UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIE
EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1998
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 offices) (Zip Code)
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 (together with associated
Common Stock Purchase Rights)
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: $1,955,989.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of January 31, 1999 based upon of the last sale price of such
stock on that date as reported by the NASDAQ SmallCapSM Market was $89,626,928.
The number of shares of the Registrant's Common Stock outstanding as of December
31, 1998 was 13,953,046.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Registrant's Proxy Statement for its Annual Meeting of Stockholders
to be held on May 20, 1999 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.
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
GENERAL
Vion Pharmaceuticals, Inc. (the "Company") is a development 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(R)), a hypoxic cancer cell therapeutic which targets
oxygen-depleted cells that are otherwise resistant to radiation therapy, (ii)
sulfonyl hydrazine 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
such as Triapine(TM), which 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 MelasynTM, a synthetic form of
melanin. 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.
Strategic Partnerships. Second, the Company has concluded and will
continue to pursue strategic partnerships with other companies to more
effectively develop and eventually market technologies in its portfolio. In
November 1997, the Company and Boehringer Ingelheim International GmbH entered
into an exclusive worldwide licensing agreement for the development and
marketing of Promycin(R) (porfiromycin), Vion's lead anticancer agent. 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
anticancer agents for delivery using TAPET, and the Company may also contract
with other pharmaceutical companies to use TAPET to deliver new, proprietary
anticancer agents. Other technologies which are candidates for strategic
partnerships include Triapine,(beta)-L-Fd4C and the sulfonyl hydrazine prodrugs.
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 result in genetic changes affecting the
ability of cells to normally regulate their growth and differentiation. When a
normal cell becomes cancerous it can
2
<PAGE>
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 1.22 million new cases of invasive cancer will be
diagnosed in the United States in 1999 and 563,100 U.S. citizens are expected to
die from cancer in 1999. Sixty percent of new cases of cancer are expected to
result in death within five years. Cancer is the second leading cause of death
in the U.S., exceeded only by heart disease. Since 1990, approximately 4 million
Americans have died from cancer. The market for cancer therapeutics in the U.S.
was approximately $9.3 billion in 1997 and is projected to total approximately
$11.5 billion in 1999.
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 provide 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 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. Other research has focused on mechanisms to efficiently deliver
therapies to tumors. 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, and to therapies that can selectively
deliver antineoplastic agents to tumors.
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, delivered systemically or in ways that make anticancer agents
selectively more toxic to tumors. Therefore, the Company intends to take a
balanced approach in its research and development efforts. It will continue to
develop chemically defined small molecules based upon unique cellular targets
discovered through biotechnology, while also pursuing development of vectors to
deliver therapeutic agents to tumors.
3
<PAGE>
RESEARCH AND DEVELOPMENT
The Company is currently focusing on the following principal areas of
research: (i) hypoxic cancer cell therapeutics, (ii) sulfonyl hydrazine
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/or the Yale/MelaRx Agreement (as defined below) 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 of cancer of the head
and neck, seven remained 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 of Promycin in
combination with radiation has been initiated 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 was initially
conducted at Yale and the Company has expanded the Phase III program 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 data
on Yale's research on Promycin and the clinical studies of Promycin conducted by
Yale. Because composition of matter patent protection is unavailable for
Promycin, the Company has received Orphan Drug status with respect to the use of
Promycin to treat head and neck cancer. In March, 1997, the Company also
received Orphan Drug status with respect to the use of Promycin to treat
cervical cancer.
Sulfonyl Hydrazine 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.
4
<PAGE>
The Company has licensed several classes of sulfonyl hydrazine prodrugs
from Yale, including certain prodrugs which are the subject of eight issued
patents and one pending patent application. 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. 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 3TC and its use
as an anti-hepatitis B virus ("HBV") agent, and several patent applications
relating to the nucleoside analog (beta)-L-Fd4C and its use as anti-HBV agents.
These nucleoside analogs are antimetabolites and have shown, in 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 3TC 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. 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 completed animal
studies necessary to determine the pharmacological and toxicological profiles of
its lead compound, Triapine (previously known as 3-AP or OCX-0191) . Triapine
has demonstrated significant in vitro and in vivo activity against murine L1210
leukemia, the murine M109 lung carcinoma, and the human A2780 ovarian carcinoma.
The Company filed an Investigational New Drug (IND) application for Triapine in
December 1997 and received clearance one month later from the FDA to proceed
with Phase I clinical trials. The Company is conducting these studies at the
University of Miami Hospital and the Arizona Clinical Research Center.
Triapine's target indications are for solid tumors such as lung, breast,
colorectal cancer and melanoma, and chronic myelogenous leukemia.
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 effectively target cancerous tumors, amplify within tumors and
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. Bacteria from the genus
Salmonella, attenuated for virulence, were chosen because they multiply rapidly,
can be easily modified genetically and have been found to grow under both
aerobic (air) and anaerobic (lack of air)
7
<PAGE>
conditions, such as those that occur within solid tumors. The microorganisms
have been designed to be highly selective for tumor tissue, and as an additional
safeguard, the possibility for infection of normal tissue has been attenuated by
bioengineering the organisms. In addition, TAPET vectors are designed to remain
fully sensitive to antibiotics. This sensitivity allows for greater control
since the vector can be cleared from the body in the presence of an antibiotic
at any time during therapy. Tumor localization has been shown in animal models
using TAPET strains in 16 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. To Vion's knowledge, the TAPET discovery effort is the
only vector-based research program currently underway that is studying the use
of bacterial as opposed to viral vectors for the treatment of cancer. Whereas
viral vectors are delivered locally, TAPET bacterial vectors are delivered
systemically, allowing for the potential treatment of tumors throughout the body
whether their location is known or not. 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 to reproduce at high levels within tumor tissue. Vion is
continuing to develop TAPET in preclinical studies and plans to initiate a Phase
I clinical study of its first TAPET vector in 1999. The Company has completed
GMP production and characterization of a master cell bank for production of the
clinical dosage form, as well as frozen and lyophilized formulations of the
vector, known as VNP20009.
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 technology 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.
OTHER POTENTIAL PRODUCT CANDIDATES
Melasyn(TM). Pursuant to a Research Agreement dated September 23, 1988,
as amended and restated as of August 1, 1992 (the "Yale/MelaRx Agreement"), 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. Melasyn
is a readily soluble form of melanin making it a novel and useful ingredient for
formulation of skin care products and cosmeceuticals. In February 1998, Vion
agreed to license its Melasyn technology in an exclusive worldwide agreement
with San Mar Laboratories, a leading manufacturer of private label cosmetics and
pharmaceuticals. Under the terms of the agreement, Vion granted an exclusive
worldwide license to San Mar for the manufacture and sale of products containing
Melasyn. Vion will receive a royalty on products sold by San Mar with guaranteed
minimum annual royalties over an initial three year period.
The Company has also funded research projects relating to 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."
6
<PAGE>
COLLABORATIVE ARRANGEMENTS
The Company is seeking 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.
In November 1997, Boehringer Ingelheim International GmbH of Ingelheim,
Germany and the Company entered into an exclusive worldwide licensing agreement
for the development and marketing of Promycin (porfiromycin), the Company's lead
anticancer agent. Promycin, a bioreductive alkylating agent, is currently being
investigated in Phase III clinical trials for use in combination with radiation
therapy for solid tumors of the head and neck.
The strategic agreement provides the Company with exclusive
co-promotion rights to Promycin in North America. Roxane Laboratories, Inc. (a
subsidiary of Boehringer Ingelheim) and the Company will co-promote Promycin in
the United States. Boehringer Ingelheim will have exclusive worldwide rights to
market and sell Promycin outside North America. In exchange for these rights,
Boehringer Ingelheim paid the Company up front licensing fees, and is obligated
to pay development milestones and royalties on future sales of Promycin outside
North America.
Both Boehringer Ingelheim and the Company will share in worldwide
development costs. In addition, Boehringer Ingelheim made an equity investment
in Vion at a premium to the then current market price. Vion will manufacture and
supply Promycin for all territories.
SPONSORED RESEARCH AND LICENSE AGREEMENTS
Yale/OncoRx Agreement. Pursuant to a License Agreement dated August 31,
1994, as amended, 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 several of the 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 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. In July 1997, the Company and Yale amended this license
agreement and the Yale/MelaRx Agreement to reduce certain amounts payable by the
Company under such agreements. As a result, the Company issued an additional
150,000 shares of common stock to Yale. 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, and $86,250 in
September 1997 for continued support of this research. The Company also made an
unrestricted grant to Yale of $200,000 in April 1998 to fund research in Dr.
Sartorelli's laboratory. 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
7
<PAGE>
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 the Yale/MelaRx Agreement, 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 $852,000 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 paid Yale a
$100,000 fee and has agreed to make 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, 2001, subject to earlier
termination by the Company if Dr. John W. Pawelek is no longer the principal
investigator.
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 sub-licensing 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.
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, 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.
8
<PAGE>
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/MelaRx Agreement, the Company is the
exclusive licensee of a number of filed patent applications relating to the
Company's TAPET platform technology which provide for methods for diagnosing
and/or treating various solid tumor cancers, including but not limited to
melanoma, lung cancer, breast cancer and colon cancer. The Company is also the
exclusive licensee of issued United States and foreign utility patents and
pending patent applications relating to synthetic melanins and methods for using
synthetic melanins, 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 corresponding applications relevant to the Melasyn products for patent
protection in foreign countries.
In connection with the Yale/OncoRx Agreement, the Company is the
exclusive licensee of eight issued and one pending United States patents
relating to its sulfonyl hydrazine 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 number of issued
and pending United States and foreign patent applications relating to
(beta)-L-Fd4C, its composition and its use for the treatment of HIV and HBV
infections and their use in combination with other anti-AIDS agents, a pending
United States patent application relating to 3TC and its use for the treatment
of hepatitis B virus (HBV) infection, as well as issued patents and patent
applications related to TriapineTM and other 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 U.S. Patent and Trademark Office has issued patents to Yale
University covering the composition of matter and method of use of (beta)-L-Fd4C
for treating HBV and HIV, and Yale has licensed to the Company exclusive
worldwide rights to the patents including the use of (beta)-L-Fd4C for the
treatment of HBV and AIDS. In addition Yale has also licensed to the Company
rights to a pending patent application covering the use of these agents in
combination with other nucleoside anti-HIV drugs.
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
9
<PAGE>
University of Georgia Research Foundation, that relate to, enantiomerically
enriched racemic mixtures containing 3TC, methods of preparation, and use of 3TC
or racemic mixtures containing 3TC 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 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 3TC 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 3TC will likely
prevent the Company from obtaining product claims to 3TC in the patent
applications it has licensed. If the Company were able to obtain a patent with
claims directed to the use of 3TC as an anti-HBV agent, it would have the right
to exclude only the use of 3TC as an anti-HBV agent. Other third parties, in
addition to those described above, may also have filed patent applications
relating to 3TC and (beta)-L-Fd4C and/or their uses as anti-HBV agents.
The Company or its licensors is prosecuting the patent applications
licensed to the Company with the United States Patent and Trademark Office and
various foreign patent agencies 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 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.
10
<PAGE>
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.
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 of 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 and the pattern
of drug distribution, absorption and
11
<PAGE>
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. 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 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 sponsor 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.
The Company received Orphan Drug designation for Promycin in September 1995 to
treat head and neck cancer and in May 1997 received FDA approval of its request
for Orphan Drug status for the use of Promycin to treat cervical cancer. It
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. Notwithstanding
12
<PAGE>
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
use 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 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 the FDA and whether they will have a significant
impact on the approval process for cancer drugs.
MANUFACTURING AND MARKETING
The Company has no experience in manufacturing or marketing products
and has not yet commercially introduced any pharmaceutical 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 pharmaceutical
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
the FDA which are applicable to such a facility.
Upon FDA approval of one of the Company's pharmaceutical product
candidates, the Company would develop a sales force targeting oncology doctors
and clinics to market its products. 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, 1998, the Company had 42 full-time employees,
including 22 scientists and technicians. The Company has plans to hire 4
additional employees over the next 12 months to support continuing progress in
both research and development. The Company's employees are not covered by any
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company is currently leasing approximately 19,000 square feet of
office and laboratory space on three floors of a building at 4 Science Park, New
Haven, Connecticut. The lease is for a term ending in May 2001, with a right to
renew for an additional five years. Contractual rental for 1999 will be
$231,080. The Company believes that its current space will meet the Company's
requirements for the foreseeable future.
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, 1998.
13
<PAGE>
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 1998.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
The Common Stock of the Company has traded on The Nasdaq SmallCap
MarketSM under the symbol VION since April 29, 1996. From August 14, 1995 to
April 26, 1996 the Common Stock traded on The Nasdaq SmallCap MarketSM 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 in 1997 and
1998. This information is based on closing bid prices as reported by The Nasdaq
Stock MarketSM and such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
1997 1998
---------------------------- ---------------------------------
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C>
First Quarter 6-1/4 3 3-7/8 2-7/8
Second Quarter 5-1/8 3-3/8 5-9/32 3-3/8
Third Quarter 5-7/16 3-5/8 4-1/4 2-15/16
Fourth Quarter 6 2-13/16 4-15/16 2-1/8
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
The Company made no sales of unregistered securities during the fourth
quarter of the fiscal year ended December 31, 1998.
HOLDERS
At March 4, 1999 there were approximately 236 holders of record of the
Company's 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 Common Stock into which shares of Class A Preferred
Stock is then convertible.
The certificate of designations for the Company's Series 1998 Preferred
Stock provides that holders of Series 1998 Preferred Stock are entitled to
receive dividends payable quarterly "in kind" at a rate of 5% per annum, accrued
from day to day until converted into Common Stock. Dividends other than non-cash
dividends paid "in kind" with respect to other classes or series of preferred
stock require consent of a two-thirds majority-in-interest of the holders of
Series 1998 Preferred Stock.
The Company currently intends to retain any future earnings to finance
the growth and development of its business.
15
<PAGE>
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's revenues consist of research grants, technology
license fees and reimbursements for research expenses. The Company has not
generated any revenues from product sales and has incurred substantial operating
losses from its activities.
The Company has and intends to continue using a substantial portion of
the net proceeds of its June 1998 private financing, equity investment, and
initial payments and reimbursed cost sharing from the November 24, 1997
exclusive worldwide licensing agreement with Boehringer Ingelheim International
GmbH to fund its plan of operations, which includes the following elements
through December 1999:
o Continue to 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 research
and development expenses. During the next twelve months, the Company plans
to hire 4 additional employees primarily in management information
services, regulatory and administrative positions.
o Conduct Phase III clinical studies in the U.S. and Europe of Promycin for
treatment of cancer of the head and neck.
o Conduct Phase I clinical studies in the U.S. of the Company's anticancer
agent Triapine for safety and pharmacokineectics.
o File Investigational New Drug application(s) with the FDA and conduct Phase
I clinical studies in the U.S. for the safety, tumor targeting and
pharmacokineectics of several bacterial constructs using the Company's
TAPET cancer therapy delivery technology.
o Continue to support research and development being performed at Yale
University and by other collaborators and seek additional collaborative
agreements.
The Company currently estimates that anticipated revenues, the
remaining net proceeds from its private placement in June 1998, equity
investments, and initial payments and reimbursed cost sharing from the agreement
with Boehringer Ingelheim International GmbH and its existing cash and
equivalents will be sufficient to fund its planned operations until
approximately July 1999. 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. As of December 31,
1998 the Company estimates that the amount required to fund operations for the
next twelve months is approximately $15,300,000, of which approximately
$2,350,000 is subject to reimbursement under the terms of a collaboration
agreement. However, the Company's cash requirements may vary materially from
those now planned because of results of research and development, results of
product testing, relationships with strategic partners, changes in focus and
direction of the Company's research and development programs, competitive and
technological advances, the regulatory process in the United States and abroad
and other factors.
Impact of the Year 2000 Issue
- -----------------------------
The Year 2000 Issue refers to potential problems with computer systems
or any equipment with computer chips or software that use dates where the date
has been stored as just two digits
16
<PAGE>
(e.g., 97 for 1997). On January 1, 2000, any clock or date recording mechanism
incorporating date sensitive software which uses only two digits to represent
the year may recognize a date using 00 as the Year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, perform laboratory analyses, or engage in similar
business activities.
The Company's exposure to potential risks from the Year 2000 Issue
involves Information Technology (IT) systems, scientific instrumentation, and
laboratory facilities. The Company has hired an Information Systems
Administrator and has inventoried all of the software and hardware embedded in
its laboratory and facilities equipment employed in its research and development
programs to ascertain its Year 2000 compliance. The Company has not completed
its assessment of its internal information systems to determine the extent of
any Year 2000 problem. However, based on an initial review, the Company does not
currently believe that it has material exposure to the Year 2000 Issue with
respect to its own information systems, since its existing systems correctly
define the Year 2000 or will correctly define Year 2000 by December 31, 1999.
The Company has also not completed its assessment of its scientific
instrumentation, and laboratory facilities to determine the extent of any Year
2000 problem. However, the Company maintains service agreements covering its
critical instrumentation and laboratory environmental equipment. Accordingly, to
the extent that these service agreements are enforceable, the Company does not
believe that the Year 2000 presents a material exposure with regard to its
critical instrumentation and laboratory environmental equipment.
The Company has purchased Year 2000 upgrades to several software
programs, including its accounting programs, the cost of which has not been
material. To date, the Company has spent an immaterial amount with respect to
its Year 2000 assessment and estimates that its costs to complete its
assessment, as well as any corrective measures, will not be material to the
Company's financial condition, results of operations, or cash flows. The Company
does not expect to reach profitability on an operating basis before 2000 and
therefore expects to fund all such costs from funds it has raised or expects to
raise in various financings.
Management of the Company believes it will complete its review and
implement contingency plans to deal with the Year 2000 issue in a timely manner.
In the event that it does not implement adequate plans, Company operations could
be affected in several adverse ways. Failure of a scientific instrument or
laboratory facility could result, among other things, in the loss of experiments
that would take weeks to set up and repeat. Such delays in the progress of
research could have an adverse impact on the Company's stock price and on its
ability to raise capital, and the cost of repeating lost experiments cannot
reasonably be estimated at this time. In addition, research delays could occur
due to the impact of Year 2000 problems at major vendors, government research
funding agencies, or development partners.
The Company believes it maintains adequate data backup to computers
used in its information systems and scientific instrumentation. The Company
currently does not have a contingency plan in the event that it or any of its
key suppliers and vendors is unable to become Year 2000 compliant. The company
will develop a contingency plan if the Company determines it or any of it key
vendors or suppliers is not likely to achieve its compliance objectives.
Forward-Looking Statements: Cautionary Factors
- -----------------------------------------------
Statements included in this Form 10-KSB which are not historical in
nature are forward-looking statements made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements regarding the Company's future business prospects,
plans, objectives, expectations and intentions are subject to certain risks,
uncertainties and other factors that could cause actual results to differ
materially from those projected or suggested in the forward-looking statements,
including, but not limited to: the inability to raise additional capital, the
possibility that any or all of the Company's products or procedures are found to
be ineffective or unsafe, the possibility that third parties hold proprietary
rights that preclude the
17
<PAGE>
Company from marketing its products, and the possibility that third parties will
market a product equivalent or superior to the Company's product candidates.
ITEM 7. FINANCIAL STATEMENTS
This information appears in a separate section of this report following
Part III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
BOARD OF DIRECTORS
Eight directors (constituting the entire Board) are to be elected at
the upcoming 1999 Annual Meeting of Shareholders. Mr. E. Donald Shapiro,
currently a director of the Company, has not been renominated for election at
the upcoming Annual Meeting. The nominees for election at the upcoming Annual
Meeting, their ages, the year in which each first became a director of the
Company and their principal occupations or employment during the past five years
are:
<TABLE>
<CAPTION>
Year First Principal Occupation
Nominee Age Became Director During the Past Five Years
- ------- --- --------------- --------------------------
<S> <C> <C> <C>
William R. Miller.............. 70 1995 Chairman of the Board of the Company since
April 1995; from February 1995 until April
1995, Chairman of the Board of OncoRx Inc.
("OncoRx"), which was merged into a subsidiary
of the Company (then known as MelaRx
Pharmaceuticals, Inc.) in April 1995; currently
Chairman of the Board of SIBIA Neurosciences,
Inc., and a director of ImClone Systems, Inc.,
Isis Pharmaceuticals, Inc., Transkaryotic
Therapies, Inc., Westvaco Corporation and Xomed
Surgical Products Inc.; from 1964 until his
retirement in 1991, various positions with
Bristol-Myers Squibb Company, including Vice
Chairman of the Board commencing in 1985. (1)
Alan Kessman................... 52 1998 Chief Executive Officer of the Company since
January 1999 and President of the Company since
April 1999; Partner of PS Capital, an
international investment and management
advisor, since October 1998; from 1983 to 1998,
Chairman, President and Chief Executive Officer
of Executone Information Systems, Inc. and its
subsidiary eLottery, Inc.; currently a director
of eLottery, Inc. and Castelle Corporation. (2)
Alan C. Sartorelli, Ph.D....... 67 1995 Professor of Pharmacology at Yale University
School of Medicine since 1967; Chairman of the
Company's Scientific Advisory Board since April
1995; Chairman of the OncoRx Scientific
Advisory Board from May 1993 to April 1995;
Director of Yale Comprehensive Cancer Center
from 1984 to 1993.
Michel C. Bergerac............. 67 1992 Chairman of M.C. Bergerac & Co., Inc., an
investment advisory firm, since 1985; from 1974
to 1985, Chairman of the Board, President and
Chief Executive Officer of Revlon, Inc. (1)
Frank T. Cary.................. 78 1995 Director of Celgene Corporation, Cygnus
Therapeutic Systems, ICOS Corporation, Lincare,
Inc., Lexmark International Group, Inc. and
Teltrend, Inc; from 1973 to 1981, Chairman of
the Board and Chief Executive Officer of IBM.
(1)(3)
James L. Ferguson.............. 72 1995 Director of ICOS Corporation; Chairman of the
Board of General Foods Corporation from 1974
until 1989 and President from 1973 to 1977.
Michael C. Kent................ 59 1995 Founded OncoRx in May 1993 and served as a
director until April 1995; since 1983,
President and Chief Executive Officer of Kent,
Reynolds & Stuart, a consulting firm; involved
in the creation of a number of biotechnology
companies, including Nova Pharmaceutical
Corporation, Celgene Corporation, Neurogen
Corporation, Biopure Corporation, Pathogenesis
Corporation, Texas Biotechnology Corporation
and ICOS Corporation.
Walter B. Wriston.............. 79 1995 Director of ICOS Corporation, York
International Corporation and Cygnus, Inc.;
retired as Chairman and Chief Executive Officer
of Citicorp and its principal subsidiary,
Citibank, N.A., in 1984 after having served as
Chief Executive Officer for 17 years. (3)
19
</TABLE>
<PAGE>
- -------------------------------
(1) Member of the Compensation Committee of the Board of Directors.
(2) Mr. Kessman is the nominee of Elliott Associates, L.P. and Westgate
International, L.P., which have the right to designate a nominee to the
Board of Directors pursuant to the Certificate of Designation of the
Company's 5% Convertible Preferred Stock Series 1998.
(3) Member of the Audit Committee of the Board of Directors.
MANAGEMENT
The following table sets forth the names and positions of the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Alan Kessman...................................... President, Chief Executive Officer and Director
Terrence W. Doyle, Ph.D........................... Vice President - Research & Development
Thomas E. Klein................................... Vice President - Finance and Chief Financial Officer
Thomas Mizelle.................................... Vice President - Operations and Secretary
</TABLE>
Alan Kessman, age 52, has been the Company's Chief Executive Officer
since January 1999, the Company's President since April 1999 and has been a
director of the Company since October 1998. From 1983 to 1998, Mr. Kessman was
Chairman, Chief Executive Officer and President of Executone Information
Systems, Inc., a developer and marketer of voice and data communications
systems, and its subsidiary eLottery, Inc.
Terrence W. Doyle, Ph.D., age 56, has been the Company's Vice President
of Research and Development since the merger with OncoRx and served in the same
capacity for OncoRx from January 1994 until the merger. Dr. Doyle was an
employee of the Bristol-Myers Squibb Company ("Bristol-Myers") from 1967 to
1993. From 1990 to 1993, Dr. Doyle was an Executive Director with Bristol-Myers.
Dr. Doyle is the original holder of 41 U.S. patents for anti-infective,
anti-inflammatory and anti-tumor agents and the author of over 100 published
research articles and abstracts on cancer chemotherapy.
Thomas E. Klein, age 49, has been the Company's Vice President -
Finance and Chief Financial Officer since October 1995. From 1988 to 1994, Mr.
Klein was Director of Finance and Treasurer of Novo Nordisk of North America,
Inc.
Thomas Mizelle, age 48, has been the Company's Vice President of
Operations since the merger with OncoRx and has been the Company's Secretary
since October 1995. Prior to the merger, Mr. Mizelle was Vice President of
Business Development since August 1994. From May 1990 to July 1994, Mr. Mizelle
served as Senior Vice President, Vice President of Sales and Marketing and
Director of Sales of Immunex Corporation.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's executive officers and directors, and persons who beneficially own
more than ten percent of the Company's Common Stock, to file initial reports of
ownership and reports of changes in ownership with the SEC and The NASDAQ Stock
Market. Executive officers, directors and greater than ten percent beneficial
owners are required by the SEC to furnish the Company with copies of all Section
16(a) forms they file.
Based upon a review of the copies of such forms furnished to
the Company and written representations from the Company's executive officers
and directors, the Company believes that during fiscal 1998 all Section 16(a)
filing requirements applicable to its executive officers, directors and greater
than ten percent beneficial owners were complied with.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information concerning all cash and
non-cash compensation awarded to, earned by or paid to the Company's chief
executive officer and each of the other executive officers who earned over
$100,000 and were serving at the end of 1998, for services in all capacities to
the Company, its subsidiaries and predecessors.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
AWARDS
OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SARS (#) COMPENSATION ($)
- --------------------------- ---- ---------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
John A. Spears -Former President 1998 $246,750 $37,013(2) 12,000 $-------
and Chief Executive Officer (1) 1997 $234,557 $61,000 ------ $-------
1996 $189,167 $70,500 15,000 $-------
Terrence W. Doyle-Vice President- 1998 $183,750 $27,563(2) 9,600 $-------
Research and Development 1997 $174,549 $38,000 ------ $-------
1996 $154,167 $42,000 12,000 $-------
Thomas E. Klein - Vice President 1998 $157,500 $23,625(2) 9,600 $-------
Finance and Chief Financial Officer 1997 $148,486 $33,000 ----- $-------
1996 $129,167 $36,000 37,000 $-------
Thomas Mizelle - Vice President- 1998 $183,750 $27,563(2) 9,600 $-------
Operations and Secretary 1997 $173,362 $38,000 ----- $-------
1996 $154,167 $42,000 62,000 $-------
</TABLE>
- -------------------------------
(1) The Company was a party to an employment agreement with Mr. Spears. See
"-Employment Agreements." Mr. Spears was Chief Executive Officer of the
Company until January 1999 and President of the Company until April 1999.
(2) Payments of bonuses accrued in 1998 have been deferred until completion of
the Company's next round of financing.
The following table sets forth the grant of stock options made during the
year ended December 31, 1998 to the persons named in the Summary Compensation
Table:
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
% OF TOTAL
OPTIONS GRANTED
NUMBER OF SECURITIES TO EMPLOYEES IN
UNDERLYING FISCAL EXERCISE
NAME OPTIONS GRANTED PERIOD(1) PRICE EXPIRATION DATE
- ---- --------------- --------- ----- ---------------
<S> <C> <C> <C> <C>
John A. Spears..... 12,000 5.4% $3.0313 1/29/2008
Terrence W. Doyle.. 9,600 4.3% $3.0313 1/29/2008
Thomas E. Klein.... 9,600 4.3% $3.0313 1/29/2008
Thomas Mizelle..... 9,600 4.3% $3.0313 1/29/2008
</TABLE>
- -------------------------------
(1) Computed based on an aggregate of 221,112 shares issuable upon exercise of
options granted to employees during the year ended December 31, 1998.
21
<PAGE>
The following table sets forth information with respect to unexercised
stock options held by the persons named in the Summary Compensation Table at
December 31, 1998. No stock options were exercised in 1998 by such persons.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT FISCAL YEAR-END THE-MONEY OPTIONS AT FISCAL
# YEAR-END($) (1)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John A. Spears................. 383,812 19,500 $1,538,147 $29,718
Terrence W. Doyle.............. 6,000 15,600 $4,875 $23,775
Thomas E. Klein................ 74,750 46,850 $78,313 $59,713
Thomas Mizelle................. 106,000 53,100 $134,250 $70,650
</TABLE>
- -------------------------
(1) Computed based upon the difference between the closing price of the
Company's Common Stock on December 31, 1998 ($5.00) and the exercise price.
EMPLOYMENT AGREEMENTS
Effective January 11, 1999, the Company entered into an
agreement with Alan Kessman and PS Capital LLC, an entity of which Mr. Kessman
is a member, pursuant to which Mr. Kessman serves as Chief Executive Officer of
the Company. The agreement provides for a base salary of $300,000 per year. The
agreement does not provide for any payments upon a change in control or any
other severance payments. As an inducement to enter into the agreement, on
January 11, 1999 the Company granted to Mr. Kessman ten year options to purchase
an aggregate of 980,000 shares of Common Stock. The foregoing grants consist of
(i) an option to purchase 760,000 shares at an exercise price of $5.775
(representing a 10% premium to the market price on the date prior to the date of
grant), such option to vest 25% on July 11, 2000, 50% on July 11, 2001, 75% on
July 11, 2002 and 100% on July 11, 2003 and (ii) an option to purchase 220,000
shares at an exercise price of $5.25 (representing the market price on the date
prior to the date of grant), such option to vest in full six months from the
date of grant. The option to purchase 220,000 shares of Common Stock is not
terminable if Mr. Kessman is no longer acting as Chief Executive Officer of the
Company.
Effective January 16, 1998, the Company entered into an
Employment Agreement with John A. Spears, then its President and Chief Executive
Officer. The agreement was for a term of three years and provided for an annual
base salary of $246,750 (the "Base Salary"). In the event of a termination of
the Employment Agreement by the Company for any reason other than "just cause"
or death, including upon a "change in control," the Company was required to pay
Mr. Spears the Base Salary for the remaining term of the Employment Agreement,
subject to the obligation of Mr. Spears to mitigate damages by seeking new
employment. The Company also had the right at any time after the first
anniversary of the date of the agreement to terminate the Employment Agreement
without cause upon ten days notice, upon payment to Mr. Spears of a single lump
sum equal to one year's Base Salary, plus an amount equal to the average annual
cash bonus paid to Mr. Spears during the prior two years. Mr. Spears resigned as
Chief Executive Officer in January 1999 and resigned as President and as a
director of the Company in April 1999. Pursuant to his resignation, the
Employment Agreement was terminated and the Company agreed
22
<PAGE>
to make bi-monthly payments to Mr. Spears in the same amounts as his Base Salary
due pursuant to the Employment Agreement through the earlier of January 15, 2001
or the date on which Mr. Spears secures full-time employment; provided, the
Company will receive a credit against such payments equal to 75% of any gross
income earned by Mr. Spears from providing services as a part-time employee or
consultant. The Company also agreed to pay Mr. Spears his 1998 bonus of
$37,012.50 and Mr. Spears agreed to a lock-up provision regarding certain of the
shares underlying his stock options and further agreed to a confidentiality
covenant.
SEVERANCE AGREEMENTS
Effective October 15, 1998, the Company entered into Severance
Agreements with Thomas Mizelle, its Vice President - Operations, Terrence W.
Doyle, its Vice President - Research & Development and Thomas E. Klein its Vice
President - Finance (collectively, the "Officers"), pursuant to which each
Officer would be entitled to certain payments in the event such Officer loses
his employment during the twelve month period following a "change in control."
Specifically, if a "change in control" (as defined below) occurs, the Officer
shall be entitled to a lump sum severance payment equal to the sum of twelve
months of the Officer's monthly base salary as in effect as of the date of
termination or immediately prior to the change in control of the Company,
whichever is greater, plus the average of the last two cash bonus payments made
to the Officer prior to the change in control of the Company. The Officer would
also be entitled to all payments necessary to provide the Officer with group
health insurance benefits substantially similar to those which the Officer was
receiving immediately prior to the date of termination until the earlier of 18
months after such termination or the date such Officer has obtained new
full-time employment. The foregoing amounts are not payable if termination of
the Officer is because of the Officer's death, by the Company for Cause (as
defined in the Severance Agreement), or by the Officer other than for Good
Reason (as defined in the Severance Agreement). For purposes of the Severance
Agreements, a "change in control" of the Company means that any person or entity
becomes the beneficial owner of securities of the Company representing 30
percent or more of the combined voting power of the Company's then outstanding
securities; during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board, and any new director (other than
a director designated by an acquiring person) whose election by the Board or
nomination for election by the Company's stockholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute at least
a majority thereof; or the stockholders of the Company approve a merger or
consolidation of the Company (other than certain recapitalizations).
COMPENSATION OF DIRECTORS
Directors are reimbursed for expenses actually incurred in
connection with each meeting of the Board of Directors or any Committee thereof
attended. The Company also pays the Chairman of the Board $4,000 per meeting of
the Board attended and each other non-employee director $1,000 for each such
meeting attended. Certain directors are also entitled to automatic grants of
options under the Company's Amended and Restated 1993 Stock Option Plan (the
"Plan"). See "- Directors' Options."
DIRECTORS' OPTIONS
The provisions of the Company's Amended and Restated 1993
Stock Option Plan (the "Plan") provide 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 after
August 1995 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
23
<PAGE>
stockholders 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.
The size of the Automatic Grant for the Chairman of the Board has been increased
from 5,000 shares per year to 20,000 shares per year, and the size of the
Automatic Grant for the other Eligible Directors has been increased from 5,000
shares per year to 15,000 shares per year, each subject to stockholder approval.
See "Proposal No. 2 - Amendments to Amended and Restated 1993 Stock Option
Plan." 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 will expire the earlier of 10 years after the date of grant or
90 days after the termination of the director's service on the Board of
Directors.
During the fiscal year ended December 31, 1998, Mr. Kessman
was granted an Initial Director Option to purchase 20,000 shares of Common Stock
at an exercise price of $2.563 per share and Messrs. Miller, Bergerac, Cary,
Ferguson, Kent, Sartorelli Shapiro and Wriston were each granted ten year
options under the Plan (which included the Automatic Grant) to purchase 15,000
shares of Common Stock, at an exercise price of $4.875 per share.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information as of April 22,
1999 (except as otherwise noted in the footnotes) regarding the beneficial
ownership (as defined by the Securities and Exchange Commission (the "SEC")) of
the Company's Common Stock and Class A Preferred Stock of: (i) each person known
by the Company to own beneficially more than five percent of the Company's
outstanding Common Stock or Class A Preferred Stock; (ii) each current director
of the Company; (iii) the Company's Chief Executive Officer and each other
officer who received over $100,000 in compensation from the Company during the
1998 fiscal year; and (iv) all current directors and executive officers of the
Company as a group. Except as otherwise specified, the named beneficial owner
has the sole voting and investment power over the shares listed and the address
of each beneficial owner is c/o Vion Pharmaceuticals, Inc., 4 Science Park, New
Haven, Connecticut 06511.
<TABLE>
<CAPTION>
Common Stock Class A Total Number Percentage Percentage
Directors and Executive Officers ------------ Preferred Stock of Shares of of Common of Class A
- -------------------------------- --------------- Common Stock Stock Preferred
Beneficially Beneficially Stock
Owned (1) Owned Beneficially
--------- ----- Owned
-----
<S> <C> <C> <C> <C> <C>
Michel C. Bergerac............................... 38,750(2) 0 38,750 * --
Frank T. Cary.................................... 62,718(3) 0 62,718 * --
James L. Ferguson................................ 22,250(4) 0 22,250 * --
Michael C. Kent.................................. 347,056(5) 0 347,056 2.3% --
Alan Kessman..................................... 4,000 0 4,000 * --
William R. Miller................................ 171,906(6) 0 171,906 1.1% --
Alan C. Sartorelli, Ph.D......................... 442,758(7) 0 442,758 2.9% --
E. Donald Shapiro................................ 26,633(8) 0 26,633 * --
Walter B. Wriston................................ 57,718(9) 0 57,718 * --
Terrence W. Doyle, Ph.D.......................... 280,124(10) 0 280,124 1.8% --
Thomas E. Klein.................................. 104,684(11) 0 104,684 * --
Thomas Mizelle................................... 128,410(12) 0 128,410 * --
John A. Spears................................... 422,317(13) 0 422,317 2.7% --
All directors and executive officers as a group (12
persons)......................................... 1,687,007(14) 0 1,687,007 10.9% --
</TABLE>
24
<PAGE>
Other Beneficial Owners
- -----------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Elliott Associates, L.P.
Westgate International, L.P.
Martley International, Inc.
c/o Elliott Associates, L.P.
712 Fifth Avenue, 36th Floor
New York, NY 10019............................ 3,010,279(15) 0 3,010,279 17.8% --
Phoenix Partners L.P.
Morgens Waterfall Vintiadis Investments N.V.
Betje Partners
c/o Morgens Waterfall Vintiadis & Co., Inc.
10 East 50th Street
New York, NY 10022............................ 302,787 206,479(16) 876,340 5.6% 40.2%
Kingdon Capital Management Corp.
152 West 57th Street, 50th Floor
New York, NY 10019............................. 0 230,350(17) 639,861 4.0% 44.8%
</TABLE>
- -------------------------------
*Less than one percent
(1) The Class A Preferred Stock is convertible into Common Stock by
dividing (i) the sum of the $10.00 per share stated value by (ii) $3.60
per share (as adjusted from time to time for certain events of
dilution). As of April 22, 1999, each share of Class A Preferred Stock
was convertible into 2.777777 shares of Common Stock.
(2) Represents shares issuable upon exercise of options exercisable within
60 days.
(3) Includes 10,000 shares issuable upon exercise of options exercisable
within 60 days.
(4) Includes 21,250 shares issuable upon exercise of options exercisable
within 60 days.
(5) Includes 14,302 shares of Common Stock beneficially owned by Mr. Kent's
wife, as to which Mr. Kent disclaims beneficial ownership. Also
includes 3,750 shares issuable upon exercise of options exercisable
within 60 days.
(6) Includes 28,750 shares issuable upon exercise of options exercisable
within 60 days.
(7) Includes (i) 190,874 shares beneficially owned by Dr. Sartorelli's wife
and (ii) 57,260 shares held in trust for Dr. Sartorelli's
grandchildren, for which Dr. Sartorelli's wife serves as trustee, as to
which Dr. Sartorelli disclaims beneficial ownership. Does not include
57,260 shares beneficially owned by other family members of Dr.
Sartorelli, which were received as gifts from Dr. Sartorelli. Also
includes 3,750 shares issuable upon exercise of options exercisable
within 60 days.
(8) Includes 13,750 shares issuable upon exercise of options exercisable
within 60 days.
(9) Includes 10,000 shares issuable upon exercise of options exercisable
within 60 days.
(10) Includes 86,600 shares held by Dr. Doyle's wife and children, as to
which Dr. Doyle disclaims beneficial ownership. Also includes 8,400
shares issuable upon exercise of options exercisable within 60 days.
(11) Includes 83,400 shares issuable upon exercise of options exercisable
within 60 days. Also includes 1,199 shares of common stock held by Mr.
Klein's wife and children.
(12) Includes 120,900 shares issuable upon exercise of options and 12,210
shares issuable upon exercise of warrants, exercisable within 60 days.
Also includes 488 shares of common stock held by Mr. Mizelle's
children.
(13) Includes 386,812 shares issuable upon exercise of options exercisable
within 60 days.
(14) Includes 342,700 shares issuable upon exercise of options exercisable
within 60 days.
(15) Beneficial ownership information is based upon data set forth in a
Schedule 13D Amendment No. 2 filed with the SEC on April 16, 1999.
Elliott Associates, L.P. owns 625,468 shares of Common Stock and
beneficially owns 2,500 shares of the Company's 5% Convertible
Preferred Stock Series 1998, which are convertible into 722,195 shares
of Common Stock, and also beneficially owns 78,132 of the Company's
Class A Warrants which are convertible into 156,264 shares of Common
Stock. Westgate International, L.P., which has its business address at
c/o Midland Bank Trust Corporation (Cayman) Limited, P.O. Box 1109,
Mary Street, Grand Cayman, Cayman Islands, British West Indies, owns
628,709 shares of Common Stock and beneficially owns 2,500 shares of
the Company's 5% Convertible Preferred Stock Series 1998, which are
convertible into 722,195 shares of Common Stock, and also beneficially
owns 77,724 of the Company's Class A Warrants which are convertible
into 155,448 shares of Common Stock. Pursuant to the Certificate of
Designation for the Company's 5% Convertible Preferred Stock Series
1998, the aggregate percentage ownership by Elliott Associates, L.P.
and Westgate International, L.P. of Common Stock is limited to 9.9% of
the Common Stock, although effective June 8, 1999 the threshold is
being increased from 9.9% to 19.9%. Martley International, Inc. is
25
<PAGE>
the investment manager for Westgate International, L.P. and has shared
voting and dispository power over the shares held by Westgate
International, L.P. Martley International, Inc. disclaims beneficial
ownership of all such shares.
(16) Beneficial ownership information is based in part upon data set forth
in a Schedule 13G filed with the SEC on February 12, 1999. Class A
Preferred Stock consists of 103,238 shares held by Phoenix Partners
L.P., 72,160 shares held by Morgens Waterfall Vintiadis Investments
N.V. and 31,081 shares held by Betje Partners. Morgens, Waterfall,
Vintiadis & Co., Inc. is deemed to beneficially own all such shares by
virtue of it status as investment advisor to the foregoing entities.
(17) Consists of 138,208 shares held by M. Kingdon Offshore, N.V., 46,071
shares held by Kingdon Partners, L.P. and 46,071 shares held by Kingdon
Associates, L.P. Kingdon Capital Management Corp. ("KCMC") is a general
partner of Kingdon Partners, L.P. and Kingdon Associates, L.P. and is
the investment advisor to M. Kingdon Offshore, N.V. KCMC disclaims
beneficial ownership of all indicated shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In January 1998, the Company entered into a consulting agreement with
Kent, Reynolds and Stuart ("KR&S"), pursuant to which KR&S was to assist the
Company by providing executive search services, consulting regarding financing
activities and corporate partnership arrangements. Michael Kent, a director of
the Company, is a principal of KR&S. In 1998, the Company paid KR&S an aggregate
of $120,000 for consulting services under this consulting agreement and
otherwise. The consulting agreement terminated on December 31, 1998.
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 Underwriter's Unit Purchase Option(1)
4.2 -- Form of Warrant Agreement for Class A and Class B
Warrants(1)
4.3 -- Rights Agreement dated as of October 26, 1998 between Vion
Pharmaceuticals, Inc. and American Stock Transfer & Trust
Company (includes form of Right Certificate attached as
Exhibit A and a Summary of Rights to Purchase Common Shares
attached as Exhibit B thereto) (3)
10.1 -- License Agreement between Yale University and OncoRx, Inc.
dated as of August 31, 1994(1)
10.2 -- Letter Agreement between Yale University and OncoRx, Inc.
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 -- Employment Agreement between the Registrant and John A.
Spears, dated as of January 16, 1995(1)
10.7 -- Stock Option Agreement between OncoRx, Inc. and John A.
Spears, dated February 2, 1995(1)
10.8 -- Employment Letter from MelaRx Pharmaceuticals, Inc. to
Thomas Mizelle, dated as of July 29, 1994(1)
10.9 -- Marketing Services Agreement between MelaRx
Pharmaceuticals, Inc. and Creative Polymers, Inc. dated as
of March 21, 1994(1)
26
<PAGE>
10.10 -- Amended and Restated 1993 Stock Option Plan of the
Registrant(4)
10.11 -- Lease Agreement between Science Park Development
Corporation and Vion Pharmaceuticals, Inc., dated as of
February 1, 1996 (5)
10.12 -- Option Agreement between the Registrant and PMP, Inc.,
dated April 27, 1995(1)
10.13 -- Agreement between MelaRx Pharmaceuticals, Inc. and certain
shareholders, dated February 17, 1995(1)
10.14 -- 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)
10.15 -- Form of Indemnification Agreement(1)
10.16 -- Letter Agreement between Yale University and OncoRx, Inc.
(formerly MelaRx Pharmaceuticals, Inc.), dated July 5,
1995(1)
10.17 -- Lease between Science Park Development Corporation and
OncoRx, Inc. dated August 10, 1995(6)
10.18 -- Master Lease Agreement between Citicorp Leasing, Inc. and
OncoRx, Inc. dated September 27, 1995(6)
10.19 -- Sale and Leaseback Agreement and Master Equipment Lease
Agreement between FINOVA Technology Finance, Inc. and Vion
Pharmaceuticals, Inc. dated as of October 17, 1996 (7)
10.20 -- Clinical Development Agreement between Vion
Pharmaceuticals, Inc., Covance Clinical Research Unit Ltd.
and Covance Inc. (Confidential treatment has been granted
with regard to certain provisions of this exhibit) (8)
10.21 -- Amendment No. 1 to License Agreement between Yale
University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx,
Inc.) dated as of June 12, 1997 (8)
10.22 -- Amendment No. 2 to License Agreement between Yale
University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx,
Inc.) dated as of June 12, 1997 (8)
10.23 -- Collaborative Development and Distribution Agreement
between Boehringer Ingelheim International GmbH and Vion
Pharmaceuticals, Inc. dated November 24, 1997 (Confidential
treatment has been requested with regard to certain
provisions of this exhibit) (5)
10.24 -- Sale and Leaseback Agreement between FINOVA Technology
Finance, Inc. and Vion Pharmaceuticals, Inc. dated as of
December 10, 1997 (5)
10.25 -- Employment Agreement dated January 16, 1998 between Vion
Pharmaceuticals, Inc. and John A. Spears (2)
10.26 -- License Agreement dated February 9, 1998 between Vion
Pharmaceuticals, Inc. and San Mar Laboratories Inc.
10.27 -- Amendment No. 3 to a License Agreement between Yale
University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx,
Inc.) dated as of September 25, 1998.
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 Quarterly Report on form 10-QSB
for the quarterly period ended June 30, 1998.
(3) Incorporated by reference to the Company's Current Report on Form 8-K filed
on October 26, 1998.
(4) Incorporated by reference to the Company's Registration Statement on Form
S-8 (File No. 333-39407), effective November 4, 1997.
(5) Incorporated by reference to the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997.
(6) Incorporated by reference to the Quarterly Report on form 10-QSB for the
quarter ended September 30, 1995.
27
<PAGE>
(7) Incorporated by reference to the Annual Report on form 10-KSB for the fiscal
year ended December 31, 1996.
(8) Incorporated by reference to the Quarterly Report on form 10-QSB for the
quarter ended June 30, 1997.
(b) Reports on Form 8-K.
During the final quarter of the Company's 1998 fiscal year, the
Company filed with the Commission on October 26, 1998 a Current Report on
Form 8-K dated October 15, 1998 regarding the distribution of rights to all
holders of Common Stock pursuant to a Rights Agreement between the Company
and American Stock Transfer & Trust Company, as rights agent.
28
<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: March 24, 1999 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ WILLIAM R. MILLER Chairman of the Board March 24, 1999
- ----------------------------------------
William R. Miller
/S/ ALAN KESSMAN Director, Chief Executive March 24, 1999
- ---------------------------------------- Officer (Principal Executive
Alan Kessman Officer)
/S/ JOHN A. SPEARS Director, President March 24, 1999
- ----------------------------------------
John A. Spears
/S/ THOMAS E. KLEIN Vice President--Finance and March 24, 1999
- ---------------------------------------- Chief Financial Officer (Principal
Thomas E. Klein Financial and Accounting Officer)
/S/ MICHEL C. BERGERAC Director March 24, 1999
- ----------------------------------------
Michel C. Bergerac
/S/ FRANK T. CARY Director March 24, 1999
- ----------------------------------------
Frank T. Cary
/S/ JAMES FERGUSON Director March 24, 1999
- ----------------------------------------
James Ferguson
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ MICHAEL C. KENT Director March 24, 1999
- ---------------------------------------
Michael C. Kent
/S/ ALAN C. SARTORELLI Director March 24, 1999
- ---------------------------------------
Alan C. Sartorelli
/S/ E. DONALD SHAPIRO Director March 24, 1999
- ---------------------------------------
E. Donald Shapiro
/S/ WALTER B. WRISTON Director March 24, 1999
- ---------------------------------------
Walter B. Wriston
</TABLE>
30
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VION PHARMACEUTICALS, INC.
(Registrant)
By: /s/ Thomas E. Klein
-----------------------------
Thomas E. Klein
Vice President - Finance
(Duly authorized signatory and
Chief Financial Officer)
Date: April 29, 1999
31
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
AUDITED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
CONTENTS
Report of Independent Auditors.............................................F-1
Audited Financial Statements
Balance Sheet..............................................................F-2
Statement of Operations....................................................F-3
Statement of Changes in Shareholders' Equity...............................F-4
Statement of Cash Flows....................................................F-5
Notes to Financial Statements..............................................F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
VION PHARMACEUTICALS, INC.
We have audited the accompanying balance sheet of Vion Pharmaceuticals, Inc. (a
development stage company) as of December 31, 1998 and the related statements of
operations, shareholders' equity, and cash flows for the years ended December
31, 1998 and 1997 and the period from May 1, 1994 (inception) to December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vion Pharmaceuticals, Inc. at
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 and the period from May 1, 1994
(inception) to December 31, 1998 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that Vion
Pharmaceuticals, Inc. will continue as a going concern. As more fully described
in Note 1, since commencement of operations, the Company has incurred recurring
operating losses and requires substantial amounts of additional funding to
continue its operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effect on the
recoverability and classification of assets or the amounts or classification of
liabilities that may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Stamford, Connecticut
February 12, 1999
F-1
<PAGE>
BALANCE SHEET
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
---------------------
December 31,
1998
---------------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,821,234
Short-term investments (Includes $1,129,886 restricted) 2,594,497
Accounts receivable 1,251,618
Other current assets 107,198
---------------------
Total current assets 7,774,547
Property and equipment, net 1,026,184
Security deposits 51,347
Research contract prepayments 416,945
---------------------
Total assets $ 9,269,023
---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Obligation under capital leases - current $ 291,668
Accounts payable and accrued expenses 2,437,682
---------------------
Total current liabilities 2,729,350
Obligation under capital leases - long term 180,960
---------------------
Total Liabilities 2,910,310
Redeemable Preferred Stock:
5% convertible preferred stock Series 1998, $0.01 par value, authorized:
15,000 shares; issued and outstanding: 5,000 shares 4,854,505
(redemption value $5,125,000)
Shareholders' equity
Preferred stock, $0.01 par value - 5,000,000 shares authorized consisting of:
Class A convertible preferred stock, $0.01 par value, authorized:
3,500,000 shares; issued and outstanding: 616,656
(liquidation preference $6,167,000) 6,167
Class B convertible preferred stock, $0.01 par value, authorized:
100,000 shares; issued and outstanding: none 0
Class C convertible preferred stock, $0.01 par value, authorized:
25,000 shares; issued and outstanding: none 0
Common stock, $0.01 par value, authorized: 35,000,000 shares;
issued and outstanding: 13,953,046 shares 139,530
Additional paid-in-capital 52,024,648
Deferred compensation (37,496)
Accumulated deficit (50,628,641)
---------------------
1,504,208
---------------------
Total liabilities and shareholders' equity $ 9,269,023
=====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
STATEMENT OF OPERATIONS
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
For The Period
From May 1, 1994
Year Ended (Inception) through
December 31, December 31, December 31,
------------------------------------------------------------------
1998 1997 1998
------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Contract research grants $ 308,787 $ 48,221 $ 408,787
Research support 1,647,202 1,222,912 2,870,114
Technology license revenues 0 4,000,000 4,000,000
------------------------------------------------------------------
Total revenues 1,955,989 5,271,133 7,278,901
Operating expenses:
Research and development 10,709,401 7,675,486 27,493,176
General and administrative 2,202,944 2,639,486 9,040,826
Nonrecurring collaboration restructuring fee 0 600,000 600,000
Purchased research and development 0 0 4,481,405
Amortization of finance charges 0 0 345,439
Interest Income (540,240) (343,911) (1,406,188)
Interest Expense 61,553 43,666 160,666
------------------------------------------------------------------
Net Loss $ (10,477,669) $(5,343,594) $ (33,436,423)
------------------------------------------------------------------
Preferred stock dividends and accretion $ (4,414,050) $(1,131,740) $ (17,173,194)
------------------------------------------------------------------
Loss applicable to common shareholders $ (14,891,719) $(6,475,334) $ (50,609,617)
==================================================================
Basic and diluted loss applicable to common
shareholders per share $ (1.24) $ (0.75)
------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
VION PHARMACEUTICALS, INC.
( A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
Class A Class B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
---------------------- ---------------------- --------------------------
Shares Amount Shares Amount Shares Amount
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued for cash - July 1994 0 $0 0 $0 2,693,244 $26,932
Common stock issued for services -
August 1994 159,304 1,593
Net loss
----------------------------------------------------------------------------
Balance - December 31, 1994 0 0 0 0 2,852,548 28,525
----------------------------------------------------------------------------
Stock options issued for compensation -
February 1995
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 2,000,000 20,000
Shares repurchased pursuant to
employment agreements - April 1995 (274,859) (2,749)
Private placement of common stock -
April 1995 76,349 763
Warrants issued with bridge notes -
April 1995
Initial public offering of units of one common share,
one Class A warrant and one Class B warrant at
$4.00 per unit - August 1995 and September 1995 2,875,000 28,750
Issuance of common stock 1,250 13
Receipts from sale of unit purchase option
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1995 0 0 0 0 7,530,288 75,302
----------------------------------------------------------------------------
Issuance of Class A convertible preferred stock 1,250,000 12,500
Conversion of Class A convertible preferred stock (164,970) (1,650) 458,255 4,582
Class A convertible preferred stock dividend 21,998 220
Issuance of common stock 29,418 294
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1996 1,107,028 $11,070 0 $0 8,017,961 $80,178
----------------------------------------------------------------------------
Conversion of Class A convertible preferred stock (396,988) (3,970) 1,102,757 11,028
Class A convertible preferred stock dividend 47,592 476
Issuance of Class B convertible preferred stock 4,850 49
Conversion of Class B convertible preferred stock (258) (3) 64,642 647
Accretion of dividend payable on Class B convertible
preferred stock
Extension/reissuance of underwriter warrants
Exercise of warrants 238 3
Issuance of common stock 598,336 5,983
Exercise of stock options 50,000 500
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1997 757,632 $7,576 4,592 $46 9,833,934 $98,339
----------------------------------------------------------------------------
Conversion of Class B convertible preferred stock (4,592) (46) 1,205,178 12,052
Accretion of dividend payable on Class B convertible
preferred stock
Premium on Conversion dividend on class B
convertible preferred stock 585,898 5,859
Conversion of Class A convertible preferred stock (174,981) (1,749) 486,062 4,860
Class A convertible preferred stock dividend 34,005 340
Discount on Series 1998 convertible preferred stock
Series 1998 convertible preferred stock accretion
Common stock issued in exchange for cancellation 1,792,952 17,929
of outstanding warrants
Exercise of stock options 32,750 328
Exercise of warrants 16,272 163
Compensation associated with stock option grants
Amortization of deferred compensation
Net loss
----------------------------------------------------------------------------
Balance at December 31, 1998 616,656 $6,167 0 $0 13,953,046 $139,530
----------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Shareholders' Equity (continued)
Vion Pharmaceuticals, Inc.
( A Development Stage Company)
<TABLE>
<CAPTION>
Additional Total
Paid-in Deferred Accumulated Stockholders'
Capital Compensation Deficit Equity
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock issued for cash - July 1994 $0 $0 ($19,877) 7,055
Common stock issued for services -
August 1994 (1,176) 417
Net loss (475,946) (475,946)
-------------------------------------------------------------------------
Balance - December 31, 1994 0 0 (496,999) (468,474)
-------------------------------------------------------------------------
Stock options issued for compensation -
February 1995 540,000 540,000
Reverse acquisition of MelaRx
Pharmaceuticals, Inc. - April 1995 4,300,000 4,320,000
Shares repurchased pursuant to
employment agreements - April 1995 2029 (720)
Private placement of common stock -
April 1995 205,237 206,000
Warrants issued with bridge notes -
April 1995 200,000 200,000
Initial public offering of units of one common share,
one Class A warrant and one Class B warrant at
$4.00 per unit - August 1995 and September 1995 9,667,460 9,696,210
Issuance of common stock 488 501
Receipts from sale of unit purchase option 250 250
Net loss (9,530,535) (9,530,535)
-------------------------------------------------------------------------
Balance at December 31, 1995 14,913,435 0 (10,025,505) 4,963,232
-------------------------------------------------------------------------
Issuance of Class A convertible preferred stock 22,890,075 (11,371,523) 11,531,052
Conversion of Class A convertible preferred stock (2,932) 0
Class A convertible preferred stock dividend 255,661 (255,881) 0
Issuance of common stock 102,426 102,720
Compensation associated with stock option grants 190,407 (190,407) 0
Amortization of deferred compensation 83,647 83,647
Net loss (7,608,679) (7,608,679)
-------------------------------------------------------------------------
Balance at December 31, 1996 $38,349,072 ($106,760) ($29,261,588) 9,071,972
-------------------------------------------------------------------------
Conversion of Class A convertible preferred stock (7,058) (0)
Class A convertible preferred stock dividend 623,038 (623,514) 0
Issuance of Class B convertible preferred stock 4,851,662 (369,861) 4,481,850
Conversion of Class B convertible preferred stock (644) 0
Accretion of dividend payable on Class B convertible
preferred stock 138,365 (138,365) 0
Extension/reissuance of underwriter warrants 168,249 168,249
Exercise of warrants (6) (3)
Issuance of common stock 3,463,818 3,469,801
Exercise of stock options 19,500 20,000
Compensation associated with stock option grants 55,643 55,643
Amortization of deferred compensation 34,632 34,632
Net loss (5,343,594) (5,343,594)
-------------------------------------------------------------------------
Balance at December 31, 1997 $47,661,639 ($72,128) ($35,736,922) 11,958,550
-------------------------------------------------------------------------
Conversion of Class B convertible preferred stock (12,006) 0
Accretion of dividend payable on Class B convertible
preferred stock 286,776 (286,776) 0
Premium on Conversion dividend on class B
convertible preferred stock 2,043,532 (2,049,391) 0
Conversion of Class A convertible preferred stock (3,111) 0
Class A convertible preferred stock dividend 329,206 (329,546) 0
Discount on Series 1998 convertible preferred stock 1,597,218 (1,597,218) 0
Series 1998 convertible preferred stock accretion 0 (151,119) (151,119)
Common stock issued in exchange for cancellation 8,441,442
of outstanding warrants (8,502,064) (42,693)
Exercise of stock options 119,854 120,182
Exercise of warrants 10,910 11,073
Compensation associated with stock option grants 51,252 51,252
Amortization of deferred compensation 34,632 34,632
Net loss (10,477,669) (10,477,669)
-------------------------------------------------------------------------
Balance at December 31, 1998 $52,024,648 ($37,496) ($50,628,641) 1,504,208
-------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
STATEMENT OF CASH FLOWS
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
For the period
from May 1, 1994
For the Year Ended (inception) through
December 31, December 31,
------------------------------------------------------------
1998 1997 1998
------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from operating activities:
Net loss $ (10,477,669) $ (5,343,594) $ (33,436,423)
Adjustments to reconcile net loss to net
cash used in operating activities
Purchased research and development 0 0 4,481,405
Amortization of financing costs 0 0 345,439
Depreciation and amortization 496,776 303,746 951,982
Increase in other current assets (511,165) (741,016) (1,357,830)
Increase in other assets (16,453) 192,670 (466,577)
Increase in accounts payable and
accrued expenses 1,563,332 380,223 2,403,150
Extension/reissuance of placement agent warrants 0 168,249 168,249
Stock issued for services 0 600,000 600,417
Stock options issued for compensation 85,884 90,275 799,806
------------------------------------------------------------
Net cash used in operating activities (8,859,295) (4,349,447) (25,510,382)
------------------------------------------------------------
Cash flows used for investing activities:
Purchase of marketable securities (2,498,422) (8,121,720) (24,707,588)
Maturities of marketable securities 6,992,465 5,661,626 22,113,091
Cash portion of MelaRx acquisition 0 0 4,061
Acquisition of fixed assets (221,280) (299,131) (1,033,733)
------------------------------------------------------------
Net cash provided by (used in) investing activities 4,272,763 (2,759,225) (3,624,169)
------------------------------------------------------------
Cash flows provided by financing activities:
Initial public offering 0 0 9,696,210
Net proceeds from issuance of common stock 77,489 2,889,801 3,283,566
Net proceeds from issuance of preferred stock 4,703,386 4,481,850 20,716,288
Repurchase of common stock 0 0 (720)
Net proceeds from bridge financing 0 0 1,704,269
Repayments of bridge financing 0 0 (2,000,000)
Advances from stockholders 0 0 250,000
Repayments to stockholders 0 0 (250,000)
Exercise of warrants 11,073 (3) 11,070
Receipts from sale of unit purchase option 0 0 250
Repayment of equipment capital leases (274,803) (160,724) (455,148)
------------------------------------------------------------
Net cash provided by financing activities 4,517,145 7,210,924 32,955,785
------------------------------------------------------------
Net (decrease) increase in cash (69,387) 102,252 3,821,234
Cash and cash equivalents at beginning of period 3,890,621 3,788,369 0
------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,821,234 $ 3,890,621 $ 3,821,234
============================================================
</TABLE>
Supplemental schedule of noncash investing and financing activities:
o Capital lease obligations of $593,489 and $22,899 were incurred for the years
ended December 31, 1997 and December 31, 1998, respectively, when the company
entered into leases for laboratory and office equipment.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
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. 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). In August 1995, the Company
completed an initial public offering ("IPO") (see Note 5) resulting in net
proceeds to the Company of approximately $9,696,000.
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.
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 1999 calendar
year. The Company requires 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 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 is
seeking to raise funds through additional means, including (1) private and
public placements of its securities; (2) spin-off, refinancing, or partial sale
or disposition of its rights to certain of its non-core technologies; and (3)
equipment lease financing. 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. The financial statements do not include any adjustments to reflect
the possible future effect on the recoverability and classification of assets or
the amounts or classification of liabilities that may result from the outcome of
this uncertainty.
F-6
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. 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 OF FINANCIAL INSTRUMENTS
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.
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, which approximates cost plus accrued interest at
December 31, 1998.
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). Leasehold improvements are carried at cost and
depreciated on a straight line basis over the shorter of the life of the lease
or the estimated useful lives of the assets.
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 set forth in the Plan. Employee
contributions to the Plan are voluntary and are based on eligible compensation,
as defined therein. In accordance with the terms of the Plan, no Company
contributions are made to the Plan.
F-7
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SMALL BUSINESS INNOVATION RESEARCH GRANT
During 1998 the Company was awarded a Small Business Innovation Research
("SBIR") grant from the National Cancer Institute for the Reduced Toxicity of
Tumor-Targeted Salmonella for $100,000, which was fully utilized, and an award
for $373,565 for the Inhibitors of Ribonucleotide Reductase programs. The SBIR
grants reimburse the company for allowable expenses and are recorded as contract
research grants in the statement of operations.
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.
PER SHARE DATA
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
--------------------- ----------------------
1998 1997
- ---------------------------------------------- --------------------- ----------------------
<S> <C> <C>
Numerator:
- ---------------------------------------------- --------------------- ----------------------
Net loss ($10,477,669) ($5,343,594)
- ---------------------------------------------- --------------------- ----------------------
Preferred stock dividends and accretion
(4,414,050) (1,131,740)
- ---------------------------------------------- --------------------- ----------------------
Numerator for basic and diluted loss
applicable to common shareholders per ($14,891,719) ($6,475,334)
share
- ---------------------------------------------- --------------------- ----------------------
Denominator:
- ---------------------------------------------- --------------------- ----------------------
Denominator for basic and diluted loss
applicable to common shareholders per share
11,977,121 8,670,717
- ---------------------------------------------- --------------------- ----------------------
Basic and diluted loss applicable to common
shareholders per share ($1.24) ($0.75)
- ---------------------------------------------- --------------------- ----------------------
</TABLE>
For additional disclosures regarding warrants and Class A, B and Series 1998
Convertible Preferred Stock see Note 5. For additional disclosures regarding
stock options see Note 6. These potentially dilutive securities were not
included in diluted loss applicable to common shareholders per share as the
effect would be antidilutive.
F-8
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31:
1998
----------------------
Office equipment $ 208,498
Furniture and fixtures 170,482
Laboratory equipment 322,998
Leasehold improvements 325,512
Leased equipment under capital lease 950,676
----------------------
1,978,166
Less accumulated depreciation (951,982)
----------------------
Net property and equipment $1,026,184
----------------------
4. RESEARCH AND LICENSE AGREEMENTS
BOEHRINGER INGELHEIM AGREEMENT
On November 24, 1997, the Company and Boehringer Ingelheim International GmbH of
Germany ("BI") entered into an exclusive worldwide licensing agreement for the
development and marketing of Promycin(R) (porfiromycin), Vion's most advanced
anticancer agent. The agreement provides the Company with exclusive co-promotion
rights to Promycin in the United States and Canada. BI will have exclusive
worldwide rights to market and sell Promycin outside the United States and
Canada. The Company is responsible for the manufacturing and supply of Promycin
for all territories.
In exchange for these rights, the Company received $4.0 million in upfront
technology access fees and net proceeds of $2,869,801 from the sale of 448,336
shares of common stock at a premium to the then current market price. BI also
reimbursed the Company for certain initial development costs and will share in
future worldwide development costs.
The Company has cash equivalents and short-term investments of $6,415,731 at
December 31,1998. This balance includes $1,129,886 of restricted investments for
Promycin development expenses. Pursuant to the BI Agreement, the Company must
use the BI license fee of $4.0 million exclusively for Promycin development
expenses. The Company recorded $1,647,202 of Promycin development expenses as
research support revenue under the agreement during 1998. Included in the
company's total current assets as of December 31, 1998 is $1,189,369 in
receivables from BI.
COVANCE AGREEMENT
During the quarter ended June 30, 1997, the Company entered into a Clinical
Development Agreement (the "Agreement") with Covance Clinical Research Unit Ltd.
and Covance Inc. ("Covance"). Pursuant to the Agreement, the Company is
contracting to Covance the selection and management of clinical sites and the
preparation of clinical trial reports arising from clinical trials performed by
Covance regarding the Company's product candidate Promycin for the inclusion in
a regulatory submission. The Company has incurred expenses of $2,610,213 for the
year ended December 31, 1998 under this agreement which has been expensed as
incurred as research and development. Included in the company's total current
liabilities at December 31, 1998 are payables to Covance Development Service
Corporation for $1,589,588.
F-9
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
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. In
the first quarter of 1998, the Company terminated an agreement with Creative
Polymers pursuant to which Creative Polymers had agreed to be the exclusive
selling agent for Melasyn, and agreed to license its Melasyn technology in an
exclusive worldwide agreement with San Mar Laboratories, a leading manufacturer
of private label cosmetics and pharmaceuticals. Under the terms of the
agreement, Vion will grant an exclusive worldwide license to San Mar for the
manufacture and sales of products containing Melasyn. Vion will receive a
royalty on products sold by San Mar with guaranteed minimum annual royalties of
$50,000 per year over an initial three year period.
The Company has agreed to reimburse Yale for its costs in connection with the
research projects performed under the direction and supervision of Dr. John
Pawelek of the Department of Dermatology in an amount currently equal to
$852,000 per year. Technology licensed by the Company from research conducted
under this agreement includes the inventions collectively known as TAPET. The
agreement is for a term ending June 30, 2001, subject to earlier termination as
defined. The Company also has an option to obtain an exclusive license for any
inventions that result from research projects by Yale which are relating to
synthetic melanin funded by the Company.
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 paid Yale
a $100,000 fee, and has agreed to pay future 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.
YALE/ONCORX AGREEMENT
Pursuant to a License Agreement dated August 31, 1994, as amended, 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 was renewed in June 1998 for a 3
year period 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.
F-10
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. 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 1). 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 and September 6, 1995, the Company completed an IPO of
2,875,000 units, consisting of an aggregate of 2,875,000 shares of common stock,
2,875,000 redeemable Class A Warrants and 2,875,000 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. Each Class B Warrant
entitles the holder to purchase one share of common stock. These warrants are
exercisable through August 13, 2000. 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 until August 14, 2000 to purchase up to 250,000 units at
$5.20 per unit, subject to adjustment.
Commencing with it's IPO, and including the gross proceeds therefrom, the
Company has raised a gross amount of $33,850,000 to date, through the issuance
of common and preferred stock.
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
immediately convertible into 2.777777 shares of the Company's common stock and
is entitled to vote on all matters on an "as if" converted basis. The Company
recorded an imputed one-time non-cash dividend of approximately $11.4 million as
a result of the difference between the conversion price and the quoted market
price of the Company's common stock as of the date of issuance as required by
the Financial Accounting Standards Board Emerging Issues Task Force D-60
"Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature" (EITF D-60). The $11.4 million has been
recognized as a charge against accumulated deficit with a corresponding increase
in additional paid-in capital. The imputed non-cash dividend has been included
in the dividend requirement on Preferred Stock and the loss applicable to common
shareholders. In connection with the foregoing transaction, the Company also
issued to the placement agent warrants, exercisable over a five year period, to
purchase an aggregate of 546,875 shares of the Company's common stock at prices
ranging from $3.96 to $12.00. The shares of Class A Preferred Stock pay
semi-annual dividends of 5% per annum, payable in additional shares of Class A
Preferred Stock, which are immediately convertible into common stock of the
Company. The Company has recorded non-cash dividends as a charge against the
accumulated deficit and a credit to additional paid-in capital based on the
quoted market price of the common stock as of the date of the issuance of the
preferred dividends of $623,514 in 1997 and $329,546 in 1998. The non-cash
dividend has been included in the dividend requirement on Preferred Stock and
the loss
F-11
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
applicable to common shareholders. The issue contains a provision for a 15% one
time dividend payable in additional Class A Preferred Stock if the Company
redeems the issue within 3 years. In the event that the closing bid price of the
Company's common stock exceeds $10.3125 for 20 trading days in any 30 trading
day period, the Company can redeem the Class A Preferred Stock at the issue
price plus all declared and unpaid dividends thereon. If all of the 616,656
outstanding shares of the Company's Class A Preferred Stock were thusly
redeemed, their redemption value would be $6,166,560. The issuance of the Class
A Preferred Stock at closing also triggered certain antidilution adjustment
provisions of the Company's outstanding warrants, resulting in the issuance of
additional warrants. The Company can not pay cash dividends on Common Stock
without the consent of a majority of holders of the class A Preferred Stock.
PRIVATE PLACEMENT OF CLASS B CONVERTIBLE PREFERRED STOCK
On August 20, 1997, the Company completed a private placement of 4,850 shares of
non-voting Class B Convertible Preferred Stock, at $1,000 per share, resulting
in net proceeds to the Company of $4,481,450. Shares of Class B Preferred Stock
were immediately convertible into shares of common stock including an accretion
of 8% per annum. The difference between the conversion price and the quoted
market price of the company's common stock at the date of issuance, $369,861,
was recognized upon the issuance of the preferred securities as a charge against
accumulated deficit, with a corresponding increase in additional paid-in
capital. The imputed non-cash dividend has been included in the dividend
requirement on Preferred Stock and the loss applicable to common shareholders.
Shares of the Class B Preferred Stock are eligible, under certain circumstances,
to receive dividends paid in Class C Preferred Stock. The Class C Preferred
Stock was immediately convertible into shares of common stock at the average
closing bid price of the Company's common stock for thirty consecutive business
days ending on the private placement closing date and was not entitled to
dividends. Conversions of Class B Preferred Stock from January 1, 1998 through
August 10, 1998 resulted in Class C dividends representing 180,141 shares of
common stock valued at $622,749. In addition, the Company recorded accretion of
37,168 shares of common stock valued at $138,365 in 1997, and 61,078 shares of
common stock valued at $263,737 through August 10, 1998. These dividends were
recorded as a charge against accumulated deficit, with a corresponding increase
in paid-in capital. The dividends have been included in the dividend requirement
on Preferred Stock and the loss applicable to common shareholders.
On August 11, 1998, the Company reached agreement with each of the holders of
its Class B Convertible Preferred Stock such that the holders of the Class B
Preferred Stock would convert an aggregate of 2,892 shares of Class B Preferred
Stock, constituting all of the outstanding Class B Preferred Stock, into an
aggregate of 1,070,423 shares of common stock. This included Class C dividends
representing 304,188 shares of common stock valued at $1,069,525, and accretion
of 6,553 shares of common stock valued at $23,039. As part of this agreement, an
additional 101,569 common shares were issued to holders of the Class B Preferred
Stock. In accordance with Financial Accounting Standards Board Emerging Issues
Task Force D-42 "The Effect on the Calculation of Earnings Per Share for the
Redemption or Induced Conversion of Preferred Stock" (EITF D-42), the excess of
the fair value of the common stock issued upon conversion over the fair value of
the common stock issuable pursuant to the original conversion terms ($357,117),
has been added to the dividend requirement to arrive at loss applicable to
common shareholders. In addition, holders of the Class B Preferred Stock waived
their "anti-dilution" rights arising from the issuance of the Series 1998
Preferred Stock.
F-12
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
PRIVATE PLACEMENT OF 5% REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES 1998
On June 30, 1998, the Company completed a private placement of 5,000 shares of
non-voting 5% Redeemable Convertible Preferred Stock Series 1998 ("Series 1998
Preferred Stock"). The Series 1998 Preferred Stock was issued at $1,000 per
share, resulting in net proceeds to the Company of $4,703,386. The shares of
Series 1998 Preferred Stock accrue dividends of 5% per annum payable in-kind.
Each share of Series 1998 Preferred Stock is convertible into Common Stock based
on the formula of issued price plus accrued dividends divided by $3.60.
Dividends other than non-cash dividends paid in-kind with respect to other
classes or series of preferred stock require consent of two-thirds majority
interest of the holders of Series 1998 Preferred Stock. The Series 1998
Preferred Stock is manditorily redeemable at $1,000 per share plus dividends on
June 30, 2003. In connection with the sale of the Series 1998 Preferred Stock,
the Company imputed a one-time non-cash dividend of approximately $1.6 million
as a result of the difference between the conversion price and the quoted market
price of the Company's common stock at the date of issuance as required by EITF
D-60. Such amount was recognized upon issuance of the Series 1998 Preferred
Stock as a charge against the accumulated deficit with a corresponding increase
to additional paid-in capital. The imputed non-cash dividend has been included
in the dividend requirement on Preferred Stock and the loss applicable to common
shareholders. The dividend requirement on Preferred Stock also reflects the
amortization of the costs of completing the offering and the accretion of the 5%
per annum dividend. The issuance of the Series 1998 Preferred Stock at closing
also triggered certain antidilution adjustment provisions of the Company's
outstanding warrants, resulting in the issuance of additional warrants.
WARRANT EXCHANGE OFFER
On May 19, 1998, the Company commenced an offer to exchange each outstanding
Class A Warrant, at the option of the holder, for either (A) 0.438 shares of
common stock or (B) 0.254 shares of common stock and $0.66 in cash. The Company
simultaneously offered to exchange each outstanding Class B Warrant, at the
holder's option, for either (A) 0.212 shares of common stock or (B) 0.123 shares
of common stock and $0.32 in cash. The Exchange Offer was not conditioned upon
the exchange of a minimum number of Class A Warrants or Class B Warrants. As a
result of the Exchange Offer 3,209,806 Class A Warrants and 1,881,835 Class B
Warrants were exchanged for 1,395,027 and 397,925 shares of the Company's Common
Stock and $39,007 and $3,686 in cash, respectively.
ANTIDILUTION ADJUSTMENT
As a result of the sale on May 22, 1996 of 1,250,000 shares of Class A
Convertible Preferred Stock, 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-13
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
Subsequently, as a result of the sale on June 30, 1998 of 5,000 shares of Series
1998 Redeemable Preferred Stock, an additional adjustment was made to the
exercise price of the Class A Warrants and the Class B Warrants with a
corresponding distribution of additional Class A Warrants and Class B Warrants.
Specifically, on September 8, 1998 (the "Payment Date") each holder of a Class A
Warrant at the close of business on August 26, 1998 (the "Record Date") received
an additional 0.02 (2 per 100 outstanding) Class A Warrants and the exercise
price of the Class A Warrants was reduced from $4.73 to $4.63. In addition, on
the Payment Date each holder of a Class B Warrant on the close of business on
the Record Date received an additional 0.02 (2 per 100 outstanding) Class B
Warrants and the exercise price of the Class B Warrants was reduced from $6.37
to $6.23.
ISSUANCE AND EXTENSION OF PLACEMENT AGENT WARRANTS
In connection with its role as placement agent for two private financings of the
Company's predecessor MelaRx, Inc., D.H. Blair Investment Banking Corporation
was issued warrants to purchase 56,504 and 11,929 shares of common stock at
$3.56 per share, expiring August 20, 1997 and November 1, 1997; respectively,
warrants to purchase 23,632 shares at $4.44 per share, expiring March 3, 1998,
and warrants to purchase 110,421 shares at $4.44 per share, expiring July 5,
1998. The warrants to purchase 56,504 shares of common stock at $3.56 per share
initially expired on October 31, 1997; however, the Company agreed to reissue
the expired warrants and extend the expiration date of all such warrants to July
5, 1998. The extension, which was approved by the Board of Directors in 1997,
resulted in an expense of $168,249. As of July 5, 1998, warrants to purchase
94,336 shares elected a "cashless" exercise into 13,949 shares of common stock;
warrants to purchase 108,150 shares expired.
ISSUANCE OF COMMON STOCK TO YALE UNIVERSITY
Effective July 24, 1997, the Company and Yale amended two license agreements
between the parties pursuant to which Yale agreed to reduce certain amounts
payable by the Company under such agreements. As a result, the Company issued
150,000 shares of common stock to Yale valued at $600,000.
6. 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, if 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"). The Option Plan originally
provided 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. 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
F-14
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
annual meeting on April 18, 1996. On January 29, 1997, the Board of Directors
adopted an amendment to the Plan increasing the number of shares which may be
issued under the Plan from 1,000,000 to 1,500,000 which was approved by the
stockholders at the Company's annual meeting on April 16, 1997. 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 to date 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.
Through December 31, 1997 and 1998, options to purchase an aggregate of
1,033,050 and 1,394,162 shares, respectively had been granted under the plan.
The Company recognized $51,252 and $55,643 of compensation expense in 1998 and
1997, respectively for options granted under the plan which was a result of
stock options granted to non-employees.
The provisions of the Option Plan provide 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 are 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"). Each Eligible
Director, other than directors who received an Initial Director Option since the
last annual meeting, is 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 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. The number of director options
issued were 140,000 and 35,000 in 1998 and 1997, respectively. Of the Director
Options issued in 1998, options for 20,000 shares represent an initial Director
Option and options for 120,000 shares represent Automatic Grants.
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 1997 and 1998, respectively: risk-free interest
rates of 5.77% and 4.70%; volatility factors of the expected market price of the
Company's common stock of .490 and .806; and a weighted-average expected life of
the option of 7 years. The Company has assumed no dividend yield in 1997 and
1998 because it did not pay cash dividends on its common stock and does not
expect to pay cash dividends in the foreseeable future.
F-15
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
<S> <C> <C>
Pro forma net loss $(10,925,090) $ (5,650,169)
Pro forma dividends and accretion (4,414,050) (1,131,740)
------------------------- -------------------------
Pro forma loss applicable to common
shareholders ($15,339,140) ($6,781,909)
------------------------- -------------------------
Pro forma basic and diluted loss
applicable to common shareholders per share: ($1.28) ($0.78)
------------------------- -------------------------
</TABLE>
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>
1998 1997
------------------- --------------------------- ------------------- -------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
------------------- --------------------------- ------------------- -------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 981 $ 4.00 885 $ 3.93
Granted 361 3.71 136 4.53
Exercised (30) 3.77 -
Forfeited (50) 4.28 (40) 4.26
------------------- --------------------------- ------------------- -------------------------
Outstanding - end of year 1,260 $ 3.91 981 $ 4.00
------------------- --------------------------- ------------------- -------------------------
Exercisable at end of year 571 $ 3.94 422 $ 3.83
------------------- --------------------------- ------------------- -------------------------
Weighted-average fair
value of options granted
during the year $ 3.97 $ 2.65
------------------- --------------------------- ------------------- -------------------------
</TABLE>
F-16
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
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, 1998 follows:
<TABLE>
<CAPTION>
- ------------------ ---------------- ------------------------- ---------------- ------------------------ ----------------------------
WEIGHT-AVERAGE
NUMBER OF NUMBER OF WEIGHTED-AVERAGE REMAINING CONTRACTUAL
OUTSTANDING WEIGHTED-AVERAGE OPTIONS EXERCISE PRICE OF LIFE OF
SHARES EXERCISE PRICE OF EXERCISABLE OPTIONS EXERCISABLE OPTIONS OUTSTANDING
RANGE (000) OPTIONS OUTSTANDING (000)
--------------- -------------------------- ---------------- ----------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
$3.625- $5.625 1,191 $ 4.08 522 $ 4.25 7.48 years
$2.219- $2.400 26 2.26 6 2.40 1.67 years
$.40 43 .40 43 .40 7.98 years
- ------------------ --------------- -------------------------- ---------------- ----------------------- -----------------------------
</TABLE>
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>
1998 1997
------------------- -------------------------- ------------------- -------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
------------------- -------------------------- ------------------- -------------------------
<S> <C> <C> <C> <C>
Outstanding - beginning
of year 348 $ .18 398 $ .21
Granted - -
Exercised (1) .40 (50) .40
Forfeited - -
------------------- -------------------------- ------------------- -------------------------
Outstanding - end of year 347 $ .18 348 $ .18
------------------- -------------------------- ------------------- -------------------------
Exercisable at end of year 347 $ .18 348 $ .18
------------------- -------------------------- ------------------- -------------------------
</TABLE>
F-17
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
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, 1998 follows:
<TABLE>
<CAPTION>
- ------------------- ---------------- ------------------------- ---------------- ------------------------ ---------------------------
NUMBER OF NUMBER OF WEIGHT-AVERAGE
OUTSTANDING WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE REMAINING CONTRACTUAL
SHARES EXERCISE PRICE OF EXERCISABLE EXERCISE PRICE OF LIFE OF
RANGE (000) OPTIONS OUTSTANDING (000) OPTIONS EXERCISABLE OPTIONS OUTSTANDING
---------------- ------------------------- ---------------- ------------------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 5.00 .5 $ 5.00 .5 $ 5.00 1.67 years
$ .40 61 .40 61 .40 1.67 years
$ .13 286 .13 286 .13 5.00 years
- ------------------- ---------------- ------------------------- ---------------- ------------------------ ---------------------------
</TABLE>
7. INCOME TAXES
At December 31, 1998, the Company has available for federal income tax purposes
net operating loss carryforwards of approximately $6,360,000 and a general
business credit of $621,000 expiring in 2010 through 2013. 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 1. Significant differences have resulted from amortizing
previously capitalized research and development expenses. The ability of the
Company to realize a future tax benefit from a portion of its net operating loss
carryforwards and general business credits may be limited due to changes in
ownership of the Company. 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. Accordingly, the Company has provided a full
valuation allowance against its deferred tax assets. The valuation allowance
increased by $4,330,671 during 1998.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998
-----------------------
<S> <C>
Deferred tax assets:
Operating loss carryforwards $ 2,561,162
Research and development costs 8,610,163
General business tax credit 621,326
AMT tax credit 9,966
-----------------------
Total deferred tax assets 11,802,617
Total deferred tax liabilities (26,429)
-----------------------
Total deferred tax assets and liabilities 11,776,188
Valuation allowance for deferred tax assets and liabilities (11,776,188)
-----------------------
Total net deferred tax assets $ 0
-----------------------
</TABLE>
F-18
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. 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 2000. The future minimum lease payments under the capital and
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
------------------- --------------------
CAPITAL OPERATING
LEASE LEASE
------------------- --------------------
<S> <C> <C>
Year ending December 31:
1999 $ 322,198 $ 209,873
2000 183,890 184,237
2001 5,681 76,092
Thereafter - -
------------------- --------------------
Total minimum lease payments 511,769 470,202
=======
Less amount representing interest 39,141
-------------------
Present value of minimum lease payments $ 472,628
===================
</TABLE>
The cost of assets under capital leases amounted to $950,676 at December 31,
1998. Accumulated amortization relating to the leased equipment amounted to
$483,782 at December 31, 1998. Amortization expense included in depreciation
expense, relating to the leased equipment, amounted to $298,578, $159,791, and
$483,782 for the year ended December 31, 1998, the year ended December 31, 1997,
and the period from May 1, 1994 (inception) through December 31, 1998,
respectively.
Rent expense amounted to $270,298, $249,799 and $738,955 for the year ended
December 31, 1998, the year ended December 31, 1997, and the period from May 1,
1994 (inception) through December 31, 1998, respectively.
On December 10, 1997 the Company entered into a sale and leaseback agreement
with FINOVA Technology Finance, Inc. ("FINOVA"). The cost of assets under the
capital lease is $360,284 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
president of the Company an annual salary of $246,750 through January 2001.
A former director of the Company is a party to a Consulting and Finder's
Agreement dated June 4, 1992 and amended February 17, 1995 ("Agreement") with
the Company. This Agreement entitles him to receive an annual fee equal to 10%
of the net after-tax profits of the
F-19
<PAGE>
VION PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Company attributable to the sale or licensing of products or technology licensed
pursuant to the Company's agreement with Yale (see Note 4), 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 4).
9. 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 $60,000 and $120,000 for services rendered for the years ended December 31,
1997 and 1998, 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 receives an annual fee of $48,000.
10. SUBSEQUENT EVENT
In connection with the retention its Chief Executive Officer, the Company
granted options and issued warrants to purchase an aggregate amount of 980,000
shares of the Company's Common Stock. The options and warrants have exercise
prices ranging from the fair market value on the date of grant to 110% of the
fair market value on the date of grant.
F-20
Exhibit 10.26
LICENSE AGREEMENT
-----------------
AGREEMENT made this 9th day of February, 1998 (the "Effective Date"),
by and between VION PHARMACEUTICALS, INC., a Delaware corporation located at
Four Science Park, New Haven, Connecticut 06511 ("Vion"), and SAN-MAR
LABORATORIES INC., a New York corporation located at 4 Warehouse Lane, Elmsford,
New York 10523 ("San-Mar").
W I T N E S S E T H:
WHEREAS, Vion is the owner of certain technology related to synthetic
and cosmetic forms of melanin and methods for using melanin;
WHEREAS, San-Mar wishes to obtain a license to such technology, and
Vion is willing to grant such a license to San-Mar, subject to the terms and
conditions hereof;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I. DEFINITIONS
----------------------
As used in this Agreement, the following terms shall be defined as set
forth below:
1.1 "Affiliate" shall mean any person or entity that, directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, a party. "Control" means the direct or indirect
(a) legal or beneficial ownership of more than fifty percent (50%) of the
outstanding voting rights of such person or entity or (b) power or ability to
direct the management or policies of such person or entity.
1.2 "Field" shall mean cosmetic and non-pharmaceutical uses of the
Product, but including over-the-counter topicals.
<PAGE>
1.3 "Gross Revenue" shall mean the gross amounts invoiced by San-Mar,
its Affiliates or its permitted sublicensees on the sale of Products to
unaffiliated third parties, without deduction of any kind, except, to the extent
actually paid or allowed: (a) quantity and other normal and customary trade cash
discounts fairly attributable to the Products; (b) freight, postage and
insurance incurred in connection with the shipping of the Products to
unaffiliated third parties; and (c) credits, rebates or adjustments paid or
credited in the same year attributable to the expiration, rejection or return of
Products.
1.4 "Know-How" shall mean techniques, inventions, practices, methods,
knowledge, know-how, skill, experience and test data, including, without
limitation, clinical test data and efficacy studies, in each case, relating to
synthetic or cosmetic melanins, including future Know-How, if any, in respect to
same.
1.5 "Patents" shall mean the patents and patent applications listed on
Exhibit A attached hereto, and all additions, continuations,
continuations-in-part, divisional or substitute patents, all reissues or
reexaminations of all such applications or patents, and all extensions and
renewals of any such patents, confirmations, importation or registration patents
thereof or therefor, in whatsoever legal form and/or by whatsoever legal title
they are granted.
1.6 "Products" shall mean finished products incorporating synthetic or
cosmetic melanins for use in the Field.
1.7 "Proprietary Information" shall mean: all know-how, inventions, and
trade secrets, whether or not patentable, preclinical and clinical test data,
and technical and marketing information that is disclosed by either party to the
other party, either (i) in writing and marked "Confidential," "Proprietary," or
the like, or (ii) orally, and confirmed in writing within sixty (60) days after
such disclosure, unless such information: (a) is or becomes public knowledge
through no fault of the receiving party; (b) is in the future legally received
by the receiving party from a third party free of any obligation of
confidentiality; or (c) is legally in the possession of the receiving party free
of any
2
<PAGE>
obligation of confidentiality and prior to receipt from the disclosing party,
which possession shall be proven by documentary evidence.
1.8 "Royalty" shall have the meaning set forth in Section 3.1.1.
1.9 "Royalty Year" shall mean each twelve month period commencing on
March 1 and ending February 28, except the first Royalty Year shall be the
period commencing on the Effective Date and ending February 28, 1999.
1.10 "Technology" shall mean all Patents and Know-How to the extent
necessary or appropriate for the development, use or sale of Products in the
Field, now or during the term hereof (a) owned by Vion, or (b) to the extent
Vion is permitted to grant a sublicense to San-Mar, licensed to Vion by a third
party.
1.11 "Territory" shall mean the entire world.
ARTICLE 2. GRANT OF LICENSE
---------------------------
2.1 License Grant. Vion hereby grants to San-Mar a non-transferable
exclusive license under the Technology to make, have made, use, or sell the
Products in the Field within the Territory, subject to the rights retained by
Vion described in Section 2.3 below.
2.2 Sublicense Rights. Subject to Vion's prior written consent which
shall not be unreaonsably withheld or delayed, San-Mar shall have the right to
sublicense the rights granted hereunder to third parties for the purpose of
marketing, distributing and/or selling Products; provided, that, (a) San-Mar
shall remain primarily liable for the performance of such sublicensees; and (b)
each sublicensee shall enter into a written sublicense agreement having
substantially the same obligations toward Vion as those provided herein. All
sublicenses hereunder granted by San-Mar shall be coterminable with this
Agreement. Except as otherwise provided in this Section 2.2. San-Mar shall have
no right to sublicense any of the rights granted hereunder without the prior
written consent of Vion.
3
<PAGE>
2.3 Retention of Rights. Vion shall retain the right to make, use, and
practice the Technology for all uses outside the Field.
2.4 Transfer of Documentary Know-How. Vion shall supply to San-Mar all
Know-How that now exists in a written or other tangible medium that Vion now
possesses and owns or controls and that is necessary or useful in the
manufacture and sale of the Products in the Field. Vion shall also furnish,
subject to third parties' rights that may hereafter come, all revisions and
modifications to such Know-How that may be developed or acquired by Vion from
time to time during the term of this Agreement.
ARTICLE 3. LICENSE FEE AND ROYALTIES
------------------------------------
3.1 Royalties.
3.1.1 In consideration of the license rights set forth in
Article 2 above, San-Mar shall pay to Vion a royalty equal to ten percent (10%)
of the Gross Revenue invoiced by San-Mar and/or permitted sublicensees (the
"Royalty"), subject to quarterly adjustment and an annual reconciliation based
upon final calculation of Gross Revenue taking into account the permissible
deductions under paragraph 1.3 hereof.
3.1.2 A Product shall be deemed to have been sold when
delivered or shipped, sixty (60) days after invoiced, or when paid for,
whichever is earliest. In the event that San-Mar shall transfer Products to a
permitted sublicensee (including an Affiliate), then the price charged by the
sublicensee to third parties shall be included in Gross Revenue.
3.2 Minimum Royalties. For each Royalty Year during the term hereof,
San-Mar shall pay Vion an annual minimum royalty payment of $50,000 (a "Minimum
Royalty Payment"), irrespective of whether any sales of the Products have been
made which annual Minimum Royalty Payment of $50,000 shall be payable on the
last day of each Royalty Year. San-Mar shall credit payments of Royalty against
such Minimum Royalty Payments for each Royalty Year, and pay Vion the shortfall,
if any, in accordance with Section 4.2 hereof.
4
<PAGE>
3.3 Minimum Royalties Upon Termination. In the event that this
Agreement is terminated in accordance with the terms of Section 10.3.1 or 10.3.2
hereof, the Minimum Royalty Payment for the year of termination shall be
prorated for that portion of the year that the Agreement is in effect; provided,
however, that if this Agreement is terminated by San-Mar pursuant to the terms
of Section 10.3.1 or 10.3.2 hereof within six (6) months of the Effective Date,
no Minimum Royalty payments shall be due. In all other cases, the aggregate
Minimum Royalties Payments due hereunder shall accrue on termination.
ARTICLE 4. PAYMENTS AND REPORTS
-------------------------------
4.1 Royalty Reports. Within thirty (30) days after the end of each
calendar quarter, San-Mar shall furnish to Vion a written report (the "Royalty
Report") setting forth (a) the gross sales of the Products, (b) the deductions
allowable under Section 1.3 in calculating Gross Revenues, (c) the Gross
Revenues, and (d) the Royalty, accompanied by full payment of the Royalty due
and payable thereon.
4.2 Minimum Royalty Payments. In the event that the Royalties for any
Royalty Year during the term of this Agreement are less than the Minimum Royalty
Payment due for such Year, then San-Mar shall pay the difference between the
Royalty and the applicable Minimum Royalty Payment for such Royalty Year on
March 1, and shall satisfy its minimum royalty obligation by paying such
difference at that time. If San-Mar fails to make the Minimum Royalty Payments
set forth in Section 3.2 above, Vion shall have the option of terminating this
Agreement at any time by providing written notice to San-Mar of its intention to
terminate and giving San-Mar thirty (30) days to make the required Minimum
Royalty Payments. The failure by Vion to exercise such right of termination
shall not be deemed to be a waiver of any such right and shall not preclude Vion
from exercising such right of termination at any time after providing the notice
previously
5
<PAGE>
specified. Such right of termination is not Vion's exclusive remedy and shall
not preclude Vion from pursuing any other rights or remedies available to Vion.
4.3 Currency. The Royalties shall be paid to Vion in U.S. dollars,
without deductions for taxes, assessments, fees or charges of any kind. If Gross
Revenues are received in foreign currency, the exchange rate used for
calculating Royalty shall be the applicable currency exchange rated published by
the Wall Street Journal on the last business day of the month just prior to the
date payment is required to be made hereunder.
4.4 Books and Records. San-Mar and its permitted sublicensees shall
keep and maintain complete and accurate records and books of account in
sufficient detail and form so as to enable verification of the Royalty payable
by San-Mar hereunder. Such records and books of account shall be maintained for
a period of no less than three (3) years following the calendar year to which
they pertain. San-Mar shall permit such records and books of account to be
examined by Vion or Vion's duly appointed agent, to enable Vion to verify the
amounts payable hereunder. Such examination shall be made no more than once
annually and shall be at Vion's expense, during normal business hours, and upon
thirty (30) days' prior written notice to San-Mar. In the event that San-Mar
underpaid the amounts due to Vion by more than five percent (5%), San-Mar shall
forthwith pay the cost of such examination, together with the deficiency not
previously paid.
4.5 Regulatory Responsibility. San-Mar shall comply with all applicable
federal, state, and local laws, regulations, rules, and orders applicable to the
testing, production, transportation, packaging, labeling, promotion, export,
distribution, sale, and use of the Products in the Territory. In addition,
San-Mar shall be solely responsible for assuring compliance with all
applicable export laws and regulations applicable to this Agreement and
San-Mar's activities hereunder.
4.6 Access. Vion may, upon reasonable prior written notice and at times
reasonably acceptable to San-Mar: (a) visit the facilities where the development
and manufacturing work is being conducted; and (b) consult informally, during
such visits and by telephone, with San-Mar's personnel conducting the
development and manufacturing work.
6
<PAGE>
ARTICLE 5. DUE DILIGENCE IN COMMERCIALIZATION
---------------------------------------------
5.1 Plan of Commercialization.
5.1.1 San-Mar agrees to use commercially reasonable efforts
and diligence to (a) proceed with the development, manufacture, and sale of the
Products in the Territory and (b) develop markets for the Products in the Field.
Vion may terminate this Agreement at any time in accordance with Section 10.2.5
if San-Mar fails to exercise such due diligence within thirty (30) days after
notice of the alleged default with respect thereto from Vion. Such right of
termination is not Vion's exclusive remedy and shall not preclude Vion from
pursuing any other rights or remedies available to Vion.
5.1.2 As used in this Agreement, "commercially reasonable
efforts and diligence" shall mean that degree of effort, expertise and resources
that a person of ordinary skill, ability and experience in the matters addressed
herein would utilize or otherwise apply with respect to fulfilling its
obligations assumed hereunder, provided, however, that San-Mar shall not be
deemed to have failed to abide by or have failed to perform in accordance with
the foregoing standard to the extent that San-Mar is prevented from performing
or hindered in its performance of such standard by any act or omission of Vion,
or to the extent that San-Mar is prevented from complying with such standard by
reason of force majeure, including, without limitation, fire, flood, explosion,
storm, strike, lockout or other labor dispute, riot, war, accidents, acts of
God, acts of governmental agencies or instrumentalities, or any other cause or
externally induced casualty beyond San-Mar's reasonable control, whether similar
to the foregoing or not.
5.2 Reports. San-Mar shall provide periodic status reports to Vion, at
least quarterly, indicating progress and problems to date in development and
commercialization, and a forecast and schedule of major events required to
market the Products in the Territory.
5.3 Abandonment or Suspension of Commercialization. San-Mar shall use
commercially reasonable efforts to diligently and continuously promote the sale
of Products to
7
<PAGE>
purchasers in each country in the Territory. If at any time San-Mar abandons or
suspends its development, manufacture, marketing, or intent to market the
Products for a period exceeding ninety (90) days, San-Mar shall immediately
notify Vion giving reasons therefore and a statement of its intended actions.
ARTICLE 6. PATENTS
------------------
6.1 Patent Marking. San-Mar shall apply, and shall require sublicensees
to apply, patent marking notices to the extent feasible and practical, and in
accordance with the applicable patent laws of any country where the Products are
made, sold, or used.
6.2 Enforcement of Patents. Upon learning of the possible infringement
of any of the Patents by a third party, each party shall inform the other party
of that fact, and shall supply the other party with any evidence available to it
pertaining to the infringement. Vion shall have the sole right to defend the
Patents against infringement or interference by any third party in any country
in which a Patent is in effect hereunder, including bringing any legal action
for infringement or defending any counterclaim of invalidity or action of a
third party for declaratory judgment of non-infringement or interference. Vion
may settle any such actions solely at its own expense and through counsel of its
selection; provided, however, that San-Mar shall be entitled in each instance to
participate (but not control) through counsel of its selection at its own
expense. Vion shall bear the expenses of such actions and shall obtain the
benefits in the recoveries, if any, whether by judgment, award, decree or
settlement.
ARTICLE 7. REPRESENTATIONS AND WARRANTIES
-----------------------------------------
7.1 Vion Representations. Vion represents and warrants to San-Mar that:
7.1.1 Vion (a) has the right to grant the licenses hereunder,
and (b) has not granted licenses to any other entity that would restrict the
rights granted hereunder;
8
<PAGE>
7.1.2 Vion has not received any notice or claim asserting, and
has no knowledge of, any infringement, conflict or interference in respect of
the practice, or the proposed practice of the Patents;
7.1.3 This Agreement has been duly authorized, executed, and
delivered by Vion and is a valid, binding, and legally enforceable obligation of
Vion, subject to applicable bankruptcy, insolvency, moratorium, and other laws
now or hereafter in effect affecting the rights of creditors generally, and
subject (as to the enforcement of remedies) to equitable principles;
7.1.4 No consent, approval, authorization, or order of any
court or governmental agency or body is required for the consummation by Vion of
the transactions contemplated by this Agreement; and
7.1.5 The execution, delivery, and performance of this
Agreement will not result in a breach or violation of, or constitute a default
under, any statute, regulation, or other law to which it is a party or by which
it is bound, or any order, rule, or regulation of any court or governmental
agency or body having jurisdiction over it or any of its properties.
7.2 San-Mar Representations. San-Mar represents and warrants to Vion
that:
7.2.1 This Agreement has been duly authorized, executed, and
delivered by it and is a valid, binding, and legally enforceable obligation of
it, subject to applicable bankruptcy, insolvency, moratorium, and other laws now
or hereafter in effect affecting the rights of creditors generally, and subject
(as to the enforcement of remedies) to equitable principles;
7.2.2 No consent, approval, authorization, or order of any
court or governmental agency or body is required for the consummation by it of
the transactions contemplated by this Agreement; and
7.2.3 The execution, delivery, and performance of this
Agreement will not result in a breach or violation of, or constitute a default
under, any statute, regulation, or other law or agreement or instrument to which
it is a party or by which it is bound, its charter documents, or
9
<PAGE>
any order, rule, or regulation of any court or governmental agency or body
having jurisdiction over it or any of its properties.
7.3 Limitations. EXCEPT AS PROVIDED IN SECTIONS 7.1.1 AND 7.1.2, VION
DISCLAIMS ALL WARRANTIES WHATSOEVER WITH RESPECT TO THE PATENTS, THE TECHNOLOGY,
AND THE PRODUCT, EITHER EXPRESS OR IMPLIED. THERE IS NO EXPRESS OR IMPLIED
WARRANTY: (a) OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR (b)
THAT ANY PATENT IS VALID, OR (c) THAT THE USE OF THE PRODUCT WILL NOT INFRINGE
ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER RIGHTS, OR ANY OTHER EXPRESS OR
IMPLIED WARRANTIES. San-Mar shall make no statements, representations, or
warranties whatsoever to any third parties inconsistent with this Section 7.3.
ARTICLE 8. INDEMNIFICATION; INSURANCE
-------------------------------------
8.1 Indemnification.
8.1.1 Except to the extent that the same results from the
gross negligence or willful acts of Vion, or the non-disclosure of any material
fact known to Vion relating to the Know-How and/or Technology, San-Mar shall
defend, indemnify and hold harmless Vion and its agents, from and against any
and all third party claims, demands, damages, suits, actions, judgments, awards,
fines, liabilities, losses, and all costs and expenses incurred in connection
therewith (including attorneys' fees) (collectively, "Losses") arising from or
in connection with any of the following: (a) the use by San-Mar, its Affiliates,
or permitted sublicensees of any method or process related to the Technology;
(b) the development, manufacture, handling, storage, labeling, use, promotion,
sale, or other disposition of the Products by San-Mar, its Affiliates or
permitted sublicensees, or other transferees; (c) failure by San-Mar to comply
with all applicable rules and regulations in the Territory in the manufacture,
handling, labeling, and sale of the Products; (d) failure to provide adequate
warnings; (e) the exposure to, or administration or use of, the Products by any
person; (f) a breach of any warranty or
representation by San-Mar herein; or (g) any willful act or omission or
10
<PAGE>
negligence of San-Mar, its Affiliates, or permitted sublicensees, or their
respective employees, agents, or other contractors. Vion shall reasonably
cooperate with San-Mar in defending any such claim. Vion shall be entitled to
receive information regarding the status of any such matter and shall be
entitled to retain advisory counsel on its own behalf and at its own expense.
8.1.2 Vion shall defend, indemnify and hold harmless San-Mar,
from and against any and all Losses arising from or in connection with any of
the following: (a) a breach of any warranty or representation by Vion herein;
(b) any willful act or omission or negligence of Vion; or (c) the exercise by
Vion of its rights retained in Section 2.3 of this Agreement.
8.2 Insurance. From the Effective Date and thereafter, San-Mar shall
purchase and maintain in effect and shall require any sublicensees to purchase
and maintain in effect a policy of general comprehensive products liability
insurance covering all claims with respect to the Products developed, tested,
manufactured or sold within the term of any license granted hereunder, which
policy shall (a) be in an amount of not less than $5 million combined single
limit for each occurrence of bodily injury and property damage; (b) provide that
such policy is primary and not excess or contributory with regard to other
insurance San-Mar may have; (c) provide at least thirty (30) days notice to Vion
of cancellation or material change, (d) include Vion as an additional insured,
and (e) be written to cover all claims made during or after the termination or
expiration of this Agreement. San-Mar shall furnish a certificate of such
insurance to Vion on the Effective Date and annually thereafter.
11
<PAGE>
ARTICLE 9. SECRECY
------------------
9.1 Non-Disclosure. Except as otherwise provided in Section 9.2 below,
no party shall disclose to a third party any Proprietary Information. Each party
shall take all reasonable steps to minimize the risk of disclosure of
Proprietary Information or transfer, including without limitation, if
applicable: (a) ensuring that only its employees whose duties require them to
possess such information or materials have access thereto; (b) exercising at
least the same degree of care that it uses for its own proprietary information;
and (c) providing proper and secure storage for the Proprietary Information.
9.2 Disclosure. Upon prior notice to the disclosing party, the
receiving party may disclose Proprietary to any governmental agency or judicial
authority that requires or legally requests such Proprietary Information;
provided, that protective orders or other assurances of confidentiality are
obtained to the extent reasonably available from such agency or authority.
9.3 Equitable Remedies. Each party acknowledges that if any party
discloses Proprietary Information in violation of this Agreement, the other
parties shall have no adequate remedy in arbitration or at law and may seek such
equitable relief as it deems appropriate, including but not limited to
preliminary and permanent injunctive relief.
ARTICLE 10. TERM AND TERMINATION
--------------------------------
10.1 Term. The term of this Agreement shall commence upon the date
San-Mar receives a fully executed counterpart of this Agreement and shall
continue in full force and effect until March 1, 2001, unless sooner terminated
as set forth in Sections 10.2 and 10.3. Upon the expiration of the initial term,
the term of this Agreement shall be renewed and extended automatically for a
second three (3) year term, unless either party notifies the other party in
writing at least sixty (60) days prior to the expiration of the initial term.
12
<PAGE>
10.2 Termination for Cause by Vion. Without prejudice to any other
rights it may have hereunder or at law or in equity, Vion may terminate this
Agreement immediately upon notice to San-Mar, upon the occurrence of any of the
following:
10.2.1 San-Mar becomes insolvent, an order for relief is
entered against San-Mar under any bankruptcy or insolvency laws or laws of
similar import (and in the case of an involuntary action only, such order of
relief is not discharged within thirty (30) days), or San-Mar fails generally to
pay its debts as they become due;
10.2.2 San-Mar makes an assignment for the benefit of its
creditors or a receiver or custodian is appointed for it or its business is
placed under attachment, garnishment or other process involving a significant
portion of its business;
10.2.3 After thirty (30) days' notice from Vion (stating its
intent to so terminate), San-Mar fails to make all payments due and owing
pursuant to Articles 3 and 4 hereof;
10.2.4 After sixty (60) days' notice from Vion (stating its
intent to so terminate), San-Mar fails to commence and diligently pursue to
remedy any material breach (other than breach for payment referred to in Section
10.2.3 hereof) of this Agreement; and
10.2.5 San-Mar fails to exercise due diligence in bringing the
Products to market in accordance with Section 5.1, and such failure is not
remedied within thirty (30) days after written notice as provided in Section
5.1.
10.3 Termination by San-Mar.
10.3.1 Without prejudice to any other rights it may have
hereunder or at law or in equity, San-Mar may terminate this Agreement
immediately upon notice to Vion if, after sixty (60) days' notice from San-Mar
(stating its intent to so terminate), Vion fails to commence and diligently
pursue to remedy any material breach of this Agreement.
10.3.2 Notwithstanding anything to the contrary contained in
Section 10.3.1, San-Mar may terminate this Agreement without breach by Vion, if
in San-Mar's reasonable business
13
<PAGE>
judgment, San-Mar is unable to develop and/or market a commercially viable
product or the continuation of such development and/or marketing is impractical.
10.4 Rights and Duties Upon Termination.
10.4.1 Upon expiration or termination of this Agreement and
except as otherwise expressly provided herein, (a) all licenses granted to
San-Mar under this Agreement and, at Vion's option, any sublicenses granted by
San-Mar, shall terminate, (b) except as provided in this Section 10.4.1, both
parties shall immediately cease using the other party's Proprietary Information,
and (c) San-Mar shall provide Vion with all available Know-How in San-Mar's
possession or control and the right to use such Know-How.
10.4.2 Expiration or termination of this Agreement for
whatever reason, shall not affect any rights or obligations accrued by either
party prior to the effective date of such termination, including but not limited
to San-Mar's obligation to pay the Royalty and Minimum Royalty Payments
specified by Articles 3 and 4.
10.4.3 The following provisions shall survive expiration or
termination of this Agreement: Sections 3.3, 4.4, 7.3 and 10.4 and Articles 8
and 9.
ARTICLE 11. MISCELLANEOUS
-------------------------
11.1 Notices. All notices, requests, demands, waivers, consents,
approvals, or other communications to any party hereunder shall be in writing
and shall be deemed to have been duly given if sent to such party by facsimile,
by registered or certified mail return receipt requested, postage prepaid, or by
commercial courier requiring receipt, to the following addressees:
to Vion:
--------
Vion Pharmaceuticals, Inc.
Four Science Park
New Haven, Connecticut 06511
Attention: President and Chief Executive Officer
14
<PAGE>
to San-Mar:
-----------
San-Mar Laboratories, Inc.
4 Warehouse Lane
Elmsford, New York 10523
Attention: President
or to such other address as the addressee may have specified in notice duly
given to the sender as provided herein. Such notice, request, demand, waiver,
consent, approval, or other communication will be deemed to have been given as
of the date so delivered by reputable, overnight courier requiring receipt, or
five (5) days after so mailed.
11.2 Force Majeure. Failure by either party to perform its obligations
under this Agreement (excepting the obligation to make payments) shall not
subject such party to any liability to the other if such failure is caused or
occasioned by act of God, fire, explosion, flood, drought, war, riot, sabotage,
embargo, strikes or other labor trouble, compliance with any order, regulation
or request of government, or by any other event or circumstance of like or
different character to the foregoing beyond the reasonable control of such
party, provided such party uses reasonable efforts to remove such circumstance
and gives the other party prompt notice of the existence of such circumstance.
11.3 Amendment and Entire Agreement. This Agreement may not be amended
or modified except by written agreement signed by all of the parties hereto.
This Agreement constitutes the entire agreement of the parties relating to the
subject matter hereof, and all prior representations and understandings are
merged into and superseded hereby.
11.4 Governing Law. This Agreement shall be governed and interpreted,
and all rights and obligations of the parties shall be determined, in accordance
with the laws of the State of Connecticut, without regard to its principles of
conflicts of law.
11.5 Arbitration. Any controversy or claim arising out of or relating
to this Agreement, or the breach hereof, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the
15
<PAGE>
arbitrator(s) may be entered in any court having jurisdiction thereof. Such
arbitration proceedings shall take place in New York, New York. The decision of
the arbitration proceeding shall be final and binding upon the parties.
11.6 Assignment; Binding Effect. This Agreement shall not be assigned
by San-Mar without the prior written consent of Vion. Any attempted assignment
in contravention of this Section 11.6 without Vion's prior consent shall be null
and void. This Agreement and the rights herein granted shall be binding upon and
shall inure to the benefit of the parties and their respective successors,
heirs, and permitted assigns.
11.7 Severability. The provisions of this Agreement shall be deemed
separable. In the event any provision of this Agreement is found in any
jurisdiction to be in violation of public policy or illegal or unenforceable in
law or equity, such finding shall in no event invalidate any other provision of
this Agreement in that jurisdiction, and this Agreement shall be deemed amended
to the minimum extent required to comply with the law of such jurisdiction.
11.8 No Waiver. The failure of any party hereto to enforce at any time,
or for any period of time, any provision of this Agreement shall not be
construed as a waiver of either such provision or the right of such party
thereafter to enforce each and every provision of this Agreement.
11.9 Counterparts. This Agreement may be executed in any number of
counterparts and any party may execute any such counterpart, each of which when
executed and delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the date first set forth above.
VION PHARMACEUTICALS, INC.
/s/ John Spears
16
<PAGE>
By: John Spears
Title: President and Chief Executive Officer
SAN-MAR LABORATORIES, INC.
/s/ Marvin Berkrot
By: Marvin Berkrot
Title: President
17
<PAGE>
EXHIBIT A
---------
PATENTS
-------
TITLE OF PATENT PATENT NUMBER
- --------------- -------------
1. Soluble Melanin 5,216,116
2. Soluble Melanin 5,218,079
3. Soluble Melanin 5,225,435
4. Synthetic Melanin 5,227,459
5. Soluble Melanin 5,618,519
6. Synthetic Melanin As a Subscreen And 5,384,116
Tanning Agent
7. Cosmetic Melanins 5,744,125
8. Decreasing the Melanin Content in Mammalian 5,126,125
Skin and Hair using 5,6 dihydroxindole
derivatives
9. Composition and Method for Whitening Skin 5,523,077
18
Exhibit 10.27
AMENDMENT NO. 3
TO
LICENSE AGREEMENT
-----------------
AMENDMENT NO. 3 TO LICENSE AGREEMENT (this "Amendment No. 3") made as
of this 25th day of September, 1998 by and between YALE UNIVERSITY, a
corporation organized and existing under and by virtue of a charter granted by
the general assembly of the Colony and State of Connecticut and located in New
Haven, Connecticut ("YALE"), and VION PHARMACEUTICALS, INC. (f/k/a OncoRx Inc.),
a corporation organized and existing under the laws of the State of Delaware and
with principal offices located in New Haven, Connecticut ("LICENSEE").
W I T N E S S E T H:
WHEREAS, YALE and LICENSEE are parties to a License Agreement dated
August 31, 1994, under which YALE exclusively licensed to LICENSEE a series of
YALE owned inventions relating to potential anti-tumor and anti-viral compounds;
WHEREAS, YALE and LICENSEE amended the License Agreement pursuant to an
Agreement dated November 15, 1995 to make an additional patent subject to the
License Agreement and provide the terms of compensation to YALE therefor;
WHEREAS, YALE and LICENSEE again amended the License Agreement pursuant
to an Agreement dated June 12, 1997 to reduce the earned royalties payable on
Sublicense Income, and to make certain other changes to the License Agreement;
and
WHEREAS, YALE and LICENSEE wish to amend the License Agreement, as
amended, to modify and clarify the patents subject to the License Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and for other good and valuable consideration,
receipt of which is hereby acknowledged, YALE and LICENSEE hereby agree as
follows:
1. Exhibit C of the License Agreement shall be deleted in its entirety
and shall now read as follows:
"PATENT LISTING
U.S. Patent Application Serial Number 098,650
Novel L-2',3'-Dideoxy Nucleoside Analogs as Anti-Hepatitis B (HBV)
Agents
U.S. Patent Application Serial Number 08/067,299
Novel L-2'3'-Dideoxy Nucleoside Analogs as Anti-Hepatitis (HBV) Agents
<PAGE>
U.S. Patent Application Serial Number 08/406,198
Reduced Toxicity Compositions and Methods for Treating HIV Infections
Additional Technology
Inhibition of Human Hepatitis B virus Replication by 3'-Thia 2',
3'-dideoxycytidine and its Derivatives (OCR 340)".
2. For purposes of this Amendment No. 3, "Additional Licensed Patents"
shall mean U.S. Patent Applications 08/067,299 and 08/406,198.
3. The following new Section 8.5 shall be added to the License
Agreement:
"8.5 Diligence with respect to (beta)-L-FD4C.
(a) LICENSEE shall endeavor to perform pre-clinical and clinical
development of (beta)-L-FD4C, a Licensed Product that is covered by one or more
claims of the Additional Licensed Patents, consistent with sound scientific and
business judgment and the development plan attached to this Amendment No. 3 as
Exhibit E.
(b) If one or more of the milestones listed in Exhibit E is not
achieved for reasons attributable to safety, efficacy, pharmacokinetics,
formulation difficulties, patient enrollment or any of the excused causes listed
in clauses (i) through (iv) of Section 8.2 of the License Agreement, then
LICENSEE will have additional reasonable time to achieve the milestones so
affected. If LICENSEE is unable to achieve any of the milestones listed in
Exhibit E, then YALE has the right and option to terminate the license grant
under the Additional License Patents subject to the terms and conditions of
Sections 8.5(c) and 8.5(d) below.
(c) To exercise the right to terminate LICENSEE's exclusive license
under this Section 8.5, YALE must give LICENSEE written notice (stating its
intent to so terminate). LICENSEE thereafter has ninety (90) days to present
written tangible evidence that it has made good faith efforts to diligently
achieve any missed milestone, and YALE will take into consideration the evidence
provided by LICENSEE. However, if YALE is not satisfied with the evidence
provided by LICENSEE that LICENSEE has made good faith efforts to diligently
achieve a missed milestone, then YALE may, at its option, terminate the license
grant under the Additional Licensed Patents by giving written notice to
LICENSEE. In the event that YALE terminates LICENSEE's exclusive license, such
termination shall be made only with respect to (beta)-L-FDFC and the intended
use for which a milestone has been missed as set forth in Exhibit E.
(d) Notwithstanding anything to the contrary contained in this Section
8.5, in the event that LICENSEE enters into a sublicense or other strategic
alliance with a third party to develop and market Licensed Products that are
covered by one or more claims of the Additional Licensed Patents, the provisions
of this Section 8.5 shall no longer apply.
4. Except as expressly amended hereby, the License Agreement, as
amended to date, remains unchanged and in full force and effect.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 3
to be executed in duplicate originals by their duly authorized representatives.
YALE UNIVERSITY VION PHARMACEUTICALS, INC.
By: /s/ Gregory E. Gardiner By: /s/ John A. Spears
Name: Gregory E. Gardiner Name: John Spears
Title: Senior Director Title: President & CEO
-3-
<PAGE>
Exhibit E
CLINICAL DEVELOPMENT OF (beta)-L-FD4C
o Completion of Woodchuck Study (long term dosing) 1Q/99
o GMP Formulation 1Q/99
o GMP Drug Synthesis Complete: Toxicology Initiated 2Q/99
o IND Filing Phase I (Human Volunteer) 4Q/99
o Initiate Phase II (HBV Asia) 3Q/00
o Initiate Phase II (HIV USA) 3Q/00
-4-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
NAME OF SUBSIDIARY INCORPORATED IN
------------------ ---------------
None
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-98738 and No. 333-39407) pertaining to the Vion
Pharmaceuticals, Inc. Amended and Restated Stock Option Plan and in the
Registration Statements (Form S-3 No. 333-37941 and 333-61477) of Vion
Pharmaceuticals, Inc. and in the related Prospectus of our report dated February
12, 1999, with respect to the financial statements of Vion Pharmaceuticals, Inc.
included in the Annual Report (Form 10-KSB/A Amendment No. 1) for the year ended
December 31, 1998.
Ernst & Young LLP
Stamford, Connecticut
April 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,821,234
<SECURITIES> 2,594,497
<RECEIVABLES> 1,251,618
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,774,547
<PP&E> 1,026,184
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,269,023
<CURRENT-LIABILITIES> 2,910,310
<BONDS> 0
4,854,505
6,167
<COMMON> 139,530
<OTHER-SE> 1,358,511
<TOTAL-LIABILITY-AND-EQUITY> 9,269,326
<SALES> 0
<TOTAL-REVENUES> 1,955,989
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (12,912,345)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (61,553)
<INCOME-PRETAX> (10,477,669)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,477,669)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,477,669)
<EPS-PRIMARY> (1.24)
<EPS-DILUTED> (1.24)
</TABLE>
