in tumors, TAPET organisms selectively target and infect tumors, rapidly
multiplying in them by several orders of magnitude relative to normal tissue.
The microorganisms have been designed to be highly selective for tumor tissue,
greater than in normal tissue, and as an additional safeguard, the possibility
for infection of normal tissue has been attenuated by bioengineering the
organisms. The organisms are also sensitive to a broad spectrum of commonly used
antibiotics. Tumor localization has been shown in animal models using TAPET
strains in 12 tumor models including models of melanoma, breast, lung, colon,
renal and liver cancer. Having developed this vector, the expression of multiple
genes that are capable of regulating prodrug converting enzymes has been
achieved. For example, the program has demonstrated in vivo activity for a
bacterial strain which expresses the herpes simplex virus thymidine kinase gene
for the conversion of ganciclovir to its toxic phosphorylated forms. As a
platform technology, Vion is developing a portfolio of TAPET organisms for
itself and potential partners to deliver prodrug converting enzymes and/or
cytokines to tumors. The Company believes that TAPET is unique in its ability to
target solid tumor tissue and the vector's ability reproduce at high levels
within tumor tissue. Vion is developing TAPET towards human clinical trials.
Other Programs. The Company also intends to pursue other research and
development projects leading to the development of anticancer therapeutics. The
Company intends to seek collaborations with academic institutions, including
additional arrangements with Yale, to obtain additional rights. The Company
believes that its relationship with Dr. Sartorelli and Dr. Yung-Chi Cheng of
Yale, both of whom are on the Company's Scientific Advisory Board, may provide
the Company with the ability to obtain rights in connection with work being done
in their laboratories. However, the Yale/OncoRx Agreement only granted to the
Company rights to specific technologies and the Company does not have any right
to obtain a license to any of the work being conducted in their laboratories and
any such rights would be subject to reaching an agreement with Yale as to the
terms of such license.
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In-Licensing Program
As part of the Company's strategy, the Company also intends to in-license
or acquire rights to niche oncology-related products which the Company believes
can be commercialized in the near-term (24-36 months). The Company believes that
there should be products available for in-licensing because larger
pharmaceutical companies generally pursue products only if they believe that
such products will provide a source of substantial revenues and therefore will
discontinue developing or promoting products which have smaller potential
markets. In many cases, the Company believes that these products may be ready
for marketing without significant additional expense or development activities
and can provide a source of revenues for the Company in the near term. The
objective of this strategy is to generate revenues to help support the Company's
infrastructure while the Company pursues research and development projects
which, if successful, are not expected to produce any material revenues for a
significant number of years. Through its in-licensing program, the Company
intends to target products which can be distributed through a sales and
marketing team which the Company plans to establish to target the oncology
market. In connection with this strategy, the Company has identified certain
products and technologies which it intends to develop and market. However, there
can be no assurance that any required FDA marketing clearances or approvals can
be obtained on a timely basis, if at all.
Hydrogel Polymer. The Company has entered into an agreement with PMP, Inc.
pursuant to which the Company has exercised an option for an exclusive license
to purchase from PMP the raw material, and to market, distribute and sell in
North America, a proprietary polymer-based hydrogel wetting agent. The $10,000
option exercise fee was paid to PMP on November 2, 1995 and represents fully
paid up license fees and royalties, with no further payments due from Vion. The
product has been formulated as an oral spray, gel and lozenge with mucoadhesive
properties for the treatment of mucositis (an inflammation of the oral mucosa)
and xerostomia (dryness of the mouth and lips), which commonly occur in
individuals receiving cancer chemotherapy and certain radiation therapies.
Mucositis and xerostomia are both conditions which can cause pain and discomfort
and can be sufficiently severe so as to require a limitation on the chemotherapy
dose. A number of other products are currently being marketed to treat these
conditions. The proposed product, which is expected to be marketed
over-the-counter with a distribution approach aimed at oncology doctors and
clinics, has not yet received FDA clearance or approval and there can be no
assurance that it ever will. However, there is a possibility that, if the
product is substantially equivalent to other products on the market, it could
obtain 510(k) marketing clearance as a medical device.
Termination of Response GM Agreement. On August 30, 1996, Response
Biomedical Corp. and the Company mutually agreed to terminate a Sales and
Distribution Agreement pursuant to which the Company was to have been the sole
and exclusive distributor in the United States and Canada of Response's
WhiteCounts (formerly the Response GM) point-of-care white blood cell monitor in
the oncology marketplace. WhiteCounts, designed as a hand-held granulocyte
(white blood cell) monitoring device, is not patented in the United States and
had not received FDA 510(k) clearance or premarket approval to be marketed as a
professional use device in the United States. Under the terms of the former
agreement, the Company would have been required to conduct, at its expense,
clinical testing in order to receive such FDA approval. The Company would have
also been required to pay up to an aggregate of $725,000 to Response Biomedical
Corp. based on the achievement of certain milestones, with most of the payments
due after FDA approval.
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Other Potential Product Candidates
In addition, the Company has two additional product candidates, described
below. The Company intends to explore outlicensing or other corporate partner
strategies for these technologies.
Melasyn(TM). Pursuant to a license agreement with Yale (the Melasyn
License), the Company has obtained rights to a synthetic form of melanin which
the Company has named Melasyn. Melanin is a pigment formed by cells in the skin
which gives skin its color and protects it from sun damage by absorbing
ultraviolet rays. The Company is seeking opportunities to market Melasyn to
cosmetics and other companies for possible use in self tanning and sunscreen
products. The Company has entered into an agreement with Creative Polymers
pursuant to which Creative Polymers has agreed to be the exclusive selling agent
for Melasyn and will be entitled to 20% of the net sales of Melasyn.
The Company has also funded research projects relating to synthetic
melanin for use in cosmetics, as well as compounds to control pigmentation and
chemotherapeutic products for treating melanoma. To date, such research has not
provided any other products or product candidates which the Company presently
plans to pursue, although the Company still has substantial financial
commitments to Yale pursuant to such agreement. See '--Sponsored Research and
License Agreements.'
Drug Delivery Technology. In July 1994, the Company entered into a
sponsored research and an option agreement with Berkeley, pursuant to which the
Company is sponsoring research at Berkeley being conducted in the laboratory of
Dr. Mauro Ferrari regarding microfiltration and drug delivery technology. The
Company has an exclusive option to negotiate an exclusive license for any
resulting product. Dr. Ferrari and his research associates at Berkeley have been
working on techniques for micromanufacturing silicon filters with controlled
pore sizes and geometries. At present, there is no source of inorganic membrane
filters having geometrically defined submicron-sized pores. If Dr. Ferrari's
technology functions in accordance with his theories, the Company believes that
this microfabrication technology will produce such membrane filters. The Company
is currently evaluating promising applications for this microfabrication
technology. Potential applications include bioseparation filters and use as a
drug delivery device. The Company's current strategy for commercializing this
microfabrication technology will be to continue to evaluate opportunities for
its applications and actively pursue collaboration alternatives. See
'--Sponsored Research and License Agreements.'
Collaborative Arrangements
The Company intends to seek collaborative agreements with pharmaceutical
or biotechnology companies to develop certain of its product candidates. The
Company believes that these arrangements will permit the Company to develop
certain of its product candidates without incurring the substantial costs
associated with development and may also provide an additional source of
financing.
Sponsored Research and License Agreements
Yale/OncoRx Agreement. Pursuant to a License Agreement dated August 31,
1994, as amended November 15, 1995, Yale granted to Vion an exclusive,
non-transferable, worldwide license to make, have made, use, sell and practice
certain inventions and research for therapeutic and diagnostic purposes. The
licensed technology includes the five core technologies on which the Company
initially intends to focus. See '--Research and Development.' The term of the
license is the expiration of any patents relating to any inventions or, with
respect to non-patented inventions
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or research, 17 years. Yale has retained the right to make, use and practice the
inventions and research for non-commercial purposes. The Yale/OncoRx Agreement
also provides that if Yale, pursuant to its own research, identifies potential
commercial opportunities for the inventions and research, Yale will give the
Company a first option to negotiate a commercial license for such commercial
opportunities. Pursuant to the Yale/OncoRx Agreement, the Company issued to Yale
159,304 shares of common stock, granted certain registration rights to Yale with
respect to these shares of Common Stock and made a payment of $50,000. In
addition, Yale is entitled to royalties on sales, if any, of resulting products
and sub-licensing revenues and, with regard to one patent, milestone payments
based on the status of clinical trials and regulatory approvals. The Company has
agreed with Yale that the Company will plan and implement appropriate research
and development with respect to commercialization of products based on the
licensed inventions and research. In the event that the agreement is terminated
for breach, all rights under licenses previously granted terminate. Accordingly,
a default as to one product could affect the Company's rights in other products.
Subsequent to entering into the Yale/OncoRx Agreement, the Company paid
$345,000 as unrestricted grants to fund certain research at Yale, including
research in Dr. Cheng's laboratory. The Company made additional unrestricted
grants to Yale of $345,000 in November 1995 and November 1996 for continued
support of this research. There can be no assurance that these funds will be
used to conduct research relating to products which the Company desires to
pursue. Additionally, to the extent that such research results in technologies
not covered by the Yale/OncoRx Agreement, the Company may be unable to utilize
such technologies unless it negotiates additional license agreements.
Yale/MelaRx Agreement. Pursuant to a Research Agreement dated September
23, 1988, as amended and restated as of August 1, 1992, Yale has agreed to
perform a research program under the supervision of Dr. John Pawelek, while he
is employed by Yale. The research program has primarily involved synthetic
melanin and products designed to control the effects of ultraviolet radiation.
In addition, under the Company's TAPET program, Dr. Pawelek is conducting
certain research regarding the use of a bacterial vector in connection with
genetic therapy for melanoma. The Company has agreed to reimburse Yale for its
direct and indirect costs in connection with the research program in an amount
currently equal to $856,211 per year (subject to increase by up to 5% per year).
Except to the extent of inventions made solely by the Company's employees, Yale
will be the owner of any inventions resulting from the research and the Company
will have an option to obtain an exclusive license (to the extent Yale has the
right to grant such a license) with respect to the inventions. The Company and
Yale entered into a License Agreement dated December 15, 1995 pursuant to which
the Company received a non-transferable worldwide exclusive license to three
inventions relating to gene therapy for melanoma. Pursuant to this agreement the
Company has agreed to pay Yale a $100,000 fee not later than June 15, 1997, plus
milestone payments based on the status of clinical trials and regulatory
approvals. In addition, Yale is entitled to royalties on sales, if any, of
resulting products and sub-licensing revenues. The Yale/MelaRx Agreement is for
a term ending June 30, 1998, subject to earlier termination by the Company if
Dr. John W. Pawelek is no longer the principal investigator and subject to the
Company's right to terminate its participation on one year's notice if its
economic circumstances make it impracticable and unfeasible to provide funding
for the research.
Pursuant to the Yale/MelaRx Agreement, Yale and the Company have entered
into five license agreements which grant the Company exclusive licenses to make,
use, sell and practice the inventions covered by certain patents. Each such
license agreement requires the Company to pay to Yale royalties based on a
percentage of net sales of the products covered and sublicensing income. In
addition, the licenses provide that they are terminable in the event the Company
does not exercise due diligence in commercializing the licensed technology.
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University of California, Berkeley. In July 1994, MicroFab BioSystems,
Inc. ('MicroFab'), a subsidiary of the Company, entered into a Sponsored
Research Agreement with Berkeley pursuant to which MicroFab agreed to sponsor
research conducted by Dr. Ferrari at Berkeley through June 30, 1996. In November
1995, the Company amended the sponsored research agreement with Berkeley,
increasing the amount of sponsorship to $1,208,236 through August 31, 1996. The
Company has agreed to an extension of the agreement which continues through
February 28, 1997 at a total level of funding of $250,000. To the extent
Berkeley has a legal right to do so, and to the extent MicroFab has paid all
direct and indirect costs of the research, including a proportionate share of
the principal investigator's salary, Berkeley has agreed to negotiate in good
faith with respect to one or more licenses with MicroFab in accordance with the
Option Agreement (as is described below).
Under the Option Agreement which was entered into simultaneously with the
Sponsored Research Agreement, Berkeley granted to the Company an option to
negotiate in good faith an exclusive license to Berkeley's patent rights to
three inventions relating to microfabricated particle filters and
microfabricated capsules for immunological isolation of cell transplants.
MicroFab paid Berkeley a non-refundable option payment of $30,000 for the three
inventions covered by the Option Agreement, which option expired in July 1995.
MicroFab exercised a right to elect to renew the Option Agreement for one
additional one-year period and paid Berkeley an additional $30,000 for the
exercise of this option. The Option Agreement expired July 25, 1996, but was
extended through February 28, 1997 at no additional cost to the Company. It
provides that a license agreement entered into pursuant to the Option Agreement
would be an exclusive license, with right to grant sublicenses, to make, have
made, use and sell licensed products for medical and human pharmaceutical
applications in all countries where Berkeley has patent rights. The Option
Agreement provides that each license agreement would provide for a
non-refundable license fee as well as a royalty based on net sales. There can be
no assurance that the parties will be able to agree on terms of a license
agreement which are satisfactory to the Company. Pursuant to a separate
agreement, Dr. Ferrari has been retained as a consultant by the Company for a
two-year term commencing June 1, 1996 at an annual rate of $48,000 per year
subject to certain adjustments. In connection therewith, Dr. Ferrari was issued
10% of the common stock of MicroFab.
Competition
Competition in the biopharmaceutical industry is intense and based
significantly on scientific and technological factors, the availability of
patent and other protection for technology and products, the ability to
commercialize technological developments and the ability to obtain governmental
approval for testing, manufacturing and marketing. Moreover, the
biopharmaceutical industry is characterized by rapidly evolving technology that
could result in the technological obsolescence of any products developed by the
Company. The Company competes with specialized biopharmaceutical firms in the
United States, Europe and elsewhere, as well as a growing number of large
pharmaceutical companies that are applying biotechnology to their operations.
Most of the Company's competitors have substantially greater financial,
technical and human resources than the Company and may be better equipped to
develop, manufacture and market products. In addition, many of these companies
have extensive experience in preclinical testing and human clinical trials and
in obtaining regulatory approvals. These companies, as well as academic
institutions, governmental agencies and private research organizations, also
compete with the Company in recruiting and retaining highly qualified scientific
personnel and consultants.
Existing therapies to treat cancer have varying degrees of success. Many
products are under development by competitors for the treatment of cancer, some
of which may compete directly with the Company's proposed products. Some of
these product candidates may be in advanced stages of clinical trials. The
existence of these products, or other products or treatments of which the
Company is not aware, or products or treatments that may be developed in the
future,
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may adversely affect the marketability of products developed by the Company.
There can be no assurance that research and development by others will not
render the Company's potential products obsolete or uneconomical or result in
treatments or cures superior to any therapy developed by the Company, or that
any therapy developed by the Company will be preferred to any existing or newly
developed technologies.
The timing of market introduction of some of the Company's potential
products or of competitor's products may be an important competitive factor.
Accordingly, the relative speed with which the Company can develop products,
complete preclinical testing, clinical trials and regulatory approval processes
and supply commercial quantities to market are expected to be important
competitive factors. In addition, the Company may apply for Orphan Drug
designation by the FDA for its proposed products. To the extent that a
competitor of the Company develops and receives Orphan Drug designation and
marketing approval for a drug to treat the same indication prior to the Company,
the Company may be precluded from marketing its product for a period of seven
years. See '--Government Regulation.'
Patents, Licenses and Trade Secrets
The Company's policy is to protect its technology by, among other things,
filing patent applications 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 continuing
technological innovation to develop and maintain its competitive position.
In connection with the Yale/OncoRx Agreement, the Company is the
exclusive licensee of three issued United States patents relating to its
alkylating agent prodrug technology, including patents relating to novel
sulfonylhydrazine methylating agents and their use for treatment of
trypanosomiasis and cancer and to novel 1-alkyl-2-acyl-1,2-disulfonylhydrazines
and their use for controlling neoplastic cell growth. The Company is also the
exclusive licensee of a pending United States patent application relating to
3-TC and its use for the treatment of hepatitis B virus (HBV) infection, and of
a number of pending United States and foreign patent applications relating to
Beta-L-FddC and Beta-L-Fd4C and their use for the treatment of HBV infection, as
well as technology related to ribonucleotide reductase inhibitors.
Competitors or potential competitors have filed applications for, or have
been issued, patents and may obtain additional patents and proprietary rights
relating to compounds or processes competitive with those of the Company.
Accordingly, there can be no assurance that the patent applications licensed to
the Company will result in patents being issued or that, if issued, the patents
will afford protection against competitors with similar technology; nor can
there be any assurance that others will not obtain patents that the Company
would need to license or circumvent.
The Company is aware that patent applications, some of which have issued
as patents, have been filed by IAF Biochem International, Inc., Emory
University, Glaxo Group Limited and the University of Georgia Research
Foundation, that relate to 3-TC, enantiomerically enriched racemic mixtures
containing 3-TC, methods of preparation, and use of 3-TC or racemic mixtures
containing 3-TC as an antiviral agent. Some of these patent applications have
earlier filing dates than the patent applications licensed to the Company, and
thus may prevent the Company from obtaining patent protection in the
applications it has licensed.
The Company is also aware that patent applications, some of which have
issued as patents, have been filed by IAF Biochem International, Inc., and The
Wellcome Foundation Limited of Unicorn House that relate to the use of 3-TC for
the treatment of HBV infection. Some of these
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patent applications have earlier filing dates than the patent applications
licensed to the Company, and thus may prevent the Company from obtaining patent
protection in the applications it has licensed. The Company believes that it may
be able to prove that it is entitled in its licensed applications to priority of
invention for claims directed to the use of 3-TC as an anti-HBV agent. However,
there is a substantial risk that the Company will not prevail in proving that it
is so entitled, and that others will be awarded patent protection for such
claims.
The patent applications filed by third parties that relate to 3-TC will
likely prevent the Company from obtaining product claims to 3-TC in the patent
applications it has licensed. Furthermore, a third party is likely to obtain
claims relating to 3-TC that may dominate the use of 3-TC as an anti-HBV agent
(to treat HBV infection). The holder of such dominating patent claims would have
the right to exclude the Company from making, using or selling 3-TC for any use,
including as an anti-HBV agent. If the Company were able to obtain a patent with
claims directed to the use of 3-TC as an anti-HBV agent, it would have the right
to exclude others, including the holder of a dominating patent, only from using
3-TC as an anti-HBV agent. There can be no assurance that a license to such
dominating patent will be available to the Company, or, if available, that such
license can be obtained on reasonable terms.
With respect to Beta-L-FddC, the Company is aware that patent applications
have been filed by Biochem Pharma, Inc. that relate to Beta-L-FddC and its use
as an anti-HBV agent. These patent application(s) claim priority to a United
Kingdom patent application having a filing date earlier than the filing dates of
all the applications relating to Beta-L-FddC that have been licensed to the
Company. In October 1996 the U.S. Patent and Trademark Office issued a patent to
Yale University covering the composition of matter and method of use of
Beta-L-Fd4C for treating HBV, and Yale has licensed to the Company exclusive
worldwide rights to the patent including the use of Beta-L-Fd4C for the
treatment of HBV and AIDS.
Other third parties, in addition to those described above, may also have
filed patent applications relating to 3-TC, Beta-L-FddC and Beta-L-Fd4C and/or
their uses as anti-HBV agents.
In connection with the Yale/MelaRx Agreement, the Company is the exclusive
licensee of a number of issued United States and foreign utility patents and
pending patent applications relating to synthetic melanins and methods for using
synthetic melanins, including, such as, for sunscreening or self-tanning agents.
Of the United States patents and patent applications, however, only two pending
patent applications are relevant to the Company's Melasyn product(s). The
Company has filed or plans to file corresponding applications relevant to the
Melasyn products for patent protection in foreign countries. In addition, the
Company is in the process of preparing and plans to file a patent application
relating to new products and methods for diagnosing and/or treating various
solid tumor cancers, including but not limited to melanoma.
The Company or its licensors is prosecuting the patent applications
licensed to the Company with the United States Patent and Trademark Office but
the Company does not know whether any of its applications will result in the
issuance of any patents or, if any patents are issued, whether any issued patent
will provide significant proprietary protection or will be circumvented or
invalidated. During the course of patent prosecution, patent applications are
evaluated, inter alia, for utility, novelty, nonobviousness and enablement. The
United States Patent and Trademark Office may require that the claims of an
initially filed patent application be amended if it is determined that the scope
of the claims include subject matter that is not useful, novel, nonobvious or
enabled. Furthermore, in certain instances, the practice of a patentable
invention may require a license from the holder of dominant patent rights. In
cases where one party believes that it has a claim to an invention covered by a
patent application or patent of a second party, the first party may provoke an
interference proceeding in the United States Patent and Trademark Office or such
a proceeding may otherwise be declared by the Patent & Trademark
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Office. In general, in an interference proceeding, the Patent and Trademark
Office would review the competing patents and/or patent applications to
determine the validity of the competing claims, including but not limited to
determining priority of invention. Any such determination would be subject to
appeal in the appropriate United States federal courts.
There can be no assurance that additional patents for the Company's
products will be obtained, or that issued patents will provide substantial
protection or be of commercial benefit to the Company. The issuance of a patent
is not conclusive as to its validity or enforceability, nor does it provide the
patent holder with freedom to operate without infringing the patent rights of
others. A patent could be challenged by litigation and, if the outcome of such
litigation were adverse to the patent holder, competitors could be free to use
the subject matter covered by the patent, or the patent holder may license the
technology to others in settlement of such litigation. The invalidation of key
patents owned by or licensed to the Company or non-approval of pending patent
applications could create increased competition, with potential adverse effects
on the Company and its business prospects. In addition, there can be no
assurance that any application of the Company's technology will not infringe
patents or proprietary rights of others so that, as a result of such
infringement, licenses that might be required for the Company's processes or
products would be available on commercially reasonable terms, if at all.
The Company cannot predict whether its or its competitors' patent
applications will result in valid patents being issued. Litigation, which could
result in substantial cost to the Company, may also be necessary to enforce the
Company's patent and proprietary rights and/or to determine the scope and
validity of others proprietary rights. The Company may participate in
interference proceedings that may in the future be declared by the United States
Patent and Trademark Office to determine priority of invention, which could
result in substantial cost to the Company. There can be no assurance that the
outcome of any such litigation or interference proceedings will be favorable to
the Company or that the Company will be able to obtain licenses to technology
that it may require or that, if obtainable, such technology can be licensed at a
reasonable cost.
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 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.
The Company also expects to rely on unpatented technology, trade secrets
and information and no assurance can be given that others will not independently
develop substantially equivalent information and techniques or otherwise gain
access to the Company's technology or disclose such technology, or that the
Company can meaningfully protect its rights in such unpatented technology, trade
secrets and information. The Company requires each of its employees, consultants
and advisors to execute a confidentiality agreement at the commencement of an
employment or consulting relationship with the Company. The agreements generally
provide that all inventions conceived by the individual in the course of
employment or in the providing of services to the Company and all confidential
information developed by, or made known to, the individual during the term of
the relationship shall be the exclusive property of the Company and shall be
kept confidential and not disclosed to third parties except in limited specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's information in the event of
unauthorized use or disclosure of such confidential information.
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Government Regulation
Overview. Regulation by state and federal governmental authorities in the
United States and foreign countries is a significant factor in the manufacture
and marketing of the Company's products and in its ongoing research and product
development activities. All the Company's products will require regulatory
clearances or approvals prior to commercialization. In particular, drugs,
biologicals and medical devices are subject to rigorous preclinical testing and
other approval requirements by the FDA pursuant to the Federal Food, Drug and
Cosmetic Act (the 'FDC Act') and the Public Health Service (PHS) Act and
regulations promulgated thereunder, as well as by similar health authorities in
foreign countries. Various federal statutes and regulations also govern or
influence the testing, manufacturing, safety, labeling, packaging, advertising,
storage, registration, listing and recordkeeping related to marketing of such
products. The process of obtaining these clearances or approvals and the
subsequent compliance with appropriate federal statutes and regulations require
the expenditure of substantial resources. Any failure by the Company or its
collaborators or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the manufacturing and marketing of products
being developed by the Company and its ability to receive product or royalty
revenues. There can be no assurance that any required FDA or other regulatory
approval will be granted or, if granted, will not be withdrawn.
Drugs and Biologicals. Preclinical development of diagnostic and
therapeutic drugs and biological products is generally conducted in the
laboratory to evaluate the safety and the potential efficacy of a compound by
relevant in vitro (e.g., cell culture) and in vivo (e.g., animal model) testing.
When a product is tested prospectively to determine its safety for purposes of
obtaining FDA approvals or clearances, such testing must be performed in
accordance with good laboratory practices for nonclinical studies. The results
of preclinical testing are submitted to the FDA as part of an investigational
new drug application (IND). The IND must become effective, informed consent must
be obtained from clinical subjects, and the study must be approved by an
institutional review board (IRB) before human clinical trials can begin.
Regulatory approval often takes a number of years and involves the
expenditure of substantial resources. Approval time also depends on a number of
factors, including the severity of the disease in question, the availability of
alternative treatments and the risks and benefits demonstrated in clinical
trials. Typically, clinical evaluation involves a three-phase process. In Phase
I, clinical trials are conducted with a small number of subjects to determine
the tolerated drug dose, early safety profile, proper scheduling, the pattern of
drug distribution, absorption and metabolism. In Phase II, clinical trials are
conducted with groups of patients afflicted with a specific disease in order to
determine efficacy, dose-response relationships and expanded evidence of safety.
In Phase III, large-scale, multi-center, controlled clinical trials are
conducted in order to (1) provide enough data for statistical proof of safety
and efficacy, (2) compare the experimental therapy to existing therapies, (3)
uncover any unexpected safety problems, such as side-effects, and (4) generate
product labeling. In the case of drugs for cancer and other life-threatening
diseases, the initial human testing is generally conducted in patients rather
than in healthy volunteers. Because these patients are already afflicted with
the target disease, it is possible that such studies will provide results
traditionally obtained in Phase II trials. These trials are referred to as
'Phase I/II' trials.
The results of the preclinical and clinical testing are submitted to the
FDA either as part of a New Drug Application ('NDA') (for drugs) or a Product
License Application ('PLA') (for biologics) for approval to commence commercial
distribution. For a biological, the manufacturer generally must also obtain
approval of an establishment license application (ELA). In responding to an NDA
or PLA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. A minimum of several years is generally required
to obtain approval after submission of an NDA
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or PLA. There can be no assurance that approvals will be granted on a timely
basis, if at all. The FDA also normally conducts a pre-approval inspection and
other occasional inspections of an applicant's facilities to assure compliance
with current good manufacturing practices. Further, stringent FDA regulatory
requirements continue after a product is approved for marketing, and changes to
products or labeling can require additional approvals. If products are approved
for marketing, the Company will be subject to stringent post-marketing
requirements, and there can be no assurance that regulatory or enforcement
action will not occur, which would potentially limit the Company's ability to
market its products.
The Company also will be subject to widely varying foreign regulations
governing clinical trials and pharmaceutical sales. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. The Company intends, to the extent possible, to rely on foreign
licensees to obtain regulatory approval for marketing its products in foreign
countries.
Orphan Drug Designation. Under the Orphan Drug Act, a developer may obtain
designation by the FDA of a drug or biologic as an 'orphan' drug for a
particular indication. Orphan Drug designation is granted to drugs for rare
diseases or conditions, including many cancers, with a prevalence of less than
200,000 cases in the U.S. The sponsor of a drug that has obtained Orphan Drug
designation and which is the first to obtain approval of a marketing application
for such drug is entitled to marketing exclusivity for a period of seven years
for the designated indication. This means that no other company can market the
same Orphan Drug for the same indication approved by the FDA for seven years
after approval unless such company proves its drug is clinically superior or the
approved Orphan Drug marketer cannot supply demand for the drug. Legislation is
periodically considered which could significantly affect the Orphan Drug law. In
particular, hearings have been held which would establish a 'sales trigger'
under which, if cumulative net sales of an Orphan Drug exceed $200 million,
marketing exclusivity will be withdrawn from the sponsor of the drug and other
manufacturers will be permitted to enter the market. The Company has received
Orphan Drug designation for Promycin and intends to seek this designation for
other products where appropriate. There can be no assurance that future changes
to the Orphan Drug Act would not diminish the value of any orphan drug
designation obtained by the Company.
Drugs for Life Threatening Illnesses. FDA regulatory procedures
established in 1988 are intended to speed further the availability of new drugs
intended to treat life-threatening and severely debilitating illnesses. These
procedures provide for early and continuous consultation with the FDA regarding
preclinical and clinical studies necessary to gain marketing approval. This
regulatory framework also provides that if Phase I results are promising, Phase
II clinical trials may be designed that obviate the need for lengthy, expensive
Phase III testing. The Company believes that its proposed anticancer products
might qualify for this regulatory procedure. Notwithstanding the foregoing,
approval may be denied by the FDA or traditional Phase III studies may be
required. The FDA may also seek the Company's agreement to perform post-approval
Phase IV studies.
The FDA has announced that the accelerated approval concept is being
expanded for cancer drugs. The proposed changes are designed to speed drug
approvals by requiring less extensive preapproval testing in some circumstances.
Specifically, the FDA has stated that it may approve these drugs based on the
basis of surrogate markers. 'Partial responses,' such as a drug's effectiveness
at short-term tumor shrinkage, that the FDA believes are clear indicators of
therapeutic effect, would be sufficient to demonstrate efficacy for these drugs.
This is in contrast to requiring the traditional 'full-endpoint' measures of
improved survival or quality of life. Other
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provisions of the new initiatives include proactive solicitation by the FDA of
expanded access filings for foreign- approved cancer agents and greater patient
representation on the FDA's Oncology Drugs Advisory Committee. Although agency
officials have estimated that the changes will reduce by as much as a year the
normal development time for most cancer drugs, it is uncertain whether and how
these initiatives will actually be implemented by FDA and whether they will have
a significant impact on the approval process for cancer drugs.
Medical Devices. Pursuant to the 1976 and 1990 Amendments to the FDC Act
and the regulations promulgated thereunder, the FDA regulates the testing,
manufacture, distribution and promotion of medical devices in the United States.
Various states and foreign countries in which the Company's products may be sold
in the future may impose additional regulatory requirements. Following the
enactment of the Medical Device Amendments to the FDC Act in May 1976, the FDA
classified medical devices in commercial distribution into three classes, Class
I, II and III. Class I devices are those devices whose safety and effectiveness
can be reasonably assured through general controls, such as adequate labeling,
premarket notification, and adherence to the FDA's Good Manufacturing Practice
('GMP') regulations. Some Class I devices are further exempted from some of the
general controls. Class II devices are those devices whose safety and
effectiveness can be reasonably assured through the use of special controls,
such as performance standards, post-market surveillance, patient registries, and
other FDA guidelines, in addition to the general controls. If determined to be a
Class II medical device under the Safe Medical Services Act of 1990, certain of
the Company's proposed products are potentially subject to performance standards
and other special controls that the FDA has the authority to establish.
Currently, no such performance standards or special controls have been
established. If any such performance standards are established, obtaining
initial marketing clearance for its products or maintaining continued clearance
will be dependent upon the Company's ability to satisfactorily comply with such
standards or controls. Class III devices are devices which generally are
invasive or life sustaining, but Class III also includes devices which are not
similar enough to previously marketed devices to be marketed without a higher
level of regulation. Class III devices generally must receive premarket approval
by the FDA to ensure their safety and effectiveness.
If a manufacturer or distributor of medical devices can establish that a
new device is 'substantially equivalent' to a legally marketed Class I or Class
II medical device, or another device the FDA has determined to be substantially
equivalent to a pre-1976 device, or to a Class III medical device for which the
FDA has not required premarket approval, the manufacturer or distributor may
seek FDA marketing clearance for the device by filing a 510(k) notification. The
510(k) notification and the claim of substantial equivalence will almost
certainly have to be supported by various types of data indicating that the
device is as safe and effective for its intended use as a legally marketed
predicate device. Clinical data is not always required for a 510(k), but can be
requested by the FDA, and is becoming a more common request. If human clinical
trials of a proposed device are required, and the device presents 'significant
risk,' the manufacturer or distributor of the device will have to file an
investigational device exemption ('IDE') application with the FDA prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and mechanical testing. If the IDE
application is approved, human clinical trials may begin at the specific number
of investigational sites including the number of patients approved by the FDA.
Sponsors of clinical trials may be permitted to sell the devices distributed in
the course of the study provided such compensation does not exceed recovery of
the costs of manufacture, research, development and handling. No promotion or
test marketing is permitted for an investigational device.
Following submission of the 510(k) notification, the manufacturer or
distributor may not place the device into commercial distribution until the FDA
determines that the device is 'substantially equivalent' to another legally
marketed device, and allows the proposed device to be marketed in the United
States. The FDA may, however, determine that the proposed device is not
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substantially equivalent, or may require further information, such as additional
test data, before the FDA is able to make a determination regarding substantial
equivalence.
If a manufacturer or distributor cannot establish to the FDA's
satisfaction that a new device is substantially equivalent, the manufacturer or
distributor may seek premarket approval ('PMA') or reclassification of the
device. A PMA application would have to be submitted and be supported by
extensive data, including preclinical and clinical trial data, to demonstrate
the safety and efficacy of the device, as well as manufacturing and quality
control data, proposed labeling, advertising, operating directions and other
information. There can be no assurance that a PMA, if submitted, would be
approved by the FDA in a timely manner, or at all. Further, after a device is
permitted to be marketed via a 510(k) or PMA approval, changes to the device, to
components or accessories, the manufacturing process, or its labeling may
require additional clearances or approvals by the FDA. Additionally, the Company
would be subject to stringent post-marketing requirements and there can be no
assurance that regulatory or other enforcement action would not occur, having a
potential adverse impact on its ability to market its products.
Manufacturing and Marketing
The Company has no experience in manufacturing or marketing products and
has not yet commercially introduced any products. The Company does not now have
resources to manufacture or market on a commercial scale any products that it
may develop. To be successful, the Company's products must be manufactured in
commercial quantities in compliance with regulatory requirements and at
acceptable costs. Initially, the Company intends to manufacture products through
contracts with manufacturers and believes that contract manufacturing will be
readily available. In the event that the Company decides to establish a
manufacturing facility, the Company will require substantial additional funds
and will be required to hire and retain significant additional personnel and
comply with the extensive GMP regulations mandated by FDA which are applicable
to such a facility.
The Company intends to develop a sales force targeting oncology doctors
and clinics to market its products. Development of a sales force is an important
component of the Company's in-licensing strategy. The Company currently has no
marketing or sales staff and there can be no assurance that the Company will be
able to establish such a sales force or be successful in gaining market
acceptance for its products.
Human Resources
As of December 31, 1996, the Company had 29 full-time employees, including
22 scientists and technicians. The Company believes its present staffing level
is adequate for its current plan of operations but it intends to hire at least
two additional employees in research and development positions. The Company's
employees are not covered by any collective bargaining agreement.
Item 2. PROPERTIES
The Company is currently leasing approximately 17,000 square feet of
office and laboratory space on two floors of a building at 4 Science Park, New
Haven, Connecticut. The lease is for a three-year term ending in 1999 at a
rental of $180,000 per year, with a right to renew for an additional three
years. The Company believes that its current space will meet the Company's
requirements for the foreseeable future.
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Item 3. LEGAL PROCEEDINGS
There is no material legal proceeding pending against the Company or any
of its property, nor was any such proceeding terminated during the fourth
quarter of the year ended December 31, 1996.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of Vion
Pharmaceuticals, Inc. during the fourth quarter of fiscal year 1996.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market information for Common Stock
The Common Stock of the Company has traded on The Nasdaq SmallCap
Market(SM) under the symbol VION since April 29, 1996. From August 14, 1995 to
April 26, 1996 the Common Stock traded on The Nasdaq SmallCap Market(SM) under
the symbol OCRX. The following table reflects the range of high and low bid
prices of the Company's Common Stock for each of the calendar quarters since the
Company's initial public offering in August 1995. This information is based on
closing bid prices as reported by The Nasdaq Stock Market(SM) and such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
1995 1996
-------------------- ----------------------
High Low High Low
---- --- ---- ---
First Quarter 4-3/4 3
Second Quarter 7-3/4 3-1/2
Third Quarter 5 3-1/4 5-1/4 3-3/4
Fourth Quarter 4-3/4 2-1/4 4-11/16 2-7/8
Recent Sales of Unregistered Securities
In May 1996 the Company issued 1,250,000 shares of Class A Convertible
Preferred Stock at $10.00 per share to accredited investors resulting in net
proceeds to the Company of $11,531,052 after placement agent's commissions and
other expenses. The Class A Preferred Stock is convertible at the option of the
holder into 2.777777 shares of Common Stock of the Company. In connection with
the foregoing transaction, the Company also issued to the placement agent
warrants to purchase an aggregate of 546,875 shares of Common Stock of the
Company. The sale of the Class A Preferred Stock and placement agent's warrants
were private transactions not involving a public offering and were exempt from
the registration provisions of the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof. The sale of these securities was without the use of an
underwriter.
Holders
At February 11, 1997 there were approximately 242 holders of record of
common stock.
Dividends
The Company has paid no cash dividends and does not expect to pay cash
dividends in the foreseeable future. The certificate of designations for the
Company's Class A Convertible Preferred Stock ('Class A Preferred Stock')
precludes the Company from paying cash dividends on the Common Stock so long as
shares of Class A Preferred Stock are outstanding, without the consent of
holders of a majority of the Class A Preferred Stock. The holders of the
outstanding Class A Preferred Stock are entitled to receive semi-annual
dividends, on a cumulative basis, equal to five percent (5%) (on a per annum
basis) of the Class A Preferred Stock held by such holder, payable, in arrears,
in additional shares of Class A Preferred Stock. If and when the Company
declares any dividend or distribution on the Common Stock (other than a stock
dividend), the Company is required to declare a like dividend or distribution on
the number of shares of
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Common Stock into which shares of Class A Preferred Stock is then convertible.
The Company currently intends to retain any future earnings to finance the
growth and development of its business.
Item 6. PLAN OF OPERATIONS
General
The Company is a development stage biopharmaceutical company. Its
activities to date have consisted primarily of research and development
sponsored by it pursuant to two separate license agreements with Yale
University, negotiating and obtaining other collaborative agreements, recruiting
management and other personnel, securing its facilities and raising equity and
debt financing. The Company has not generated significant revenues and has
incurred substantial operating losses from its activities.
The Company intends to use a substantial portion of the net proceeds of
its May, 1996 private financing to fund its plan of operations, which includes
the following elements through December 1997:
o Continue to support research and development being performed at Yale
University and by other collaborators and seek additional collaborative
agreements.
o Develop internal research and development capabilities and conduct research
and development with respect to the Company's core technologies and other
product candidates which may be identified by the Company. The Company
expects to incur substantial expenditures for continued research and
development expenses. In addition, the Company expects to purchase or lease
laboratory and office equipment worth approximately $233,000. During the next
six months, the Company plans to hire at least two additional employees in
research and development positions.
o Seek to acquire, generally through in-licensing, oncology-related products
that can be marketed without significant additional development activities.
o Conduct Phase III clinical studies in the U.S. and Europe of Promycin for
treatment of cancer of the head and neck.
The Company currently estimates that the net proceeds of its private
placement in May, 1996 and its existing cash and equivalents will be sufficient
to fund its planned operations through October, 1997. In the event of delays or
unexpected problems in product development, cost overruns, or other
unanticipated expenses commonly associated with a company in an early stage of
development, the Company will require additional funds. In addition, the Company
will need substantial additional financing, beyond this period to fund further
research and development and the Company's working capital requirements.
Item 7. FINANCIAL STATEMENTS
This information appears in a separate section of this report following
Part III.
20
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 27, 1995 OncoRx, Inc. (now Vion Pharmaceuticals, Inc.), with
the approval and recommendation of its Board of Directors, announced that it had
determined, effective immediately, to replace its current independent
accountants, Richard A. Eisner & Company, LLP ("RAE"), with Ernst & Young, LLP
("E&Y"). The opinion of RAE with regard to the financial statements of OncoRx,
Inc. for the period from May 1, 1994 to December 31, 1994 and of MelaRx
Pharmaceuticals, Inc. for the two years ended December 31, 1994 contained no
adverse opinion or disclaimer of opinion and was not modified as to uncertainty,
audit scope, or accounting principles. There were no disagreements between the
Company and RAE on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which, if not resolved to
RAE's satisfaction, would have caused it to make reference to the subject matter
of any disagreement in connection with its report.
21
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated herein by reference from the Registrant's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
Item 10. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Registrant's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Registrant's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Registrant's Proxy Statement for
its Annual Meeting of Stockholders to be held in 1997.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Agreement and Plan of Merger among MelaRx Pharmaceuticals,
Inc., OncoRx Research Corp. and OncoRx, Inc. dated as of April
19, 1995(1)
2.2 -- Certificate of Merger, dated April 20, 1995(1)
3.1 -- Restated Certificate of Incorporation of the Registrant, as
amended(2)
3.2 -- By-laws of the Registrant(1)
4.1 -- Form of Bridge Note(1)
4.2 -- Form of Warrant Agreement for Warrants issued in connection with
the bridge financing(1)
4.3 -- Form of Underwriter's Unit Purchase Option(1)
4.4 -- Form of Placement Agent's Warrant(1)
4.5 -- Form of Warrant Agreement for Class A and Class B Warrants(1)
10.1 -- License Agreement between Yale University and Old OncoRx, dated
as of August 31, 1994(1)
10.2 -- Letter Agreement between Yale University and Old OncoRx dated
August 19, 1994(1)
10.3 -- Extension Agreement between Yale University and MelaRx
Pharmaceuticals, Inc., dated as of July 1, 1992(1)
10.4 -- Form of License Agreement between Yale University and MelaRx
Pharmaceuticals, Inc.(1)
10.5 -- Letter Agreement between Yale University and MelaRx
Pharmaceuticals, Inc., dated as of February 2, 1995(1)
10.6 -- Research Agreement between The Regents of the University of
California and MicroFab Biosystems, Inc., dated as of July 25,
1994(1)
10.7 -- Option Agreement between The Regents of the University of
California and MicroFab
22
<PAGE>
Biosystems, Inc. dated as of July 25, 1994(1)
10.8 -- Consulting Agreement between Mauro Ferrari and MicroFab
Biosystems, Inc., dated as of July 25, 1994(1)
10.9 -- Option Agreement between MelaRx Diagnostics Inc. and Response
Biomedical Corp., dated as of March 30, 1995(1)
10.10 -- Distribution Agreement between MelaRx Diagnostics Inc. and
Response Biomedical Corp., dated April 4, 1995(1)
10.11 -- Employment Agreement between the Registrant and John A. Spears,
dated as of January 16, 1995(1)
10.12 -- 1995 Stock Option Plan of Old OncoRx(1)
10.13 -- Stock Option Agreement between Old OncoRx and John A. Spears,
dated February 2, 1995(1)
10.14 -- Employment Letter from MelaRx Pharmaceuticals, Inc. to Thomas
Mizelle, dated as of July 29, 1994(1)
10.15 -- Marketing Services Agreement between MelaRx Pharmaceuticals,
Inc. and Creative Polymers, Inc. dated as of March 21, 1994(1)
10.16 -- 1993 Stock Option Plan of the Registrant(3)
10.17 -- Lease Agreement between Science Park Development Corporation and
MelaRx Pharmaceuticals, Inc., dated as of May 5, 1993 (Annual)(1)
10.18 -- Lease Agreement between Science Park Development Corporation and
MelaRx Pharmaceuticals, Inc. dated as of May 5, 1993
(Month-to-Month)(1)
10.19 -- Letter Agreement between Old OncoRx and Sinton Pharmaceuticals
U.S., Inc. dated March 30, 1995(1)
10.20 -- Option Agreement between the Registrant and PMP, Inc., dated
April 27, 1995(1)
10.21 -- Agreement between MelaRx Pharmaceuticals, Inc. and
certain shareholders, dated February 17, 1995(1)
10.22 -- Consulting and Finder's Agreement between MelaRx
Pharmaceuticals, Inc. and Jacob A. Melnick, dated June 4, 1992,
as amended by Agreement dated February 17, 1995(1)
10.23 -- Form of Indemnification Agreement(1)
10.24 -- Letter Agreement between Yale University and OncoRx, Inc.
(formerly MelaRx Pharmaceuticals, Inc.), dated July 5, 1995(1)
10.25 -- Amendment, dated July 19, 1995, to Amended and Restated Stock
Option Plan of Registrant (1)
10.26 -- Lease between Science Park Development Corporation and OncoRx,
Inc. dated August 10, 1995(4)
10.27 -- Master Lease Agreement between Citicorp Leasing, Inc. and
OncoRx, Inc. dated September 27, 1995(4)
10.28 -- Sale and Leaseback Agreement and Master Equipment Lease
Agreement between FINOVA Technology Finance, Inc. and Vion
Pharmaceuticals, Inc. dated as of October 17, 1996
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young L.L.P.
27.1 -- Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 33-93468), effective August 14, 1995.
(2) Incorporated by reference to the Company's Registration Statement on Form
SB-2 (File No. 333-7483) effective September 6, 1996.
(3) Incorporated by reference to the Company's Post-Effective Amendment No. 1
to Registration Statement on Form S-8 (File No. 33-98738), effective
October 22, 1996.
(4) Incorporated by reference to the Quarterly Report on form 10-QSB for the
quarter ended September 30, 1995.
(b) Reports on Form 8-K. No reports on form 8-K were filed by the Company
during the fourth quarter of 1996.
23
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Audited Consolidated Financial Statements
Years ended December 31, 1996 and 1995
Contents
Report of Independent Auditors...............................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheet...................................................F-2
Consolidated Statements of Operations........................................F-3
Consolidated Statements of Changes in Shareholders' Equity...................F-4
Consolidated Statements of Cash Flows........................................F-5
Notes to Consolidated Financial Statements...................................F-6
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Vion Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheet of Vion
Pharmaceuticals, Inc. as of December 31, 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
ended December 31,1996 and 1995, and the period May 1, 1994 (inception) to
December 31, 1994. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Vion
Pharmaceuticals, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1996 and 1995,
and the period from May 1, 1994 (inception) to December 31, 1994 in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
Vion Pharmaceuticals, Inc. will continue as a going concern. As more fully
described in Note 1, the Company has no significant revenues since commencement
of operations and has incurred recurring operating losses. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts or classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Hartford, Connecticut
February 12, 1997
F-1
<PAGE>
Consolidated Balance Sheet
Vion Pharmaceuticals, Inc., 1996 AnnuAl Report
(A Development Stage Enterprise)
-----------------
December 31,
1996
- ------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,788,369
Short-term investments 4,628,446
Other current assets 106,635
-----------------
Total current assets 8,523,450
Property and equipment, net 712,806
Security deposits 41,301
Research contract prepayments 603,208
-----------------
Total assets $ 9,880,765
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Obligation under capital lease - current $ 91,476
Accounts payable and accrued expenses 494,127
-----------------
Total current liabilities 585,603
Obligation under capital lease - long term 223,190
-----------------
Total Liabilities 808,793
-----------------
Shareholders' equity:
Convertible preferred stock, $0.01 par value, authorized:
5,000,000 shares; issued and outstanding: 1,107,028
shares 11,070
Common stock, $0.01 par value, authorized: 35,000,000
shares; issued and outstanding: 8,017,961 80,178
Additional paid-in capital 26,721,888
Deferred compensation (106,760)
Accumulated deficit (17,634,404)
-----------------
9,071,972
-----------------
Total liabilities and shareholders' equity $ 9,880,765
=================
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
Consolidated Statements of Operations
Vion Pharmaceuticals, Inc., 1996 Annual Report
(A Development Stage Enterprise)
For The Period
From May 1, 1994
(Inception)
through
Year ended December 31, December 31,
-----------------------------------------
1995 1996 1996
- -------------------------------------------------------------------------------
Revenues:
Contract research grants $ 0 $ 51,779 $ 51,779
-----------------------------------------
Operating expenses:
Research and development 2,710,783 5,975,089 9,108,289
General and administrative 2,031,790 2,113,077 4,198,396
Purchased research and development 4,481,405 0 4,481,405
Amortization of finance charges 345,439 0 345,439
Interest income (84,044) (437,993) (522,037)
Interest expense 45,162 10,285 55,447
-----------------------------------------
Net loss ($9,530,535) ($7,608,679) ($17,615,160)
=========================================
Net loss per share ($1.59) ($0.96)
-----------------------------------------
Weighted average common stock and
common stock equivalents
outstanding 6,007,154 7,932,203
-----------------------------------------
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Consolidated Statement of Changes in Shareholders' Equity
Vion Pharmaceuticals, Inc., 1996 Annual Report
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock
---------------------- ------------------- Additional Deferred
Shares Amount Shares Amount Paid-in Capital Compensation
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for cash - July 1994 0 $ 0 2,693,244 $26,932 $ 0 $ 0
Common stock issued for services -
August 1994 159,304 1,593
Net loss
---------------------------------------------------------------------------
Balance - December 31, 1994 0 0 2,852,548 28,525 0 0
Stock options issued for compensation -
February 1995 540,000
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 2,000,000 20,000 4,300,000
Shares repurchased pursuant to
employment agreements - April 1995 (274,859) (2,749)
Private placement of common stock -
April 1995 76,349 763 205,237
Warrants issued with bridge notes -
April 1995 200,000
Initial public offering of units of one
common share, one A warrant and one B
warrant at $4.00 per unit - August
1995 and September 1995 2,875,000 28,750 9,667,460
Issuance of common stock 1,250 13 488
Receipts from sale of unit purchase option 250
Net loss
---------------------------------------------------------------------------
Balance at December 31, 1995 0 0 7,530,288 75,302 14,913,435 0
Issuance of convertible preferred stocks 1,250,000 12,500 11,518,552
Conversion of convertible preferred (164,970) (1,650) 458,255 4,582 (2,932)
Issuance of common stock 29,418 294 102,426
Convertible preferred stock, class A
preferred dividend 21,998 220
Deferred compensation associated with
stock options grants 190,407 (190,407)
Amortization of deferred compensation 83,647
Net loss
---------------------------------------------------------------------------
Balance at December 31, 1996 1,107,028 $11,070 8,017,961 $80,178 $26,721,888 ($106,760)
===========================================================================
</TABLE>
Total
Accumulated Stockholders'
Deficit Equity
-----------------------------
Common stock issued for cash - July 1994 ($19,877) $7,055
Common stock issued for services -
August 1994 (1,176) 417
Net loss (475,946) (475,946)
-----------------------------
Balance - December 31, 1994 (496,999) (468,474)
Stock options issued for compensation -
February 1995 540,000
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 4,320,000
Shares repurchased pursuant to
employment agreements - April 1995 2,029 (720)
Private placement of common stock -
April 1995 206,000
Warrants issued with bridge notes -
April 1995 200,000
Initial public offering of units of one
common share, one A warrant and one B
warrant at $4.00 per unit - August
1995 and September 1995 9,696,210
Issuance of common stock 501
Receipts from sale of unit purchase option 250
Net loss (9,530,535) (9,530,535)
-----------------------------
Balance at December 31, 1995 (10,025,505) 4,963,232
Issuance of convertible preferred stocks 11,531,052
Conversion of convertible preferred 0
Issuance of common stock 102,720
Convertible preferred stock, class A
preferred dividend (220) 0
Deferred compensation associated with
stock options grants 0
Amortization of deferred compensation 83,647
Net loss (7,608,679) (7,608,679)
-----------------------------
Balance at December 31, 1996 ($17,634,404) $9,071,972
=============================
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
Consolidated Statements of Cash Flows
Vion Pharmaceuticals, Inc., 1996 Annual Report
(A Development Stage Enterprise)
<TABLE>
<CAPTION>
For the period
from May 1,
1994
(inception)
through
Year ended December 31, December 31,
----------------------------------------------
1995 1996 1996
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,530,535) $ (7,608,679) $(17,615,160)
Adjustments to reconcile net loss to
cash flows used in operating activities
Purchased research and development 4,481,405 0 4,481,405
Amortization of financing costs 345,439 0 345,439
Depreciation and amortization 25,316 125,838 151,460
(Increase) in other current assets (17,839) (87,810) (105,649)
(Increase) in other assets (465,888) (176,906) (642,794)
Increase in accounts payable and
accrued expense 147,931 185,054 459,595
Stock issued for services 0 0 417
Stock options issued for compensation 540,000 83,647 623,647
----------------------------------------------
Net cash (used in) operating
activities (4,474,171) (7,478,856) (12,301,640)
----------------------------------------------
Cash flows used for investing
activities:
Purchase of marketable securities (2,291,108) (11,796,338) (14,087,446)
Maturities of marketable securities 0 9,459,000 9,459,000
Acquisition of fixed assets (247,353) (262,907) (513,322)
Cash portion of MelaRx acquisition 4,061 0 4,061
----------------------------------------------
Net cash used in investing
activities (2,534,400) (2,600,245) (5,137,707)
----------------------------------------------
Cash flows provided by financing
activities:
Initial public offering 9,696,210 0 9,696,210
Net proceeds from issuance of 206,501 2,720 316,276
common stock
Net proceeds from issuance of
preferred stock 0 11,531,052 11,531,052
Repurchase of common stock (720) 0 (720)
Net proceeds from bridge financing 1,704,269 0 1,704,269
Repayments of bridge financing (2,000,000) 0 (2,000,000)
Advances from stockholders 0 0 250,000
Repayments to stockholders (250,000) 0 (250,000)
Receipts from sale of unit
purchase option 250 0 250
Repayment of equipment capital
lease (2,386) (17,235) (19,621)
----------------------------------------------
Net cash provided by financing
activities 9,354,124 11,516,537 21,227,716
----------------------------------------------
Net increase in cash 2,345,553 1,437,436 3,788,369
Cash and cash equivalents at beginning
of year 5,380 2,350,933 0
----------------------------------------------
Cash and cash equivalents at end of year $2,350,933 $3,788,369 $3,788,369
==============================================
</TABLE>
Supplemental schedule of noncash investing and financing activities:
o Capital lease obligations of $94,422 and $239,866 were incurred for the years
ended December 31, 1995 and December 31, 1996, respectively, when the Company
entered into leases for laboratory and office equipment.
o An investor of the Company did not exercise the option to require the Company
to repurchase shares of preferred stock for $100,000, and the investor received
23,859 shares of common stock during 1996, which had been converted from
previously held preferred stock.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements
1. The Company
Vion Pharmaceuticals, Inc., formerly OncoRx, Inc., (the "Company") was
incorporated in May 1993 and began operations on May 1, 1994. The Company is in
the development stage and is principally devoted to the research and development
of therapeutic products for the treatment of cancer and cancer related
disorders.
In April 1995, the Company merged into OncoRx Research Corp. a previously
unaffiliated company ("Research"). The stockholders of the Company were issued
shares of common and preferred stock of MelaRx Pharmaceuticals Inc. ("MelaRx"),
the 100% owner of Research, in exchange for all of the outstanding shares of the
Company (see Note 2). In August 1995, the Company completed an initial public
offering ("IPO") (see Note 6) resulting in net proceeds to the Company of
approximately $9,696,000.
The accompanying financial statements are prepared assuming the Company will
continue as a going concern; however, at its current and planned rate of
spending, the Company's cash, cash equivalents and short term investments are
not sufficient to allow it to continue operations through the 1997 calendar
year. The Company requires substantial new revenues and other sources of capital
in order to meet such budgeted expenditures and to continue its operations
throughout the year. The Company is seeking to enter into one or more
significant strategic partnerships with pharmaceutical companies for the
development of its core technologies, through which it would anticipate
receiving some of the substantial revenues and financing required to continue
operations beyond the year end. The Company has entered into discussions with
several major pharmaceutical companies concerning such a strategic alliance, but
there can be no assurance that the Company will be successful in achieving such
an alliance, nor can the Company predict what funds might be available to it if
it can achieve such an alliance. The Company is also seeking to raise funds
through additional means, including (1) spin-off, refinancing, or partial sale
or disposition of its rights to certain of its non-core technologies; (2)
equipment lease financing; and (3) private placements of its securities. No
assurance can be given that the Company will be successful in arranging
financing through any of these alternatives.
Failure to obtain such financing will require the Company to delay, renegotiate,
or omit payment on its outside research funding commitments causing it to
substantially curtail its operations, resulting in a material adverse effect on
the Company.
2. Acquisition
On April 20, 1995, the Company merged into OncoRx Research Corp., a wholly-owned
subsidiary of MelaRx, which was renamed OncoRx, Inc. after the merger. The
stockholders of the Company were issued 2,654,038 common and 23,859 preferred
shares of MelaRx in exchange for 2,000,000 shares of common stock of the Company
valued at $2.16 per share (fair value).
As the shareholders of the Company obtained a majority interest in the merged
company for accounting purposes, the Company is treated as the acquirer.
Therefore, the transaction is recorded as a purchase in the Company's financial
statements which include the results of operations of the Company from inception
and MelaRx from the date of acquisition. The excess of cost over the fair value
of MelaRx's net tangible assets, $4,481,405, was treated as purchased research
and development and expensed immediately.
F-6
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
2. Acquisition (continued)
The following unaudited pro forma data presents information as if the
acquisition had occurred at the beginning of fiscal year 1995. The pro forma
information is provided for information purposes only. It is based on historical
information and does not necessarily reflect the actual results that would have
occurred if the transaction had been in effect on the date indicated nor is it
necessarily indicative of future results of operations of the combined
enterprise.
-------------------------
Unaudited
Year ended December 31,
1995
- ------------------------------------------------------------------------------
Cost and expenses:
Research and development expenses $ 2,913,325
General and administrative expenses 1,932,502
-------------------------
Total operating expenses 4,845,827
Loss before non-recurring charges (1) $ (4,804,038)
Loss before non-recurring charges per
share (1) $ (0.80)
-------------------------
Weighted average shares 6,007,154
-------------------------
(1) Loss before non-recurring charges does not reflect the purchased research
and development charge of $4,481,405 and a non-recurring charge of
$345,439 relating to the bridge financing.
3. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents.
Fair Value and Concentration of Credit Risks
The estimated fair value of amounts reported in the financial statements have
been determined by using available market information and appropriate valuation
methodologies. All current assets and current liabilities are carried at cost,
which approximates fair value, because of their short-term nature.
F-7
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Short-term Investments
The Company accounts for short-term investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company's investments in debt securities, which
typically mature in one year or less, are classified as available for sale and
are carried at fair value. The aggregate fair value of the debt securities at
December 31, 1996 was $4,628,446.
Property and Equipment
Property and equipment is stated at cost. Depreciation of equipment is computed
under the straight-line method over the estimated useful lives of the assets
(three to seven years).
Income Taxes
The Company accounts for income taxes under the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under this method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of assets and liabilities.
Defined Contribution Plan
The Company sponsors a defined contribution plan (the "Plan") that covers all
employees who meet the eligibility conditions of the Plan, as defined. Employee
contributions to the Plan are voluntary and are based on eligible compensation,
as defined. In accordance with the terms of the Plan, no Company contributions
are made to the Plan.
Small Business Innovation Research Grant
On September 27, 1996 the Company was awarded a Small Business Innovation
Research ("SBIR") grant for the Inhibitors of Ribonucleotide Reductase program.
The award was for reimbursable direct costs of up to $100,000. The SBIR grant
expires on March 30, 1997. As of December 31, 1996 the Company recognized
$51,779 of revenue from the SBIR grant for reimbursement of expenses incurred
for the four months ended December 31, 1996.
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. Certain 1995 amounts have been
reclassified to conform to the 1996 presentation.
Per Share Data
Net loss per share of common stock is computed using the weighted average number
of common stock and dilutive common stock equivalent shares outstanding. The
weighted average number of common stock and dilutive common stock equivalent
shares was 7,932,203 and 6,007,154 for the years ended December 31, 1996
F-8
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
and December 31, 1995, respectively. For purposes of computing net loss per
share, options and warrants granted by the Company during the 12 months
preceding the IPO have been included in the calculation of common and common
equivalent shares outstanding as if they were outstanding for all periods
presented using the Treasury Stock method and the IPO price of $4.00. Fully
diluted earnings per share did not differ significantly from primary earnings
per share in any period.
4. Property and Equipment
The following is a summary of property and equipment as of December 31:
1996
- --------------------------------------------------------------
Office equipment $ 154,989
Furniture and fixtures 84,547
Laboratory equipment 174,392
Leasehold improvements 116,050
Leased equipment under capital lease 334,288
----------------
864,266
Less accumulated depreciation (151,460)
----------------
Net property and equipment $712,806
----------------
5. Research and License Agreements
Yale/MelaRx Agreement
Pursuant to a license agreement between the Company and Yale University
("Yale"), as amended and restated as of August 1, 1992, the Company has obtained
rights to a synthetic form of melanin which the Company has named Melasyn. The
Company has entered into an agreement with Creative Polymers pursuant to which
Creative Polymers has agreed to be the exclusive selling agent for Melasyn and
will be entitled to 20% of the net sales of Melasyn.
The Company has an option to obtain an exclusive license for any inventions that
result from research projects relating to synthetic melanin by Yale funded by
the Company. The Company has agreed to reimburse Yale for its costs in
connection with the research projects in an amount currently equal to $856,211
per year (subject to increase by up to 5% per year). The agreement is for a term
ending June 30, 1998, subject to earlier termination as defined.
The Company and Yale entered into a License Agreement dated December 15, 1995
pursuant to which the Company received a nontransferable worldwide exclusive
license, expiring over the lives of the patents, to three inventions relating to
gene therapy for melanoma. Pursuant to this agreement, the Company has agreed to
pay Yale a $100,000 fee not later than June 15, 1997, plus milestone payments
based on the status of clinical trials and regulatory approvals. In addition,
Yale is entitled to royalties on sales, if any, of resulting products and
sublicensing revenues.
F-9
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
5. Research and License Agreements (continued)
Yale/OncoRx Agreement
Pursuant to a license agreement (the "Agreement") dated August 31, 1994, as
amended November 15, 1995, Yale granted the Company an exclusive,
nontransferable, worldwide license to make, have made, use, sell and practice
certain inventions and research for therapeutic and diagnostic purposes. The
term of the license is the expiration of any patents relating to any inventions
or, with respect to nonpatented inventions or research, 17 years. Yale is
entitled to royalties on sales, if any, of resulting products and sublicensing
revenues and, with regard to one patent, milestone payments based on the status
of clinical trials and regulatory approvals.
Yale Subscription Assignment and Assumption Agreement
On June 4, 1992, the Company entered into a Subscription, Assignment and
Assumption Agreement (the "SAAA") with Yale. Pursuant to the agreement as
amended and extended, the Company is to provide funding for certain research in
the field of dermatology by Yale. The agreement expires in June 1998 and
provides for quarterly payments to Yale in accordance with agreed upon annual
budgets. The payments are recorded as expense when incurred. The Company was
granted exclusive licenses to inventions in countries where patents are
effective and nonexclusive licenses elsewhere expiring over the lives of the
patents and 20 years, respectively. The Company is obligated to pay royalties on
sales of licensed products.
Berkeley Agreement
In July 1994, the Company entered into a research agreement with The Regents of
the University of California on behalf of the Berkeley Campus ("Berkeley"). The
agreement as amended expired on June 30, 1996 and provided for the Company to
fund research costs aggregating $1,208,236 through June 1996. The Company has
agreed to an extension which continues through February 28, 1997 at a total
level of funding of $250,000. Approximately $275,000, $433,000 and $650,000 of
research costs have been expensed by the Company for the years ended December
31, 1994, December 31, 1995, and December 31, 1996, respectively.
The Company also entered into an agreement with Berkeley providing for an option
to obtain licenses for certain inventions resulting from the research. The
Company has paid fees of $60,000 under the terms of the option agreement, which
expired July 25, 1996, but was extended through February 28, 1997 at no
additional cost to the Company.
6. Shareholders' Equity
On April 20, 1995, 2,000,000 shares of common stock valued at $2.16 per share
were issued in conjunction with the merger with MelaRx (see Note 2). Shortly
prior to the consummation of the Merger, the Company issued 76,349 shares of
common stock for net proceeds of $206,000 after deducting placement fees of
$14,000.
On August 17, 1995, the Company completed an IPO of 2,500,000 units, consisting
of an aggregate of 2,500,000 shares of common stock, 2,500,000 redeemable Class
A warrants and 2,500,000 redeemable Class B warrants at a price of $4.00 per
unit. Each Class A Warrant entitles the holder to purchase one share of common
stock and one Class B Warrant at the exercise price listed below, subject to
adjustment. Each Class B Warrant entitles the holder to purchase one share of
common stock at the exercise price listed below, subject to adjustment.
F-10
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
6. Shareholders' Equity (continued)
These warrants are exercisable through August 17, 2000. In addition, in
conjunction with the offering, the underwriter was granted an option to purchase
from the Company at the public offering price, less underwriting discounts, up
to 375,000 additional units for the purpose of covering over allotments, if any.
On September 6, 1995, the Company issued such units to the underwriter.
The net proceeds to the Company of the IPO were approximately $9,696,000 before
repayment of the bridge financing noted below.
In conjunction with the Company's IPO, the Company granted the underwriter an
option, exercisable over a period of three years commencing two years from the
date of the offering, to purchase up to 250,000 units at $5.20 per unit, subject
to adjustment.
Bridge Financing
In April 1995, the Company issued $2,000,000 in 10% promissory notes and
warrants to purchase 1,000,000 shares of common stock at $3.00 per share for net
proceeds of $1,704,000. The promissory notes were recorded net of a discount of
$200,000, attributable to the fair value of the bridge warrants. The notes were
paid at the closing of the IPO of the Company's securities described above and
the warrants, which are exercisable over four years, were converted into Class A
warrants at that time.
Private Placement of Class A Convertible Preferred Stock
On May 22, 1996, the Company completed a private placement of 1,250,000 shares
of Class A convertible preferred stock, at $10.00 per share, resulting in net
proceeds to the Company of $11,531,052. Each share of Class A preferred stock is
initially convertible into 2.777777 shares of the Company's common stock. In
connection with the foregoing transaction, the Company also issued to the
placement agent warrants to purchase an aggregate of 546,875 shares of the
Company's common stock. The shares of Class A preferred stock pay semi-annual
dividends of 5% per annum, payable in additional shares of Class A preferred
stock, and a 15% one time dividend if the Company redeems the issue within 3
years. The issue also contains a provision for a special dividend after 2 years
under certain conditions if the Company's common stock price falls below the
conversion price of the Class A preferred stock. The issuance of the Class A
preferred stock at closing also triggered certain adjustment provisions of the
Company's outstanding warrants, resulting in the issuance of additional
warrants.
Antidilution Adjustment
As a result of the sale on May 22, 1996 of 1,250,000 shares of Class A
Convertible Preferred Stock, and pursuant the Warrant Agreement governing the
rights of the Class A Warrants and the Class B Warrants, an adjustment was made
to the exercise price of the Class A Warrants and the Class B Warrants and there
was a corresponding distribution of additional Class A Warrants and Class B
Warrants. Specifically, on July 12, 1996 (the "Payment Date") each holder of a
Class A Warrant at the close of business on July 3, 1996 (the "Record Date") was
issued an additional 0.1 Class A Warrant and the exercise price of the Class A
Warrants was reduced from $5.20 to $4.73. In addition, on the Payment Date each
holder of a Class B Warrant on the close of business on the Record Date was
issued an additional 0.1 Class B Warrant and the exercise price of the Class B
Warrants was reduced from $7.00 to $6.37.
F-11
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
7. Employee Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
In July 1995, the Board of Directors of the Company adopted the Amended and
Restated 1993 Stock Option Plan (the "Option Plan") of MelaRx. The Option Plan
provides for the granting of incentive stock options or non-qualified stock
options to employees, officers, directors, and consultants of the Company, to
purchase up to an aggregate of 534,750 shares of common stock. Options to
purchase 134,750 shares of common stock had previously been granted by MelaRx
under the Option Plan. Incentive options granted under the Option Plan are
exercisable for a period of up to ten years from the date of grant at an
exercise price which is not less than the fair market value of the common stock
on the date of the grant except that the term of an incentive option granted
under the Option Plan to a stockholder owning more than 10% of the outstanding
voting power may not 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 granted under the Option plan become exercisable in no less than four
equal annual installments commencing no earlier than the first anniversary of
the date of grant. No option may be granted under the Option Plan after April
14, 2003.
On January 31, 1996, the Board of Directors adopted, subject to stockholder
approval, an amendment to the plan increasing the number of shares which may be
issued under the plan from 534,750 to 1,000,000. The amendment to the plan was
adopted by the stockholders at the Company's annual meeting on April 18, 1996.
Through December 31, 1995 and 1996, options to purchase an aggregate of 532,750
and 896,750 shares, respectively had been granted under the plan. The Company
recognized $83,647 of compensation expense in 1996 for options granted under the
plan which was a result of stock options granted to non-employees and the
issuance of certain stock options subject to approval by the board of directors
of the Company resulting in compensation expense of $51,907 and $31,740,
respectively.
The provisions of the Option Plan provided for the automatic grant of
non-qualified stock options to purchase shares of common stock ("Director
Options") to directors of the Company who are not employees or principal
stockholders of the Company ("Eligible Directors"). Eligible Directors of the
Company elected subsequent to the public offering will be granted a Director
Option to purchase 20,000 shares of common stock on the date such person is
first elected or appointed a director (an "Initial Director Option"). Further,
commencing on the day immediately following the date of the annual meeting of
stockholders during the Company's fiscal year ending December 31, 1996, each
Eligible Director, other than directors who received an Initial Director Option
since the last annual meeting, will be granted a Director Option to purchase
5,000 shares of Common Stock ("Automatic Grant") on the day immediately
following the date of each annual meeting of stockholders, as long as such
director is a member of the Board of Directors. The exercise price for each
share subject to a Director Option shall be equal to the fair market value of
the common stock on the date of grant. Director Options are exercisable in four
equal annual installments, commencing one year from the date of grant. Director
Options will expire the earlier of ten years after the date of grant or ninety
days after the termination of the director's service on the Board of Directors.
F-12
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
7. Employee Stock Option Plan (continued)
In addition, options to purchase an aggregate of 418,812 shares have been
granted outside the Option Plan at December 31, 1995. Of such options, 286,312
were granted to an officer of the Company in 1995 resulting in the recognition
of $540,000 of compensation expense.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options granted under the Option Plan was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free interest
rates of 6.23% and 6.28%; volatility factors of the expected market price of the
Company's common stock of .519 and .563; and a weighted-average expected life of
the option of 7 years. The Company has assumed no dividend yield in 1995 and
1996 because it did not pay cash dividends on its common stock and does not
expect to pay cash dividends in the foreseeable future.
The fair value for those options granted outside the Option Plan was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1995: risk-free interest rate of
5.89%; dividend yield of 0.0%; volatility factor of the expected market price of
the Company's common stock of .519; and a weighted-average expected life of the
option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The Company's pro forma
information follows:
1995 1996
- -------------------------------------------------------------------
Pro forma net loss $ (9,555,886) $ (7,824,863)
Pro forma loss
per share: ($1.59) ($0.99)
------------------------------------
F-13
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
7. Employee Stock Option Plan (continued)
A summary of the Company's stock option activity under the Option Plan, and
related information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1996
------------------------------------------------------------------
Options Weighted-average Options Weighted-average
(000) exercise price (000) exercise price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 129 $ 3.48 533 $ 3.86
Granted 404 3.98 364 4.06
Exercised -- --
Forfeited -- (12) 4.25
------------------------------------------------------------------
Outstanding - end of
year 533 $ 3.86 885 $ 3.93
------------------------------------------------------------------
Exercisable at end of
year 79 $ 3.39 221 $ 3.71
------------------------------------------------------------------
Weighted-average fair
value of options granted
during the year $2.43 $2.60
------------------------------------------------------------------
</TABLE>
A summary of the Company's ranges of exercise prices and weighted-average
remaining contractual life of options outstanding and of weighted-average
exercise price of options currently exercisable under the Option Plan as of
December 31, 1996 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Weighted-average Weighted-average Weight-average
exercise price exercise price remaining
Number of of Number of of contractual
outstanding options options options life of
Range shares outstanding exercisable exercisable options outstanding
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.625-$5.00 836 $4.12 177 $4.47 8.54 years
$2.40 6 2.40 6 2.40 3.67 years
$.40 43 .40 38 .40 3.67 years
- ------------------------------------------------------------------------------------------------------
</TABLE>
F-14
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
7. Employee Stock Option Plan (continued)
A summary of the Company's stock option activity outside the Option Plan, and
related information for the years ended December 31 follows:
<TABLE>
<CAPTION>
1995 1996
------------------------------------------------------------------
Options Weighted-average Options Weighted-average
(000) exercise price (000) exercise price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 127 $ .71 404 $ .21
Granted 292 .22 --
Exercised (1) .40 (6) .40
Forfeited (14) 5.00 --
------------------------------------------------------------------
Outstanding - end of 404 $ .21 398 $.21
year
------------------------------------------------------------------
Exercisable at end of 395 $.21 398 $.21
year
------------------------------------------------------------------
Weighted-average fair
value of options
granted during the year $1.90
------------------------------------------------------------------
</TABLE>
A summary of the Company's ranges of exercise prices and weighted-average
remaining contractual life of options outstanding and of weighted-average
exercise price of options currently exercisable outside the Option Plan as of
December 31, 1996 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Weighted-average Weighted-average Weight-average
exercise price exercise price remaining
Number of of Number of of contractual
outstanding options options options life of
Range shares outstanding exercisable exercisable options outstanding
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.00 .5 $5.00 .3 $5.00 3.67 years
$ .40 112 .40 112 .40 3.67 years
$ .13 286 .13 286 .13 2.08 years
- ------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
8. Income Taxes
At December 31, 1996, the Company has available for federal income tax purposes
net operating loss carryforwards of approximately $3,487,000 and a general
business credit of $231,000 expiring in 2010 through 2012. The difference
between the deficit accumulated during the development stage for financial
reporting purposes and the net operating loss carryforwards for tax purposes is
primarily due to certain costs which are not currently deductible for tax
purposes and differences in accounting and tax basis resulting from the merger
described in Note 2. The ability of the Company to realize a future tax benefit
from a portion of its net operating carryforwards is severely limited due to
changes in ownership of the Company. The Company has provided a full valuation
reserve against its deferred tax assets. The U.S. statutory rate is 34%;
however, the Company has recorded no provision or benefit for income taxes in
the financial statements due to recurring losses.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
December 31
1996
- ---------------------------------------------------------------
Deferred tax assets:
Operating loss carryforwards $ 1,439,400
Research and development costs 3,741,600
General business tax credit 231,000
-----------------
Total deferred tax assets 5,412,000
Valuation allowance for deferred tax assets (5,412,000)
-----------------
Net deferred tax assets 0
-----------------
Total net deferred tax assets (liabilities) $ 0
=================
9. Commitments and Contingencies
The Company is the lessee of equipment under capital leases expiring in 2000.
Effective February 1, 1996, the Company entered into a noncancelable operating
lease for its facility expiring in 1999. Effective April 1, 1996, the Company
entered into noncancelable operating leases for laboratory and office equipment
expiring in 1999. The future minimum lease payments under the capital and
operating leases as of December 31, 1996 are as follows:
---------------------------
Capital Operating
lease lease
- ----------------------------------------------------------------------
Year ending December 31:
1997 $ 114,960 $195,199
1998 114,960 195,199
1999 112,717 26,554
2000 20,520 --
2001 -- --
Thereafter -- --
---------------------------
Total minimum lease payments 363,157 416,952
=======
Less amount representing interest 48,491
---------------------------
Present value of minimum lease payments $ 314,666
=============--------------
F-16
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Entity)
Notes to Financial Statements (continued)
9. Commitments and Contingencies (continued)
The cost of assets under capital leases amounted to $334,288 at December 31,
1996. Accumulated amortization relating to the leased equipment amounted to
$25,413 at December 31, 1996. Amortization expense included in depreciation
expense, relating to the leased equipment, amounted to $20,692, $4,721, and
$25,413 for the year ended December 31, 1996, the year ended December 31, 1995,
and the period from May 1, 1994 (commencement of operations) through December
31, 1996, respectively.
Rent expense amounted to $181,093, $37,765 and $218,858 for the year ended
December 31, 1996, the year ended December 31, 1995, and the period from May 1,
1994 (commencement of operations) through December 31, 1996, respectively.
On December 20, 1996 the Company entered into a sale and leaseback agreement
with FINOVA Technology Finance, Inc. ("FINOVA") The cost of assets under the
capital lease is $207,328 which is being depreciated over the lease term of 3
years.
Under the terms of an employment agreement, the Company is obligated to pay the
chief executive officer of the Company an annual salary of $180,000, increased
annually by an amount no less than an annual cost-of-living adjustment, through
January 1998. The Company has the right, at any time after January 1996, to
terminate the employment agreement without cause upon ten days notice to the
chief executive officer and upon payment by the Company to the chief executive
officer, in a single lump sum on the termination date, an amount equal to one
year's base salary.
A former director of the Company is a party to a Consulting and Finder's
Agreement ("Agreement") with the Company. This Agreement entitles him to receive
an annual fee equal to 10% of the net after-tax profits of the Company
attributable to the sale or licensing of products or technology licensed
pursuant to the Company's agreement with Yale (see Note 5), until the cumulative
total of such fees equal $3,000,000. Such fee continues to be payable not
withstanding the director's death or incapacity until the $3,000,000 has been
paid.
The Company has various commitments relating to its research agreements (see
Note 5).
10. Related Party Transactions
A director of the Company is a principal of a management consulting firm that
has rendered various consulting services for the Company. The Company paid the
firm $80,000 and $120,000 for services rendered for the years ended December 31,
1995 and 1996, respectively
The Company and one of its directors, who is affiliated with Yale University,
entered into a five year consulting agreement on September 29, 1995 which is
renewable for one additional year, providing for various advisory services.
Under the agreement, the director will receive an annual fee of $48,000.
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: February 21, 1997 Vion Pharmaceuticals, Inc.
By: /S/ THOMAS E. KLEIN
---------------------------
Thomas E. Klein
Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/S/ WILLIAM R. MILLER Chairman of the Board February 21, 1997
- ---------------------------
William R. Miller
/S/ JOHN A. SPEARS Director, President and February 21, 1997
- --------------------------- Chief Executive Officer
John A. Spears (Principal Executive Officer)
/S/ THOMAS E. KLEIN Vice President--Finance and February 21, 1997
- --------------------------- Chief Financial Officer
Thomas E. Klein (Principal Financial and
Accounting Officer)
/S/ MICHEL C. BERGERAC Director February 21, 1997
- ---------------------------
Michel C. Bergerac
/S/ FRANK T. CARY Director February 21, 1997
- ---------------------------
Frank T. Cary
/S/ A. E. COHEN Director February 21, 1997
- ---------------------------
A. E. Cohen
24
<PAGE>
Signature Title Date
/S/ JAMES FERGUSON Director February 21, 1997
- --------------------------
James Ferguson
/S/ MICHAEL C. KENT Director February 21, 1997
- --------------------------
Michael C. Kent
/S/ ALAN C. SARTORELLI Director February 21, 1997
- --------------------------
Alan C. Sartorelli
/S/ E. DONALD SHAPIRO Director February 21, 1997
- --------------------------
E. Donald Shapiro
/S/ WALTER WRISTON Director February 21, 1997
- --------------------------
Walter Wriston
25
<PAGE>
EXHIBIT 10.28
MASTER EQUIPMENT LEASE AGREEMENT
Dated as of
October 17, 1996
between
FINOVA TECHNOLOGY FINANCE, INC.
(LESSOR)
AND
VION PHARMACEUTICALS, INC.
(LESSEE)
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. Agreement for Lease of Equipment..................................1
2. Delivery and Acceptance of Equipment..............................1
3. Disclaimer of Warranties..........................................2
4. Primary Term......................................................2
5. Rent..............................................................2
6. Lessee's Representations and Warranties...........................3
7. Identification Marks..............................................4
8. Fees and Taxes....................................................5
9. General Indemnity................................................5
10. Use of Equipment; Location; Liens.................................6
11. Maintenance and Repairs; Additions to Equipment...................6
12. Loss, Damage or Destruction of Equipment..........................7
13. Reports; Inspections..............................................8
14. Insurance.........................................................8
15. Return of Equipment...............................................9
16. Lessor's Ownership; Equipment To Be and
Remain Personal Property.........................................11
17. Other Covenants..................................................11
18. Events of Default................................................12
19. Assignment and Transfer by Lessor................................15
20. Recording and Filing; Expenses...................................16
21. Automatic Lease Term Renewal.....................................16
22. Quiet Enjoyment..................................................16
ii
<PAGE>
23. Failure or Indulgence Not Waiver;
Additional Rights of Lessor......................................16
24. Sublease.........................................................16
25. Purchase Option..................................................17
26. Notices..........................................................17
27. Entire Agreement; Severability; Amendment or
Cancellation of Lease............................................18
28. Waiver of Jury...................................................18
29. Restriction of Limitation Periods
and Damages......................................................18
30. Governing Law; Consent to Jurisdiction
and Service .....................................................18
31. Lessor's Right to Perform for Lessee.............................18
32. Agreement for Lease Only.........................................18
33. Binding Effect...................................................18
34. General..........................................................18
35. Definitions......................................................19
iii
<PAGE>
MASTER EQUIPMENT LEASE AGREEMENT
MASTER EQUIPMENT LEASE AGREEMENT dated as of October 17, 1996, between
VION PHARMACEUTICALS, INC. (hereinafter called "Lessee"), a Delaware corporation
that has its executive office and principal place of business at Four Science
Park, New Haven, Connecticut 06511 and FINOVA TECHNOLOGY FINANCE, INC., formerly
named Financing for Science International, Inc. (hereinafter called "Lessor"), a
Delaware corporation with its principal place of business at 10 Waterside Drive,
Farmington, Connecticut 06032-3065.
In consideration of the mutual covenants hereinafter contained, Lessee and
Lessor agree as follows:
1. Agreement for Lease of Equipment. Lessor shall lease to Lessee and
Lessee shall lease from Lessor, upon the terms and conditions specified in this
Master Lease and the applicable Rental Schedule, the Equipment as described in
the applicable Rental Schedule including Schedule A of such Rental Schedule and
this Master Lease. Each Rental Schedule shall incorporate the terms of this
Master Lease and shall constitute a separate lease (the term "this Lease" shall
refer collectively to the applicable Rental Schedule and this Master Lease).
Only the signed copy of each Rental Schedule and not this Master Lease shall
constitute chattel paper the possession of which can perfect a security
interest. In the event of a conflict between the provisions of this Master Lease
and the provisions of any Rental Schedule, the provisions of the Rental Schedule
shall prevail.
2. Delivery and Acceptance of Equipment. (a) Lessor and Lessee agree that
the vendor of the Equipment to Lessor or, as to any Equipment to be sold by
Lessee to Lessor and leased back, the vendor of the Equipment to Lessee (in
either case, the "Vendor") will be responsible to deliver the Equipment to
Lessee at the location specified in the applicable Rental Schedule. Such
delivery shall be delivery of the Equipment by Lessor to Lessee under this Lease
unless such Equipment is to be sold by Lessee to Lessor and leased back.
Provided that no Event of Default has occurred, no event which with the passage
of time or giving of notice would be an Event of Default has occurred, and is
continuing, and the conditions set forth in the next following paragraph have
been met and the Equipment is not to be sold by Lessee to Lessor and leased
back, Lessor hereby authorizes Lessee, acting as Lessor's agent, to accept for
Lessor, and in Lessor's name, the Equipment from the Vendor upon delivery
pursuant to the purchase contract for the Equipment. Such acceptance shall be
acceptance of the Equipment by Lessee under this Lease. Nevertheless, if within
five business days after Lessee has received delivery of an item of the
Equipment, Lessee has not given Lessor written notice of a defect therein and
Lessor has not notified Lessee not to accept the Equipment, Lessee shall be
deemed to have (a) acknowledged receipt of such item of the Equipment in good
condition and repair and (b) accepted such item of the Equipment under this
Lease. Lessee agrees to confirm any acceptance of the Equipment by Lessee by
executing a Certificate of Inspection and Acceptance and providing the same to
Lessor in accordance with the notice provision hereof on or about the Lease
Commencement Date, but no later than the date for payment to the Vendor.
(b) Conditions precedent to every progress payment and Lease Term
Commencement shall include that (i) no payment shall be past due to Lessor or
any assign of Lessor from Lessee or any Guarantor (as hereinafter defined),
whether as a lessee, a guarantor or in some other capacity; (ii) Lessee shall be
in compliance with the provisions of this Lease; (iii) all documentation then
required by Lessor's counsel shall have been received by Lessor; (iv) Lessee
shall not be in default under any material contract to which Lessee is a party
or by which Lessee or the property of Lessee is bound; and (v) there shall not
have been any material adverse change or threatened material adverse change in
the financial or other condition, business, operations, properties, assets or
prospects of Lessee since December 31, 1995, or from the written information
that has been supplied to Lessor prior to October 6, 1996 by Lessee..
3. Disclaimer of Warranties. LESSEE ACKNOWLEDGES THAT IT HAS SELECTED BOTH
THE EQUIPMENT AND EVERY MANUFACTURER AND OTHER VENDOR OF THE EQUIPMENT, THAT
LESSEE HAS NOT RELIED UPON LESSOR FOR SUCH SELECTION AND THAT LESSEE HAS A
1
<PAGE>
COPY OF THE PURCHASE CONTRACT(S) FOR LESSOR'S PURCHASE OF THE EQUIPMENT. LESSOR
HAS NOT MADE AND SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, AS TO THE MERCHANTABILITY, FITNESS FOR USE,
FITNESS FOR A PARTICULAR PURPOSE OR TITLE OF THE EQUIPMENT (OR ANY PART THEREOF)
OR AS TO COMPLIANCE WITH SPECIFICATIONS, COMPLIANCE WITH GOVERNMENTAL
REGULATIONS, QUALITY, SELECTION, INSTALLATION, SUITABILITY, PERFORMANCE,
CONDITION, DESIGN, ABSENCE OF DEFECTS, OPERATION, OR NON-INFRINGEMENT OF PATENT,
COPYRIGHT, TRADEMARK OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THE EQUIPMENT (OR
ANY PART THEREOF). LESSEE SHALL LEASE THE EQUIPMENT "AS IS, WHERE IS". LESSOR
HEREBY DISCLAIMS ANY AND ALL SUCH WARRANTIES OR REPRESENTATIONS, EXPRESS OR
IMPLIED. LESSEE AND LESSOR AGREE THAT ALL RISKS INCIDENT TO THE MATTERS REFERRED
TO IN THIS SECTION ARE TO BE BORNE BY LESSEE. Lessor has and shall have no
responsibility for the installation, adjustment or servicing of the Equipment.
The provisions of this Section have been negotiated and are intended to be a
complete exclusion and negation of any representations or warranties by Lessor,
express or implied, with respect to the Equipment that may arise pursuant to any
law now or hereafter in effect, or otherwise. In no event shall defect in, or
unfitness of, any or all of the Equipment, or any breach of warranty or
representation by any or every Manufacturer or other Vendor relieve Lessee of
the obligation to pay rent or to make any other payments required hereunder or
to perform any other obligation hereunder. Without limiting the generality of
the foregoing, Lessor shall not be responsible or liable for any (i) defect,
either latent or patent, in any of the Equipment or for any direct or
consequential damages therefrom, (ii) loss of use of any of the Equipment or for
any loss of profits or any interruption in Lessee's business occasioned by
Lessee's inability to use any or all of the Equipment for any reason whatsoever,
or (iii) in the event that any Vendor delays or fails to make delivery of any or
all of the Equipment or fails to fulfill or comply with any purchase contract or
order. For as long as no Event of Default shall have occurred hereunder, Lessor
hereby transfers and assigns to Lessee during the Lease Term (as hereinafter
defined) all right and interest of Lessor in any Manufacturer's and other
Vendor's warranties with respect to any and all of the Equipment, and agrees to
execute all documents reasonably necessary to effect such transfer and
assignment, except that to the extent any rights of Lessor with respect to the
Equipment may not be assigned or otherwise be available to Lessee, Lessor shall
instead use reasonable efforts to enforce such rights against such Manufacturers
or other Vendors but only upon the request and at the expense of Lessee.
4. Primary Term. The Primary Term for each item of the Equipment shall
commence on the Lease Commencement Date provided for by the Rental Schedule for
such Equipment, and unless sooner terminated pursuant to the provisions of this
Lease, shall be for the number of calendar months set forth in such Rental
Schedule, plus the number of days remaining in any partial calendar month if the
Lease Commencement Date occurs on other than the first day of a month.
Notwithstanding the foregoing, the provisions of this Master Lease on
indemnification of Lessor by Lessee shall apply between Lessor and Lessee with
respect to any Equipment from the time that any order for the Equipment is
placed by Lessor.
5. Rent. (a) Lessee shall pay to Lessor in cash or by check as rent for
the Equipment during the Lease Term, the amounts provided for in the Rental
Schedule ("Basic Rent") for such Equipment on the dates designated therein
("Payment Dates"), at the location of Lessor set forth therein, or at such other
address or to such other person or entity as Lessor, from time to time, may
designate.
(b) Lessee shall also pay to Lessor, upon notice by Lessor to Lessee that
payment is due, any sums other than for Basic Rent that Lessee at any time shall
be required to pay Lessor pursuant to the provisions of this Lease, including
but not limited to sums payable by reason of payments by Lessor to any Vendors
in advance of the delivery of such Equipment or the commencement of the Lease
Term for such Equipment, together with every additional charge, interest and
cost which may be added for non-payment or late payment of any such sums or of
Basic Rent. All such sums shall be additional rent ("Additional Rent") and
Lessor shall provide Lessee with notification as to the amount of any Additional
Rent. If Lessee shall fail to pay any Additional Rent, Lessor shall have all
rights, powers and remedies with respect thereto as are provided herein or by
law in the case of non-payment of Basic Rent.
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(c) With respect to any amount of Basic Rent or Additional Rent not
received by Lessor within three businessdays from when due hereunder, Lessee
shall pay to Lessor interest on such amount from the due date thereof until
payment is received by Lessor at two percent per month or the highest rate of
interest on amounts past due that is not unlawful, whichever is lower (the
"Default Interest Rate"). Additionally, with respect to each such instance of
late payment, Lessee shall pay to Lessor, within ten days of notification that
such payment is due, a collection fee of $300, which fee approximates Lessor's
administrative costs, at minimum, to collect such unpaid Basic Rent or
Additional Rent.
(d) LESSEE AGREES THAT TIME IS OF THE ESSENCE TO LESSOR IN LESSEE'S MAKING
PAYMENTS OF BASIC RENT AND ADDITIONAL RENT WHEN SUCH PAYMENTS BECOME DUE.
(e) This Lease is a net-net-net lease and, notwithstanding any other
provisions of this Lease, it is intended that Basic Rent and Additional Rent
shall be paid without notice, demand, counterclaim, setoff, deduction or defense
and without abatement, suspension, deferment, diminution or reduction. Lessee
shall perform all its obligations under this Lease at its sole cost and expense.
Except to the extent otherwise expressly specified herein, the obligations and
liabilities of Lessee hereunder shall in no way be released, discharged or
otherwise affected for any reason, including, without limitation: (i) any defect
in the condition, quality or fitness for use of the Equipment or any part
thereof; (ii) any damage to, removal, abandonment, salvage, loss, scrapping or
destruction of or any requisition or taking of the Equipment or any part
thereof; (iii) any restriction, prevention or curtailment of or interference
with any use of the Equipment or any part thereof; (iv) any defect in title or
rights to the Equipment or any lien on such title or rights or on the Equipment;
(v) any change, waiver, extension, indulgence or other action or omission in
respect of any obligation or liability of Lessor; (vi) any bankruptcy,
insolvency, reorganization, composition, adjustment, dissolution, liquidation or
other like proceedings relating to Lessee or any action taken with respect to
this Lease by any trustee or receiver of Lessee or by any court, in any such
proceeding; (vii) any claim that Lessee has or might have against any Person (as
hereinafter defined), including without limitation Lessor; (viii) any failure on
the part of Lessor to perform or comply with any of the terms hereof or of any
other agreement; or (ix) any invalidity, unenforceability or disaffirmance of
this Lease or any provision hereof against or by Lessee or ;all whether or not
Lessee or Lessor shall have notice or knowledge of any of the foregoing. To the
extent permitted by law, Lessee waives all rights now or hereafter conferred by
statute or otherwise to quit, terminate, cancel, rescind or surrender this
Lease, or to any diminution or reduction of Basic Rent or Additional Rent
payable by Lessee hereunder.
6. Lessee's Representations and Warranties. Lessee represents and warrants
(and if requested by Lessor, promptly will provide supporting documents to the
effect that as of the date that Lessee signs this Master Lease, as of any date
that Lessor makes a payment to a Vendor prior to the date all Equipment has been
accepted for lease hereunder, as of each date that any Equipment is accepted for
lease hereunder and as of each Lease Commencement Date pursuant to a Rental
Schedule hereunder: (i) all items of the Equipment are new and unused as of the
Lease Commencement Date, unless otherwise specified in the applicable Rental
Schedule in which event the specified items of the Equipment shall have been
delivered new to Lessee by their suppliers not more than 90 days prior to their
Lease Term Commencement; (ii) Lessee is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, and is
qualified and in good standing to do business wherever necessary to carry on its
present business and operations, including the jurisdictions where the Equipment
is or will be located; (iii) Lessee has the power to enter into this Lease and
the other instruments and documents executed by Lessee in connection herewith
(together with this Lease, the "Transactional Documents") and to pay and perform
its obligations under this Lease and the other Transactional Documents; (iv)
this Lease and the other Transactional Documents have been duly authorized,
executed and delivered by Lessee, and constitute the valid, legal and binding
obligations of Lessee enforceable in accordance with their terms; (v) no vote or
consent of, or notice to, the holders of any class of stock of Lessee is
required, or if required, such vote or consent has been obtained or given, to
authorize the execution, delivery and performance of this Lease and the other
Transactional Documents by Lessee; (vi) neither the execution and delivery by
Lessee of this Lease or the other Transactional Documents, nor the consummation
by Lessee of the transactions
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contemplated hereby or thereby, nor compliance by Lessee with the provisions
hereof or thereof, conflicts with or results in a breach of any of the
provisions of any Certificate of Incorporation or By-laws or partnership or
trust agreement or certificate of Lessee, or of any applicable law, judgment,
order, writ, injunction, decree, award, rule or regulation of any court,
administrative agency or other governmental authority, or of any indenture,
mortgage, deed of trust, other agreement or instrument of any nature to which
Lessee is a party or by which it or its property is bound or affected or
pursuant to which it is constituted, or constitutes a default under any thereof
or will result in the creation of any lien, charge, security interest or other
encumbrance upon any of the Equipment, other than the interests therein of
Lessor or any Assignee (as hereinafter defined), or upon any other right or
property of Lessee or will in any manner adversely affect Lessor's or any
Assignee's right, title and interest in any of the Equipment; (vii) no consent,
approval, withholding of objection or other authorization of or by any court,
administrative agency, other governmental authority or any other Person is
required, except such consents, approvals or other authorizations which have
been duly obtained and are in full force and effect and copies of which have
been furnished Lessor, in connection with the execution, delivery or performance
by Lessee, or the consummation by Lessee, of the transactions contemplated by
this Lease and the other Transactional Documents; (viii) there are no actions,
suits or proceedings pending, or, to the knowledge of Lessee, threatened, in any
court or before any administrative agency or other governmental authority
against or affecting Lessee, which, if adversely decided would or could,
individually or in the aggregate, materially and adversely affect the financial
or other condition, business, operations, properties, assets or prospects of
Lessee or the ability of Lessee to perform any of its obligations under this
Lease or under the other Transactional Documents, except for any such actions,
suits or proceedings that Lessee has described in writing to Lessor; (ix) no
Event of Default or event or condition which upon the passage of time, the
giving of notice, or both, would constitute an Event of Default, exists or is
continuing; (x) there has been no material adverse change in Lessee's, financial
or other condition, business, operations, properties, assets or prospects since
the date of Lessee's, most recent financial statements reported on by an
independent public accounting firm prior to the date of this Master Lease, since
the dates of each such Person's interim and annual financial statements, if any,
subsequent to such prior statements, or from the written information that has
been supplied to Lessor by Lessee, ; (xi) Lessee possesses any and all
authorizations, certifications and licenses which are or may be required to use
and operate the Equipment; (xii) the actual Acquisition Cost pursuant to the
applicable Rental Schedule of each item of the Equipment does not exceed the
fair and usual price for like quantity purchases of such item and reflects all
discounts, rebates and allowances for the Equipment given to Lessee, or any
affiliate of Lessee by any Vendor or other Person including, without limitation,
discounts for advertising, prompt payment, testing or other services; (xiii) all
information supplied to Lessor by Lessee is correct and does not omit any
statement necessary to make the information supplied not misleading; and (xiv)
the financial statements of Lessee have been prepared in accordance with
generally accepted accounting principles consistently applied and accurately and
completely present the financial condition and the results of operations of
Lessee at the dates of and for the periods covered by such statements. As of the
earliest Lease Commencement Date for the equipment subject to the provisions of
this Master Lease, Lessee shall provide to Lessor an opinion of counsel for
Lessee substantially in the form requested by Lessor.7. Identification Marks. To
the extent requested by Lessor or if required by applicable law, Lessee shall
affix to the Equipment at Lessee's expense signs, labels, or other forms of
notice to disclose Lessor's ownership of, and the interest of any Assignee in,
the Equipment. Lessee shall keep and maintain such signs, labels or other forms
of notice affixed to the Equipment throughout the Lease Term. Lessor may furnish
such signs, labels or other forms of notice to Lessee. Except as otherwise
directed by Lessor, Lessee shall not allow the name of any person other than
Lessor to be placed on any part of the Equipment as a designation that might
reasonably be interpreted as a claim of ownership.
8. Fees and Taxes. Lessee agrees to pay promptly when due, and to
indemnify and hold Lessor harmless from, all license, title, registration and
recording fees whatsoever, all taxes including, without limitation, sales, use,
franchise, personal property, excise, import, export and stamp taxes and customs
duties, and all charges together with any penalties, fines or interest thereon
which are assessed, levied or imposed by any governmental or taxing authority
against Lessor with respect to any or all of the Equipment or the purchase,
acquisition, ownership, construction, installation, shipment, delivery, lease,
possession, use, maintenance, condition, operation, control, return or other
disposition thereof or the rents, receipts or
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earnings arising therefrom which accrue or are payable with respect to the
Equipment or this Lease or which are assessed, are based on a valuation date, or
are due during or with respect to the Lease Term or any subsequent period until
the Equipment has been returned to Lessor pursuant to the provisions of this
Lease or until the Equipment has been purchased by Lessee pursuant to any
purchase option provisions of this Lease, excluding, however, any taxes solely
measured by Lessor's net income from the general operation of Lessor's business.
In the event any fees, taxes or charges payable by Lessee pursuant to the next
preceding sentence are paid by Lessor, or if Lessor is required to collect or
pay any thereof, Lessee shall reimburse Lessor therefor (plus any penalties,
fines or interest thereon not resulting from an error or negligent omission by
Lessor) promptly upon demand. Unless and until Lessor notifies Lessee in writing
to the contrary, Lessee shall file and pay any personal property taxes levied or
assessed on the Equipment directly to the levying authority. Upon Lessor's
written request, Lessee shall submit to Lessor satisfactory evidence of payment
by Lessee of any or all amounts for which Lessee is required to make payment or
to indemnify Lessor hereunder that are paid by Lessee, and of the filing of any
and all reports, returns and other documentation required in connection with any
such payment. In the event Lessor elects to pay the personal property taxes
directly to a levying authority, Lessor shall submit to Lessee a copy of its
personal property tax return and its receipt for the full amount of such
personal property taxes so paid by Lessor. All of the obligations of Lessee
under this Section shall continue in full force and effect notwithstanding any
expiration, termination, rescission or cancellation of this Lease. Lessee
acknowledges that Lessor may not be exempt from the payment of any of the
amounts referred to herein, even though Lessee might have been exempt therefrom
if it were the owner or purchaser of the Equipment, and Lessee agrees that this
Section shall apply, and the amounts due from it hereunder shall be due, whether
or not Lessee might itself have otherwise been exempt from any such payments.
Subject to the foregoing, Lessee shall have the right to contest in good faith
any such taxes levied or imposed by any governmental or taxing authority,
provided that Lessee shall have given Lessor not less than ten days prior notice
of its intention to contest and full particulars of the proposed contest, in the
opinion of Lessor the proposed contest will not adversely affect the interests
of Lessor or any Assignee, and Lessee either shall have paid the taxes or
provided for a bond or other security so that none of the Equipment will be
subject to seizure, confiscation or forfeiture. For purposes of this Section,
the term "Lessor" shall include each member of Lessor's affiliated group, if
any.
9. General Indemnity. (a) Lessee shall indemnify Lessor and any Assignee
(as hereinafter defined), and their respective agents and servants, against, and
agrees to defend, protect, save and keep them harmless from, any and all
liabilities, obligations, losses, damages, penalties, claims, actions, suits,
costs, expenses and disbursements, including attorneys' fees and expenses and
costs for customs, completion, performance and appeal bonds, of whatsoever kind
and nature (including, without limitation, for negligence, tort liability,
damages by reason of strict or absolute liability, punitive damages, and
indirect and consequential damages, but excluding any such amounts imposed or
incurred as a result of Lessor's gross negligence or willful misconduct),
imposed on or incurred by or assessed against Lessor and/or any Assignee, in any
way relating to or arising out of (i) the failure of Lessee to provide or obtain
any certificates, documents, consents, authorizations, clearances, licenses,
permits or instruments required hereunder or under any of the other
Transactional Documents, or (ii) the ordering, construction, installation,
delivery, testing, ownership, lease, possession, use, maintenance, operation,
control, movement, import, export, shipment, condition, or return of the
Equipment (including but not limited to latent and other defects, whether or not
discoverable by Lessor or Lessee, and any claim for patent, trademark,
copyright, software or other intellectual property infringement) until such time
as the Equipment shall have been returned to Lessor pursuant to the provisions
of this Lease or until the Equipment shall have been purchased by Lessee
pursuant to any purchase option provisions of this Lease.
(b) The obligations of Lessee under this Section shall survive the payment
of all known obligations under and any expiration, termination, rescission or
cancellation of this Lease, and are expressly made for the benefit of and shall
be enforceable by Lessor, its successors and any Assignee.
10. Use of Equipment; Location; Liens. (a) During the Lease Term, Lessee
warrants and agrees that the Equipment shall be used and operated and otherwise
be in compliance with any established operating procedures therefor of any
Manufacturer and all statutes, regulations and orders of any governmental
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body having power to regulate the Equipment or its use. Lessee shall bear and
pay all costs of such compliance. Lessee shall not permit the Equipment to be
used or maintained in any manner or condition that would violate, or could
result in the termination of, the insurance policies carried by Lessee pursuant
to the provisions of this Lease on insurance, or in any manner or condition or
for any purpose for which, in the opinion of any Manufacturer, the Equipment is
not designed or suited.
(b) Lessee agrees that without Lessor's prior written consent, it will not
remove any of the Equipment from the location specified in the Rental Schedule
for such Equipment or permit any of the Equipment to be used by anyone other
than Lessee, Lessee's employees or a responsible independent contractor engaged
by Lessee.
(c) During the Lease Term and until the Equipment has been returned to
Lessor pursuant to the provisions of this Lease or until the Equipment is
purchased by Lessee pursuant to any purchase option provisions of this Lease,
Lessee will not directly or indirectly create, incur, assume or suffer to exist
any mortgage, security interest, lien or encumbrance on the Equipment or
Lessor's or any Assignee's title thereto or interest therein, except in the name
of Lessor and its successor(s) and any Assignee. Lessee, at its own expense,
will promptly take such action as may be necessary to keep the Equipment free
and clear of, and to duly discharge, any such mortgage, security interest, lien
or encumbrance not excepted above.
(d) Lessee agrees to procure and maintain in effect all licenses,
certificates, permits and other approvals and consents required by federal,
state and local laws and regulations in connection with Lessee's possession,
use, operation and maintenance of the Equipment. During the Lease Term, Lessee
agrees that 100 percent of the use of the Equipment shall be "qualified business
use" as that term is and shall be from time to time defined by the Internal
Revenue Code of 1986, as amended.
(e) Lessee shall cooperate fully with Lessor or any Assignee to perfect
and record their respective interests in connection with the Transactional
Documents including, without limitation, the filing of financing statements and
will pay such Persons their reasonable costs related thereto.
11. Maintenance and Repairs; Additions to Equipment. (a) Lessee shall, for
the entire Lease Term, at its sole expense, maintain all of the Equipment in
good, safe and efficient operating repair, appearance and condition, will keep
all components of the Equipment properly calibrated and aligned, will make all
required adjustments, replacements and repairs and will obtain and install any
upgrades for the Equipment that are announced and available for sale by a
Manufacturer (collectively, "maintenance and repairs"). Such maintenance and
repairs shall include, but not be limited to, all recommended or advised by a
Manufacturer, all required or advised by cognizant governmental agencies or
regulatory bodies and all commonly performed by prudent business and/or
professional practice. All maintenance and repairs to any item of the Equipment
shall be made by the Manufacturer or its authorized representatives or, upon
prior written approval by Lessor, those of substantially equal skill or
knowledge in maintaining and repairing the Equipment.
(b) Lessee shall not modify the Equipment without the prior written
consent of Lessor. Any replacements, substitutions, additions, attachments,
accessions, parts, fittings, accessories, modifications, enhancements,
maintenance and repairs and other upgrades to the Equipment whenever made shall
be considered accessions to the Equipment and shall automatically become the
property of Lessor.
(c) All instruction manuals, published statements of capabilities and
technical specifications, service, maintenance and repair records, installation,
qualification, certification and calibration reports, usage logs, and printed
material relating to the Equipment shall be deemed part of the Equipment.
Computer programs, programming codes, operating systems, data processing
instructions, series of instructions or statements which are machine readable,
and any like symbols or signals usable by an electronic data processing system
(collectively "Software") that has been or shall be installed or entered in the
Equipment shall become a part of the Equipment except for any Software that is
proprietary Software of Lessee and is not a modification, change, enhancement or
improvement to any Software which is identified or listed in
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the description of specific items of the Equipment in or attached to a Rental
Schedule. Whenever Lessee acquires Software licenses from other parties, with
respect to the Software such licenses shall automatically and without further
action by Lessee be assigned to Lessor and become through assignment a part of
the Equipment transferable to any future user of the Equipment for use with the
Equipment.
12. Loss, Damage or Destruction of Equipment. (a) Lessee shall bear all
risks of damage to, taking of, or theft, loss or destruction of, any or all of
the Equipment commencing as of the date of this Master Lease and continuing
throughout the Lease Term and until such Equipment has been returned to Lessor
or purchased by Lessee pursuant to any purchase option provisions of this Lease.
Except as otherwise herein expressly provided, no damage to, taking of or theft,
loss or destruction of any Equipment shall impair any obligation of Lessee to
Lessor under this Lease, including, without limitation, the obligation to pay
Basic Rent.
(b) In the event that any item of Equipment shall become damaged from any
cause whatsoever, Lessee agrees to promptly notify Lessor in writing of such
fact, fully informing Lessor of the details thereof. If any item of Equipment is
damaged (unless the same, in the opinion of Lessor is irreparably damaged, in
which case the provisions of this Lease with respect to a Casualty Occurrence
shall apply), Lessee shall, at its sole cost and expense, place the same in good
repair, condition and working order or replace the same with "like property"
having the same value and operating capabilities and useful life at least equal
to the damaged Equipment prior to the date of such damage, which property shall
thereupon become subject to this Lease with title thereto in Lessor. In the
event that an item of Equipment has been damaged, but not irreparably, if no
Event of Default has occurred and is continuing hereunder, upon receipt by
Lessor of evidence, satisfactory to Lessor, that such repair, restoration or
replacement has been completed, and an invoice therefor, Lessor shall release to
Lessee or its supplier the proceeds of any insurance received by Lessor as a
result of such damage for the purpose of reimbursing Lessee for the costs of
repairing, restoring or replacing such item.
(c) In the event that any item of Equipment shall become lost, stolen,
destroyed or irreparably damaged from any cause whatsoever, or if any item of
Equipment or Lessor's title thereto shall be requisitioned or seized by any
governmental authority (each such occurrence being herein called a "Casualty
Occurrence") during the Lease Term and until it has been returned to Lessor
pursuant to the provisions of this Lease or until the Equipment is purchased by
Lessee pursuant to any purchase option provisions of this Lease, Lessee shall
promptly notify Lessor in writing of such fact, fully informing Lessor of all
details of the Casualty Occurrence in question, and shall pay Lessor in cash the
greater of (i) the "Stipulated Loss Value" as set forth in the Table of
Stipulated Loss Values attached to the Rental Schedule pursuant to which such
item of Equipment is leased hereunder, calculated as of the date of the Casualty
Occurrence, or (ii) the Fair Market Value (as hereinafter defined) of the item
of Equipment in question as of the date of the Casualty Occurrence. This payment
shall be made within 30 days following the Casualty Occurrence, together with
the Basic Rent accrued and unpaid with respect to such Equipment as of the date
of the Casualty Occurrence, plus all Additional Rent or amounts owing with
respect to such Equipment on such date of payment.
(d) Upon the payment of the greater of the Stipulated Loss Value or Fair
Market Value of the Equipment in question in accordance with the terms of this
Section, and the payment of all Basic Rent, Additional Rent and any other sums
then due hereunder, this Lease shall terminate with respect to the Equipment or
part thereof suffering the Casualty Occurrence and all Lessor's rights and title
to such Equipment shall pass to Lessee, "as is" and "where is", without any
representation or warranty by, or recourse to, Lessor, as provided by the
provisions of this Master Lease on disclaimer of warranties and as evidenced by
a duly executed bill of sale naming Lessor as the seller and Lessee as the
buyer.
(e) Provided that no Event of Default has occurred and no event that with
the passage of time or giving of notice, or both, would be an Event of Default
has occurred and is continuing, any insurance proceeds received as the result of
a Casualty Occurrence with respect to any or all items of the Equipment shall be
applied first in reduction of any other then unpaid obligation of Lessee to
Lessor hereunder and
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second in reduction of Lessee's obligation to pay the greater of the Fair Market
Value or the Stipulated Loss Value for such item if not already paid by Lessee
to Lessor, or, if already paid by Lessee, to the reimbursement of Lessee
therefor, and the balance of the insurance proceeds, if any, shall be paid to
Lessee.
13. Reports; Inspections. Lessee will cause to be furnished to Lessor, if
requested, from time-to-time a statement showing the condition and such other
information regarding the Equipment as Lessor may reasonably request. Lessor and
any Assignee shall have the right, upon reasonable notice to Lessee, to inspect
the Equipment including Lessee's records with respect to the Equipment, and to
copy such records. Any inspection by Lessor or any Assignee shall not be deemed
to be approval or acknowledgment by Lessor or such Assignee of the safety,
freedom from defects, performance or compliance with specifications or
governmental requirements of the Equipment or of the conformity of the Equipment
or such financial statements to the requirements or warranties of this Lease,
and the disclaimers set forth in the provisions of this Master Lease on
disclaimer of warranties shall apply to any such inspection. Lessee shall pay or
reimburse Lessor for Lessor's costs and travel expenses for one such inspection
per year, and for Lessor's costs, travel expenses and the charges and such
expenses of Lessor's advisers for the inspection following an inspection which
encountered a breach of the requirements of this Lease or the warranties of
Lessee pursuant to this Lease.
14. Insurance. During the Lease Term and until all Equipment has been
returned to Lessor pursuant to the provisions of this Lease or until the
Equipment is purchased by Lessee pursuant to any purchase option provisions of
this Lease, Lessee shall procure and maintain at its expense with reputable
insurers acceptable to Lessor (i) insurance on all of the Equipment in an amount
not less than the greater of the Equipment's Stipulated Loss Value or Fair
Market Value replacement cost insuring against all risks of loss or damage to
the Equipment and against such other risks as Lessee would, in the prudent
management of its properties, maintain with respect to similar equipment owned
by it, and (ii) comprehensive public liability and property damage insurance, in
such amounts as shall be satisfactory to Lessor but for not less than the
greater of $1,000,000 or the amounts customarily maintained by parties similar
to Lessee for similar leased equipment with similar contemplated use, insuring
Lessor and any Assignees, as their interests may appear, against liability for
death, bodily injury, and property damage arising out of or resulting from the
design, construction, manufacture, ownership, use, operation, lease or
maintenance of, or otherwise in connection with, the Equipment. On the policies
referred to in clause (i), such insurance shall name Lessor (and any Assignees)
as the sole loss payee so that (and Lessor and Lessee hereby agree that) the
insurance proceeds payable under such policies will be payable and paid solely
to Lessor (and to any Assignees). On the policies referred to in clause (ii),
such insurance will name Lessor (and any Assignees) as an additional insured as
its interests may appear. All such policies shall provide that they may not be
invalidated against Lessor (or any Assignees) because of any violation of a
condition or a breach of warranty of the policies or application therefor by
Lessee, that they may not be altered or canceled except after 30 days' prior
written notice to Lessor, and that Lessor and any Assignee have the right but
not the obligation to pay the premiums with respect to coverage required by this
Lease in order to continue such insurance in effect or to obtain like coverage.
Under the policies of insurance required to be maintained by Lessee pursuant to
this Master Lease, Lessee agrees to waive any right of subrogation and to cause
the insurance carrier to waive any right of subrogation in each instance as such
right may exist against Lessor or any Assignee and for any and all loss or
damage to the Equipment. Lessor is hereby appointed Lessee's attorney-in-fact to
endorse any check or draft which may be payable to Lessee in order to collect
the proceeds of such insurance. Lessee shall deliver to Lessor, prior to the
beginning of the Lease Term with respect to any of the Equipment and at such
other time or times as Lessor may request, a certificate or other evidence
satisfactory to Lessor of the maintenance of such insurance. Lessor shall be
under no duty to examine such policies, certificates or other evidence of
insurance or to advise Lessee in the event that its insurance is not in
compliance with this Lease. In the event of failure on the part of Lessee to
provide such insurance, Lessor may, at its option, but without obligation,
provide such insurance and add the amount of the premiums to the rents due
hereunder, and Lessee shall, upon Lessor's demand, pay the same as Additional
Rent.
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15. Return of Equipment. (a) At the end of the Lease Term for any
Equipment, Lessee at its sole expense shall forthwith return possession of such
Equipment without omissions to Lessor by:
(i) properly preparing, crating and/or assembling such Equipment (in
accordance with the Manufacturer's instructions if such instructions exist) for
shipment by common carrier with all containers and pieces labeled with model,
part and unit numbers and descriptions; and
(ii) shipping such Equipment by common carrier, with insurance and freight
prepaid, to a place designated by Lessor within a 1,000 mile radius of the
specified location under this Lease for such Equipment. Lessor shall pay
additional shipping charges incurred because of distances in excess of such
1,000 miles.
The insurance required by clause (ii) above shall provide that in the
event of loss such insurance shall pay Lessor in cash directly the greater of
(A) the Fair Market Value of such Equipment and (B) the "Stipulated Loss Value"
as set forth in the Exhibit to the Rental Schedule calculated as of the Payment
Date next preceding the date of loss.
(b) When the Equipment is returned to Lessor it shall be complete. The
condition of the Equipment including Software upon receipt by Lessor shall be
not less than (i) meeting all specifications for such equipment as published
most currently by the respective Equipment vendor(s), Manufacturer(s) or
supplier(s) (collectively referred to, together with their successors and
assigns, if any, as "Vendors"), (ii) in fully operational condition, (iii)
capable of being installed and operated in the normal course by another user,
(iv) for each item of the Equipment for which the Vendor has a program of
maintenance and service including certification for reinstallation and for
qualification under the maintenance and service program certified in writing by
the Vendor that the items of the Equipment are in compliance with the conditions
specified in this paragraph, are accepted by the Vendor for reinstallation and
are qualified for the usual and customary service and maintenance program of the
Vendor, (v) legally qualified for future use or operation of the Equipment by
another lessee or purchaser of the Equipment, (vi) free of defects, visible or
concealed, including, but not limited to, damage or malfunction of any kind,
dents, fractures, chips, scratches, stains, defacements, discolorations, rust,
corrosion, electrical shorts, fluid restrictions or blockages, disconnections,
breakage or the like, (vii) safe for routine and usual operation, (viii) in
compliance with any and all pertinent governmental or regulatory rules, laws or
guidelines for its operation or use, (ix) free of Lessee's markings or
labelings, and (x) free of any advertising or insignia not requested by Lessor
that was placed on the Equipment by Lessee.
(c) Lessor reserves the right to inspect the Equipment within 30 days of
its return to verify compliance with the provisions of this Master Lease on
Equipment maintenance and repairs and additions and on return of Equipment.
Should there be less than full compliance, Lessor at its option may (i) perform
or cause to be performed through service organizations of its own choosing such
maintenance and repairs, including upgrades, replacements, the obtaining of
paid-up Software licenses and other services, as it deems necessary to effect
such compliance, (ii) require Lessee to perform or cause to be performed such
maintenance and repairs, including upgrades, replacements, the obtaining of
paid-up Software licenses and other services, as Lessor deems necessary to
effect such compliance and/or (iii) reasonably estimate the costs to effect such
compliance. Lessee shall pay to Lessor the costs for performance of (i) or (ii)
above, or the estimated costs under (iii) above, in any such case including the
costs of the inspection(s). If maintenance and repairs, including upgrades,
replacements, and the obtaining of paid-up Software licenses and other services,
are necessary to place any of the Equipment under any Rental Schedule in the
condition required by this Lease, Lessee shall continue to pay to Lessor monthly
Additional Rent at the last prevailing rate during the Lease Term for Basic Rent
on the Equipment under such Rental Schedule for the period of delay until all
such required maintenance and repairs can be performed, or for the period of
time reasonably necessary to accomplish such maintenance and repairs. For any
such period that applies, Lessee shall continue to provide the insurance
required during the Lease Term. However, Lessor's acceptance of such rent and
provision of insurance during such period shall not constitute a renewal of the
Lease Term, a
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waiver of Lessor's right to prompt return of such Equipment in the condition
required by this Section, or a waiver of Lessor's right to possession of such
Equipment.
(d) Should the inspection reveal any item(s) of the Equipment to be
missing, Lessee shall be responsible for paying to Lessor promptly the greater
of the Stipulated Loss Value or the Fair Market Value of such item(s) of the
Equipment computed as of the last Payment Date prior to the end of the Lease
Term, plus the amount of any impairment of the Fair Market Value, if any, of the
remaining item(s) of the Equipment due to the absence of such missing item(s) of
the Equipment.
(e) In the event that Lessee fails to return any of the Equipment when
required, at the election of Lessor effected by notice to Lessee, the Lease Term
for such Equipment shall be extended on a month-to-month basis on the same terms
as previously in effect, and Lessee shall pay to Lessor monthly in advance Basic
Rent for such Equipment at the last prevailing rate during the unextended Lease
Term, until such Equipment has been returned to Lessor pursuant to the
provisions of this Lease. Notwithstanding any month-to-month continuance of this
Lease, Lessor may resort to any remedies available to it under this Lease, at
law or in equity, to recover such Equipment at any time following the end of
such extended Lease Term.
(f) Not less than 90 days prior to expiration of the Lease Term, if
Lessee has not given notice of the exercise of any purchase option and Lessor
has not given notice of the exercise of any option to require Lessee to purchase
such Equipment, Lessee shall give Lessor notice that Lessee shall be returning
the Equipment forthwith upon the expiration of the Lease Term unless otherwise
notified by Lessor and either (i) that the Equipment is in the condition
required by this Lease upon the return of the Equipment or (ii) specifying the
respects in which the condition of the Equipment is not in compliance with such
requirements and the measures that Lessee shall take to bring the Equipment into
compliance.
16. Lessor's Ownership; Equipment To Be and Remain Personal Property. (a)
Lessee acknowledges and agrees that it does not have, and by execution of this
Lease and/or payments and performance hereunder it shall not have or obtain, any
title to the Equipment, nor any property right or interest, legal or equitable,
therein, except its rights as Lessee hereunder and subject to the terms hereof.
Lessee shall not have or claim a security interest and shall not seek or obtain
replevin, detinue, specific performance, sequestration, claim and delivery, or
like remedies in or for this Lease, any rents under this Lease, any or all of
the Equipment, any items of personal property identified to become items of the
Equipment, or any proceeds of any or all of the foregoing.
(b) All of the Equipment shall be and remain personal property
notwithstanding the manner in which the Equipment may be attached or affixed to
realty. Upon the expiration, cancellation or termination of the Lease Term of
any or all of the Equipment, Lessee shall have the obligation, and Lessor shall
have the right, to remove, or cause the removal of, such Equipment from the
premises where the same is then located, for return to Lessor pursuant to the
provisions of this Master Lease on return of Equipment and, if applicable, on
Events of Default, whether or not any of the Equipment is affixed or attached to
realty or to any building. Lessee further covenants and agrees that Lessee will,
at the request of Lessor, obtain and deliver to Lessor concurrently with the
execution and delivery of each Rental Schedule, a waiver, in recordable form,
from the owner and any landlord, tenant or holder of any lien or encumbrance on
the realty or building(s) on or in which any of the Equipment described in such
Rental Schedule shall be located, under which such owner, landlord, tenant and
holder (i) agree and consent that such Equipment is and shall be personal
property, owned by and removable by Lessor upon the expiration, cancellation or
termination of the Lease Term thereof, and (ii) waive any rights of distraint or
similar rights with respect to such Equipment.
(c) If Lessee is unable to return, or is prevented from returning, any of
the Equipment to Lessor upon the expiration, cancellation or termination of the
Lease Term as required under the provisions of this Master Lease on return of
Equipment, for any reason whatsoever, including, but not limited to, the
assertion by any third party of any claim against such Equipment, or of any
right with respect thereto,
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whether or not resulting from the manner in which such Equipment is affixed or
attached to, or installed in, the realty or any building(s) thereon or any other
personal or real property, or from the failure of any owner, landlord or tenant
of said realty (or the building(s) thereon) or the holder of any lien or
encumbrance to execute the waiver in writing of such fact, for all purposes of
this Lease such Equipment shall be deemed to have been the subject of a Casualty
Occurrence. Thereupon, Lessee shall pay to Lessor the amounts provided for by
the provisions of this Master Lease on loss, damage or destruction of Equipment,
with respect to such Equipment, at the time, in the manner, and with the
consequences provided by such provisions.
(d) Notwithstanding the foregoing provisions of this Section, without
Lessor's prior written consent, Lessee shall not permit any of the Equipment to
be attached or affixed to, imbedded in or incorporated into any building,
structure, real estate or other personal or real property.
17. Other Covenants. (a) Lessee agrees to furnish, upon Lessor's request,
such financial, business and operational information concerning Lessee and any
or all Guarantors, including copies of its and their tax returns, as Lessor or
its assigns may reasonably request during the Lease Term. Additionally, Lessee
shall furnish to Lessor and its assigns without notice or demand therefor two
complete copies of its (i) quarterly interim financial statements within 45 days
of the close of each of the first three fiscal quarters of every year, certified
by the chief financial officer of Lessee or Form 10-QSB or similar form and (ii)
annual financial statements within 90 days of the close of each fiscal year
reported on by independent accountants . All such financial statements shall be
prepared in accordance with generally accepted accounting principles
consistently applied, and shall accurately and completely present Lessee's and
every Guarantor's financial condition and results of operations at the dates of
and for the periods covered by such statements.
(b) Lessee shall promptly furnish to Lessor copies of (i) filings that
Lessee makes with the SEC or other government agencies under the securities laws
including but not limited to definitive proxy statements, registration
statements, prospectuses and tender offer filings, and reports on holdings or
acquisitions of securities, relating to proxy solicitations, and on Form 10-K,
10-Q, 8-K or similar forms, and any amendments to such filings, (ii) press
releases of Lessee, and (iii) new product (or service) announcements of Lessee.
(c) Lessee shall give Lessor notice of all meetings of the stockholders of
Lessee and copies of all materials that are furnished to the stockholders for
the meetings at the same time that the notice or materials are sent to the
stockholders. Lessor shall have the right to have its representative attend any
and all such meetings.
(d) There shall be no actual or threatened conflict with, or violation of,
any statute, regulation, standard or rule relating to Lessee, its present or
future operations, or the Equipment.
(e) All information supplied to Lessor or its assigns by Lessee or any
Guarantor shall be correct and shall not omit any statement necessary to make
the information supplied not be misleading. There shall be no material breach of
the representations and warranties made by Lessee in connection with this Lease
or by any Guarantor in connection with a Guaranty (as hereinafter defined).
(f) Lessee shall give Lessor notice of any change in the address of the
executive office or principal place of business of Lessee not less than 15 days
prior to the change.
(g) No change shall occur in the control of Lessee which results in the
change in the senior management of Lessee without the consent of Lessor, which
consent shall not be unreasonably withheld.
(h) Lessee shall not make any payment or distribution of money, checks,
securities or property to any Person in contravention of the provisions of any
Guaranty or subordination that such Person has made in favor of Lessor or its
assigns of which Lessee shall have notice or knowledge.
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18. Events of Default. If one or more of the following events (hereinafter
called "Events of Default" or an "Event of Default") shall occur:
(i) default shall be made in the payment of any Basic Rent or Additional
Rent due under this Master Lease or under any Rental Schedule hereto, and any
such default shall continue for more than 10 days after the due date thereof;
(ii) any representation or warranty by Lessee made in this Master Lease or
other Transactional Document or certificate furnished to Lessor in connection
with this Lease or pursuant hereto shall at the time provided be incorrect in
any material respect;
(iii) Lessee shall make or permit any unauthorized assignment or transfer
of this Master Lease or any Rental Schedule to this Master Lease or of any of
Lessee's rights and obligations hereunder or thereunder, or Lessee shall make or
permit any unauthorized sublease or transfer of any Equipment or the possession
of any Equipment;
(iv) Lessee shall default in the observance and/or performance of any
other covenant, condition or agreement on the part of Lessee to be observed
and/or performed under this Master Lease, under any Rental Schedule hereto, or
under any other Transactional Document, which default is not governed by
paragraphs (i), (ii) or (iii) above, and such default shall continue for 30 days
after written notice from Lessor to Lessee specifying the default and demanding
the same to be remedied;
(v) Lessee shall make an assignment for the benefit of creditors, or cease
being in substantially the same line or lines of business in which it is
presently engaged, or generally fail to pay its debts as they become due, or
become insolvent or commence a voluntary case under the federal Bankruptcy Code
as now or hereafter constituted or any other applicable federal or state
bankruptcy, insolvency or similar law, or admit in writing its inability to pay
its debts as they mature, or consent to the appointment of a trustee or
receiver, or a trustee or a receiver shall be appointed for Lessee or any
Guarantor or for a substantial part of Lessee's property without such party's
consent and such appointment shall be not dismissed for a period of 60 days;
there shall have been entered a decree or order for relief by a court having
jurisdiction in respect of Lessee, or approving as properly filed a petition
seeking a reorganization, arrangement, adjustment or composition of or in
respect of Lessee in an involuntary proceeding or case under any applicable
federal or state bankruptcy, insolvency or other similar law, or appointing a
receiver, liquidator, assignee, custodian, trustee or similar official of Lessee
or of any substantial part of its property, or ordering the winding-up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 days, or there shall have been filed a
petition by or against Lessee under any bankruptcy law or other insolvency law
and, if petition is filed against Lessee, the petition is not withdrawn or
dismissed within 60 days after the date of filing; or Lessee shall cease doing
business as a going concern or shall liquidate or be dissolved;
(vi) Lessee or shall, without the prior written consent of Lessor, enter
into a merger, consolidation or division, effect a share exchange of its
outstanding stock for the stock of another corporation, make a tender offer for
equity securities of another publicly held entity, or sell or otherwise dispose
of all or a major part of its assets or of assets that produce all or a major
part of its revenues or profits; provided, however, that Lessee, without
violating the provisions of this clause, may consolidate with or merge with a
corporation or other entity organized under the laws of one of the states of the
United States (the surviving entity, a "successor"), or sell (except by means of
a sale and leaseback arrangement) all or substantially all of its business and
assets to such a successor, on the condition that any successor expressly assume
in writing all of the obligations of Lessee pursuant to this Lease, and that the
net tangible assets and the net worth (determined in accordance with generally
accepted accounting principles) of the successor after the consolidation, merger
or sale shall be at least equal to the net tangible assets and the net worth of
Lessee immediately prior to the consolidation, merger or sale;
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(vii) there shall occur under any other lease, contract or agreement
between Lessee and Lessor, an Event of Default, as defined in such lease,
contract or agreement;
(viii) any of the Equipment shall be attached, levied upon, encumbered,
pledged, seized or taken under any judicial process (except for any attachment,
levy, encumbrance or pledge caused to be placed on the Equipment by Lessor) and
such proceedings shall not be vacated, or fully stayed, within 30 days thereof;
(ix) at any time there shall occur under (A) any lease between Lessee and
a party other than Lessor as lessor or (B) under any lease wholly or partially
guaranteed by Lessee, the exercise by the lessor of its possessory remedies or
commencement of legal proceedings by the lessor for default under the lease;
provided that the aggregate future payments remaining to be made or guaranteed
by Lessee exceed $10,000, and that under a lease described in (B) above within
ten days of notice to Lessee of such exercise of remedies and demand for payment
by Lessee any such amount guaranteed by Lessee remains unpaid; or
(x) any obligation of Lessee for the payment of borrowed money or under a
contract for the acquisition of assets by purchase, conditional sale or other
arrangement is not paid or refinanced at maturity, whether by acceleration or
otherwise, or is declared due and payable prior to the stated maturity thereof
by reason of default or other violation of the terms of any promissory note or
agreement evidencing or governing such obligation, and Lessor has given Lessee
an opportunity to either cure the purported Event of Default or supply
information satisfactory to Lessor that it does not, in fact, exist;
this Lease shall be declared in default, immediately and without notice upon the
occurrence of an Event of Default specified in clause (v) above, and in the case
of any other Event of Default, upon Lessor at any time at its option subsequent
to such Event of Default giving notice to Lessee that this Lease is declared in
default. At any time after this Lease has been declared in default, Lessor may
exercise one or more of the following remedies, to the extent not then
prohibited by law, as Lessor in its sole discretion may elect:
(I) to proceed by appropriate court action or actions at law or in equity
or in bankruptcy to enforce performance by Lessee of the covenants and terms of
this Lease and/or to recover damages for the breach thereof;
(II) to terminate or cancel this Lease upon written notice to Lessee
whereupon all rights of Lessee to use the Equipment shall immediately terminate,
but Lessee shall not be relieved of any accrued or post-termination obligations
under this Lease;
(III) whether or not this Lease be so terminated or canceled, and without
notice to Lessee, to repossess and/or to render inoperable the Equipment
wherever found, with or without legal process, and for this purpose Lessor
and/or its agents may enter upon any premises of or under the control or
jurisdiction of Lessee or any agent of Lessee without liability for suit, action
or other proceeding by Lessee and remove the Equipment therefrom; Lessee hereby
expressly waives any claims for damages occasioned by such repossession; LESSEE
HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS, INCLUDING RIGHTS TO NOTICE OR A
JUDICIAL HEARING, WITH RESPECT TO REPOSSESSION OF THE EQUIPMENT AFTER AN EVENT
OF DEFAULT;
(IV) to hold or to use any Equipment returned to Lessor or repossessed by
Lessor for any purpose whatsoever, to sell any Equipment at a private or public,
cash or credit sale, to re-lease any Equipment, in all the foregoing events free
and clear of any rights of Lessee and without any duty to account to Lessee with
respect to such action or inaction;
(V) whether or not Lessor shall have exercised, or shall hereafter at any
time exercise, any of its other rights with respect to an item of the Equipment,
upon written notice to Lessee, to demand that Lessee pay to Lessor, and Lessee
shall pay to Lessor on the date specified in such notice, as liquidated damages
for loss of a bargain and not as a penalty (in lieu of the Basic Rent for such
Equipment that prior to the Event
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of Default was to have been paid on Payment Dates subsequent to the date
specified in such notice), the sum equal to the excess, if any, of 125% of the
Stipulated Loss Value for such item of Equipment computed as of the latest
Payment Date when all Basic Rent and Additional Rent then due and payable has
been fully paid over whichever of the following three amounts Lessor, in its
sole discretion, shall designate in such notice:
(A) the present value of the fair market rental value (determined as
hereafter provided in this Section) of such item of the Equipment
for the remainder of the Lease Term as of the date specified in such
notice, the present value to be computed on the basis of a seven
percent per annum rate of discount from the respective dates upon
which such rent would be paid,
(B) the fair market sales value (determined as hereafter provided in
this Section) of such item of Equipment as of the date specified in
such notice, or
(C) if Lessor shall have sold or re-leased any item of Equipment
pursuant to clause (IV) above, the net proceeds of such sale or
re-lease,
plus interest at the Default Interest Rate (a) on such sum from the such Payment
Date until paid and (b) on whichever of such three amounts is so designated by
Lessor from such Payment Date until whichever one of the following shall be
applicable to the designated amount: the time when the fair market rental or
sales value shall have been so determined or the time when the Equipment shall
have been sold or re-leased; and
(VI) to forthwith recover from Lessee, and Lessee shall be fully liable
for, all Basic Rent that shall accrue until the date that the Equipment is
returned to or repossessed by Lessor and any Additional Rent including
collection fees, whenever accrued, and interest at the Default Interest Rate.
In addition to the foregoing, Lessor may also recover from Lessee all
costs and expenses arising out of Lessee's default, including, without
limitation, expenses of repossession of the Equipment and the storage,
inspection, repair, reconditioning, sale and re-leasing thereof, and reasonable
attorneys' fees incurred by Lessor in exercising any of its rights or remedies
hereunder. For the purposes of this Section only, "fair market rental value" and
"fair market sales value" shall be determined by an appraisal of an independent
appraiser chosen by Lessor, and the cost of any such appraisal shall be borne by
Lessee. No remedy referred to in this Section is intended to be exclusive, but
each shall be cumulative and in addition to any other remedy referred to above
or otherwise available to Lessor at law or in equity or in bankruptcy. Lessor
shall have no duty to pay Lessee any surplus from sale or lease of the
Equipment, or in the fair market rental or sales value of the Equipment, above
all amounts payable by Lessee to Lessor. The exercise by Lessor of any one or
more remedies shall not be deemed to preclude the simultaneous or later exercise
by Lessor of any or all such previously exercised remedies and any and all other
remedies.
19. Assignment and Transfer by Lessor. (a) Lessor may at any time and from
time to time assign to one or more security assignees (all herein called the
"Secured Party" and also called an "Assignee") for the purpose of securing a
loan to Lessor or for any other purpose, and at its sole discretion, may also
sell or transfer to one or more Persons (herein called the "Transferee" and also
called an "Assignee"), in any case subject to the rights of Lessee under this
Lease but without notice to or consent of Lessee, this Lease, any other
Transactional Documents, any or all of the Equipment, and all sums at any time
due and to become due or at any time owing or payable by Lessee to Lessor under
this Lease or pursuant to any or all of the Transaction Documents. The Secured
Party shall not be obligated to perform any duty, covenant or condition required
to be performed by Lessor under this Lease or any other Transactional Documents.
(b) Lessee agrees that notwithstanding any assignment to a Secured Party,
each and every covenant, agreement, representation and warranty of Lessor under
this Lease shall be and remain the sole liability of Lessor and of every
successor in interest of Lessor (excluding any Secured Party) or, in the case of
assignment to a Transferee, shall become and remain the sole liability of the
Transferee if so agreed to by the Transferee and if not so agreed to shall be
and remain the sole liability of Lessor. Lessee further
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agrees and acknowledges that any assignment, sale or transfer by Lessor could
not and shall not materially change any duty or obligation of Lessee or
materially increase any burden or risk of Lessee.
(c) Lessee further acknowledges and agrees that from and after the receipt
by Lessee of written notice of an assignment from Lessor, Lessee shall comply
with the directions or demands given in writing by the Secured Party or (to the
extent not inconsistent with the directions or demands of the Secured Party) by
the Transferee, and the Secured Party or Transferee shall have the right to
exercise (either in its own name or in the name of Lessor) all rights,
privileges, and remedies of Lessor provided for herein. Lessee agrees that any
obligation to a Secured Party as a result of the assignment of this Lease to a
Secured Party as aforesaid shall not be reduced or minimized by reason of any
claim, defense, counterclaim, set-off, abatement, reduction or recoupment or
other right that Lessee might otherwise have been able to assert against Lessor,
any prior Assignee or any Transferee. After any assignment to a Secured Party
and unless and until Lessee is otherwise notified by the Secured Party, this
Lease may not be amended or modified, and no consent or waiver hereunder shall
be effective, without the prior written consent of the Secured Party. Lessee
agrees to execute and Lessor or any Transferee or Secured Party may record any
instruments and documents relating to such assignment, mortgage or security
interest desired by Lessor or any Transferee or Secured Party. Lessee shall
promptly provide any such instruments and documents that are requested by Lessor
or any Assignee including certificates indicating any claim, defense,
counterclaim, set-off, abatement, reduction, recoupment or other right that
Lessee may have against Lessor or any Assignee, the date to which Basic Rent has
been paid under each Rental Schedule hereunder and that this Lease is in effect
without default or amendment, or the extent of such default or amendment, as the
case may be.
20. Recording and Filing; Expenses. Lessee will, upon demand of Lessor, at
Lessee's cost and expense, do and perform any other act and will execute,
acknowledge, deliver, file, register, record and deposit (and will re-file,
re-register, re-record or re-deposit whenever required) any and all instruments
required by law or requested by Lessor (or any Assignee) including, without
limitation, financing statements under the Uniform Commercial Code (which,
notwithstanding the intent of Lessor and Lessee that this is a true lease,
Lessor shall have the right to file wherever and whenever Lessor requires), for
the purpose of providing proper protection to the satisfaction of Lessor (and/or
any Assignee) of Lessor's title to any Equipment (and/or of any Assignee's
security interest in the Equipment) or for the purpose of carrying out the
intention of this Lease. Lessee will also pay, or will upon demand reimburse
Lessor for, all reasonable costs and expenses incurred by Lessor in connection
with this Lease, any other Transactional Documents, and any related
transactions, closings, assignments, sales and transfers to any Secured Party or
Transferee, enforcement of Lessor's rights under this Lease and the other
Transactional Documents, proceedings involving Lessee or any Guarantor as a
debtor under any chapter of the Bankruptcy Code, filings, the documentation of
this and any related transactions, and fees and costs of attorneys for Lessor in
connection therewith.
21. Automatic Lease Term Renewal. In the event that at the expiration of
the Primary Term Lessee does not exercise the purchase option set forth in this
Master Lease with respect to the Equipment subject to a Rental Schedule, the
Lease Term shall automatically be renewed for all of the Equipment subject to
such Rental Schedule for an additional term twelve months (the "Renewal Term")
at a monthly Basic Rent equal to one percent ( 1 %) of the Acquisition Cost of
such Equipment, plus any applicable sales and other taxes, that shall be paid
monthly in advance.
22. Quiet Enjoyment. So long as no Event of Default has occurred and is
continuing hereunder, Lessee shall have peaceful and quiet use and enjoyment of
the Equipment during the Lease Term as against acts of Lessor or anyone claiming
solely by, through or under Lessor including any Secured Party or Transferee.
23. Failure or Indulgence not Waiver; Additional Rights of Lessor. (a) No
failure to exercise, and no delay in exercising, any right, power or remedy
hereunder on the part of Lessor shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or remedy.
Any waiver, to be effective,
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must be in writing. A waiver of any covenant, term or condition contained herein
shall not be construed as a waiver of any subsequent breach of the same
covenant, term or condition. Receipt by Lessor of any Basic Rent or Additional
Rent with knowledge of the breach of any provision hereof shall not constitute a
waiver of such breach.
(b) Lessor shall be entitled to injunctive relief in case of the violation
or attempted or threatened violation of any of the provisions hereof, to a
decree compelling performance of any of the provisions hereof, and to any other
remedy allowed in law or in equity.
24. Sublease. Lessee shall not sublease the Equipment, relinquish
possession of the Equipment, or assign, pledge or hypothecate this Lease or any
of Lessee's rights or obligations hereunder, in whole or in part, without the
prior written consent of Lessor. Nevertheless, any such sublease and the rents,
profits and proceeds therefrom shall be the property of Lessor and, unless
Lessor has consented to such sublease, Lessor within 30 days after receiving
notice thereof in accordance with the provisions of this Master Lease on notices
shall have the right to declare the sublease void from its purported
commencement, to terminate the sublease or to accept the sublease. Any such
attempted relinquishment of possession, assignment, pledge or hypothecation by
Lessee without such consent shall be null and void.
25. Purchase Option. (a) If (i) no Event of Default, and no event which
with the giving of notice or lapse of time, or both, would constitute an Event
of Default, has occurred and then remains unremedied to Lessor's satisfaction,
and (ii) this Lease shall not have been earlier terminated, Lessee shall be
entitled, at its option, upon written notice to Lessor, as hereinafter provided,
to purchase all, but not less than all, items of the Equipment then subject to a
Rental Schedule, at the expiration of the Primary Term for such items of the
Equipment or, as the case may be, at the expiration of any Renewal Term for such
items of the Equipment, for an amount, with respect to each such item of the
Equipment, payable in immediately available funds, equal to the Fair Market
Value thereof as determined by an Appraisal, plus any applicable sales, excise
or other taxes imposed as a result of such sale (other than net income taxes
attributable to such sale). Lessor's sale of any item of the Equipment shall be
on an "as-is", "where-is" basis, without any representation or warranty by or
recourse to Lessor, as provided by the provisions of this Master Lease on
disclaimer of warranties, and shall be subject to such additional terms and
conditions as may be specified in the Rental Schedule. If Lessee intends to
exercise said purchase option, Lessee shall give written notice to Lessor to
such effect at least 90 days prior to the earliest expiration of the Primary
Term of the item(s) of the Equipment subject to the particular Rental Schedule
with respect to which Lessee intends to exercise its purchase option, or, if a
Renewal Term is then in effect, at least 90 days prior to the earliest
expiration of the then current Renewal Term of the item(s) of the Equipment
subject to the particular Rental Schedule with respect to which Lessee intends
to exercise its purchase option. If Lessee fails to give such written notice to
Lessor as aforesaid, it shall be conclusively presumed that Lessee has elected
not to exercise such purchase option. If Lessee gives such written notice,
Lessee shall be obligated to buy, and Lessor shall be obligated to sell, such
Equipment on the terms herein provided.
(b) If Lessee has elected to exercise its purchase option, as provided in
this Section, as soon as practicable following Lessor's receipt of the written
notice from Lessee of Lessee's intent to exercise such option, Lessor and Lessee
shall consult for the purpose of determining the Fair Market Value of each such
item of the Equipment as of the end of the Primary Term thereof, or, if this
Lease has been renewed pursuant to any provisions of this Lease on option to
renew, as of the end of the then current Renewal Term thereof, and any values
agreed upon in writing shall constitute the Fair Market Value of each such item
of the Equipment for the purposes of this Section. In so consulting, Lessor and
Lessee may refer to books containing indexes of standard values for used
equipment of relevant type and age If Lessor and Lessee have failed to agree
upon such value prior to the 60th day before the expiration of the Primary Term,
or, if this Lease has been renewed, prior to the 60th day before the expiration
of the then current Renewal Term, on and after such 60th day either party may
request that such value be determined by Appraisal.
16
<PAGE>
(c) Notwithstanding any election by Lessee to purchase, the provisions of
this Lease shall continue in full force and effect until the transfer of
ownership of such Equipment upon the date of purchase by the delivery of a Bill
of Sale by Lessor.
26. Notices. Any notice or other communication required or permitted to be
given by either party hereto to the other party shall be deemed to have been
given upon its receipt, in writing, by the receiving party at its address set
forth below, or at such other address as the receiving party shall have
furnished to the other party by notice pursuant to this Section.
If to Lessee: VION Pharmaceuticals, Inc.
Four Science Park
New Haven, CT 06511
Attn: Thomas E. Klein,
Vice President Finance
If to Lessor: FINOVA Technology Finance, Inc.
10 Waterside Drive
Farmington, CT 06032-3065
27. Entire Agreement; Severability; Amendment or Cancellation of Lease.
This Lease constitutes the complete and exclusive statement of the terms of the
agreement between the parties with respect to the leasing of the Equipment and
any sale of the Equipment by Lessor to Lessee. Any provision of this Lease which
is prohibited or unenforceable in any jurisdiction shall be, as to such
jurisdiction, ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. LESSEE ACKNOWLEDGES
RECEIPT OF A COPY OF THIS MASTER LEASE. Lessor and Lessee agree that neither
this Lease nor Lessee's acceptance or deemed acceptance of any or all of the
Equipment may be canceled, waived, altered, amended, repudiated, terminated,
rescinded, revoked or modified, except by a writing signed by Lessee and a duly
authorized representative of Lessor.
28. Waiver of Jury. Lessor and Lessee waive any right and all right to
trial by jury in any action or proceeding relating in any way to this Lease.
29. Restriction of Damages. . Lessee shall not make any claim in respect
of or relating to the Equipment or this Lease against Lessor or any Assignee for
special consequential or punitive damages.
30. Governing Law; Consent to Jurisdiction and Service. This Lease shall
be governed by and construed in accordance with the laws of the State of
Connecticut (other than the conflicts of laws provisions). Lessee agrees that
any legal action or proceeding against Lessee in respect of or relating to this
Lease or the Equipment may be brought in any state or federal court sitting in
the city of Hartford in the State of Connecticut. Lessee hereby irrevocably
consents and submits to the nonexclusive personal jurisdiction of said courts
and irrevocably agrees that all claims in any such action or proceeding may be
heard and determined in and enforced by any such court. Lessee irrevocably
consents to the service of summons, notice, or other process relating to any
such action or proceeding by delivery thereof to it by hand or by mail in the
manner set forth in the provisions of this Master Lease on notices.
31. Lessor's Right to Perform for Lessee. If Lessee fails to duly and
promptly perform any of its obligations under this Lease or fails to comply with
any of the covenants or agreements contained herein, Lessor may itself perform
such obligations or comply with such covenants or agreements, for the account of
Lessee, without thereby waiving any default, and any amount paid or expense
(including, without limitation, attorney's fees) reasonably incurred by Lessor
in connection with such performance or compliance shall, together with interest
thereon at the Default Interest Rate, be payable by Lessee to Lessor on demand.
17
<PAGE>
32. Agreement for Lease Only. Lessor and Lessee agree that this Lease is
and is intended to be a true lease (and not a lease in the nature of a security
interest) and further agree to treat this Lease as a true lease for all
purposes, including, without limitation, tax purposes.
33. Binding Effect. This Lease shall inure to the benefit of and be
binding upon the parties hereto and their respective permitted successors and
assigns.
34. General. The captions in this Master Lease and each Rental Schedule
are for convenience of reference only. There shall be only one original executed
copy of this Master Lease and of each Rental Schedule. This Master Lease is and
each Rental Schedule shall be executed in the State of Connecticut by Lessor's
having countersigned the same in the State of Connecticut, and are to be and
shall be performed in the State of Connecticut by reason of the requirements
therein for payment by Lessee to Lessor to be made in the State of Connecticut.
35. Definitions. The following terms, not elsewhere defined, shall have
the following meanings for all purposes hereof:
"Acquisition Cost" of any item of the Equipment shall mean an amount equal
to the sum of (i) the purchase price of such item of the Equipment paid by
Lessor pursuant to the purchase order for such item of the Equipment assigned to
or given by Lessor, plus (ii) any excise, sales or use tax, freight,
installation, set-up and other costs that are paid by Lessor on or with respect
to such item of the Equipment on or about the time of Lessor's purchase of the
Equipment or the Lease Commencement Date and that Lessor does not request Lessee
to directly reimburse to Lessor.
"Appraisal" shall mean the following procedure whereby recognized
independent qualified equipment appraisers shall mutually agree upon the amount
in question. The party seeking Appraisal shall deliver a written notice to that
effect to the other party appointing its appraiser, and within 15 days after
receipt of such notice, the other party shall, by written notice, appoint its
appraiser. If within 15 days after appointment of the two appraisers as
described above, the two appraisers are unable to agree upon the amount in
question, a third appraiser shall be chosen within five days thereafter by
mutual agreement of the first two appraisers, or if the first two appraisers
fail to agree upon the appointment of a third appraiser, such appointment shall
be made by an authorized representative of the American Arbitration Association.
The appraisal of the third appraiser shall be given within a period of ten days
after the selection of the third appraiser. The average of the three appraisals
arrived at by the three appraisers shall be binding and conclusive on Lessor and
Lessee. Lessor and Lessee each shall pay the fees of the appraiser appointed by
it and shall share equally the fees and expenses of the third appraiser, if any,
and those of the American Arbitration Association, if applicable.
"Certificate of Inspection and Acceptance" shall mean a certificate in the
form designated by Lessor whereby Lessee evidences its acceptance of one or more
items of the Equipment for lease hereunder.
"Fair Market Value" shall mean, with respect to the Equipment in question,
the amount which would be paid for that Equipment in an arm's-length sale
transaction between an informed and willing buyer (not a used equipment or scrap
dealer) who wants the Equipment to be as described in the next following
sentence and is under no compulsion to buy, and an informed and willing seller
under no compulsion to sell. In determining the Fair Market Value, it shall be
assumed (whether or not the same be true) that the Equipment is fully
operational, installed and in economically productive service and that all
maintenance and repairs including upgrades, replacements and other services
required by this Lease have been performed and that the Equipment is in such
condition to comply fully with the requirements of this Lease, including
provisions of this Master Lease governing the return of Equipment. The costs of
removal from the location of current use and installation at another location
for use shall not be a deduction in determining the Fair Market Value. Upon any
exercise by Lessee of the purchase option provided for by this Master Lease at
the expiration of the Primary Term for the Equipment subject to a Rental
Schedule,
18
<PAGE>
Lessor and Lessee agree that the Fair Market Value shall not be less than
fifteen percent (15%) of the Acquisition Cost of such Equipment.
"Guarantor" shall mean a guarantor of any or all of the obligations of
Lessee pursuant to this Lease.
"Guaranty" shall mean a writing containing a guaranty of any or all of the
obligations of Lessee pursuant to this Lease.
"Lease Commencement Date" with respect to an item of Equipment shall mean
the date of commencement of the Lease Term of the item as provided by the
applicable Rental Schedule.
"Lease Term" with respect to an item of the Equipment shall mean the
Primary Term plus any and all Renewal Terms plus any period during which Lessee
retains the Equipment on a month-to-month basis pursuant to provisions of this
Master Lease governing the return of the Equipment. The Lease Term shall include
the Lease Commencement Date and the date on which the Lease Term ends.
"Manufacturer" shall mean the Person that manufactures the item of the
Equipment in question.
"Master Lease" shall mean this Master Equipment Lease Agreement.
"Person" shall mean an individual, a corporation, a partnership, an
association, a joint-stock company, a trust, an estate, any incorporated
organization or similar association, a government or political subdivision, or
any other entity.
"Rental Schedule" shall mean each schedule, executed by Lessor and Lessee
pursuant to this Master Lease, providing for a description of some or all of the
Equipment to be leased hereunder, the place or places where such Equipment shall
be located, its Acquisition Cost, the Basic Rent payable by Lessee with respect
thereto, the Primary Term thereof, the Lease Commencement Date with respect
thereto, and such other matters as Lessor and Lessee may agree upon.
"Stipulated Loss Value" shall mean the amounts specified in the Table of
Stipulated Loss Values applicable to the items of the Equipment subject to a
Rental Schedule, as provided by the Schedule B attached to the Rental Schedule.
Except as otherwise provided in a writing signed by Lessor and Lessee, the
Stipulated Loss Value immediately prior to the end of the Primary Term for any
items of the Equipment shall be the Stipulated Loss Value throughout any Renewal
Term(s) for such items, and thereafter until such items are returned to Lessor
pursuant to the provisions of this Lease or purchased by Lessee pursuant to any
then applicable purchase option provisions of this Lease.
IN WITNESS WHEREOF, the duly authorized representatives of Lessor and
Lessee have executed this Master Lease as of the date first above written.
LESSOR: LESSEE:
FINOVA TECHNOLOGY. VION PHARMACEUTICALS, INC.
FINANCE, INC.
By: /s/Linda A. Moschitto By: /s/Thomas E. Klein
Title: Director, Contract Administration Title: Vice President Finance
ATTEST: ATTEST:
By:____________________________ By: /s/Thomas Mizelle
Title:_________________________ Title: V. P. Operations
19
<PAGE>
SALE AND LEASEBACK AGREEMENT
This Sale and Leaseback Agreement is entered into as of the 20TH day of
December, 1996, by and between VION Pharmaceuticals, Inc., a Delaware
corporation with its principal place of business a Four Science Park, New Haven,
Connecticut 06511 (hereinafter referred to as "Seller"), and FINOVA Technology
Finance, Inc., a Delaware corporation with its principal place of business at 10
Waterside Drive, Farmington, Connecticut 06032-3065 (hereinafter referred to as
"Buyer").
WHEREAS, Seller desires to sell to Buyer the personal property listed in
Schedule A attached hereto (such listed personal property being hereinafter
referred to as the "Equipment"), and
WHEREAS, Seller desires to use the Equipment for the exclusive benefit of
Seller under the terms and conditions of the Master Equipment Lease Agreement
dated October 17, 1996, between Buyer (as Lessor) and Seller (as Lessee) and
Rental Schedule No. 2 thereunder (hereinafter referred to together as the
"Lease"),
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the parties agree as follows:
1. Buyer agrees to purchase the Equipment from Seller, and to lease the
Equipment to Seller pursuant to the terms and conditions contained in the Lease.
The Purchase Date for the Equipment and the date that title to the Equipment
shall pass from Seller to Buyer shall correspond with the Lease Commencement
Date as defined in the Lease.
2. Buyer and Seller agree that the Purchase Price of the Equipment is $
207,328.08, which amount shall be payable to Seller by Buyer on the Purchase
Date.
3. Seller agrees that upon payment by Buyer of the Purchase Price, Seller
will deliver to Buyer a Bill of Sale, in the form attached hereto as Exhibit A
(the "Bill of Sale"), which will convey to Buyer good and marketable title to
the Equipment, free and clear of all liens and encumbrances of any kind or
description. Seller also agrees to provide Buyer with copies of all
documentation received or executed by Seller upon the original acquisition of
the Equipment by Seller.
4. Buyer and Seller agree that the warranties, covenants and agreements
herein contained shall survive the passing of title.
5. Seller agrees to pay any and all applicable Federal, state, county or
local taxes and any and all present or future taxes or other governmental
charges levied upon or created by the sale of the Equipment hereunder, including
sales, use, or occupation taxes due upon the purchase by Buyer.
6. To induce Buyer to enter into this Sale and Leaseback Agreement ("this
Agreement") and with the knowledge that Buyer is doing so in reliance upon these
representations and warranties, Seller represents and warrants to Buyer that (i)
Seller is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation, with full power to
enter into this Agreement; (ii) the person who has executed this Agreement and
who shall execute the Bill of Sale has the authority to bind Seller; (iii) the
execution, delivery and performance of this Agreement and the sale and leaseback
of the Equipment by Seller pursuant to the Lease will not conflict with or be a
breach of any provisions of the Certificate of Incorporation or By-Laws of
Seller or any law (including fraudulent conveyance laws), judgment, writ,
injunction, decree, award, rule or regulation of any court, administrative
agency or other governmental authority, or of any indenture or other agreement
to which Seller is a party or by which it is bound, or constitute a default
under any thereof; (iv) this Agreement and the Bill of Sale, when executed and
delivered to Buyer, will be a duly authorized, valid and binding agreement of
Seller enforceable against Seller in accordance with the respective terms
thereof and enforceable against purchasers from and
20
<PAGE>
creditors of Seller; (v) no filing, giving of notice or publication is required
in connection with the sale and leaseback or if required such filing, notice or
publication has been duly made and given; (vi) no vote or consent of, or notice
to, the holders of any class of stock of Seller is required, or if required,
such vote, consent or notice has been obtained or given, to authorize the
execution , delivery and performance of this Agreement and the Bill of Sale by
Seller; (vii) Seller has and is transferring to Buyer title to the Equipment
free and clear of all liens and encumbrances of any kind or description; and
(viii) no consent, approval, withholding of objection or other authorization of
or by any court, administrative agency, other governmental authority or any
other person is required, except such consents, approvals or other
authorizations which have been duly obtained and are in full force and effect,
in connection with the execution, delivery or performance by Seller or the
consummation by Seller, of the transactions contemplated by this Agreement.
Seller hereby agrees to deliver to Buyer, upon the Lease Commencement Date of
the Lease, an opinion of Seller's counsel, substantially in the form attached
hereto as Exhibit B, to the effect that the above representations of Seller are
true and correct.
7. Seller warrants that it has taken all action necessary to obtain all
agreements, warranties and indemnifications applicable to the Equipment which
are normally provided by the manufacturer to its customers. Seller hereby
assigns to Buyer all of its right, title and interest in and to all such
agreements, warranties and indemnifications. To the extent assignable, Seller
warrants that all such agreements, warranties and indemnifications are
assignable to Buyer.
8. Buyer and Seller agree that this Agreement and all documents attached
hereto shall inure to the benefit of and shall be binding upon Seller and Buyer,
their subsidiaries, successors and assigns, except that the assignee of Buyer
shall not be required to perform any of the obligations of Buyer and any
assignment by Buyer shall not relieve Buyer of its obligations hereunder. Seller
shall not assign any interest in this Agreement or in the documents attached
hereto without Buyer's written consent.
9. Seller agrees that all obligations of Buyer are expressly contingent
and conditional upon: (a) Seller executing and delivering the Lease for the
Equipment in a form which will constitute a valid, binding and legal obligation
and agreement of Seller and which is acceptable to Buyer; (b) Seller executing a
written Certificate of Inspection and Acceptance in the form required by the
Lease; and (c) Seller delivering any and all instruments required by Buyer under
the Lease in a form acceptable to Buyer.
10. The entire agreement between the parties with respect to the subject
matter hereof is contained in this Agreement and the Lease and the Schedules and
Exhibits referenced herein and therein. There are no understandings, agreements,
representations or warranties, express or implied, respecting this Agreement or
the Lease or the Equipment purchased hereunder and leased thereunder except as
specifically set forth in this Agreement, the Lease, and the Schedules and
exhibits hereto and thereto. Buyer shall not be liable for any indirect, special
or consequential damages, in connection with or arising out of the furnishing,
performance or use of any item of the Equipment or services provided for in this
Agreement, nor shall Buyer be liable in whole or in part for any event beyond
its control.
11. Any notice or other communication required or permitted to be given by
either party hereto to the other party shall be deemed to have been given upon
its receipt, in writing, by the receiving party at its address set forth below,
or at such other address as the receiving party shall have furnished to the
other party by notice pursuant to this paragraph.
If to Seller VION Pharmaceuticals, Inc.
Four Science Park
New Haven, CT 06511
If to Buyer FINOVA Technology Finance, Inc.
10 Waterside Drive
Farmington, CT 06032-3065
21
<PAGE>
12. Buyer and Seller agree that this Agreement and the Bill of Sale shall
be governed by and construed in accordance with the laws of the State of
Connecticut (other than the conflicts of laws provisions) and that any legal
action or proceeding arising out of this Agreement or the Bill of Sale shall be
brought in any state or federal court sitting in the city of Hartford in the
State of Connecticut. Buyer and Seller hereby irrevocably consent and submit to
the exclusive personal jurisdiction of said courts and irrevocably agree that
all claims in any such action or proceeding may be heard, determined in and
enforced by any such court. Seller irrevocably consents to the service of
summons, notice, or other process relating to any such action or proceeding by
delivery thereof to it by hand or by mail in the manner set forth in the
provisions of this Agreement on notices.
13. Buyer and Seller waive any and all right to trial by jury in any
action or proceeding relating in any way to this Agreement or the Bill of Sale.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the date set forth below by their duly authorized corporate
officers.
FINOVA TECHNOLOGY FINANCE, INC. ("Buyer") VION PHARMACEUTICALS, INC.("Seller")
By: /s/Linda A. Moschitto By: /s/Thomas E. Klein
Name (typed): Linda A. Moschitto Name (typed:) Thomas E. Klein
Title: Director, Contract Administration Title: Vice President Finance
Date: December 19, 1996 Date: December 18, 1996
22
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary Incorporated In
------------------ ---------------
MicroFab Biosystems, Inc. Delaware
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in Post Effective Amendment No.1 to
the Registration Statement (Form S-8 No. 33-98738) pertaining to the Vion
Pharmaceuticals , Inc. Amended and Restated 1993 Stock Option Plan of our report
dated February 12, 1997, with respect to the consolidated financial statements
of Vion Pharmaceuticals, Inc. included in its' Annual Report (Form 10-KSB) filed
with the Securities and Exchange Commission.
Ernst & Young LLP
Hartford, Connecticut
February 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,788,369
<SECURITIES> 4,628,446
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,523,450
<PP&E> 712,806
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,880,765
<CURRENT-LIABILITIES> 585,603
<BONDS> 0
0
11,070
<COMMON> 80,178
<OTHER-SE> 8,980,724
<TOTAL-LIABILITY-AND-EQUITY> 9,880,765
<SALES> 0
<TOTAL-REVENUES> 51,779
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,088,166
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,285
<INCOME-PRETAX> (7,608,679)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,608,679)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,608,679)
<EPS-PRIMARY> (0.96)
<EPS-DILUTED> (0.96)
</TABLE>
