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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 1999
Commission File No. 0-26534
VION PHARMACEUTICALS, INC.
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(Name of Small Business Issuer as specified in its charter)
DELAWARE 13-3671221
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of 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. [ ]
The Registrant's revenues for the most recent fiscal year were: $3,154,194.
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 1, 2000 based upon of the last sale price of such stock
on that date as reported by the NASDAQ Stock Market was $396,694,569. The number
of shares of the Registrant's Common Stock outstanding as of March 1, 2000 was
20,731,958.
Transitional Small Business Disclosure Format (check one): Yes[ ] No [X]
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
GENERAL
We are a biopharmaceutical company engaged in the research, development
and commercialization of cancer treatment technologies. Our product portfolio
consists of a drug delivery platform and three cancer therapeutics. We believe
that TAPET'r', our drug delivery technology, addresses one of the biggest
challenges faced in treating cancer: how to effectively deliver anticancer drugs
to tumors without harming normal cells. TAPET uses genetically altered strains
of Salmonella bacteria as a vehicle, or vector, for delivering cancer-fighting
drugs preferentially to solid tumors. We believe that TAPET's greatest potential
application is the ability to continuously deliver a large variety of anticancer
drugs directly to tumors while minimizing the side effects associated with
current treatments.
Promycin'r' is an anticancer cell therapeutic that is designed to
improve the treatment of solid tumors by attacking the hypoxic, or
oxygen-depleted, cells. Used in conjunction with radiation therapy, Promycin may
improve the treatment of solid tumors by killing the poorly oxygenated cells of
tumors that are not readily destroyed by radiation therapy alone. Preclinical
studies have shown that Promycin, in conjunction with radiation, is effective in
eradicating oxygen-depleted cells. Promycin is currently in Phase III clinical
trials.
Triapine'r' is designed to prevent the replication of tumor cells by
blocking a critical step in the synthesis of DNA and, as a result, inhibit the
growth and repair of cancer cells. In preclinical research, this drug has shown
significant, broad-spectrum activity against a variety of cancer types.
Sulfonyl hydrazine prodrugs represent compounds that are designed to be
converted into unique, potent alkylating agents. Alkylating agents are highly
effective against tumors but can also lead to toxic side effects. Sulfonyl
hydrazine prodrugs reduce these toxic side effects and allow alkylating agents
to be delivered safely and preferentially to tumor cells for conversion into
powerful cancer-fighting drugs.
Our product development strategy consists of two main approaches.
First, we engage in product development with respect to anticancer technologies
through in-house research and through collaboration with academic institutions.
Second, depending on the drug market conditions and required resources, we
determine the best method and or partnership to develop, and eventually market,
our products. Our research and development programs are based on technologies
that we license from Yale University.
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OVERVIEW OF CANCER
Cancer is the second leading cause of death in the United States,
exceeded only by heart disease. Since 1990, approximately four million Americans
have died from cancer. It is a devastating disease with tremendous unmet medical
needs. The American Cancer Society estimates that 1.2 million new cases of
invasive cancer will be diagnosed in the United States in 1999 and 563,100
Americans are expected to die from cancer in 1999. We estimate that new cases of
cancer in Europe and the Far East are 1.5 times the cases in the U.S., meaning
the estimated worldwide incidences of new cancer are about 2.5 million. Sixty
percent of new cases of cancer are expected to result in death within five
years.
Cancer is characterized by uncontrolled cell division resulting in the
development of a mass of cells, commonly known as a tumor, as well as the
invasion and spreading of these 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 spread to various sites in the body.
COMMON TREATMENT METHODS
The three most common methods of treating patients with cancer are
surgery, radiation therapy and chemotherapy. A cancer patient often receives a
combination of these methods. 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 the cancer cells have not yet spread,
surgery 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 ionized molecules 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 have varying levels of effectiveness, and
can cause patient weakness, loss of appetite, nausea and vomiting. Radiation can
also result in 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
spread. 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 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 that affect the growth of various
tumors. Chemotherapy, however, can also result in loss of
<PAGE>
normal body functions and can result in patient weakness, loss of appetite,
nausea and vomiting. In many cases, chemotherapy consists of the administration
of several different drugs in combination.
RECENT ADVANCES
In recent years, there have been significant advances in molecular
biology, immunology and other related fields of biotechnology that have led to a
better understanding of how malfunctioning genes can result in the formation of
tumors. It is anticipated that these advances 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 that have malfunctioned and caused the cancer to
form or spread, and to therapies that can selectively deliver agents to tumors
that prevent the abnormal growth of cells.
Most current anticancer drugs, when introduced into the system by
current delivery methods, affect rapidly growing cells, both cancerous and
normal, throughout the body. The result is often significant side effects that
take a toll on a patient's health and can limit the amount of treatment a
patient may receive. Therefore, a great need exists for new therapies and
delivery strategies that preferentially deliver anticancer agents to tumors
while having minimal effects on healthy, normal tissues.
We believe 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 preferentially
more toxic to tumors. Therefore, we intend to take a balanced approach in our
research and development efforts. We will continue to develop chemically defined
small molecules based upon unique cellular targets discovered through
biotechnology, while also pursuing development of technologies to deliver
therapeutic agents to tumors.
OUR PRODUCT DEVELOPMENT PROGRAM
We are currently developing several products for the treatment of
cancer. The table below sets forth the development status of our core product
candidates as of December 31, 1999:
[GRAPHIC OMITTED]
'Preclinical' indicates that the product candidate selected for
development has met predetermined criteria for potency, specificity,
manufacturability and pharmacologic activity in animal and in vitro models.
'Phase I' indicates safety and proof of concept testing in a limited patient
population and toxicology testing in animal models. 'Phase II' indicates safety,
dosing and efficacy testing in a limited patient population. 'Phase III'
indicates safety, dosing and efficacy testing in a large patient population.
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DRUG DELIVERY PLATFORM: TAPET
TAPET is a drug delivery system that uses genetically altered strains
of Salmonella bacteria as a vehicle, or vector, for delivering cancer-fighting
drugs preferentially to solid tumors.
The origin of TAPET comes from the concept that malignant melanoma has
some striking similarities to normal white blood cells. Melanoma kills after
spreading throughout the body and forming solid black tumors, in a process known
as metastasis. Dr. David Bermudes, our director of microbiology, together with
Yale researchers Dr. Brooks Low, a microbiologist, and Dr. John Pawelek, a
cancer biologist, noting the similarities between melanoma and white blood
cells, conducted experiments to determine whether parasites that are specific
for white blood cells would be effective cancer-fighting agents. Through his
experience with infectious diseases, Dr. Bermudes knew that there were a number
of parasites that have evolved to attack white blood cells, especially ones
known as macrophages. Working in petri dishes, he was able to show that several
different parasites were able to infect human melanoma cells. Among these
parasites was the bacterium Salmonella.
The Salmonella bacteria that comprise TAPET organisms were chosen as
the vector because of their ability to preferentially target and infect tumors,
and to survive in both the oxygenated and low-oxygen environments found within
solid tumors. In preclinical studies, after injection into the body, TAPET
organisms migrated to and penetrated throughout tumors. The bacteria grew in the
tumor cells at ratios in excess of 1,000:1 compared to normal tissues and
multiplied throughout the entire tumor mass, thriving even within the necrotic,
or the deep, oxygen-starved cells where other anticancer drugs generally do not
reach. The increase in the quantity of the TAPET organisms improves their
ability to inhibit tumor growth and to enable the continuous delivery of
anticancer drugs to tumors. We believe that this growth occurs because the
organisms utilize components of DNA and proteins found in tumors and are
protected within the tumor from the body's immune system. We believe that
bringing a 'drug factory' preferentially to the tumor will result in a cancer
therapy that is more concentrated, more effective and less toxic to normal
tissue.
We have also genetically altered TAPET organisms to significantly
reduce the serious toxicities associated with septic shock from normal
Salmonella bacteria. As an additional safety measure, TAPET organisms are
designed to remain fully sensitive to antibiotic therapies. Therefore, if there
is an adverse reaction, the bacteria can be treated with antibiotics at any time
during therapy. Preclinical studies have demonstrated these safety measures to
be effective.
We are developing a portfolio of TAPET organisms as a platform to
deliver a variety of cancer-fighting drugs to tumors. Our scientists have
demonstrated in animals TAPET's potential therapeutic effects on melanoma and
colon, lung and breast cancer, all of which are solid tumors. If our TAPET
technology proves an effective platform to
<PAGE>
deliver anticancer drugs and inhibit the growth of tumors in humans, we intend
to use TAPET to deliver Vion-developed, anticancer drugs. Some of these drugs
will be generic and non-proprietary, however, when combined with the TAPET
system, they could result in proprietary products for us. In addition, we intend
to seek multiple strategic partnerships with pharmaceutical companies to use
TAPET to deliver their proprietary anticancer drugs.
In preclinical studies, the altered Salmonella bacteria were injected
into tumor-ridden mice. In these studies, administration of TAPET organisms
inhibited the growth of melanoma tumors by 94% compared with untreated control
animals. Additionally, the treated mice survived more than twice as long as
those that did not receive TAPET treatment. Toxicological studies in four animal
species suggest that TAPET can be administered safely at doses that exhibit
antitumor effects in animal models.
We received approval for an IND from the FDA and are now running Phase
I intratumoral safety studies in human patients using a TAPET organism that is
unarmed, or without an anticancer drug. On December 8, 1999, we announced that
VNP20009, our first generation TAPET(R) bacterial vector, was administered to
the first patients enrolled into Vion's Phase I intratumoral trial, which is
being conducted at The Cleveland Clinic Foundation. The patients were initially
monitored in the hospital and subsequently discharged. The Phase I safety trials
are being conducted at the Cleveland Clinic under the direction of Ronald M.
Bukowski, M.D. If successful, these safety studies will be followed by
additional Phase I studies using TAPET organisms delivered intravenously, as
well as an armed TAPET organism designed to manufacture and express an
anticancer drug.
ANTICANCER CELL THERAPEUTICS
PROMYCIN
Promycin is an anticancer cell therapeutic that targets oxygen-depleted
cells. Used in conjunction with radiation therapy, Promycin may improve the
treatment of solid tumors by killing the poorly oxygenated cells of tumors that
are not easily destroyed by radiation therapy alone. The intended market for
Promycin is lung, head and neck, cervical, colon, rectal and esophageal cancer.
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.
We believe that 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. Preclinical studies have shown that Promycin, in
conjunction with radiation, is effective in eradicating hypoxic cells. Although
we believe that one
<PAGE>
possible explanation for the failure of radiation therapy is the existence
within tumors of hypoxic cells, to date, there is no direct proof on humans of
this belief.
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, there was a 33% cancer-free survival rate at five years versus
the clinical expectation of approximately 15% for radiation therapy alone. Based
on these findings, we and Boehringer Ingelheim International GmbH of Ingelheim,
Germany are conducting a Phase III trial of Promycin in patients with head and
neck cancer at 42 centers worldwide. The trial is designed to determine the
efficacy of Promycin as an adjunct to radiation therapy for these conditions. We
have expanded our Phase III program to include additional sites in Europe and
the United States. We also plan to evaluate Promycin in other tumor types.
We have obtained an exclusive license from Yale for data from Yale's
research on Promycin and the clinical studies of Promycin conducted by Yale
scientists. We have received Orphan Drug status to use Promycin to treat head
and neck and cervical cancer. The FDA grants Orphan Drug status for rare
diseases or conditions, including many cancers. The sponsor of a drug that has
obtained Orphan Drug designation and is the first to obtain approval of a
marketing application for this drug is entitled to marketing exclusivity for a
period of seven years for the designated indication.
In November 1997, we entered into an exclusive worldwide licensing
agreement with Boehringer Ingelheim for the development and marketing of
Promycin. This agreement originally provided us with co-promotion rights to
Promycin in North America. Boehringer Ingelheim also had exclusive worldwide
rights to market and sell Promycin outside North America. In exchange for these
rights, Boehringer Ingelheim paid us up front licensing fees and was obligated
to pay development milestones and royalties on future sales of Promycin outside
North America. Additionally, in connection with the licensing agreement,
Boehringer Ingelheim made an equity investment in us at a premium to the then
current market price.
In December 1999 we restructured our agreement with Boehringer
Ingelheim to provide Boehringer Ingelheim with full managerial and financial
responsibility for the development of Promycin. In return for Boehringer
Ingelheim's assumption of these development costs and responsibilities, we will
receive a reduced level of milestone payments and a reduced royalty rate on
future sales of Promycin. Boehringer Ingelheim was also granted worldwide
marketing rights to Promycin.
TRIAPINE
Triapine is designed to prevent the replication of tumor cells by
blocking a critical step in the synthesis of DNA. If DNA is not synthesized,
cells cannot replicate. Triapine has shown significant broad-spectrum activity
in a variety of preclinical models involving
<PAGE>
human and mouse tumors. We plan to develop Triapine as a potential treatment for
cancers such as lung, breast, colorectal, melanoma and chronic myelogenous
leukemia.
In preclinical trials, Triapine exhibited significant in vitro and in
vivo activity against human ovarian cancer grafted onto another species and in
mouse tumors for leukemia and lung cancer. We have rights, either by license
and/or assignment under a patent with claims to compositions of matter and use
of prodrug forms of Triapine as well as under a patent for a process covering
the synthesis of the compounds.
In 1998, we began Phase I human clinical testing with Triapine,
investigating its use against solid tumors. We are conducting these studies at
the University of Miami Hospital and the Arizona Clinical Research Center. We
recently announced we have completed a Phase I single dose study of Triapine(R).
The Phase I study was designed to assess Triapine's safety profile and
pharmacokinetics when administered intravenously as a two-hour infusion every
four weeks. Patients were treated on nine dose levels of Triapine and tolerated
the treatment well. Furthermore, at the highest dose level, there were no
clinically significant toxicities, and peak serum levels of Triapine exceeded
the concentrations required to show activity against tumor cells, as
demonstrated in preclinical studies. We expect to enroll patients into a second
Phase I trial of Triapine administered daily for five days every four weeks and
will initiate a Phase I study of 96-hour continuous intravenous infusion in the
near future. In addition, we are developing a water soluble prodrug version of
Triapine with a therapeutic half-life that is four-to-six times longer than
Triapine itself. This prodrug would enable the development of injectable and
oral dosage forms.
SULFONYL HYDRAZINE PRODRUGS
Sulfonyl hydrazine prodrugs represent compounds that are designed to be
converted to unique, potent alkylating agents. Alkylating agents, as a class,
are reactive chemicals that are highly effective against tumors and are used to
treat a variety of cancers. The interaction of alkylating agents with DNA
prevents the division of the cells. These drugs, however, lack selectivity and
affect many normal tissues as well as cancer cells, causing toxic side effects.
Sulfonyl hydrazine alkylating agents can be converted to prodrug forms, thereby
blocking the reactivity of these compounds, decreasing their toxicity and
allowing them to be delivered preferentially to tumor cells for conversion into
powerful cancer-fighting drugs. We are working closely with scientists at Yale
to develop prodrug formulations of the sulfonyl hydrazine class. We are also
investigating approaches that combine these potent cytotoxins with our TAPET
technology. A cytotoxin is any substance that poisons living cells.
We have licensed several classes of sulfonyl hydrazine prodrugs from
Yale, including various prodrugs that are the subject of nine issued patents.
Each of these alkylating agent prodrugs may target a unique property of a cancer
cell, thereby destroying it. We are in the process of evaluating several lead
candidates for development. We intend to extend our preclinical studies, which
will
<PAGE>
include analytical studies, formulation and toxicological evaluation, and, if
successful, we intend to file an IND.
LICENSED PRODUCT AND PRODUCT CANDIDATES
MELASYN'r'
MELASYN is a synthetic form of melanin that dissolves readily in water.
Melanin is a pigment formed by cells in the skin that gives skin its color and
protects it from sun damage by absorbing ultraviolet rays. We believe that
MELASYN is the first water-soluble, synthetic version of melanin, making it a
novel and useful ingredient for formulation of skin care products and cosmetics.
The simplicity of its manufacture allows MELASYN to be produced in commercial
quantities at low cost. In addition, MELASYN blends in and conforms to a
person's own skin tone without the orange color associated with most
commercially available self-tanning products.
In February 1998, we entered into an exclusive worldwide agreement for
a term of three years to license our MELASYN technology to San-Mar Laboratories,
a leading manufacturer of private label cosmetics and pharmaceuticals. Under the
terms of this agreement, we granted an exclusive worldwide license to San-Mar
for the manufacture and sale of products containing MELASYN. We 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.
We have also funded research projects relating to compounds to control
pigmentation and chemotherapeutic products for treating melanoma. To date, such
research has not provided any product candidates that we presently plan to
pursue.
NOVEL NUCLEOSIDE ANALOGS
We have licensed the development of a nucleoside analog, or synthetic
molecule, known as (beta)-L-Fd4C. (beta)-L-Fd4C is an anti-viral drug capable of
inhibiting the replication of the hepatitis B virus, or HBV, that has produced
preclinical results superior to those of competing anti-viral drugs. We expect
(beta)-L-Fd4C to last longer and require a less frequent dosage than the current
treatment, 3TC. HBV is a causative agent of both acute and chronic forms of
hepatitis that affects about 300 million people worldwide. HBV also predisposes
its victims to the development of liver cancer.
In October 1996, the U.S. Patent and Trademark Office issued a patent
to Yale covering the composition of matter and method of use of (beta)-L-Fd4C
for treating HBV, and Yale has licensed to us exclusive worldwide rights to the
patent including the use of (beta)-L-Fd4C for the treatment of HBV and AIDS. In
February 2000 we announced that we signed a licensing agreement for
(beta)-L-Fd4C with Achillion Pharmaceuticals, a privately held biopharmaceutical
company located in New Haven, that recently completed a financing and is
commencing operations to develop and commercialize innovative antiviral
therapies. Under the terms of the license agreement,
<PAGE>
Achillion will fund the development of (beta)-L-Fd4C, which it intends to
develop as one of its key product candidates. In return, we will receive
potential milestone payments, downstream royalties and a small equity position
in Achillion.
SPONSORED RESEARCH AND LICENSE AGREEMENTS
Yale/OncoRx Agreement. Under a license agreement with Yale, referred to
as the Yale/OncoRx Agreement, Yale granted us an exclusive, non-transferable,
worldwide license to make, have made, use, sell and practice various 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
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.
This agreement also provides that if Yale, as a result of its own research,
identifies potential commercial opportunities for the inventions and research,
Yale will give us a first option to negotiate a commercial license for such
commercial opportunities. Pursuant to this agreement, we issued to Yale 159,304
shares of our common stock, granted registration rights to Yale with respect to
these shares 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 June 1997, we amended this license
agreement as well as another license agreement to reduce certain amounts payable
by us under such agreements. In consideration for the reduction, we issued to
Yale an additional 150,000 shares of our common stock. We have agreed with Yale
that we 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 our rights in other products. In addition, Yale, at its
sole option, can terminate any sublicenses that we grant.
Subsequent to entering into the Yale/OncoRx Agreement, we paid
approximately $6.0 million to fund certain research at Yale, including research
in the laboratory of Dr. Yung-Chi Cheng, a member of our scientific advisory
board, and of Dr. Sartorelli, one of our directors. Yale has sole discretion to
use these funds to conduct research relating to products that it desires to
pursue. Additionally, to the extent that such research results in technologies
not covered by the Yale/OncoRx Agreement, we may be unable to utilize such
technologies unless we negotiate additional license agreements.
Yale/MelaRx Agreement. Under a research agreement with Yale, referred
to as the Yale/MelaRx Agreement, Yale has agreed to perform a research program
under the supervision of Dr. John W. 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 our TAPET
program, Dr. Pawelek is conducting certain research regarding the use of a
bacterial vector in connection with genetic therapy for melanoma. We have 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. We entered
into an additional license agreement with Yale in
<PAGE>
December 1995, under which we received a non-transferable worldwide exclusive
license to three inventions relating to gene therapy for melanoma. Under this
agreement, we paid Yale $100,000 and have 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 term of the Yale/MelaRx Agreement ends June 30,
2001, subject to earlier termination by us if Dr. Pawelek is no longer the
principal investigator.
Under the Yale/MelaRx Agreement, we and Yale have entered into five
license agreements that grant us exclusive licenses to make, use, sell and
practice the inventions covered by various patents. Each such license agreement
requires us to pay to Yale royalties based on a percentage of net sales of the
products covered and sub-licensing income. In addition, four of the five
licenses provide that they are terminable in the event we do 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 us.
We compete 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 our competitors
have substantially greater financial, technical and human resources than we have
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 us in recruiting and retaining highly
qualified scientific personnel and consultants.
The timing of market introduction of our potential products or of
competitors' products will be an important competitive factor. Accordingly, the
relative speed with which we can develop products, complete preclinical testing,
clinical trials and regulatory approval processes and supply commercial
quantities to market will influence our ability to bring a product to market. In
addition, we may apply for Orphan Drug designation by the FDA for our proposed
products. To the extent that a competitor of ours develops and receives Orphan
Drug designation and marketing approval for a drug to treat the same indication
prior to us, we may be precluded from marketing our product for a period of
seven years.
<PAGE>
PATENTS, LICENSES AND TRADE SECRETS
Our policy is to protect our technology by, among other means, filing
patent applications for technology that we consider important to the development
of our business. We intend to file additional patent applications, when
appropriate, relating to new developments or improvements in our technology and
other specific products that we develop. We also rely on trade secrets and
improvements, unpatented know-how and continuing technological innovation to
develop and maintain our competitive position.
Pursuant to the Yale/MelaRx Agreement, we are the exclusive licensee of
a number of pending patent applications relating to our TAPET platform
technology which include claims for methods of diagnosing and/or treating
various solid tumor cancers, including, but not limited to, melanoma, lung
cancer, breast cancer and colon cancer. We also have rights, either by license
and/or by assignment, to pending patent applications, U.S. and foreign, relating
to our TAPET platform technology. In addition, we have filed six provisional
patent applications related to this technology. One of the applications is
co-owned with Yale, another with Memorial Sloan Kettering Cancer Center and the
remaining four are exclusively owned by us. We are also the exclusive licensee
of issued U.S. 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 these U.S. patents and patent
applications, however, only one issued patent is relevant to our MELASYN
products. Patent applications relevant to the MELASYN products are pending in
foreign countries.
In connection with a collaboration with Memorial Sloan Kettering Cancer
Center, we have filed a provisional patent application relating to non-invasive
methods to detect solid tumors in vivo using attenuated tumor-targeted bacteria.
In connection with the Yale/OncoRx Agreement, we are the exclusive
licensee of nine issued patents relating to our sulfonyl hydrazine prodrug
technology, including patents relating to treatment of trypanosomiasis and
cancer and for controlling neoplastic cell growth. We are also the exclusive
licensee of a number of issued and pending U.S. and foreign patent applications
relating to:
o (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 drugs;
o the use of 3TC or mixtures containing 3TC for the treatment of HBV
infection;
o Triapine and other ribonucleotide reductase inhibitors.
We are aware that BioChem Pharma has been granted an issued U.S. patent
with claims to methods of use of a compound or a group of compounds, including
3TC, for treating HBV. We believe that the BioChem Pharma patent (as well as
other BioChem Pharma patent applications and/or patents) is licensed to Glaxo
Group. Under the Yale/OncoRx agreement, we have rights in a patent application
with claims directed to methods for the use of 3TC or a mixture containing 3TC
for treating HBV. In November 1997, we requested that the U.S. Patent and
Trademark Office declare an Interference
<PAGE>
between the BioChem patent and the Vion patent application. An Interference is a
legal proceeding held when more than one patent application or at least one
patent application and one or more patents, owned by different parties, contain
claims to the same subject matter. An Interference proceeding determines which
one of the parties is entitled to a patent containing claims to the common
subject matter. In November 1999 we obtained a ruling from the United States
Patent and Trademark Office, Board of Patent Appeals and Interferences, granting
our request for an Interference between the Vion-licensed patent application
from Yale University and United States patent No. 5,532,246 assigned to BioChem
Pharma, Inc. The Patent Office has designated us as the senior party of the
Interference and BioChem Pharma as the junior party. As the junior party,
BioChem Pharma bears the burden of proof. Both we and BioChem Pharma, however,
have an opportunity to argue our positions during the Interference proceeding.
Depending upon the length of an Interference proceeding, which could be reduced
by a mutually agreed upon settlement, its cost to each party could be
substantial. Determinations in Interference proceedings are subject to appeal in
the appropriate United States federal courts.
The BioChem Pharma patent has a filing date earlier than that of the
Vion patent application. If an Interference is declared between the BioChem
Pharma patent and the Vion patent application, however, we believe that we may
be able to prove that we are entitled to priority of invention for claims to a
method of use of 3TC and/or a mixture containing 3TC for treating HBV. However,
there can be no guarantee that we will prevail and there is a substantial risk
that we will not be able to prove priority and obtain a patent.
Further, even if we were to prevail in the Interference and were to
obtain a patent with claims directed to the method of use of 3TC or a mixture
containing 3TC for treating HBV, we would only have the right to go to court to
exclude any third party, for example, BioChem Pharma, from using 3TC or a
mixture containing 3TC in a method for treating HBV. It is possible, if we were
to prevail in the Interference, other parties such as BioChem Pharma might be
willing to take a license for the right to use 3TC in a method for treating HBV.
There can be no guarantee that we would be successful in licensing such rights
at acceptable terms.
It should be noted that even if we were to prevail in the Interference,
we would not have any right to make, use, sell or import 3TC in the United
States based on any patent we could obtain by prevailing in the Interference.
In addition, we are aware that third parties, including BioChem Pharma,
Glaxo Group and Emory University have filed patent applications, some of which
have issued relating to 3TC, mixtures containing 3TC, and methods of preparation
and use of 3TC or mixtures containing 3TC as an anti-viral drug. In fact, we are
aware that both BioChem Pharma and Emory have been granted patents that have
claims directed to 3TC, itself, or a group of compounds including 3TC.
Accordingly, even if we had rights to an issued patent with claims to a method
of use of 3TC to treat HBV, we would not be able to make, use and sell or import
3TC in the United States unless we obtained a license from
<PAGE>
one or more third parties. There can be no guarantee that we could obtain such a
license or that if available, the license would be on acceptable terms.
We have received correspondence from F. C. Gaskin, Inc. alleging that
we may be infringing certain of their patents relating to melanin-containing
compositions and their use. We believe this assertion has no merit.
We or our licensors are prosecuting the patent applications related to
products we license both with the U.S. Patent and Trademark Office and various
foreign patent agencies, but we do not know whether any of our applications will
result in the issuance of any patents or, 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 for,
among other things, utility, novelty, nonobviousness and enablement. The U.S.
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 attempt to provoke
an interference proceeding in the U.S. Patent and Trademark Office or such a
proceeding may otherwise be declared by the U.S. Patent and Trademark Office. In
general, in an interference proceeding, the U.S. Patent and Trademark Office
reviews 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.
We cannot predict whether our or our competitors' patent applications
will result in valid patents being issued. An issued patent is entitled to a
presumption of validity. The presumption may be challenged in litigation; a
court could find any patent of ours or our competitors invalid and/or
unenforceable. Litigation, which could result in substantial cost to us, may
also be necessary to enforce our patent and proprietary rights and/or to
determine the scope and validity of others proprietary rights. We 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. Interference and/or litigation proceedings could result in
substantial cost to us.
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.
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
<PAGE>
our products and in our ongoing research and product development activities. All
of our 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 FDC Act and the Public Health Service 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. We cannot be certain 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, or cell culture, and in vivo, or 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 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 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 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:
o provide enough data for statistical proof of safety and efficacy;
o compare the experimental therapy to existing therapies;
o uncover any unexpected safety problems, such as side-effects; and
o 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.
<PAGE>
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, or NDA, for drugs, or a
product license application, or 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. It may take several years to obtain approval after
submission of an NDA or PLA, although approval is not assured. The FDA also
normally conducts a pre-approval inspection and other occasional inspections of
an applicant's facilities to ensure 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 any of our products is approved for marketing,
we will be subject to stringent post-marketing requirements.
We 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 before marketing 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. We intend, to the
extent possible, to rely on foreign licensees to obtain regulatory approval to
market our 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 United States. 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 that could significantly affect the
Orphan Drug law. We received Orphan Drug designation for Promycin in September
1995 to treat head and neck cancer and in May 1997 received FDA approval of our
request for Orphan Drug status for the use of Promycin to treat cervical cancer.
We intend 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 us.
<PAGE>
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 the foregoing, approval may be denied by the
FDA or traditional Phase III studies may be required. The FDA may also seek our
agreement to perform post-approval Phase IV studies, which confirm product
safety and efficacy.
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 drugs 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.
Environmental Matters. We are subject to environmental laws, including
those promulgated by OSHA, the EPA and the NRC, that govern activities or
operations that may have adverse environmental effects, such as discharges to
air and water, as well as handling and disposal practices for solid and
hazardous wastes. These laws also impose strict liability for the costs of
cleaning up, and for damages resulting from, sites of past spills, disposals or
other releases of hazardous substances and materials for the investigation and
remediation of environmental contamination at properties operated by us and at
off-site locations where we have arranged for the disposal of hazardous
substances. If it is determined that we are not in compliance with current
environmental laws, we could be subject to fines and penalties. The amount of
any such fines and penalties could be material.
Our facilities have made, and will continue to make, expenditures to
comply with current and future environmental laws. We anticipate that we could
incur additional capital and operating costs in the future to comply with
existing environmental laws and new requirements arising from new or amended
statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, we cannot at this time reasonably estimate the cost for
compliance with these additional requirements. The amount of any such
<PAGE>
compliance costs could be material. We cannot predict the impact that future
regulations will impose upon our business.
EMPLOYEES
As of December 31, 1999, we had 45 full-time employees, including 32
scientists and technicians. We plan to hire 8 additional employees over the next
12 months to support continuing progress in both research and development. Our
employees are not covered by any collective bargaining agreement. Additionally,
we had seven scientific consultants on a part-time basis.
ITEM 2. PROPERTIES
Our principal facility consists of approximately 19,000 square feet of
leased laboratory and office space in New Haven, Connecticut at an annual rental
of approximately $230,000. The lease expires in May 2001, with a right to renew
for an additional five years.
ITEM 3. LEGAL PROCEEDINGS
On August 10, 1999, Swartz Investments, L.L.C. filed a lawsuit against
us in the state court in Fulton County, Georgia, alleging non-payment of a
placement agent fee and seeking payment of such fee in the amount of $100,000,
consequential damages and interest. We believe that the allegations made in the
complaint are without merit and intend to defend them vigorously. We do not
believe that any ultimate liability arising out of this action, even a
determination that we are liable for the full amount sought, will have a
material adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the
fourth quarter of fiscal year 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION FOR COMMON STOCK
<PAGE>
Our common stock has traded on The Nasdaq Stock MarketSM since October
25, 1999 and traded on The Nasdaq SmallCap MarketSM from April 29, 1996 until
October 25, 1999, under the symbol VION. 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 closing sales prices of
the our common stock for each of the calendar quarters in 1998 and 1999. This
information is based on closing sales prices as reported by The Nasdaq Stock
MarketSM.
1998 1999
-----------------------------------------------
HIGH LOW HIGH LOW
----- ----- ----- -----
First Quarter 4.000 2.938 7.250 4.438
Second Quarter 5.375 3.406 6.938 4.500
Third Quarter 4.266 3.000 6.000 4.063
Fourth Quarter 5.000 2.125 6.938 4.469
RECENT SALES OF UNREGISTERED SECURITIES
The Company made no sales of unregistered securities during the fourth
quarter of the fiscal year ended December 31, 1999.
HOLDERS
At March 16, 1999 there were approximately 328 holders of record of the
Company's Common Stock.
DIVIDENDS
We have never paid any cash dividends on our shares. We currently
intend to retain all earnings for use in our business and do not anticipate
paying cash dividends in the foreseeable future. Additionally, we cannot pay
cash dividends on our common stock without the consent of a majority of holders
of the Class A Preferred Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a development stage biopharmaceutical company. Our activities to
date have consisted primarily of research and product development sponsored by
us pursuant to license agreements with Yale University, negotiating and
obtaining other collaborative agreements, recruiting management and other
personnel, securing our facilities and raising capital through equity and debt
financings. Our revenues consist of research grants, technology license fees and
reimbursements for research expenses. We have
<PAGE>
generated minimal revenues and have incurred substantial operating losses from
our activities.
Our plan of operations for the next 18 months includes the following
elements:
o Continue to conduct internal research and development with respect to
our core technologies and other product candidates that we may
identify;
o Conduct Phase I clinical studies of Triapine in the United States for
safety and efficacy;
o File IND(s) with the FDA and conduct Phase I clinical studies in the
United States and Europe for the safety and selective tumor
accumulation of several bacterial constructs using our TAPET delivery
system, and other trials depending on the results of Phase I;
o Continue to support research and development being performed at Yale
University and by other collaborators; and
o Continue to seek collaborative partnerships, joint ventures,
co-promotional agreements or other arrangements with third parties.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Revenues. Our fiscal 1999 revenues increased approximately 61% to $3.15
million from $1.96 million for the year ended December 31, 1998, down from the
$5.3 million recorded for the year ended December 31, 1997. The increase in 1999
was due to higher reimbursed development costs under our collaboration agreement
with Boehringer Ingelheim ("BI") totaling $2.6 million for the year ended
December 31, 1999. 1997 revenues outpaced 1998 and 1999 due to a $4.0 million up
front technology license fee from BI. The amount of these reimbursements and
fees can be expected to decrease significantly in 2000 based on new contractual
arrangements with BI in which BI assumed all development costs for the drug
Promycin, while continuing to pay us for certain laboratory support services. In
1999, we recorded $35,000 in laboratory support service revenue under these new
arrangements for the first time. In addition, reimbursements of expenses from
Small Business Innovation Research grants on TAPET and Triapine increased to
$335,767 in 1999, compared to $308,787 in 1998 and $48,221 in 1997.
Research and Development. Research and development expenses increased
approximately 6% to $11.5 million for the year ended December 31, 1999 as
compared to the same period in 1998. Research and development expenses increased
40% to $10.7 million in 1998 compared to $7.7 million in 1997. These increases
primarily reflect expenses related to patient accumulation for the Promycin head
and neck Phase III trial,
<PAGE>
patient accumulation for the Triapine Phase I clinical trial and expenses of
TAPET preclinical development. Research and development costs represented 81%,
83% and 74% of total operating expenses for the years ended December 31, 1999,
1998 and 1997, respectively.
General and Administrative. General and administrative expenses
increased 22% to $2.7 million in 1999 from $2.2 million in 1998 after decreasing
17% in 1998 from $2.6 million in 1997. The 1999 increase was primarily due to
management changes and increased legal and patent fees. General and
administrative expenses decreased in 1998 compared to 1997 because expenses in
1997 include investment banking expenses incurred in closing the collaboration
agreement with BI. In July 1997, we amended certain licensing agreements with
Yale University pursuant to which Yale agreed to reduce certain amounts payable
under such agreements. As a result, in 1997 we issued additional shares of
common stock to Yale and recorded a one time charge of $600,000.
Interest Income and Expense. Interest income on invested funds
decreased 44% to $301,382 in 1999 from $540,240 in 1998. Interest income in 1998
increased 57% compared to $343,911 in 1997. These changes reflect the level of
invested funds during each period. Interest expense decreased 44% to $34,603 in
1999 compared to $61,553 in 1998. The interest expense for 1998 was 41% greater
than 1997 interest expense of $43,666.
Preferred Dividends and Accretion. Preferred stock dividends and
accretion decreased from $4,414,050 for the year ended December 31, 1998 to
$709,781 for 1999. The amounts included primarily represent our recording of
non-cash dividends related to the issuance of our Series 1998 Redeemable
Convertible Preferred Stock in 1998. The amounts for 1998 also include
additional dividend requirements equal to 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 of the Class B Convertible
Preferred Stock. Since the Class B Convertible Preferred Stock was entirely
converted into common stock in August 1998, none of the dividend requirements
relating to the conversion affect 1999. Additionally, the annual accretion of
dividends related to the issuance of the Series 1998 Redeemable Convertible
Preferred Stock is included in the amounts described above. Loss applicable to
common shareholders decreased from $14,891,719 in 1998 to $11,478,705 in 1999 as
a result of the net loss and the effects of the preferred dividends and
accretion.
In comparison, preferred dividends and accretion for 1997 include
smaller non-cash charges based on the difference between the quoted market price
of our common stock as of the date of issuance of preferred dividends on our
Class A preferred stock and its conversion price, and a smaller non-cash charge
for the difference between the conversion price of our Class B preferred stock
and the quoted market price of our common stock when the Class B preferred stock
was issued in August 1997. The 1997 loss applicable to common shareholders of
$6,475,334 was less than 1998 as a result of the net loss and the effects of the
preferred dividends and accretion.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had working capital of $9,911,176. In April
1999, we consummated a private placement of our common stock. Pursuant to the
private placement, we issued 893,915 shares of common stock at a price of
approximately $4.47 per share, for aggregate proceeds of approximately
$4,000,000. In October 1999, we completed a public offering of 2.2 million
shares of newly issued common stock priced at $5.00 per share. In addition, we
granted the underwriters a 30-day option to purchase up to 330,000 additional
shares to cover over-allotments, which was exercised in full. Aggregate gross
proceeds from this public offering thus totaled $12,650,000.
During the 12 months ending December 31, 2000, we will be required to
make payments of an aggregate of $852,000 to Yale University under sponsored
research and license agreements. In addition, in the second quarter of 2000 we
anticipate fulfilling the final $200,000 installment of an unrestricted grant to
Yale to fund additional research.
On February 11, 2000, we notified registered holders of our outstanding
Class A Warrants of our intention to redeem their warrants on March 13, 2000.
Our Class A Warrants entitled the holder to purchase one share of Common Stock
and one Class B Warrant for an exercise price of $4.63. There were approximately
1.08 million Class A Warrants outstanding at December 31, 1999. During January
and February 2000, approximately 140,000 additional Class A warrants were issued
in connection with the exercise of Unit Purchase Options. By the time the right
of Class A warrant holders to exercise their warrants to purchase shares of Vion
common stock and Class B warrants terminated on March 10, 2000, we had received
net proceeds of $5.3 million from the exercise of 1.2 million Class A warrants,
which includes exercises of approximately 56,000 outstanding Class A warrants
prior to the redemption period. We also received approximately $650,000 from the
exercise of Unit Purchase Options originally granted to underwriters in
connection with our initial public offering in 1995.
On March 27, 2000, we notified registered holders of our outstanding
Class B warrants of our intention to redeem their warrants on April 27, 2000.
Our Class B warrants entitle the holder to purchase, at an exercise price of
$6.23, one share of common stock. From January 1 through March 13, 2000, the day
we redeemed the Class A warrants the Company received net proceeds of
approximately $3.7 million from the exercise of approximately 600,000 of the
Class B Warrants. If all of the remaining 2.1 million Class B warrants are
exercised before they can be redeemed, we will receive additional funding of
approximately $12 million.
At our present budgeted level of spending, we anticipate that our
existing available capital resources and interest earned on available cash and
short-term investments, together with the net proceeds of the exercise of our
warrants, will be sufficient to fund our operating expenses and capital
requirements through the first quarter of 2001, excluding any cash from exercise
of the Class B warrants.
<PAGE>
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 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.
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years in the period
ended December 31, 1999, and for the period from May 1, 1994 (inception) through
December 31, 1999 are derived from our audited financial statements. The
selected financial data should be read in conjunction with the financial
statements, related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE><CAPTION>
FOR THE PERIOD
FROM MAY 1, 1994
(INCEPTION)
THROUGH DECEMBER
1999 1998 1997 1996 1995 31, 1999
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Total revenues ............................ $ 3,154 $ 1,956 $ 5,271 $ 52 $ -- $ 10,433
Total operating expenses .................. 14,190 12,912 10,914 8,088 9,570 56,151
Loss from operations ...................... (11,036) (10,956) (5,643) (8,036) (9,570) (45,718)
Net loss .................................. (10,770) (10,478) (5,343) (7,609) (9,531) (44,205)
Preferred dividends and accretion ......... (710) (4,414) (1,132) (11,627) -- (17,883)
------------ ------------ ------------ ------------ ------------ ------------
Loss applicable to common shareholders .... $ (11,480) $ (14,892) $ (6,475) $ (19,236) $ (9,531) $ (62,088)
============ ============ ============ ============ ============ ============
Basic and diluted loss applicable to common
shareholders per share ................. $ (0.74) $ (1.24) $ (0.75) $ (2.52) $ (1.59)
Weighted average number of shares of common
stock outstanding ...................... 15,543,701 11,977,121 8,670,717 7,641,546 6,007,154
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 11,105 $ 3,821 $ 3,891 $ 3,788 $ 2,351
Working capital ........................... 9,911 5,045 10,678 7,938 4,337
Total assets .............................. 13,934 9,269 13,580 9,881 5,464
Redeemable preferred stock ................ 5,179 4,854 -- -- --
Total shareholders' equity ................ 5,853 1,504 11,959 9,072 4,963
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE><CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Alan Kessman 53 President, Chief Executive Officer and Director
Terrence W. Doyle, Ph.D. 57 Vice President, Research & Development
Thomas E. Klein 50 Vice President, Finance and Chief Financial Officer
Thomas Mizelle 48 Vice President, Operations and Secretary
Bijan Almassian, Ph.D 46 Vice President, Development
Ivan King, Ph.D 44 Vice President, Biology
Mario Sznol, M.D 42 Vice President, Clinical Affairs
William R. Miller(1) 71 Chairman of the Board
Michel C. Bergerac(1) 68 Director
Frank T. Cary(1)(2) 79 Director
James L. Ferguson(2) 74 Director
Alan C. Sartorelli, Ph.D. 68 Director
Walter B. Wriston(2) 80 Director
</TABLE>
- ----------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
ALAN KESSMAN has been our Chief Executive Officer since January 1999,
our President since April 1999 and has been a director 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. Mr. Kessman is a
partner of PS Capital, LLC, an investment company and a director of Fastnet
Corporation, an internet service provider.
TERRENCE W. DOYLE, PH.D. has been our Vice President, 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 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 drugs and the
author of over 100 published research articles and abstracts on cancer
chemotherapy.
<PAGE>
THOMAS E. KLEIN has been our 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 has been our Vice President, Operations since the merger
with OncoRx and has been our Secretary since October 1995. Prior to the merger,
Mr. Mizelle was Vice President, Business Development since August 1994. From May
1990 to July 1994, Mr. Mizelle served as Senior Vice President, Vice President,
Sales and Marketing and Director of Sales of Immunex Corporation.
BIJAN ALMASSIAN, PH.D. has been our Vice President, Development since
March 1997 and was named an executive officer in July 1999. From September 1995
to March 1997, Dr. Almassian was our Director of Development. From 1994 to 1995,
Dr. Almassian was the Director of Pharmaceutical development at Genelabs
Technologies, where he was responsible for product development of several
anticancer and antiviral drugs and biologics. Before joining Genelabs, he held
several scientific positions at Genzyme/Integrated Genetics, Instrumentation
Laboratories and Orion Research.
IVAN KING, PH.D. has been our Vice President, Biology since September
1995 and became an executive officer in July 1999. From 1990 to 1995, Dr. King
was a Section Leader in the Department of Tumor Biology at Schering-Plough
Research Institute in charge of the Cell Biology and In Vivo Biology groups
where he was responsible for identifying targets, developing high throughput
assays, evaluating in vitro and in vivo activities of drug candidates and
recommending candidates for clinical development. Dr. King's first industrial
position was as a Senior Research Scientist at Bristol-Myers Squibb.
MARIO SZNOL, M.D. has been our Vice President, Clinical Affairs since
September 1999 and became an executive officer in November 1999. From 1987 to
1999, Dr. Sznol worked for the National Cancer Institute, or NCI, a component of
the National Institutes of Health. Most recently he was Head of the Biologics
Evaluation Section, Investigational Drug Branch, Cancer Therapy Evaluation
Program. From March 1997 to October 1998, he served as acting Chief of NCI's
Investigational Drug Branch, Cancer Therapy Evaluation Program. Prior to joining
the NCI, Dr. Sznol conducted his fellowship in Medical Oncology, Department of
Neoplastic Diseases, at Mt. Sinai School of Medicine, and his residency in
Internal Medicine at Baylor College of Medicine in Houston. Dr. Sznol is on the
editorial advisory boards of both the Journal of the National Cancer Institute
and the Journal of Immunotherapy.
WILLIAM R. MILLER has been Chairman of our Board since April 1995. From
February 1995 until April 1995, Mr. Miller was Chairman of the Board of OncoRx
Inc., which was merged into our subsidiary (then known as MelaRx
Pharmaceuticals, Inc.) in April 1995. Mr. Miller is currently a director of
ImClone Systems, Inc., Isis Pharmaceuticals, Inc., Transkaryotic Therapies,
Inc., and Westvaco Corporation. From
<PAGE>
1964 until 1991, Mr. Miller was employed by Bristol-Myers Squibb Company,
including as Vice Chairman of the Board commencing in 1985.
MICHEL C. BERGERAC has been a director since 1992. Mr. Bergerac has
been Chairman of M.C. Bergerac & Co., Inc., an investment advisory firm, since
1985 and is a director of Tiedeman Capital. From 1974 to 1985, Mr. Bergerac was
Chairman of the Board, President and Chief Executive Officer of Revlon, Inc.
FRANK T. CARY has been a director since 1995. Mr. Cary is a director of
Celgene Corporation, Cygnus, Inc. , ICOS Corporation, Lincare, Inc., Lexmark
International Group, Inc. and Teltrend, Inc. From 1973 to 1981, Mr. Cary was
Chairman of the Board and Chief Executive Officer of IBM.
JAMES L. FERGUSON has been a director since 1995. Mr. Ferguson is a
director of ICOS Corporation. Mr. Ferguson was Chairman of the Board of General
Foods Corporation from 1974 until 1989 and President from 1973 to 1977.
ALAN C. SARTORELLI, PH.D. has been a director since 1995. Dr.
Sartorelli has been a professor of pharmacology at Yale University School of
Medicine since 1967 and Chairman of our Scientific Advisory Board since April
1995. Dr. Sartorelli was chairman of the OncoRx Scientific Advisory Board from
May 1993 to April 1995 and director of Yale Comprehensive Cancer Center from
1984 to 1993.
WALTER B. WRISTON has been a director since 1995. Mr. Wriston is a
director of ICOS Corporation, York International Corporation and Cygnus, Inc.
Mr. Wriston 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.
Our directors are elected annually to serve until the next annual
meeting of stockholders and until their successors shall have been duly elected
and shall qualify. Our executive officers are elected by the board annually and
serve for such period or until their earlier resignation or removal by the
board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our
executive officers and directors, and persons who beneficially own more than ten
percent of our 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 us with copies of all Section 16(a) forms they file.
Based upon a review of the copies of forms furnished to us and written
representations from our executive officers and directors, we believe that
during fiscal 1999 all Section 16(a) filing requirements applicable to our
executive officers, directors
<PAGE>
and greater than ten percent beneficial owners were complied with, except that
Dr. Almassian and Dr. King, who were elected officers in 1999, failed to file
Form 3 on a timely basis.
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 former chief executive officer and each of the four other
highest paid executive officers who earned over $100,000 and were serving at the
end of 1999, for services in all capacities to the Company, its subsidiaries and
predecessors.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE><CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- -------------------------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION SARS (#) COMPENSATION ($)
- --------------------------- ---- ---------- --------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Alan Kessman - President and Chief 1999 $391,393(2) $152,000 (3) 980,000 $1,773(4)
Executive Officer(1) 1998 $0 $0 (3) 20,000 $-------
1997 $0 $0 (3) ------ $-------
Terrence W. Doyle - Vice President- 1999 $191,100 $43,628 (3) 45,000 $-------
Research and Development 1998 $183,750 $27,563 (3) 9,600 $-------
1997 $174,549 $38,000 (3) ------ $-------
Thomas E. Klein - Vice President 1999 $163,800 $26,159 (3) 20,000 $-------
Finance and Chief Financial Officer 1998 $157,500 $23,625 (3) 9,600 $-------
1997 $148,486 $33,000 (3) ------ $-------
Thomas Mizelle - Vice President- 1999 $191,100 $41,206 (3) 20,000 $-------
Operations and Secretary 1998 $183,750 $27,563 (3) 9,600 $-------
1997 $173,362 $38,000 (3) ------ $-------
Bijan Almassian - Vice President - 1999 $160,760 $30,896 (3) 12,500 $-------
Development 1998 $153,400 $23,010 (3) 12,500 $-------
1997 $140,000 $21,750 (3) 25,000 $-------
Ivan King - Vice President - 1999 $152,250 $30,165 (3) 31,300 $-------
Research 1998 $137,500 $21,750 (3) 11,000 $-------
1997 $121,475 $16,600 (3) 12,500 $-------
John A. Spears -Former President 1999 $ 85,540 $0 (3) 0 $178,894(6)
and Chief Executive Officer (5) 1998 $246,750 $37,013 (3) 12,000 $-------
1997 $234,557 $61,000 (3) ------ $-------
</TABLE>
- -------------------------------
(1) We are a party to an employment agreement with Mr. Kessman. See
"-Employment Agreements." Mr. Kessman became our Chief Executive Officer in
January 1999 and became our President in April 1999.
(2) Includes $324,726 paid pursuant to our January 1999 employment agreement
with Mr, Kessman to PS Capital, LLC, an entity of which Mr. Kessman is a
member. See "-Employment Agreements."
(3) Aggregate amount of such compensation is less than the lesser of $50,000 or
10% of the total salary and bonus reported for the indicated person.
(4) Consists of life insurance payments of $878 and disability insurance
payments of $895.
(5) We were a party to an employment agreement with Mr. Spears. See
"-Employment Agreements." Mr. Spears was our Chief Executive Officer until
January 1999 and our President until April 1999.
(6) Consists of severance paid to Mr. Spears.
<PAGE>
The following table sets forth the grant of stock options made during
the year ended December 31, 1999 to the persons named in the Summary
Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE><CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED
UNDERLYING TO EMPLOYEES IN EXERCISE
NAME OPTIONS GRANTED FISCAL PERIOD(1) PRICE EXPIRATION DATE
- ---- --------------- ----------------- -------- ---------------
<S> <C> <C> <C> <C>
Alan Kessman ........ 700,000 48.9% $5.775 1/11/2009
120,000 8.4% $5.25 1/11/2009
60,000(2) 4.2% $5.775 1/11/2009
60,000(2) 4.2% $5.25 1/11/2009
40,000 2.8% $5.25 1/11/2009
Terrence W. Doyle ... 45,000 3.2% $6.063 5/20/2009
Thomas E. Klein ..... 20,000 1.4% $6.063 5/20/2009
Thomas Mizelle ...... 20,000 1.4% $6.063 5/20/2009
Bijan Almassian ..... 12,500 0.9% $4.6875 3/4/2009
Ivan King ........... 14,000 1.0% $4.6875 3/4/2009
17,300 1.2% $6.063 5/20/2009
John A. Spears ...... 0 -- -- --
- ---------------------
</TABLE>
(1) Computed based on an aggregate of 1,430,375 shares issuable upon exercise
of options granted to employees during the year ended December 31, 1999.
(2) Options were granted to CBK Associates, LLC an entity of which Mr. Kessman
is a member.
The following table sets forth information with respect to stock
options exercised in 1999 and unexercised stock options held by the persons
named in the Summary Compensation Table at December 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE><CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END # AT FISCAL YEAR-END($) (1)
----------------------------- -----------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alan Kessman........... 19,100 $0 205,900 775,000 $195,598 $298,430
Terrence W. Doyle...... -- -- 11,400 55,200 $ 24,862 $ 30,877
Thomas E. Klein........ 2,400 $5,325 102,750 36,450 $223,688 $ 44,952
Thomas Mizelle......... 12,500 $62,969 123,900 42,700 $252,987 $ 60,577
Bijan Almassian........ -- -- 65,625 34,375 $133,887 $ 64,935
Ivan King.............. -- -- 59,000 45,800 $125,695 $ 57,667
John A. Spears......... 348,042 $1,587,906 0 0 --- ---
- -------------------------
</TABLE>
(1) Computed based upon the difference between the closing price of the
Company's Common Stock on December 31, 1999 ($6.125) and the exercise
price.
<PAGE>
EMPLOYMENT AGREEMENTS
In October 1999, we entered into an employment agreement with Alan
Kessman, our President and Chief Executive Officer. Pursuant to this agreement,
which will terminate on December 31, 2003, Mr. Kessman receives a base salary of
$400,000 per year and will be eligible for a bonus of up to 50% of his base
salary based on the achievement of specified objectives. In the event Mr.
Kessman's employment is terminated by us for any reason other than cause or
disability, or if Mr. Kessman terminates for good reason, we are obligated to
pay him the sum of two times his base salary, average annual bonus for the prior
two years and continue payment of certain insurance costs on his behalf. The
agreement further provides that if Mr. Kessman's employment is terminated on or
after a change in control, he will be paid two and one-half times his base
amount as defined in the agreement. This agreement replaced a prior agreement we
entered into an agreement with Alan Kessman and PS Capital LLC, an entity of
which Mr. Kessman is a member, which was effective January 11, 1999, pursuant to
which Mr. Kessman served as our chief executive officer. Pursuant to the prior
agreement, Mr. Kessman received a base salary of $400,000 per year. The prior
agreement did not provide for any payments upon a change in control or any other
severance payments. As an inducement to enter into the prior agreement, on
January 11, 1999, we granted to Mr. Kessman options to purchase an aggregate of
980,000 shares of common stock. The foregoing grants consist of (1) 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 (2) 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 having vested in full on July 11, 1999, 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 our Chief Executive
Officer.
Effective January 16, 1998, we entered into an employment agreement
with John A. Spears, then our President and Chief Executive Officer. The
agreement was for a term of three years and provided for an annual base salary
of $246,750. In the event of our termination of the employment agreement for any
reason other than "just cause" or death, including a "change in control," we
were required to pay Mr. Spears his base salary for the remaining term of the
employment agreement through January 2001, subject to the obligation of Mr.
Spears to mitigate damages by seeking new employment. We 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
<PAGE>
during the prior two years. Mr. Spears was relieved of his obligations as Chief
Executive Officer in January 1999 and was relieved of his obligations as
President and as a director in April 1999. As a result, the employment agreement
was terminated and we agreed to make bi-monthly payments to Mr. Spears in the
same amounts as his base salary due pursuant to the separation and release
agreement through the earlier of January 16, 2001 or the date on which Mr.
Spears secures full-time employment; provided, we 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; and provided further,
that Mr. Spears will receive a lump-sum payment of 40% of the balance of
payments otherwise payable through January 16, 2001 if he secures full-time
employment elsewhere, such amount to be payable only if we close an underwritten
public offering resulting in gross proceeds to us of at least $10 million.
Because Mr. Spears obtained a new position, we are no longer obligated for some
these payments. We 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, with respect to Thomas Mizelle, our Vice
President, Operations, Terrence W. Doyle, our Vice President, Research and
Development and Thomas E. Klein, our Vice President, Finance, and effective July
28, 1999 with respect to Ivan King, our Vice President Research and Bijan
Almassian, our Vice President Development, we entered into severance agreements
pursuant to which each of these officers 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" 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, whichever is
greater, plus the average of the last two cash bonus payments made to the
officer prior to the change in control. The officer would also be entitled to
all payments necessary to provide him with group health insurance benefits
substantially similar to those which he was receiving immediately prior to the
date of termination until the earlier of 18 months after such termination or the
date he has obtained new full-time employment. The foregoing amounts are not
payable if termination of the officer is because of his death, by us for cause,
or by the officer other than for good reason. For purposes of the severance
agreements, a "change in control" means that (1) any person or entity becomes
the beneficial owner of our securities representing 30 percent or more of the
combined voting power of the then outstanding securities; (2) 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
our stockholders was approved by a vote of at least two-thirds 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 (3) our stockholders
approve a merger or consolidation (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.
We also pay the Chairman of the Board $4,000 per meeting of the Board attended
and each other non-employee or non-consultant director $1,000 for
<PAGE>
each such meeting attended. Various directors are also entitled to automatic
grants of options under our Amended and Restated 1993 Stock Option Plan.
DIRECTORS' OPTIONS
Our Amended and Restated 1993 Stock Option Plan provides for the
automatic grant of non-qualified stock options to purchase shares of common
stock to our directors who are not employees or principal stockholders. Eligible
directors elected after August 1995 will be granted an option to purchase 20,000
shares of common stock on the date such person is first elected or appointed a
director. Further, commencing on the day immediately following the date of the
annual meeting of stockholders each eligible director, other than directors who
received an initial director option since the last annual meeting, will be
granted an option to purchase 15,000 shares of common stock (20,000 shares in
the case of the chairman of the board) on the day immediately following the date
of each annual meeting of stockholders. 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. As an inducement to enter into an employment
agreement, on January 11, 1999, we granted to Mr. Kessman options to purchase an
aggregate of 980,000 shares of common stock. The foregoing grants consist of (1)
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 (2) 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 having vested in full on July 11, 1999,
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 our Chief
Executive Officer. In addition, during 1999, Messrs. Bergerac, Cary, Ferguson,
Sartorelli and Wriston were each granted ten year options to purchase 15,000
shares of common stock at an exercise price of $5.063 per share and Mr. Miller
was granted an option to purchase 20,000 shares on the same terms.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 1, 2000 (except
as otherwise noted in the footnotes) regarding the beneficial ownership of our
common stock and Class A preferred stock of: (1) each person known to us to
beneficially own 5% or more of our outstanding common stock or Class A preferred
stock; (2) each of our directors; (3) our chief executive officer and each other
officer or former officer who received over $100,000 in compensation during the
1999 fiscal year; and (4) all current directors and executive officers of the
Company as a group.Beneficial ownership is determined in accordance with the
rules of the SEC, which attribute beneficial ownership of securities to persons
who possess sole or shared voting power and/or investment power with respect to
those securities. Additionally, shares beneficially owned include shares that
may be acquired pursuant to the exercise of fully vested options and warrants
that are exercisable within 60 days of March 1, 2000. Except as otherwise
indicated, 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.
<PAGE>
<TABLE><CAPTION>
Percentage
Total Number of Class A
of Shares of Percentage of Preferred
Class A Common Stock Common Stock Stock
Directors and Preferred Beneficially Beneficially Beneficially
Executive Officers Common Stock Stock Owned (1) Owned Owned
- ------------------ ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Michel C. Bergerac ............... 42,500(2) 0 42,500 * --
Frank T. Cary .................... 65,218(3) 0 65,218 * --
James L. Ferguson ................ 28,500(4) 0 28,500 * --
Alan Kessman ..................... 229,000(5) 0 229,000 1.1% --
William R. Miller ................ 180,656(6) 0 180,656 * --
Alan C. Sartorelli, Ph.D. ........ 392,458(7) 0 392,458 1.9% --
Walter B. Wriston ................ 60,218(8) 0 60,218 * --
Terrence W. Doyle, Ph.D. ......... 285,524(9) 0 285,524 1.4% --
Thomas E. Klein .................. 135,084(10) 0 135,084 * --
Thomas Mizelle ................... 158,810(11) 0 158,810 * --
Bijan Almassian .................. 78,125(12) 0 78,125 * --
Ivan King ........................ 68,375(13) 0 68,375 * --
John A. Spears ................... 317,863 0 317,863 1.5% --
All directors and executive
officers as a group (13 persons).. 1,724,468(14) 0 1,724,468 8.1% --
Other Beneficial Owners
- -----------------------
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............. 2,969,213(15) 0 2,969,213 14.1% --
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............. 300,000 171,642 776,784(16) 3.7% 37.7%
Kingdon Capital Management Corp.
152 West 57th Street, 50th Floor
New York, NY 10019.............. 0 236,110 639,861(17) 3.0% 51.9%
- ----------------------------------
</TABLE>
*Less than one percent
<PAGE>
<TABLE><CAPTION>
<S> <C>
(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 March 1, 2000, each share of Class A Preferred Stock was convertible into 2.777777
shares of Common Stock.
(2) Includes 12,500 shares issuable upon exercise of options.
(3) Includes 2,500 shares issuable upon exercise of options.
(4) Includes 22,500 shares issuable upon exercise of options.
(5) Includes 205,900 shares issuable upon exercise of options.
(6) Includes 2,500 shares issuable upon exercise of options.
(7) Includes 190,874 shares beneficially owned by Dr. Sartorelli's wife, as to which Dr. Sartorelli
disclaims beneficial ownership. Also includes 3,750 shares issuable upon exercise of options.
(8) Includes 6,250 shares issuable upon exercise of options.
(9) Includes 86,600 shares held by Dr. Doyle's wife and children, as to which Dr. Doyle disclaims
beneficial ownership. Also includes 13,800 shares issuable upon exercise of options.
(10) Includes 111,400 shares issuable upon exercise of options. Also includes 1,199 shares of common stock
held by Mr. Klein's wife and children.
(11) Includes 138,800 shares issuable upon exercise of options. Also includes 488 shares of common stock
held by Mr. Mizelle's children.
(12) Consists of shares issuable upon exercise of options.
(13) Consists of shares issuable upon exercise of options.
(14) Includes 666,400 shares issuable upon exercise of options.
(15) Beneficial ownership information is based upon data set forth in a Schedule 13D Amendment No. 4 filed
with the SEC on February 22, 2000. Elliott Associates, L.P. owns 1,327,130 shares of Common Stock and
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 1,330,371 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. Martley International, Inc. is
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 Amendment No. 1
filed with the SEC on February 15, 2000. Class A Preferred Stock consists of 65,819 shares held by
Phoenix Partners L.P., 73,964 shares held by Morgens Waterfall Vintiadis Investments N.V. and 31,859
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) Beneficial ownership information is based in part upon data set forth in a Schedule 13D Amendment No. 1
filed with the SEC on January 11, 2000. Consists of 141,664 shares held by M. Kingdon Offshore, N.V.,
47,223 shares held by Kingdon Partners, L.P. and 47,223 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.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Michael Kent, a former director, is a principal of an executive search
firm that has rendered services for us. We paid the firm $60,000 for services
rendered for the year ended December 31, 1999 and $120,000 for services rendered
for the fiscal year ended December 31, 1998.
We and Dr. Alan Sartorelli, one of our directors, who is affiliated
with Yale University, entered into a five year consulting agreement on September
29, 1995 providing for various advisory services that is renewable for one
additional year. Under the agreement, Dr. Sartorelli receives an annual fee of
$48,000.
On August 27, 1998, Elliott Associates, L.P., together with Westgate
International, L.P., two of our principal stockholders, exercised their rights
as holders of the 5% Convertible Preferred Stock Series 1998, to nominate a
candidate for election to our board of directors. That candidate, Alan Kessman,
is now our President and Chief Executive Officer, as well as a director.
<PAGE>
In April 1999, we completed a private placement of 893,915 shares of
our common stock. 446,957 of these shares were sold to Elliott Associates, L.P.
and Westgate International, L.P., two of our principal stockholders. All shares
were sold at a price of approximately $4.47 per share, which was 90% of the
average closing price of the common stock on the Nasdaq SmallCap Market for the
10 consecutive trading days immediately prior to April 8, 1999, for aggregate
proceeds of $4,000,000.
ITEM 13. EXHIBITS, LIST 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, as amended (2)
3.2 -- By-laws (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)
4.4 -- Revised form of Warrant Agreement by and between Vion
Pharmaceuticals, Inc. and Brean Murray & Co., Inc. (4)
4.5 -- Form of Underwriter's Warrant (included as Exhibit A to Exhibit
4.4 above) (4)
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)
<PAGE>
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)
10.10 -- Amended and Restated 1993 Stock Option Plan of the Registrant (5)
10.11 -- Lease Agreement between Science Park Development Corporation and
Vion Pharmaceuticals, Inc., dated as of February 1, 1996 (6)
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 (7)
10.18 -- Master Lease Agreement between Citicorp Leasing, Inc. and OncoRx,
Inc. dated September 27, 1995 (7)
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 (8)
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) (9)
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 (9)
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 (9)
10.23 -- Collaborative Development and Distribution Agreement between
Boehringer Ingelheim International GmbH and Vion Pharmaceuticals,
Inc. dated November 24, 1997 (Confidential treatment has been
granted with regard to certain provisions of this exhibit) (6)
10.24 -- Sale and Leaseback Agreement between FINOVA Technology Finance,
Inc. and Vion Pharmaceuticals, Inc. dated as of December
10, 1997 (6)
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)
10.27 -- Amendment No. 3 to a License Agreement between Yale University
and Vion Pharmaceuticals, Inc. (f/d/a OncoRx, Inc.) dated as of
September 25, 1998 (10)
<PAGE>
10.28 -- Form of Severance Agreement between the Company and Terrence W.
Doyle, Thomas E. Klein and Thomas Mizelle (11)
10.29 -- Form of Employment Agreement between the Company and Alan
Kessman (4)
10.30 -- Senior Executive Stock Option Plan (11)
10.31 -- Separation and Release Agreement between the Company and John
Spears, dated April 7, 1999 (4)
10.32 -- Development and License Agreement dated December 1, 1999 between
the Company and Boehringer Ingelheim International GmbH
(confidential treatment has been requested with respect to
portions of this exhibit)
10.33 -- Amendment to Clinical Development Agreement between the Company
and Covance Clinical Research Unit Ltd. Dated October 27, 1999
(confidential treatment has been requested with respect to
portions of this exhibit)
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young LLP
24.1 -- Power of Attorney (included on signature page)
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-1 (File No. 333-83837), effective October 26, 1999.
(5) Incorporated by reference to the Company's Registration Statement on
Form S-8 (Filed No. 333-39407), effective November 4, 1997.
(6) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(7) Incorporated by reference to the Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1995.
(8) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996.
(9) Incorporated by reference to the Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997.
<PAGE>
(10) Incorporated by reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1998.
(11) Incorporated by reference to the Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1999.
(b) Reports on Form 8-K.
During the final quarter of the Company's 1999 fiscal year, we filed with the
SEC on October 15, 1999 a Current Report on Form 8-K regarding the resignation
of Michael Kent from our Board of Directors due to health reasons.
<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 29, 2000 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 29, 2000
- --------------------------
William R. Miller
/S/ ALAN KESSMAN Director, Chief Executive March 29, 2000
- -------------------------- Officer (Principal Executive
Alan Kessman Officer)
/S/ THOMAS E. KLEIN Vice President--Finance and March 29, 2000
- -------------------------- Chief Financial Officer (Principal
Thomas E. Klein Financial and Accounting Officer)
/S/ MICHEL C. BERGERAC Director March 29, 2000
- --------------------------
Michel C. Bergerac
/S/ FRANK T. CARY Director March 29, 2000
- --------------------------
Frank T. Cary
/S/ JAMES FERGUSON Director March 29, 2000
- --------------------------
James Ferguson
/S/ ALAN C. SARTORELLI Director March 29, 2000
- --------------------------
Alan C. Sartorelli
/S/ WALTER B. WRISTON Director March 29, 2000
- --------------------------
Walter B. Wriston
</TABLE>
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Audited Financial Statements
Three year period ended December 31, 1999
CONTENTS
Report of Independent Auditors.............................................F-2
Audited Financial Statements
Balance Sheet..............................................................F-3
Statement of Operations....................................................F-4
Statement of Changes in Shareholders' Equity...............................F-5
Statement of Cash Flows....................................................F-7
Notes to Financial Statements..............................................F-8
<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, 1999 and 1998 and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999 and the period from May 1,
1994 (inception) to December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 and the period
from May 1, 1994 (inception) to December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
-------------------------
Stamford, Connecticut
February 18, 2000, except for Note 11,
as to which the date is March 27, 2000
F-2
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheet
<TABLE><CAPTION>
DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,105,262 $ 3,821,234
Short-term investments (includes $1,129,886 restricted in 1998) -- 2,594,497
Accounts receivable 1,592,583 1,251,618
Other current assets 108,404 107,198
------------ ------------
Total current assets 12,806,249 7,774,547
Property and equipment, net 659,823 1,026,184
Security deposits 49,851 51,347
Research contract prepayments 417,882 416,945
------------ ------------
Total assets $ 13,933,805 $ 9,269,023
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Obligation under capital leases - current $ 160,328 $ 291,668
Accounts payable and accrued expenses 2,734,745 2,437,682
------------ ------------
Total current liabilities 2,895,073 2,729,350
Obligation under capital leases - long term 6,181 180,960
------------ ------------
Total liabilities 2,901,254 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 at
December 31, 1999 and 1998, (redemption value $5,387,000 and
$5,125,000 at December 31, 1999 and 1998, respectively) 5,179,287 4,854,505
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: 498,194 and 616,656
at December 31, 1999 and 1998, respectively (liquidation
preference $4,982,000 and $6,167,000 at December 31, 1999
and 1998, respectively) 4,982 6,167
Class B convertible preferred stock, $0.01 par value, authorized:
100,000 shares; issued and outstanding: none -- --
Class C convertible preferred stock, $0.01 par value, authorized:
25,000 shares; issued and outstanding: none -- --
Common stock, $0.01 par value, authorized: 35,000,000 shares;
issued and outstanding: 18,242,119 and 13,953,046 shares
at December 31, 1999 and 1998, respectively 182,421 139,530
Additional paid-in-capital 68,012,183 52,024,648
Deferred compensation (2,864) (37,496)
Accumulated deficit (62,343,458) (50,628,641)
------------ ------------
5,853,264 1,504,208
------------ ------------
Total liabilities and shareholders' equity $ 13,933,805 $ 9,269,023
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
F-3
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Operations
<TABLE><CAPTION>
FOR THE
PERIOD FROM
MAY 1, 1994
(INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Contract research grants $ 335,767 $ 308,787 $ 48,221 $ 744,554
Research support 2,628,039 1,647,202 1,222,912 5,498,153
Technology license revenues 155,388 -- 4,000,000 4,155,388
Laboratory support service revenue 35,000 -- -- 35,000
------------ ------------ ------------ ------------
Total revenues 3,154,194 1,955,989 5,271,133 10,433,095
Operating expenses:
Research and development 11,496,649 10,709,401 7,675,486 43,471,230
General and administrative 2,693,248 2,202,944 2,639,486 12,079,513
Nonrecurring collaboration restructuring fee
-- -- 600,000 600,000
Interest Income (301,382) (540,240) (343,911) (1,707,570)
Interest Expense 34,603 61,553 43,666 195,269
------------ ------------ ------------ ------------
Net Loss $(10,768,924) $(10,477,669) $ (5,343,594) $(44,205,347)
------------ ------------ ------------ ------------
Preferred stock dividends and accretion $ (709,781) $ (4,414,050) $ (1,131,740) $(17,882,975)
------------ ------------ ------------ ------------
Loss applicable to common shareholders $(11,478,705) $(14,891,719) $ (6,475,334) $(62,088,322)
============ ============ ============ ============
Basic and diluted loss applicable to common
shareholders per share $ (0.74) $ (1.24) $ (0.75)
------------ ------------ ------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Changes in Shareholders' Equity
<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 -- $ -- -- $ -- 2,693,244 $ 26,932
Common stock issued for services - August 1994 159,304 1,593
Net loss
----------- ----------- ----------- ----------- ----------- -----------
Balance - December 31, 1994 -- $ -- -- $ -- 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 -- $ -- -- $ -- 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 -- $ -- 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
----------- ----------- ----------- ----------- ----------- -----------
Additional Total
Treasury Paid-in Deferred Accumulated Shareholders'
Stock Capital Compensation Deficit Equity
----------- ----------- ----------- ----------- -----------
Common stock issued for cash - July 1994 $ -- $ -- $ (19,877) $ 7,055
Common stock issued for services - August 1994 (1,176) 417
Net loss (475,946) (475,946)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1994 $ -- $ -- $ (496,999) $ (468,474)
----------- ----------- ----------- ----------- -----------
Stock options issued for compensation -
February 1995 540,000 540,000
Reverse acquisition of MelaRx Pharmaceuticals,
Inc. - April 1995 4,300,000 4,320,000
Shares repurchased pursuant to employment
agreements - April 1995 2,029 (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 $ -- $(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) --
Class A convertible preferred stock dividend 255,661 (255,881) --
Issuance of common stock 102,426 102,720
Compensation associated with stock option grants 190,407 (190,407) --
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) --
Class A convertible preferred stock dividend 623,038 (623,514) --
Issuance of Class B convertible preferred stock 4,851,662 (369,861) 4,481,850
Conversion of Class B convertible
preferred stock (644) --
Accretion of dividend payable on Class B
convertible preferred stock 138,365 (138,365) --
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
----------- ----------- ----------- ----------- -----------
</TABLE>
F-5
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Changes in Shareholders' Equity (continued)
<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>
Accretion of dividend payable on Class B
convertible preferred stock
Conversion of Class B convertible preferred stock (4,592) (46) 1,205,178 12,052
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 of outstanding warrants 1,792,952 17,929
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 -- $ -- 13,953,046 $ 139,530
----------- ----------- ----------- ----------- ----------- -----------
Conversion of Class A convertible preferred stock (144,612) $ (1,446) 401,707 $ 4,018
Class A convertible preferred stock dividend 26,150 261
Series 1998 convertible preferred stock accretion
Common stock issued in exchange for
cancellation of outstanding warrants 102 1
Exercise of stock options 470,886 4,709
Retirement of treasury stock (35,659) (357)
Exercise of warrants 26,296 263
Issuance of common stock 3,425,741 34,257
Amortization of deferred compensation
Net loss
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 498,194 $ 4,982 -- $ -- 18,242,119 $ 182,421
=========== =========== =========== =========== =========== ===========
Additional Total
Treasury Paid-in Deferred Accumulated Shareholders'
Stock Capital Compensation Deficit Equity
----------- ----------- ----------- ----------- -----------
Accretion of dividend payable on Class B
convertible preferred stock 286,776 (286,776) --
Conversion of Class B convertible
preferred stock (12,006) --
Premium on Conversion dividend on class
B convertible preferred stock 2,043,532 (2,049,391) --
Conversion of Class A convertible
preferred stock (3,111) --
Class A convertible preferred stock
dividend 329,206 (329,546) --
Discount on Series 1998 convertible
preferred stock 1,597,218 (1,597,218) --
Series 1998 convertible preferred stock
accretion -- (151,119) (151,119)
Common stock issued in exchange for
cancellation of outstanding warrants 8,441,442
(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
----------- ----------- ----------- ----------- -----------
Conversion of Class A convertible
preferred stock $ (2,572) $ --
Class A convertible preferred stock dividend 384,738 $ (384,999) --
Series 1998 convertible preferred stock accretion (324,782) (324,782)
Common stock issued in exchange for
cancellation of outstanding warrants 473 474
Exercise of stock options $ (196,159) 650,028 (40,310) 418,268
Retirement of treasury stock 196,159 (195,802) --
Exercise of warrants (263) --
Issuance of common stock 14,955,131 14,989,388
Amortization of deferred compensation $ 34,632 34,632
Net loss (10,768,924) (10,768,924)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 $ -- $68,012,183 $ (2,864) $(62,343,458) $ 5,853,264
=========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-6
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Statement of Cash Flows
<TABLE><CAPTION>
FOR THE PERIOD
FROM MAY 1, 1994
FOR THE (INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(10,768,924) $(10,477,669) $ (5,343,594) $(44,205,347)
Adjustments to reconcile net loss to net cash
used in operating activities
Purchased research and development -- -- -- 4,481,405
Amortization of financing costs -- -- -- 345,439
Depreciation and amortization 495,370 496,776 303,746 1,447,352
Increase in accounts receivable and other
current assets (342,171) (511,165) (741,016) (1,700,001)
Increase (decrease) in other assets 559 (16,453) 192,670 (466,018)
Increase in accounts payable and accrued
expenses 297,063 1,563,332 380,223 2,700,213
Extension/reissuance of placement agent
warrants -- -- 168,249 168,249
Stock issued for services -- -- 600,000 600,417
Non-cash compensation 34,632 85,884 90,275 834,438
------------ ------------ ------------ ------------
Net cash used in operating activities (10,283,471) (8,859,295) (4,349,447) (35,793,853)
------------ ------------ ------------ ------------
Cash flows used for investing activities:
Purchase of marketable securities -- (2,498,422) (8,121,720) (24,707,588)
Maturities of marketable securities 2,594,497 6,992,465 5,661,626 24,707,588
Acquisition of fixed assets (129,009) (221,280) (299,131) (1,162,742)
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities 2,465,488 4,272,763 (2,759,225) (1,162,742)
------------ ------------ ------------ ------------
Cash flows provided by financing activities:
Initial public offering -- -- -- 9,696,210
Net proceeds from issuance of common stock 15,408,130 77,489 2,889,801 18,691,696
Net proceeds from issuance of preferred stock -- 4,703,386 4,481,850 20,716,288
Other financing activities, net -- 11,073 (3) (281,070)
Repayment of equipment capital leases (306,119) (274,803) (160,724) (761,267)
------------ ------------ ------------ ------------
Net cash provided by financing activities 15,102,011 4,517,145 7,210,924 48,061,857
------------ ------------ ------------ ------------
Net (decrease) increase in cash 7,284,028 (69,387) 102,252 11,105,262
Cash and cash equivalents at beginning of period 3,821,234 3,890,621 3,788,369 --
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 11,105,262 $ 3,821,234 $ 3,890,621 $ 11,105,262
============ ============ ============ ============
</TABLE>
Supplemental schedule of noncash investing and financing activities:
o Capital lease obligations of $22,899 and $593,489 were incurred for the
years ended December 31, 1998 and 1997, respectively, when the Company
entered into leases for laboratory and office equipment. No obligations
were incurred for the year ended December 31, 1999.
o Cash paid for interest was $34,603, $61,553 and $43,666 for the years
ended December 31, 1999, 1998 and 1997, and $195,269 for the period from
May 1, 1994 (inception) through December 31, 1999.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-7
<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. ("Research"), a
wholly-owned subsidiary of MelaRx Pharmaceuticals Inc. ("MelaRx"), which was
renamed OncoRx, Inc. after the merger. The stockholders of the Company were
issued shares of common and preferred stock of MelaRx, the 100% owner of
Research, in exchange for all of the outstanding shares of the Company. 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.
F-8
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
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". 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.
F-9
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SMALL BUSINESS INNOVATION RESEARCH GRANT
On February 27, 1998 and April 22, 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 and the Inhibitors of
Ribonucleotide Reductase ("IRR") programs, respectively. The awards were for
reimbursable direct costs of up to $100,000 and $373,565, respectively, and
expired on August 31, 1998 and April 30, 1999. The Company recognized $100,000
and $316,068 of revenue on these two grants, respectively, for reimbursement of
expenses incurred for the duration of the grants through December 31, 1999. An
automatic extension was granted on the IRR grant to utilize the amount remaining
on the IRR grant. In addition to the extension, a new twelve-month IRR grant was
approved on April 7, 1999 for $374,764. For the year ended December 31, 1999 the
Company recorded revenues of $228,486 for this grant.
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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Net loss $(10,768,924) $(10,477,669) $ (5,343,594)
Preferred stock dividends and accretion (709,781) (4,414,050) (1,131,740)
------------ ------------ ------------
Numerator for basic and diluted loss applicable
to common shareholders per share (11,478,705) (14,891,719) (6,475,334)
Denominator:
Denominator for basic and diluted loss applicable
to common shareholders per share 15,543,701 11,977,121 8,670,717
------------ ------------ ------------
Basic and diluted loss applicable to common
shareholders per share $ (0.74) $ (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-10
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
3. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment as of December 31:
1999 1998
----------- -----------
Office equipment $ 256,894 $ 208,498
Furniture and fixtures 174,106 170,482
Laboratory equipment 394,041 322,998
Leasehold improvements 331,458 325,512
Leased equipment under capital lease 950,676 950,676
----------- -----------
2,107,175 1,978,166
Less accumulated depreciation (1,447,352) (951,982)
----------- -----------
Net property and equipment $ 659,823 $ 1,026,184
=========== ===========
4. RESEARCH AND LICENSE AGREEMENTS
BOEHRINGER INGELHEIM AGREEMENT
In November 1997, the Company and Boehringer Ingelheim International GmbH ("BI")
entered into an exclusive worldwide licensing agreement for the development and
marketing of Promycin(R) (porfiromycin), Vion's most advanced anticancer agent.
The original agreement provided the Company with exclusive co-promotion rights
to Promycin in the United States and Canada and gave BI exclusive worldwide
rights to market and sell Promycin outside the United States and Canada. Under
the original agreement, the Company was also responsible for the manufacturing
and supply of Promycin for all territories, and was obliged to share worldwide
development costs.
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 agreed to share
in future worldwide development costs.
The original agreement was modified by amendment in December 1999 to provide BI
with exclusive worldwide rights to sell and market Promycin. BI agreed to assume
manufacturing, supply and worldwide development expenses in return for paying
reduced future royalties and milestone payments to the Company.
F-11
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
4. RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
Pursuant to the original BI Agreement, the Company was required to use the BI
license fee of $4.0 million exclusively for Promycin development expenses. The
Company recorded $2,628,039, $1,647,202, and $1,222,912 of Promycin development
expenses as research support revenue under the agreement during 1999, 1998 and
1997, respectively. At December 31, 1998, $1,129,886 of short-term investments
were restricted for Promycin development expenses. Included in accounts
receivable are amounts due from BI of $1,512,938 and $1,189,369 at December 31,
1999 and 1998, respectively.
COVANCE AGREEMENT
During the second quarter of 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 contracted
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.
During the fourth quarter of 1999, the Company and Covance agreed to terminate
the Agreement subject to the assumption of clinical site management
responsibilities by BI. The original Agreement will terminate as soon as the
Company has formally transferred responsibility for all Investigational New Drug
sponsorship to BI. BI also agreed to contract with Covance for future patient
randomization, assignment and clinical trial supply management.
The Company has incurred expenses of $3,362,939, $2,610,213 and $1,633,974 for
the years ended December 31, 1999, 1998 and 1997, respectively, under these
agreements which has been expensed as incurred as research and development.
Included in the Company's total current liabilities at December 31, 1999 and
1998 are amounts due Covance Development Service Corporation for $654,427 and
$1,589,588, respectively.
YALE/MELARX AGREEMENT
Pursuant to a License Agreement between the Company and Yale University
("Yale"), the Company obtained rights to a synthetic form of melanin which the
Company has named Melasyn. In the first quarter of 1998, the Company agreed to
be the exclusive selling agent for Melasyn, and licensed its Melasyn technology
in an exclusive worldwide agreement with San Mar Laboratories, a 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
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.
F-12
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
4. RESEARCH AND LICENSE AGREEMENTS (CONTINUED)
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 related to
synthetic melanin funded by the Company.
In 1995, the Company and Yale entered into a License Agreement 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
In 1994, 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
In 1992, the Company entered into a Subscription, Assignment and Assumption
Agreement (the "SAAA") with Yale 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 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-13
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
5. SHAREHOLDERS' EQUITY
In 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.
In 1995, the Company completed an initial public offering ("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 entitled the holder to purchase one
share of common stock and one Class B Warrant. Each Class B Warrant entitled the
holder to purchase one share of common stock. The 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. In
conjunction with the 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 its IPO, and including the gross proceeds therefrom, the Company
has raised a gross amount of $50,500,000 to date, through the issuance of common
and preferred stock.
PRIVATE PLACEMENT OF CLASS A CONVERTIBLE PREFERRED STOCK
In May 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 Convertible
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,
F-14
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
5. SHAREHOLDERS' EQUITY (CONTINUED)
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 Convertible Preferred Stock pay semi-annual dividends of 5% per
annum, payable in additional shares of Class A Convertible 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
$384,999, $329,546 and $623,514 in 1999, 1998 and 1997, respectively. The
non-cash dividend has been included in the dividend requirement on Preferred
Stock and the loss applicable to common shareholders. In the event that the
closing bid price of the Company's common stock exceeds $9.9375 for twenty
trading days in any thirty trading day period, the Company can redeem the Class
A Convertible Preferred Stock at the issue price plus all declared and unpaid
dividends thereon. If all of the 498,194 outstanding shares of the Company's
Class A Convertible Preferred Stock were thusly redeemed, their redemption value
would be $4,981,940. The issuance of the Class A Convertible 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 Convertible Preferred Stock.
PRIVATE PLACEMENT OF CLASS B CONVERTIBLE PREFERRED STOCK
In August 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 Convertible
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 Convertible Preferred Stock were eligible,
under certain circumstances, to receive dividends paid in Class C Convertible
Preferred Stock. The Class C Convertible 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.
F-15
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
5. SHAREHOLDERS' EQUITY (CONTINUED)
Conversions of Class B Convertible 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.
In August 1998, the Company reached agreement with each of the holders of its
Class B Convertible Preferred Stock to convert an aggregate of 2,892 shares of
Class B Convertible Preferred Stock, constituting all of the outstanding Class B
Convertible 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 Convertible 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 Convertible Preferred Stock waived their
"anti-dilution" rights arising from the issuance of the Series 1998 Preferred
Stock.
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 the holders of two
thirds of the Series 1998 Preferred Stock. The Series 1998 Preferred Stock is
mandatorily redeemable at $1,000 per share plus dividends on June 30, 2003. The
Series 1998 Preferred Stock carries a mandatory conversion feature if the
closing bid price of the Company's common stock exceeds $7.20 for 20 consecutive
days in any 30 day period (see Note 11). 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
F-16
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
5. SHAREHOLDERS' EQUITY (CONTINUED)
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 5% accretion
resulted in a charge against the accumulated deficit with a corresponding
increase to additional paid-in-capital of $324,782 and $151,119 for the years
ended December 31, 1999 and 1998, respectively. 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.
PRIVATE PLACEMENT OF COMMON STOCK - APRIL 1999
In April 1999, the Company consummated a private placement of the Company's
common stock and issued 893,915 shares of common stock at a price of
approximately $4.47 per share, for gross proceeds of approximately $4 million.
PUBLIC OFFERING OF COMMON STOCK - OCTOBER 1999
In October and November 1999, the Company completed the sale of 2,530,000 newly
issued shares of common stock (including shares sold to the underwriter upon the
exercise of its over-allotment option) at a purchase price of $5.00 per share,
in an underwritten public offering. The net proceeds from this offering were
approximately $11.05 million.
ANTIDILUTION ADJUSTMENT
As a result of the sale in May 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-17
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
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.
WARRANT EXCHANGE OFFER
In 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. 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.
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, holders of warrants to
purchase 94,336 shares elected a "cashless" exercise into 13,949 shares of
common stock; warrants to purchase 108,150 shares expired.
F-18
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
5. SHAREHOLDERS' EQUITY (CONTINUED)
ISSUANCE OF COMMON STOCK TO YALE UNIVERSITY
Effective July 1997, the Company and Yale amended two license agreements
pursuant to which Yale agreed to reduce certain amounts payable by the Company
in exchange for 150,000 shares of common stock issued 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
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") 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. In January 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 which was approved by the stockholders at the Company's
annual meeting on April 18, 1996. In January 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. On January 11,
1999, the Board of Directors adopted, subject to stockholder approval, an
amendment to the Option Plan increasing the number of shares that may be issued
under the Plan from 1,500,000 to 3,000,000 which was approved by the
stockholders at the Company's annual meeting on June 17, 1999. 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. The Company also currently has in effect
its Senior Executive Stock Option Plan, pursuant to which it has granted stock
options to purchase 980,000 shares of common stock to its Chief Executive
Officer.
F-19
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
6. EMPLOYEE STOCK OPTION PLAN (CONTINUED)
Through December 31, 1999, 1998 and 1997, options to purchase an aggregate of
2,054,537, 1,394,162, and 1,033,050 shares, respectively had been granted under
the Option Plan. The Company recognized $51,252, and $55,643 of compensation
expense in 1998 and 1997, respectively for options granted under the Option Plan
to non-employees. No compensation expense was recognized in 1999 for options
granted under the Option Plan.
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 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. In 1999, the Option Plan was
amended to increase the Automatic Grant to 20,000 shares for the Chairman of the
Board and 15,000 shares for each other Eligible Director. 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 110,000, 140,000, and
35,000 in 1999, 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 and additional grants.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method. 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 1999, 1998 and 1997, respectively: risk-free interest rates of
5.1%, 4.70%, and 5.77%; volatility factors of the expected market price of the
Company's common stock of .656, .806, and .490 and a weighted-average expected
life of the option of 7 years. The Company has assumed no dividend yield in
1999, 1998, and 1997 because it did not pay cash dividends on its common stock
and does not expect to pay cash dividends in the foreseeable future.
F-20
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss $(12,213,146) $(10,925,090) $ (5,650,169)
Pro forma dividends and accretion (709,781) (4,414,050) (1,131,740)
------------ ------------ ------------
Pro forma loss applicable to common shareholders (12,922,927) (15,339,140) (6,781,909)
Pro forma basic and diluted loss applicable to common
shareholders per share $ (0.83) $ (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>
1999 1998 1997
---------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000'S) (000'S) (000'S)
Outstanding-beginning of year 1,260 $3.91 981 $4.00 885 $3.93
Granted 661 5.00 361 3.71 136 4.53
Exercised (150) 3.15 (30) 3.77 -- --
Forfeited (214) 4.90 (50) 4.28 (40) 4.26
------ ----- ------ ----- ------ -----
Outstanding-end of year 1,557 4.31 1,260 3.91 981 4.00
------ ----- ------ ----- ------ -----
Exercisable at end of year 661 4.04 571 3.94 422 3.83
------ ----- ------ ----- ------ -----
Weighted-average fair value of
options granted during the year $ 3.63 $ 3.97 $ 2.65
====== ===== ====== ===== ====== =====
</TABLE>
F-21
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
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, 1999 and 1998 follows:
<TABLE><CAPTION>
WEIGHTED
WEIGHTED WEIGHTED -AVERAGE
-AVERAGE -AVERAGE REMAINING
NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE CONTRACTUAL LIFE
OUTSTANDING OF OPTIONS OPTIONS OF OPTIONS OF OPTIONS
RANGE SHARES OUTSTANDING EXERCISABLE OUTSTANDING OUTSTANDING
- ----------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(000's) (000's)
As of December 31, 1999
- -----------------------
$3.625 - $6.0630 1,517 $4.37 651 $4.07 7.66 years
$2.219 40 2.22 10 2.22 8.70 years
As of December 31, 1998
- -----------------------
$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>
1999 1998 1997
---------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(000'S) (000'S) (000'S)
Outstanding-beginning of year 347 $ .18 348 $ .18 398 $ .21
Granted 980 5.62 -- -- -- --
Exercised (316) .50 (1) .40 (50) .40
Forfeited -- -- -- -- -- --
------ ----- ------ ----- ------ -----
Outstanding-end of year 1,011 5.41 347 .18 348 .18
------ ----- ------ ----- ------ -----
Exercisable at end of year 251 $4.30 347 $ .18 348 $ .18
====== ===== ====== ===== ====== =====
</TABLE>
F-22
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
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, 1999 and 1998 follows:
<TABLE><CAPTION>
WEIGHTED
WEIGHTED WEIGHTED -AVERAGE
-AVERAGE -AVERAGE REMAINING
NUMBER OF EXERCISE PRICE NUMBER OF EXERCISE PRICE CONTRACTUAL LIFE
OUTSTANDING OF OPTIONS OPTIONS OF OPTIONS OF OPTIONS
RANGE SHARES OUTSTANDING EXERCISABLE OUTSTANDING OUTSTANDING
- ----------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(000's) (000's)
As of December 31, 1999
- -----------------------
$5.00 - $5.775 962 $5.66 201 $5.25 9.1 years
$.40 49 .40 49 .40 .67 years
As of December 31, 1998
- -----------------------
$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, 1999 the Company has available for federal income tax purposes
net operating loss carryforwards of approximately $26,689,000 and a general
business credit of $1,039,864 expiring in 2010 through 2019. 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 $4,091,206, $4,330,671 and $2,033,517 during 1999, 1998 and 1997,
respectively.
F-23
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
7. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE><CAPTION>
DECEMBER 31
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 10,571,390 $ 2,561,162
Research and development costs 4,159,306 8,610,163
General business tax credit 1,039,864 621,326
AMT tax credit 9,966 9,966
Other 176,323 --
------------ ------------
Total deferred tax assets 15,956,849 11,802,617
Total deferred tax liabilities (89,455) (26,429)
------------ ------------
Total deferred tax assets and liabilities 15,867,394 11,776,188
Valuation allowance for deferred tax assets and liabilities (15,867,394) (11,776,188)
------------ ------------
Total net deferred tax assets $ -- $ --
============ ============
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
The Company is the lessee of equipment under capital leases expiring in 2001.
The Company has a noncancelable operating lease for its facility expiring in
2001. 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, 1999
are as follows:
CAPITAL OPERATING
LEASES LEASES
-------------------
Year ended December 31:
2000 $169,054 $267,413
2001 5,681 95,912
-------- --------
Total minimum lease payments $174,735 $363,325
======== ========
Less amount representing interest 8,226
--------
Present value of minimum lease payments $166,509
========
F-24
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The cost of assets under capital leases amounted to $950,676 at December 31,
1999 and 1998. Accumulated amortization relating to the leased equipment
amounted to $786,277 and $483,782 at December 31, 1999 and 1998, respectively.
Amortization expense included in depreciation expense, relating to the leased
equipment, amounted to $302,495, $298,578, $159,791, and $786,277 for the years
ended December 31, 1999, 1998, 1997, and the period from May 1, 1994 (inception)
through December 31, 1999, respectively.
Rent expense amounted to $266,613, $270,298, $249,799 and $1,005,567 for the
years ended December 31, 1999, 1998, 1997, and the period from May 1, 1994
(inception) through December 31, 1999, 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 $400,000 through December 2003.
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 with the Company.
This agreement entitles him to receive an annual fee equal to 10% of the net
after-tax profits of the Company attributable to the sale or licensing of
products or technology licensed pursuant to the Company's agreement with Yale
(see Note 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 former 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, $120,000 and $60,000 for services rendered for the years ended
December 31, 1999, 1998 and 1997, 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.
F-25
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
9. RELATED PARTY TRANSACTIONS (CONTINUED)
In connection with the retention of its Chief Executive Officer, the Company
granted options to purchase an aggregate amount of 980,000 shares of the
Company's common stock. The options 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.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE><CAPTION>
QUARTER
-------------------------------------------- YEAR
1999 FIRST SECOND THIRD FOURTH 1999
- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 371 $ 958 $ 287 $ 1,538 $ 3,154
Net loss (2,432) (3,656) (2,333) (2,348) (10,769)
Preferred stock dividends and accretion
(81) (276) (77) (276) (710)
Loss applicable to common shareholders
(2,513) (3,933) (2,410) (2,623) (11,479)
Basic and diluted loss applicable to
common shareholders per share $ (0.18) $ (0.26) $ (0.16) $ (0.15) $ (0.74)
</TABLE>
<TABLE><CAPTION>
QUARTER
-------------------------------------------- YEAR
1998 FIRST SECOND THIRD FOURTH 1998
- ---- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $ 275 $ 257 $ 307 $ 1,117 $ 1,956
Net loss (2,506) (2,209) (2,136) (3,627) (10,478)
Preferred stock dividends and accretion
(630) (2,045) (1,537) (202) (4,414)
Loss applicable to common shareholders
(3,137) (4,255) (3,673) (3,827) (14,892)
Basic and diluted loss applicable to
common shareholders per share $ (0.32) $ (0.40) $ (0.27) $ (0.27) $ (1.24)
</TABLE>
F-26
<PAGE>
Vion Pharmaceuticals, Inc.
(A Development Stage Company)
Notes to Financial Statements
11. SUBSEQUENT EVENTS
In January 2000, the Company received a two-year, Small Business Innovation and
Research grant from the National Institutes of Health/National Cancer Institute
for $750,000. This grant will be used to enhance the Company's TAPET research.
REDEMPTION OF CLASS A WARRANTS
On February 11, 2000, the Company notified registered holders of its outstanding
Class A Warrants of its intention to redeem their warrants on March 13, 2000.
The Class A Warrants entitled the holder to purchase one share of common stock
and one Class B Warrant for an exercise price of $4.63. There were approximately
1.08 million Class A Warrants outstanding at December 31, 1999. During January
and February 2000, approximately 140,000 additional Class A Warrants were issued
in connection with the exercise of Unit Purchase Options. When the right of
Class A Warrant holders to exercise their warrants to purchase shares of the
Company's common stock and Class B Warrants terminated on March 10, 2000, the
Company had received net proceeds of $5.3 million from the exercise of 1.2
million Class A Warrants which includes the exercise of approximately 56,000 of
outstanding Class A Warrants prior to the redemption period. The Company also
received approximately $650,000 from the exercise of Unit Purchase Options
originally granted to underwriters in connection with the Company's initial
public offering in 1995.
CALL FOR REDEMPTION OF CLASS B WARRANTS
On March 27, 2000, the Company notified registered holders of its outstanding
Class B Warrants of its intention to redeem their warrants on April 27, 2000.
The Class B Warrants entitle the holder to purchase, at an exercise price of
$6.23, one share of common stock. From January 1 through March 13, 2000, the day
the Company redeemed the Class A Warrants, the Company received net proceeds of
approximately $3.7 million from the exercise of approximately 600,000 of the
Class B Warrants. If all of the remaining Class B Warrants (2.1 million) are
exercised before they can be redeemed, the Company will receive additional net
proceeds of approximately $12 million.
MANDATORY CONVERSION OF 5% REDEEMABLE CONVERTIBLE PREFERRED STOCK SERIES 1998
The Company's common stock traded above $7.20 for a period of 20 consecutive
trading days ending on February 7, 2000, and in accordance with the terms of the
5% Redeemable Convertible Preferred Stock Series 1998 issued on June 30, 1998,
all of the outstanding preferred shares having a redemption value of $5,425,286
were automatically converted into 1,507,024 common shares at the $3.60
conversion price, effective February 22, 2000.
F-27
EXHIBIT 10.32
--------------
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
FOR PORTIONS OF THIS EXHIBIT
DEVELOPMENT AND LICENSE AGREEMENT
BETWEEN
BOEHRINGER INGELHEIM INTERNATIONAL GMBH
AND
VION PHARMACEUTICALS, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE 1. DEFINITIONS...................................................... 1
ARTICLE 2. RESEARCH AND DEVELOPMENT......................................... 5
ARTICLE 3. DISTRIBUTION & LICENSE RIGHTS.................................... 7
ARTICLE 4. PAYMENT OBLIGATIONS.............................................. 9
ARTICLE 5. PAYMENT; RECORDS, AUDITS.........................................10
ARTICLE 6. INTELLECTUAL PROPERTY RIGHTS AND INFRINGEMENT....................11
ARTICLE 7. CONFIDENTIALITY..................................................13
ARTICLE 8. REPRESENTATIONS, WARRANTIES AND COVENANTS........................14
ARTICLE 9. INDEMNITY........................................................16
ARTICLE 10. TRANSITION.......................................................17
ARTICLE 11. TERM AND TERMINATION.............................................18
ARTICLE 12. MISCELLANEOUS....................................................19
ii
<PAGE>
DEVELOPMENT AND LICENSE AGREEMENT
---------------------------------
THIS AGREEMENT is entered into as of December 1, 1999 (the "Effective
Date"), by and between BOEHRINGER INGELHEIM INTERNATIONAL GmbH, a limited
liability company organized under the laws of Germany having its principal place
of business at D-55216 Ingelheim, Rhein, Germany ("BI") and VION
PHARMACEUTICALS, INC., a Delaware corporation having offices at Four Science
Park, New Haven, Connecticut 06511 ("Vion").
WHEREAS, the parties have entered a Collaborative Development and
Distribution Agreement relative to the development and commercialization of
Promycin(R)(porfiromycin) dated November 24, 1997 (hereafter "Original
Agreement"); and
WHEREAS, the parties seek to redefine the allocation of responsibility
under the Original Agreement to facilitate the development and commercialization
of Promycin(R); and
WHEREAS, the parties now seek a new agreement to define, among other
things, the responsibilities assumed by BI relating to the development and
commercialization of Promycin(R).
NOW, THEREFORE, the parties agree as follows:
ARTICLE 1. DEFINITIONS
----------------------
As used herein, the following terms shall have the following meanings:
1.1 "Affiliate" means an individual, trust, business trust, joint
venture, partnership, corporation, limited liability company, association or any
other entity which owns, is owned by or is under common ownership with a party.
For the purposes of this definition, the term "owns" (including, with
correlative meanings, the terms "owned by" and "under common ownership with") as
used with respect to any party, shall mean the possession (directly or
indirectly) of more than fifty percent (50%) of the outstanding voting
securities of a corporation or comparable equity interest in any other type of
entity.
1.2 "Agreement" means the present agreement together with all exhibits
and schedules.
1.3 "BI Technology" means all Know-How and Patent Rights to the extent
necessary or appropriate for the full development, use or sale of the Compound
or the Product, now or during the term hereof, (a) owned by BI or one of its
Affiliates, or (b) to the extent BI (or its Affiliate) is permitted to grant a
sublicense to Vion, licensed to BI or one of its Affiliates by a Third Party.
<PAGE>
1.4 "BI Trademarks" means trademarks for use on the Product (other
than the Vion Trademarks) designated by BI from time to time in accordance with
Section 3.3(a) below.
1.5 "Commercially reasonable and diligent efforts" means those efforts
consistent with the exercise of prudent scientific and business judgment, as
applied to other products of similar scientific and commercial potential in the
country in which the Product would be marketed and sold.
1.6 "Compound" means the compound porfiromycin.
1.7 "Confidential Information" means all information and materials
received by either party from the other party pursuant to this Agreement and all
information and materials developed in the course of the parties' collaboration,
including, without limitation, Know-How of each party, subject to the exceptions
set forth in Section 7.2.
1.8 "Deductions" means: (a) trade discounts, trade credits or returns,
recalls, chargebacks, rebates and prompt payment discounts, (b) transportation
charges and insurance expenses, (c) Medicare, Medicaid and managed care rebates,
fees or refunds actually granted to health care organizations, governments and
their agencies, purchasers and reimbursers, all of which are granted in the
ordinary course of BI's business, (d) any government imposed fees, other than
income taxes, required to permit manufacture, marketing, or sale of the Product
in the Territory, such fees include, but are not limited to, establishment fees,
submission review fees, and product registration fees, and (e) sales taxes, use
taxes, duties and other similar taxes borne by BI, its Affiliates, Recognized
Agents or permitted sublicensees provided, in each case, to the extent such
items are actually included in the price charged to such Third Parties for the
Product.
1.9 "Development Plan" means the plan prepared pursuant to this
Agreement by BI for development and commercialization of the Product. A copy of
which Development Plan will be provided to Vion. The Development Plan may be
amended by BI at BI's sole discretion.
1.10 "Development Work" means the research and development program
performed by BI as described in the Development Plan under BI's direction and
conducted in accordance with the terms and conditions of this Agreement.
1.11 "Development Work Under The Original Agreement" shall mean the
research and clinical development program performed by the parties in accordance
with the terms and conditions of the Original Agreement.
1.12 "FDA" means the United States Food and Drug Administration (or its
substantial equivalent in any foreign country).
2
<PAGE>
1.13 "FDA Act" means the United States Food, Drug and Cosmetic Act, as
amended.
1.14 "First Commercial Sale" of the Product shall mean the first sale
for use or consumption of the product in a country after required marketing and
pricing approval has been granted by the governing health regulatory authority
of such country. A sale to an Affiliate, Recognized Agent or permitted
sublicensee shall not constitute a First Commercial Sale.
1.15 "IND" means Investigational New Drug Application No. 52,804 filed
for the Product with the FDA or its substantial equivalent in any foreign
country.
1.16 "Invention" means any discovery or invention made by either party
relating to the Compound or Product.
1.17 "Know-How" means techniques; inventions, practices; methods;
knowledge; know-how; skill; experience; and test data, including, without
limitation, pharmacological, toxicological and clinical test data, analytical
and quality control data.
1.18 "Major Country" means any of the following: (i) the European
Union, and (ii) the United States.
1.19 "NDA" means a New Drug Application in the United States (or the
equivalent application in any other country) and all supplements filed pursuant
to the requirements of the FDA, including all documents, data and other
information concerning products which are necessary for or included in NDA
Approval.
1.20 "NDA Approval" means FDA approval of an NDA.
1.21 "Net Sales" means the gross amounts invoiced by BI, its Affiliates
or to the extent permitted under Section 3.4, Recognized Agents or permitted
sublicensees of BI or its Affiliates, to Third Parties for sales of the Product
for use in the treatment or prevention of cancer in humans less the Deductions
as determined in accordance with Section 4.3 below. The transfer of the Product
by BI or one of its Affiliates to (i) another Affiliate of BI, (ii) a permitted
sublicensee of BI, or (iii) a Recognized Agent shall not be considered a sale.
1.22 "North America" shall mean the United States of America and
Canada.
1.23 "Original Agreement" means the Collaboration Development and
Distribution Agreement between Vion and BI dated November 24, 1997.
1.24 "Patent Rights" means all rights existing during or after the term
of the Original Agreement or this Agreement under (a) patents (including
inventor's certificates) that include one or more Valid Claims, including
without limitation any substitution, extension, registration, confirmation,
reissue, re-examination, renewal, supplementary protection certificate or the
like and (b) pending applications for patents, including without limitation any
continuation, division or continuation-in-part thereof and any provisional
applications.
3
<PAGE>
1.25 "Product" means a pharmaceutical product in an injectable dosage
form, containing the Compound.
1.26 "Recognized Agent" shall mean an entity other than an Affiliate of
BI through which BI regularly distributes and sells its products in a particular
country or region.
1.27 "Royalty" shall have the meaning set forth in Section 4.2.
1.28 "Royalty Term" means, in any country, the period of time equal to
the longer of: (a) if the sale of the Product in such country is covered by a
Valid Claim, the term of such Valid Claim; or (b) seven (7) years from the date
of the First Commercial Sale of the Product in such country, unless modified by
the terms of Article 11.
1.29 "Territory" shall mean all countries and territories in the world.
1.30 "Third Party" means any entity other than Vion or BI or an
Affiliate or sublicensee of Vion or BI.
1.31 "Trademarks" means the Vion Trademarks and the BI Trademarks.
1.32 "Transition Plan" means the plan developed by BI and Vion to
facilitate the transfer of research and development conducted, managed or
otherwise facilitated by Vion (including, but not limited to activities
conducted by Covance Clinical Research, Ltd., Covance Inc., and/or Pharm-Olam,
Ltd.) under the Original Agreement to BI and as further defined in Article 10.
The Transition Plan is attached hereto as Exhibit A.
1.33 "Valid Claim" means, to the extent covering the Compound or the
Product, a marketing exclusivity right conferred as a result of: (i) a
designation as a drug for rare diseases or conditions under Section 526 et. al.
of the FDC Act (or the equivalent rights in any country outside the United
States), or (ii) an exclusive right to sell under an NDA pursuant to Section 505
(j) (4) of the FDC Act (or the equivalent rights in any country outside the
United States).
1.34 "Vion Technology" means all Know-How and Patent Rights to the
extent necessary or appropriate for the full development, use or sale of the
Compound or the Product, which is, during the term of the Original Agreement,
now, or during the term hereof (a) owned by Vion or one of its Affiliates, or
(b) to the extent Vion (or its Affiliate) is permitted to grant a sublicense to
BI, licensed to Vion or one of its Affiliates by a Third Party. Vion Technology
as of the Effective Date includes, but is not limited to, the Know-How and
Patent Rights listed on Schedule 1 attached hereto.
4
<PAGE>
1.35 "Vion Trademarks" means Promycin(R) and such other trademarks
owned and/or used by Vion for use in conjunction with the development and
commercialization of Product.
ARTICLE 2. RESEARCH AND DEVELOPMENT
-----------------------------------
2.1 Responsibility. BI, consistent with the terms and conditions of
this Agreement, will conduct research and development on the Compound with the
goal of further development of the Compound into Product for commercialization
as more specifically provided in the Development Plan. BI shall have sole
discretion to determine the scope and conduct of research and development of the
Compound and Product. As provided in Section 2.3 below, Vion, consistent with
the Transition Plan, Development Plan, this Agreement, and as otherwise
requested by BI, shall cooperate fully with BI to facilitate development, NDA
submission(s), NDA Approval(s), and maintenance of the NDA(s). Except as
otherwise provided in this Agreement and the attachments hereto, BI shall be
responsible for the preparation of NDA(s), for filing and maintaining NDA(s) and
for all expenses for filing and maintaining NDA(s), which NDA(s) shall be owned
by BI.
2.2 Research and Development Efforts. BI shall use commercially
reasonable efforts to perform its responsibilities under the Development Plan.
The Development Work shall be conducted in compliance with applicable good
clinical, laboratory, and manufacturing practices and other legal requirements.
2.3 Availability of Resources.
(a) Vion shall use its best efforts to facilitate the transition
according to the Transition Plan and this Agreement and support BI's efforts to
secure an NDA and commercialize the Product.
(b) Vion agrees to make its employees and non-employee consultants, and
all data, records or other information relating to development of the Compound
and/or Product reasonably available at its facilities (or at such other
non-employee consultants' facilities, as necessary) and at its own cost to
consult with BI on issues arising during the transition, the Development Work,
commercialization of the Product, or in connection with any request or request
for inspection from any regulatory agency, including, without limitation,
regulatory, scientific, technical and clinical testing issues. Representatives
of BI may, upon reasonable notice and at times reasonably acceptable to Vion (or
other non-employee consultants): (i) visit the facilities where the Development
Work or Development Work Under The Original Agreement is or has been conducted,
provided, that if such facilities are not under Vion's control, Vion shall use
reasonable efforts and cooperate with BI to permit BI access to such facilities;
(ii) consult informally, during such visits and by telephone, with Vion
personnel that performed or is performing the Development Work or Development
Work Under The Original Agreement, and
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(iii) review the data, records, or other information relating to the development
of the Compound and/or Product.
2.4 Allocation of Costs.
(a) All costs that accrue for Development Work Under The Original
Agreement performed prior to May 1, 1999 will be allocated according to the
terms of the Original Agreement. BI shall, subject to Section 4.2(b) below,
reimburse to Vion Vion's share of the costs of development for Development Work
Under The Original Agreement performed between May 1, 1999 and the Effective
Date.
(b) Notwithstanding Section 2.4(a) above, the parties acknowledge and
agree that Covance fees for Development Work Under The Original Agreement
performed prior to September 27, 1999 is an amount fixed at [] and Covance
non-investigator pass-through fees accrued prior to September 27, 1999 is an
amount fixed at []. BI shall reimburse Vion for [] of these costs.
(c) Except as expressly provided in the Transition Plan or this
Agreement, or as agreed from time to time by the parties, all costs of
development for Development Work performed after the Effective Date shall be the
sole responsibility of BI. Notwithstanding the foregoing, in no event shall BI
be obligated to pay any late charges, penalties or damages Vion has incurred or
may incur for failure to make any timely payments to its vendors or as the
result of its failure or alleged failure to fulfill any obligations to its
vendors, including penalties for early termination of contracts with vendors
including, but not limited to, []
(d) The parties acknowledge and agree that, pursuant to the Original
Agreement, Vion is responsible for the manufacture and costs of Compound and
Product necessary to conduct Development Work Under The Original Agreement. BI
agrees to purchase from Vion, at a price equal to the lesser of U.S. [] per gram
or Vion's actual cost, Compound that: (i) was purchased by Vion prior to the
Effective Date, (ii) meets all required technical specifications (which shall be
mutually agreed to by BI and []), iii) has been manufactured according to all
applicable good manufacturing standards (including, but not limited to, United
States cGMP regulations) and in a manner that allows the Compound to be used
without restriction in BI's Development Work pursuant to this Agreement, and
(iv) in amounts reasonably necessary and appropriate, as determined solely by
BI, to perform Development Work pursuant to this Agreement. BI may, in its sole
discretion, analyze Compound or Product described in this Section 2.4(d) to
determine compliance with the specifications. BI shall purchase Compound
pursuant to this Section 2.4(d) on a standard Boehringer Ingelheim
Pharmaceuticals, Inc. purchase order and all the terms and conditions of such
purchase order shall apply unless explicitly modified by this Agreement.
(e) Preclinical studies performed by Vion will be appropriately audited
at Vion's expense for quality assurance, such audits to be completed prior to
January 1, 2000. Any remediation required for preclinical studies performed by
Vion shall be performed at Vion's sole expense.
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2.5 Disclosure; Reports. BI will meet annually, or as mutually agreed,
with Vion senior management to provide the status of the Development Work and
commercialization of the Product.
2.6 Exclusivity. Neither Vion, nor any of its Affiliates, shall during
the term of this Agreement either directly or indirectly, enter into any
agreement, or engage in, either alone or with any sublicensee or Third Party,
any research, development, manufacture, or commercialization of the Compound or
Product.
ARTICLE 3. DISTRIBUTION & LICENSE RIGHTS;
-----------------------------------------
COMMERCIALIZATION EFFORTS
-------------------------
3.1 Grant of Rights. For the duration of this Agreement, Vion grants BI
an exclusive license in the Territory under the Vion Technology to develop, use
and sell Compound and Product, and to manufacture Product from Compound.
3.2 Commercialization Efforts.
(a) Subject to Section 3.2(b) and Section 11.2(c) below, BI shall use
commercially reasonable and diligent efforts to commercialize the Product
consistent with the Development Plan. Subject to Section 3.2(b) below, BI shall
have sole discretion to determine the scope and conduct of commercialization
efforts of the Product.
(b) Within twenty-four (24) months after the date of the first NDA
Approval in a Major Country, or thereafter during the term of this Agreement, BI
shall identify in writing to Vion those countries in the Territory that neither
BI, nor its Affiliates nor its permitted sublicensees plans to market and sell
the Product. Upon receipt of such written notice, Vion may elect to market the
Product in the countries so identified, subject to the royalty obligations of
Section 4.2. Should Vion elect to market the Product pursuant to this Section
3.2, and providing that BI is marketing and selling Product in the Territory,
Vion agrees to purchase Product from BI and BI agrees to sell Product to Vion.
The sale price of Product to Vion under this Section 3.2 shall be equal to []
The parties agree to negotiate in good faith such other terms and conditions
required to supply Product to Vion pursuant to this Section 3.2 (b).
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3.3 Trademarks.
(a) Vion hereby grants to BI an exclusive, worldwide royalty-free
license to use the Vion Trademarks in connection with the promotion and sale of
the Product for so long as BI, a BI Affiliate, a Recognized Agent, or
sublicensee is distributing the Product. BI shall have the right to promote and
sell the Product using the Vion Trademarks or any other trademark that, in BI's
sole discretion, BI desires to use in connection with the promotion and sale of
the Product.
(b) Each party shall own, register and maintain, at its own expense,
its own Trademarks.
(c) BI acknowledges that it has and will obtain no proprietary interest
in the Vion company name or the Vion logos (collectively, the "Vion Tradenames")
or the Vion Trademarks and agrees that it: (i) will not attempt to register the
Vion Trademarks or Tradenames, or any colorable imitation thereof, or in any way
assist a Third party to do so; (ii) will not use the same as part of its
corporate or business name; (iii) will not make any representation that it owns
any rights in or to the Vion Trademarks or Tradenames, and (iv) will use the
Vion Trademarks and Vion Tradenames as permitted under this Agreement.
(d) Vion acknowledges that it has and will obtain no proprietary
interest in the BI Trademarks or the BI Tradenames and agrees that it: (i) will
not attempt to register the BI Trademarks or Tradenames, or any colorable
imitation thereof, or in any way assist a Third Party to do so; (ii) will not
use the same as part of its corporate or business name; and (iii) will not make
any representation that it owns any rights in or to the BI Trademarks or
Tradenames.
(e) Should BI, pursuant to Section 3.3(a) above, choose to use the Vion
Trademarks in connection with the promotion and sale of the Product, BI shall
submit, on written request of Vion, but not more than once per year, to Vion's
Quality Assurance Department for review for trademark purposes, sample packaging
of the Product and advertising materials which bear or show the Vion Trademarks.
BI shall not sell any Product or utilize any advertising or packaging materials
bearing or showing the Vion Trademarks which in any way is inconsistent with
this Agreement.
3.4 Assignment or Sublicense to Affiliates or Third Parties.
(a) BI shall have the unrestricted right to assign or sublicense any or
all of its rights or obligations under this Agreement to any of its Affiliates
or to a Third Party; provided, that such assignment shall not relieve BI of its
responsibilities for performance of its obligations under this Agreement.
(b) BI may also sublicense its rights to sell the Product to Recognized
Agents in the Territory.
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3.5 Preservation of Licenses in Bankruptcy.
(a) If Vion should file a petition under bankruptcy laws, or if any
involuntary petition shall be filed against Vion, BI shall be protected in the
continued enjoyment of BI's rights as licensee hereunder to the maximum feasible
extent permitted under the law, including, without limitation, if it so elects,
the protection conferred upon licensees under Section 365(n) of Title 11 of the
United States Code, or any similar provision of any applicable law. Vion shall
give BI reasonable prior notice of the filing of any voluntary petition, and
prompt notice of the filing of any involuntary petition, under any bankruptcy
laws.
(b) The Vion Technology shall, to the extent permitted under the law,
be deemed to be "intellectual property" as that term is defined in 11 U.S.C.
Section 101 or any successor provision and shall include Patent Rights, if any.
ARTICLE 4. PAYMENT OBLIGATIONS
------------------------------
4.1 Milestone Payments. Upon achievement of each of the following
milestones (in whatever order they occur), BI shall pay to Vion the
nonrefundable milestone payments set forth below:
(a) [];
(b) []
All such payments shall be made by wire transfer to the bank account designated
by Vion within thirty (30) days after achievement of the applicable milestone.
4.2 Royalties.
(a) BI shall pay to Vion a royalty on the Net Sales of the Product in
North America at a royalty rate of [] percent. BI shall pay to Vion a royalty on
the Net Sales of the Product in the remainder of the Territory at a royalty rate
of []. In the event that Vion markets the Product pursuant to Section 3.2(b),
Vion shall pay to BI a Royalty on the Net Sales of the Product in the countries
so identified at a royalty rate of []. Royalty payments shall continue to accrue
and be payable with respect to sales of the Product and will automatically
expire on a country-by-country basis upon the expiration of the Royalty Term in
such country.
(b) Notwithstanding Section 4.2 (a) above, the parties acknowledge that
BI paid to Vion an initial license fee pursuant to Section 6.1 of the Original
Agreement in the amount of U.S. $4.0 million, which amount Vion was to have used
exclusively for the development of Promycin(R) as defined by the terms of the
Original Agreement. Pursuant to the Transition Plan, Vion shall provide an
accounting of the amount of the initial license fee that has been used for
development of Promycin(R). Any amount of the initial
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license fee that has not been used for development of Promycin(R) ("Remaining
Amount") shall be identified and applied against any costs of development for
which BI has agreed to reimburse Vion pursuant to Section 2.4. Any portion of
the Remaining Amount still remaining thereafter shall be set off by BI against
Royalty payments in installments equal to no more than [] of any applicable
Royalty.
4.3 Net Sales and Deemed Deductions. For twelve (12) months following
the First Commercial Sale (hereinafter, the "First Annual Period", each twelve
(12) month period thereafter, an "Annual Period") in order to facilitate BI's
data collection and payment of Royalties, Deductions for the First Annual Period
shall be deemed to be equal to ten percent (10%) of the gross invoice amount of
Product sold to Third Parties for use in the treatment or prevention of cancer
in humans (the "Deemed Amount"); provided, however, that: (a) within sixty (60)
days following the end of the First Annual Period and each Annual Period
thereafter, BI shall provide Vion with all necessary information (in sufficient
detail) to permit Vion to confirm whether the Deemed Amount accurately reflects
the actual Deductions for the applicable Annual Period, and (b) within sixty
(60) days thereafter, the parties shall: (i) determine the actual Deductions
pertaining to the sale or other disposition of the Product for the applicable
Annual Period; (ii) if the Deemed Amount is determined to be greater than or
less than the actual Deductions by more than five percent (5%) or $50,000,
whichever is larger, make prompt retroactive adjustments to the Royalty payments
made during such Annual Period on the basis of the Deemed Amount; and (iii)
determine, in good faith, any appropriate adjustments to the Deemed Amount for
the following Annual Period, or if the parties are unable to agree on a Deemed
Amount, agree that actual Deductions shall be used to determine Net Sales
thereafter.
ARTICLE 5. PAYMENT; RECORDS, AUDITS
-----------------------------------
5.1 Payment; Reports. All Royalty payments due under this Agreement
shall be paid within sixty (60) days of the end of each calendar quarter, unless
otherwise specifically provided herein. Each payment of Royalties shall be
accompanied by a report of Net Sales of the Product on a country-by-country
basis in the Territory in sufficient detail to permit confirmation of the
accuracy of the Royalty payment made.
5.2 Exchange Rate; Manner and Place of Payment. Royalty payments and
reports due pursuant to this Agreement shall be calculated and reported for each
calendar quarter. Exchange conversion of foreign payments into U.S. Dollars
shall be made as necessary at the rate of exchange reported by the Deutsche
Bank, Frankfurt am Main, Germany on the date payment is made. All payments owed
under this Agreement shall be made by wire transfer, unless otherwise specified
by the payee.
5.3 Records and Audit. During the term of this Agreement and for a
period of two (2) years thereafter, the parties shall each keep complete and
accurate records pertaining to the development of the Compound and sale or other
disposition of the Product in sufficient detail to permit the other party to
confirm the accuracy of all
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payments due hereunder. Each party shall have the right to cause an independent,
certified public accountant to audit such records to confirm Net Sales and
Royalty for the preceding year. Such audits may be exercised on a mutually
agreed date and during normal business hours once a year. The party requesting
the audit shall bear the full cost of such audit unless such audit discloses a
variance of more than five percent (5%) or $50,000 (whichever is larger) from
the amount of the Net Sales, Royalties or other payments due under this
Agreement. In such case, the audited party shall bear the actual out-of-pocket
cost of such audit. The terms of this Section 5.3 shall survive any termination
or expiration of this Agreement for a period of two years.
5.4 Withholding Obligations.
(a) Subject to Section 5.4(b), BI and Vion (to the extent Vion pays
Royalties pursuant to Sections 3.2(b) and 4.2(a)) shall be entitled to deduct
any required withholding taxes and other statutory duties from the Royalties and
milestone payments to be made pursuant to Sections 4.1 hereof, and pay such
taxes and duties to the proper tax authorities as required by law applicable at
the time of payment.
(b) The parties shall exercise reasonable efforts to insure that any
withholding taxes are reduced to the extent possible under the provisions of the
current or any future double taxation agreement between the United States of
America and the Federal Republic of Germany, under which current law requires a
certificate of tax exemption from the German Bundesamt fuer Finanzen.
(c) In order to achieve the applicable reduction in withholding, Vion
will provide BI with the application for a certificate of tax exemption for
royalties under the United States - Germany Double Taxation Treaty, on the
official form (Application for Tax Exemption) and signed by Vion. The
Certificate for Filing a tax return (IRS Form 6166) shall be enclosed with the
Application for Tax Exemption. BI will provide Vion with the official forms and
Vion will promptly complete them after the Effective Date.
(d) Every three (3) years, or on such other schedule as the parties may
agree, Vion will submit a new Application for Tax Exemption that complies with
the requirements set forth in Section 5.4(c) above.
ARTICLE 6. INTELLECTUAL PROPERTY RIGHTS AND INFRINGEMENT.
---------------------------------------------------------
6.1 Patentable Inventions. BI shall own all Inventions made solely by
its employees and agents, and all Patent Rights claiming such Inventions. Vion
shall own all Inventions made solely by its employees and agents, and all Patent
Rights claiming such Inventions.
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6.2 Infringement by Third Parties.
(a) BI and Vion shall promptly notify each other in writing of any
alleged or threatened infringement of the Trademarks or the BI or Vion
Technology of which they become aware. Both parties shall cooperate with each
other in the defense or prosecution of infringement matters, including if
required to bring such action, the furnishing of a power of attorney.
(b) Vion shall have the first right to bring and control any action or
proceeding with respect to any alleged or threatened infringement of the Vion
Trademarks or the Vion Technology at its own expense and by counsel of its own
choice, and BI shall have the right, at its own expense, to be represented in
any such action by counsel of its own choice. BI shall have the first right to
bring and control any action or proceeding with respect to any alleged or
threatened infringement of the BI Trademarks or BI Technology at its own expense
and by counsel of its own choice, and Vion shall have the right, at its own
expense, to be represented in any such action by counsel of its own choice.
(c) If either party with the first right as provided herein fails to
bring an action or proceeding within (i) ninety (90) days following the notice
of alleged infringement or (ii) ten (10) days before the time limit, if any, set
forth in the appropriate laws and regulations for the filing of such actions,
whichever comes first, the other party shall have the right to bring and control
any such action at its own expense and by counsel of its own choice, and the
party with the first right shall have the right, at its own expense, to be
represented in any such action by counsel of its own choice; provided, however,
that Vion shall not have the right to bring or control any such action with
respect to the alleged infringement of a BI Trademark.
(d) In the event that the party with the second right elects to bring
an action as provided in Section 6.2(c), such party shall be entitled to: (i)
reimbursement of fifty percent (50%) of its costs and expenses, or (ii) offset
fifty percent (50%) of its costs and expenses against Royalties due hereunder
(in the event that BI brings such action), but in no event shall the Royalty to
Vion be reduced by more than fifty percent (50%) of the amount due in any given
calendar quarter; provided, however, that in the event that the party with the
second right elects to bring an action as provided in Section 6.2(c) with
respect to any alleged or threatened infringement of any of the Trademarks, such
party shall be entitled to reimbursement of all of its costs and expenses.
(e) Neither party shall have the right to settle any infringement
litigation under this Section 6.2 in a manner that diminishes the rights or
interests of the other party without the consent of such other party. Except as
otherwise agreed to by the parties as part of a cost sharing arrangement, any
recovery realized as a result of such litigation, after reimbursement of any
litigation expenses of BI and Vion (including, any offset Royalties) shall
belong to the party who brought the action.
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6.3 Infringement of Third Party Rights.
(a) BI and Vion shall promptly notify each other in writing of any
allegation or claim by a Third Party that the manufacturing, marketing or sale
of the Product infringes or may infringe the intellectual property rights of
such Third Party.
(b) Vion shall have the obligation to control any defense of such claim
if it relates to Vion Technology or the Vion Trademarks, and BI shall have the
obligation to control any defense of such claim if it relates to BI Technology
or the BI Trademarks, in each case, at its own expense. In each case, the party
not controlling the defense shall have the right, at its own expense, to be
represented in any such action by counsel of its own choice.
(c) Neither party shall have the right to settle any infringement
litigation under this Section 6.3 in a manner that diminishes the rights or
interests of the other party without the consent of such other party.
ARTICLE 7. CONFIDENTIALITY
--------------------------
7.1 Nondisclosure. During the term of this Agreement and for a period
of ten (10) years after termination hereof, each party will maintain all
Confidential Information in trust and confidence and will not disclose any
Confidential Information to any Third Party or use any Confidential Information
for any purpose except as expressly authorized by this Agreement, including
Section 7.3. Each party may use such Confidential Information only to the extent
required to accomplish the purposes of this Agreement. Each party will use at
least the same standard of care as it uses to protect proprietary or
confidential information of its own to ensure that its employees, agents,
consultants and other representatives do not disclose or make any unauthorized
use of the Confidential Information. Each party will promptly notify the other
upon discovery of any unauthorized use of disclosure of the Confidential
Information.
7.2 Exceptions. Confidential Information shall not include any
information that the receiving party can prove by competent evidence:
(a) Is now, or hereafter becomes, through no act or failure to act on
the part of the receiving party, generally known or available;
(b) Is known by the receiving party at the time of receiving such
information, as evidenced by its records;
(c) Is hereafter furnished to the receiving party by a Third Party, as
a matter of right and without restriction on disclosure;
(d) Is independently developed by the receiving party without the aid,
application or use of Confidential Information; or
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(e) Is the subject of a written permission to disclose provided by the
disclosing party;
7.3 Financial Terms. Except as required by applicable law (including,
but not limited to securities laws), the parties agree that the material
financial terms of this Agreement will be considered Confidential Information of
both parties. Notwithstanding the foregoing, either party may disclose such
terms as are required to be disclosed in its financial statements. Either party
shall have the further right to disclose the material financial terms of this
Agreement under strictures of confidentiality to any potential acquiror, merger
partner or other bona fide potential strategic partner.
ARTICLE 8. REPRESENTATIONS, WARRANTIES AND COVENANTS
----------------------------------------------------
8.1 Corporate Power. Each party represents and warrants to the other
that: (a) it has the legal right and power to enter into this Agreement and to
extend the rights and licenses granted to the other herein; and (b) the
performance of such obligations will not conflict with its charter documents or
any agreements, contracts or other arrangements to which it is a party.
8.2 Organization; Due Authorization. BI represents and warrants to Vion
that BI is a limited liability company duly organized, validly existing and in
good standing under applicable German law and has taken all necessary action to
authorize the execution, delivery and performance of this Agreement. Vion
warrants to BI that Vion is a corporation duly organized, validly existing and
in good standing under applicable Delaware law and has taken all necessary
action to authorize the execution, delivery and performance of this Agreement.
8.3 Binding Agreement. Each party represents and warrants to the other
that, upon the delivery and execution of this Agreement, this Agreement shall
constitute a valid and binding obligation of such party enforceable in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and except as enforceability may be subject to
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
8.4 Intellectual Property Rights. Vion represents and warrants that, as
of the Effective Date, to the best of its knowledge and belief: (a) there are no
unexpired patents claiming the Compound, its uses or methods for its
manufacture; (b) the manufacture, sale and use of the Product as contemplated in
this Agreement, does not infringe the patent rights of any Third Parties; (c)
Vion owns or possesses and shall maintain adequate licenses or other rights to
all Patents and Know-How necessary to grant the licenses granted to BI under
Article 3 hereof and fulfill its other obligations hereunder. Vion further
represents and warrants that, to the best of its knowledge and belief, there are
not now any threatened or pending proceedings against Vion by any Third Party
that would interfere with or prevent BI from using the Vion Technology, the
Compound, its uses or
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methods for manufacture or the Vion Trademarks as provided herein; and (d) none
of the research on the Compound conducted in Dr. Alan Sartorelli's laboratory
was funded by the United States Government. Vion further represents and warrants
to BI that Vion has no Patent Rights, proprietary interest in, or ownership of
any technology in any way relating to manufacture of the Compound or Product.
Vion further represents and warrants that BI by manufacture of the Compound
shall not infringe any proprietary right owned by Vion.
8.5 Compliance with Laws. Each party hereby represents, warrants,
covenants and agrees that it shall comply with all applicable foreign, federal,
state and local laws and regulations relating to the manufacture, use,
distribution and sale of the Product by such party as contemplated by this
Agreement. Vion further represents, warrants, covenants and agrees that it
complied with all applicable foreign, federal, state and local laws and
regulations in performing Development Work Under The Original Agreement.
8.6 Data and Information. Vion represents and warrants that, as of the
Effective Date, to the best of its knowledge and belief, all data and
information provided by Vion to BI hereunder concerning the Vion Technology and
the Compound and Product are true and correct in all material respects.
8.7 Disclaimer of Warranties. The parties understand that the
Collaboration will involve technologies that have not been approved by any
regulatory authority and that neither party guarantees the safety or usefulness
of the Compound of the Product. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY TO THE OTHER PARTY OF ANY
NATURE, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF
NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
8.8 Cooperation. Vion represents and warrants to BI that it will use
its best efforts to transition all its responsibilities under the Original
Agreement that have been transferred to BI pursuant to this Agreement. Vion
further represents and warrants that to the best of its knowledge and belief it
has provided to BI all relevant information and documentation in its possession
pertaining to the Development Work Under The Original Agreement and has given BI
written notification of all matters pertaining to the Development Work Under The
Original Agreement including, but not limited to, all communications (written or
oral) and/or contracts with investigators, FDA, contract research organizations,
vendors or other Third Parties. Vion further represents and warrants that to the
extent clinical, regulatory, or other information which is in Vion's possession
or control is lacking or later required, Vion will promptly notify BI of such
fact and/or promptly provide such information to BI.
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ARTICLE 9. INDEMNITY
--------------------
9.1 Vion Indemnity Obligations. Vion shall indemnify, defend and hold
BI and its Affiliates and their respective employees and agents harmless from
and against any and all claims, liability, damage, loss, cost or expense,
including without limitation reasonable legal fees, in connection with any Third
Party claims which (a) arise out of any breach of any material provision of this
Agreement or any representation or warranty of Vion contained in this Agreement,
or (b) arise out of any claim of infringement of any patent or trademark or
unauthorized use of a trade secret (other than the BI Trademarks or the BI
Technology) in connection with the use of the Vion Technology or Vion Trademarks
as contemplated by this Agreement, (c) arise out of any third party actions
arising out of Vion's activities under the Original Agreement, including but not
limited to, actions arising out of Vion's contracts with Sicor S.p.A., Vinchem,
Inc., Alco Chemicals Ltd., Covance Clinical Research Unit, Ltd., Covance Inc.
9.2 BI Indemnity Obligations. BI shall indemnify, defend and hold Vion,
its Affiliates and their respective employees and agents harmless from the
against any and all claims, liability, damage, loss, cost or expense, including
without limitation reasonable legal fees, in connection with any Third Party
claims which: (a) arise out of any breach of any material provision of this
Agreement or any representation or warranty of BI contained in this Agreement,
or (b) arise out of any claim of infringement of any patent or trademark or
unauthorized use of a trade secret (other than the Vion Trademarks or the Vion
Technology) in connection with the use of the BI Technology or BI Trademarks as
contemplated by this Agreement, or (c) arise out of claims for bodily injury,
death or property damage arising from the distribution, use or sale of the
Product hereunder or manufacture or labeling of the Product when manufactured or
labeled by BI or a BI Affiliate or a BI sublicensee, to the extent attributable
to any failure by BI, its Affiliates or sublicensees to perform their
obligations hereunder in accordance with applicable laws and regulations
(except, in each case, to the extent such claim relates to the negligence or
willful misconduct of Vion).
9.3 Procedure. A party or any of its Affiliates or their respective
employees or agents (the "Indemnitee") that intends to claim indemnification
under this Article 9 shall promptly notify the other party (the "Indenmitor") of
any loss, claim, damage, liability or action in respect of which the Indemnitee
intends to claim such indemnification, and the Indemnitor shall assume the
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that the Indemnitee shall have the right to retain its own counsel,
with the fees and expenses to be paid by the Indemnitor, if representation of
such Indemnitee by the counsel retained by the Indemnitor would be inappropriate
due to actual or potential differing interests between such Indemnitee and any
other party represented by such counsel in such proceedings. The indemnity
agreement in this Article 9 shall not apply to amounts paid in settlement of any
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Indemnitor, which consent shall not be withheld unreasonably.
The failure to deliver notice to the Indemnitor within a reasonable time after
the commencement of any such action, if prejudicial to its ability to defend
such action, shall relieve such Indemnitor of any
16
<PAGE>
liability to the Indemnitee under this Article 9, but the omission so to deliver
notice to the Indemnitor will not relieve it of any liability that it may have
to any Indemnitee otherwise than under this Article 9. The Indemnitee under this
Article 9, its employees and agents, shall cooperate fully with the Indemnitor
and its legal representatives in the investigation of any action, claim or
liability covered by this indemnification.
9.4 Insurance. BI and Vion shall each maintain appropriate product
liability insurance with respect to the development, manufacture and sales of
the product by BI and Vion, respectively, in such amount as BI and Vion,
respectively, customarily maintain with respect to the manufacture or sales of
its other products.
ARTICLE 10. TRANSITION
----------------------
10.1 Transition Plan. The parties acknowledge and agree that to meet
the goals of this Agreement, a successful, efficient and complete transition of
Vion's Development Work Under The Original Agreement to BI (including all
Development Work Under The Original Agreement actually performed by Vion as well
as work performed by Third Parties managed by Vion) is required. As such, Vion
agrees to fully meet its obligations under the Transition Plan, a copy of which
is attached hereto and made a part hereof. The Transition Plan shall, at a
minimum, require: i) a financial accounting of all the costs of Development Work
Under The Original Agreement up to the Effective Date, ii) a list of all vendors
or other Third Parties engaged directly or indirectly by Vion that have assisted
or performed Development Work Under The Original Agreement, iii) that BI receive
a copy of all contracts entered into by Vion relating to the Vion Technology,
the Compound or the Product, including, but not limited to, all contracts with
Vendors identified pursuant to this Section 10.1(ii) above, iv) a copy of all
purchase orders relating to Development Work Under The Original Agreement
outstanding as of Effective Date, and v) a formal acknowledgment by Vion that it
has met all the terms and requirements of the Transition Plan and this Article
10.
10.2 Pre-transition Audits and Remediation.
(a) Each party acknowledges that this Agreement is contingent upon the
successful completion and satisfactory results (as determined solely by BI) of
audits and assessments of Vion's Development Work Under The Original Agreement
including, but not limited to, audits or assessments of Sicor S.p.A.
(b) Each party acknowledges transfer of responsibility and ownership of
INDs to BI is contingent upon: i) the successful completion of transfer of Study
PORF-96-001 from Covance to BI, ii) BI's completion of clean up and entry of all
data for all patients recruited into Study PORF-96-001 prior to October 31,
1999, iii) BI's completion of a safety assessment based on the transferred and
updated SAE database of Study PORF-96-001 from Covance, and iv) FDA confirmation
of the acceptability of study PORF-96-001.
17
<PAGE>
10.3 INDs. Vion agrees that, upon satisfaction of the conditions in
Section 10.2 above and upon BI's request, it will execute or cause to be
executed all documentation required to transfer full and exclusive control and
ownership of the INDs to BI.
10.4 Joint Technology. BI and Vion each acknowledge that no Joint
Technology, as defined by Section 1.21 of the Original Agreement, exists as of
the Effective Date of this Agreement.
10.5 Original Agreement. BI and Vion each acknowledge and agree that
except to the extent expressly and explicitly modified by this Agreement, all
terms, conditions, obligations, and rights of each party under the Original
Agreement remain in full force and effect until the Effective Date. Upon the
Effective Date, the Original Agreement will terminate.
ARTICLE 11. TERM AND TERMINATION
--------------------------------
11.1 Term. Unless terminated earlier pursuant to Section 11.2, this
Agreement shall expire and the licenses granted by Vion to BI pursuant to
Sections 3.1 and 3.3 (subject to the terms and conditions set forth therein)
shall become fully-paid, on a country by country basis, upon the expiration of
the Royalty Term in such country.
11.2 Early Termination. Either party may terminate this Agreement upon
the occurrence of any of the following:
(a) upon or after the bankruptcy, insolvency, dissolution or winding up
of the other party (other than dissolution or winding up for the purposes of
reconstruction or amalgamation);
(b) upon the material breach of any material provision of this
Agreement by either party (a "Material Breach"), which has not been cured within
sixty (60) days after written notice from the other party (a "Default"). The
non-Defaulting party may, in its discretion, terminate this Agreement
immediately upon written notice of such Default and proceed against the other
party for all applicable damages. Without limiting the generality of the
foregoing, the parties hereto expressly agree that in the event of a Default by
either of them, in addition to all other remedies available at law or in equity,
which may be available to the other, it is agreed that the non-Defaulting party
may, at its option, notify the Defaulting party that it wishes to proceed with
the development of the product on an exclusive basis. []
[]
(c) Notwithstanding the foregoing, or the provision of Section 3.4, BI
shall have the right in it's sole discretion, upon thirty (30) days prior
written notice, to cease development, manufacture, or sale of Compound or
Product. If BI exercises its rights
18
<PAGE>
under this Section while the product is still in development, BI will phase out
and terminate the development program as it deems appropriate. Upon expiry of
the thirty (30) day period each party hereto shall have no further obligations
to the other, except as set forth Section 11.3 below.
11.3 Effect of Expiration or Termination.
(a) 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 expiration or termination, including without limitation, the
obligation to pay Royalties on Product sold prior to expiration or termination.
(b) Termination of this Agreement under Section 11.2 shall not
prejudice any claim for damages a party may have under this Agreement.
(c) Except as otherwise provided in Article 11, upon expiration or
termination of this Agreement both parties shall immediately cease using the
other party's BI or Vion Technology and Confidential Information.
(d) Termination of this Agreement pursuant to Section 11.2(c) shall
cause the Royalty Term to expire concurrently with the date of termination.
(e) The obligations and rights of the parties under Articles 7, 9, and
12, and Sections 5.3, 8.4, 11.1 and 11.3 shall survive termination or expiration
of this Agreement.
ARTICLE 12. MISCELLANEOUS
-------------------------
12.1 Assignment.
(a) Notwithstanding any provision of this Agreement to the contrary,
either party may assign any of its rights or obligations under this Agreement:
(i) in any country to any Affiliates; provided, however, that such assignment
shall not relieve the assigning party of its responsibilities for performance of
its obligations under this Agreement; or (ii) in connection with the sale of all
or substantially all of its assets.
(b) This Agreement shall survive any merger of either party with or
into another party and no consent for a merger or similar reorganization shall
be required hereunder; provided, that in the event of such merger or in the
event of a sale of all assets, no intellectual property rights of the acquiring
corporation shall be included in the technology licensed hereunder.
(c) This Agreement shall be binding upon and inure to the benefit of
the successors and permitted assigns of the parties. Any assignment not in
accordance with this Agreement shall be void.
19
<PAGE>
12.2 Publicity.
(a) Vion shall not, without the prior review and written consent of BI,
publish in any form or in any media any information relating to the Compound or
Product or this Agreement.
(b) Each party agrees not to publicize or otherwise use the other
party's name except upon the express written consent of such other party.
12.3 Headings. The descriptive headings in this Agreement are included
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
12.4 Force Majeure. Neither party shall lose any rights hereunder or be
liable to the other party for damages or losses on account of failure of
performance by the defaulting party if the failure is occasioned by government
action, war, fire, explosion, flood, strike, lockout, embargo, act of God, or
any other similar cause beyond the control of the defaulting party, provided
that the party claiming force majeure has exerted all reasonable efforts to
avoid or remedy such force majeure.
12.5 Payment in U.S. Dollars. All payments due to either party under
this Agreement shall be paid in U.S. Dollars.
12.6 Notices. Any notices or communications provided for in this
Agreement to be made by either of the parties to the other shall be in writing,
in English, and shall be made by prepaid air mail with return receipt or by
overnight or similar courier service, addressed to the other at its address set
forth below. Any such notice of communication may also be given by hand, or
facsimile to the appropriate designation. Notices shall be sent:
If to BI, to: Boehringer Ingelheim International GmbH
Postbox 200
D-55216 Ingelheim, Rhein
Germany
Attention: Corporate Licensing
Telephone: 011 49 61 32 77 50 63
Facsimile: 011 49 61 32 77 42 25
With a copy to:
Boehringer Ingelheim International GmbH
Postbox 200
D-55216 Ingelheim, Rhein
Germany
Attention: Head of Legal Department
Telephone: 011 49 61 32 77 2106
Facsimile: 011 49 61 32 77 3583
20
<PAGE>
If to Vion, to: Vion Pharmaceuticals, Inc.
Four Science Park
New Haven, Connecticut 06511
Attention: President and CEO
Telephone: 1 203 498 4210
Facsimile: 1 203 498 4211
With a copy to:
Terence Jones, Esq.
Wiggin & Dana
One Century Tower
P.O. Box 1832
New Haven, Connecticut 06508-1832
Telephone: 1 203 498 4324
Facsimile: 1 203 782 2889
21
<PAGE>
Either party may, by like notice, specify or change an address to which notices
and communications shall thereafter be sent. Notices sent by mail, facsimile or
cable shall be effective upon receipt and notices given by hand shall be
effective when delivered.
12.7 Governing Law. This Agreement shall be governed by the laws of the
State of Connecticut, as such laws are applied to contracts entered into and to
be performed within such state without giving effect to conflicts of laws
principles.
12.8 Waiver. Except as specifically provided for herein, the waiver
from time to time by either of the parties of any of their rights or their
failure to exercise any remedy shall not operate or be construed as a continuing
waiver of same or of any other of such party's rights or remedies provided in
this Agreement.
12.9 Severability. If any term, covenant or condition of this Agreement
or the application thereof to any party or circumstance shall, to any extent, be
held to be invalid or unenforceable, then (a) the remainder of this Agreement,
or the application of such term, covenant or condition to parties or
circumstances other than those as to which it is held invalid or unenforceable,
shall not be affected thereby and each term, covenant or condition of this
Agreement shall be valid and be enforced to the fullest extent permitted by law;
and (b) the parties hereto covenant and agree to renegotiate any such term,
covenant or application thereof in good faith in order to provide a reasonably
acceptable alternative to the term, covenant or condition of this Agreement or
the application thereof that is invalid or unenforceable, it being the intent of
the parties that the basic purposes of this Agreement are to be effectuated.
12.10 Independent Contractors. It is expressly agreed that Vion and BI
shall be independent contractors and that the relationship between the two
parties shall not constitute a partnership or agency of any kind. Neither Vion
nor BI shall have the authority to make any statements, representations or
commitments of any kind or to take any action, which shall be binding on the
other, without the prior written authorization of the party to do so.
12.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.12 Entire Agreement. This Agreement sets forth all of the covenants,
promises, agreements, warranties, representations, conditions and understandings
between the parties hereto and supersede and terminate all prior agreements and
understanding between the parties. There are no covenants, promises, agreements,
warranties, representations, conditions or understandings, either oral or
written, between the parties other than as set forth herein and therein. No
subsequent alteration, amendment, change, agreement or addition to this
Agreement shall be binding upon the parties hereto unless reduced to writing and
signed by the respective authorized officers of the parties.
22
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement in
duplicate originals by their proper officers as of the date and year first above
written.
BOEHRINGER INGELHEIM VION PHARMACEUTICALS, INC.
INERNATIONAL GmbH
By: /s/ Barner By: /s/ Alan Kessman
Name: Barner Name: Alan Kessman
Title: Title: President
By: /s/ Muller By: /s/ Thomas Mizelle
Name: Muller Name: T. Mizelle
Title: Authorized Signatory Title: VP Operations
23
EXHIBIT 10.33
-------------
CONFIDENTIAL TREATMENT HAS BEEN REQUESTED
WITH REGARD TO PORTIONS OF THIS EXHIBIT
AMENDMENT TO CLINICAL DEVELOPMENT AGREEMENT
This Amendment is entered into this 27th day of October, 1999 by and
between Vion Pharmaceuticals, Inc., Four Science Park, New Haven, Connecticut
("Vion"), Covance Clinical Research Unit Ltd., Hyde Street, Leeds, United
Kingdom ("Covance"), and Covance Inc., 210 Carnegie Center, Princeton, New
Jersey ("Covance"), and amends the Clinical Development Agreement between Vion
and Covance dated June 6, 1997 ("Original Agreement").
WHEREAS, the parties to the Original Agreement desire to effect an
amicable and efficient transfer of Covance's responsibilities (except as
provided hereinafter in Section 2(b)) and terminate the Original Agreement.
NOW THEREFORE, in consideration of the premises and the undertakings of
the parties hereinafter set forth, the parties agree as follows:
1. DEFINITIONS
a. "Affiliate" means an individual, trust, business trust, joint
venture, partnership, corporation, limited liability company,
association or any other entity which owns, is owned by or is under
common ownership with a party. For the purposes of this definition,
the term "owns" (including, with correlative meanings, the terms
"owned by" and "under common ownership with") as used with respect
to any party, shall mean the possession (directly or indirectly) of
more than fifty percent (50%) of the outstanding voting securities
of a corporation or comparable equity interest in any other type of
entity.
b. "FDA" means the United States Food and Drug Administration (or its
substantial equivalent in any foreign country).
c. "IND" means Investigational New Drug Application No. 52,804 filed
for the Drug with the FDA or its substantial equivalent in any
foreign country.
d. All capitalized terms used herein and not otherwise defined, shall
have the meaning ascribed thereto under the Original Agreement.
e. "BIPI" means Boehringer Ingelheim Pharmaceuticals, Inc.
Page 1 of 5
<PAGE>
2. OBLIGATIONS OF COVANCE
a. Covance shall use its best efforts to cooperate with Vion and BIPI
to transition its responsibilities under the Original Agreement
according to the Transition Plan, which is attached as Appendix 1
to this Amendment (and which may be amended from time to time
during the transition period). For the purposes of this amendment,
"best efforts" shall be those efforts Covance would apply to a
similar project for its most important clients in good standing.
BIPI and Vion agree that they shall accept such responsibilities in
accordance with the Transition Plan no later than November 30,
1999.
b. Covance shall continue to perform IVRS patient randomization and
assignment and clinical trial supply management according to the
methodology and fee structure as under the Original Agreement and
in accordance with the Roles and Responsibilities for Protocol No.
PORF-96-001 dated January 15, 1999 and approved January 18, 1999.
The fee to Covance for IVRS patient randomization and assignment
and clinical trial supply management shall be []. The parties agree
that fees described in this Section 2(b) apply to the first []
patients randomized and assigned. Covance agrees to perform further
IVRS randomization and assignment and clinical trial supply
management at BIPI's request on a PRO RATA cost basis.
c. Covance will continue to be responsible for site management of each
individual research site in accordance with the methodology
described in the Original Agreement and Transition Plan until BIPI
(or a BIPI Affiliate) is prepared to take over responsibility for
such tasks but in no event later than November 30, 1999. It is
understood and agreed that during the transition herein described,
these tasks may be performed jointly by Covance and BIPI (or a BIPI
Affiliate). All agreements with Investigators shall be assigned by
Covance and accepted by BIPI (or a BIPI Affiliate) no later than
such date pursuant to a written acknowledgment of such assignment
and acceptance from each individual research site at which point
Covance's responsibility for such tasks shall cease. After BIPI (or
a BIPI Affiliate) has executed a contract with an individual
research site, Covance shall continue to be responsible for
reporting all (including Pharm-Olam generated) expeditable and/or
severe adverse events to the FDA (or other relevant agencies) until
the date upon which BIPI provides written notice to Covance that
acceptable data bases have been established at BIPI and all
relevant BIPI Affiliates, but in no event shall Covance be so
responsible beyond November 30, 1999.
d. BIPI and Covance shall enter a contract for performance of the
activities described in Section 2(b).
Page 2 of 5
<PAGE>
3. OBLIGATIONS OF VION
a. For all activities performed by Covance and not yet paid by Vion
through September 27, 1999, Vion shall pay Covance a total of [].
This payment shall be in full settlement of all amounts owed to
Covance by Vion for Covance activities under the Original Agreement
through September 27, 1999 and shall be paid to Covance no later
than November 30, 1999.
b. Vion shall reimburse Covance for pass-through Investigator fees
that have been incurred by Covance through September 27, 1999 but
not yet reimbursed by Vion. The amount of the pass-through
Investigator fees incurred through September 27, 1999 is
approximately []. For all other outstanding pass-through fees
incurred by Covance through September 27, 1999, Vion shall
reimburse Covance a total of []. The sums described herein shall be
paid no later than November 30, 1999.
c. For all fees and pass-through costs other than Investigator fees
after September 27, 1999, including the transition activities
described in Section 2(a) above and the Transition Plan, Vion shall
pay Covance a fee of [], such fee payable within fifteen (15) days
of the date upon which BIPI provides written notice to Covance that
acceptable data bases have been established at BIPI and all
relevant BIPI Affiliates, but in no event later than December 15,
1999. Vion shall continue to reimburse Covance for pass-through
Investigator fees incurred by Covance within thirty (30) days of
invoice.
4. ORIGINAL AGREEMENT
a. Upon the date of formal transfer of responsibility for all INDs
from Vion to BIPI as defined in Section 5 below, the Original
Agreement will terminate.
b. The confidentiality obligations contained in Section 5, the
indemnification provisions of Sections 2(l) and 3(h) of the
Original Agreement shall survive termination of the Original
Agreement. In addition, the parties agree that the obligation to
comply with all applicable regulations shall also survive
termination of the Original Agreement.
Page 3 of 5
<PAGE>
5. RELEASE FROM LIABILITY
a. Upon full review of all the data and information relating to
Covance's work under the Original Agreement and formal transfer of
responsibility for all INDs from Vion to BIPI, Vion and Covance
shall execute a mutual release, from further responsibility or
liability under the Original Agreement (including a waiver of any
early termination penalties described in Section 8 of the Original
Agreement). Such release shall not release Vion or Covance from the
claims of third parties pursuant to Sections 2(l) and 3(h) of the
Original Agreement. For the purposes of this Amendment, "formal
transfer of responsibility" is defined, on a country-by-country
basis, as notification from BIPI (or a BIPI Affiliate) to the FDA
of the transfer of sponsor responsibility for the IND from Vion to
BIPI (or a BIPI Affiliate). The review described herein shall be
completed by BIPI and Vion no later than March 31, 2000. In the
event of any complaints with respect to the data and information so
reviewed, BIPI and Vion shall provide Covance with prompt written
notice of the same and Covance shall be given an opportunity, if
practicable, to cure any identified deficiency. In the event of a
dispute among the parties with respect to this review, the parties
agree to submit the dispute to non-binding mediation in the event
that executive discussion cannot resolve the issue to everyone's
satisfaction.
Page 4 of 5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date and year first
written above.
VION PHARMACEUTICALS, INC. COVANCE CLINICAL
RESEARCH UNIT LTD.
By: /s/ Thomas Mizelle By: /s/ Charles C. Harwood, Jr.
--------------------------- ---------------------------
Its: VP Operations Its: Director
--------------------------- ---------------------------
Date: October 27, 1999 Date: October 28, 1999
--------------------------- ---------------------------
COVANCE INC.
By: /s/ Charles C. Harwood, Jr.
---------------------------
Its: Senior Vice President and Chief Financial Officer
-------------------------------------------------
Date: October 28, 1999
---------------------------
The undersigned hereby agrees to be bound by the applicable provisions of
Sections 2(a), (c), (d) and 5 hereof.
BOEHRINGER INGELHEIM
PHARMACEUTICALS, INC.
By: /s/ M. Haehl
---------------------------
Its: Sr. VP Medical/DRA
---------------------------
Date: October 27, 1999
---------------------------
Page 5 of 5
EXHIBIT 21.1
------------
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, No. 333-61477, No. 333-79939
and No. 333-95671) of Vion Pharmaceuticals, Inc. and in the related Prospectus
of our report dated February 18, 2000, except for Note 11, as to which the date
is March 27, 2000, with respect to the financial statements of Vion
Pharmaceuticals, Inc. included in this Annual Report (Form 10-KSB) for the year
ended December 31, 1999.
ERNST & YOUNG LLP
Stamford Connecticut
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 11,105,262
<SECURITIES> 0
<RECEIVABLES> 1,592,583
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,806,249
<PP&E> 659,823
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,933,805
<CURRENT-LIABILITIES> 2,895,073
<BONDS> 0
5,179,287
4,982
<COMMON> 182,421
<OTHER-SE> 5,665,861
<TOTAL-LIABILITY-AND-EQUITY> 13,933,805
<SALES> 0
<TOTAL-REVENUES> 3,154,194
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,189,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,603
<INCOME-PRETAX> (10,768,924)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,768,924)
<EPS-BASIC> (0.74)
<EPS-DILUTED> (0.74)
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