As filed with the Securities and Exchange Commission on July 26, 1996
Registration No. ________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
HEMISPHERx BIOPHARMA, INC.
(Name of Issuer in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial Classification Code Number)
52-0845822
(I.R.S. Employee Identification No.)
--------------------
1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080
(Address and telephone number of principal executive offices
and principal place of business)
--------------------
William A. Carter, M.D., Chief Executive Officer
Hemispherx Biopharma, Inc.
1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
(215) 988-0080
(Name, address and telephone number of agent for service)
Copies of all communications to:
Anthony M. Collura, Esq.
Silverman, Collura & Chernis, P.C.
381 Park Avenue South, Suite 1601
New York, New York 10016
(212) 779-8600
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]
================================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
Proposed Proposed
Title of Each Class of Amount to Maximum Maximum Amount of
Securities to be Registered Be Registered(2) Offering Price Aggregate Offering Registration Fee
Per Share(1) Price(1)
===================================================================================================================================
===================================================================================================================================
<S> <C> <C> <C> <C>
Common Stock, $.001 par value 2,770 $2.00 $5,540 $1.91
===================================================================================================================================
Common Stock $.001 par value
underlying Warrants 890,543 $2.00 $1,781,086 $614.15
===================================================================================================================================
Common Stock $.001 par value 2,427,275 $2.00 $4,854,550 $1,673.98
underlying Series D Preferred Stock
===================================================================================================================================
TOTAL 3,320,588 $2.00 $6,641,176 $2,290.04
===================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c).
(2) Includes such additional number of shares as may become issuable by reason
of anti-dilution provisions pursuant to Rule 416.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
<PAGE>
HEMISPHERx BIOPHARMA, INC.
Cross-Reference Sheet to Prospectus on Form S-1
Furnished Pursuant to Item 501(b) of Regulation S-K
Item From S-1 Caption Location in Prospectus
- ---- ---------------- ----------------------
1. Forepart of the Registration Outside Front Cover Page
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover Page
Pages of Prospectus Outside Front Cover Page
3. Summary Information, Risk Prospectus Summary; Selected
Factors and Ratio of Earnings Financial Data; Risk Factors
to Fixed Charges
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Resales by Selling Shareholders
8. Plan of Distribution Cover Page; Underwriting;
Resales by Selling Shareholders
9. Description of Securities Description of Securities;
to be Registered Shares Eligible for Future Sale
10. Interest of Named Experts Experts and Legal Matters
and Counsel
11. Information with Respect to Business; Description of
the Registrant Securities; Financial Statements;
Selected Financial Data;
Management's Discussion
and Analysis of Financial
Condition and Results of
Operations; Certain Transactions;
Management; Price Range of Common
Stock Dividend Policy;
Principal Shareholders
12. Disclosure of Commission Not Applicable
Position on Indemnification
for Securities Act Liabilities
iii
<PAGE>
[TO BE INSERTED ALONG LEFTHAND SIDE OF PROSPECTUS COVER PAGE]
[RED HERRING LEGEND]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of any offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any State.
iv
<PAGE>
PROSPECTUS
DATED JULY 26, 1996 SUBJECT TO COMPLETION
HEMISPHERx BIOPHARMA, INC.
2,770 SHARES OF COMMON STOCK
2,427,275 SHARES OF COMMON STOCK UNDERLYING SERIES D PREFERRED STOCK
890,543 SHARES OF COMMON STOCK UNDERLYING
COMMON STOCK PURCHASE WARRANTS
This Prospectus relates to the possible resale of up to 2,770 shares of the
common stock, $.001 par value (the "Common Stock") of Hemispherx Biopharma, Inc.
(the "Company") currently outstanding, 2,427,275 shares of Common Stock
underlying the Company's Series D Preferred Stock, $.01 par value (the
"Preferred Stock") and up to 890,543 additional shares of Common Stock
underlying certain outstanding Common Stock Purchase Warrants (the "Warrants").
The Warrants represent the right of the registered holder to purchase one share
of Common Stock at an average weighted exercise price of $4.56.
The Company will not receive any proceeds from possible resales by the
Selling Securityholders of their respective shares of Common Stock of the
Company. The Company has agreed to indmenify certain of the Selling
Securityholders against certain liabilities, including certain liabilities under
the Securities Act of 1933, as amended (the "Securities Act"), or contribute to
payments which such Selling Securityholders may be required to make in respect
thereof. The Company will receive gross proceeds of up to $4,064,900 upon
exercise of the Warrants. There can be no assurance that any of the Warrants
will be exercised.
The Selling Securityholders may sell their shares of Common Stock from time
to time, in market transactions, in negotiated transactions, through the writing
of options, or a combination of such methods of sale, at fixed prices which may
be changed, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Securityholders may effect such transactions by selling their shares of Common
Stock to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Securityholders and/or the purchasers of such shares of Common Stock for
whom such broker-dealer may act as agents or to whom they may sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions.) The Company has agreed to bear all
expenses in connection with the registration of the shares of Common Stock to
which this Prospectus relates.
The Company's Units, each Unit consisting of one share of Common Stock and
one Class A Redeemable Warrant (the "Unit"), Common Stock and Class A Redeemable
Warrants (the "Class A Warrants") are quoted on the Nasdaq SmallCap Market
System ("Nasdaq") under the symbols HEMXU, HEMX and HEMXW, respectively. On July
23, 1996 the last sale price of the Units, Common Stock and Class A Warrants as
reported on Nasdaq was $2.625, $2.00 and $.50, respectively.
THESE SECURITIES ARE HIGHLY SPECULATIVE. THEY INVOLVE A HIGH DEGREE OF
RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN A TOTAL
LOSS OF THEIR ENTIRE INVESTMENT (SEE "RISK FACTORS" - PAGE 8)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is July 26, 1996
<PAGE>
ADDITIONAL INFORMATION
With respect to the securities offered hereby, the Company has filed with
the principal office of the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act. For purposes hereof, the term "Registration Statement" means
the original Registration Statement and any and all amendments thereto. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto, to which reference hereby is made. Each
statement made in this Prospectus concerning a document filed as an exhibit to
the Registration Statement is not necessarily complete and is qualified in its
entirety by reference to such exhibit for a complete statement of its
provisions. The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith
files reports and other information with the Commission. Any interested party
may inspect the Registration Statement and its exhibits and other reports and
information filed by the Company with the Commission without charge, or obtain a
copy of all or any portion thereof, at prescribed rates, at the public reference
facilities of the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Registration
Statement and exhibits may also be inspected at the Commission's regional
offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York,
New York 10048.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere or incorporated by reference elsewhere in this Prospectus,
including information under "Risk Factors". See "Glossary of Terms" for the
definition of certain terms used in this Prospectus.
THE COMPANY
Hemispherx Biopharma, Inc. ("HEM" or the "Company") (formerly HEM
Pharmaceuticals Corp.) is a pharmaceutical company using nucleic acid
technologies to develop therapeutic products for the treatment of viral diseases
and certain cancers. Nucleic acid compounds represent a potentially new class of
pharmaceutical products that are designed to act at the molecular level for the
treatment of human disease. The Company's drug technology utilizes specially
configured ribonucleic acid ("RNA"). The Company's double stranded RNA drug
product, trademarked Ampligen(R), which is administered intravenously, is in
human clinical development for various therapeutic indications. Based on the
results of pre-clinical studies and clinical trials, the Company believes that
Ampligen may have broad-spectrum anti-viral and anti-cancer activities. Over 300
patients have received Ampligen in clinical trials authorized by the U.S. Food
and Drug Administration ("FDA") at over twenty clinical trial sites across the
United States, representing the administration of more than 40,000 doses of this
drug.
Ampligen is being developed clinically for use in treating three anti-viral
indications: chronic hepatitis B virus ("HBV") infection (Phase I/II clinical
trial), human immunodeficiency virus ("HIV") associated disorders (Phase II),
and myalgic encephalomyelitis, also known as chronic fatigue syndrome ("ME/CFS")
(Phase II/III). The Company's business strategy is designed around seeking the
required regulatory approvals which will allow the progressive introduction of
Ampligen for HIV followed by HBV and ME/CFS in the U.S., Canada, Europe and
Japan. There can be no assurance that Ampligen will receive regulatory approval
for any of such disorders. Ampligen has received Orphan Drug designation from
the FDA for four indications (AIDS, renal cell carcinoma, chronic fatigue
syndrome and invasive malignant melanoma), the latter two of which were obtained
in December 1993. The Company is also developing a second generation RNA drug
technology, termed Oragen compounds, which the Company believes offers the
potential for broad spectrum antiviral activity by oral administration.
The World Health Organization ("WHO") estimates that there are
approximately 300 million chronic carriers of HBV worldwide. More than 40% of
the persistently infected persons who survive to adulthood will die from
cirrhosis, hepatocellular carcinoma (liver cancer), or some other consequence of
their infection. In the U.S. alone, there are an estimated 1.25 million
carriers. HBV is one of several viruses that cause human hepatitis, or
inflammation of the liver. The Company has been conducting a Phase I/II clinical
trial of Ampligen in the U.S. for the treatment of chronic HBV infection at
Stanford University and the University of Pennsylvania. A significant reduction
in viral components and improvement in liver function was noted during the
course of the Phase I/II clinical trial to date and the drug has been generally
well tolerated. At present, interferon-alpha is the only approved product for
the treatment of this disease; however, 60% to 75% of patients with chronic HBV
ultimately fail to respond to interferon-alpha. The global sales of interferon
are presently estimated at more than $1 billion, largely because of its use in
liver infections.
3
<PAGE>
The Centers for Disease Control ("CDC") has estimated that approximately
one million people in the U.S. are infected with HIV, excluding patients who
have progressed to fully symptomatic AIDS. The WHO has estimated that 30 to 40
million people will be infected with HIV worldwide by the year 2000. The Company
is in Phase II clinical testing of Ampligen in the U.S. for the treatment of
symptomatic HIV infection.
ME/CFS is a condition recently recognized by the CDC and characterized by
unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC is
presently conducting studies to more exactly determine the rate of incidence of
ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the
U.S. is in excess of 200 per 100,000 population. In November 1992, the Company
received approval from the Health Protection Branch ("HPB") of Canada's
Department of Health and Welfare, the federal drug regulatory agency in Canada,
to conduct an open-label clinical trial of Ampligen in patients with severely
debilitating ME/CFS. In this clinical trial, the HPB has authorized the Company
to charge patients for the cost of the Ampligen administered. The Company is
presently receiving limited revenues from sales of Ampligen in Belgium under a
similar cost recovery program. The Company has also received authorization in
1993 from the FDA, in the U.S., and the HPB, in Canada, to initiate a Phase
II/III clinical trial of Ampligen in patients with ME/CFS. The Company is
unaware of any investigational new drugs which are currently at comparable
stages of clinical development for ME/CFS.
The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Based on estimates prepared by the American Cancer Society,
the Company anticipates that approximately 25,000 new cases of renal cell
carcinoma will be diagnosed in the U.S. in 1996. In March and June, 1993,
respectively, the Company was authorized by the FDA, in the U.S., and the HPB,
in Canada, to initiate a Phase II/III clinical trial of Ampligen in renal cell
carcinoma patients. In late 1993, the HPB authorized the Company to proceed with
an open-label clinical trial of Ampligen for renal cell carcinoma in Canada. The
HPB has authorized the Company to charge patients for the cost of the Ampligen
administered in this clinical trial. The Company has not initiated these
programs to date because of limited resources and a shift in the Company's
clinical priorities. The Company does not believe that approvals for these
studies will be withdrawn as a result of the delay since the approvals were not
conditioned upon a particular commencement date. Based on estimates prepared by
the American Cancer Society, the Company anticipates that approximately 34,000
new cases of malignant melanoma will be diagnosed in the U.S. in 1996. Data from
the American Cancer Society and the World Health Organization indicate that both
the incidence and mortality from malignant melanoma are rising steadily among
white populations throughout the world. In the past decade, the incidence of
melanoma has increased faster than that of any other cancer except lung cancer
in women.
In November 1995, the Company sold 5,313,000 Units through an initial
public offering. Each Unit consists of one share of Common Stock and one Class A
Warrant.
In September 1995, the Company entered into an agreement with Rivex Pharma,
Inc., a Canadian-based pharmaceutical company ("Rivex"), pursuant to which Rivex
will provide various services in connection with the exclusive distribution of
Ampligen in Canada on an emergency drug release basis. Under the terms of this
agreement, the Company will supply and Rivex will purchase as much Ampligen as
necessary to satisfy Rivex's customers at a mutually agreed upon cost. In
return, Rivex will retain the exclusive right to distribute Ampligen in Canada.
4
<PAGE>
In October 1994, the Company entered into an agreement with Bioclones
Proprietary Limited ("Bioclones"), a biopharmaceutical company which is
associated with The South African Breweries Limited ("SAB" and, together with
Bioclones, "SAB/Bioclones") with respect to codevelopment of various RNA drugs,
including Ampligen, for which the Company has previously obtained international
patent protection. The licensing agreement, as amended (the "SAB Agreement")
provides that the Company will provide SAB/Bioclones with an exclusive
manufacturing and marketing license for certain Southern hemisphere countries
(including certain countries in South America) as well as the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand and certain other countries
and territories. In exchange for these marketing and distribution rights, the
SAB Agreement provides for: (a) a $3 million cash payment to the Company,
payable in installments upon the occurrence of certain milestones, including the
transfer of certain technical documents which have already been transferred; (b)
the formation and issuance to the Company of 24.9% of the capital stock of a
company which is developing and operating a new manufacturing facility for RNA
drugs constructed by SAB/Bioclones; and (c) royalties on all sales of the
Company's product in the licensed territories after the first $50 million of
sales. In addition, SAB/Bioclones has agreed to use reasonable efforts to pursue
the marketing approval of Ampligen for hepatitis B in Australia, South Africa,
Brazil, and the United Kingdom, as well as to perform (at its own expense) a
phase III study of Ampligen for chronic HBV infection in South Africa, which
clinical study is to be performed pursuant to U.S. FDA good clinical practice
and good laboratory practice ("GLP") guidelines and standards. SAB/Bioclones
will be granted a right of first refusal to manufacture and supply to the
Company the drug product required for not less than one-third of its world-wide
sales of Ampligen (after deducting SAB/Bioclones-related sales). To date, the
Company has received approximately $3,000,000 pursuant to the SAB Agreement.
In September 1994, the Company formed three subsidiaries and granted
licenses to the subsidiaries for the purpose of developing its technology for
ultimate sale into certain non-pharmaceutical specialty consumer markets, such
as the tobacco market, the market for skincare products and the market for
diagnostic devices. The Company intends to issue equity in one of such
subsidiaries and has granted options to certain of its officers and directors.
See "Business--Subsidiary Companies." No assurance can be given that any of
these companies will be able to complete testing in these areas, develop any
products or successfully produce and market any products in the targeted
specialty consumer markets.
The Company's corporate headquarters are located at 1617 JFK Boulevard,
Philadelphia, Pennsylvania 19103. The Company's telephone number is (215)
988-0080.
5
<PAGE>
As of July 15, 1996
Securities Outstanding(1)(2)(3)(4) Common Stock 9,470,675
Series D Preferred Stock 6,000
Units 6,117,167
Risk Factors AN INVESTMENT IN THE SECURITIES OFFERED
HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS".
Nasdaq Symbols
for the Units HEMXU
for Common Stock HEMX
for Warrants HEMXW
(1) Excludes: (i) 460,798 shares of Common Stock reserved for issuance pursuant
to the Company's 1990 Stock Option Plan under which options to purchase
228,502 shares have been granted; (ii) 92,160 shares of Common Stock
reserved for issuance pursuant to the Company's 1992 Stock Option Plan
under which no options or other rights to purchase shares have been
granted; (iii) 138,240 shares of Common Stock reserved for issuance
pursuant to the Company's 1993 Employee Stock Purchase Plan pursuant to
which no rights to purchase shares have been granted; (iv) 556 shares of
Common Stock reserved for issuance pursuant to options granted prior to
1990; (v) 1,663,797 shares of Common Stock reserved for issuance pursuant
to certain outstanding warrants with an average weighted exercise price of
$3.70; (vi) 2,080,000 warrants to purchase Common Stock of the Company
issued to officers, directors and consultants of the Company in reliance
upon Rule 701 of the Securities Act of 1933, as amended, at an exercise
price of $3.50 per share (the "Rule 701 Warrants"); and (vii) 2,750,000
warrants to purchase Common Stock at an exercise price of $1.75 per share
issued in accordance with the terms of the 1995 Standby Financing
Agreement. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Management--1992 Stock Option Plan," "--1990
Stock Option Plan" and "--Employee Stock Purchase Plan," "Description of
Securities--Warrants"
(2) Does not include 195,833 shares of Common Stock and 1,000,000 Class A
Redeemable Warrants contained in the Bridge Units issuable upon exercise of
the Bridgeholder Option issued in connection with the Bridge Loans.
(3) Does not include 6,117,167 shares of Common Stock issuable upon the
exercise of the Class A Redeemable Warrants contained in the Units at an
exercise price of $4.00 per share.
(4) Does not include 2,427,275 shares of Common Stock reserved for issuance
upon conversion of the Preferred Stock.
(5) There can be no assurance that the Company will be able to meet the
requirements for continued quotation on Nasdaq or that a trading market
will develop or that, if such market develops, it will be sustained.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(in thousands, except share and per share data)
The data set forth below should be read in conjunction with the
Consolidated Financial Statements, related Notes and other financial information
included or incorporated by reference elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
December 31, March 31,
---------------------------------------------------------------- ---------------------
(unaudited)
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues
Research and Development $ -- $ -- $ 48 $ 76 $ 66 $ 11 $ 18
License fee -- -- -- 100 2,900 750 --
------- ------- ------- ------- -------- ------ ------
Total Revenues -- -- 48 176 2,966 761 18
Cost and expenses:
Research and development 6,181 4,734 2,119 1,638 1,029 258 299
General and administrative 2,469 2,825 3,347 2,618 2,880 697 514
------- ------- ------- ------- -------- ------ ------
Total costs and expenses 8,650 7,559 5,466 4,256 3,909 955 813
Debt conversion expenses -- -- (1,215) (10) (149) (149) --
Net interest income (expense) 172 (322) (1,069) (748) (243) 122
------- ------- ------- ------- -------- ------ ------
Net loss $(8,478) $(7,881) $(7,702) $(5,133) $ (1,840) $ (587) $ (672)
======= ======= ======= ======= ======== ====== ======
Net loss per share $ -- $ -- $ -- $ (.44)(1) $ (.13)(1) $ (.05)(1) $ (.04)
Weighted average
number of shares outstanding
used in computing
net loss per share -- -- -- 11,536,276(1) 14,199,701(1) 13,014,174(1) 15,581,592
</TABLE>
December 31, 1995 March 31, 1996
----------------- --------------
Consolidated Balance Sheet Data: (Unaudited)
Current assets $11,354 $3,700
Current liabilities 8,279 1,330
Total assets 12,700 5,079
Long-term obligations 0 0
Accumulated deficit (43,544) (44,216)
Stockholders' equity 4,421 3,749
(1) Computed on a proforma basis described in Note 3 to the Consolidated
Financial Statements.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE,
INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO
MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER
MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
Dependence on Ampligen; Non-Exclusive Right to Manufacture of Ampligen;
Expiration of Patents.
The Company's principal development efforts are currently focused on
Ampligen. While most clinical trials of Ampligen have to date produced favorable
results, additional trials sponsored by the Company are planned, and no
assurance can be given that the drug will ultimately be demonstrated to be safe
or efficacious. In addition, while Ampligen has been authorized for use in
clinical trials in the United States and other countries, no assurance can be
given that additional clinical trials approvals will be authorized in the United
States or in other countries in a timely fashion or at all or that such clinical
trials will be completed by the Company. The Company has never commercially
introduced a product, and no assurance can be given that commercialization of
Ampligen in any countries where Ampligen may be approved will prove successful.
In addition, the Company does not have exclusive rights to manufacture Ampligen.
Competitors of the Company are currently able to manufacture Ampligen. The
Company believes, however, that its extensive patent estate may hinder such
competitors from testing and developing Ampligen for particular indications
since the Company has patented the use of Ampligen for many disease indications.
The Company further believes that the available market for non-patented disease
indications for Ampligen which might be available to competitors is minimal
since the Company believes, based on laboratory tests, that Ampligen may not be
effective against such disease indications; however, no assurances can be given.
Willful infringement of the Company's patents by a competitor could result in
significant monetary damages to the Company in the event that such infringement
was not enjoined by a court of law. Nevertheless, in the event that the
Company's patent protection is not adequate for all relevant disease
indications, competitors might be able to test, develop and commercialize
Ampligen. Additionally, as a result of the Company's dependence on Ampligen, the
failure to demonstrate the drug's safety and efficacy in planned clinical
trials, to conduct the planned clinical trials, to obtain additional approvals
for the drug or to successfully commercialize the drug would have a materially
adverse effect on the Company.
No Assurance of Regulatory Approval; Government Regulation.
The Company's research, preclinical development, clinical trials, and the
manufacturing and marketing of its products are subject to extensive regulation
by numerous governmental authorities in the U.S. and other countries, including,
but not limited to, the Food and Drug Administration ("FDA") in the U.S. and the
Health Protection Branch of Canada's Department of Health and Welfare ("HPB"), a
federal regulatory agency in Canada. None of the Company's products has been
approved for commercial sale by the FDA, the HPB or any other foreign regulatory
authority and the Company does not expect to achieve profitable operations
unless Ampligen receives FDA approval and is commercialized successfully. In
order to obtain FDA approval of a new drug product for an indication, the
8
<PAGE>
Company must demonstrate to the satisfaction of the FDA that such product is
safe and effective for its intended uses and that the Company is capable of
manufacturing the product to the applicable regulatory standards. The process of
obtaining FDA and other required regulatory approvals (including those of the
HPB) is rigorous and lengthy and has required and will continue to require the
expenditure of substantial resources. There can be no assurance that the Company
will be able to obtain the necessary regulatory approvals. Unsatisfactory
clinical trial results, clinical trials not conducted in accordance with
applicable protocol requirements and/or delays in obtaining regulatory approvals
would prevent the marketing of products developed by the Company, and pending
the receipt of such approvals, the Company will not receive product revenues or
royalties.
Pharmaceutical products and their manufacture are subject to continued
review following regulatory approval, and later discovery of previously unknown
problems may result in the imposition of restrictions on such products or their
manufacture, including withdrawal of the products from the market. Failure to
comply with applicable regulatory requirements could, among other things, result
in fines, suspension of regulatory approvals, operating restrictions and
criminal prosecution. The Company cannot predict the extent to which current or
future government regulations might have a materially adverse effect on the
production, marketing and sale of the Company's products. Such regulations may
delay or prevent clinical trials, regulatory approval, and the manufacture or
marketing of the Company's potential products. In addition, such regulation may
impose costly procedures upon the Company's activities or furnish a competitive
advantage to other companies more experienced in regulatory affairs than the
Company and may deplete the Company's liquidity and capital resources.
Additional Financing Requirements.
The development of the Company's products has required and will continue to
require the commitment of substantial resources to conduct the time-consuming
research, preclinical development, and clinical trials that are necessary to
bring pharmaceutical products to market and to establish commercial-sale
production and marketing capabilities. Based on its current operating plan, the
Company anticipates that projected cash flow from operations and currently
available financing arrangements will be sufficient to meet the Company's
capital requirements for approximately 18 months from the date of this
Prospectus. It is not expected that the Company's current cash flow will be
sufficient to enable the Company to complete the necessary clinical trials or
regulatory approval process for Ampligen for any indication or, if any such
approval were obtained, to begin manufacturing or marketing Ampligen on a
commercial basis. Accordingly, the Company may need to raise substantial
additional funds through additional equity or debt financing, collaborative
arrangements with corporate partners, off balance sheet financing or from other
sources in order to complete the necessary clinical trials and the regulatory
approval processes and begin commercializing its products. If adequate funds are
not available from operations, as is anticipated, and if the Company is not able
to secure additional sources of financing on acceptable terms, the Company's
business will be materially adversely affected. In addition, certain officers,
directors and shareholders have entered into a 1995 Standby Financing Agreement
pursuant to which they have agreed to provide funding up to $5,500,000 to the
Company in the event that existing and additional financing is insufficient to
cover the cash needs of the Company through December 1, 1996.
Moreover, because of the Company's long-term capital requirements, it may
seek to access the public equity market whenever conditions are favorable, even
if it does not have an immediate need for additional capital at that time. There
9
<PAGE>
can be no assurance that any additional funding will be available to the Company
on terms acceptable to the Company, if at all. Any additional funding may result
in significant dilution and could involve the issuance of securities with rights
which are senior to those of existing stockholders. The Company may also need
additional funding earlier than anticipated, and the Company's cash requirements
in general may vary materially from those now planned, for reasons including,
but not limited to, changes in the Company's research and development programs,
clinical trials, competitive and technological advances, the regulatory process,
and higher than anticipated expenses and lower than anticipated revenues from
certain of the Company's clinical trials as to which cost recovery from
participants has been approved.
Uncertainty Regarding Patents and Proprietary Rights.
The Company's success will depend, in large part, on its ability to obtain
patent protection for its products and to obtain and preserve proprietary
information and trade secrets. The Company does not have exclusive rights to the
manufacture of Ampligen. Consequently, the Company's ability to obtain exclusive
rights for the commercial sale of Ampligen is subject to the Company's
acquisition of enforceable patents covering the use of the drug for a particular
indication. The Company has been issued certain patents on the use of Ampligen
alone and Ampligen in combination with certain other drugs for the treatment of
human immunodeficiency virus ("HIV"). The Company has also been issued a patent
on the use of Ampligen in combination with certain other drugs for the treatment
of chronic hepatitis B virus ("HBV") and chronic hepatitis C virus ("HCV") and a
patent which affords protection on the use of Ampligen in patients with myalgic
encephalomyetis, also know as chronic fatigue syndrome ("ME/CFS"). To date, the
Company has not been issued any patents in the U.S. for the use of Ampligen as
monotherapy for HBV or for any of the cancers which the Company has sought to
target. The Company's applications for U.S. patents for the use of Ampligen as
monotherapy for HBV and in the treatment of renal cell carcinoma and lung cancer
are currently pending, although no assurances can be given that any of such
applications will be approved. No assurances can be given that competitors will
not seek and obtain patents regarding the use of Ampligen in combination with
various other agents (including AZT) for a particular target indication prior to
the Company. Although the Company's license to manufacture Ampligen is
non-exclusive, the Company believes that the existence of the Company's
treatment indication patents precludes a competitor from selling an identical or
similar product for the same treatment indication without infringing upon the
Company's issued patents. No assurance can be given, however, that the Company's
patent protection will be adequate to prevent the entry into the market of
competitors for all of the Company's treatment indications.
The Company has been unable to secure Orphan Drug designation from the FDA
for treatment of HBV in the U.S. In the event that the Company is unable to
obtain adequate patent protection for the indication, it would be unable to
maintain a competitive advantage over other drug manufacturers which could enter
the market immediately.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions. To date, no
consistent policy has emerged regarding the breadth of protection afforded by
pharmaceutical and biotechnology patents. Accordingly, there can be no assurance
that patent applications relating to the Company's products or technology will
result in patents being issued or that, if issued, such patents will afford
meaningful protection against competitors with similar technology. It is
generally anticipated that there may be significant litigation in the industry
10
<PAGE>
regarding patent and other intellectual property rights and that such litigation
could consume substantial resources of the Company. No assurance can be given
that the Company's patents will provide competitive advantages for its products
or will not be successfully challenged or circumvented by its competitors. No
assurance can be given that patents do not exist or could not be filed which
would have a materially adverse effect on the Company's ability to market its
products or to obtain or maintain any competitive position the Company may
achieve with respect to its products. The Company's patents also may not prevent
others from developing competitive products using related technology. Other
companies obtaining patents covering products or processes useful to the Company
may bring infringement actions against the Company. There can be no assurance
that the Company will have the financial resources necessary to enforce patent
rights it may hold. As a result, the Company may be required to obtain licenses
from others to develop, manufacture or market its products. There can be no
assurance that the Company would be able to obtain any such licenses on
commercially reasonable terms, if at all. The Company licenses certain patents
and proprietary information from third parties, some of which patents and
proprietary information may have been developed with government grants under
circumstances where the government maintained certain rights with respect to the
patents/information developed. No assurances can be given that such third
parties will adequately enforce any rights they may have or that the rights, if
any, retained by the government will not adversely affect the value of the
Company's license. Certain of the Company's know-how and technology is not
patentable, particularly the procedures for the manufacture of the Company's
drug product which are carried out according to standard operating procedure
manuals. To protect its rights, the Company has since 1991 required employees
and consultants to enter into confidentiality agreements with the Company. There
can be no assurance that these agreements will not be breached, that the Company
would have adequate and enforceable remedies for any breach, or that any trade
secrets of the Company will not otherwise become known or be independently
developed by competitors.
Disputes and Legal Proceedings Related to Patent Rights.
The Company's ownership of one of its patents for the use of Ampligen for
the treatment of HIV is the subject of a dispute. Vanderbilt University has
advised the Company of its position that employees of the University were the
inventors of the patent at issue. The Company does not believe the University's
position to have merit, and if the University filed a claim against the Company,
the Company would vigorously defend against such an action. If such a claim were
filed and if such a claim were found to have merit, the loss of the patent at
issue would not have a materially adverse effect on the Company's long range
business since the University would be able to limit or prevent only the
Company's use of Ampligen in combination with AZT in the treatment of HIV. In
the event that the University obtained ownership of the disputed patent, the
University could license a third entity to sell Ampligen for a specific
combinational treatment. However, without the Company's consent, the Company
believes that the commercialization process by a third party would require
substantial expenditure to repeat clinical trials and establish a new
manufacturing protocol acceptable to regulatory agencies and would require a
license from the Company for the use of Ampligen as a component of the
combinational requirement. Furthermore, the loss of this patent would not affect
the Company's ability to market Ampligen as a monotherapy for HIV which
treatment the Company has tested and expects to continue to develop.
In July 1994, Temple University advised the Company that it was in breach
of a certain licensing agreement for certain ribonucleic acid ("RNA") drug
11
<PAGE>
compounds termed Oragen compounds at the preclinical stage of product
development. In November 1994, in an action captioned HEM Pharmaceuticals Corp.
v. Temple University of the Commonwealth System of Higher Education, the Company
filed suit against Temple in the Superior Court of the State of Delaware, New
Castle County seeking a declaratory judgment that the licensing agreement was
unlawfully terminated by Temple and remains in full force and effect and seeking
monetary damages estimated to be in excess of $10 million for Temple's alleged
breach of its obligations of good faith and fair dealing and certain terms of
the Temple Agreement. In January 1995, Temple filed a separate litigation
against the Company in the Court of Common Pleas of Philadelphia County seeking
declaratory judgment that the Temple Agreement was lawfully terminated as of
July 1, 1994, together with an award of costs, including attorney fees. The
Court of Common Pleas has stayed further proceedings in that litigation pending
the outcome of the Company's Superior Court case. If the Company were to lose
its claim, the Company would lose its investment to date in certain Oragen
compounds acquired pursuant to the Temple Agreement. While not yet tested on
humans these Oragen compounds have the potential and theoretical advantage of
having an Ampligen-like effect upon oral administration. No assurance can be
given that as a result of such loss, Temple or its new licensee, if any, would
not become competitors of the Company or that the termination of the licensing
agreement will not have a materially adverse effect on the Company's long range
business or financial condition.
History of Losses; Future Profitability Uncertain.
The Company began operations in 1966 and has reported net profit only from
1985 through 1987. Since 1987, the Company has incurred substantial operating
losses and as of March 31, 1996, the Company's accumulated deficit was
approximately $44 million. The Company has not generated significant revenues
from its products and could incur substantial and increased losses over the next
several years. Such losses may fluctuate significantly from quarter to quarter.
There can be no assurance that the Company will ever achieve significant
revenues from product sales or become profitable. The Company's ability to
achieve profitable operations is dependent, in large part, on successfully
developing products, obtaining regulatory approvals on a timely basis, and
making the transition from a research and development firm to an organization
producing commercial products or entering into joint ventures or other licensing
arrangements. No assurance can be given that the Company's product development
efforts will be successfully completed, required regulatory approvals will be
obtained, any products will be manufactured and marketed successfully, or
profitability will be achieved.
No Assurance of Successful Product Development.
The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at an early
stage of research or development may not reach the market for a number of
reasons. Potential products may be found to be ineffective or to have adverse
side effects, fail to receive necessary regulatory clearances, be difficult to
manufacture on a commercial scale, be uneconomical to market or be precluded
from commercialization by proprietary rights of third parties. The Company's
products are in various stages of clinical and pre-clinical development; each
will need to progress through further clinical studies and appropriate
regulatory approval processes before any such products can be marketed. Ampligen
is not expected to be generally available for commercial sale for any indication
for at least the next several years, if at all. Generally, only a small
percentage of potential therapeutic products are eventually approved by the FDA
for commercial sale. The transition from limited production of pre-clinical and
12
<PAGE>
clinical research quantities to production of commercial quantities of the
Company's products will involve distinct management and technical challenges and
will require additional management and technical personnel and capital to the
extent such manufacturing is not handled by third parties. There can be no
assurance that the Company's efforts will be successful or that any given
product will be determined to be safe and effective, capable of being
manufactured economically in commercial quantities or successfully marketed.
Limited Manufacturing Experience and Capacity.
Ampligen is currently produced only in limited quantities for use in its
clinical trials. To be successful, the Company's products must be manufactured
in commercial quantities in compliance with regulatory requirements and at
acceptable costs. Although the Company has entered into an agreement with
Bioclones Proprietary, Ltd. ("Bioclones"), a biopharmaceutical company which is
associated with South African Breweries, Ltd. (together with Bioclones,
"SAB")(the "SAB Agreement") which provides for the construction of a new
commercial manufacturing facility by a company which is 24.9% owned by the
Company, no assurance can be given as to the timing of such construction, and
therefore the Company may continue to be dependent on third parties for a
considerable portion of the manufacturing and production process. A pilot
facility in South Africa is being expanded to provide a limited supply of
Ampligen raw material. While the Company believes that construction of the
commercial facility will begin in 1997, the construction is dependent upon the
regulatory status of Ampligen in various global markets, and no assurance can be
given with respect to when, and if, construction will occur. To the extent the
Company is involved in the production process, the Company's current facilities
are not adequate for the production of its proposed products for large-scale
commercialization, and the Company currently does not have adequate personnel to
conduct commercial-scale manufacturing. The Company intends to utilize
third-party facilities if and when the need arises or, if it is unable to do so,
to build or acquire commercial-scale manufacturing facilities. The Company will
need to comply with regulatory requirements for such facilities, including those
of the FDA and HPB pertaining to Good Manufacturing Practices ("GMP")
regulations. There can be no assurance that such facilities can be used, built,
or acquired on commercially acceptable terms, that such facilities, if used,
built, or acquired, will be adequate for the Company's long-term needs.
Moreover, there is no assurance that successful manufacture of a drug on a
limited scale basis for investigational use will lead to a successful transition
to commercial, large-scale production. Small changes in methods of manufacture
may affect the chemical structure of Ampligen and other such RNA drugs, as well
as their safety and efficacy. Changes in methods of manufacture, including
commercial scale-up, can, among other things, require new clinical studies and
affect orphan drug status, particularly, market exclusivity rights, if any,
under the Orphan Drug Act.
Lack of Marketing Experience and Capacity.
The Company currently has limited marketing or sales capability and does
not expect to establish a significant direct sales capability for at least the
next several years. To the extent that the Company determines not, or is unable,
to enter into marketing agreements or third party distribution agreements for
its products, significant additional resources will be required to develop a
sales force and distribution organization. Pursuant to the SAB Agreement, the
corporate partner will be responsible for fielding an adequate sales force in
South America, Africa, United Kingdom, Australia and New Zealand. Nevertheless,
there can be no assurance that the Company will be able to establish such
13
<PAGE>
arrangements, under the SAB Agreement or otherwise, on terms acceptable to the
Company, if at all, or that the cost of establishing such arrangements will not
exceed any product revenues, or that such arrangements will be successful. To
the extent that the Company enters into co-marketing or other licensing
arrangements, any revenues received by the Company will be dependent on the
efforts of third parties, and there can be no assurance that such efforts will
be successful.
Rapid Technological Change and Substantial Competition.
The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Technological competition from pharmaceutical
and biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Most of
these entities have significantly greater research and development capabilities
than the Company, as well as substantial marketing, financial and managerial
resources, and represent significant competition for the Company. Acquisition
of, or investments in, competing companies by large pharmaceutical companies
could increase such competitors' financial, marketing and other resources. There
can be no assurance that developments by others will not render the Company's
products or technologies obsolete or noncompetitive or that the Company will be
able to keep pace with technological developments. Competitors have developed or
are in the process of developing technologies that are, or in the future may be,
the basis for competitive products. Some of these products may have an entirely
different approach or means of accomplishing similar therapeutic effects to
products being developed by the Company. These competing products may be more
effective and less costly than the Company's products. In addition, conventional
drug therapy, surgery and other more familiar treatments will offer competition
to the Company's products. Furthermore, many of the Company's competitors have
significantly greater experience than the Company in pre-clinical testing and
human clinical trials of pharmaceutical products and in obtaining FDA, HPB and
other regulatory approvals of products. Accordingly, the Company's competitors
may succeed in obtaining FDA and HPB product approvals more rapidly than the
Company. If any of the Company's products receive regulatory approvals for any
indication and the Company commences commercial sales of its products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has no experience. The Company's competitors may
possess or obtain patent protection or other intellectual property rights that
prevent, limit or otherwise adversely affect the Company's ability to develop or
exploit its products.
Dependence upon Qualified and Key Personnel.
Because of the specialized nature of the Company's business, the Company's
success will depend, among other things, on its ability to attract and retain
qualified management and scientific personnel. Competition for such personnel is
intense. There can be no assurance that the Company will be able to continue to
attract or retain such persons. The Company currently depends upon the services
of Dr. William A. Carter, its President, Chief Executive Officer and Chairman of
the Board, Robert E. Peterson, its Chief Financial Officer and Dr. Carol A.
Smith, the Company's Director of Manufacturing and Process Development. Certain
key individuals upon whom the Company currently depends, including but not
limited to the Company's Medical Director, Dr. David Strayer, are not employees
of the Company, but instead are employees of an institution with whom the
Company has a collaborative at will arrangement. R. Douglas Hulse, Chief
Operating Officer, is an employee of The Sage Group and serves in his position
under a written agreement. In addition, Dr. Smith and Mr. Peterson do not have
14
<PAGE>
written employment agreements with the Company. The continued availability to
the Company of the services of these individuals is subject to the policies of
the institution which employs them; any change in such policies may have an
adverse effect upon the Company's continued retention of the services of these
individuals. While the Company has an employment agreement with Dr. William A.
Carter, and has secured key man life insurance in the amount of $2 million on
the life of Dr. Carter, the loss of Dr. Carter or other key personnel or of the
services of such employees of collaborators or the failure to recruit additional
personnel as needed could have a materially adverse effect on the Company's
ability to achieve its objectives.
Dependence on Third Parties.
The Company's strategy for research, development and commercialization is
to rely in part upon collaborative arrangements with third parties in
appropriate circumstances. The Company's strategy has led it to enter into
various arrangements with universities, research groups, licensors and others.
The Company is dependent on a number of important arrangements with third
parties. In particular, the Company utilizes the services of employees of and
regularly makes use of certain equipment and facilities at Hahnemann University
and has obtained certain of its technology for Oragen products through a license
with Temple University, which agreement is alleged by Temple to be terminated
and which is the subject of a suit filed by the Company in November 1994. There
can be no assurance that the Company will be able to negotiate additional third
party arrangements or continue any existing arrangements on terms acceptable to
the Company, if at all, or that key researchers upon whom the Company is
dependent will continue to be associated with such universities and/or to work
on the Company's products. The loss of any such existing arrangement or key
researcher could have a materially adverse effect on the Company. The Company
may seek a significant portion of its future capital requirements from
arrangements with pharmaceutical companies or others pursuant to arrangements
under which, among other things, the Company would receive payment for certain
research and development activities in exchange for future royalty payments.
There can be no assurance that any such arrangements will be established on a
basis acceptable to the Company, if at all, or if established, will be
scientifically or commercially successful. The failure to achieve such
arrangements on satisfactory terms could have a materially adverse effect on the
Company. The Company is dependent upon certain third party suppliers for key
components of its proposed products and for substantially all of the production
process. The failure to continue arrangements with such third parties or obtain
satisfactory substitute arrangements could have a materially adverse effect on
the Company.
Impact of Potential Nasdaq Delisting on Marketability of Securities;
Broker-Dealer Sales of the Company's Units.
The Company's Units, Common Stock and Warrants trade on Nasdaq. The NASD
has rules which establish criteria for the initial and continued listing of
securities on Nasdaq. Under the rules for initial listing, a company must have
at least $4,000,000 in total assets, at least $2,000,000 in total stockholders'
equity, and a minimum bid price of $3.00 per share. For continued listing on
Nasdaq, a company must maintain at least $2,000,000 in total assets, at least
$1,000,000 in shareholders' equity, and a minimum bid price of $1.00 per share.
The Company currently has approximately $5,079,000 in total assets and
approximately $3,750,000 in total shareholders' equity.
15
<PAGE>
If the Company were to continue to incur operating losses, it might be
unable to maintain the standards for continued listing and the listed securities
could be subject to delisting from Nasdaq. If the Company's securities are
delisted, trading in the delisted securities could thereafter be conducted on
the NASD Bulletin Board or in the over-the-counter market in what is commonly
referred to as the "pink sheets." If this were to occur, an investor would find
it more difficult to dispose of the Company's securities or to obtain accurate
quotations as to the price of the Company's securities and it could have an
adverse effect on the coverage of news concerning the Company. In addition, if
the Company's securities were delisted, they would be subject to a rule that
imposes additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(accredited investors are generally persons having net worth in excess of
$1,000,000 or annual income exceeding $200,000, or $300,000 together with a
spouse). For transactions covered by this rule, the broker-dealer must make a
special suitability determination for the purchaser and must have received the
purchaser's written consent to the transaction prior to sale, as well as
disclosing certain information concerning the risks of purchasing low-priced
securities on the market for such securities. Consequently, delisting, if it
occurred, would adversely affect the ability of broker-dealers to sell the
Company's securities and would make subsequent financing more difficult.
In order for the Company's securities to be included for trading on Nasdaq,
there must exist market makers and specialists, respectively, to support trading
in such securities. As of the date of this Prospectus, several brokerage firms,
sufficient to satisfy the requirements of Nasdaq are engaged in market making
activities with respect to the securities. There is no obligation on the part of
the brokerage firm to continue to act as market makers. In the event that the
market makers and specialists cease to function as such, public trading in the
securities will be adversely affected or may cease entirely.
Product Liability Exposure.
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its products results in adverse
effects. Such liability might result from claims made directly by patients,
hospitals, clinics or other consumers, or by pharmaceutical companies or others
manufacturing such products on behalf of the Company. While the Company will
continue to attempt to take appropriate precautions, there can be no assurance
that it will avoid significant product liability exposure. The Company does not
currently maintain any product liability insurance coverage; accordingly, a
significant uninsured risk exists with respect to product liability claims
arising out of the Company's human clinical trials. The Company plans to obtain
product liability insurance coverage for its product distribution in Canada .
Uncertainty of Health Care Reimbursement and Potential Legislation.
The Company's ability to successfully commercialize its products will
depend, in part, on the extent to which reimbursement for the cost of such
products and related treatment will be available from government health
administration authorities, private health coverage insurers and other
organizations. Significant uncertainty exists as to the reimbursement status of
newly approved health care products, and from time to time legislation is
proposed which, if adopted, could further restrict the prices charged by and/or
amounts reimbursable to manufacturers of pharmaceutical products. The Company
cannot predict what, if any, legislation will ultimately be adopted or the
16
<PAGE>
impact of such legislation on the Company. Reimbursement from government
agencies may become more restricted in the future. The Company also understands
that there is increasing political pressure in Canada to limit health care
costs; no assurances can be given that the legislative or regulatory results, if
any, of such pressure will not have an adverse impact on the Company.
Furthermore, there can be no assurance that third party insurance companies will
allow the Company to charge and receive payments for its products sufficient to
realize an appropriate return on its investment in product development. The
Company's potential products represent a new mode of therapy, and the Company
expects that the costs associated with purchasing and administering its products
will be substantial. There can be no assurance that the Company's proposed
products, if successfully developed, will be considered cost effective to
third-party payors, that reimbursement will be available or, if available, that
the timing and amount of such payors' reimbursement will not adversely affect
the Company's ability to sell its products on a profitable basis.
Legal Proceedings
In February 1991, Vanderbilt University advised the Company of its position
that University employees were the inventors of an issued U.S. patent regarding
the use of Ampligen in combination with various other agents (including AZT) for
the treatment of HIV infection. See Risk Factors - "Disputes and Legal
Proceedings Related to Patent Rights".
The Company is the plaintiff in an action captioned HEM Pharmaceuticals
Corp. v. Temple University of the Commonwealth System of Higher Education, in
which the Company is seeking a declaratory judgment that the Company's licensing
agreement with Temple University was unlawfully terminated by Temple. Temple has
filed a motion to dismiss this lawsuit upon the grounds of lack of personal
jurisdiction and forum non conviens. In January 1995, Temple filed a separate
litigation against the Company seeking declaratory judgment that the Temple
Agreement was lawfully terminated as of July 1, 1994, together with an award of
costs, including attorney fees. See Risk Factors - "Disputes and Legal
Proceedings Related to Patent Rights".
While the Company intends to vigorously prosecute or defend against all of
the litigation described above, no assurance can be given as to the ultimate
outcome or the Company's costs in bringing or defending this litigation, and
with regard to the Temple litigation, no assurance can be given that an outcome
adverse to the Company will not have a materially adverse effect on the
Company's business or financial condition.
Hazardous Materials.
The Company's business involves the controlled use of hazardous materials,
carcinogenic chemicals and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply in all material respects with the standards prescribed by applicable
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident or the failure
to comply with applicable regulations, the Company could be held liable for any
damages that result, and any such liability could be significant. The Company
does not maintain insurance coverage against such liabilities. The Company is
also subject to a variety of laws and regulations relating to occupational
17
<PAGE>
health and safety, environmental protection, hazardous substance control, and
waste management and disposal. The failure to comply with any of such
regulations could subject the Company to, among other things, third party damage
claims, civil penalties and criminal liability.
Control of the Company by Certain Officers, Directors and Current
Stockholders.
The officers, directors and current 5% stockholders of the Company
beneficially own approximately 32.5% of the outstanding shares of Common Stock.
Pursuant to certain irrevocable proxies, Dr. William A. Carter, President and
Chief Executive Officer of the Company, has the power to control the vote of
21.1% of the outstanding shares of Common Stock. As a result of such ownership
or voting power these persons, should they vote as a bloc, may be able to
effectively control all matters requiring approval by the stockholders of the
Company, including the election of directors.
Possible Volatility of Stock Price.
The stock market in general and biotechnology and pharmaceutical stocks in
particular have from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. The market price of the Securities, like the stock prices of many
publicly traded biotechnology and smaller pharmaceutical companies, may be
highly volatile. Announcements of technological innovations, regulatory matters
or new commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual or
potential medical results relating to products under development by the Company
or its competitors, regulatory developments in both the U.S. and foreign
countries, public concern as to the safety of pharmaceutical products, economic
and other external factors, and period-to-period fluctuations in financial
results, may have a significant impact on the market price of the Securities.
Shares Eligible for Future Sale; Registration Rights.
Of the 15,587,842 (32,750,313 upon the exercise of the outstanding Class A
Warrants, other Warrants, stock options and conversion of Preferred Stock)
shares of Common Stock issued and outstanding as of the date of this Prospectus
a significant number of such shares are "restricted securities" as that term is
defined under Rule 144 promulgated under the Securities Act. William A. Carter,
the Company's President, Chief Executive Officer and Chairman, has agreed not to
sell or transfer his securities for a period of 36 months following commencing
November 2, 1995. The purchasers of the Bridge Loans who hold the Bridgeholder
Options and the holder of 5,898 shares of Common Stock have agreed (with certain
exceptions) not to sell or transfer their securities for a period of 13 months
commencing November 2, 1995. The Tisch/Tsai Entities have agreed with the
Company (with certain exceptions including the transfer to immediate family
members or related entities) not to sell or transfer their securities for a
period of 18 months commencing November 2, 1995. In addition, Canaan Venture
Limited Partnership and Canaan Venture Offshore Limited Partnership C.V. (the
"Canaan Entities"), Michael Dubilier, a principal stockholder of the Company,
and three other stockholders holding an aggregate of 1,253,227 shares of Common
Stock have agreed not to sell or transfer their securities for a period of 18
months commencing November 2, 1995. These agreements are subject to early
termination in the event of the early release of other securityholders of the
Company from
18
<PAGE>
lock-up agreements by the Company. The holders of the remainder of the Company's
securities are subject to agreements with the Company which prohibit the sale or
transfer of such securities for a period of 24 months commencing November 2,
1995, without the Company's consent ("Lock Up Agreements"). As of October 25,
1995, the holders of approximately 10% of the Company's securities had not
executed lock up agreements. The restricted securities may be sold without
registration pursuant to Rule 144, under certain circumstances. In addition, the
Company has issued warrants to purchase 2,080,000 shares of Common Stock (the
"Rule 701 Warrants") in reliance upon the provisions of Rule 701 of the
Securities Act, pursuant to which, in certain circumstances, such Rule 701
Warrants may be sold. The holders of these securities are subject to Lock Up
Agreements with the Company for a period of 24 months. The sale, or availability
for sale, of substantial amounts of the Company's securities in the public
market subsequent to this Prospectus, including the securities held by those
stockholders who have not executed 24-month Lock Up Agreements and the
Securities issued pursuant to Rule 144, Rule 701 or otherwise, could adversely
affect the market price of the Common Stock and could impair the Company's
ability to raise additional capital through the sale of its equity securities or
debt financing. The availability of Rule 144 and Rule 701 to the holders of
restricted securities of the Company would be conditioned on, among other
factors, the availability of certain public information concerning the Company.
Adverse Consequences Associated with Substantial Shares of Common Stock
Reserved for Issuance Pursuant to Outstanding Warrants, Options and Conversion
of the Preferred Stock.
The Company has reserved an aggregate of up to 17,162,407 shares of Common
Stock for issuance upon exercise of the Class A Warrants, Warrants, stock
options and upon conversion of the Preferred Stock. Holders of these Warrants,
options and Preferred Stock are likely to exercise and convert them when, in all
likelihood, the Company could obtain additional capital on terms more favorable
than those provided by such convertible securities. Furthermore, while the
convertible securities are outstanding, they may adversely affect the terms on
which the Company could obtain additional capital. Should a significant portion
of such convertible securities be exercised, the resulting increase in the
amount of the Common Stock in the public market may have the effect of reducing
the market price thereof.
Conflicts of Interest.
All of the members of the Company's Scientific Advisory Board are employed
other than by the Company and may have commitments to or consulting or advisory
contracts with other entities (which may include competitors of the Company)
that may limit their availability to the Company. While each member of the
Company's Scientific Advisory Board does execute a non-disclosure and
non-competition agreement with respect to proprietary data that he or she
receives from the Company, there can be no assurance that these agreements will
absolutely protect the Company from the results of such data being revealed,
accidentally or otherwise, by a member of its Scientific Advisory Board.
Absence of Dividends.
The Company intends to retain future earnings, if any, to provide funds for
the operations of its business and, accordingly, does not anticipate paying any
dividends on its Common Stock in the reasonably foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996. This table should be read in conjunction with the Consolidated
Financial Statements and related Notes appearing elsewhere in this Prospectus.
March 31, 1996
--------------
(in thousands except share data)
(unaudited)
Notes Payable and Stockholder Loans
(including accrued related interest) $ 0
Stockholders' equity (deficit):
Common Stock, $.001 par value,
50,000,000 shares authorized;
15,587,592 issued and outstanding 16
Additional paid-in capital 47,949
Accumulated deficit (44,216)
Total stockholders' equity 3,749
Total capitalization 3,749
(1) Assumes no exercise of (i) outstanding options to purchase an aggregate of
228,502 shares of Common Stock or of options to purchase 392,624 shares of
Common Stock which may be granted under the Company's stock option and
stock purchase plans; (ii) outstanding warrants to purchase shares of
Common Stock and Bridgeholders Options to purchase Bridge Units consisting
of 195,833 shares of Common Stock and 1,000,000 Class A Redeemable
Warrants; or (iii) 5,313,000 Class A Redeemable Warrants included in the
Units; (iv) other Warrants to purchase Common Stock totaling 6,493,797
shares; or (v) 1,504,000 Warrants to purchase Common Stock issued in
connection with the Company's initial public offering ("IPO") and
subsequent financing. See "Manage- ment--1990 Stock Option Plan," "--1992
Stock Option Plan" and "--Employee Stock Purchase Plan," "Descriptions of
Securities--Class A Redeemable Warrants".
20
<PAGE>
SELECTED FINANCIAL DATA
(in thousands, except share and per share data)
The selected financial data should be read in conjunction with the
Consolidated Financial Statements as of December 31, 1995 and 1994 and for each
of the years in the three year period ended December 31, 1995, the related notes
and the independent auditors' report. The consolidated statements of operations
data for the years ended December 31, 1991 and 1992, and the consolidated
balance sheet data at December 31, 1991, 1992 and 1993 are derived from audited
Consolidated Financial Statements not included in this Prospectus. Selected
financial data for the three months ended March 31, 1995 and 1996 are derived
from unaudited condensed consolidated financial statements included in this
Prospectus. The unaudited condensed consolidated financial statements, in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments, which the Company considers necessary to present fairly the
financial position of the Company at March 31, 1996 and the results of
operations and cash flows for the three months ended March 31, 1995 and 1996.
The results of operations for the three months ended March 31, 1996 are not
necessarily indicative of results that may be expected for the full fiscal year
ending December 31, 1996.
<TABLE>
<CAPTION>
Three Months Ended
December 31, March 31,
---------------------------------------------------------- -------------------
(unaudited)
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues
Research and Development $ -- $ -- $ 48 $ 76 $ 66 $ 11 $ 18
License fee -- -- -- 100 2,900 750 --
------- ------- ------- -------- -------- ------ -------
Total Revenues -- -- 48 176 2,966 761 18
Cost and expenses:
Research and development 6,181 4,734 2,119 1,638 1,029 258 299
General and administrative 2,469 2,825 3,347 2,618 2,880 697 514
------- ------- ------- -------- -------- ------ -------
Total costs and expenses 8,650 7,559 5,466 4,256 3,909 955 813
Debt conversion expenses -- -- (1,215) (10) (149) (149) --
Net interest income (expense) 172 (322) (1,069) (1,043) (748) (243) 122
------- ------- ------- -------- -------- ------ -------
Net loss $(8,478) $(7,881) $(7,702) $ (5,133) $ (1,840) $ (587) $ (672)
======= ======= ======= ======== ======== ====== =======
Net loss per share $ -- $ -- $ -- $(.44)(1) $(.13)(1) $(.05)(1) $ (.04)
Weighted average
number of shares outstanding
used in computing
net loss per share(1) -- -- -- 11,536,276(1) 14,199,701(1) 13,014,174(1) 15,581,592
</TABLE>
(1) Computed on a proforma basis described in Note 3 to the Consolidated
Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------------------------------------------------------- ---------
(In Thousands) (Unaudited)
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Current assets $ 1,316 $ 2,282 $ 6 $ 64 $ 11,354 $ 3,700
Current liabilities 1,714 2,750 10,599 13,043 8,279 1,330
Total assets 3,190 4,415 1,916 1,651 12,700 5,079
Long-term obligations 112 6,950 30 -- -- --
Redeemable preferred stock 2,000 2,536 2,866 3,238 -- --
Accumulated deficit (20,988) (28,869) (36,571) (41,704) (43,544) (44,216)
Stockholders' equity (deficit) $ (637) $ (7,821) $(11,579) $(14,630) $ 4,421 $ 3,749
</TABLE>
22
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Units, Common Stock and Class A Warrants are traded on the
National Association of Securities Dealers Automated Quotation System ("NASDAQ")
under the symbols HEMXU, HEMX and HEMXW, respectively. The following table sets
forth the high and low bid prices for the Company's Units, for the periods
indicated as reported by the NASDAQ. The Company's Common Stock and Class A
Warrants were listed for trading on NASDAQ on July 12, 1996. On July 23, 1996,
the high and low bid price for the Common Stock was $2.00 and $2.00,
respectively. The high and low bid price for the Class A Warrants on such date
was $.5625 and $.50, respectively. The high and low bid price for the Units was
$2.6875 and $2.625, respectively
UNITS
1995 High Low
- ---- ---- ---
Quarter ended 12/31 8 1/2 2
1996
- ----
Quarter ended 3/31 3 9/16 1 1/2
Quarter ended 6/30 6 2 11/16
On May 15, 1996, there were approximately 331 holders of record of the
Company's Common Stock. The number of record holders do not include holders
whose securities are held in street name.
DIVIDENDS
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Common Stock, but
to retain earnings, if any, for the operation and expansion of the Company's
business.
The holders of its Series D Preferred Shares are entitled to certain
dividend payments upon declaration by the Company's Board.
USE OF PROCEEDS
The Company intends to utilize the proceeds received from the exercise of
the 890,543 Warrants, estimated to be $4,064,900 if all Warrants are exercised
in full, for general corporate and working capital purposes. There can be no
assurance that any of the Warrants will be exercised. The foregoing represents
the Company's best estimate of its use of proceeds generated from the possible
exercise of Warrants based upon the current state of its business operations,
its current plans and current economic and industry conditions. Any changes in
the use of proceeds will be made at the sole discretion of the Board of
Directors of the Company.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related notes contained elsewhere in
this Prospectus.
GENERAL
Hemispherx Biopharma, Inc. and subsidiaries (the "Company"), formerly known
as HEM Pharmaceuticals Corp., is a pharmaceutical company using nucleic acid
technologies to develop therapeutic products for the treatment of viral diseases
and certain cancers. The Company's drug technology uses specially-configured
ribonucleic acid (RNA). the Company's double- stranded RNA drug product,
trademarked Ampligen, is in human clinical development for various therapeutic
indications. The efficacy and safety of Ampligen is being developed clinically
for three anti-viral indications: myalgic encephalomyelitis, also known as
chronic fatigue syndrome (ME/CFS)(Phase II clinical trial completed and Phase
II/III clinical trial authorized); human immunodeficiency virus associated
disorders (Phase II clinical trial authorized); and chronic hepatitis B virus
infection (HBV)(Phase I/II clinical trial in process). The Company also has
clinical experience with Ampligen in patients with certain cancers including
renal cell carcinoma (kidney cancer) and metastatic malignant melanoma.
The Consolidated Financial Statements include the financial statements of
Hemispherx Biopharma, Inc. and its three wholly-owned subsidiaries, BioPro
Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in
September 1994 for the purpose of developing technology for ultimate sale into
certain non-pharmaceutical specialty consumer markets. All significant
intercompany balances and transactions have been eliminated in consolidation.
Since fiscal 1994 , the Company has focused on negotiating and executing
the South African Breweries (SAB) Agreement, exploring potential partnerships to
pursue additional clinical trials with special emphasis on the HBV disease
indication, restructuring certain of its outstanding debt, conducting the 1994
Common Stock Financing and the Bridge Financing and preparing for its Initial
Public Offering ("IPO"). In 1996 and beyond, the Company expects to add some
additional personnel to augment its general and administrative activities in
support of increased efforts for research and development, production and
regulatory activity.
The Company expects to continue its research and clinical efforts for the
next several years with some benefit of certain revenues from cost recovery
programs, notably in Canada and Belgium. Beginning in October, 1993, limited
revenues were initiated in Belgium from sales under the cost recovery provision
for conducting clinical tests in ME/CFS. Overall, the Company expects to
continue incurring losses over the next several years due to clinical costs
which are only partially offset by revenues and potential licensing fees. Such
losses may fluctuate from quarter to quarter as a result of differences in the
timing of significant expenses incurred and receipt of licensing fees and/or
revenues.
24
<PAGE>
Result of Operations
Three months ended March 31, 1996 versus the three months ended March 31, 1995
The Company reported a net loss of $671,759 for the quarter ended March 31,
1996 versus a net loss of $586,647 for the same period in 1995. Several factors
contributed to the increase in net loss of $85,112.
Revenues were down $742,946 for the quarter ended March 31, 1996 as the
results for the quarter ended March 31, 1995 include $750,000 of licensing fees
recorded in connection with SAB/Bioclones agreement. Research and development
costs increased by $40,880 in the quarter ended March 31, 1996 due primarily to
increased efforts on the Canadian and Belgium clinical programs. General and
administrative expenses of $513,813 in the first quarter of 1996 reflect the
benefit of a one time gain in the amount of $318,757 resulting from the
forgiveness of certain lease obligations in connection with the restructuring of
the Company's principal office lease. Excluding this one time gain, general and
administrative expense in the first quarter of 1996 exceeded related expenses in
the first quarter of 1995 by $134,976. This increase can be attributed to
consulting fees, public relations, printing expenses and director and officer
insurance premiums. Most of which are associated with the administration of a
public company.
Debt conversion costs of $149,384 and interest expense of $245,984 incurred
in the first quarter of 1995 did not recur in 1996 due the fact that all the
associated debt was converted or repaid in 1995. Interest income increased by
$119,565 in the first quarter of 1996 due to the earnings on the remaining IPO
proceeds.
Years Ended December 31, 1995 versus 1994
The Company reported revenues of $2,965,910 in 1995 versus $175,758 in
1994. In 1995, the Company received and recognized $2,900,000 in licensing fees
resulting from the SAB/Bioclones agreements as compared to $100,000 in 1994.
Revenues from cost recovery clinical trials were $65,910 in 1995 versus $75,758
in 1994. Net losses of $1,839,840 were incurred in 1995 versus losses of
$5,133,051 in 1994. The year to year improvement of $3,293,211 basically
consists of: (1) $2,790,152 in higher revenues primarily due to the licensing
fees received from the SAB Agreement, (2) $609,107 or 37% in lower research and
development costs as a result of the winddown and completion of certain clinical
trials, (3) higher general and administrative costs of $262,681 or 10% basically
due to increased legal and professional fees associated with various legal
matters and the Company's IPO efforts, (4) $138,884 in higher debt conversion
expense relating to certain debt restructuring that took place in April, 1995,
and (5) lower net interest expense in the amount of $295,517 or 28% due to the
paydown of certain notes from the proceeds of the IPO.
Years ended December 31, 1994 versus 1993
In 1994, the Company's net loss was $5,133,051 as compared to a net loss of
$7,702,050 in 1993. The $2,568,999 improvement resulted from increased revenues
of $127,758, reduced research and development costs of $481,127, reduced general
and administrative costs of $729,714, reduced conversion expense of $1,204,000
and reduced net interest expense of $26,400.
The Company had revenues of $48,000 in 1993 compared to $175,758 in 1994.
In 1994 the Company received $100,000 in licensing fees in accordance with the
25
<PAGE>
terms of the SAB Agreement. Additionally, cost recovery revenues from the
Belgium clinical trials increased by approximately $29,000. Operating expenses
declined 22% in 1994 as compared to 1993, primarily as a result of reduced
research costs and efforts to correspondingly downsize the general and
administrative costs. Research and development costs declined $481,000 or 23%
primarily due to the completion of certain clinical trial efforts. General and
administrative expenses declined approximately $730,000 or 22% as a result of
restructuring and downsizing the Company's overhead to support the needs of the
Company and reduced research and development activity. This restructuring in the
fall of 1993 produced lower wages and salaries, telephone expense, travel and
other expenses in 1994. In addition, in 1993 the Company incurred debt
conversion expenses of $1,214,500 as a result of the conversion of certain debt
to equity.
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 1996 was $3,620,343 compared to
$11,291,167 at December 31, 1995. The December 31, 1995 amount included
$5,818,733 of restricted cash as ordered by the Court in connection with the
Cohn litigation. In February 1996, the Company agreed to repay the Cohn note and
settle the Cohn litigation. In exchange for mutual releases and other
consideration, the Company paid Mr. Cohn $6,450,000 on March 21, 1996. This
figure includes $4,920,000 in principal and $1,530,000 for legal and other
costs. The Company retired much of the outstanding vendor and supplier
obligations from the proceeds from the SAB Agreement, the Bridge Loan and
revenue from sales under the cost recovery programs. In addition, certain
officers, directors and shareholders have entered into the 1995 Standby
Financing Agreement pursuant to which they have agreed to provide funding up to
$5,500,000 to the Company in the event that existing and additional financing is
insufficient to cover the cash needs of the Company through December 31, 1996
Moreover, because of the Company's long-term capital requirements, it may seek
to access the public equity market whenever conditions are favorable, even if it
does not have an immediate need for additional capital at that time. Any
additional funding may result in significant dilution and could involve the
issuance of securities with rights which are senior to those of existing
stockholders. The Company may also need additional funding earlier than
anticipated, and the Company's cash requirements in general may vary materially
from those now planned, for reasons including, but not limited to, changes in
the Company's research and development programs, clinical trials, competitive
and technological advances, the regulatory process, and higher than anticipated
expenses and lower than anticipated revenues form certain of the Company's
clinical trials as to which cost recovery from participants has been approved.
The Company has financed its operations since January 1, 1992 primarily
through the IPO, private placement of equity and debt securities, equipment
lease financing interest income, and revenues from licensing and royalty
agreements. Net cash provided by financing activities from January 1, 1992
through March 31, 1996 totaled $29.7 million, including approximately $16
million in net proceeds from the IPO, $3.3 million in net proceeds from the
private placement of Common Stock and Preferred Stock and $10.6 million from the
private placement of debt securities and warrants. Since December 31, 1993, the
Company has raised approximately $20.2 million in the form of debt securities,
warrants, and the sale of stock. $16 million of the $20.2 million raised since
December 31, 1993 represents approximate net proceeds from the IPO in which the
Company sold 5,313,000 Units, each consisting of one share of Common Stock and
one Class A Warrant. See "Certain Transactions" and "Description of
Securities--Class A Redeemable Warrants."
In February 1995, the Company entered into a settlement agreement with
the Tisch/Tsai Entities to restructure the December 1992 and February 1993
26
<PAGE>
promissory notes in the aggregate principal amount of $2,400,000 and settle
certain threatened claims made by the Tisch/Tsai Entities against the Company.
This debt restructuring consisted of (i) the repayment by the Company of
$1,200,000 in principal, (ii) the issuance of replacement Tisch/Tsai Notes in
the aggregate principal amount of $600,000 to the Tisch/Tsai Entities which
notes were retired on November 2, 1995, (iii) the conversion of $600,000 of
principal into 172,414 shares of Series C Preferred Stock at the rate of $3.48
per share, (iv) the amendment and restatement of certain warrants issued in
connection with the original notes in order to increase the number of shares of
stock issuable thereunder by 64,000 shares and to provide for warrants to
purchase a total of 144,000 shares of Common Stock at an exercise price of $2.00
per share, which warrants are exercisable until December 31, 1997, and (v) the
release by all parties of any claims. The replacement notes were secured by a
pledge of stock by the Company's President, Chairman and Chief Executive
Officer. The Company may have been in default of the Tisch/Tsai Notes due to a
possible default under certain other notes payable by the Company. Because such
other notes have been extended, the Company does not believe that any claim of
default can be made under the Tisch/Tsai Notes. See "Risk Factors--Possible
Default on Certain Debt."
In March 1995, the Company issued a promissory note to Gerald A. Brauser in
the amount of $200,000, bearing interest at a rate of 12% per year (the
"Original Brauser Note"). In connection with the Original Brauser Note, the
Company agreed to pay attorney fees and miscellaneous expenses of approximately
$12,000. In connection with the Original Brauser Note, the Company issued a
warrant to purchase 50,000 shares of Common Stock at a price of $1.75 per share.
The Original Brauser Note was collateralized by the Company and Bridge Ventures
with the Company's patent estate. In May 1995, the Company restructured the
Original Brauser Note in exchange for the Company issuing to Mr. Brauser (i) a
promissory note, collateralized by the Company's patent estate, in the amount of
$100,000 bearing interest at a rate of 12% per year (the "New Brauser Note"),
(ii) a warrant to purchase 25,000 shares of Common Stock at a price of $1.75 per
share, (iii) 100,000 shares of Common Stock at $.50 per share, and (iv) a Bridge
Loan in the amount of $50,000 as well as a Bridgeholder Option to purchase
33,333 Bridge Units. The New Brauser Note was originally due on the earlier of
June 30, 1995 or the Company's receipt of a certain payment from SAB/Bioclones
but has been amended to extend the date on which repayment is due to the earlier
of November 2, 1995 or the closing of the IPO. The notes were retired on
November 2, 1995.
As of March 31, 1996, the Company's cash on hand was $3,620,000 which does
not include $5,475,000 received after March 31, 1996 in connection with the
private placement of Series D Preferred Stock. At March 31, 1996, the Company
had accounts payable and accrued current liabilities of approximately
$1,330,400.
Net cash used by the Company for operating activities amounted to
approximately $5,170,638 in 1993, $1,952,145 in 1994, $1,939,219 in 1995 and
$2,655,215 for the three months ended March 31, 1996.
The Company has incurred and will continue to incur substantial research
and development costs and manufacturing costs. In addition, if the Company
receives regulatory clearance for the commercial sale of its products, the
Company will incur substantial expenditures to develop its manufacturing, sales,
marketing and distribution capabilities to the extent such functions are not
supplied by third parties. The Company will require substantial additional funds
for these purposes through additional equity and/or debt financings,
collaborative arrangements with corporate partners or from other sources. No
assurances can be given that such additional funds will be available for the
Company to finance its development on acceptable terms, if at all. If adequate
27
<PAGE>
funds are not available from additional sources of financing, the Company's
business will be materially adversely affected and the Company may not be able
to continue operations. "See Business--Company Strategy" and "Risk Factors."
The Company's future capital requirements will depend on many factors,
including scientific progress in its research, drug discovery and development
programs, the magnitude of these programs, the length and expense of
pre-clinical and clinical trials, the time and costs involved in seeking
regulatory approvals, the costs involved in filing, prosecuting and enforcing
patent claims, competing technological and market developments, changes in the
existing collaborative research relationships, the ability of the Company to
establish product development arrangements, the cost of manufacturing scale-up
and effective commercialization activities and arrangements. The failure by the
Company to obtain regulatory approval for any product will preclude its
commercialization. There can be no assurance that necessary regulatory approvals
will be obtained. See "Risk Factors" and "Business--Government Regulation."
Pursuant to the terms of the SAB Agreement, the Company has received an
aggregate of $3,000,000 through July 10, 1996.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(Statement 121). Statement 121 provides guidance for recognition and measurement
of impairment of long-lived assets, certain identifiable intangibles and
goodwill related both to assets to be held and used and assets to be disposed
of. The Company is required to adopt Statement 121 for the year ended December
31, 1996. The Company has not yet quantified the impact, if any, of the adoption
of Statement 121 may have on its consolidated financial statements.
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation" (Statement 123). Statement 123 allows companies the option to
retain the current accounting method for recognizing stock-based expense in the
financial statements or to adopt a new accounting method based on the estimated
fair value of employee stock options. Companies that do not adopt the new fair
value based method will be required to provide expanded disclosures in the
footnotes. The Company is required to adopt Statement 123 for the year ended
December 31, 1996. The Company expects to continue applying its current
accounting method and upon adoption will present the required footnote
disclosures.
28
<PAGE>
BUSINESS
General
The Company is a pharmaceutical company using nucleic acid technologies to
develop therapeutic products for the treatment of viral diseases and certain
cancers. Nucleic acid compounds represent a potential new class of
pharmaceutical products that are designed to act at the molecular level for the
treatment of human disease. The Company's drug technology utilizes
specially-configured RNA. The Company's double stranded RNA drug product,
trademarked Ampligen, which is administered intravenously, is in human clinical
development for various therapeutic indications. Based on the results of
pre-clinical studies and clinical trials, the Company believes that Ampligen may
have broad-spectrum anti-viral and anti-cancer activities. Over 300 patients
have received Ampligen in clinical trials authorized by the FDA at over twenty
clinical trial sites across the United States, representing the administration
of more than 40,000 doses of this drug.
Ampligen is being developed clinically for three anti-viral indications:
HBV (Phase I/II clinical trial), HIV associated disorders (Phase II), and ME/CFS
(Phase II/III). The Company's business strategy is designed around seeking the
required regulatory approvals which will allow the progressive introduction of
Ampligen for HIV followed by HBV and ME/CFS in the U.S., Canada, Europe and
Japan. There can be no assurance that Ampligen will receive regulatory approval
for any of such disorders. Ampligen has received Orphan Drug designation from
the FDA for four indications (AIDS, renal cell carcinoma, chronic fatigue
syndrome and invasive malignant melanoma). The Company is also developing a
second generation RNA drug technology, termed Oragen compounds, with potential
for broad spectrum antiviral activity by oral administration.
The Company has been issued certain patents on the use of Ampligen alone
and Ampligen in combination with certain other drugs, including AZT, ddI, ddC,
interferon and/or IL-2, for the treatment of HIV. The Company has also been
issued a patent on the use of Ampligen in combination with certain other drugs,
including ddI and ganciclovir, for the treatment of HBV and HCV and a patent
which affords protection on the use of Ampligen in patients with ME/CFS. While
the Company does not have any ownership rights to these other drugs, such drugs
may be readily purchased for combinational treatment regimens and thus, the
Company believes that the lack of such ownership rights will not have a material
adverse effect on the Company; however, no assurance can be given. To date, the
Company has not been issued any patents in the U.S. regarding the use of
Ampligen for treatment of the cancers which the Company has sought to target.
The Company's applications for such patents are currently pending; no assurances
can be given that such applications will be allowed. See "Business--Patent
Rights."
The WHO estimates that there are approximately 300 million chronic carriers
of HBV worldwide. More than 40% of the persistently infected persons who survive
to adulthood will die from cirrhosis, hepatocellular carcinoma (liver cancer),
or some other consequence of their infection. In the U.S. alone there are an
estimated 1.25 million carriers. HBV is one of the several viruses that cause
human hepatitis or inflammation of the liver. The Company is presently
conducting a Phase I/II clinical trial of Ampligen in the U.S. for the treatment
of chronic HBV infection at Stanford University and the University of
Pennsylvania. A significant reduction in viral components and improvement in
liver function has been noted during the course of the study to date and the
drug has been generally well tolerated. At present, interferon-alpha is the only
29
<PAGE>
approved product for this disease; however, approximately 75% of patients with
chronic HBV ultimately fail to respond to interferon-alpha. The global sales of
interferon are presently estimated at more than $1 billion, largely because of
its use in liver infections.
The CDC has estimated that approximately one million people in the U.S. are
infected with HIV, excluding patients who have progressed to fully symptomatic
AIDS. The WHO has estimated that 30 to 40 million people will be infected with
HIV worldwide by the year 2000. The Company is presently in Phase II of clinical
development of Ampligen in the U.S. for the treatment of symptomatic HIV
infection.
ME/CFS is a condition recently recognized by the CDC and characterized by
unexplained fatigue or chronic illness for six months or longer for which no
cause has been identified after a thorough medical work-up. Although the CDC is
presently conducting studies to determine more exactly the rate of incidence of
ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the
U.S. is in excess of 200 per 100,000 population. In November 1992, the Company
received approval from the HPB of Canada's Department of Health and Welfare, the
federal drug regulatory agency in Canada, to conduct an open-label clinical
trial of Ampligen in patients with severely debilitating ME/CFS. In this
clinical trial, the HPB has authorized the Company to charge patients for the
cost of the Ampligen administered. The Company is presently receiving limited
revenues from sales in Belgium under a similar cost recovery program. The
Company has also received authorization from the FDA, in the U.S., and the HPB,
in Canada, to initiate a Phase II/III clinical trial of Ampligen in patients
with ME/CFS. The Company is unaware of any investigational new drugs which are
currently at comparable stages of clinical development for ME/CFS.
The Company also has clinical experience with Ampligen in patients with
certain cancers, including renal cell carcinoma (kidney cancer) and metastatic
malignant melanoma. Based on estimates prepared by the American Cancer Society,
the Company anticipates that approximately 25,000 new cases of renal cell
carcinoma will be diagnosed in the U.S. in 1996. In March and June, 1993,
respectively, the Company was authorized by the FDA, in the U.S., and the HPB,
in Canada, to initiate a Phase II/III clinical trial of Ampligen in renal cell
carcinoma patients. Recently, the HPB authorized the Company to proceed with an
open-label clinical trial of Ampligen for renal cell carcinoma in Canada. The
HPB has authorized the Company to charge patients for the cost of the Ampligen
administered in this clinical trial. Based on estimates prepared by the American
Cancer Society, the Company also anticipates that approximately 34,000 new cases
of malignant melanoma will be diagnosed in the U.S. in 1996. Data from the
American Cancer Society and the World Health Organization indicate that both the
incidence and mortality from malignant melanoma are rising steadily among white
populations throughout the world. In the past decade, the incidence of melanoma
has increased faster than that of any other cancer except lung cancer in women.
From its inception in 1966 to the early 1980s, the Company's principal
business was to supply research support via contracts received principally from
the NIH. In the early 1980s, the Company redirected its efforts to the
development of nucleic acid pharmaceutical technology and since that time the
Company has devoted substantially all of its resources to its research, drug
discovery and development programs.
In October 1994, the Company entered into the SAB Agreement with respect to
codevelopment of various RNA drugs, including Ampligen, for which the Company
has previously obtained international patent protection. The SAB Agreement, as
amended, provides that the Company will provide SAB/Bioclones with an exclusive
30
<PAGE>
manufacturing and marketing license for certain Southern hemisphere countries
(including certain countries in South America) as well as the United Kingdom,
Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries
and territories. In exchange for these marketing and distribution rights, the
SAB Agreement provides for: (a) a $3 million cash payment to the Company,
payable in installments upon the occurrence of certain milestones including the
transfer of certain technical documents, some of which have already been
transferred; (b) the formation and issuance to the Company of 24.9% of the
capital stock of a company which is shall developing and operating a new
manufacturing facility for RNA drugs constructed by SAB/Bioclones, and (c)
royalties on all sales of the Company's products in the licensed territories
after the first $50 million of sales. In addition, SAB/Bioclones agrees to use
its best efforts to pursue the marketing approval of Ampligen for HBV in
Australia, South Africa, Brazil, and the United Kingdom, as well as to perform
(at its own expense) a phase III study of Ampligen in chronic HBV infection in
South Africa, which clinical study is to be performed pursuant to U.S. FDA good
clinical practice and good laboratory practice guidelines and standards.
SAB/Bioclones will be granted a right of first refusal to manufacture and supply
to the Company the drug product required for not less than one-third of its
world-wide sales of Ampligen (after deducting SAB/Bioclones-related sales).
According to its most recent annual report, SAB is a multinational holding
company investing in and taking management responsibility for a portfolio of
business in beer and beverages retailing, hotels and the manufacture of certain
mass market consumer goods, together with strategic investments in businesses
which support its mainstream interests. As of July 10, 1996, the Company had
received $3,000,000 pursuant to the SAB Agreement.
Nucleic Acid Pharmaceuticals
The Company believes that nucleic acid compounds represent a potentially
new class of pharmaceutical products that are designed to act at the molecular
level for the treatment of human disease. There are two forms of nucleic acid:
deoxyribonucleic acid ("DNA") and RNA. DNA is a group of naturally occurring
molecules found in chromosomes, the cell's genetic machinery. RNA is a group of
naturally occurring informational molecules which orchestrate a cell's behavior
and which regulate the action of groups of cells, including the cells which
comprise the body's immune system. RNA directs the production of proteins and
regulates certain cell activities including the activation of otherwise dormant
cellular defenses against viruses and tumors. To date, the Company has focused
its efforts on developing two classes of RNA pharmaceuticals, Ampligen, a high
molecular weight double stranded intravenous drug, and Oragen, low molecular
weight double or single stranded drugs intended for oral administration.
Company Strategy
The Company's business strategy is designed around seeking the required
regulatory approvals which will allow the progressive introduction of Ampligen
for HIV followed by HBV and ME/CFS in the U.S., Canada, Europe and Japan and the
Southern hemisphere countries including South Africa, Australia and countries in
South America. Within the next year, the Company expects to receive limited
revenues through cost-recovery from patients who become enrolled in a clinical
trial of Ampligen for severely debilitating ME/CFS in Canada (authorized by the
HPB) and a clinical trial of Ampligen for renal cell carcinoma in Canada
(authorized by the HPB) and has begun to receive revenues from a clinical trial
of Ampligen for ME/CFS in Belgium (authorized by the Belgian Minister of
Health). See "Business--Ampligen." To date, the Company has not granted the
right to market any of the Company's drug products to any third party other than
31
<PAGE>
SAB/Bioclones, Rivex and certain commercial rights to its subsidiaries. See
"Business--General," "--Marketing" and "--Subsidiary Companies."
As part of its development strategy, the Company has initiated clinical
trials of Ampligen in the U.S. and Belgium and has been authorized to conduct
clinical trials in Canada and Ireland. Ampligen is being tested in Phase II
trials in Belgium for ME/CFS, with the active drug administration phase ongoing.
In the U.S., the Company is evaluating and monitoring the duration of the drug
benefit period in certain HIV patients who completed a Phase II trial as well as
monitoring the drug benefit period in certain patients who previously received
Ampligen in a Phase I/II trial in HBV diseases. The Company expects that the
monitoring will help the Company to determine and evaluate the duration of the
potential drug benefit period. In connection with the foreign trials, the
Company has received export authorization from the FDA to ship Ampligen to
Belgium (for ME/CFS) and Canada (for ME/CFS and renal cell carcinoma) for
clinical trials which the Company either has initiated or plans to initiate in
those countries for ME/CFS in 1995, 1996 or 1997. In Japan, there is a high
incidence of chronic HBV. Based on data obtained from the clinical testing of
Ampligen as a possible therapy for HBV, the Company anticipates focusing its
efforts in Japan on the implementation of clinical trials of Ampligen for
chronic HBV. The Company's current strategy is to seek a partnering arrangement
with a Japanese entity and, subject to seeking and obtaining necessary
approvals, to conduct trials in Japan through such an arrangement.
As indicated above, the HPB has approved the Company's application to
conduct an open-label clinical trial of Ampligen at specified sites in Canada
for up to 200 patients with severely debilitating ME/CFS. Clinical sites are
presently being pursued. The HPB has also recently approved the Company's
application to conduct an open-label clinical trial of Ampligen at specified
sites in Canada for up to 200 patients with renal cell carcinoma (kidney
cancer). In these clinical trials, the HPB has authorized the Company to require
participants to pay the Company for the cost of the Ampligen administered. The
Company understands that patients may not be reimbursed for these costs by any
Canadian authority or from any private insurer. Due to the inability of patients
to receive reimbursement, the Company may not be able to charge a sufficient
price for the Ampligen used in such tests. The Company cannot promote
participation in the trial or sale of Ampligen through advertisements to the
general public.
Subject to obtaining the necessary regulatory approvals for the sale of
Ampligen in the home infusion (non-hospital) segment of the U.S. market and
favorable results of clinical trials, which cannot be assured, (see
"Business--Government Regulation"), the Company may utilize a service provider
to execute the direct marketing activities, conduct physical distribution of its
products, and handle billing and collections. The Company believes that this
approach may facilitate the generation of revenues without incurring the
substantial product launch costs associated with the employment of a direct
sales force. Furthermore, this approach will enable the Company to retain many
options for future marketing strategies. The Company does not currently
anticipate devoting substantial resources to the development of an in-house
sales force.
In Europe, the Company plans to adopt a country-by-country and, in certain
cases, an indication-by-indication, marketing strategy due to the heterogeneity
of governmental regulations and alternative distribution systems in these areas.
The Company anticipates that it will adopt an indication-by-indication marketing
strategy in Japan. The marketing alternatives the Company intends to consider
32
<PAGE>
include joint venture arrangements with pharmaceutical companies and the
co-marketing of the Company's products on a selective basis.
Pursuant to the SAB Agreement, the Company has granted SAB/Bioclones an
exclusive marketing license for certain Southern hemisphere countries (including
countries in South America) as well as the United Kingdom, Ireland, Africa,
Australia, Tasmania, New Zealand and certain other countries and territories. In
addition, SAB has agreed to use its best efforts to pursue the necessary
approval to market Ampligen for HBV in Australia, South Africa, Brazil, and the
United Kingdom, as well as to perform a phase III study of Ampligen in chronic
HBV infection in South Africa. See "Business--General."
The Company's current facilities and staff are not adequate to support the
manufacture and production of Ampligen for large-scale commercialization and, to
the extent the Company receives the necessary regulatory approvals, it will be
required to significantly increase its quality control, packaging, marketing and
distribution capabilities in order to sell the approved product commercially.
The Company plans to utilize third-party facilities or, if it is unable to do
so, build or acquire commercial-scale manufacturing facilities as the need
arises. The Company has entered into the SAB Agreement, which provides for the
issuance to the Company of 24.9% of the capital stock of a company which is
developing and operating a new manufacturing facility financed by SAB/Bioclones.
The Company expects that manufacturing at this new facility will commence in
1996, on a limited scale, with commercial production in 1997, although no
assurances can be given that this will occur.
Based on its current operating plan, the Company anticipates that the net
proceeds of its recent financings and interest thereon, together with
anticipated cost recovery revenues, will be sufficient to meet the Company's
capital requirements for approximately 18 months from the date of this
Prospectus. See "Use of Proceeds" and "Risk Factors--Additional Financing
Requirements, Lack of Liquidity, Uncertainty of Additional Funding and
Independent Auditors' Report with Explanatory Paragraph."
Ampligen
Ampligen is a high molecular weight RNA drug which is administered
intravenously. Based on the results of clinical trials to date, the Company
believes that Ampligen may have the potential to address significant medical
needs where current treatment methods are inadequate or non-existent. The
following table summarizes the primary indications and the current clinical
trial regulatory status of Ampligen in the U.S.
FDA-AUTHORIZED
INDICATION THERAPEUTIC TARGETS CLINICAL TRIALS*
- ---------- ------------------- ----------------
Antiviral Chronic HBV (hepatitis B virus) Phase I/II(1)
HIV Phase II(2)
ME/CFS (chronic fatigue syndrome) Phase II/III(3)
Anti-Cancer Renal Cell Carcinoma Phase II/III(4)
Melanoma (skin cancer) Phase II(5)
* The foregoing chart is qualified in its entirety by reference to more
detailed information included elsewhere in this Prospectus. See
"Business--Government Regulation" for a description of the FDA regulatory
approval process.
33
<PAGE>
(1) A Phase I/II study was authorized by the FDA. This study has been partially
enrolled with patients, and the Company expects the results of this study
of Ampligen in HBV to be available in 1996.
(2) A FDA-authorized Phase I and two Phase II clinical trials of Ampligen for
HIV infection have been completed; one Phase II trial studied Ampligen as
monotherapy and the second used Ampligen in combination with AZT. A Phase
II/III study utilizing Ampligen in a population of largely asymptomatic HIV
carriers has been presented to the FDA but is not yet authorized. The
Company is also discussing a double-blinded placebo-controlled Phase III
study with the FDA in a population of HIV patients currently taking a
variety of anti-HIV drugs. The Company is also discussing an open label
safety trial with the FDA in a similar population.
(3) The Company has completed a Phase I/II study and a second Phase II clinical
trial of Ampligen in ME/CFS under FDA authorizations. The FDA has also
authorized the Company's Phase II/III study in ME/CFS which the Company may
consider initiating in North America in 1996 or 1997.
(4) A FDA-authorized Phase I/II study of Ampligen in cancer including patients
with renal cell carcinoma has been completed. The Company has received
authorization from the FDA to initiate a Phase II/III study of Ampligen in
patients with metastatic renal cell carcinoma. At present, the Company does
not anticipate devoting significant Company resources to the funding of
this study, and, accordingly, a date for initiating this study has not been
determined.
(5) Patients with metastatic melanoma have been treated with Ampligen as
monotherapy under a FDA-authorized Phase I/II open-label study of Ampligen
in cancer. The FDA has authorized the Company to conduct a Phase II trial
of Ampligen in melanoma. The Company expects to initiate this trial in
1997.
The Company has not yet determined when it will seek to commence its
authorized Phase II/III clinical trial for renal cell carcinoma. Although the
Company plans to use a small portion of its available cash for the renal cell
carcinoma and melanoma studies, the Company plans to seek funding under third
party collaborative arrangements for these studies. Decisions regarding the
timing and sources of funding of such trials will be based, in part, on the
Company's progress in conducting clinical trials and seeking regulatory
approvals for other indications. In addition, pursuant to the SAB Agreement, a
controlled Phase II/III clinical trial of Ampligen for treatment of HBV
anticipated to be sufficient for product registration and commercialization in
certain foreign countries is contemplated to begin in 1996 or 1997. No assurance
can be given, however, that the clinical trial will be successfully completed or
that product registration or commercialization will ever occur.
Mechanism of Antiviral Action of Ampligen
When a virus enters a healthy human cell, the cell's normal response is to
activate the intracellular enzymes which cause the destruction of viral genetic
information, thereby preventing viral replication. Cells also normally produce
extracellular antiviral factors, called cytokines (such as interferon), which
activate the immune system to attack or scavenge virally infected cells. In
acute viral infections (such as influenza and measles), the presence of the
virus activates these intracellular alarm signals thus triggering the
intracellular and immune system response. Certain viruses associated with
34
<PAGE>
chronic diseases, such as HIV, ME/CFS associated viruses, and HBV, may produce
inhibitory substances which inactivate these natural defenses, and allow the
unchecked proliferation of the virus. A compilation of studies recently
published by the University of Washington suggests that viruses may not be able
to survive unless they can incapacitate these natural defenses.
Although the antiviral mechanism of action of Ampligen is not fully
understood, the Company believes that Ampligen's antiviral mechanism of action
is two-fold. First, the Company believes Ampligen reactivates the inactivated or
dormant antiviral defense system present in various cells. This natural defense
system, termed the ribonuclease L ("RNAse-L") and protein kinase antiviral
pathways, disrupts viral multiplication within human cells, thereby thwarting
further virus-induced cell damage. Second, the Company believes Ampligen
activates components of the immune response, called macrophages and natural
killer cells, which attack or scavenge virally infected cells. This activity is
thought to occur in part by inducing formation of selected cytokines such as
interferon. The Company believes Ampligen causes the production of various
different antiviral or anticancer proteins. Thus, the Company believes that the
administration of Ampligen into the body stimulates the appropriate antiviral
defenses at two levels: first, by activating the intracellular defense system
within various cells of the body; and second, by activating the immune system,
in part by the production of various interferons in their natural form.
The Company believes that the mechanisms of action of most existing
FDA-approved antiviral drugs do not stimulate the production of immune cells to
attack, or scavenge, disease-causing agents such as viruses, in the bloodstream
or attached to the surface of cells. Rather, these drugs appear to directly
inhibit the viruses by interfering with their replication. The Company also
believes that most of these currently available antivirals do not activate the
dormant intracellular defenses described above. See "Business--Competition."
The Company believes that Ampligen may have the ability to elicit a broad
range of host defenses and, consequently, may have the potential to eradicate
certain viral infections. The Company believes that Ampligen therapy may
reactivate the RNAse-L and protein kinase pathways; this activity is believed to
arrest further viral multiplication of certain viruses including retroviruses
(such as HIV), HBV, and ME/CFS associated viruses.
Mechanism of Anti-cancer Activity of Ampligen
Based on preclinical test results, the Company believes that Ampligen may
have an anti-cancer effect at three levels. First, in order for tumor cells to
divide (and thus multiply), the DNA in such cells must unwind. Ampligen triggers
the production of a chemical entity called "bioactive 2-5A" which the Company
believes may inhibit the unwinding of DNA in tumor cells. Second, when the DNA
in tumor cells unwinds, the tumor often spreads to other parts of the body
through a process called metastasis. Selected regions of the tumor cell's DNA,
called oncogenes, produce substances which accelerate tumor spread. The Company
believes that Ampligen may activate pathways, such as the protein kinase pathway
referred to above, which may serve to inhibit certain effects of oncogenes.
Third, the Company believes that Ampligen also induces the formation of various
cytokines, including interferon, interleukins and tumor necrosis factor, each of
which may enhance the ability of circulating immune cells, such as cytotoxic T
cells and natural killer cells, to scavenge tumor cells. Thus, the Company
believes that Ampligen may have three separate anticancer benefits: (1)
inhibiting the unwinding of DNA in tumor cells; (2) inhibiting the spread of
tumors to other parts of the body; and (3) inducing formation of various
35
<PAGE>
cytokines which may enhance the ability of healthy cells to kill tumor cells.
However, no assurance can be given that Ampligen will have any anti-cancer
effect whatsoever.
Ampligen for Viral Diseases
Chronic Hepatitis B ("HBV")
The Hepatitis B virus ("HBV") is one of several viruses that cause human
hepatitis, or inflammation of the liver. Worldwide, an estimated 300 million
people are chronic carriers of HBV. More than 40% of persistently infected
persons who survive into adulthood will die from cirrhosis, hepatocellular
carcinoma (liver cancer), or some other consequence of their infection. In the
U.S. alone, there are an estimated 1.25 million carriers. In the mid 1970's, the
first HBV vaccine was developed and it became commercially available in the U.S.
in 1981.
Hepatitis B, the form of hepatitis caused by HBV, is a contagious disease
and is transmitted from person to person in several ways including contact with
bodily fluids of an infected person. Perinatal and early childhood transmission
is the predominant mechanism of infection, particularly in lesser developed
countries. Those populations most at risk for infection include health care
workers, housemates of HBV carriers, the sexually active, hemodialysis patients,
the immunodepressed, child care workers, IV drug users, and neonates of HBV
positive mothers.
Common symptoms of HBV include jaundice, fever and the loss of appetite. In
general, infants and young children have milder initial disease than older age
patients. Adults usually develop acute hepatitis after a 4-28 week incubation
period, exhibiting symptoms of fever, nausea, fatigue, headache, jaundice, and
an enlarged and tender liver. Symptoms usually disappear 2-12 weeks after the
onset of jaundice. In rare cases, i.e. in less than 1.5% of patients
hospitalized for acute viral hepatitis, a fatal form of the disease called
fulminant hepatitis occurs.
Approximately 90% of HBV acutely infected adults become free of the HBV
antigen 1-5 years after infection. The remaining approximately 10% become
chronic carriers of HBV, capable of transmitting the disease to other persons.
Chronic carriers can be divided into two groups: (i) chronic active carriers,
and (ii) chronic persistent carriers. Among chronic carriers, about 3 in 10 are
chronic active, exhibiting frequent and often severe symptoms of acute
infection. Chronic active carriers develop significant liver damage, have a high
incidence of hepatocellular carcinoma (liver cancer) and cirrhosis.
Approximately 7 out of 10 chronic carriers are chronic persistent, and are
generally asymptomatic or have very mild and infrequent symptoms of hepatitis.
Chronic persistent carriers do not usually develop significant liver damage,
hepatocellular carcinoma, or cirrhosis.
In the U.S., 300,000 new cases of Hepatitis B occur each year. The reported
incidence of the disease has increased 37% between 1979 and 1989, despite the
introduction and availability of a vaccine in the early 1980's. Of the estimated
1.25 million Americans chronically infected with HBV, there are about 375,000
chronic active carriers, resulting annually in approximately 4,000 deaths from
cirrhosis, and 800 deaths from hepatocellular carcinoma. In China, most of
Africa, Southeast Asia, parts of the Middle East, and the Amazon basin, it is
estimated that 8-15% of the population is chronically infected with HBV. In the
developed countries, such as Western Europe, the U.S., and Australia, chronic
infection rates are generally less that 1% of the population, although some
36
<PAGE>
developed countries--Japan, Italy, and Greece, for example--report chronic
infection rates of 2-7%. In southern Europe, a resistant mutant strain of HBV
has been identified for which current vaccines do not provide immunity.
In late 1991, the Company commenced a Phase I/II study of Ampligen in
HBV-infected individuals in collaboration with investigators at Stanford
University and the University of Pennsylvania. The protocol for this study calls
for a treatment period of six months, and the Company expects the results to be
available in 1996. Subject to completion of and satisfactory results from the
Phase I/II study, the Company anticipates seeking FDA approval for the
initiation of a Phase II/III study for Ampligen for HBV in 1997.
In 1992, the FDA approved the commercial use of recombinant alpha
interferon for the treatment of chronic HBV infection. To the Company's
knowledge, this is the only approved HBV drug in the U.S. Published studies
indicate that 60% to 75% of patients with HBV fail to respond to interferon.
Among the laboratory markers being monitored in the Company's ongoing Phase
I/II study of Ampligen for HBV is the level of viral DNA. Decreases in viral DNA
levels in clinical evaluations of interferon were found to correlate positively
with clinical improvements as well as improvements in liver function. To date,
eight patients have enrolled in this study. Significant decreases in viral DNA
have been observed in 50% of the patients enrolled in the Company's study with
the patients' DNA levels becoming undetectable during or after Ampligen therapy.
In addition, liver enzymes have been measured as an indication of liver damage
in these patients. There was a significant improvement in liver function with an
approximate 50% or greater decrease in liver enzyme levels in these responding
patients and one additional patient. The liver enzymes returned to normal in two
patients during or after Ampligen therapy. Overall, 63% (5/8) of the chronic HBV
infected patients showed a response to Ampligen therapy.
Ampligen therapy was generally well tolerated. One patient who was
intolerant to IFN-alpha therapy was able to tolerate the full course of Ampligen
therapy at the highest dose given in this study. The Company believes that
Ampligen therapy may convey certain safety advantages over interferon therapy
during prolonged treatment cycles necessary in treating HBV.
The Company has also filed internationally various patent applications
covering hepatitis treatment in conjunction with closely related RNA drugs,
including poly Ao poly U, which is also being developed by a potential
competitor of the Company. The Company has notified the competitor that the
Company believes its patents cover various RNA drugs used in potential treatment
of hepatitis infections.
HIV Infection
HIV infection is characterized by a progressive decline in the patient's
immune system usually resulting in death from overwhelming infections. Fully
symptomatic AIDS is associated with multiple viral infections and the ongoing
destruction of the immune system. At present, each of these viral infections is
generally treated separately, resulting in a "multi-pharmaceutical" treatment
approach for each patient. In studying potential treatments for AIDS, scientists
have employed CD4 cell counts as a surrogate marker to indicate the extent to
which the disease has progressed. Independent studies of the natural course of
HIV disease at the Harvard University School of Public Health have indicated
37
<PAGE>
that stabilization of CD4 levels is associated with reduced short term risk of
death. The Company believes that correction of the underlying deficit in
cellular immunity may result in longer-lasting clinical benefits than currently
approved treatments and also may reduce the need for multi-pharmaceutical
treatments.
In 1986, the Company initiated a Phase II study in ten individuals with HIV
disease, three of whom had fully symptomatic AIDS. This study indicated that
Ampligen treatment appeared to delay the expected immune cell deterioration in
six of the seven HIV patients who had not progressed to AIDS. Although the
Company regards these observations as clinically important, it does not consider
them to be statistically significant due to the small number of cases studied.
In a separate study conducted in Houston, Texas between 1987 and 1989 and
completed at Baylor University in an extension of the Company's first HIV study,
AZT was administered as part of a combination therapy with Ampligen. Patients
who received this combinational therapy experienced a stabilization of CD4 cell
levels for a longer time than was reported for patients receiving either
Ampligen alone or AZT alone. Data obtained at the United States Air Force
Medical Center, Veterans Administration Hospitals and the Walter Reed Army
Institute of Research indicate that responsiveness to foreign antigens injected
under the skin ("skin tests") predicts anticipated life span in patients with
HIV disease. As HIV disease progresses, patients may cease to have a positive
skin test response. The Company's Phase II studies suggest that Ampligen may
have restored the positive skin test response in HIV infected individuals who
had not progressed to AIDS at the time of initiation of Ampligen treatment,
although these preliminary results must be confirmed in subsequent clinical
trials consisting of larger numbers of patients.
In 1987, the Company formed a joint venture with DuPont which sponsored a
multi-center, double-blind placebo-controlled Phase II clinical study of
Ampligen for the treatment of HIV infection. The total patient population of
this study was 330. This study, known as AMP 101, was terminated in 1988 when an
analysis of interim data showed no clinical benefit from Ampligen therapy as
opposed to placebo. After comparing the data from this study with data from
other studies, and additional experimental investigation, the Company concluded
that the activity of the Ampligen administered to the participants in the AMP
101 study was impaired due to a reaction which the Company believed to have been
caused by the packaging of Ampligen in polyvinyl chloride (plastic) bags. Such
plastic bags had not previously been used in the packaging and delivery of
Ampligen used in other clinical trials. On April 13, 1990, a fifteen member
scientific panel assembled by the NIH in order to evaluate whether an NIH grant
for the clinical testing of Ampligen should be renewed issued its report and
recommendations regarding the renewal of this grant. This report observed that
the Ampligen used in the AMP 101 study had been found by the Company to have
increased content of single strand RNA due to preparation of the drug and the
use of plastic bags. The report further stated that "the promising preliminary
results obtained make further evaluation of the compound alone or in combination
with other agents of great importance to define fully its role as a therapeutic
agent." The joint venture arrangement with DuPont was later terminated as part
of the settlement of a lawsuit brought against the Company by DuPont and an
action against DuPont brought by the Company related to the AMP101 study and
alleged breaches of the joint venture agreement.
In 1991, the NIH, through the National Institute of Allergy and Infectious
Diseases, completed an open-label Phase I/II study of Ampligen involving 39
patients at the University of Pittsburgh treated at different dosages. Of the 24
evaluable patients who received at least 120 mg/m2 of Ampligen for the treatment
of HIV, 14 patients experienced stabilized CD4 levels for at least nine weeks.
38
<PAGE>
The Company has conducted a Phase II clinical trial of Ampligen for HIV
infection. This study, which was initiated in 1990, was a randomized,
controlled, multicenter study evaluating Ampligen therapy in combination with
AZT. The Company filed the results of this study with the FDA in late 1993 along
with a request for approval to initiate a Phase II/III study in 1994. The Phase
II/III study currently being considered by the FDA would utilize Ampligen in a
population of largely asymptomatic HIV carriers. The FDA raised certain issues
with respect to the Phase II clinical trial results, including the laboratory
endpoints used. The Company has presented to the FDA the design of the Phase
II/III study, including identification of appropriate clinical and laboratory
endpoints. See "Business--Government Regulation."
Currently, the principal treatments for HIV are AZT, DDI, DDC, D4T, 3TC and
a new group of compounds termed protease inhibitors, of which three have been
recently approved. In the case of each of these drugs, most patients ultimately
cease to benefit from the drug due to the emergence of new strains of the AIDS
virus. Based on the results obtained to date, an AZT resistant virus has
remained sensitive to Ampligen in various in vitro studies which have been
performed at Hahnemann University. Although no assurances can be given and
additional testing will be necessary to substantiate the Company's belief, the
Company believes that human subjects may be less likely to develop viral
resistance to Ampligen as a result of the drug's perceived mechanism of action.
See "Business--Mechanism of Antiviral Action of Ampligen."
ME/CFS
ME/CFS is characterized by unexplained fatigue or chronic illness for six
months or longer for which no cause has been identified after a thorough medical
workup. Although the etiology of ME/CFS is unknown, a significant segment of the
medical community believes that it may be caused by a virus because the onset of
the condition is usually characterized by flu-like symptoms followed by chronic
tiredness that, in some cases, can continue for years. ME/CFS is also often
accompanied by a disturbance of the patient's immune system, as measured by
lower levels of natural killer cell activity and/or lower lymphocyte counts.
Data reported by a consortium of institutions including Harvard University
and the University of Washington indicate that a majority of those ME/CFS
patients who have been tested have been found to have elevated levels of herpes
virus (HHV-6) as well as brain abnormalities that were noted during magnetic
resonance imaging (known as MRI) testing. Because there may be both viral and
immune components to this disease, the Company believes, although it has not yet
clinically proven, that Ampligen may be well suited as a treatment for ME/CFS.
There are no drugs specifically approved by the FDA for this disorder and
physicians typically prescribe analgesics and anti-inflammatory drugs to combat
the painful symptoms.
In 1989, the Company received FDA authorization to conduct a Phase I/II
study of Ampligen for ME/CFS. In 1991, the Company completed a multicenter,
double-blind, placebo-controlled Phase II clinical trial (the "Phase II ME/CFS
Study") of Ampligen in patients with ME/CFS. The FDA raised certain issues with
respect to this clinical trial. See "Business--Ampligen Safety Profile" for a
discussion of the drug safety issues raised by the FDA.
In 1992, the Company received approval from the HPB, the federal drug
regulatory agency in Canada, to conduct an open-label clinical study at
39
<PAGE>
specified sites to evaluate the activity and safety of Ampligen in up to 200
patients with severely debilitating ME/CFS. The Company has been authorized to
require patients in this clinical study to pay the Company for the Ampligen
administered. The Company understands that patients may not be reimbursed for
these costs by any Canadian authority or any private insurer. The Company
anticipates that initial patients may be enrolled in this study during 1997. In
October and November 1992, respectively, the Company was authorized by the FDA,
in the U.S., and the HPB, in Canada, to initiate a Phase II/III multicenter,
placebo-controlled, randomized, double blind clinical trial in up to 230
patients in the U.S. and Canada with ME/CFS. In December 1992, the FDA
authorized the export of Ampligen for investigational use for treatment of
ME/CFS patients in Canada. The Company anticipates this study will be initiated
in 1997 at multiple centers in North America.
In February 1993, the Company presented results of its Phase II study of
Ampligen for ME/CFS to an FDA Advisory Committee and these results were
published in early 1994 in Clinical Infectious Diseases, a peer reviewed medical
journal which emphasizes the understanding and potential treatment of infectious
diseases. The results indicated that patients on Ampligen, in contrast to those
receiving a placebo, showed significant improvement in physical capacity as
determined by performance on treadmill testing. The Ampligen treated patient
group also required less pain medication than did the placebo group.
In December 1993, Ampligen was designated as an Orphan Drug by the FDA for
the treatment of Chronic Fatigue Syndrome. See "Business--Government
Regulations."
Ampligen for Cancer
Renal Cell Carcinoma (Kidney Cancer)
Based on estimates prepared by the American Cancer Society, the Company
anticipates that there will be approximately 25,000 new cases of renal cell
carcinoma diagnosed in the U.S. in 1996. Patients with metastatic renal cell
carcinoma show five-year survival rates of only 2%-18%. Treatment of advanced
renal cell carcinoma with metastases with conventional chemotherapy has not
resulted in significant median increases in survival. Biological response
modifiers, or lymphokines, have also been used with limited success to treat
renal cell carcinoma patients. To the Company's knowledge, the only FDA approved
drug for the treatment of renal cell carcinoma is Interleukin-2 ("IL-2"), which
is a biological response modifier. Based on published reports, treatment with
IL-2 results in a reduction in tumor size in approximately 10%-20% of patients.
Increased survival of patients receiving IL-2 therapy has been reported. The FDA
approved IL-2 in 1992 for sale in the treatment of metastatic renal cell
carcinoma.
In 1991, Ampligen was designated as an Orphan Drug by the FDA for the
treatment of renal cell carcinoma. See "Business--Government Regulations." A
Phase I/II clinical trial of Ampligen in cancer patients was initiated in 1983.
Thirteen patients with metastatic renal cell carcinoma received Ampligen at low
doses (10-120 mg.) twice weekly; eighteen patients with metastatic renal cell
carcinoma received Ampligen at high doses (200-500 mg.) twice weekly. Data
analysis from this study indicates that the patients in the high dose group
experienced an increase in median survival versus the low dose group and as
compared to an historical control group of 610 patients. Specifically, the
median survival for the Ampligen high dose group was 20.4 months while the
median survival for the historical control group was 5.5 months. This increase
represents a 370% prolongation of survival in the high dose Ampligen treated
40
<PAGE>
group. The survival of the low dose Ampligen group did not increase compared to
the historical control group. Overall, the Company believes that these results
are encouraging given the substantial inadequacy of current treatment
modalities, and the short life expectancy of many renal cell carcinoma patients.
The Company believes that these results suggest that there may be a correlation
between high dose Ampligen treatment and increased survival in metastatic renal
cell carcinoma patients.
On March 22, 1993, the Company received authorization from the FDA to
initiate an open label, active-controlled, multicenter study of Ampligen in
patients with metastatic renal cell carcinoma. On June 7, 1993, the HPB
authorized the Company to conduct this clinical trial in Canada. At present, the
Company does not anticipate devoting significant Company resources to the
funding of these studies, because the size of the potential market for renal
cell carcinoma is relatively small.
On June 7, 1993, the Company also received approval from the HPB in Canada
to conduct a second open-label clinical study at specified sites to evaluate the
activity and safety of Ampligen in up to 200 patients with renal cell carcinoma.
The Company has been authorized to require patients in this clinical study to
pay the Company for the Ampligen administered. There can be no assurance that
patients will be reimbursed for these costs by any Canadian authority or by any
private insurer. The Company has not initiated this program to date because of
limited resources and a shift in the Company's clinical priorities but
anticipates that, once resources are available, initial patients will be
enrolled in this study during 1997. The Company does not believe that approvals
for these studies will be withdrawn as a result of the delay since the approvals
were not conditioned upon a particular commencement date.
The Canadian clinical trials have not yet been approved by the ethical
review committees ("ERCs") at the respective clinical sites involved, and the
Company has agreed with the HPB not to proceed with such trials unless such
approvals are obtained. These approvals are required for all drug studies
conducted in Canada. Although the Company believes that it will be able to
secure the approvals of the ERCs, no assurances can be given with respect to
when, or if, these approvals will be obtained. The Company has received
authorization from the FDA to export Ampligen to Canada for investigational use
for treatment of renal cell carcinoma patients in Canada.
Malignant Melanoma
Data from the American Cancer Society and the WHO indicate that both the
incidence and mortality from malignant melanoma are rising steadily among white
populations throughout the world. In the past decade, the incidence of melanoma
has increased faster than that of any other cancer, except lung cancer in women.
In December 1993, Ampligen was designated as an Orphan Drug by the FDA for
the treatment of invasive malignant melanoma. See "Business--Government
Regulations." Patients with metastatic melanoma have been treated with Ampligen
as monotherapy under a Phase I/II open-label study of Ampligen as part of a
broader study of cancer patients at Hahnemann University beginning in 1983 and
Yale University beginning in 1991. Two of the ten patients treated had complete
responses, as substantiated by computerized axial tomography (known as CAT
scans). There was no evidence of clinical benefit among the eight other patients
in this study. The FDA has authorized the Company to conduct a Phase II trial at
the M.D. Anderson Hospital in Houston, Texas. The Company expects to initiate
this trial in 1997.
41
<PAGE>
Ampligen Safety Profile
The Company believes that Ampligen has been generally well tolerated in
more than 15,000 patient treatment weeks with a low incidence of clinical
toxicity, particularly given the life threatening diseases being treated.
Clinical experience with Ampligen now totals 311 patients, of whom 171 patients
have received Ampligen for six months or more. Of these patients, 117 patients
have received Ampligen for one year or more; 63 patients have received Ampligen
for two years or more; and 22 patients have received Ampligen for periods in
excess of three years. A mild flushing reaction has been observed in
approximately 15% of patients treated in the Company's various studies. This
reaction is occasionally accompanied by erythema, a tightness of the chest,
tachycardia, anxiety, shortness of breath, subjective reports of "feeling hot,"
sweating and nausea. The reaction is usually infusion-rate related and may
generally be controlled by slowing the infusion rate. Other adverse side effects
include liver enzyme level elevations, diarrhea, itching, urticaria (swelling of
the skin), bronchospasm, transient hypotension, photophobia, rash, bradycardia,
transient visual disturbances, arrhythmias, decreases in platelets and white
blood cell counts, anemia, dizziness, confusion, elevation of kidney function
tests, occasional temporary hair loss and various flu-like symptoms, including
fever, chills, fatigue, muscular aches, joint pains, headaches, nausea and
vomiting. These flu-like side effects typically subside within several months.
In February 1992, after the conclusion of the Phase II ME/CFS Study and
subsequent to the Company's submission of data from that study to the FDA, the
FDA advised the Company, among other things, of certain concerns regarding the
safety profile of Ampligen. Specifically, the FDA noted that various side
effects of Ampligen had been observed during the Phase II ME/CFS Study,
including severe liver toxicity, severe swelling and itching of extremities,
severe chest pain, severe muscle cramps and severe flu-like symptoms. These
observations were made by the FDA in the context of the FDA's review of the
Company's proposed protocol for a Phase II/III ME/CFS trial.
In July 1992, the Company responded to these concerns by providing an
analysis of the side effects data obtained from the Phase II study and the
treating physicians' views. The Company observed that many of the side effects
described by the FDA were regarded by both the Company and the treating
physicians of those patients as unrelated to Ampligen treatment. The Company
advised the FDA of the Company's view that the data from the Phase II ME/CFS
Study indicated that Ampligen appeared to have a favorable risk/benefit ratio
for ME/CFS. On October 9, 1992, the FDA authorized the Company's proposed Phase
II/III clinical trial for ME/CFS, concluding "that it is reasonably safe for the
initiation of [the Company's] proposed clinical study." This regulatory action
allows Ampligen to be administered for up to one year to an additional 115
patients (in a 230 patient placebo-controlled trial).
In February 1993, the FDA raised an issue regarding possible side effects
of Ampligen which grew out of the agency's review of an animal study conducted
in 1987 involving beagle dogs. Although the results of this study suggest a
possible association between Ampligen administration and focal epicarditis (a
small localized area of inflammation of the outer lining of the heart), the
study did not establish whether the epicarditis observed was attributable to
Ampligen administration. The meaning of these findings in the beagle dog and how
they relate to human clinical experience is not presently known. Because these
conditions were not observed in any other animal studies or in the clinical
trials conducted in humans over the previous ten years, the Company believes
42
<PAGE>
that these findings may be restricted to the beagle dog. The FDA has requested
that the Company conduct an additional toxicity study of Ampligen in beagle
dogs. The FDA has also asked the Company to revise the informed consent forms
provided to patients upon enrollment in the Company's clinical trials to include
the findings of the 1987 study concerning epicarditis in beagle dogs, as well as
other toxicities observed during the course of the Company's various preclinical
toxicology studies in rabbits, rats, dogs and monkeys. The Company has revised
its informed consent forms in accordance with this request. Finally, the FDA has
also asked the Company to conduct cardiovascular follow-up examinations on
selected patients in accordance with criteria suggested by the FDA. The Company
has complied with this request. These examinations, the results of which were
submitted to the FDA in March, April and May, 1993, showed no evidence of
Ampligen-induced epicarditis in these patients. The Company believes that it has
adequately complied with the FDA's requests for information and believes that
the issues raised by the FDA will not have a material effect on the Company's
efforts to receive approval for Ampligen as a treatment for ME/CFS, although no
assurances can be given.
In connection with the proposed Phase III study on HIV patients under
discussion with the FDA, the Company will complete additional toxicity studies
as required by the FDA.
Oragen Drugs
The Company is in the early pre-clinical stages of developing Oragen drugs,
a nucleic acid technology related to Ampligen. Oragen drugs are low molecular
weight RNA compounds which the Company believes, by virtue of their small size,
have the potential for becoming oral, broad-spectrum treatments for various
viral diseases such as HIV infection and chronic HBV infection. The technology
for these products has been developed in part by the Company and has also been
developed in part by Temple University which has licensed to the Company certain
technology for commercial use on an exclusive basis, subject to certain limited
exceptions. The Company was notified in July 1994 that Temple University
believed the Company was in breach of the licensing agreement and therefore that
the agreement was being terminated. The Company has filed a lawsuit seeking a
declaratory judgement that the agreement remains in full force and effect and
seeking monetary damages. See "Business--Research and Development, Licensing and
Collaboration Agreements," "Business--Legal Proceedings" and "Risk
Factors--Disputes and Legal Proceedings Related to Patent Rights". In the event
that the Company does not prevail in its lawsuit and the agreement is deemed
terminated, the Company would lose its investment to date in certain Oragen
compounds which it acquired pursuant to its licensing agreement. Although the
Company has developed its own Oragen compounds, to which it would maintain its
rights, Temple or its new licensees, if any, could become competitors of the
Company in the event that the Company does not prevail in its lawsuit. To date,
a number of compounds have been developed using this nucleic acid technology by
both the Company and Temple, working both together and separately. No clinical
trials of Oragen drugs have been conducted, and authorization to conduct such
trials cannot be sought or obtained until such time as sufficient pre-clinical
work has been completed.
Initial studies show that these drugs can withstand enzymatic destruction,
an important factor in order for compounds to enter the blood stream in an
intact form. Results from in vitro studies conducted in collaboration with the
National Institute of Allergy and Infectious Diseases indicate that Oragen
products may inhibit HBV infection, and in vitro studies conducted in
collaboration with the National Cancer Institute and the University of Mainz,
43
<PAGE>
Germany, indicate that Oragen products may inhibit HIV infections. One compound,
Oragen 0004, has shown inhibition of HBV multiplication in vitro and another,
Oragen 0044, has demonstrated activity against HIV in in vitro studies performed
by Temple University. These two Oragen compounds have been produced in
quantities which the Company believes are sufficient to perform initial animal
toxicology testing. Recent experiments with mice at the University of Toronto
indicate that Oragen 0004 may inhibit mouse hepatitis virus, and that Oragen
0004 may be absorbed after oral delivery. There has been no human clinical
testing of Oragen products to date. There can be no assurance that human
clinical testing, if initiated, will yield results consistent with those
achieved in in vitro or animal testing.
The Company believes that Oragen drugs may exert anti-viral activity
through two intracellular mechanisms. First, they may activate the intracellular
"latent" RNAse-L to degrade viral RNA. Second, they may inhibit the HIV
replication enzyme, reverse transcriptase, by binding to a different site on the
enzyme from that bound by conventional anti-HIV compounds such as AZT. The
Company's belief in the potential effects of these compounds is based, in part,
on the collaborative in vitro studies with the National Cancer Institute
referred to above. Certain in vitro experiments performed at Vanderbilt
University indicate that certain human immune cells can be protected from cell
death caused by HIV infection by treatment with Oragen drugs. Under sponsorship
of the National Institute for Allergy and Infectious Diseases, in vitro studies
at Georgetown University also demonstrated that Oragen drugs may inhibit the
replication of human HBV virus. In each of the in vitro studies, no substantial
cell toxicity was observed at concentrations which inhibit the applicable virus.
The Company believes Oragen drugs work at a different stage of the
anti-viral and anti-cancer response chain than Ampligen and therefore may be
effective in disorders where the activity of Ampligen is limited.
The following table shows the Company's past and present pre-clinical
studies of Oragen compounds. Except as otherwise noted, the studies have been
conducted under collaborative arrangements pursuant to which the Company
supplies quantities of the drug to the third party institution for testing, and
that institution assigns all of the commercial rights to the studies to the
Company and funds the research costs. See "Research and Development, Licensing
and Collaboration Agreements."
Target Programs Potential Market Applications Collaborators
- --------------- ----------------------------- -------------
Human Immuno-
deficiency Treatment of HIV National Cancer Institute
Virus (HIV) Temple University(1)(2)
Vanderbilt University(1)
University of Mainz,
Germany(1)
Hepatitis B Virus
(HBV) Treatment of HBV National Institute of
Allergy and Infectious
Diseases, Georgetown
University
44
<PAGE>
Mouse Hepatitis
Virus Treatment of Hepatitis C University of Toronto(1)
Herpes Simplex Virus
Type 1 and 2 Treatment of Herpes Medical College of
(HSV-1, HSV-2) Infections Pennsylvania(1)
Juntendo University
Tokyo, Japan
Poliovirus/Respiratory
Syncytial virus Childhood Viral Diseases Howard University
Solid tumors Treatment of various
types of cancer Temple University(1)(2)
Hahnemann University
(1) Funding provided by the Company. In all other cases, funding provided by
the institution.
(2) The Company was notified in July 1994 that Temple believed the Company was
in breach of its licensing agreement and therefore that the agreement was
being terminated. The Company has filed a lawsuit seeking a declaratory
judgment that the agreement remains in full force and effect and seeking
monetary damages and Temple has filed a lawsuit against the Company. See
"Business--Legal Proceedings" and "Business-- Research and Development,
Licensing and Collaboration Agreements."
Diagnostic Products
The Company is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians in
identifying patients for the Company's RNA drug therapies and to assist in their
clinical management thereafter. The Company believes that the availability of
such tests may lead to improved patient care and increased market penetration by
the Company's products, if and when such products are available for commercial
sale. While these tests are at an early stage of commercial development, the
Company believes that they may ultimately provide an opportunity for
diversification of the Company's products and revenues and may help to identify
patients who could benefit from the Company's drug treatment. The Diagen
products would have to go through a regulatory diagnostic product clearance
process prior to commercial sale. See "Business -- Government Regulation" below.
Subsidiary Companies
In September 1994, the Company incorporated three wholly-owned subsidiaries
- -- BioPro Corp. ("BioPro"), Core BioTech Corp. ("Core BioTech"), and BioAegean
Corp. ("BioAegean") -- in the state of Delaware.
The purpose of BioPro is to commercialize tobacco-related products. BioPro
intends to develop methods to utilize RNA technology in conjunction with certain
tobacco and cigarette filter products to provide cleaner tobacco products. The
technology is based in part on recent unpublished experiments in laboratory
animals conducted at the University of California, Davis, which suggest that the
Company's RNA drugs may prevent certain aspects of lung fibrosis under certain
45
<PAGE>
experimental conditions. In September, 1994, the Company granted an exclusive
worldwide license and/or sub-license to certain of its patents and assigned
certain other patents to BioPro (the "BioPro License") for a term of three
years, which term will automatically be extended for a term of 15 years in the
event that BioPro provides evidence that it has commercialized one or more of
the patents. BioPro has agreed that it will not develop any product or
technology which may be deemed therapeutic and has granted a right of first
refusal to the Company with respect to any technology which it may develop or
acquire. BioPro has the right to grant sublicenses subject to the requirement
that its sublicensees agree to non-competition arrangements with the Company.
The Company has agreed that it will not develop any technology related to the
business of BioPro and has granted BioPro a right of first refusal with respect
to any technology it may develop with respect to the business of BioPro.
In July 1995, the Company entered into an agreement with Vernacular
Communications, Inc. and certain other individuals (collectively, "Vernacular")
pursuant to which Vernacular will provide various services to and for the
Company and BioPro, including introduction to the Company and BioPro of entities
interested in potential corporate alliances. If, as a result of such
introductions, the Company and BioPro enter into a transaction with such an
entity, the Company shall (i) pay to Vernacular 8%, 6% and 3% of the first,
second and third million dollars, respectively, paid to the Company for the
licensing of its products through BioPro and 2% of each subsequent million
dollars, (ii) pay to Vernacular 10% of all licensing fees/ royalties received in
connection with the transaction and (iii) grant to Vernacular 4% stock interests
in BioPro and/or any other business entity created as a result of the
transaction. In addition, the Company agreed to pay one of the individuals a
one-time consulting fee of $25,000.
The purpose of Core BioTech is to commercialize the Company's diagnostic
oriented patents which provide RNA technology to detect certain difficult to
diagnose viral diseases such as ME/CFS and other immuno-dysfunctional conditions
through strategically located central reference laboratories. In September,
1994, the Company granted an exclusive worldwide license and/or sub-license to
certain of its patents and assigned certain other patents to Core BioTech (the
"Core BioTech License") for a term of three years, which term will automatically
be extended for a term of 15 years in the event that Core BioTech provides
evidence that it has commercialized one or more of the patents. Core BioTech has
agreed that it will not develop any product or technology which may be deemed
therapeutic and has granted a right of first refusal to the Company with respect
to any technology which it may develop or acquire. Core BioTech has the right to
grant sublicenses subject to the requirement that its sublicensees agree to
non-competition arrangements with the Company. The Company has agreed that it
will not develop any technology related to the business of Core BioTech and has
granted Core BioTech a right of first refusal with respect to any technology it
may develop with respect to the business of Core BioTech.
The purpose of BioAegean is to commercialize the Company's consumer
oriented patents, especially in the skin care area including the development of
sunscreens to prevent malignant melanoma and maintain vitality of cutaneous
tissues normally lost with aging or increased sun exposure. In September, 1994,
the Company granted an exclusive worldwide license and/or sub-license to certain
of its patents and assigned certain other patents to BioAegean (the "BioAegean
License") for a term of three years, which term will automatically be extended
for a term of 15 years in the event that BioAegean provides evidence that it has
commercialized one or more of the patents. BioAegean has agreed that it will not
develop any product or technology which may be deemed therapeutic and has
granted a right of first refusal to the Company with respect to any technology
46
<PAGE>
which it may develop or acquire. BioAegean has the right to grant sublicenses
subject to the requirement that its sublicensees agree to non-competition
arrangements with the Company. The Company has agreed that it will not develop
any technology related to the business of BioAegean and has granted BioAegean a
right of first refusal with respect to any technology it may develop with
respect to the business of BioAegean.
In exchange for the grant of the BioAegean License, BioAegean has agreed to
issue the following securities to the Company: (i) 1,000,000 shares of common
stock of BioAegean, (ii) an option to purchase 1,000,000 shares of common stock
of BioAegean at an exercise price of the lesser of the initial public offering
price of BioAegean or $5.00 per share, provided the initial public offering of
BioAegean occurs before May 4, 1997 and (iii) 10,000 shares of Preferred Stock
having a liquidation preference and a right to 1,000 votes for each share on all
matters that may come before the shareholders.
In June 1995, the directors of BioAegean approved the private placement of
1,000,000 shares of common stock at $1.00 per share which is expected in 1996 or
1997. In addition, the directors of BioAegean issued 10-year options to purchase
an aggregate of 1,200,000 shares of common stock of BioAegean at an exercise
price of $1.00 per share (the "BioAegean Options") to its officers and
directors. The BioAegean Options are conditional upon the recipient's agreement
to serve BioAegean as needed for at least 24 months unless fully incapacitated.
William A. Carter, M.D., Chairman, President and Chief Executive Officer of the
Company, serves as Chairman, Chief Executive Officer and a Director of BioAegean
and received 300,000 BioAegean Options. Peter Rodino, III, a director and
Secretary of the Company, serves as Vice-Chairman, Secretary, Corporate Counsel
and a director of BioAegean and received 150,000 BioAegean Options. R. Douglas
Hulse serves as Chief Operating Officer of both the Company and BioAegean and
received 50,000 BioAegean Options. Robert Peterson serves as Chief Financial
Officer of both the Company and BioAegean and received 50,000 BioAegean Options.
Sharon Will, Vice President of Investor Relations and Corporate Communications
for the Company, serves as Vice President of Marketing for BioAegean and
received 150,000 BioAegean Options. Harris Freedman serves as Vice President for
Strategic Alliances for both the Company and BioAegean and received 150,000
BioAegean Options. Richard Piani, a director of the Company, serves as a
director and the Advisor for European Affairs of BioAegean and received 50,000
BioAegean Options. Gerald Kay serves as a director for both the Company and
BioAegean and received 50,000 BioAegean Options. BioAegean's remaining director,
Jerome Belson, a principal shareholder of the Company, received 50,000 BioAegean
Options.
While the Company believes it has developed an international patent
position to cover these possible applications of its technology, no assurance
can be given that any of the goals of the three subsidiaries described above
will be achieved, that significant clinical testing will occur, that any
products will ultimately be developed, commercially or otherwise or that the
Company's patent position will be adequate to protect any products which may
result.
Patent Rights
The Company has sought patent protection in four major geographic markets:
the United States, Canada, Europe, and Japan. The Company has filed patent
applications involving chemistry and processes with the U.S. Patent and
Trademark Office and foreign patent applications in other countries, such as
members of the European Patent Convention, Canada, Japan, South Korea,
Australia. The Company's patents and patent applications are principally "field
of therapeutic use" patents and cover various potential uses of the Company's
47
<PAGE>
RNA technology in the health care field, including ethical drugs for anti-viral
and cancer indications, as well as non-prescription consumer health care
products. "Field of therapeutic use" patents restrict the use of the compounds
to specific disease categories or medical conditions but do not restrict
potential competitors from manufacturing the same product for other potential
uses which are not covered by the Company's patents. Of the patent applications
filed worldwide, as of June 30, 1996 approximately 230 had been issued,
including 13 U.S. patents and 13 Canadian patents. None of such issued U.S.
patents will expire prior to the year 2006. No assurances can be given that the
Company's pending applications will mature into patents. The Company believes
that all of these 200 patents are pertinent to the Company's present and future
operations as the Company expects to market its product in Europe, Asia and
certain Third World countries, although the Company has not entered into any
additional agreements with respect to these areas and no assurance can be given
that any business relationship will result.
The Company's ability to receive patent protection for the commercial sale
of Ampligen is subject to the Company's obtaining enforceable patents covering
the use of the drug for a particular indication. The Company has been issued
certain patents on the use of Ampligen alone and Ampligen in combination with
certain other drugs for the treatment of HIV. The Company has also been issued a
patent on the use of Ampligen in combination with certain other drugs for the
treatment of HBV and HCV and a patent which affords protection on the use of
Ampligen in patients with ME/CFS. To date, the Company has not been issued any
patents in the U.S. regarding the use of Ampligen for treatment of the cancers
which the Company has sought to target. The Company's applications for such
patents are currently pending; no assurances can be given that such applications
will be allowed. No assurances can be given that competitors will not seek and
obtain patents regarding the use of Ampligen for a particular target indication
before the Company.
The Company's licensor, Temple University, has filed patent applications
regarding the composition of matter, methods of preparation and use of novel
double-stranded RNAs, oligonucleotides, and 2-5A analogues trademarked Oragen.
Composition of matter patent applications have been filed which define
nucleotide sequences and RNA structures that correct certain biochemical
reactions which may be associated with immunological disorders.
In July 1994, Temple University advised the Company that it was in breach
of a certain licensing agreement for Oragen compounds at the preclinical stage
of product development. In November 1994, in an action captioned HEM
Pharmaceuticals Corp. v. Temple University of the Commonwealth System of Higher
Education, the Company filed suit against Temple. In January 1995, Temple filed
a separate litigation against the Company. If the Company were to lose its
claim, the Company would lose its investment to date in certain Oragen compounds
acquired pursuant to the Temple Agreement. While not yet tested on humans these
Oragen compounds have the potential and theoretical advantage of having an
Ampligen-like effect upon oral administration. No assurance can be given that as
a result of such loss, Temple or its new licensee, if any, would not become
competitors of the Company or that the termination of the licensing agreement
will not have a materially adverse effect on the Company's long range business
or financial condition. See "Risk Factors--Disputes and Legal Proceedings
Related to Patent Rights" and "Business--Legal Proceedings" and "--Research and
Development, Licensing and Collaboration Agreements."
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are generally uncertain and involve complex legal and factual
questions. Consequently, even though the Company is currently prosecuting many
48
<PAGE>
patent applications with the U.S. and foreign patent offices, the Company does
not know how many of its applications will result in the issuance of any patents
or, of patents which are issued, whether they will provide significant
proprietary protection or will be circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific or patent literature tend
to lag behind actual discoveries by at least several months, the Company cannot
be certain that it was the first creator of the inventions covered by pending
patent applications or that it was the first to file patent applications for
such inventions. Competitors or potential competitors may have filed (or may
subsequently file) applications for, and may obtain, additional patents and
proprietary rights relating to, compounds or processes competitive with those of
the Company. Accordingly, there can be no assurance that the Company's patent
applications will result in patents being issued or, if issued, that the patents
will afford protection against competitors with similar technology; nor can
there be any assurance that others will not obtain patents that the Company
would need to license or circumvent.
There can be no assurance that any patents issued or which may in the
future be issued to the Company would be upheld by a court of competent
jurisdiction. The Company also relies upon unpatented trade secrets, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to unpatented trade secrets. See "Risk Factors --
Uncertainty Regarding Patents and Proprietary Rights."
The Company currently requires its employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors to execute
confidentiality agreements upon the commencement of employment or consulting
relationships with the Company. The Company also has required members of its
Scientific Advisory Board to sign a confidentiality agreement prior to each of
the last two annual meetings, at which confidential information was provided.
The Company will continue this practice in the future. These agreements require
that all confidential information made known to the individual during the course
of the individual's relationship with the Company be kept confidential and not
disclosed to third parties except in specific circumstances. In the case of
employees, the agreements provide that all inventions conceived by the
individual shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection or
adequate remedies for the Company's trade secrets in the event of unauthorized
use or disclosure of such information.
In connection with the 1994 Common Stock Financing, the Company agreed with
Bridge Ventures to collateralize its patents until the earlier of the effective
date of this Public Offering or a licensing relationship or corporate
partnership agreement with a third party which provides significant operating
capital and clinical development resources for the Company. Pursuant to this
arrangement, the SAB Agreement has resulted in the release of liens on the
Company's patents in the licensed territories. Bridge Ventures has also released
the patents assigned or licensed to the Company's subsidiaries. In addition,
upon consummation of this Public Offering, the collateralization of patents in
connection with the 1994 Common Stock Financing will be terminated.
In addition, in May 1994, a former officer and director of the Company,
guaranteed payment of two promissory notes in the aggregate amount of $76,000
payable by the Company representing payments due in connection with the Temple
licensing agreement. In return for the guarantee, the Company assigned its
49
<PAGE>
rights, patents and related technology in certain RNA compounds to such officer,
which rights will revert to the Company upon repayment of the principal on the
notes, 12% interest, and certain fees and expenses which will be paid out of the
proceeds of this Public Offering. See "Use of Proceeds."
In addition, in 1991, Vanderbilt University advised the Company of its
position that employees of the University were the inventors of an issued U.S.
patent regarding the use of Ampligen in combination with various other agents
(including AZT) for the treatment of HIV infection, a position which the Company
believes has no merit. See "Risk Factors--Disputes and Legal Proceedings Related
to Patent Rights" and "Business--Legal Proceedings."
Competition
The development of therapeutic drugs for human disease is intensely
competitive. Many different approaches are being developed for the management of
diseases targeted by the Company. Certain viral diseases and cancers are the
targets for therapeutic product development at numerous entities, many of which
have greater human and financial resources dedicated to product development and
human clinical testing than the Company. In addition, Ampligen will compete with
conventional drug therapy, as well as other modalities of treatment such as
biological and hormonal therapies, prophylactic and therapeutic vaccines and
surgery. Competing products include interferon-alpha and thymosin for treatment
of HBV, interferon-alpha and ribavirin for treatment of HCV and interleukin 2
for treatment of kidney cancer. Interferon, a drug that has been approved by the
FDA for the treatment of chronic HBV, acts by an immune mechanism and is
beneficial in the treatment of HBV, where it will be competitive with the
Company's product. However, its efficacy has thus far not been demonstrated in
HIV, ME/CFS and the primary tumors and indications which the Company has
targeted. The Company is also aware of a European firm which is conducting
clinical trials of an RNA drug for at least one indication (HBV) for which the
Company is testing Ampligen. This firm has also conducted pre-clinical research
of the drug as a possible treatment for HIV infection. The Company is not privy
to further information regarding other competing drug development activities, if
any, of this potential competitor. Competing products for the treatment of HIV
disease include AZT, DDI, DDC, D4T, 3TC and three approved protease inhibitors.
There are a number of other companies engaged in developing nucleic acid
pharmeuticals. The approach used by certain of such companies seeks to identify
specific proteins and /or nucleotide sequences associated with viral replication
or cell dysfunction and to design molecules that will selectively bind to these
"target sites" in order to interfere with the production or activity of the
specific disease-causing protein involved. This is the method currently being
employed by some researchers through the use of so-called "antisense" and
"triple-strand" nucleic acid technologies which are the pre-clinical or early
clinical testing phase. Such an approach requires the design, synthesis and
testing of numerous compounds for each disease or indication being treated.
Although no assurances can be given, the Company believes its RNA drug
development technology has certain advantages over these other technologies
because the Company believes its drugs may activate cell defenses which may
convey broad-spectrum activity against various diseases.
The pharmaceutical and biotechnology industries are subject to rapid and
substantial technological change. Technological competition from pharmaceutical
and biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Most of
these entities have significantly greater research and development capabilities
50
<PAGE>
than the Company, as well as substantial marketing, financial and managerial
resources, and represent significant competition for the Company. Acquisitions
of, or investments in, competing pharmaceutical and biotechnology companies by
large pharmaceutical companies as well as collaborative efforts among such
companies could increase such competitors' financial, marketing and other
resources. There can be no assurance that developments by others will not render
the Company's products or technologies obsolete or noncompetitive, or that the
Company will be able to keep pace with technological developments. Competitors
have developed or are in the process of developing technologies that are, or in
the future may be, the basis for competitive products. Some of these products
may have an entirely different approach or means of accomplishing the
therapeutic effect than products being developed by the Company. These competing
products may be more effective and less costly than the Company's products.
Furthermore, many of the Company's competitors have significantly greater
experience than the Company in pre-clinical testing and human clinical trials of
pharmaceutical products and in obtaining regulatory approvals of products.
Accordingly, the Company's competitors may succeed in obtaining product
approvals more rapidly than the Company. If any of the Company's products
receive regulatory approvals and the Company commences commercial sales of its
products, it will also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which it has limited or no experience. The
Company's competitors may possess or obtain patent protection or other
intellectual property rights that prevent, limit or otherwise adversely affect
the Company's ability to develop or exploit its products. See "Risk Factors --
Uncertainty Regarding Patents and Proprietary Rights" and "Risk Factors -- Rapid
Technological Change and Substantial Competition."
Research and Development, Licensing and Collaboration Agreements
In fiscal years 1992, 1993, 1994, 1995 and for the three months ended March
31, 1996, the Company expended $4,734,000, $2,119,000, $1,638,000, $258,000 and
$299,000 respectively, on research and development, consisting primarily of
amounts spent on the clinical testing and development of Ampligen. As part of
its research and development activities, the Company has entered into various
collaborative and sponsored research agreements with researchers, universities
and government agencies. The Company believes that these agreements provide the
Company with access to physicians and scientists with expertise in the fields of
clinical medicine, virology, molecular biology, biochemistry, immunology and
cellular biology.
The Company has a clinical pharmacology unit at Hahnemann University
Hospital in Philadelphia. This clinical pharmacology unit performs studies on
Ampligen metabolism in the body, and initiates clinical trials at the Phase I/II
level. The Company also plans to use this unit for its initial clinical studies
of Oragen drugs, subject to receipt of necessary clinical approvals.
The Company does not own its own research and development or drug discovery
laboratories. Instead, employees of the Company's collaborators conduct those
functions at the laboratories of their employers. The Company has a
long-standing relationship with Hahnemann University, which currently provides
laboratory support in conjunction with licensing arrangements and financial
support from the Company. No assurances can be given that such relationship will
continue on terms advantageous to the Company, or at all.
In June 1989, the Company entered into an assignment and research support
agreement (the "Hahnemann Agreement") with Hahnemann University and Dr. David
Strayer, Dr. Isadore Brodsky and Dr. David Gillespie who is now deceased (the
51
<PAGE>
"Scientist Group"). Dr. Strayer is the Company's Medical Director. Prior to the
execution of the Hahnemann Agreement, Hahnemann and the Scientist Group had
participated in the clinical testing of Ampligen. In an effort to obtain the
benefits of the Scientist Group's future contributions to the development of
Ampligen and obtain exclusive rights to certain proprietary and regulatory
rights relating to Ampligen, the Company, Hahnemann and the Scientist Group
entered into the Hahnemann Agreement, which provides (i) for the assignment by
Hahnemann and the Scientist Group to the Company of all of their respective
rights in certain proprietary information which was then owned or subsequently
developed and the exclusive and perpetual right to apply for any patents,
trademarks or copyrights relating to the proprietary information; (ii) for the
payment by the Company to Hahnemann (and the sharing by Hahnemann and the
Scientist Group on such terms as they determine) of a royalty of 2% of net sales
proceeds (up to a maximum royalty of $6 million per year) on all Ampligen sold
by the Company or any entity licensed by the Company after the date of the grant
by the FDA of the first NDA for Ampligen through January 1, 2005; (iii) for the
payment by the Company to Hahnemann of $162,000 for certain scientific
consultative support services to be performed by the Scientist Group during the
first year of the Hahnemann Agreement; (iv) for the payment by the Company to
Hahnemann of certain incremental amounts for scientific consultative support
services to be rendered by the Scientist Group subsequent to the first year of
the Hahnemann Agreement; (v) that either party may terminate the scientific
consultative support services of the Scientist Group (and the Company's
obligations to pay for those services) on 90 days' notice; and (vi) that all
rights to discovery and inventions resulting from the Hahnemann Agreement are to
be the exclusive property of the Company. The Company satisfied all amounts due
together with 8% annual interest calculable from the due date of each payment
upon the Closing of the IPO.
The Company has entered into an at-will arrangement with Hahnemann
University, and Dr. Strayer, among others, pursuant to which the services of Dr.
Strayer, among others, are made available to the Company in return for monthly
salary subsidization payments made by the Company to the University. The
aggregate amount of these monthly payments is presently $14,896.
In August 1988, the Company entered into a pharmaceutical use license
agreement with Temple University (the "Temple Agreement"). Under the terms of
the Temple Agreement, Temple granted the Company an exclusive world-wide license
for the term of the agreement for the commercial sale of Oragen products using
patents and related technology held by Temple, which license is exclusive except
to the extent Temple is required to grant a license to any governmental agency
or non-profit organization as a condition of funding for research and
development of the patents and technology licensed to the Company. The rights to
such patents and related technology had previously been assigned to Temple by
various parties, including Dr. Robert J. Suhadolnik, an employee of Temple. The
Temple Agreement provides (i) for the payment by the Company to Temple of 4% of
net sales of Oragen products the active ingredients of which consist entirely of
products, processes or uses claimed by Temple's patents and 2% of net sales of
Oragen products some, but not all, of the active ingredients of which consist of
products, processes or uses claimed by Temple's patents, with minimum royalties
of $30,000 per year commencing in 1995; (ii) that the Company must seek all
necessary approvals for the commercial sale of Oragen products; (iii) that the
Company must file an application for marketing approval for at least one
licensed product with the FDA or a foreign counterpart on or before August 3,
1996; (iv) for the funding of specified research payments by the Company; and
(v) that the Company shall have an exclusive option to negotiate for a period of
52
<PAGE>
six months the terms of an exclusive license for the commercial sale of any
future related technology with respect to which Temple shall hold a patent. The
Temple Agreement expires upon the expiration of the last licensed patent, unless
sooner terminated by mutual consent, upon the failure by the Company to pay any
required royalties or upon any material breach of the agreement. Dr. Suhadolnik,
as well as his laboratory, will derive income and financial support from any
royalties paid by the Company. The Company was notified by Temple in July 1994
that it believed the Company was in breach of the Temple Agreement and that
Temple believed that the Temple Agreement was terminated. The Company has filed
a lawsuit seeking a declaratory judgement that the Temple Agreement remains in
full force and effect and seeking monetary damages. Temple has filed a motion to
dismiss this lawsuit and in January 1995, Temple has filed a separate litigation
against the Company seeking declaratory judgment that the Temple Agreement has
been lawfully terminated, together with an award of costs, including attorney
fees. See "Business--Legal Proceedings" and "Risk Factors--Disputes and Legal
Proceedings Related to Patent Rights."
In May 1992, the Company entered into a letter agreement to provide
research payments to Dr. Werner E. Muller at the University of Mainz for various
exclusive 20-year licensing arrangements including certain technologies for
genetic manipulation of the 2-5A pathway. The Company believes that the research
being conducted by Dr. Muller will provide general knowledge with respect to the
manipulation of the cellular mechanism by which Ampligen works. The Company
agreed to make quarterly research payments of $5,000 during the course of the
consultative agreement, which has no explicit duration, which payments are
presently accruing.
In addition to the arrangements with Temple University and Hahnemann
University described above, the Company has two types of collaborative research
arrangements. First, the Company has entered into "sponsored research
arrangements" with various institutions which provide for the payment by the
Company of specified financial support to the institutions which conduct the
research. Second, the Company has entered into "collaborative arrangements"
pursuant to which the institution conducts studies of the Company's products at
the institution's expense and gives the Company exclusive commercial rights to
research results. The Company provides its drugs to these institutions free of
charge. Collaborative research arrangements provide that the proprietary
knowledge is the sole property of the Company but permit the collaborator, after
a specified time period, to publish the results of its research in scientific
medical journals. The Company has research agreements with the National
Institute for Allergy and Infectious Diseases on the use of Ampligen and Oragen
products in the treatment of HBV infection and various herpes and respiratory
viruses and Hahnemann University on the biochemical and molecular activities of
RNA. Other collaborators include the following entities or scientists therefrom:
the National Cancer Institute, Harvard University Medical School, Yale
University Medical School, Vanderbilt University, University of Pittsburgh,
Howard University, Cornell University, Georgetown University, Stanford
University, University of Pennsylvania, Medical College of Pennsylvania,
University of California at Davis and the Uniformed Services University for the
Health Sciences. International collaborations include scientists from Konstanz
University (Germany), University of Mainz (Germany), University of Toronto
(Canada) and Juntendo University (Japan).
The Company intends to continue to engage in such collaborative and
sponsored research with selected institutions. There can be no assurance,
however, that the Company will be able to maintain its existing collaborative
arrangements or enter into new collaborative arrangements.
53
<PAGE>
Marketing
The Company intends to design its marketing strategy to reflect the
differing health care systems around the world, and the different marketing and
distribution systems that are used to supply pharmaceutical products to those
systems. In the United States, the Company expects that, subject to receipt of
regulatory approval, Ampligen will be used in three medical arenas: physicians'
offices or clinics, the hospital and the home setting. The Company currently
plans to use a service provider in the home infusion (non-hospital) segment of
the U.S. market to execute direct marketing activities, conduct physical
distribution of product and handle billings and collections. Accordingly, the
Company is developing marketing plans to facilitate the product distribution and
medical support for indications, if and when they are approved . The Company
believes that this approach will facilitate the generation of revenues without
incurring the substantial costs associated with a sales force. Furthermore, this
approach will enable the Company to retain many options for future marketing
strategies.
In September 1995, the Company entered into an agreement with Rivex Pharma
Inc., a Canadian-based pharmaceutical company ("Rivex"), pursuant to which Rivex
will provide various services in connection with the exclusive distribution of
Ampligen in Canada on an emergency drug release basis. Under the terms of this
agreement, the Company will supply and Rivex will purchase as much Ampligen as
necessary to satisfy Rivex's customers at a mutually agreed upon cost. In
return, Rivex will retain the exclusive right to distribute Ampligen in Canada.
In Europe, the Company plans to adopt a country-by-country and, in certain
cases, an indication-by-indication, marketing strategy due to the heterogeneity
of governmental regulations and alternative distribution systems in these areas.
The Company also plans to adopt an indication-by-indication strategy in Japan.
Subject to receipt of regulatory approval, the Company plans to seek strategic
partnering arrangements with pharmaceutical companies to facilitate product
introductions in these areas. No assurances can be given that any such
arrangement will be entered into on terms acceptable to the Company. The
relative prevalence of people suffering from target indications for Ampligen
varies significantly by geographic region, and the Company intends to adjust its
clinical and marketing planning to reflect the special needs of each area. The
Company does not currently anticipate devoting significant resources to the
establishment of an in-house sales force in the near term.
In countries in South America, the United Kingdom, Ireland, Africa,
Australia, Tasmania, New Zealand, and certain other countries and territories,
the Company contemplates marketing its products through its relationship with
SAB/Bioclones pursuant to the SAB Agreement. See "Business--General."
The Company is also developing a set of clinical laboratory diagnostic
products, trademarked Diagen products, that are designed to assist physicians in
identifying patients for the Company's RNA drug therapies and to assist in their
clinical management thereafter. The Company believes that the availability of
such tests may lead to improved patient care and increased market penetration by
the Company's therapeutic products, if and when such products are available for
commercial sale, although the Company does not anticipate deriving significant
revenues directly from the commercial sale of Diagen products. These tests are
at an early stage of development and the Company has received limited royalties
in 1994 from its licensed reference laboratory in Texas. The Diagen products
would have to go through a regulatory diagnostic product clearance process
54
<PAGE>
applicable to medical devices prior to commercial sale. In some cases, use in
clinical trials may require FDA clearances. See "Business--Government
Regulation" below. The Company's objective is to license these potential
products to a diagnostic company. The Company has granted rights to certain of
the patents related to the Diagen products to one of its subsidiaries. See
"Business--Subsidiary Companies."
Manufacturing
Drug intermediates used in the production of Ampligen are manufactured to
order by Pharmacia Biotech, Inc. ("Pharmacia"), a division of Pharmacia Upjohn,
Inc., a major multinational pharmaceutical company. In 1987, the Company entered
into an agreement (the "Supply Agreement") with Pharmacia pursuant to which
Pharmacia agreed to supply and the Company agreed to purchase a specified amount
of drug intermediates and pay certain royalties to Pharmacia. The provisions of
the Supply Agreement requiring the sup- ply/purchase of compounds used in the
manufacture of Ampligen expired in December 1992, although the provisions
dealing with the payment of royalties survived. Although the Company does not
currently have a written agreement with Pharmacia for the supply of drug
intermediates, the Company believes that acceptable alternative sources exist
for the Company's present quantity requirements should the Company's arrangement
with Pharmacia terminate. The Company believes that it is not dependent on a
single source for any raw materials used in the manufacture of Ampligen. The
intermediates are analyzed by the Company for compliance with specifications and
then transferred to a contractor which formulates the Ampligen drug
intermediates under controlled conditions to manufacture a freeze-dried dosage
form of Ampligen. The Company does not have a written agreement with such
contractor. The freeze-dried product is tested by the Company to determine
compliance with a set of technical specifications. Upon meeting these
specifications, the product is transferred to the Company and dosage units are
then prepared at the Company's Rockville, Maryland facility or at an appropriate
hospital or other pharmacy facility. Pharmacia owns 9,216 shares of Common
Stock. In addition, pursuant to the terms of the Supply Agreement, the Company
agreed to pay the following royalties to Pharmacia: (a) for each substance based
on Ampligen or related RNA compounds, 0.5% of net sales for 5 years from the
date of the first commercial sale (subject to a cap of $5 million per year and a
minimum of $60,000 per year for each substance) and (b) for each family of RNA
substances, other than substances based on Ampligen or related RNA compounds,
0.5% of net sales for 5 years from the date of the first commercial sale
(subject to a cap of $5 million per year and a minimum of $60,000 per year for
each family of RNA substances). The obligation to pay royalties expires 12 years
from the date of the first royalty payment under the Supply Agreement.
If necessary regulatory approvals for commercial sale of a product are
obtained, the Company's products must be manufactured in commercial quantities
in compliance with all applicable regulatory requirements and at acceptable
costs. The Company's current facilities and personnel are not adequate for the
production of its proposed products for large-scale commercialization. Moreover,
it is not likely that the same processes can be used successfully for
commercial, large scale production. Small changes in methods of manufacture may
affect the chemical identity, as well as the safety and efficacy of drug
products such as Ampligen and other RNA drugs. The Company intends to utilize
third-party facilities or if it is unable to do so, build or acquire
commercial-scale manufacturing facilities and to add appropriate personnel as
the need arises.
55
<PAGE>
Pursuant to the SAB Agreement, the Company owns 24.9% of the capital stock
of a company which is developing and operating a new manufacturing facility
South Africa built to FDA standards to produce the Company's RNA drugs. A pilot
facility is currently being expanded. The Company expects that construction of a
commercial facility will commence in 1997 although the construction is dependent
upon the regulatory status of Ampligen in various global markets, and no
assurance can be given with respect to when, and if, construction will occur.
Government Regulation
Overview. Regulation by governmental authorities in the U.S. and foreign
countries is and will be a significant factor in the manufacture and marketing
of the Company's proposed products and in its ongoing research and product
development activities. All of the Company's proposed products and products of
its ongoing research and product development activities will require regulatory
clearances prior to commercialization. In particular, human new drug products
are subject to rigorous preclinical and clinical testing as a condition of
clearances by the FDA and by similar authorities in foreign countries. The
lengthy process of seeking these approvals, and the ongoing process of
compliance with applicable statutes and regulations, has required and will
continue to require the expenditure of substantial resources. Any failure by the
Company or its collaborators or licensees to obtain, or any delay in obtaining,
regulatory approvals could materially adversely affect the marketing of any
products developed by the Company and its ability to receive product or royalty
revenue.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use of and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's research work. The Company believes that its
Rockville, Maryland manufacturing and quality assurance/control facility is in
substantial compliance with all material regulations applicable to these
activities.
U.S. Regulatory Process. Before a new drug product may be sold commercially
in the U.S. and other countries, clinical trials of the product must be
conducted and results submitted to the appropriate regulatory agencies as part
of the approval process. The Company's therapeutic and diagnostic products are
subject to regulation in the U.S. under the Food, Drug and Cosmetic Act (the
"FDC Act"). Ampligen and other RNA drugs will be reviewed as new drugs by the
FDA's Center for Drug Evaluation and Research ("CDER"), instead of as biological
products which are regulated by FDA's Center for Biologics Evaluation and
Research ("CBER"). Originally, the Company's RNA drugs were considered
biological products subject to CBER jurisdiction. As part of various memoranda
of understanding executed recently among different FDA divisions, however,
responsibility for regulation of synthetic nucleic acids, such as the Company's
RNA drug products, including Ampligen, was transferred in 1992 to the CDER.
Although important differences exist between the regulation of biological
therapeutics and other drugs, the Company is unable to predict the impact of the
transfer of regulatory responsibility from CBER to CDER.
(a) Drug Products. The steps required before a non-biological drug
product may be marketed in the U.S. include (a) conducting appropriate
pre-clinical laboratory and animal tests, (b) submitting to the FDA an
application for an Investigational New Drug ("IND"), which must become
effective before human clinical trials may commence, (c) conducting
56
<PAGE>
well-controlled human clinical trials which establish the safety and
efficacy of the drug product, (d) filing a New Drug Application ("NDA")
with the FDA, and (e) obtaining FDA approval of the NDA prior to any
commercial sale or shipment of the drug. In addition to obtaining FDA
approval for each indication to be treated with each product, each domestic
drug manufacturing establishment must register with the FDA, list its drug
products with the FDA, comply with current Good Manufacturing Practices
("GMP") requirements and be subject to inspections by the FDA. Foreign
manufacturing establishments also must comply with GMP requirements, and
are subject to periodic inspection by the FDA or by local authorities under
agreement with the FDA.
Pre-clinical tests include formulation development, laboratory evaluation
of product chemistry and animal studies to assess the potential safety and
efficacy of the product formulation. Drug products must be manufactured in
accordance with GMP requirements and pre-clinical tests must be conducted in
accordance with the FDA regulations regarding Good Laboratory Practices. The
results of the pre-clinical tests are submitted to the FDA as part of the IND
and are reviewed by the FDA prior to authorizing the sponsor to conduct clinical
trials in human subjects. Unless the FDA objects to an IND, the IND will become
effective 30 days following its receipt by the FDA. There is no certainty that
submission of an IND will result in FDA authorization to commence clinical
trials or that authorization of one phase of a clinical trial will result in
authorization of other phases or that clinical trials will result in FDA
approval. Clinical trials may be placed on hold by the FDA at any time for a
variety of reasons, particularly if safety or design concerns exist.
(b) Clinical Testing Requirements. Clinical trials involve the
administration of the investigational drug product to human subjects.
Clinical trials typically are conducted in three phases and are subject to
detailed protocols. Each protocol indicating how the clinical trial will be
conducted must usually be submitted for review to the FDA as part of the
IND. The FDA's review of a study protocol does not necessarily mean that,
if the study is successful, it will constitute proof of efficacy or safety.
Further, each clinical study must usually be conducted under the auspices
of an independent Institutional Review Board ("IRB") established pursuant
to FDA regulations. The IRB considers, among other factors, ethical
concerns, informed consent requirements, and the possible liability of the
hospital conducting the trials. The FDA or IRB may require changes in a
protocol both prior to and after the commencement of a trial. There is no
assurance that the IRB or FDA will permit a study to go forward or, once
started, to be completed.
The three phases of clinical trials are generally conducted sequentially,
but they may overlap. In Phase I, the initial introduction of the drug into
humans, the drug is tested for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Phase I testing for an indication
typically takes at least one year to complete. Phase II involves controlled
tests in a larger but still limited patient population to determine the efficacy
of the drug for specific indications, to determine optimal dosage and to
identify possible side effects and safety risks. Phase II testing for an
indication typically takes at least from one and one-half to two and one-half
years to complete. If preliminary evidence suggesting effectiveness has been
obtained during Phase II evaluations, expanded Phase III trials are undertaken
to gather the additional information about effectiveness and safety that is
needed to evaluate the overall benefit-risk relationship of the drug and to
provide an adequate basis for physician labeling. Phase III studies for an
indication generally take at least from two and one-half to five years to
complete. There can be no assurance that Phase I, Phase II or Phase III testing
will be completed successfully within any specified time period, if at all, with
57
<PAGE>
respect to any of the Company's products that have not yet completed any such
testing. Nor can there be any assurance that completion of clinical testing will
result in FDA approval. Furthermore, the FDA may suspend clinical trials at any
time if the patients are believed to be exposed to a significant health risk.
Phase III or other clinical studies may be conducted after rather than before
approval under certain circumstances. For example, the FDA may determine under
its accelerated approval regulations that earlier studies, involving the use of
surrogate markers rather than clinical outcomes, may establish an adequate basis
for drug product approval, providing that the sponsor agrees to conduct an
additional study after approval to verify and describe the clinical benefit of
the drug. These and other similar regulations, however, are often limited to
drug products that are intended to treat serious or life-threatening diseases,
especially those diseases for which there are no alternative therapies, or that
provide meaningful therapeutic benefit to patients over existing treatments. The
Company believes that Ampligen may be eligible for review under the FDA's
"accelerated approval" or other similar regulations for certain indications;
however, the Company has not decided whether to seek such accelerated or other
similar approval and no assurances can be given that such accelerated or other
similar approval, if sought, will be granted for any indication pursuant to such
regulations.
In the case of drugs for life-threatening diseases, the initial human
testing is generally done on patients rather than on healthy volunteers. Because
these patients are already afflicted with the target disease, it is possible
that such studies may provide results traditionally obtained in Phase II trials.
These trials are referred to as Phase I/II trials.
Reports of results of the pre-clinical studies and clinical trials for
non-biological drugs are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment. The NDA also includes information
pertaining to the preparation of drug substances, analytical methods, drug
product formulation, details on the manufacture of finished product as well as
proposed product packaging and labeling. Submission of an NDA does not assure
FDA approval for marketing. The application review process generally takes two
to three years to complete, although reviews of treatments for cancer and other
life-threatening diseases may be accelerated or expedited. However, the process
may take substantially longer if, among other things, the FDA has questions or
concerns about the safety and/or efficacy of a product. In general, the FDA
requires at least two properly conducted, adequate and well-controlled clinical
studies demonstrating efficacy with sufficient levels of statistical assurance.
However, additional information may be required. For example, the FDA also may
request long-term toxicity studies or other studies relating to product safety
or efficacy. Notwithstanding the submission of such data, the FDA ultimately may
decide that the application does not satisfy its regulatory criteria for
approval. Finally, the FDA may require additional clinical tests following NDA
approval to confirm product safety and efficacy (Phase IV clinical tests).
Among the requirements for product approval is the requirement that
prospective manufacturers conform to the FDA's GMP standards. In complying with
GMP standards, manufacturers must continue to expend time, money and effort in
production, recordkeeping and quality control to ensure that the product meets
applicable specifications and other requirements. The FDA periodically inspects
drug manufacturing facilities in order to ensure compliance with applicable GMP
requirements. Failure to so comply subjects the manufacturer to possible FDA
action, such as the suspension of manufacturing, seizure of the product, or
voluntary recall of a product.
58
<PAGE>
The product testing and approval process is likely to take a substantial
number of years and involves the expenditure of substantial resources. There can
be no assurance that any approval will be granted on a timely basis, or at all.
The FDA also may require post-marketing testing and surveillance to monitor the
record of the product and continued compliance with regulatory requirements.
Upon approval, a drug may only be marketed for the approved indications in the
approved dosage forms and at the approved dosages. Adverse experiences with the
product must be reported to the FDA. The FDA also may require the submission of
any lot of the product for inspection and may restrict the release of any lot
that does not comply with FDA standards, or may otherwise order the suspension
of manufacture, recall or seizure. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems concerning
safety or efficacy of the product occur following approval.
In addition to applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a product by the comparable
regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries. The approval
process varies from country to country and the time required may be longer or
shorter than that required for FDA approval.
(c) Orphan Drug Status. Under the Orphan Drug Act, the FDA may
designate drug products as orphan drugs if they are intended to treat a
rare disease or condition, which is defined as a disease or condition that
affects less than 200,000 persons in the U.S., or if there is no reasonable
expectation of recovery of the costs of research and development from sales
in the U.S. Provided certain conditions are met, orphan drug status confers
upon the sponsor certain tax credits for amounts expended on clinical
trials prior to 1995, as well as marketing exclusivity for seven years
following FDA approval of the product. Marketing exclusivity means that the
FDA cannot approve another version of the same product for the same use for
seven years after approval of the first product. However, the FDA can still
approve a different drug for the same use or the same drug for a different
use. The FDA regulations implementing the Orphan Drug Act define what drugs
are the "same" for purposes of the seven year market exclusivity
provisions. The Company has been advised that nucleic acids and other
complex drugs may present potentially difficult orphan drug issues under
these regulations. The Company cannot predict how these provisions will be
implemented with respect to its RNA products and competitive drugs. Certain
benefits of orphan drug status are only available upon obtaining FDA
approval for marketing. For example, orphan drug exclusivity only vests in
the same designated product that is first to receive FDA marketing
approval. In 1993, Ampligen was designated as an orphan drug by the FDA for
the clinical indications of AIDS and renal cell carcinoma. The Company does
not believe that the former designation extends to HIV disease which has
not progressed to AIDS. In December 1993, the FDA designated Ampligen as an
orphan drug for the clinical indications of invasive malignant melanoma and
chronic fatigue syndrome. The FDA has recently denied a request by the
Company to designate Ampligen as an orphan drug for chronic active HBV
infection. There is no assurance that any future products will receive
orphan drug designation, or that the benefits currently available from such
designations for Ampligen will not hereafter be amended or eliminated.
Various legislative proposals have from time to time been introduced in
Congress to modify various provisions of the Orphan Drug Act. Currently,
Congress is considering legislation that would amend the Orphan Drug Act
59
<PAGE>
and may limit the scope of marketing exclusivity. The tax credit provisions
expired on December 31, 1994. No prediction can be made as to the effect of
any such proposed legislation, or any other legislation which may be
introduced in the future, on the Company's operations.
(d) Diagnostic Products. The Company's potential Diagen diagnostic
products also must receive FDA clearance prior to any commercial marketing.
The FDC Act regulates most in vitro diagnostic products as medical devices,
and provides for two clearance mechanisms. Certain products may qualify for
a Section 510(k) procedure, under which the manufacturer gives the FDA a
premarket notification ("510(k) Notice") of the manufacturer's intent to
commence marketing the product. The manufacturer must establish that the
product to be marketed is "substantially equivalent" to another legally
marketed product which is subject to a 510(k) Notice or was commercially
marketed prior to May 28, 1976 and is not subject to premarket application
("PMA") requirements. In some cases, a 510(k) Notice must include data from
human clinical studies. Normally, marketing may commence when the FDA
issues an order to the manufacturer finding the product to be
"substantially equivalent." If the product does not qualify for the 510(k)
procedure, the manufacturer must file a PMA which includes results of
extensive clinical and nonclinical tests demonstrating that the product is
both safe and effective. The PMA process requires more intensive testing
than the 510(k) procedure, involves a significantly longer FDA review
process, and usually requires review by an FDA scientific advisory
committee. Approval of a PMA allowing commercial sale of a product requires
that its safety and effectiveness be demonstrated through human clinical
studies, usually conducted under an Investigational Device Exemption
("IDE"). Some diagnostic products may be clinically tested without an FDA
approved IDE. It is unknown at this time whether an IDE will be required in
order to clinically test Diagen products. In responding to a PMA, 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. There can be no assurance that
investigational or marketing approvals or clearances for Diagen products
will be granted to the Company.
Canadian Regulatory Process. The regulatory approval process in Canada of
pre-clinical and clinical trials, manufacturing and sales of drugs, registration
of establishments which manufacture biologics, compliance with GMP requirements
and periodic inspection by the HPB is, in general, similar to that in the United
States.
(a) Investigational New Drug Application. Before conducting clinical
trials of a new drug in Canada, a company must submit an IND application to
the HPB containing various information about the drug. In November 1992,
the HPB approved the Company's INDs to conduct open-label and controlled
clinical trials of Ampligen for ME/CFS. There is no assurance that the HPB
will accept data obtained from those clinical trials in any submission of
the Company to the HPB to market Ampligen in Canada or that such data, if
accepted, will result in the approval of Ampligen for sale in Canada. The
HPB may place clinical trials on hold at any time if safety concerns exist.
(b) New Drug Submission. Before marketing or selling a new drug in
Canada, the Company must submit a New Drug Submission ("NDS") to the HPB
and receive a notice of compliance from the HPB to sell the drug. The NDS
60
<PAGE>
includes information describing the new drug, including its proper name,
the proposed name under which the new drug will be sold, the specifications
of the new drug, the methods of manufacturing, processing and packaging the
new drug, the controls applicable to these operations, the tests conducted
to establish the safety of the new drug, the tests to be applied to control
the potency, purity, stability and safety of the new drug, the results of
clinical trials and the effectiveness of the new drug when used as
intended. Submission of an NDS does not assure HPB approval of a new drug
for sale. If it determines the NDS meets the requirements of Canada's Food
and Drugs Act and Regulations, the HPB will issue a notice of compliance
for the new drug.
The HPB may deny approval of an NDS if applicable regulatory criteria are
not satisfied or may require additional testing. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the drug reaches the market. The HPB may require testing
and surveillance programs to monitor the new drug once commercialized.
Non-compliance with applicable requirements can result in fines and other
penalties, including product seizures and criminal prosecutions.
Among the requirements for product approval in Canada is the requirement
that a prospective manufacturer conform to the HPB's GMP and good laboratory
practices ("GLP") standards. Before manufacturing a biologic, a manufacturer
must have a license from the HPB that is specific to the site of manufacture.
The HPB periodically inspects the drug manufacturing site in order to ensure
compliance with Canada's Food and Drugs Act and Regulations and GMP and GLP
requirements. If there is a safety concern, the HPB, apart from other sanctions,
can suspend the manufacture of the product.
Certain provinces in Canada have the ability to determine whether the costs
of a drug sold within such province will be reimbursed by a provincial
government health plan by listing drugs on formularies. These provincial
formularies may affect the prices of drugs and the volume of drugs sold within
provinces. The Patented Medicines Prices Review Board has the ability to assess
whether the price of a patented medicine is excessive and, if determined to do
so, the Board has the ability to require the patent owner to reduce the price of
the patented medicine, to reduce the price of another patented medicine or to
remit money to the government.
Proposals have recently been made that, if implemented, would significantly
change Canada's drug approval system. Proposals include establishing a separate
agency for drug regulation and modeled on European Community agencies. It is
uncertain whether drugs such as the Company's would be evaluated by this
separate agency, and the Company is unable to predict the impact, if any, on the
transfer of regulatory responsibility from the HPB to the separate agency. The
Company is unable to predict whether these proposals will be implemented or, if
implemented, the effect thereof on the Company.
Properties
The Company leases and occupies a total of approximately 18,850 square feet
of laboratory and office space in two states. The corporate headquarters in
Philadelphia, Pennsylvania are located in a suite of offices of approximately
15,000 square feet. The pharmacy, packaging, quality assurance and quality
control laboratories, as well as additional office space, are located in
Rockville, Maryland. These facilities occupy approximately 3,850 square feet,
approximately 2,000 of which are dedicated to the packaging and quality control
product release functions. The Company believes that its Rockville facilities
61
<PAGE>
will meet its production requirements, including sufficient quantities of
Ampligen for planned clinical trials, through 1996, at which time it may need to
increase its manufacturing capacity either through third parties or by building
or acquiring commercial-scale facilities.
In addition, the Company has entered into the SAB Agreement, which provides
the Company with 24.9% of the capital stock of a company which is developing and
operating a new manufacturing facility financed by SAB/Bioclones. The Company
expects that manufacturing at this new facility will commence in 1996, although
no assurance can be given that this will occur. A commercial facility is
expected to be built in 1997.
Legal Proceedings
The Company was a defendant in a lawsuit instituted in 1991 by participants
in a double-blind placebo-controlled clinical trial of Ampligen therapy for
ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised
them that they would receive Ampligen after the placebo-controlled study at no
cost for periods ranging from "until marketable" to "for life". Plaintiffs
sought compensatory and punitive damages. The court granted the Company's
motions for summary judgment upon all claims alleged by the plaintiffs in this
case. The plaintiffs have appealed from these orders before the United States
Court of Appeals for the Ninth Circuit. In January 1996, the Court of Appeals
denied their appeal and sustained the Company's position. On the basis of the
Court of Appeals favorable decision, the Company believes the lawsuit is over
with no material effect on the Company.
In February 1991, Vanderbilt Universit advised the Company of its position
that employees of the university were the inventors of an issued U.S. patent
regarding the use of Ampligen in combination with various other agents
(including AZT) for the treatment of HIV infections. As issued, this patent
names the Company's Chief Executive Officer as sole inventor and the Company as
sole assignee. The university has demanded that the patent be reissued naming
the university's employees as inventors and the university as assignee. The
Company refused to take such action. No formal claim has been filed by the
university. If such claim were field and if such claim were found to have merit,
the loss of the patent at issue would not have a materially adverse effect on
the Company's long-range business since the university would only be able to
limit and/or prevent the Company's use of Ampligen in combinations with AZT in
the treatment of HIV.
In November 1994, the Company filed suit against Temple University
("Temple") in the Superior Court of the State of Delaware ("Superior Court")
seeking a declaratory judgment that the Temple Agreement remains in full force
and effect and seeking monetary damages in excess of $10 million for Temple's
alleged breach of its obligations of good faith and fair dealing and certain
terms of the Temple Agreement. Temple has filed a motion to dismiss this lawsuit
upon the grounds of lack of personal jurisdiction. In January 1995, Temple filed
separate litigation against the Company in the Court of Common Pleas of
Philadelphia County seeking declaratory judgment that the Temple Agreement has
been lawfully terminated as of July 1, 1994, together with an award of costs
including attorney fees, in bringing the action. The court of Common Please has
stayed further proceedings in the litigation pending the outcome of the
Company's Superior Court case. If the Company were to lose its claim, the loss
of the licensing agreement could have a material adverse effect on the Company's
future business as Temple or its new licensees, if any, could become competitors
of the Company.
62
<PAGE>
In March 1995, the Company instituted a declaratory judgment action against
the February 1992 noteholder of a $5 million convertible note and a second
defendant in the United States District Court for the Eastern District of
Pennsylvania (the "Pennsylvania action") to declare as void, set aside and
cancel the February 1992 convertible note between the Company and the noteholder
(the"Note"). In addition, the noteholder instituted suit against the Company on
the Note in the Circuit Court of the 15th Judicial District in and for Palm
Beach County, Florida, seeking judgment on the note, plus attorneys fees, costs
and expenses; in August 1995, this action was stayed by the Florida Court
pending the outcome of the Pennsylvania action. The noteholder also filed a
motion for a preliminary injunction in the Pennsylvania court to enjoin the
Company from disbursing the proceeds of a public offering in the amount of $5.8
million, which motion was granted in November, 1995. On February 15, 1996, the
Company reached an agreement to settle this matter. Terms and conditions of the
settlement include payment of $6,450,000 to the noteholder to cover the note
balance and legal expenses. The noteholder and related parties are to maintain
certain Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.
The Company is subject to claims and legal actions that arise in the
ordinary course of their business. Management believes that the ultimate
liability, if any, with respect to these claims and legal actions will not have
a material effect on the financial position or results of operations of the
Company.
The Company is not currently a party to any other material litigation.
Employees and Consultants
As of July 10, 1996, the Company had 15 full-time employees. Of these
employees, 10 either conduct or support the Company's research, development,
manufacturing, regulatory affairs or preclinical testing. The remaining five
employees perform general administrative functions including financial matters
and investor relations. In addition, as of July 10, 1996, eight individuals
employed at academic institutions served as consultants or independent
contractors to the Company. Such persons are paid pursuant to licensing
agreements with two universities. As of July 10, 1996, there were approximately
29 additional individuals who served as part-time consultants or independent
contractors to the Company. In addition, other individuals throughout the United
States from time to time are retained by the Company as independent contractors,
either on a per diem or monthly basis. The Company believes that it has been
successful in attracting skilled and experienced scientific personnel; however,
competition for such personnel is intense and there can be no assurance that the
Company will be able to attract and retain necessary qualified employees and/or
consultants in the future. None of the Company's employees is covered by
collective bargaining agreements.
Scientific Advisory Board
The Company established its Scientific Advisory Board in March 1991. The
Scientific Advisory Board consists of individuals who the Company believes have
particular expertise in immunology, virology, pharmacology, cancer therapeutics,
biochemistry and related fields. These individuals advise the Company about
present and long-term scientific planning, research and development. The
63
<PAGE>
Scientific Advisory Board holds annual meetings as required by the clinical
studies in progress by the Company. In addition, individual Scientific Advisory
Board members sometimes consult with, and meet informally with, employees of the
Company on a more frequent basis. All members of the Scientific Advisory Board
are employed by employers other than the Company and may have commitments to, or
consulting and/or advisory agreements with, other entities, including potential
competitors of the Company, that may limit their availability to the Company.
The time spent by Scientific Advisory Board members on the Company's affairs
varies. Although individual members of the Scientific Advisory Board may devote
significant time and energy to the affairs of the Company, no member is expected
to devote more than a small portion of his time to the Company. Members of the
Scientific Advisory Board are compensated at a rate of $1,500 per meeting
attended or day devoted to Company affairs. In addition, Doctors Cheng and
Brodsky have been granted options to acquire 4,608 and 5,253 shares of Common
Stock, respectively, at exercise prices of $4.34 and $1.06 per share,
respectively. As described elsewhere herein, Dr. Brodsky is a party to the
Hahnemann Agreement, pursuant to which he is entitled to receive certain
royalties from the Company with respect to sales of Ampligen. See "Research and
Development, Licensing and Collaboration Agreements."
The following information is furnished with respect to members of the
Scientific Advisory Board:
<TABLE>
<CAPTION>
NAME POSITIONS INSTITUTION
- ---- --------- -----------
<S> <C> <C>
Isadore Brodsky, M.D. Professor of Medicine and Head, Medical College of
Division of Hematology/Oncology Pennsylvania
and Hahnemann
University
School of Medicine,
Philadelphia, Penn-
sylvania
Yung-Chi Cheng, Ph.D. Director, Developmental Therapeutics/ Yale University School of
Chemotherapy Program Medicine, New Haven,
Connecticut
Professor of Pharmacology and Yale University
Comprehensive Internal Medicine Center, New Haven,
Connecticut
Clyde Crumpacker, M.D. Professor of Medicine Harvard Medical School,
Boston, Massachusetts
Physician Harvard Medical School,
Brigham & Women's
Hospital,
Beth Israel Hospital,
Boston, Massachusetts
Robert A. Good, Ph.D. Distinguished Professor Departments of Pediatrics
and M.D., D.Sc. Microbiology, University
of South Florida, Tampa,
Florida
Physician-in-Chief All Children's Hospital,
St. Petersburg, Florida
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
James Greene, Ph.D. Associate Professor of Biology Catholic University,
Washington, D.C.
Anthony L. Komaroff, M.D. Professor of Medicine, Harvard Medical School,
Chief, Division of General Medicine Brigham & Women's
Hospital,
Boston, Massachusetts
William Mitchell, M.D.,
Ph.D Professor of Pathology Vanderbilt School of
Medicine,
Nashville, Tennessee
Phillip Roane, P h.D. Associate Professor of Howard University,
Microbiology Washington, D.C.
Kenny DeMeirleir, M.D.,
Ph.D. Professor of Medicine Vrije Universiteit,
Brussels, Belgium
</TABLE>
Data Safety Monitoring Board
Because the Company periodically conducts placebo-controlled clinical
studies in chronic incurable diseases, it has designated a Data Safety
Monitoring Board comprised of independent physicians, scientists and patient
advocates. During the conduct of a placebo-controlled clinical trial (i.e.
involving the use of placebo for certain patients involved in the trial), the
Data Safety Monitoring Board meets at pre-determined intervals to evaluate the
safety, efficacy and/or ethical implications of a placebo-controlled trial.
Members of the Data Safety Monitoring Board are compensated at a rate of $1,500
per meeting attended. Members are not allowed to hold stock in the Company.
The following are members of the Data Safety Monitoring Board:
<TABLE>
<CAPTION>
NAME POSITIONS INSTITUTION
- ---- --------- -----------
<S> <C> <C>
Robert A. Good, M.D., Distinguished Professor Departments of Pediatrics and
Ph.D., D.Sc. Microbiology, University of South Florida,
Tampa, Florida
Physician-in-Chief All Children's Hospital,
St. Petersburg, Florida
Lewis Marshall, M.D. Associate Professor of Medicine Howard University College of
Medicine, Washington, D.C.
Chief, Infectious Diseases Providence Hospital,
Washington, D.C.
Chief, Infectious Diseases Columbia Hospital for Women,
Washington, D.C.
The Rev. Daniel Paul
Matthews D.D. Rector Parish of Trinity Church,
Wall Street, New York
Kenny DeMeirleir, M.D.,
Ph.D. Professor of Medicine Vrije Universiteit,
Brussels, Belgium
</TABLE>
65
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The Directors, executive officers, key employees and advisors of the
Company are as follows:
Name Age Position
---- --- --------
William A. Carter, M.D. 59 Chairman, Chief Executive Officer,
President
R. Douglas Hulse 52 Chief Operating Officer
Robert E. Peterson 59 Chief Financial Officer
David R. Strayer, M.D. 50 Medical Director, Director of Regulatory
Affairs
Carol A. Smith, Ph.D. 45 Director of Manufacturing and Process
Development
Josephine M. Dolhancryk 33 Treasurer, Assistant Secretary
Cedric C. Philipp 74 Director, Associate Secretary, Special
Advisor to the Board/International
Richard C. Piani 69 Director
Peter W. Rodino III 43 Director, Secretary
Harris Freedman 61 Vice President, Corporate Communications
Sharon D. Will 36 Vice President, Investor Relations
E. Gerald Kay 58 Director
William A. Carter, M.D., the co-inventor of Ampligen, joined the Company in
1978, and has served as (a) the Company's Chief Scientific Officer since May
1989, (b) the Chairman of the Company's Board of Directors since January 1992
(c) the Company's Chief Executive Officer since July 1993, (d) the Company's
President since April, 1995, and (e) a director since 1987. From 1987 to 1988,
Dr. Carter served as the Company's Chairman. Dr. Carter was a leading innovator
in the development of human interferon for a variety of treatment indications
including various viral diseases and cancer. In this context, he received the
first FDA approval to initiate clinical trials on a beta interferon product
manufactured in the U.S. under his supervision. From 1985 to October 1988, Dr.
Carter served as the Company's Chief Executive Officer and Chief Scientist. He
received his M.D. degree from Duke University and underwent his post-doctoral
66
<PAGE>
training at the National Institutes of Health and Johns Hopkins University. Dr.
Carter also serves as Professor of Neoplastic Diseases at Hahnemann University,
a position he has held since 1980. He is also Director of Clinical Research for
Hahnemann University's Institute for Cancer and Blood Diseases. Dr. Carter has
served as a professor at Johns Hopkins School of Medicine, Hahnemann University
and the State University of New York at Buffalo.
R. Douglas Hulse was named Chief Operating Officer on June 1, 1996. Since July
1995, he had been Special Advisor for Licensing and New Product Development to
the Company's Board of Directors. Since 1995 he has served as Executive Director
of The Sage Group, a health care consulting firm specializing in pharmaceutical
and biotechnology business development and strategic planning. Between 1991 and
1994, Mr. Hulse was Vice President of Business Development for Enzon, Inc., a
biopharmaceutical company with proprietary drug delivery technologies, and from
1986 to 1991, Mr. Hulse served as an independent financial and business
development consultant to various biotechnology companies. He was President and
CEO of i-STAT Corporation, a manufacturer of medical biosensors, from 1984 to
1986 and Vice President of Strategic Planning for Engelhard Corporation from
1982 to 1984. Mr. Hulse held several executive positions with Halcon
International, Inc., a leading chemical company, from 1968 to 1982. Mr. Hulse
received Masters degrees in Industrial Management and Chemical Engineering
Practice from M.I.T. and a Bachelors degree in Chemistry from Princeton
University.
Robert E. Peterson has served as Chief Financial Officer of the Company since
April 1993 and served as an independent financial advisor to the Company from
1989 to April 1993. Mr. Peterson has also served since 1990 as Vice President of
the Omni Group, Inc., a business consulting group based in Tulsa, Oklahoma.
During the period 1983 through 1992, Mr. Peterson was self-employed as a
financial consultant to businesses in various industries. Mr. Peterson was Vice
President and Chief Financial Officer of Pepsico Foods International from 1979
to 1983 and responsible for financial management of this multinational operating
unit with approximately $500 million in annual revenues. Mr. Peterson is a
graduate of Eastern New Mexico University.
David R. Strayer, M.D., who serves as Professor of Medicine at Medical College
of Pennsylvania and Hahnemann University, has acted as the Medical Director of
the Company since 1986. He is Board Certified in Medical Oncology and Internal
Medicine with research interests in the fields of cancer and immune system
disorders. Dr. Strayer has served as principal investigator in studies funded by
the Leukemia Society of America, the American Cancer Society, and the National
Institutes of Health. Dr. Strayer attended the School of Medicine at the
University of California at Los Angeles where he received his M.D. in 1972.
Carol A. Smith, Ph.D. has served as the Company's Director of Manufacturing and
Process Development since April 1995, as Director of Operations since 1993 and
as the Manager of Quality Control from 1991 to 1993, with responsibility for the
manufacture, control and chemistry of Ampligen. Dr. Smith has also been
Scientist/Quality Assurance Officer for Virotech International, Inc. from 1989
to 1991 and Director of the Reverse Transcriptase and Interferon Laboratories
and a Clinical Monitor for Life Sciences, Inc. from 1983 to 1989. She received
her Ph.D. from the University of South Florida College of Medicine in 1980 and
was an NIH post-doctoral fellow at the Pennsylvania State University College of
Medicine.
Josephine M. Dolhancryk joined the Company in 1990 as Office Manager, was
promoted to Executive Assistant to the Chairman of the Board and Chief Executive
67
<PAGE>
Officer in 1991 and Assistant Secretary, Treasurer and Executive Administrator
in 1995. From 1989 to 1990 Ms. Dolhancryk was President of Medical/Business
Enterprises. Ms. Dolhancryk was employed by Children's Hospital of Philadelphia
from 1984 to 1989, where she also served as research coordinator on a drug study
from 1986 to 1988. Ms. Dolhancryk attended Saint Joseph's University and
Delaware County College.
E. Gerald Kay has served as a director of the Company since July 1994. From 1980
through the present, he has served as Chairman of the Board and Chief Executive
Officer of Manhattan Drug Co., Inc. a provider of manufacturing services to the
nutritional supplement industry, Chem International, Inc., the parent company of
Manhattan Drug Co., Inc., The Vitamin Factory, Inc. a retailer and direct mail
of nutritional products, and Connaught Press, a publisher. From 1993 to date, he
has served as a Director of Carte Medical Corp. From 1986 to 1988, Mr. Kay was
President and a director of the Rexall Group, Inc. and from 1993 to 1994 served
as a consultant to Rexall Sundown in the establishment of a pharmaceutical
manufacturing facility. Mr. Kay attended the University of Vermont and New York
University from 1961 to 1963.
Cedric C. Philipp has served as a director of the Company since July 1994 and as
Special Advisor for International Marketing since 1993. He is President of
Philipp Pharmaceutical Marketing, a consulting firm which he founded in 1987.
From 1957 to 1987, he was with Wyeth International, a division of American Home
Products, during which time he served in various capacities in international
marketing and sales, most recently as Executive Assistant to the President. Mr.
Philipp received his A.B. degree from Columbia College and later attended
Columbia Law School and the Graduate School of Princeton University.
Richard C. Piani has served as a director of the Company since May 1995. Mr.
Piani has been employed as a principal delegate for Industry to the City of
Science and Industry, Paris, France, a billion dollar scientific and educational
complex since 1995. Mr. Piani provided consulting to the Company in 1993, with
respect to general business strategies for the Company's European operations and
markets. He served as Chairman of Industrielle du Batiment-Morin, a building
materials corporation, from 1986 to 1993. Previously he was Professor of
International Strategy at Paris Dauphine University from 1984 to 1993. From 1979
to 1985 Mr. Piani served as Group Director in Charge of International and
Commercial Affairs for Rhone-Poulenc and from 1973 to 1979 was Chairman and
Chief Executive Officer of Societe "La Cellophane", the French company which
invented cellophane and several other worldwide products. Mr. Piani has a Law
degree from Facilite de Droit, Paris Sorbonne and a Business Administration
degree from Ecola des Hautes Etudes Commerciales, Paris.
Peter W. Rodino III has served as a director of the Company since July 1994 and
Secretary of the Company since November 1994. He had previously served on the
Company's Board of Directors from 1987 to 1989. From 1988 through the present he
has served as Managing Partner of the law firm Rodino and Rodino, which
primarily deals in corporate, commercial, insurance, real estate, environmental,
bankruptcy and immigration law. He was a partner in the law firm of Rodino and
Scalera, Inc. from 1988 to 1991. He has served as Chairman of the Board of
Directors of the Foundation Health Plan of New Jersey, an IPA/HMO providing
health care services, from 1983 to 1988 and as a Director of Columbus Hospital
from 1986 to 1990. Mr. Rodino earned a B.S. in Business Administration from
Georgetown University in 1973 and a J.D. from Seton Hall University School of
Law in 1976.
68
<PAGE>
Harris Freedman has served as Vice President for Strategic Alliances since
August 1994 and has been a private venture capitalist and business consultant
for more than the past five years. He is the Secretary of Bridge Ventures, Inc.
("Bridge Ventures") and SMACS Holding Corp., both of which are private venture
capital companies, positions he has held for more than five years. His business
experience has encompassed developing significant business contacts and acting
as an officer or director of several companies in the pharmaceutical, health
care and entertainment fields. Mr. Freedman was Vice President of U.S. Alcohol
Testing of America, Inc., from August 1990 to February 1991. Additionally, he
was Vice President--East Coast Marketing for MusicSource U.S.A., Inc. from
October 1992 to January 1994. Mr. Freedman attended New York University from
1951 to 1954.
Sharon D. Will has been Vice President for Corporate Communications and Investor
Relations since November 1994. Prior to that time, she was a registered sales
representative and Senior Vice President for Institutional Sales at Westfield
Financial Corporation from September 1994 to October 1994. She was a registered
sales representative with Marsh Block Corporation from July 1994 to September
1994. From October 1993 to July 1994 she served as a registered sales
representative at Seaboard Securities Corp. From October 1991 to present, Ms.
Will has been President of Worldwide Marketing Inc. a manufacturers'
representative of various companies selling to the retail trade markets. Ms.
Will was the National Sales Manager of Innovo, Inc., a domestic manufacturer of
textiles, from October 1989 to November 1991. She attended Baylor College as an
undergraduate for two years with a primary focus on chemistry.
Board Committees
The Board of Directors maintains an Executive Committee consisting of
William A. Carter and Peter W. Rodino III, which makes recommendations to
management regarding general business matters of the Company; a Compensation
Committee consisting of Peter W. Rodino III, Richard C. Piani and E. Gerald Kay,
which makes recommendations concerning salaries and compensation for employees
of and consultants to the Company; an Audit Committee consisting of Cedric C.
Philipp and E. Gerald Kay, which reviews the results and scope of the audit and
other services provided by independent auditors; and a Strategic Planning
Committee consisting of William A. Carter, Peter W. Rodino III and Cedric C.
Philipp, which makes recommendations to the Board of priorities in the
application of the Company's financial assets and human resources in the fields
of research, marketing and manufacturing.
Compensation of Directors
During the fourth quarter of fiscal 1995, each non-employee directors
received $3,750 as compensation for serving on the Board of Directors or any
committee thereof. Certain non-employee directors receive compensation as
consultants to the Company and have been granted options to purchase Common
Stock under the Company's 1990 Stock Option Plan and Rule 701 Warrants to
purchase Common Stock of the Company. All of the directors are reimbursed for
their expenses incurred in attending meetings of the Board of Directors and its
committees. Currently, non-management directors receive an annual retainer of
$15,000 and receive $600 for each Board or committee meeting they attend and
will be reimbursed for out of pocket expenses incurred in attending meetings.
The Company believes such payments are necessary in order for the Company to
attract and retain qualified outside directors.
69
<PAGE>
In addition, in October 1994, the Board of Directors granted to Cedric C.
Philipp, a director of the Company and Special Advisor to the Board for
International Marketing, the right to receive 3% of the gross proceeds of any
licensing fees and prepaid royalties received by the Company pursuant to the SAB
Agreement and a fee of .75% of gross proceeds in the event that SAB/Bioclones
makes a tender offer for all or substantially all of the Company's assets,
including a merger, acquisition or related transaction, and 1% of all products
manufactured by SAB/Bioclones. The Company may prepay in full the obligation to
provide commissions up to $1,050,000 within a ten year period. These rights were
granted to Mr. Philipp in exchange for his services in the negotiation of the
SAB Agreement and his services in connection with various marketing and
licensing opportunities for the Company. In addition, the Company further agreed
to provide a monthly retainer of $2,000 to Mr. Philipp in exchange for
consulting services related to general pharmaceutical and international
marketing services and remuneration for corporate alliances which are
principally introduced by Mr. Philipp. Mr. Philipp has been paid $110,000
pursuant to these arrangements through December 31, 1995.
In June 1995, the Board of Directors of BioAegean, a subsidiary of the
Company, issued an aggregate of 550,000 BioAegean Options at an exercise price
of $1.00 per share to Dr. William A. Carter, E. Gerald Kay, Cedric C. Philipp
and Peter Rodino, III, directors of the Company.
In October and November 1994, the Company granted an aggregate of 1,480,000
Rule 701 Warrants to purchase shares of Common Stock at $3.50 per share to Dr.
Carter, Mr. Kay, Mr. Philipp and Mr. Rodino, directors of the Company, and
Maryann Charlap Azzato a former director of the Company. See "Certain
Transactions."
In 1994 and 1993 the Company issued shares of Series C Preferred Stock at
$5.00 per share to certain directors in various transactions including certain
sales of Series C Preferred Stock and conversion of certain debt. See "Certain
Transactions."
70
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth certain
information with respect to the compensation of the Company's Chief Executive
Officer and the other most highly compensated executive officers of the Company
for the fiscal year ended December 31, 1995.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Name and Other Annual Restricted Stock Awards All other
Principal Position Year Salary Compensation($)(1) Awards($)(13) Option Compensation($)(2)
- ------------------ ---- ------ ------------------ ---------------- ------ ------------------
<S> <C> <C> <C> <C> <C> <C>
William A. Carter 1995 $363,420 (3)(4) -- -- 300,000 (8) 7,778
Chairman of the Board 1994 363,420 (3)(5) -- -- 1,400,000 (9) 7,778
Chief Executive Officer 1993 363,420 (3) -- -- -- 7,778
Robert E. Peterson 1995 120,000 (6) -- -- 50,000 (10) --
Chief Financial Officer 1994 110,000 (7) -- -- --
1993 86,300 -- -- -- --
Sharon Will 1995 125,000 -- -- 50,000 (10) --
Vice President 1994 -- -- -- 200,000 (11) --
1993 -- -- -- -- --
David R. Strayer, M.D. 1995 115,083 -- -- -- --
Medical Director 1994 -- -- -- -- --
1993 -- -- -- --
Harris Freedman 1995 112,500 -- -- 150,000 (10) --
Vice President 1994 -- -- -- 400,000 (12) --
1993 -- -- -- -- --
</TABLE>
(1) The Company makes available certain non-monetary benefits to its officers
with a view to attracting and retaining qualified personnel and
facilitating job performance. The Company considers such benefits to be
ordinary and incidental business costs and expenses. The aggregate value of
such benefits, which cannot be precisely ascertained but which is less than
10% of the cash compensation of each of the above-named executive officers,
is not included in the table.
(2) Consists of insurance premiums paid by the Company with respect to term
life insurance for the benefit of the named executive officer.
(3) Includes $63,000 paid to Dr. Carter by Hahnemann University where he serves
as a professor.
(4) Does not include $224,015 paid in 1995 for salary deferred from 1993 and
1994.
71
<PAGE>
(5) Includes $137,692 in deferred salary for 1994.
(6) Mr. Peterson joined the Company in April 1993 and is paid on a fee basis.
Compensation includes $25,625 in deferred salary for 1995.
(7) Includes $33,500 in deferred salary for 1994.
(8) BioAegean Options to purchase 300,000 shares of common stock of BioAegean
Corp., a subsidiary of the Company, at $1.00 per share, which were granted
in May 1995 (the "BioAegean Options").
(9) Rule 701 Warrants to purchase Common Stock at $3.50 per share granted in
October 1994. These Rule 701 Warrants vest in 1/3 increments over a 36
month period. Rule 701 Warrants are warrants which were issued to officers,
directors and consultants of the Company in reliance upon Rule 701 of the
Act.
(10) BioAegean Options.
(11) Rule 701 Warrants to purchase common stock at $3.50 per share granted in
November 1994.
(12) Rule 701 Warrants to purchase common stock at $3.50 per share granted in
August 1994.
(13) As of December 31, 1995, Sharon Will had 100,000 shares of 144 restricted
stock valued at $228,125 using the average closing bid and asked price on
December 31, 1995 of $2.28. As of December 31, 1995, Harris Freedman had
150,000 shares of Rule 144 restricted stock valued at $342,000 using the
average closing bid and asked price on December 31, 1995 of $2.28.
72
<PAGE>
Year End Option Table. The following table sets forth certain information
regarding the stock options held as of December 31, 1995 by the individuals
named in the above Summary Compensation Table. David Strayer, M.D. did not
exercise any stock options in the last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money-Options
Fiscal Year End(#) at Fiscal Year End ($)
Shares Acquired Value ----------------------------- ---------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ------ --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
William A. Carter -- -- 1,091,355(1) 1,233,333(2) 292,188 --
Robert E. Peterson -- -- 6,912(3) 56,912(4) --- --
Sharon Will -- -- 341,667(5) 283,333(6) 146,094 --
Harris Freedman -- -- 975,494(7) 416,667(8) 292,188 --
</TABLE>
- ----------
(1) Includes (i) 466,667 currently exercisable Rule 701 Warrants to purchase
Common Stock at $3.50 per share; (ii) 73,728 stock options to purchase
Common Stock at $3.50 per share; (iii) 960 warrants to purchase Common
Stock at $3.50 per share; and (iv) warrants to purchase 550,000 shares of
Common Stock at $1.75 per share.
(2) Includes 933,333 Rule 701 Warrants and 300,000 BioAegean Options.
(3) Stock options to purchase Common Stock at $4.34 per share.
(4) Includes 50,000 BioAegean Options and 6,912 stock options.
(5) Includes 66,667 currently exercisable Rule 701 Warrants and 275,000
warrants to purchase Common Stock at $1.75 per share.
(6) Includes 150,000 BioAegean Options and 133,333 Rule 701 Warrants.
(7) Includes (i) 133,333 Rule 701 Warrants currently exercisable; (ii) 292,161
warrants to purchase common stock at $3.50 per share; and (iii) 550,000
warrants to purchase Common Stock at $1.75 per share.
(8) Includes 266,667 Rule 701 Warrants and 150,000 BioAegean Options.
73
<PAGE>
Option Grant Table. The following table sets forth certain information
regarding options granted during the fiscal year ended December 31, 1995 by the
Company to the individuals named in the above Summary Compensation Table:
OPTION GRANTS IN LAST FISCAL YEAR
% of Total
Options
Options Granted to
Granted Employees in Exercise Price Expiration
Name (#) Fiscal Year $/Share Date
- ---- --- ----------- ------- ----
William A. Carter 300,000(2) 46% $1.00 5/4/05
Robert E. Peterson 50,000(2) 8% $1.00 5/4/05
Sharon Will 150,000(2) 23% $1.00 5/4/05
Harris Freedman 150,000(2) 23% $1.00 5/4/05
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if not exercised until the end of the option term. These
gains are based on assumed rates of stock price appreciation of 5% and 10%
(as required under the rules and regulations of the Securities and Exchange
Commission) compounded annually from the dates the respective options were
granted to their respective expiration dates. This table does not take into
account any appreciation in the price of the Common Stock to date.
(2) In June 1995, the Board of Directors of BioAegean Corp. ("BioAegean"), a
subsidiary of the Company, issued options to purchase the common stock of
BioAegean at an exercise price of $1.00 per share. In consideration of
these options, the recipients agreed to serve BioAegean's needs for at
least 24 months unless fully incapacitated. There is no public market for
BioAegean shares.
74
<PAGE>
LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
Performance or
Number of Other Period
Shares, Units Until Maturation
Name or Other Rights(#)(1) or Payout
- ---- --------------------- ----------------
William A. Carter 300,000 5/4/05
Chairman of the Board
Chief Executive Officer
Robert E. Peterson 50,000 5/4/05
Chief Financial Officer
Sharon Will 150,000 5/4/05
Vice President
Harris Freedman 150,000 5/4/05
(1) BioAegean Options to purchase common stock of BioAegean Corp., a subsidiary
of the Company at $1.00 per share which were granted in May 1995.
Employment Agreements
The Company entered into an employment agreement with Sharon Will providing
for her employment as Vice President for Corporate Communications and Investor
Relations on November 1, 1994. The agreement provides for Ms. Will to be
employed for a one-year term for a base salary of $120,000 and provides for
termination of the agreement upon certain circumstances including termination by
the Company or Ms. Will on 14 days written notice or the sale of Ms. Will's
stock in the Company. Pursuant to the agreement, Ms. Will was granted Rule 701
Warrants to purchase 200,000 shares of Common Stock of the Company at $3.50 per
share. Ms. Will's agreement provides that she shall devote 60% of her business
time, attention and energies to the Company during regular business hours. In
the event that Ms. Will's employment is terminated for any reason other than
breach of contract, she shall be entitled to receive accrued and unpaid
compensation plus an additional three months' compensation. In July 1995, the
term of Ms. Will's employment agreement was extended from one year to three
years.
The Company entered into an employment agreement with Harris Freedman
providing for Mr. Freedman's employment as Vice President for Strategic
Alliances on August 1, 1994. The agreement provides for Mr. Freedman to be
employed for a one year term for a base salary of $120,000 and provides for
termination of the agreement upon certain circumstances including termination by
the Company or Mr. Freedman on 14 days written notice or the sale of Mr.
Freedman's stock in the Company. Pursuant to the agreement, Mr. Freedman was
granted Rule 701 Warrants to purchase 400,000 shares of Common Stock of the
Company at $3.50 per share. Mr. Freedman's agreement provides that he shall
devote 30% of his business time, attention and energies to the Company during
75
<PAGE>
regular business hours. In the event that Mr. Freedman's employment is
terminated for any reason other than breach of contract, he shall be entitled to
receive accrued and unpaid compensation plus an additional three months'
compensation. In July 1995, the term of Mr. Freedman's employment agreement was
extended from one year to three years.
The Company entered into an amended and restated employment agreement with
Dr. William A. Carter, dated as of July 1, 1993 and as amended in July 1995,
which provides for his employment until May 8, 2001 at an initial base annual
salary of $295,832, subject to annual cost of living increases. In addition, Dr.
Carter may receive an annual performance bonus of up to 25% of his base salary,
in the sole discretion of the Board of Directors. Dr. Carter will not
participate in any discussions concerning the determination of his annual bonus.
Dr. Carter is also entitled to an incentive bonus of 0.5% of the gross proceeds
received by the Company from any joint venture or corporate partnering
arrangement, up to an aggregate maximum incentive bonus of $250,000 for all such
transactions. It is contemplated that Dr. Carter will be entitled to this
incentive bonus upon receipt of the gross proceeds from the SAB Agreement (as
defined in "Certain Transactions"). Dr. Carter's agreement also provides that he
shall be paid his base salary and benefits through May 8, 1996 if he is
terminated without "cause," as that term is defined in the agreement. Pursuant
to his original agreement, as amended on August 8, 1991, Dr. Carter was granted
options to purchase 73,728 shares of the Company's Common Stock at an exercise
price of $2.71 per share.
1992 Stock Option Plan
The Company's 1992 Stock Option Plan (the "1992 Plan"), provides for the
grant of options for the purchase of up to an aggregate of 92,160 shares of
Common Stock to the Company's employees, directors, consultants and others whose
efforts are important to the success of the Company. The 1992 Plan is
administered by the Compensation Committee of the Board of Directors, which has
complete discretion to select the eligible individuals to receive and to
establish the terms of option grants. The 1992 Plan provides for the issuance of
either non-qualified options or incentive stock options, provided that incentive
stock options must be granted with an exercise price of not less than fair
market value at the time of grant and that non-qualified stock options may not
be granted with an exercise price of less than 50% of the fair market value at
the time of grant. The number of shares of Common Stock available for grant
under the 1992 Plan is subject to adjustment for changes in capitalization. To
date, no options have been granted under the 1992 Plan.
1990 Stock Option Plan
The Company's 1990 Stock Option Plan, as amended (the "1990 Plan"),
provides for the grant of options to employees, directors, officers, consultants
and advisors of the Company for the purchase of up to an aggregate of 460,798
shares of Common Stock. The plan is administered by the Compensation Committee
of the Board of Directors, which has complete discretion to select eligible
individuals to receive and to establish the terms of option grants. The number
of shares of Common Stock available for grant under the 1990 Plan is subject to
adjustment for changes in capitalization. As of December 31, 1995, options to
acquire an aggregate of 228,502 shares of the Common Stock were outstanding
under the 1990 Plan.
76
<PAGE>
401(K) Plan
In December 1995, the Company established a defined contribution plan,
effective January 1, 1995, the Hemispherx Biopharma employees 401(K) Plan and
Trust Agreement (the "401(K) Plan"). All full time employees of the company are
eligible to participate in the 401(K) Plan following one year of employment.
Subject to certain limitations imposed by federal tax laws, participants are
eligible to contribute up to 15% of their salary (including bonuses and/or
commissions per annum. Participants' contributions to the 401(K) Plan may be
matched by the Company at a rate determined annually by the Board of Directors.
Each participant immediately vests in his or her deferred salary contributions,
while Company contributions will vest over one year. In 1995 the Company
provided matching contributions to each employee for up to 6% of annual pay or
$25,500. The Company also absorbed the cost of employee contributions of
$25,000.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1995, the members of the
Company's Compensation Committee were William A. Carter, Peter W. Rodino III,
and E. Gerald Kay. Dr. Carter is an officer of the Company. The Company's
Compensation Committee currently consists of Peter W. Rodino III, Richard C.
Piani and E. Gerald Kay. The following transactions describe certain
relationships between the Company and present and former members of the
Compensation Committee:
In May 1995, Dr. Carter, E. Gerald Kay and certain other individuals and
entities entered into a 1995 Standby Financing Agreement with the Company
pursuant to which they were collectively obligated to invest during 1995 an
aggregate of $5,500,000 in the Company in the event the Company was unable to
secure alternative financing and the Board of Directors determined that the sale
of securities to such persons was advisable (the "1995 Standby Financing
Agreement"). In exchange for entering into the 1995 Standby Financing Agreement,
the Company issued to each of the parties ten-year warrants to purchase 50,000
shares of the Company's Common Stock at an exercise price of $1.75 per share for
each $100,000 of standby financing obligation assumed by the party, resulting in
warrants to purchase an aggregate of 2,750,000 shares of Common Stock. In
September 1995, the parties to the 1995 Standby Financing Agreement, including
Dr. Carter and Mr. Kay, agreed to extend their obligations through December 31,
1996.
In June 1995, the directors of BioAegean Corp., a subsidiary of the
Company, issued 10-year options to purchase an aggregate of 1,200,000 shares of
common stock of BioAegean at an exercise price of $1.00 per share (the
"BioAegean Options") to its officers and directors. The BioAegean Options are
conditional upon the recipient's agreement to serve BioAegean as needed for at
least 24 months unless fully incapacitated. William A. Carter, M.D., serves as
Chairman, Chief Executive Officer and a Director of BioAegean and received
300,000 BioAegean Options. Peter W. Rodino III serves as Vice-Chairman,
Secretary, Corporate Counsel and a director of BioAegean and received 150,000
BioAegean Options. R. Douglas Hulse serves as Chief Operating Officer of
BioAegean and received 50,000 BioAegean Options. Richard C. Piani serves as a
77
<PAGE>
director and the Advisor for European Affairs of BioAegean and received 50,000
BioAegean Options. E. Gerald Kay serves as a director for BioAegean and received
50,000 BioAegean Options.
In March 1995, the Company received an interest-free loan from William A.
Carter in the amount of $35,000. In March 1995, the Company repaid the loan from
Dr. Carter.
In February 1995, the Company issued notes in the aggregate principal
amount of $600,000 in connection with the Tisch/Tsai Restructuring (as defined
below). The notes were secured by a pledge by Dr. Carter of 112,925 shares of
Series C Preferred Stock and 240,756 shares of Common Stock. The notes have been
paid off and the shares are being returned.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law ("DGCL"), the Company
has adopted provisions in its Amended and Restated Certificate of Incorporation
which eliminate the personal liability of its directors to the Company and its
stockholders for monetary damages for breach of the directors' fiduciary duties
in certain circumstances and which require the Company to indemnify its
directors, officers and other agents, by Bylaw, agreement, vote of directors or
stockholders or otherwise, to the fullest extent permitted by law.
The Company has entered into separate indemnification agreements with its
directors and its officers. These agreements require, among other things, the
Company to indemnify directors and officers against certain liabilities that may
arise by reason of their status or service as directors and officers and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company believes that these provisions in
its Amended and Restated Certificate of Incorporation and the indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers. See "Business--Legal Proceedings".
78
<PAGE>
Security Ownership of Certain Beneficial
Owners and Management
The following table sets forth, as of May 15, 1996, the record and
beneficial ownership of Common Stock of the Company by each officer and
director, all officers and directors as a group, and each person known to the
Company to own beneficially or of record five percent or more of the outstanding
shares of the Company:
Shares
Officers, Directors and Beneficially Percent of Shares
Principal Stockholders Owned Beneficially Owned (1)
- ---------------------- ------------ ----------------------
William A. Carter 4,156,671(2) 21.1%
Harris Freedman 1,025,494(3) 6.2%
E. Gerald Kay 656,667(4) 4.0%
Sharon D. Will 556,667(5) 3.4%
Cedric C. Philipp 27,667(6) *
Peter W. Rodino III 25,099(7) *
Robert E. Peterson 10,368(8) *
Jerome Belson 945,000(9) 5.7%
Belson Enterprises, Inc.
495 Broadway
New York, NY 10012
Josephine Dolhancryk 820(10) *
Richard C. Piani 18,023(11) *
David R Strayer 14,745 *
R. Douglas Hulse 60,000(12) *
All directors, 6,552,221 29.6%
executive officers
as a group (11 persons)
*Less than 1%
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire such shares within 60 days of May 15, 1996. For
purposes of computing the percentage of outstanding shares of Common Stock
held by each person or group of persons named above, any security which
such person or persons has or have the right to acquire within such date is
deemed to be outstanding but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, the Company believes based on information supplied
by such persons, that the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock which they
beneficially own.
(2) Includes irrevocable proxies to vote 2,050,000 shares of Common Stock on
all matters that come before the stockholders of the Company until such
time as (i) the Company shall have achieved a market capitalization of
79
<PAGE>
$300,000,000 or greater for at least 20 consecutive days of trading in the
public markets or (ii) the Company shall have received a bona fide offer
for acquisition or merger, the net effect of which, if consummated, would
be to establish a market capitalization of the Company of not less than
$300,000,000. This proxy shall be terminated upon the sale of such shares
in an arm's length public sale. Also includes (i) an option to purchase
73,728 shares of Common Stock from the Company at an exercise price of
$2.71 per, (ii) warrants to purchase 960 shares of Common Stock at an
exercise price of $3.50 per share, (iii) Rule 701 Warrants to purchase
466,667 shares of Common Stock at a price of $3.50 per share (does not
include 933,333 which are non-exercisable); and (iv) warrants to purchase
500,000 shares of Common Stock at $1.75 per share issued in connection with
the 1995 Standby Financing Agreement. Dr. Carter has pledged 112,925 shares
of Series C Preferred and 240,756 shares of Common Stock to the Tisch/Tsai
Entities as security for the repayment of the $660,000 note executed in
March 1995. The note has been paid off and the shares are being returned.
(3) Includes (i) 50,000 shares of Common Stock held by Bridge Ventures, Inc. of
which Mr. Freedman is an officer; (ii) 50,000 shares of Common Stock held
by SMACS Holding Corp. of which Mr. Freedman is an officer, (iii) warrants
to purchase 292,161 shares of Common Stock at an exercise price of $3.50
per share owned of record by Bridge Ventures, Inc.; (iv) warrants to
purchase 390,000 shares of Common Stock which are exercisable at $1.75 per
share issued in connection with the 1995 Standby Financing Agreement owned
of record by Bridge Ventures, Inc.; and (v) 133,333 Rule 701 Warrants to
purchase Common Stock of the Company at an exercise price of $3.50 (does
not include 266,667 which are non-exercisable); and (iv) 60,000 Units each
consisting of one Common Stock and one warrant to purchase Common Stock at
$3.50. Bridge Ventures, Inc. has given an irrevocable proxy to vote its
150,000 shares to William A. Carter on the same terms as the proxy
described in Note 2.
(4) Includes Rule 701 Warrants to purchase 6,667 shares of Common Stock at an
exercise price of $3.50 per share (does not include 13,333 which are
non-exercisable) and 550,000 warrants to purchase Common Stock of the
Company at an exercises price of $1.75 per share issued in connection with
the 1995 Standby Financing Agreement. Mr. Kay has given an irrevocable
proxy to vote 100,000 shares of Common Stock to William A. Carter on the
same terms as the proxy described in Note 2.
(5) Includes Rule 701 Warrants to purchase 66,667 shares of Common Stock at an
exercise price of $3.50 per share (does not include 133,333 which are
non-exercisable). Also includes 100,000 shares of Common Stock owned of
record by Worldwide Marketing, a company for which Ms. Will serves as
President. Worldwide Marketing has given an irrevocable proxy to vote these
shares to William A. Carter on the same terms as the proxy described in
Note 2. Also includes 390,000 warrants to purchase Common Stock of the
Company at an exercise price of $1.75.
80
<PAGE>
(6) Includes Rule 701 Warrants to purchase 6,667 shares of Common Stock at
$3.50 per share (does not include 13,333 which are non-exercisable),
options to purchase 20,000 shares of Common Stock at $3.50 per share and
1,000 Units owned by the Cedric C. Philipp and Sue Jones Philipp Trust of
which Mr. Philipp and his wife are Trustees.
(7) Includes Rule 701 Warrants to purchase 6,667 shares of Common Stock at
$3.50 per share (does not include 13,333 which are non-exercisable).
(8) Consists of options to purchase Common Stock at an exercise price of $4.34
per share. Does not include 50,000 Warrants to purchase Common Stock at an
exercise price of $3.50 per share effective March 1, 1997.
(9) Includes 100,000 Bridgeholder Options to purchase 100,000 Bridge Units at
$.50 per unit consisting of 100,000 shares of Common Stock and 100,000
Class A Redeemable Warrants exercisable at $4.00 per share. Also includes
warrants to purchase 550,000 shares of Common Stock at $1.75 per share
owned of record by Belson Enterprises, Inc., a company for which Mr. Belson
serves as President, issued in connection with the 1995 Standby Financing
Agreement and 47,500 Units, each consisting of one share of Common Stock
and one warrant.
(10) Consists of options to purchase 820 shares of Common Stock at an exercise
price of $3.80. Does not include 50,000 Warrants to purchase Common Stock
at an exercise price of $3.50 per share effective March 1, 1997.
(11) Includes options to purchase 4,608 shares of Common Stock at an exercise
price of $4.34 and 4,608 shares of Common Stock owned of record by Mr.
Piani's wife.
(12) Includes 60,000 options to purchase Common Stock at $3.50 per share held by
The Sage Group, of which Mr. Hulse is an Executive Director. Does not
include 100,000 options to purchase Common Stock at $1.75 per share and
330,000 options to purchase Common Stock at $3.50 per share.
81
<PAGE>
RESALES BY
This Prospectus relates to the proposed resale by the Selling
Securityholders of up to 2,770 shares of outstanding Common Stock, 2,427,275
shares of Common Stock issuable upon conversion of the Preferred Stock and
890,543 issuable upon exercise of the Warrants. The following table sets forth
as of July 10, 1996 certain information with respect to the persons for whom the
Company is registering the Shares for sale to the public except as footnoted
below. None of such persons has had a material relationship with or has held any
position or office with the Company or any of its affiliates within three years,
other than as footnoted below (see "Certain Transactions"). The Company will not
receive any of the proceeds from the sale of the Common Stock. If the Warrants
are exercised, the Company would receive $4,064,900.
Names of Selling Common Stock Beneficially Common Stock Offered
Security Holders Owned Prior to July, 1996 By Beneficial Owner
- ---------------- ------------------------- -------------------
Seymour Cohn(1) 119,807 119,807
Myron Cherry(2) 12,770 12,770
Charles Moore(3) 43,304 43,304
Maurice Schlang(4) 138,432 138,432
The Olmstead Group, LLC(5) 240,000 240,000
Fred Craves(5) 120,000 120,000
Francis F. Bodkin, Jr.(5) 120,000 120,000
GFL Advantage Fund Ltd.(6) 2,527,275 2,527,275
(1) Represents shares of Common Stock underlying a Warrant exercisable during
the four year period commencing November 2, 1995, at an exercise price of $10.85
per share.
(2) Represents (i) 10,000 shares of Common Stock underlying two Warrants of
which 5,000 shares are exercisable at any time commencing November 1, 1994 and
expiring December 31, 1998, at an exercise price of $3.50 per share and 5,000
shares exercisable at any time commencing March 20, 1995 and expiring March 31,
1999, at an exercise price of $3.50 per share; and (ii) 2,770 share of Common
Stock.
(3) Represents (i) 40,000 shares of Common Stock underlying two Warrants
exercisable during the five year period commencing November 2, 1995, at an
exercise price of $2.00 per share; and (ii) 2,304 shares of Common Stock
underlying a stock option exercisable during the ten year period commencing
April 16, 1996, at an exercise price of $4.34 per share.
(4) Represents (i) 120,000 shares of Common Stock underlying a Warrant
exercisable during the five year period commencing November 2, 1995, at an
exercise price of $2.00 per share; and (ii) 18,432 shares of Common Stock
underlying a stock option exercisable during the ten year period commencing
January 25, 1995, at an exercise price of $4.34 per share.
(5) Represents Common Stock underlying Warrants exercisable during the five year
period commencing July 3, 1996 at an exercise price of $4.00 per share.
(6) Represents (i) 2,427,275 shares of Common Stock underlying the Preferred
Stock; and (ii) 100,000 shares of Common Stock underlying a Warrant exercisable
82
<PAGE>
during the period commencing July 3, 1996 and expiring November 2, 2000 at an
exercise price of $4.00 per share. The Preferred Stock Certificate of
Designations and the Warrant provides that GFL Advantage Fund Limited may not
convert its Preferred Stock or exercise its Warrant at any time to acquire a
number of shares of Common Stock in excess of 4.9% of the Company's outstanding
Common Stock.
83
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1996, the Company consummated a private offering of its Preferred
Stock pursuant to Rule 506 of Regulation as promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended. The Company
issued 6,000 shares of Preferred Stock, $.01 par value at a purchase price of
$1,000 per share.
In May 1996, the Company entered into two additional agreements with The
Sage Group. Under the first agreement, R. Douglas Hulse will serve as Chief
Operating Officer of the Company. In exchange, The Sage Group will receive from
the Company; (i) a monthly retainer of $10,000 starting June 1, 1996, replacing
the $5,000 monthly retainer provided in the June 1995 agreement; and (ii)
options to purchase 250,000 shares of the Company's Common Stock at an exercise
price of $3.50 per share. Under the second agreement, The Sage Group agreed to
introduce the Company to and assist the Company in negotiations with certain
foreign distribution partners. In exchange, The Sage Group will receive from the
Company; (i) a bonus payment of $500,000 if total sales of Ampligen in Canada
and Europe exceed $10 million for 1996 and 1997 combined; and (ii) options to
purchase 140,000 shares of the Company's Common Stock at an exercise price $3.50
per share. R. Douglas Hulse, Chief Operating Officer of the Company, is an
Executive Director of the Sage Group.
In March 1996, William A. Carter assigned and transferred 50,000 Warrants
to purchase Common Stock, at $1.75 per share, to three outside parties that had
loaned the Company money in 1995. These loans were repaid in 1995.
In March 1996, Harris Freedman assigned and transferred 160,000 Warrants to
purchase Common Stock at $1.75 per share to Sharon Will, an officer of the
Company and two other shareholders.
In March 1996, the Compensation Committee of the Board of Directors
approved a grant of 250,000 warrants to purchase common stock at an exercise
price of $3.50 per share to Michael C. Burrows. This grant was made in
accordance with a Letter Agreement dated January 15, 1996, in which Mr. Burrows
agreed to provide consulting services to the Company for twenty four months. Mr.
Burrows served as Director of the Company in past years.
In March 1996 the Compensation Committee of the Board of Directors approved
grants of 50,000 warrants to purchase common stock at an exercise price of $3.50
per share to each of Robert E. Peterson, CFO and Josephine Dolhancryk, Assistant
Secretary of the Company. Such warrants are not exercisable for a period of one
year from issuance.
In March 1995, the Company instituted a declaratory judgment action against
a February noteholder, Seymour Cohn, of a $5,000,000 convertible note and a
secured defendant in United States District Court for the Eastern District of
Pennsylvania to declare as void, set aside, and cancel the February 1992
convertible note between the Company and Mr. Cohn (the "Note"). In addition, Mr.
Cohn instituted suit against the Company on the Note in the Circuit Court of
84
<PAGE>
the 15th Judicial District in and for Palm Beach County, Florida, seeking
judgment on the Note, plus attorney fees, costs and expenses; in August 1995,
this action was stayed by the Florida Court pending the outcome of the
Pennsylvania action. Mr. Cohn also filed a motion for a preliminary injunction
in the Pennsylvania court to enjoin the Company from disbursing the proceeds of
a public offering in the amount of $5.8 million, which motion was granted
November, 1995. On February 15, 1996, the Company reached an agreement to settle
this matter. Terms and conditions of the settlement include payment of
$6,450,000 to Mr. Cohn to cover the unpaid balance Note balance, legal expenses
and the retention of certain warrants granted prior to the lawsuit. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.
In January 1996, the Company engaged the Research Works, Inc. to produce
four research reports with respect to the securities of the Company over a 13
month period. In exchange for this service, the Company granted 60,000 warrants
to the Research Works, Inc. exercisable at $4.00 per share.
In January 1996, the Company entered into a one year consulting agreement
with Millenium International Communications, Ltd. ("Millenium"). The
consideration for such services is $120,000, to be paid by the Company in either
monthly payments or balloon payments, in the Company's discretion. Millenium
shall consult with and render advice to the Company specifically concerning
strategic planning, public relations and other related matters. The President of
Millenium, David C. Drescher is related to Steve Drescher, a former director of
the Company.
In December 1995, the Company retained the law firm of Akin, Gump,,
Strauss, Hauer & Feld, LLP (the "Akin Group") to provide general legal counsel,
advice and representation. Initially, the Akin Group will represent the Company
in matters pertaining to the Food and Drug Administration ("FDA"). The agreement
includes incentive payments for obtaining FDA approval of Ampligen for HIV
Disease treatment.
In November 1995, the Company sold 5,313,000 Units of securities through an
initial public offering. Each Unit consists of one share of Common Stock and one
Class A Redeemable Warrant.
In August 1995, in connection with the settlement of a lawsuit brought by a
former employee of the Company against the Company and David Fries, a former
director of the Company, the Company, Dr. Fries, the Canaan Entities and Dr.
William A. Carter, President, Chairman and CEO of the Company, entered into an
agreement pursuant to which the Company has agreed to reimburse Dr. Fries for
expenses in the amount of $50,000 incurred in connection with such litigation.
As part of such agreement, the parties agreed to mutual releases of certain
claims for expenses and damages arising out of the litigation or arising in
connection with Dr. Fries' service as a director of the Company. The payment of
$50,000 to Dr. Fries is evidenced by an interest-free promissory note pursuant
to which the final payment is due on or before November 15, 1995. The note was
assigned to the Canaan Entities.
85
<PAGE>
In June 1995, the Company entered into an agreement with The Sage Group
pursuant to which The Sage Group has agreed to introduce the Company to and
assist the Company in negotiations with certain prospective distribution
partners listed in the agreement. In exchange, The Sage Group will receive from
the Company: (i) a monthly retainer of $5,000 which began accruing July 1, 1995
and (ii) at The Sage Group's option, a percentage of the proceeds, up to an
aggregate of $150,000, from the Company's first distribution agreement with a
partner listed in the agreement or the sum of $125,000 from such agreement. In
connection with this agreement, the Company will also issue to The Sage Group
options to purchase 100,000 shares of the Company's Common Stock at an exercise
price of $1.75 per share. R. Douglas Hulse, Chief Operating Officer of the
Company, is an Executive Director of The Sage Group.
In May 1995, William A. Carter, M.D., President, Chairman and CEO of the
Company, Bridge Ventures, Sharon Will, a Vice President of the Company,
Associated Funding Services, Inc., Jerome Belson, a director of one of the
Company's subsidiaries and a principal shareholder and E. Gerald Kay, a director
of the Company, entered into a 1995 Standby Financing Agreement with the Company
pursuant to which they are collectively obligated to invest during 1995 an
aggregate of $5,500,000 in the Company in the event the Company is unable to
secure alternative financing and the Board of Directors determines that the sale
of securities to such persons is advisable. In exchange for entering into the
1995 Standby Financing Agreement, the Company issued to each of the parties
ten-year warrants to purchase 50,000 shares of the Company's Common Stock at an
exercise price of $1.75 per share for each $100,000 of standby financing
obligation assumed by the party, resulting in warrants to purchase an aggregate
of 2,750,000 shares of Common Stock. In September 1995, the parties agreed to
extend their obligations under the 1995 Standby Financing Agreement through
December 31, 1996. Harris Freedman, a Vice President of the Company, and his
wife are officers of Bridge Ventures. Gerald Brauser is President of Associated
Funding Services, Inc.
In June 1995, the Board of Directors of BioAegean Corp, a subsidiary of the
Company, issued an aggregate of 1,200,000 BioAegean Options at an exercise price
of $1.00 per share to its officers and directors, including certain officers and
directors of the Company. In consideration for the BioAegean Options, the
recipients agreed to serve BioAegean's needs for at least 24 months unless fully
incapacitated. William A. Carter, M.D., Chairman, President and Chief Executive
Officer of the Company, serves as Chairman, Chief Executive Officer and a
Director of BioAegean and received 300,000 BioAegean Options. Peter W. Rodino
III, a director and Secretary of the Company, serves as Vice-Chairman,
Secretary, Corporate Counsel and a director of BioAegean and received 150,000
BioAegean Options. R. Douglas Hulse serves as Chief Operating Officer of the
Company and BioAegean and received 50,000 BioAegean Options. Robert Peterson
serves as Chief Financial Officer of both the Company and BioAegean and received
50,000 BioAegean Options. Sharon Will, Vice President of Investor Relations and
Corporate Communications for the Company, serves as Vice President of Marketing
for BioAegean and received 150,000 BioAegean Options. Harris Freedman serves as
Vice President for Strategic Alliances for both the Company and BioAegean and
received 150,000 BioAegean Options. Richard C. Piani, a director of the Company,
serves as a director and the Advisor for European Affairs of BioAegean and
86
<PAGE>
received 50,000 BioAegean Options. E. Gerald Kay serves as a director for both
the Company and BioAegean and received 50,000 BioAegean Options. BioAegean's
remaining director, Jerome Belson, a principal stockholder of the Company,
received 50,000 BioAegean Options.
In March 1995, the Company issued the Original Brauser Note, to Gerald A.
Brauser in the principal amount of $200,000. The Original Brauser Note also
provided for the issuance of warrants to purchase 50,000 shares of the Company's
Common Stock at $1.75 per share. In May 1995, the Company restructured the
Original Brauser Note and issued the New Brauser Note to Mr. Brauser in the
amount of $100,000 along with warrants to purchase 25,000 shares of the
Company's Common Stock at $1.75 per share. As part of the restructuring, Mr.
Brauser agreed to (i) purchase 100,000 shares of Common Stock with $50,000 of
the Original Brauser Note and (ii) apply $50,000 of the Original Brauser Note
towards a Bridge Loan in connection with the Bridge Financing. The New Brauser
Note of $100,000 and the $50,000 Bridge Loan have been paid off. In connection
with both the Original Brauser Note and the New Brauser Note, Bridge Ventures
agreed to permit the Company to collateralize these notes with the Company's
patent estate, which collateral had previously been granted to Bridge Ventures.
Bridge Ventures further guaranteed the Original Brauser Note with certain
publicly traded common stock, which guarantee was released by Mr. Brauser in
connection with the restructuring. Harris Freedman, a Vice President of the
Company, and his wife are both officers of Bridge Ventures.
In March and April 1995, in connection with the Bridge Financing, the
Company issued Bridge Notes to certain lenders in the aggregate principal amount
of $1,500,000, including a Bridge Note in the amount of $250,000 to Stephen
Drescher and a Bridge Note in the amount of $150,000 to Jerome Belson.
Additionally, in connection with the Bridge Loans, the Company has issued
options to purchase 166,665 Bridge Units at $.50 per Bridge Unit to Mr. Drescher
and options to purchase 100,000 Bridge Units at $.50 per Bridge Unit to Jerome
Belson. In July 1995, Mr. Drescher assigned the $250,000 Bridge Note and his
options to purchase 166,665 Bridge Units to certain other investors. Mr.
Drescher is a former director of the Company and presently serves as the
Director of Corporate Finance at Monroe Parker, one of the Underwriters. Jerome
Belson is a principal shareholder and director of BioAegean, a subsidiary of the
Company.
In March 1995, the Company received interest-free loans from William A.
Carter and Harris Freedman in the amounts of $35,000 and $12,000, respectively.
In March 1995, the Company repaid the loan from Dr. Carter. In April 1995, the
Company repaid the loan from Mr. Freedman.
In December 1992 and February 1993, the Company issued to the Tisch/Tsai
Entities, in a private placement, promissory notes in the aggregate principal
amount of $2,400,000 due on April 30, 1994, and warrants to purchase an
aggregate of 36,864 shares of the Company's Common Stock or 40,000 shares of
Series C Preferred Stock at an exercise price of the (i) $13.02 or $12.00 per
share, respectively or (ii) the per share price of Common Stock in the initial
public offering. The warrants expire on December 31, 1997. One-half of the
87
<PAGE>
principal amount of the notes and one-half of the warrants were purchased by FLF
Associates. James S. Tisch, a former director of the Company, is a principal of
FLF Associates. The remaining half of the principal amount of the note and
one-half of the warrants were purchased by Gerald Tsai, Jr. and Lincoln Trust
Company, Custodian FBO Gerald Tsai, Jr. Mr. Tsai is a former director of the
Company. Interest on the notes is payable quarterly at an annual rate of 12% (6%
prior to May 1, 1993).
In February 1995, the Company entered into a settlement agreement with the
Tisch/Tsai Entities to restructure the December 1992 and February 1993
promissory notes in the aggregate principal amount of $2,400,000 and settle
certain threatened claims made by the Tisch/Tsai Entities against the Company
(the "Tisch/Tsai Restructuring"). This debt restructuring consisted of (i) the
repayment by the Company of $1,200,000 in principal, (ii) the issuance of
replacement notes in the aggregate principal amount of $600,000 to the
Tisch/Tsai Entities which notes are due on the earlier of the closing of a
public offering or May 28, 1996 and bear interest at the rate of 8% per annum,
which interest is payable in quarterly installments from an interest reserve
established by the Company, (iii) the conversion of $600,000 of principal into
172,414 shares of Series C Preferred Stock at the rate of $3.48 per share, (iv)
the amendment and restatement of certain warrants issued in connection with the
original notes in order to increase the number of shares of stock issuable
thereunder by 64,000 shares to provide for warrants to purchase a total of
144,000 shares of Common Stock at an exercise price of $2.00 per share, which
warrants are exercisable until December 31, 1997, and (v) the release by all
parties of any claims. The replacement notes were secured by a pledge by Dr.
William A. Carter, President, Chief Executive Officer and Chairman of the
Company, of 112,925 shares of Series C Preferred Stock and 240,756 shares of
Common Stock. In March, 1996 the notes were repaid and the shares of stock are
being returned.
In November 1994, the Company restructured a $100,000 note issued in June
1993 to Myron Cherry (the "Cherry Note"), a stockholder, pursuant to which the
repayment date of the principal amount of the Cherry Note was extended to the
closing date of the Company's initial public offering and the accrued but unpaid
interest subsequent to September 30, 1993 was converted into Common Stock of the
Company at a price of $5.43 per share. Pursuant to the restructuring, in the
event that the Company's initial public offering was not completed by February
28, 1995, the principal amount would be repaid by the Company or Bridge Ventures
Inc. by March 6, 1995. In addition, the Company issued to Mr. Cherry 5,000
immediately exercisable warrants with an exercise price of $3.50 per share and
Bridge Ventures agreed that the unpaid principal on the Cherry Note would be
collateralized by the Company's patents on the same terms as the Bridge
Financing arranged by Bridge Ventures. In March 1995, the Company and Mr. Cherry
agreed to extend the maturity of the promissory note from March 1, 1995 to March
31, 1995. During this extended period, the Company agreed to pay 8% interest and
grant Mr. Cherry a warrant to purchase 5,000 shares of Common Stock exercisable
at $3.50. The Company further agreed to either register all of Mr. Cherry's
2,770 shares of Common Stock and 10,000 warrants to purchase Common Stock in
connection with this Public Offering or reduce the exercise price of Mr.
Cherry's warrants to $1.75 per share. Because Mr. Cherry has not advised the
88
<PAGE>
Company of his election, the Company has reduced the exercise price of his
warrants to $1.75 per share. As of July, 1995, the Company has repaid the entire
principal amount of the Note, including accrued interest. Harris Freedman, a
Vice President of the Company, and his wife are officers of Bridge Ventures.
In October and November 1994, the Company granted Rule 701 Warrants to
purchase 20,000 shares of Common Stock at $3.50 per share to E. Gerald Kay,
Cedric C. Philipp and Peter Rodino III, directors of the Company and Maryann
Charlap Azzato, a former director of the Company. In addition, the Company
granted the following Rule 701 Warrants to purchase shares of Common Stock at
$3.50 per share: 1,400,000 warrants to William A. Carter; 200,000 warrants to
Sharon Will, Vice President of Investor Relations and Corporate Communications;
and 400,000 warrants to Harris Freedman, Vice President for Strategic Alliances.
From July 1994 to November 1994, the Company completed a private placement
in which it sold 2,050,000 shares of Common Stock to certain accredited
investors for an aggregate consideration of $1,025,000 (the "1994 Common Stock
Financing"). In connection with the private placement, Bridge Ventures
introduced a number of investors and lenders to the Company. Harris Freedman,
Vice President of the Company, and his wife are officers of Bridge Ventures. In
conjunction with the 1994 Common Stock Financing, the Company agreed to
collateralize certain of its patents until the earlier of the effectiveness of
the initial public offering or the consummation of corporate alliances or
licensing arrangement which provide sufficient operating capital and clinical
development support to the Company. Pursuant to the agreement with Bridge
Ventures in connection with the 1994 Common Stock Financing, Messrs. Philipp,
Rodino and Kay were elected to the Board of Directors. Purchasers of 1,950,000
of the shares of Common Stock issued pursuant to the 1994 Common Stock Financing
executed irrevocable proxies naming William A. Carter, the Company's President,
Chief Executive Officer and Chairman, as proxy, with full power to vote their
shares on all matters to be voted on by the stockholders of the Company until
the achievement by the Company of a market capitalization of $300,000,000 or
greater under certain circumstances or the receipt by the Company of a bona fide
offer for acquisition or merger, the net effect of which, if consummated, would
be to establish a market capitalization of at least $300,000,000.
In October 1994, in connection with the 1994 Common Stock Financing, the
Company sold 50,000 shares of Common Stock at a price of $.50 per share to
Stephen J. Drescher, a former director of the Company, 80,000 shares of Common
Stock to the Belfort Family Trust, of which Mr. Drescher serves as Trustee, at a
price of $.50 per share and 50,000 shares of Common Stock at a price of $.50 per
share to Jerome Belson, a director of BioAegean. Mr. Drescher also received
300,000 warrants in connection with general consulting services. In addition, in
October 1994, the Company received a certain loan in the aggregate principal
amount of $150,000 from the Belfort Family Trust. In March 1995, the loan was
repaid without interest from the proceeds from the Bridge Loans. In October
1995, the Belfort Family Trust sold 80,000 shares of Common Stock to Carol
Schiller at a price of $2.00 per share.
In October 1994, the Company entered into an agreement with Bioclones
Proprietary Limited ("Bioclones"), a biopharmaceutical company which is
89
<PAGE>
associated with The South African Breweries Limited ("SAB"). In connection with
the execution of SAB Agreement, the Company granted Cedric C. Philipp, a
Director of the Company, an option to purchase 20,000 shares of Common Stock at
$3.50 per share. In addition, in October 1994, the Board of Directors granted to
Mr. Philipp, a director of the Company and Special Advisor to the Board for
International Marketing, the right to receive 3% of the gross proceeds of any
licensing fees and prepaid royalties received by the Company pursuant to the SAB
Agreement and a fee of .75% of gross proceeds in the event that SAB/Bioclones
makes a tender offer for all or substantially all of the Company's assets,
including a merger, acquisition or related transaction. In addition, the Company
further agreed to provide a monthly retainer of $2,000 to Mr. Philip in exchange
for consulting services and remuneration for corporate alliances which are
principally introduced by Mr. Philipp. Mr. Philipp has been paid $90,000 to date
in connection with these arrangements.
In September 1994, Maryann Charlap Azzato, formerly Vice President of
Investor Relations and Corporate Communications and the former Vice Chairman and
director of the Company, entered into an agreement with Lloyd DeVos, a
stockholder, former director and holder of a note in the principal amount of
$100,000 (the "DeVos Note") in order to settle a lawsuit filed against the
Company and William A. Carter by Mr. DeVos in the United States District Court
for the Southern District of New York alleging breach of contract, conversion
and certain violations of the federal securities laws in connection with the
issuance of the DeVos Note. Pursuant to the settlement agreement, principal and
interest on the DeVos Note were repaid by Ms. Azzato as well as certain expenses
incurred by Mr. DeVos in the approximate amount of $2,600 and 1,536 shares of
Common Stock of the Company were transferred to Mr. DeVos by Ms. Azzato in
exchange for the assignment to Ms. Azzato by Mr. DeVos of the right to repayment
by the Company of the DeVos Note and warrants to purchase 1,667 share of Series
C Preferred Stock. In addition, certain options to purchase 6,912 shares of
Common Stock of the Company previously issued to Mr. DeVos were delivered to Mr.
DeVos. In exchange for the above agreement, Mr. DeVos, the Company and William
A. Carter executed mutual releases of all claims and Mr. DeVos dismissed the
suit.
In September 1994, the Company incorporated three wholly-owned subsidiaries
- - BioPro Corp. ("BioPro"), Core BioTech, Corp. ("Core BioTech") and BioAegean
Corp. - in Delaware. In September 1994, the Company granted exclusive worldwide
licenses and/or sublicenses to certain of its patents and assigned certain other
patents to BioPro (the "BioPro License"), Core BioTech (the "CoreBiotech
License") and BioAegean (the "BioAegean License"). Bridge Ventures, which has
rights in the Company's patents pursuant to the collateralization of such
patents in connection with the 1994 Common Stock Financing, agreed to release
its rights in the licensed or assigned patents. Harris Freedman, the Vice
President for Strategic Alliances for the Company and BioAegean, and his wife
are officers of Bridge Ventures.
In May 1994, the Company entered into an agreement to borrow $100,000 from
Bridge Ventures for 60 days in exchange for warrants to purchase 92,160 shares
of Common Stock at $3.50 per share. In August 1994, the $100,000 loan was
converted to 200,000 shares of Common Stock and warrants to purchase 200,000
shares of Common Stock at an exercise price of $3.50 per share. Bridge Ventures
90
<PAGE>
transferred 150,000 of its shares of Common Stock to Gerald Kay, a director of
the Company. In addition, Bridge Ventures received a $50,000 consulting fee for
general business and financial consulting services rendered from January 1994 to
July 1994, which it converted into 100,000 shares of Common Stock as part of the
1994 Common Stock Financing. Harris Freedman, the Company's Vice President, and
his wife are officers of Bridge Ventures. Pursuant to the agreement with Bridge
Ventures, Messrs. Kay, Philipp and Rodino were elected to the Board of
Directors. In November 1994, each of Bridge Ventures and Gerald Kay sold 50,000
shares of Common Stock at a price of $.50 per share to Worldwide Marketing.
Sharon Will, an officer of the Company, is President of Worldwide Marketing.
In April 1994, William A. Carter, the Company's Chairman and Chief
Executive Officer, purchased 20,000 shares of Series C Preferred Stock at $5.00
per share. Also Maryann Charlap Azzato purchased 30,000 shares of Series C
Preferred Stock at $5.00 per share and agreed to purchase an additional 10,000
shares at $5.00 per share.
In May 1994, Maryann Charlap Azzato guaranteed payment of two promissory
notes in the aggregate amount of $76,000 payable by the Company representing
payments due in connection with the Temple Agreement (the "Temple Notes"). In
return for the guarantee, the Company assigned all rights, patents and related
technology in the Company's Oragen and Diagen products to Ms. Azzato, which
rights will revert to the Company upon repayment of the principal on the Temple
Notes, 12% interest, and Ms. Azzato's fees and expenses which are expected to be
paid from the proceeds of this Public Offering. The Company also received a
right of first refusal with respect to the sale or assignment by Ms. Azzato of
this technology.
In January 1994, William A. Carter, the Company's Chairman and Chief
Executive Officer, sold an aggregate of 122,880 shares of Common Stock at $3.26
per share for an aggregate price of $400,000 to Michael Dubilier, Keys
Foundation, Canaan Venture Limited Partnership ("Canaan Venture"), Canaan
Venture Offshore Limited Partnership, C.V. ("Canaan Offshore"), James Tisch and
an unaffiliated individual. Using the proceeds of this sale, Dr. Carter
purchased 80,000 shares of Series C Preferred Stock at $5.00 per share from the
Company. In addition, Maryann Charlap Azzato purchased 3,600 shares of Series C
Preferred Stock at $5.00 for an aggregate price of $18,000, representing her
remaining commitment under the 1993 Standby Financing Agreement.
91
<PAGE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 50,000,000 shares of Common Stock,
$.001 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par
value per share.
Common Stock
As of July 10, 1996, there were 9,470,675 shares of Common Stock
outstanding and subscribed held of record by 331 stockholders. In addition,
there were 6,117,167 Units outstanding, each Unit consisting of one share of
Common Stock and one Class A Redeemable Warrant. The holders of Common Stock are
entitled to one vote per share on all matters to be voted on by stockholders,
and stockholders have no rights to cumulative votes in the election of
directors. Subject to prior dividend rights and preferences of holders of shares
of Preferred Stock, if any, holders of Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors from funds legally
available therefor. Upon liquidation or dissolution of the Company, subject to
prior liquidation rights of holders of Preferred Stock, if any, the assets of
the Company available for distribution to stockholders will be distributed
ratably among the holders of Common Stock. The holders of Common Stock have no
preemptive or other subscription rights and there are no conversion or
redemption or sinking fund provisions with respect to such shares. All of the
outstanding shares of Common Stock are fully paid and nonassessable and the
shares of Common Stock sold by the Company in this offering will be fully paid
and nonassessable.
Preferred Stock
As of July 10, 1996, there were 6,000 shares of Series D Preferred Stock
which were issued and subscribed. These Preferred shares are convertible into
Common Stock.
The Board of Directors are authorized, without further action or vote of
the stockholders, to issue up to 4,400,000 shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions,
including the dividend rights, conversion rights, voting rights, rights and
terms of redemption, redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series. The
Company has no present plans to issue any shares of Preferred Stock. Issuance of
Preferred Stock, which may be accomplished through a public offering, a private
placement or otherwise may dilute the voting power of holders of Common Stock,
may render more difficult the removal of current management, even if such
removal may be in the stockholders' best interest, and may have the effect of
delaying, deferring or preventing a change in control of the Company.
Warrants
In connection with various debt financings and other agreements, the
Company has issued Warrants to acquire an aggregate of up to 6,013,630 shares of
the Company's Common Stock at a weighted average exercise price of $3.15 per
92
<PAGE>
share. In addition, the Company issued Rule 701 Warrants to the Company's
directors and certain officers in October and November 1994, to purchase an
aggregate of 2,080,000 shares of Common Stock at $3.50 per share. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions." All of these warrants, except for (i)
the Rule 701 Warrants which vest in 1/3 increments over 36 months and (ii) the
100,000 warrants which may be issued to The Sage Group which vest upon the
occurrence of certain conditions, are currently exercisable by the holders.
Class A Redeemable Warrants
The Class A Redeemable Warrants, totaling 6,313,000, (including the Class A
Redeemable Warrants included in the Bridge Units which are issuable upon
exercise of the Bridgeholder Options), are issued pursuant to an agreement,
dated November 2, 1995 (the "Warrant Agreement"), between the Company and
Continental Stock Transfer and Trust Company (the "Warrant Agent"). The
following discussion of certain terms and provisions of the Class A Redeemable
Warrants is qualified in its entirety by reference to the detailed provisions of
the Warrant Agreement.
Each Class A Redeemable Warrant represents the right of the registered
holder to purchase one share of Common Stock at an exercise price equal to
$4.00, subject to adjustment (the "Purchase Price"). The Class A Redeemable
Warrants will be entitled to the benefit of adjustments in the Purchase Price
and in the number of shares of Common Stock and/or other securities deliverable
upon the exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation, merger or the issuance of
Common Stock or options to purchase Common Stock at a price below the Purchase
Price then in effect. The Company has the right to reduce the Purchase Price or
increase the number of shares of Common Stock issuable upon the exercise of the
Class A Redeemable Warrants.
Unless previously redeemed, the Class A Redeemable Warrants may be
exercised at any time commencing November 2, 1996 and prior to the close of
business on November 2, 2000 (the "Expiration Date"). On and after the
Expiration Date, the Class A Redeemable Warrants become wholly void and of no
value. The Company may, upon 30 days written notice to all holders of the Class
A Redeemable Warrants, reduce the exercise price or extend the Expiration Date
of all outstanding Redeemable Warrants for such increased period of time as it
may determine. The Class A Redeemable Warrants may be exercised at the office of
the Warrant Agent.
The Company has the right at any time after November 2, 1997 to redeem the
Class A Redeemable Warrants at a price of $.05 each, by written notice mailed 30
days prior to the redemption date to each Class A Redeemable Warrant holder at
his address as it appears on the books of the Warrant Agent. Such notice shall
only be given within 10 days following any period of 20 consecutive trading days
during which the high closing bid price of the shares of Common Stock (if then
traded on the Nasdaq or on a national securities exchange) exceeds $9.00,
subject to adjustments for stock dividends, stock splits and the like. If the
93
<PAGE>
Class A Redeemable Warrants are called for redemption, they must be exercised
prior to the close of business on the date prior to the date of any such
redemption or the right to purchase the applicable shares of Common Stock will
lapse.
No holder, as such, of Class A Redeemable Warrants shall be entitled to
vote or receive dividends or be deemed the holder of shares of Common Stock for
any purpose whatsoever until such Class A Redeemable Warrants have been duly
exercised and the Purchase Price has been paid in full.
If required, the Company will file a new registration statement with the
Commission with respect to the securities underlying the Class A Redeemable
Warrants prior to the exercise of the Class A Redeemable Warrants and deliver a
prospectus with respect to such securities to all Class A Redeemable Warrant
holders as required by Section 10(a)(3) of the Securities Act. See "Risk
Factors--Current Prospectus and State `Blue Sky' Registration Required to
Exercise the Redeemable Warrants."
Units
Pursuant to the IPO in November 1995, the Company registered and issued
5,313,000, each Unit consisting of one share of Common Stock and one Class A
Warrant. As of July 10, 1996 there were 6,117,167 Units outstanding. On July 12,
1996, the Units were separated. Currently, the Company's Units, Common Stock and
Class A Warrants are traded publicly.
Bridge Units
In connection with the Bridge Loans, the Company issued to the holders of
the Bridge Loans Bridgeholders Options to purchase 1,000,000 Bridge Units at an
exercise price of $.50 per Bridge Unit. Each Bridge Unit originally contained
one share of Common Stock, one Class A Redeemable Warrant and one Class B
Redeemable Purchase Warrant (collectively, the "Class B Warrants"). The Company
and the purchasers have amended the Bridge Units to eliminate the Class B
Warrants such that each Bridge Unit contains one share of Common Stock and one
Class A Redeemable Warrant. The Company has registered the Bridgeholder Options,
900,000 of the Bridge Units and the 900,000 shares of Common Stock and 900,000
Class A Redeemable Warrants contained in the Bridge Units for resale in the
Concurrent Offering, although the Company will not receive any of the proceeds
from the sale of such securities. The Class A Redeemable Warrants included in
the Bridge Units are identical to the Class A Redeemable Warrants offered by the
Company in the IPO. The holders of the Bridgeholder Options may exercise such
options at an exercise price of $.50 per Bridge Unit to obtain such Bridge Units
at any time. The Bridge Units and the securities contained therein are not
transferable until the earlier of 13 months from November 2, 1995 or at such
earlier date as may be permitted by the Company. The securities underlying the
Bridge Units shall not be traded separately for a period of 12 months from
November 2, 1995 without prior written consent of the Company.
94
<PAGE>
In November 1995, Bridge Unit holders exercised 797,917 Units at $.50 per
Unit. In May 1996, one Bridge Unit holder exercised 6,250 Units.
Rule 701 Warrants
In October 1994, the Company issued 2,080,000 warrants to purchase Common
Stock at $3.50 per share pursuant to Rule 701 under the Act ("Rule 701
Warrants") to certain officers and employees of the Company. These Rule 701
Warrants vest in 1/3 increments over a thirty six month period and are
exercisable until September 30, 1999. In the event that the number of Rule 701
Warrants issued by the Company exceeds the aggregate monetary limits set forth
under Rule 701, the number of Rule 701 Warrants issued to the holders will be
reduced pro rata and the remaining warrants will not be subject to the
provisions of Rule 701. See "Shares Eligible for Future Sales and Registration
Rights."
Delaware Law and Certain Charter and By-Law Provisions
The Company will be subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless, among other
exceptions, the business combination is approved by (i) the Board of Directors
prior to the date the interested stockholder obtained such status or (ii) the
holders of two-thirds of the outstanding shares of each class or series of stock
entitled to vote generally in the election of directors, not including those
shares owned by the interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with affiliates and associates, owns, or
within three years did own, 15% or more of the corporation's voting stock.
The Company's By-Laws contain a provision whereby a stockholder of the
Company may nominate an individual or individuals for election to the Board of
Directors only if such nomination is made in writing (i) at least ninety days in
advance of the Company's annual meeting of stockholders or (ii) within seven
days following notice of a special meeting of stockholders for the election of
directors. Accordingly, it will be more difficult for stockholders, including
those holding a majority of the outstanding shares, to force an immediate change
in the composition of the Board of Directors.
The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. The Company's Certificate of Incorporation also contains provisions to
95
<PAGE>
indemnify its directors and officers to the fullest extent permitted by the
General Corporation Law of Delaware. The Company has entered into
indemnification agreements with its current directors and certain of its
executive officers. These agreements have the practical effect in certain cases
of eliminating the ability of stockholders to collect monetary damages from such
individuals. The Company believes that these provisions and agreements have
assisted the Company in attracting and retaining qualified individuals to serve
as directors and officers.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Units, Common Stock and
Class A Redeemable Warrants is Continental Stock Transfer and Trust Company, 2
Broadway, New York, New York 10004.
Nasdaq Quotation
The Company's Units Common Stock and Warrants have been approved for
trading on Nasdaq, under the trading symbols HEMXU, HEMX and HEMXW,
respectively.
Shares Eligible for Future Sale and Registration Rights
The Company has 15,587,842 shares of Common Stock outstanding as of July
10, 1996 including the Common Stock included in the 6,117,167 Units outstanding
(each Unit consists of one share of Common Stock and one Class A Redeemable
Warrant). There are 195,833 unexercised Bridgeholder Options (consisting of one
share of Common Stock and one Class A Warrant) outstanding. In addition, the
Company has 9,470,675 shares of Common Stock, 228,502 stock options and
7,997,797 Warrants outstanding. All of these shares, options and Warrants other
than the 6,117,167 outstanding Units and the 195,833 Bridgeholder Options were
issued in private transactions not involving a public offering and, therefore,
are treated as "restricted securities" subject to the restrictions of Rule 144
under the Act. Restricted securities may not be resold except in compliance with
the registration requirements of the Act or pursuant to an exemption therefrom,
such as the exemptions provided by Rule 144 and Rule 144A.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate (as that term is defined
under the rules and regulations of the Act), who has beneficially owned
"restricted securities" for at least two years will be entitled to sell within
any three month period a number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock (approximately 15,587,842
shares) or (ii) the average weekly trading volume in the Common Stock on all
national securities exchanges and/or reported through the automated quotation
system of registered securities associations during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Commission. Sales pursuant to Rule 144 are also subject to certain other
requirements regarding the manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
96
<PAGE>
time during the three months immediately preceding the sale is entitled to sell
restricted securities pursuant to Rule 144(k) without regard to the limitations
described above, provided that three years have expired since the later of the
date on which such restricted securities were acquired from the Company or the
date they were acquired from an affiliate of the Company. Affiliates, including
members of the Board of Directors and certain of the officers of the Company
continue to be subject to such limitations. As defined in Rule 144, an
"affiliate" of an issuer is a person that directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under common control
with, such issuer.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 under the Act may be relied upon with
respect to the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers between May 20, 1988,
the effective date of Rule 701, and November 2, 1995 (the date the Company
became subject to the reporting requirements of the Act), pursuant to written
compensatory benefit plans or written contracts relating to the compensation of
such persons. Shares of Common Stock of the Company issued in reliance on Rule
701 are deemed to be restricted stock and may be sold by persons other than
affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its two year minimum holding
period requirements. The Company has issued Rule 701 Warrants to purchase
2,080,000 shares of Common Stock at an exercise price of $3.50 per share in
reliance upon Rule 701. All shares which may qualify for sale under Rule 701,
however, are subject to a two year lockup.
The Company has secured written agreements from all of the current
shareholders, except as described below, not to sell, assign, pledge,
hypothecate or otherwise dispose of (collectively, "Transfer"), directly or
indirectly, any shares of Common Stock and to waive all registration rights for
a period of 24 months from November 2, 1995, subject to certain exceptions,
without the prior written consent of the Company. The Company has agreed to
certain exceptions to its request as follows. William A. Carter, the Company's
President, Chief Executive Officer and Chairman who holds 1,065,235 shares of
Common Stock, has agreed not to sell or transfer his securities for a period of
36 months from November 2, 1995. Holders of the Bridge Notes who own
Bridgeholder Options to purchase up to 1,000,000 Bridge Units in the aggregate
and the holder of 5,898 shares of Common Stock have agreed not to sell or
transfer their securities for a period of 13 months without the Company's
consent. In addition, pursuant to the Tisch/Tsai Restructuring, the Tisch/Tsai
Entities, which hold an aggregate of 485,832 shares of Common Stock, have agreed
with the Company not to exercise their registration rights or otherwise transfer
any securities held by them except to certain permitted transferees for a period
of 18 months commencing November 2, 1995 in the event that the affiliates of the
Company agree to terms no more advantageous that those of the Tisch/Tsai
Entities for a period of 24 months commencing November 2, 1995. The lock-up
period for the Tisch/Tsai Entities shall terminate in the event that any other
securityholders of the Company other than the holders of the Bridge Loans shall
be released from their lock-up periods. In addition, the Canaan Entities, which
hold an aggregate of 511,220 shares of Common Stock, Michael Dubilier, a
principal stockholder of the Company who beneficially owns 689,780 shares of
97
<PAGE>
Common Stock, and three holders of an aggregate of 1,253,227 shares of Common
Stock have agreed not to exercise their registration rights or otherwise
transfer any securities held by them for a period of 18 months commencing
November 2, 1995. The lock-up period for the Canaan Entities, Michael Dubilier
and the holder of 18,432 shares of Common Stock shall terminate in the event
that any other securityholders of the Company shall be released from their
lock-up periods. In addition, the Company has decided not to seek an additional
restriction on the sale of the shares owned by Mr. Cohn and certain related
parties, all of whom hold warrants to purchase 156,672 shares of Common Stock.
See "Business--Legal Proceedings." The Company believes, however, that pursuant
to the terms of the Series A Purchase Agreement, as amended, Mr. Cohn and
related parties are subject to a 180-day restriction of the Transfer of their
securities. In addition, as of October 25, 1995, the holders of approximately
10% of the Company's securities had not executed lock-up agreements.
Under the terms of a Registration Rights Agreement, dated May 9, 1989, as
amended, by and among the Company and E. Paul Charlap, Michael C. Burrows,
Martin H. Dubilier, Keys Foundation and James S. Tisch, if the Company proposes
to register any of its securities under the Act, other than pursuant to an
initial public offering or a registration statement on Forms S-8 or S-4, such
holders, or their successors, are entitled to notice of such registration and to
include their shares of Common Stock in such registration. These rights are
subject to certain conditions and limitations, including the right of the
underwriter to limit the number of shares included in such registration. Certain
of such holders may require the Company to file a Registration Statement under
the Act at the Company's expense with respect to their shares of Common Stock,
and the Company is required to use its best efforts to effect such registration,
subject to certain conditions and limitations. Further, such holders may require
the Company to file additional registration statements on Form S-3, subject to
certain conditions and limitations. The parties to this Registration Rights
Agreement have subordinated their rights therein to the registration rights
granted under the Series A Purchase Agreement (as described below), to the
extent of any conflict between the registration rights granted by the two
agreements. These registration rights have been waived by the holders for a
period of two years commencing November 2, 1995.
Under the terms of the Series A Purchase Agreement, as amended, if the
Company proposes to register any of its securities under the Act, either for its
own account or for the account of any other security holders, other than
pursuant to an initial public offering, such persons are entitled to notice of
such registration to include their shares of Common Stock in such registration.
These rights are subject to certain conditions and limitations including the
right of the underwriters to limit the number of shares included in such
registration. Certain of such holders may require the Company on not more than
two occasions, to file a Registration Statement under the Act at the Company's
expense with respect to their shares of Common Stock, and the Company is
required to use its best efforts with respect to such registration, subject to
certain conditions and limitations. Further, certain of such holders may require
the Company to file additional Registration Statements on Form S-3, subject to
certain conditions and limitations. In addition, notwithstanding the foregoing,
the Agreement provides that immediately prior to the IPO, as well as subsequent
to the IPO, the Company was obligated to file a "shelf" registration statement
98
<PAGE>
pursuant to Rule 415 of the Act with respect to shares of Common Stock issuable
pursuant to the exercise of the outstanding warrants and/or pursuant to the
conversion of any notes then outstanding, which were issued pursuant to the
February 1992 Investor Loan, as amended by the Cohn Amendment, and June 1993
Investor Loan. Such "shelf" registration statements must be kept current and
effective by the Company for a maximum of four years. As a condition of the IPO,
registration rights, with the exception of two holders have been waived by the
holders.
The Tisch/Tsai Entities have an additional piggyback registration right of
20% of their shares of Common Stock in the event that the Company shall register
securities in a secondary offering expected to result in gross proceeds in
excess of $10 million. In addition, the Company, at its sole expense, has agreed
to take all necessary actions to register all securities held by the Tisch/Tsai
Entities after the expiration of the 18 month lock-up period. For six months
following the expiration of the lock-up period, the Tisch/Tsai Entities may sell
no more than 25,000 shares pursuant to such registration per quarter.
All sales of securities pursuant to Rule 144 by the Tisch/Tsai Entities
during the 24-month affiliate lock-up period, if any, will be made through the
Representative, as broker, provided that all other Rule 144 sales by affiliates
during the affiliate lock-up period shall be conducted through the
Representative.
Pursuant to the 1994 Common Stock Financing, the Company has granted
certain demand registration rights to the holders of 2,050,000 shares of Common
Stock. If holders of 50% or more of these shares give the appropriate notice to
the Company, the Company will file a new registration statement under the Act
with respect to these shares. These holders are subject to a 24 month Lock Up
Agreement as described above. Jerome Belson has agreed to waive his registration
rights granted in connection with the 1994 Common Stock Financing
The holders of the Bridge Units have agreed not to sell the Bridge Units
for a period of 13 months from November 2, 1995, subject to earlier release at
the Company's discretion. Jerome Belson, owner of 100,000 Bridge Units, has
agreed to waive his registration rights in connection with the Bridge Financing.
In connection with the restructuring of the Original Brauser Note, the
Company has granted to Gerald Brauser a one-time, piggyback registration right
to register 75,000 shares of Common Stock underlying the warrants issued to Mr.
Brauser, subject to the discretion of the underwriter of such subsequent
offering. In addition, the Company has granted Mr. Brauser registration rights
for 100,000 shares of Common Stock issued pursuant to this restructuring, which
rights are identical to those granted to the holders of the shares of Common
Stock issued in connection with the 1994 Common Stock Financing (as described
above); these rights of Mr. Brauser, however, are exercisable only if holders of
50% or more of the shares of Common Stock issued in connection with the 1994
Common Stock Financing give notice and elect to exercise their rights. Mr.
Brauser has entered into a 24-month Lock Up Agreement as described above.
99
<PAGE>
In connection with the extension of a note, the Company granted to Myron
Cherry either registration rights for certain securities owned by him or a
reduction in the exercise price of his options to $1.75 per share. Because Mr.
Cherry has not advised the Company of his election, the Company has reduced the
exercise price of his warrants to $1.75 per share.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Silverman, Collura & Chernis, P.C., New York, New York.
EXPERTS
The consolidated financial statements of Hemispherx BioPharma, Inc. and
subsidiaries as of December 31, 1994 and 1995, and for each of the years in the
three year period ended December 31, 1995, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company has filed
with the Securities and Exchange Commission (the "Commission"), a Registration
Statement on Form S-1 (including any amendments thereto, the "Registration
Statement") under the Act. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement, and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement. The Registration Statement
and the exhibits and the schedules thereto filed with the Commission may be
inspected, without charge, at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W. Washington,
D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center,
13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
also be obtained upon written request from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
100
<PAGE>
GLOSSARY OF TERMS
25A: 2", 5" oligoadenylate; a short polymer of ribonucleic acid
containing the base adenine.
25A Synthetase: A set of specific enzymes that join together certain
building blocks, termed nucleotides, to form 2-5A; 2-5A
synthetase must be activated by a double-stranded RNA
molecule.
AIDS: Acquired Immunodeficiency Syndrome; a disease caused by HIV
infection due to the progressive decline in the body's
immune system leading to fatal infections or malignancies.
Analogue: A chemical compound with a structure similar to that of
another compound, but differing from it in respect to a
certain component.
Antiviral: Destroying viruses or suppressing their replication.
CD4: A certain type of immune cell which protects the body
against foreign organisms such as bacteria and viruses.
Controlled Study: A clinical trial in which patients are divided into
two groups, one of which receives the drug being tested, and
the second of which receives either a saline solution (see
definition of "Placebo") or another drug purported to be
clinically beneficial in the treatment of the indication in
question. In trials where the second group receives saline
solution, the study is referred to as "placebo-controlled".
In trials where the second group receives a drug purported
to be beneficial, the study is referred to as "active-con-
trolled".
Cytokine: Proteins released by a cell population on contact with a
stimulus, which act as intracellular mediators.
Double-Blind: Refers to a study where neither the patient nor the treating
physician knows whether the patient is being administered
with drug or placebo.
Enzyme: A protein that accelerates a chemical reaction of other
substances in the body.
FDA: Food and Drug Administration; the United States governmental
agency with authority for drug approval. Good Laboratory
Practice (GLP): Federal regulations which govern the generation of
laboratory data in a manner that is acceptable to the FDA in
its review of ongoing studies and New Drug Applications
(NDA) for marketing approval.
HIV: Human-immunodeficiency virus; the virus which causes AIDS.
101
<PAGE>
Interferon: IFN; A family of proteins that exert anti-viral activity;
interferons also have immune regulatory and anti-tumor
activities. IFN can be classified into three distinct
classes termed alpha, beta or gamma.
Interleukin: A group of protein factors, produced by immune cells.
In vitro: Refers to studies taking place within an artificial
environment such as a test tube.
In vivo: Refers to studies taking place within a living body.
Lymphokine: Antiviral and anticancer products, such as interferon,
produced by certain types of blood cells.
Macrophage: A blood cell which ingests foreign substances.
Multicenter: Refers to a trial conducted at more than one clinical site.
Oncogene: Refers to genes with the capacity to cause production or
growth of a tumor.
Open-Label: Refers to a study where both the patient and the treating
physician know the identity of the drug which is being
administered.
Placebo: A dummy treatment administered to the control group in a
controlled clinical trial in order to distinguish the
specific and nonspecific effects of the experimental
treatments.
Placebo-Controlled: Refers to a trial in which a portion of the patients receive
a drug and a portion of the patients receive a placebo, and
the activity of the drug is compared to the activity of the
placebo.
Protein Kinase: Refers to an enzyme which can modify other protein factors
leading to inhibition of viral replication or tumor cell
growth.
Randomized: Refers to a procedure where the treatment that a patient
will receive (i.e. the active drug or a placebo) is
determined by chance.
Ribonuclease: Any enzyme that decomposes ribonucleic acids, such as viral
RNA.
Ribonuclease L: A specific ribonuclease that is present in human cells,
but dormant (inactive) until activated by 2-5A or Oragen
drugs.
Transitory
Response: A tumor response which is characterized by the subsequent
recurrence of disease (notwithstanding the continuation of
treatment) after a limited period of time.
102
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
----
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995,
and the unaudited Consolidated Balance Sheet at
March 31, 1996 ........................................................... F-3
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1995, and the unaudited three month
periods ended March 31, 1995 and 1996.................................... F-4
Consolidated Statements of Stockholders' Equity(Deficit) for each of
the years in the three-year period ended December 31, 1995, and the
unaudited three month period ended March 31, 1996........................ F-5
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1995, and the unaudited three month
periods ended March 31, 1995 and 1996.................................... F-6
Notes to Consolidated Financial Statements................................. F-8
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Hemispherx BioPharma, Inc.:
We have audited the accompanying consolidated balance sheets of Hemispherx
BioPharma, Inc. and subsidiaries (the Company) as of December 31, 1994 and 1995,
and the related consolidated statements of operations, stockholders'
equity(deficit), and cash flows for each of the years in the three-year period
ended December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hemispherx
BioPharma, Inc. and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
March 1, 1996, except for paragraph 4
of Note 14, which is as of March 21, 1996.
Miami, Florida
F-2
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1995 and March 31, 1996
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------ ----------
(unaudited
1994 1995 1996
---- ---- ----
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 61,005 $11,291,167 $3,620,343
Prepaid expenses and other current assets...... 2,757 62,742 79,485
---------- ----------- ----------
Total current assets........................ 63,762 11,353,909 3,699,828
Property and equipment, net .................... 104,328 53,953 73,616
Patent and trademarks rights, net............... 1,434,420 1,245,092 1,288,221
Security deposits............................... 48,931 46,564 17,761
---------- ----------- ----------
Total assets................................ $1,651,441 $12,699,518 $5,079,426
========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Installments of obligation under
capital leases................................... $ 23,308 $ -- $ --
Accounts payable................................... 2,251,721 1,095,637 847,650
Accrued expenses (note 5).......................... 2,296,855 2,263,096 482,750
Notes payable (note 3)............................. 5,045,000 4,920,000 --
Stockholder notes payable (note 4)................. 3,425,910 -- --
---------- ---------- -------------
Total current liabilities....................... 13,042,794 8,278,733 1,330,400
Commitments and contingencies (notes 3, 4, 6,
8, 9, 10, 11, 12 and 14)
Redeemable preferred stock (note 7)................. 3,238,334 -- --
Stockholders' equity(deficit) (notes 4, 6 and 7):
Preferred stock subscribed........................ 4,772,233 -- --
Common stock subscribed........................... 1,061,331 -- --
Preferred stock................................... 7,200,017 -- --
Common stock...................................... 5,136 15,581 15,581
Additional paid-in capital........................ 14,036,082 47,949,530 47,949,530
Accumulated deficit............................... (41,704,486) (43,544,326) (44,216,085)
---------- ---------- -------------
Total stockholders' equity(deficit)............. (14,629,687) 4,420,785 3,749,026
---------- ---------- -------------
Total liabilities and stockholders' equity...... $1,651,441 $12,699,518 $5,079,426
========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1995
and the unaudited three month periods ended March 31, 1995 and 1996
<TABLE>
<CAPTION>
December 31, Three Months Ended March 31,
---------------------------------------------- ------------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Research and development ................. $ 48,000 $ 75,758 $ 65,910 $ 11,300 $ 18,354
License fees ............................. -- 100,000 2,900,000 750,000 --
----------- ------------ ------------ ------------ ------------
Total revenues ........................ 48,000 175,758 2,965,910 761,300 $ 18,354
----------- ------------ ------------ ------------ ------------
Costs and expenses:
Research and development ................. 2,118,896 1,637,769 1,028,662 257,820 298,700
General and administrative ............... 3,347,476 2,617,762 2,880,443 697,594 513,813
----------- ------------ ------------ ------------ ------------
Total cost and expenses ............... 5,466,372 4,255,531 3,909,105 955,414 812,513
Debt conversion expense ................... (1,214,500) (10,500) (149,384) (149,384) --
Interest income ........................... 18,427 25,091 95,887 2,835 122,400
Interest expense .......................... (1,087,605) (1,067,869) (843,148) (245,984) --
----------- ------------ ------------ ------------ ------------
Net loss ............................... $(7,702,050) $ (5,133,051) $ (1,839,840) $ (586,647) $ (671,759)
=========== ============ ============ ============ ============
Pro forma net loss and net loss per
share (note 2(e)):
Pro forma weighted average shares
outstanding ............................. -- 11,536,276 14,199,701 13,014,174
Pro forma net loss per share ............ -- $ (.44) $ (.13) $ (.05)
============ ============ ============
Weighted average shares outstanding ....... -- -- -- -- 15,581,592
Net loss per share ........................ -- -- -- -- $ (.04)
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity(Deficit)
For each of the years in the three-year period ended December 31, 1995
and the unaudited three month period ended March 31, 1996
<TABLE>
<CAPTION>
Preferred Common
stock stock Preferred Common Preferred Common
subscribed subscribed stock stock stock stock
shares shares shares shares subscribed subscribed
------ ------ ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.......... -- -- 810,029 5,133,986 $ -- $ --
Preferred stock subscribed .......... 41,667 -- -- -- 500,004 --
Issuance of stock purchase war-
rants, net ......................... -- -- -- -- -- --
Redeemable preferred stock
dividend............................ -- -- -- -- -- --
Debt to preferred stock
conversion.......................... 433,343 -- -- -- 3,381,219 --
Accounts payable to equity
conversion.......................... 42,502 -- -- -- 212,510 --
Net loss............................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1993.......... 517,512 28,026 810,029 5,133,986 $4,093,733 $30,227
Preferred stock subscribed .......... 130,000 -- -- -- 650,000 --
Debt to preferred/common
stock conversion.................... 3,600 300,000 -- 2,770 28,500 150,000
Redeemable preferred stock
dividend............................ -- -- -- -- -- --
Warrants issued in connection
with imputed and forgiven in-
terest charges...................... -- -- -- -- -- --
Issuance of stock purchase war-
rants, net.......................... -- -- -- -- -- --
Common stock subscribed............... -- 1,750,000 -- -- -- 875,000
Stock options exercised.............. -- 4,926 -- -- -- 6,104
Net loss............................. -- -- -- -- -- --
---------- ---------- ----------- --------- ----------- ----------
Balance at December 31, 1994.......... 651,112 2,082,952 810,029 5,136,756 $ 4,772,233 $1,061,331
Redeemable preferred stock
dividend ........................... -- -- -- -- -- --
Debt to preferred stock
dividend ........................... -- -- 172,414 -- -- --
Warrants issued in connection
with imputed and forgiven
interest charges ................... -- -- -- -- -- --
Preferred stock subscribed............ 10,000 -- -- -- 50,000 --
Debt to common stock
conversion ......................... -- 100,000 -- -- -- 50,000
Issuance of common stock
certificates ....................... -- (2,182,952) -- 2,182,952 -- (1,111,331)
Issuance of Preferred Stock
certificates ....................... (626,112) -- 626,112 -- (4,472,233) --
Convert Redeemable to Common.......... -- -- -- 343,879 -- --
Convert Preferred to Common........... (35,000) -- (1,608,555) 1,807,088 (350,000) --
Issuance of Common Stock,
net of issuance cost................ -- -- -- 5,313,000 -- --
Warrants Exercised.................... -- -- -- 797,917 -- --
Net Loss.............................. -- -- -- -- -- --
-------- --------- --------- ---------- ---------- ---------
Balance at December 31, 1995.......... -- -- -- 15,581,592 $ -- $ --
Net Loss (unaudited).................. -- -- -- -- -- (671,759)
--------- --------- --------- ---------- ---------- ---------
Balance at March 31, 1996 (unaudited) -- -- -- 15,581,592 $ -- $ --
========= ========= ========= ========== ========== =========
<CAPTION>
"C" Common stock
--------------------- Common
.001 Additional stock Total
Preferred Par paid-in Accumulated subscriptions stockholders'
stock value capital deficit receivable equity(deficit)
----- ----- ------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992.......... $7,200,017 $5,133 $13,842,861 $(28,869,385) $ -- $ (7,821,374)
Preferred stock subscribed .......... -- -- -- -- -- 500,004
Issuance of stock purchase war-
rants, net ......................... -- -- 150,000 -- -- 150,000
Redeemable preferred stock
dividend............................ -- -- (329,692) -- -- (329,692)
Debt to preferred stock
conversion.......................... -- -- -- -- -- 3,381,219
Accounts payable to equity
conversion.......................... -- -- -- -- -- 212,510
Net loss............................. -- -- -- (7,702,050) -- (7,702,050)
--------- --------- --------- ----------- --------- -----------
Balance at December 31, 1993.......... $7,200,017 $5,133 $13,663,169 $(36,571,435) $ -- $(11,579,156)
Preferred stock subscribed .......... -- -- -- -- -- 650,000
Debt to preferred/common
stock conversion.................... -- 3 1,382 -- -- 179,885
Redeemable preferred stock
dividend............................ -- -- (372,552) -- -- (372,552)
Warrants issued in connection
with imputed and forgiven in-
terest charges...................... -- -- 631,583 -- -- 631,583
Issuance of stock purchase war-
rants, net.......................... -- -- 112,500 -- -- 112,500
Common stock subscribed............... -- -- -- -- -- 875,000
Stock options exercised.............. -- -- -- -- -- 6,104
Net loss............................. -- -- -- (5,133,051) -- (5,133,051)
---------- -------- ----------- ------------- --------- -------------
Balance at December 31, 1994.......... $7,200,017 $ 5,136 $14,036,082 $(41,704,486) $ -- $(14,629,687)
Redeemable preferred stock
dividend ........................... -- -- (314,873) -- -- (314,873)
Debt to preferred stock
dividend ........................... 749,383 -- -- -- -- 749,383
Warrants issued in connection
with imputed and forgiven
interest charges ................... -- -- 572,681 -- -- 572,681
Preferred stock subscribed............ -- -- -- -- -- 50,000
Debt to common stock
conversion ......................... -- -- -- -- -- 50,000
Issuance of common stock
certificates ....................... -- 2,183 1,109,148 -- -- --
Issuance of Preferred Stock
certificates ....................... 4,472,233 -- -- -- -- --
Convert Redeemable to Common.......... -- 344 3,552,863 -- -- 3,553,207
Convert Preferred to Common........... (12,421,633) 1,807 12,769,826 -- -- --
Issuance of Common Stock,
net of issuance cost................ -- 5,313 15,825,644 -- -- 15,830,957
Warrants Exercised.................... -- 798 398,159 -- -- 398,957
Net Loss.............................. -- -- -- (1,839,840) -- (1,839,840)
-------- ------- ----------- ------------ -------- ----------
Balance at December 31, 1995.......... $ -- $15,581 $47,949,530 $(43,544,326) $ -- $4,420,785
Net Loss (unaudited).................. -- -- -- (671,759) -- (671,759)
-------- ------- ----------- ------------ -------- ----------
Balance at March 31, 1996 (unaudited) $ -- $15,581 $47,949,530 $(44,216,085) $ -- $3,749,026
========= ======= =========== ============= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows for each of the years in the three-year
period ended December 31, 1995
and the unaudited three month periods ended March 31, 1995 and 1996
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
December 31, Three Months Ended March 31
------------------------------------- --------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $(7,702,050) $(5,133,051) $(1,839,840) $(586,647) $ (671,759)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization of property
and equipment .......................................... 256,190 115,061 54,000 13,500 11,607
Amortization of patent rights ........................... 265,571 256,341 222,000 55,500 21,211
Issuance of stock purchase warrants ..................... 150,000 112,500 -- -- --
Imputed interest charges ................................ -- 150,000 41,360 19,315 --
Debt conversion expense ................................. 1,214,500 10,500 149,384 149,383 --
Write-off of patent rights .............................. -- 285,190 100,017 34,781 --
Gain on disposal of property and equipment .............. -- 17,197 -- -- --
Changes in assets and liabilities:
Prepaid expenses and other current assets .............. 109,069 (1,506) (59,985) (2,219) (16,743)
Accounts payable ....................................... 261,402 661,732 (1,156,084) 102,991 (247,988)
Accrued expenses ....................................... 252,117 1,565,450 547,561 415,481 (1,780,346)
Deferred revenue ....................................... -- -- -- 750,000 --
Security deposits ...................................... 22,563 8,441 2,368 1,168 28,803
----------- ----------- ----------- --------- -----------
Net cash (used in)
operating activities ................................ (5,170,638) (1,952,145) (1,939,219) 953,253 (2,655,215)
----------- ----------- ----------- --------- -----------
Cash flows from investing activities:
Purchase of property and equipment ....................... -- (40,000) (3,625) (855) (31,270)
Proceeds from disposal of property and equipment ......... -- 11,000 -- -- --
Additions to patent rights ............................... (403,584) (351,470) (132,689) (93,021) (64,339)
Net cash used in investing activities ................ $ (403,584) $ (380,470) $ (136,314) $ (93,876) $ (95,609)
----------- ----------- ----------- --------- -----------
</TABLE>
(CONTINUED)
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
December 31, Three Months Ended March 31,
------------------------------------------ ----------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Proceeds from shareholder loans ....................... $ 2,540,000 $ 925,910 $ 35,000 $ 35,000 $ --
Proceeds from notes payable ........................... 400,000 35,000 1,762,000 782,000 --
Payments on notes payable ............................. -- (80,000) (1,837,000) -- (4,920,000)
Payments on stockholder notes ......................... (97,566) (10,000) (2,860,911) (1,735,000) --
Principal payments under capital lease obligation ..... (95,501) (6,923) (23,308) -- --
Deferred offering costs ............................... 130,000 -- -- -- --
Proceeds from exercise of stock options ............... 30,227 -- -- -- --
Common stock subscription proceeds .................... -- 875,000 -- -- --
Preferred stock subscription proceeds ................. 500,004 650,000 -- -- --
Proceeds from issuance of common stock ................ -- -- 18,595,000 -- --
Stock issuance costs .................................. -- -- (2,764,043) -- --
Proceeds from exercise of stock warrants .............. -- -- 398,957 -- --
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing activities ............................. 3,407,164 2,388,987 13,305,695 (918,000) (4,920,000)
----------- ----------- ------------ ----------- ------------
Net increase (decrease) in cash and
cash equivalents ................................. (2,167,058) 56,372 11,230,162 (58,623) (7,670,824)
Cash and cash equivalents at beginning of period ....... 2,171,691 4,633 61,005 61,005 11,291,167
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents at end of period ............. $ 4,633 $ 61,005 $ 11,291,167 $ 2,382 $ 3,620,343
=========== =========== ============ =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ................ $ 459,955 $ -- $ 186,503 $ -- $ --
=========== =========== ============ =========== ============
Supplemental disclosure of noncash investing activities:
Debt to equity conversion ............................. $ 2,062,434 $ 100,000 $ 799,383 -- --
Accounts payable and accrued expenses to
equity conversion .................................... 264,510 74,104 50,000 -- --
Forgiveness of interest ............................... 52,285 458,333 572,681 -- --
Redeemable preferred stock to equity conversion ....... $ -- $ -- $ 3,238,334 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994 and 1995
(1) Business
Hemispherx BioPharma, Inc. and subsidiaries (the Company), formerly known as HEM
Pharmaceuticals Corp., is a pharmaceutical company using nucleic acid
technologies to develop therapeutic products for the treatment of viral diseases
and certain cancers. The Company's drug technology uses specially-configured
ribonucleic acid (RNA). The Company's double-stranded RNA drug product,
trademarked Ampligen, is in human clinical development for various therapeutic
indications. The efficacy and safety of Ampligen is being developed clinically
for three anti-viral indications: myalgic encephalomyelitis, also known as
chronic fatigue syndrome (ME/CFS) (Phase II clinical trial completed and Phase
II/III clinical trial authorized); human immunodeficiency virus associated
disorders (Phase II clinical trial); and chronic hepatitis B virus infection
(Phase I/II clinical trial in process). The Company also has clinical experience
with Ampligen in patients with certain cancers including renal cell carcinoma
(kidney cancer) and metastatic malignant melanoma.
The consolidated financial statements include the financial statements of
Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries BioPro Corp.,
BioAegean Corp. and Core BioTech Corp. which were incorporated in September 1994
for the purpose of developing technology for ultimate sale into certain
non-pharmaceutical specialty consumer markets. All significant intercompany
balances and transactions have been eliminated in consolidation.
The company plans to continue to finance its operations with a combination of
product sales, stock issuances and strategic alliances. The Company may need to
obtain further financing for the long-term development and commercialization of
its planned products in order to realize the commercial value of its patent
portfolios.
In November, 1995, the Company completed an initial public offering (IPO) of
5,313,000 units of Hemispherx BioPharma, Inc. resulting in net proceeds of
approximately $15.8 million. Each unit consists of one share of the Company's
Common Stock and one Class A Redeemable Warrant, exercisable for one share of
Common Stock at $4.00 per share. These Class A Redeemable Warrants are subject
to redemption two years from November 2, 1995 at $.05 per warrant in the event
that the closing bid price of the Company's Common Stock exceeds $9.00 for a
specified time period. In connection with the IPO, the underwriter was granted
an option to purchase 462,000 units at $5.775 per unit.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash equivalents consist of money market, bank certificates of deposit, and
overnight repurchase agreements collateralized by money market securities with
original maturities of less than three months.
(b) Property and Equipment
Property and equipment consist of furniture, fixtures, office equipment,
leasehold improvements and vehicles recorded at cost. Depreciation and
amortization is computed using the straight-line method over the estimated
useful lives of the respective assets, ranging from five to seven years.
Property and equipment held under capital leases are amortized on the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset.
Accumulated depreciation and amortization as of December 31, 1994 and 1995 is
$587,688 and $545,956, respectively. Accumulated depreciation and amortization
as of March 31, 1996 is $557,564.
(c) Patent and Trademark Rights
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight-line method over ten years. The Company reviews its
patents and trademarks periodically to determine whether they have continuing
value. Such review includes an analysis of the patent and trademark's ultimate
revenue and profitability potential on an undiscounted cash flow basis to
support the realizability of its respective capitalized cost. In addition,
management's review addresses whether the patent and trademark continues to fit
into the Company's strategic business plans. During the years ended December 31,
1994 and 1995, the Company decided not to renew patents in certain countries and
has recorded $285,190 and $100,017 respectively, relating to the expense of
writing off these patents as a charge to research and development. Accumulated
amortization as of December 31, 1994 and 1995 is $877,990 and $936,407,
respectively. Accumulated amortization as of March 31, 1996 is $809,000.
(d) License Fee Revenue
Revenue is recognized immediately for nonrefundable license fees when agreement
terms require no additional performance on the part of the Company.
F-8
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
(e) Proforma and Supplemental Proforma Net Loss Per Share
Upon the closing of the IPO of common stock, all shares of Series A, B and C
Preferred Stock (Preferred Stock) converted into Common Stock. Proforma net loss
per share for the years end December 31, 1994 and 1995 are calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period after giving effect for Common Stock equivalents arising from
stock options and warrants and Preferred Stock assumed converted to Common
Stock. Pursuant to the requirements of the Securities and Exchange Commission,
Common Stock and Common Stock equivalents issued by the Company during the
twelve months immediately preceding the IPO have been included in the
calculation of the shares used in the calculation of pro forma net loss per
share (using the treasury stock method and the public offering price).
(f) Sales of Subsidiary Stock
The Company intends to account for any sales of its subsidiaries' stock as
capital transactions.
(g) New Accounting Pronouncements
In March, 1995, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (Statement 121).
Statement 121 provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both to
assets to be held and used and assets to be disposed of. The Company is required
to adopt Statement 121 for the year ended December 31, 1996. The Company has not
yet quantified the impact, if any, of the adoption of Statement 121 may have on
its consolidated financial statements.
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation" (Statement 123). Statement 123 allows companies the option to
retain the current accounting method for recognizing stock-based expense in the
financial statements or to adopt a new accounting method based on the estimated
fair value of employee stock options. Companies that do not adopt the new fair
value based method will be required to provide expanded disclosures in the
footnotes. The Company is required to adopt Statement 123 for the year ended
December 31, 1996. The Company expects to continue applying its current
accounting method and upon adoption will present the required footnote
disclosures.
(h) 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.
(i) Interim Financial Information (Unaudited)
The unaudited interim condensed consolidated financial statements for the three
month periods ended March 31, 1995 and 1996 have been prepared on the same basis
as the Company's audited consolidated financial statements as of and for the
year ended December 31, 1995. In the opinion of the management, all adjustments,
consisting of normal recurring accruals, necessary to present fairly the
financial position of the Company at March 31, 1995 and the results of
operations and cash flows for the three month periods ended March 31, 1995 and
1996. The results of operations for the three month period ended March 31, 1996
are not necessarily indicative of the results expected for the year ending
December 31, 1996.
F-9
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
(3) Notes Payable
Notes payable at December 31, 1994 and 1995 and unaudited March 31, 1996
consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
----------------------- -----------
1994 1995 1996
---- ---- ----
(unaudited)
<S> <C> <C> <C>
February 1992 convertible note with detachable
warrants due February 26, 1995, interest payable
quarterly at 12% per annum, as amended (Note 14) $4,920,000 $4,920,000 --
June 1993 convertible note with detachable warrants
due February 28, 1995, interest after September 30,
1993 payable in Common Stock at $10.85 per share,
as amended
100,000 -- --
June 1994 note, payable with 12% interest per
annum upon completion of financing in excess
of $3 million 25,000 -- --
---------- ---------- ------------
$5,045,000 $4,920,000 $ 0
========== ========== ============
</TABLE>
F-10
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
(4) Stockholder Notes
Stockholder notes at December 31, 1994 consisted of the following:
December 31,
1994
------------
December 1992 and February 1993 convertible notes
issued with detachable warrants due April 1994, with
interest at 12% per annum, as amended in 1995................... $2,400,000
March 1993 note due upon demand, interest payable
quarterly at 12% per annum...................................... 100,000
July 1993 note issued with detachable warrants due at
option of holder upon completion of future financings,
with interest at 12% annum, as amended......................... 100,000
December 1994 notes............................................... 750,000
May 1994 note due on demand with interest at 12%
per annum collateralized by certain patents..................... 75,910
----------
$3,425,910
==========
The Company had been in default and amended the terms of the stockholder
notes prior to the completion of its IPO. Upon completion of the IPO, all
stockholders notes and accrued interest were paid in full from the
proceeds.
(5) Accrued Expenses
Accrued expenses at December 31, 1994 and 1995 and unaudited March 31, 1996
consists of the following:
<TABLE>
<CAPTION>
December 31, March 31,
------------------------------- -----------
1994 1995 1996
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Accrued research and development fees........ $ 413,940 $ -- $ -
Deferred rent................................ 285,309 228,189 2,403
Deferred and Accrued payroll and benefits.... 470,951 144,047 231,257
Accrued interest............................. 831,995 898,733 -
Accrued professional fees.................... 186,950 727,996 135,524
Accrued taxes and other...................... 107,710 264,131 113,566
---------- ---------- -------
$2,296,855 $2,263,096 $482,750
========== ========== ========
</TABLE>
(6) Stockholders' Equity(Deficit)
(a) Common Stock
The Company is authorized to issue 50,000,000 shares of $.001 par value Common
Stock. On May 9, 1994, the Company declared a 1:2.17015 reverse stock split and
change in par value to $.001 on shares of the Company's Common Stock effective
June 29, 1994. Effective November 30, 1994 and June 5, 1995, the Company
effected a 2:1 forward stock split and changed its name to Hemispherx BioPharma,
Inc., respectively. The accompanying consolidated financial statements reflect
for all periods presented the effect of the 1:2.17015 reverse stock split, 2:1
forward stock split, and a change in par value to $.001 per common share.
(b) Common Stock Options and Warrants
(i) Stock Options
(A) At December 31, 1994 and 1995, the Company had outstanding options to
purchase 556 shares of Common Stock exercisable at any time in the future
at $1.07 to $2.17 per share, for options granted prior to 1990. The option
price represents the fair market value of each underlying share of Common
Stock at the date of grant, as determined by the Company's board of
directors.
(B) The 1990 Stock Option Plan provides for the grant of options to
purchase up to 460,798 shares of the Company's Common Stock to employees,
directors, and officers of the Company and to consultants, advisers, and
other persons whose contributions are important to the success of the
Company. The recipients of options granted under the 1990 Stock Option
Plan, the number of shares to be covered by each option, and the exercise
price, vesting terms, if any, duration and other terms of each option shall
be determined by the Company's board of directors or, if delegated by the
board, its Compensation Committee. No option is exercisable more than 10
years and one month from the date as of which an option agreement is
F-11
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
executed. These shares become vested through various periods not to exceed
four years from the date of grant. Certain shares became vested upon the
underwritten public offering concluded by the Company in November 1995. The
option price represents the fair market value of each underlying share of
Common Stock at the date of grant, as determined by the Company's board of
directors.
Information regarding the options approved by the Board of Directors under the
1990 Stock Option Plan is summarized below:
December 31 March 31,
------------------ -----------
(Unaudited)
Option
Price 1994 1995 1996
--------- ---- ---- ----
Outstanding, beginning of year $ .11-4.34 331,486 285,620 232,830
Granted ...................... 3.50-4.34 49,952 0 0
Exercised .................... 1.07-3.80 (4,926) 0 0
Canceled ..................... .11-4.34 (90,892) (52,790) (4,328)
----------- -------- -------- --------
Outstanding, end of year ..... $1.07-4.34 285,620 232,830 228,502
=========== ======== ======== ========
Exercisable .................. 107,000 165,244 174,489
======== ======== ========
Available for future grants .. 175,178 227,968 232,296
======== ======== ========
The outstanding options include the right to purchase 45,344 shares of the
Company's Common Stock at $3.50 per share.
In December 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 1992 Stock Option Plan) which provides for the grant of options to purchase
up to 92,160 shares of the Company's Common Stock to employees, directors, and
officers of the Company and to consultants, advisers, and other persons whose
contribution are important to the success of the Company. The recipients of the
options granted under the 1992 Stock Option Plan, the number of shares to be
covered by each option, and the exercise price, vesting terms, if any, duration
and other terms of each option shall be determined by the Company's board of
directors. No option is exercisable more than 10 years and one month from the
date as of which an option agreement is executed. To date, no options have been
granted under the 1992 Stock Option Plan.
A general outline of the Company's 1993 Employee Stock Purchase Plan (the 1993
Purchase Plan) was approved by the board of directors in July 1993. The outline
of the 1993 Purchase Plan provides for the issuance, subject to adjustment for
capital changes, of an aggregate of 138,240 shares of Common Stock to employees.
The 1993 Purchase Plan will be administered by the Compensation Committee of the
board of directors. Under the 1993 Purchase Plan, Company employees will be
eligible to participate in semi-annual plan offerings in which payroll
deductions may be used to purchase shares of Common Stock. The purchase price
for such shares will be equal to the lower of 85% of the fair market value of
such shares on the date of grant or 85% of its fair market value of such shares
on the date such right is exercised. There have been no offerings under the 1993
Purchase Plan to date and no shares of Common Stock have been issued thereunder.
F-12
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
(ii) Warrants
The warrants outstanding at December 31, 1995, related to the issuance of notes
payable and shareholder notes payable (notes 3 and 4) which were exercisable in
either Common Stock, Series B or Series C Preferred Stock and subject to certain
antidilution adjustments. Upon completion of the IPO, these warrants became
exercisable only in Common Stock.
Common Stock
-----------------------
Exercise Number of
Price Shares Expiration
----- ------ ----------
Notes payable:
5 years
February 1992 from
convertible note (see Note 14).... $2.00 420,000 IPO date
Stockholders:
Stockholders....................... $3.50 292,160 Sept. 1997
Stockholder........................ $3.50 300,000 Oct. 1999
Stockholders....................... $3.50 72,697 Dec. 1997
Stockholder........................ 2.72 4,608 May 1996
Stockholders....................... 2.00 144,000 Dec. 1997
Stockholder........................ 1.75 75,000 Mar. 2000
Stockholders....................... 1.75 2,750,000 June 2005
Stockholders....................... 3.50 2,080,000 Sept. 1999
---------
Subtotal: 6,138,465
=========
(iii) Other Warrants
In addition, the Company has issued other warrants outstanding - totalling
7,535,847 which consists of the following:
From February through April 1995, the Company executed Bridge Loan Agreements
and promissory notes with 17 accredited lenders totaling $1,500,000. These notes
required interest at 8% per annum and were paid on the closing date of the IPO.
Interest has been imputed at 12% and is recognized as interest expense and
additional paid in capital in 1995 to reflect the issuance of additional
warrants to reflect the reduction in interest. Such agreements also included
various affirmative and negative covenants. As additional consideration, the
lenders have options to purchase 1,000,000 bridge units issuable upon the
effective date of the IPO at an exercise price of $.50 for a period of five
years. Management believes these sales are a good measure of fair value because
they represent the only notable third-party sales of Common Stock in 1994 and
1995, prior to the IPO. Such exercise price is estimated to be at fair market
value at the date of issuance based on recent sales of securities to
third-parties. Each bridge unit consists of one share of Common Stock and one
Class A Redeemable Common Stock Purchase Warrant exercisable at $4.00 per share.
797,917 units were exercised in 1995 at $.50 per Warrant.
In June 1995, the Company entered into an agreement with The Sage Group whereby,
in return for identifying certain distribution partners, The Sage Group will
receive certain percentages of the proceeds from the first distribution
agreement arising from such identification. In addition, the Company will pay to
The Sage Group a monthly retainer and warrants to purchase 100,000 shares of
Common Stock at an exercise price of $1.75 share.
In connection with the IPO completed on November 7, 1995, the Company sold
5,313,000 units. Each unit consisted of one share of common stock and one Class
A Redeemable Warrant exercisable at $4.00 per share.
Also, as part of the underwriting agreement, the underwriter received warrants
to purchase 462,000 shares of common stock at $5.775 per share as well as
462,000 Class A Redeemable Warrants to purchase common stock at $6.60 per share.
These warrants expire five years from the date of the IPO.
(iv) Subsidiary Warrants
In May 1995, the officers and directors of BioAegean Corp. were elected and
approved. The board of directors approved the issuance of 6,000,000 shares of
Common Stock, of which 1,000,000 shares are to be offered for sale to certain
investors at $1.00 per share. In addition, the directors approved options for
directors and officers totaling 1,200,000 shares at an exercise price of $1.00.
In consideration for licensing certain patents, the board authorized 1,000,000
shares of common stock to be issued to Hemispherx BioPharma, Inc., options for
an additional 1,000,000 shares of common stock at the lesser of the initial
public offering price of BioAgean Corp. or $5.00 per share and 10,000 shares of
Preferred stock to Hemispherx BioPharma, Inc.
F-13
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
The Company has granted certain rights to the debtholders to have their
securities registered under the Act. The Company believes the warrants have a
value which is not material for purposes of the financial statements and
accordingly, no value has been attributed to these warrants in the accompanying
consolidated financial statements.
(7) Preferred Stock
The Company is authorized to issue 5,000,000 shares of $.01 par value Preferred
Stock.
The Company had the following Preferred Stock shares issued, outstanding and
subscribed at December 31, 1994. All preferred stock was converted to Common
Stock in 1995 in connection with the IPO.
<TABLE>
<CAPTION>
December 31, 1994
---------------------------------------------------------------
Number of Number Stated
shares of shares Stated par value
subscribed issued par value subscribed
---------- ------ --------- ----------
<S> <C> <C> <C> <C>
Series A1 Redeemable Preferred Stock..... -- 370,370 $1,999,998
Series A2 Preferred Stock................ -- 487,805 4,000,001
Series B Preferred Stock................. -- 222,224 2,000,016
Series C Preferred Stock................. 651,112 100,000 1,200,000 4,772,233
</TABLE>
The preferred shares accrued a compounded annual cumulative dividend of $.702
per share on Series A 1, $1.23 per share on Series A 2, $1.35 per share on
Series B and $1.80 per share on Series C. As of December 31, 1994, preferred
dividends in arrears amounted to approximately $2,941,000, $1,100,000, and
$1,004,000 on outstanding shares of the Series A 2, Series B and Series C
Preferred Stock, respectively. Cumulative dividends on Series A1 Redeemable
Preferred Stock have been reflected as an addition to Redeemable Preferred Stock
and as a charge to additional paid-in capital.
(8) Research, Consulting and Supply Agreements
The Company has entered into various clinical research agreements for the
purpose of undertaking clinical evaluations of the safety and efficacy of
Ampligen. The Company's obligation under these agreements is primarily dependent
on the number of actual patients enrolled in the study. During 1993, 1994 and
1995, the Company incurred approximately $325,000, $247,000 and $179,000
respectively, of research fees under these agreements.
The Company has entered into a pharmaceutical use license agreement with Temple
University (the Temple Agreement) pursuant to which Temple granted the Company a
world-wide license for the term of the agreement for the commercial sale of
Oragen products using patents and related technology held by Temple. Under the
agreement the Company agreed, among other things, to pay royalties between 2%
and 4% of net sales, with a minimum of $30,000 per year commencing in 1995. In
May and June 1994, Temple University gave notice of certain purported violations
of certain reporting requirements contained in its Temple Agreement with the
Company and nonpayment of certain invoices in the approximate amount of $1,500.
In July 1994, Temple notified the Company that it considered the Temple
Agreement terminated (note 14).
The Company has entered into agreements for consulting services which are
performed at certain institutions and by certain individuals. The Company's
obligation to fund these agreements can generally be terminated after the
initial funding period, which generally ranges from one to three years or on an
as-needed monthly basis. During 1993, 1994 and 1995, the Company incurred
approximately $243,000, $130,000 and $87,000, respectively, of consulting fees
under these agreements.
In 1987, the Company entered into an agreement (the "Supply Agreement") to
purchase $2.7 million of compounds used in the manufacture of Ampligen which
expired in December 1992. Pursuant to the terms of the Supply Agreement, the
Company agreed to pay royalties of .5% of net sales, subject to certain minimum
and maximum requirements, for 5 years to the supplier of raw materials for the
manufacture of Ampligen.
In September 1995, the Company entered into an agreement with Rivex Pharma Inc.,
("Rivex"), pursuant to which Rivex will provide various services in connection
with the marketing and exclusive distribution of Ampligen in Canada on an
emergency drug release basis. Under the terms of this agreement, the Company
will supply and Rivex will purchase as much Ampligen as necessary to satisfy
Rivex's customers at a mutually agreed upon cost. In return, Rivex will retain
the exclusive right to market and distribute Ampligen in Canada.
F-14
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
(9) 401(K) Plan
In December 1995, the Company established a defined contribution plan, effective
January 1, 1995, the Hemispherx BioPharma Employees 401(K) Plan and Trust
Agreement (the 401(K) Plan). All full time employees of the Company are eligible
to participate in the 401(K) Plan following one year of employment. Subject to
certain limitations imposed by federal tax laws, participants are eligible to
contribute up to 15% of their salary (including bonuses and/or commissions) per
annum. Participants' contributions to the 401(K) Plan may be matched by the
Company at a rate determined annually by the Board of Directors. Each
participant immediately vests in his or her deferred salary contributions, while
Company contributions will vest over one year. In 1995 the Company provided
matching contributions to each employee for up to 6% of annual pay or $25,500.
The Company also absorbed the cost of employee contributions of $25,500.
(10) Vendor Agreements
The Company and a law firm entered into a stand-still agreement. The Company
provided for an aggregate payment of $85,000 before November 18, 1994 and
monthly payments beginning February 1, 1995 in the amount of $15,000, subject to
escalation, until all obligations are paid in full. In addition, the stand-still
agreement provides for additional payments upon any financings and repayment in
full from the proceeds of an IPO. The outstanding balance at December 31, 1994
of approximately $484,000 was paid in 1995.
On February 20, 1996 the Company entered into an agreement to amend the lease
for its principal office. For a payment of $85,000 all outstanding rent and
charges accrued through December 31, 1995 were forgiven by the landlord. The
term of the lease was extended through April 30, 2000 with an average rent of
$14,507 per month, plus applicable taxes and charges. Note 12, leases, reflects
these new terms.
(11) Royalties, License, and Employment Agreements
The Company also has entered into a licensing agreement with a group of
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen, and to obtain exclusive
information and regulatory rights relating to these compounds. Under this
agreement, the Company will pay 2% of net sales proceeds of Ampligen not to
exceed an aggregate amount of $6 million per year through 2005.
As described in note 8, the Company has agreed to pay royalties under the Temple
Agreement and to its supplier of raw materials.
The Company has employment agreements with four of its officers. The aggregate
annual base compensation under the employment agreements is $576,000 and
$540,000 respectively. In addition, certain of these officers are entitled to
receive performance bonuses of up to 25% of the annual base salary (in addition
to the bonuses described below). Pursuant to the employment agreements, certain
officers were granted options under the 1990 Stock Option Plan to purchase an
aggregate of 82,942 shares of the Company's Common Stock at exercise prices
ranging from $2.72-$4.34 and Rule 701 Warrants to purchase 2,000,000 shares of
Common Stock at $3.50 per share. One of the employment agreements provides for
bonuses based on gross proceeds received by the Company from any joint venture
or corporate partnering agreement.
The Company has a non-exclusive license (the "Hopkins License") with Johns
Hopkins University ("Hopkins") in the U.S., Canada and France related to nucleic
acid complexes. Pursuant to the Hopkins Agreement, the Company is obligated to
pay a royalty ranging from 3% to 6% of net commercial sales for products sold by
the Company with certain minimum annual royalties.
F-15
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
In October 1994, the Company entered into a licensing agreement with Bioclones
(Propriety) Limited (SAB/Bioclones) with respect to codevelopment of various RNA
drugs, including Ampligen, for a period ending three years from the expiration
of the last licensed patents. The licensing agreement provides SAB/Bioclones
with an exclusive manufacturing and marketing license for certain southern
hemisphere countries (including certain countries in South America, Africa and
Australia) as well as the United Kingdom and Ireland (the licensed territory).
In exchange for these marketing and manufacturing rights, the licensing
agreement provides for: (a) a $3 million cash payment to the Company, all of
which has been received as of December 31, 1995; (b) the formation and issuance
to the Company of 24.9% of the capital stock of a company which shall develop
and operate a new manufacturing facility by SAB/Bioclones, and (c) royalties of
6% to 8% of net sales of the licensed products in the licensed territories as
defined, after the first $50 million of sales. SAB/Bioclones will be granted a
right of first refusal to manufacture and supply to the Company licensed
products for not less than one-third of its world-wide sales of Ampligen,
excluding SAB/Bioclones-related sales. In addition, SAB/Bioclones will have the
right of first refusal for oral vaccines in the licensed territory.
In October 1994, the Board of Directors granted a director of the Company the
right to receive 3% of gross proceeds of any licensing fees received by the
Company pursuant to the SAB licensing agreement, a fee of .75% of gross proceeds
in the event that SAB makes a tender offer for all or substantially all of the
Company's assets, including a merger, acquisition or related transaction, and a
fee of 1% on all products manufactured by SAB. The Company may prepay in full
its obligation to provide commissions up to $1,050,000 within a ten year period.
In July 1995, the Company entered into an agreement with the Vernacular Group
whereby, in return for identifying certain corporate partners for the BioPro
subsidiary, the Vernacular Group would receive from the Company a minority stock
position in the subsidiary and a percentage of all licensing fees and royalties
received in connection therewith.
On December 5, 1995, the Company retained the law firm of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. (Akin, Gump) to provide general legal counsel, advise and
representation with respect to various United States regulatory agencies.
Initially, Akin, Gump will provide representation before the Food and Drug
Administration (FDA). In addition, the agreement allows for incentive payments
for obtaining a letter from the FDA evidencing Ampligen's approvability for HIV
disease treatment. If such approval is obtained by March 15, 1996 the incentive
payment is $1,000,000. If obtained by June 15, 1996 the incentive payment is
$750,000.
(12) Leases
The Company has several noncancelable operating leases for the space in which
its principal offices are located and certain office equipment. See note 10
above.
Future minimum lease payments under noncancelable operating leases are as
follows:
Year ending Operating
December 31, leases
- ------------ ----------
1996................................................... $ 263,246
1997................................................... 271,791
1998................................................... 280,411
1999................................................... 292,144
2000................................................... 91,516
----------
Total minimum lease payments........................ $1,199,108
==========
F-16
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
Rent expense charged to operations for the years ended December 31, 1993, 1994
and 1995 amounted to approximately $223,000, $173,000 and $289,000 respectively.
The Company recognizes rent expense on a straight-line basis over the lease
term, and the difference between rent expense on a straight-line basis and the
base rental is deferred and included in accrued expenses at December 31, 1994
and 1995 (note 5).
(13) Income Taxes
At December 31, 1995, the Company had available net operating loss carryforwards
of approximately $39,300,000 million for Federal and state income tax which
expire over various years through 2010. The difference between the net operating
losses for tax and financial statement purposes relates principally to
amortization of patents and related costs, inventory usage, and leases
capitalized for financial statements purposes, which are operating leases for
tax purposes. In addition, for Federal income tax purposes, the Company has
approximately $9,000 of unused investment and job tax credits available to
offset future taxes, if any, expiring 1996 through 1999.
The expiration dates of the net operating loss carryforwards are as follows:
Expiration Tax loss
date carryforwards
---- -------------
1999.............................................. $ 130,974
2003............................................... 1,773,967
2004............................................... 5,402,521
2005............................................... 3,534,484
2006............................................... 8,654,551
Thereafter......................................... 19,821,428
-----------
$39,317,925
===========
If certain substantial changes in ownership should occur there would be an
annual limitation on the amount of tax attribute carryforwards which can be
utilized in the future.
The Company has provided a valuation allowance for it's deferred tax assets in
an amount equal to it's net operating loss carry-forwards.
(14) Contingencies
The Company was a defendant in a lawsuit instituted in 1991 by participants in a
double-blind placebo-controlled clinical trial of Ampligen therapy for ME/CFS.
The plaintiffs alleged that the Company or its alleged agents promised them that
they would receive Ampligen after the placebo-controlled study at no cost for
periods ranging from "until marketable" to "for life." Plaintiffs sought
compensatory and punitive damages. The court granted the Company's motions for
summary judgment upon all claims alleged by the plaintiffs in this case. The
plaintiffs have appealed from these orders before the United States Court of
Appeals for the Ninth Circuit. In January 1996, the Court of Appeals denied
their appeal and sustained the Company's position. On the basis of the Court of
Appeals favorable decision, the Company believes the lawsuit is over with no
material effect on the Company.
F-17
<PAGE>
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1994 and 1995
In February 1991, a university advised the Company of its position that
employees of the university were the inventors of an issued U.S. patent
regarding the use of Ampligen in combination with various other agents
(including AZT) for the treatment of HIV infection. As issued, this patent names
the Company's Chief Executive Officer as sole inventor and the Company as sole
assignee. The university has demanded that the patent be reissued naming the
university's employees as inventors and the university as assignee. The Company
has refused to take such action. No formal claim has been filed by the
university. If such claim were filed and if such claim were found to have merit,
the loss of the patent at issue would not have a materially adverse effect on
the Company's long-range business since the university would only be able to
limit and/or prevent the Company's use of Ampligen in combinations with AZT in
the treatment of HIV.
In November 1994, the Company filed suit against Temple University ("Temple") in
the Superior Court of the State of Delaware ("Superior Court") seeking a
declaratory judgment that the Temple Agreement (note 8) remains in full force
and effect and seeking monetary damages in excess of $10 million for Temple's
alleged breach of its obligations of good faith and fair dealing and certain
terms of the Temple Agreement. Temple has filed a motion to dismiss this lawsuit
upon the grounds of lack of personal jurisdiction. In January 1995, Temple filed
separate litigation against the Company in the Court of Common Pleas of
Philadelphia County seeking declaratory judgment that the Temple Agreement has
been lawfully terminated as of July 1, 1994, together with an award of costs
including attorney fees, in bringing the action. The Court of Common Pleas has
stayed further proceedings in that litigation pending the outcome of the
Company's Superior Court case. If the Company were to lose its claim, the loss
of the licensing agreement could have a material adverse effect on the Company's
future business as Temple or its new licensees, if any, could become competitors
of the Company.
In March 1995, the Company instituted a declaratory judgment action against the
February 1992 noteholder of a $5 million convertible note and a second defendant
in the United State District Court for the Eastern District of Pennsylvania
("the Pennsylvania action") to declare as void, set aside, and cancel the
February 1992 convertible note between the Company and the noteholder ("the
Note"). In addition, the noteholder instituted suit against the Company on the
Note in the Circuit Court of the 15th Judicial District in and for Palm Beach
County, Florida, seeking judgment on the note, plus attorneys fees, costs and
expenses; in August 1995, this action was stayed by the Florida Court pending
the outcome of the Pennsylvania action. The noteholder also filed a motion for a
preliminary injunction in the Pennsylvania court to enjoin the Company from
disbursing the proceeds of a public offering in the amount of $5.8 million,
which motion was granted in November, 1995. On February 15, 1996, the Company
reached an agreement to settle this matter. Terms and conditions of the
settlement include payment of $6,450,000 to the noteholder to cover the note
balance and legal expenses. The noteholder and related parties are to maintain
certain Warrants that were granted prior to the lawsuit. Other Warrants granted
to the noteholder in the note restructuring in 1994 were relinquished. The funds
under this settlement were paid on March 21, 1996. Mutual releases were executed
which completed the settlement of the litigation.
The Company is subject to claims and legal actions that arise in the ordinary
course of their business. Management believes that the ultimate liability, if
any, with respect to these claims and legal actions will not have a material
effect on the financial position or results of operations of the Company.
(15) Subsequent Events (Unaudited)
In July 1996, the Company consummated a private offering of its preferred stock
pursuant to Rule 506 of regulation as promulgated by the SEC under the
Securities Act of 1933 as amended. The Company issued 6,000 shares of Series D
Preferred Stock, $.01 par value at a purchase price of $1,000 per share.
F-18
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Representative. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so or to anyone to whom it is unlawful to make such offer or solicitation.
TABLE OF CONTENTS
Page
----
Additional Information....................................................
Prospectus Summary........................................................
Risk Factors..............................................................
Dividend Policy...........................................................
Selected Financial Data...................................................
Management's Discussion and Analysis of
Financial Condition......................................................
Business..................................................................
Government Regulation.....................................................
Management................................................................
Principal Shareholders....................................................
Resales by Selling Security Holders.......................................
Certain Transactions......................................................
Description of Securities.................................................
Shares Eligible for Future Sale...........................................
Underwriting..............................................................
Legal Matters.............................................................
Experts...................................................................
Financial Statements......................................................
--------------------
Until _______, 1996 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a Prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
HEMISPHERx BIOPHARMA, INC.
2,770 SHARES OF COMMON STOCK
2,427,275 SHARES OF COMMON STOCK
UNDERLYING
SERIES D PREFERRED STOCK
890,543 SHARES OF COMMON STOCK
UNDERLYING COMMON STOCK
PURCHASE WARRANTS
---------------
PROSPECTUS
---------------
July __, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC Registration Fee $ 1,144.94
Printing $ 1,500
Legal Fees and Expenses $60,000
Accounting Fees and Expenses $ 5,000
Miscellaneous Expenses (including travel
and promotional expenses) $ 1,000
TOTAL $68,644.94
*Estimated
The Selling Security Holders will not be paying any portion of the
foregoing expenses of issuance and distribution.
Item 14. Indemnification of Directors and Officers.
The Restated Certificate of Incorporation of the Company filed as Exhibit
3.1 to this Registration Statement provides as follows:
No person who is or was a director of this Corporation shall be
personally liable to the Corporation or its stockholders for monetary
damages for the breach of any fiduciary duty as a director, unless, and
only to the extent that, such director is liable (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholder, (ii) for
acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction form
which the director derived an improper personal benefit.
Section 145 of the Delaware General Corporation Law gives Delaware
corporations the power to indemnify each of the Company's present and former
officers and directors under certain circumstances, if such person acted in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the corporation. The Company's Restated Certificate of
Incorporation generally requires the Company to indemnify directors and officers
to the fullest extent permissible under Delaware law.
The Company has entered into indemnification agreements with its current
directors and certain of its executive officers. These agreements have the
practical effect in certain cases of eliminating the ability of stockholders to
collect monetary damages from such individuals.
Under the terms o the Underwriting Agreement to be filed as Exhibit 1 to
the Registration Statement, the Underwriters will be obligated, under certain
II-1
<PAGE>
circumstances, to indemnify officers and directors of the Company against
certain liabilities under the Securities Act of 1933, as amended (the "Act").
Item 15. Recent Sales of Unregistered Securities.
(a) The following information sets forth certain information with respect
to the sale of securities by the Company since December 31, 1992. All references
to numbers of shares in the following discussion have been adjusted to give
effect to the Pre-Public Offering Transactions.
(1) From January 1, 1990 through the filing date of this Registration
Statement, the Company granted options under the 1990 Stock Option Plan to
purchase an aggregate of 360,232 shares of Common Stock at a weighted
average price of $3.39 per share and issued 8,028 shares of Common Stock
upon the exercise of options granted under the 1990 Stock Option Plan for
an aggregate purchase price of $11,479 in cash.
(2) In February 1993, the Company issued and sold a convertible
promissory note in the aggregate principal amount of $480,000, and warrants
to purchase an aggregate of 7,372 shares of Common Stock or 8,000 shares of
Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per share,
respectively, or (ii) the per share price of Common Stock in the initial
public offering to Lincoln Trust Company, custodian FBO Gerald Tsai, Jr.
(3) In March through May 1993, the Company issued and sold demand
promissory notes in the aggregate principal amount of $830,000 for an
aggregate of $830,000 to Maryann Charlap Azzato, William A. Carter, Charles
L. Moore, Michael C. Burrows, and Michael Dubilier. In April, William A.
Carter was repaid $97,566 of his $100,000 Demand Note.
(4) In May, June and July 1993, the Company issued and sold
convertible notes in the aggregate principal amount of $600,000, and
warrants to purchase an aggregate of 9,216 shares of Common Stock or 10,000
shares of Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per
share, respectively, of (ii) the per share price of Common Stock in the
initial public offering to Julian and Eunice Cohen Investments Limited
Partnership, Sidney Stoneman, Frank B. Carr, Keys foundation, Myron Cherry
and Lloyd DeVos.
(5) In June 1993, the Company issued convertible promissory notes in
the aggregate principal amount of 632,434, and warrants to purchase an
aggregate of 9,216 shares of Common Stock or 10,000 shares of Series C
Preferred Stock at the lower of (i) $13.02 or $12.00 per share,
respectively, or (ii) the per share price of Common Stock in the initial
public offering to Maryann Charlap Azzato, William A. Carter, Michael C.
Burrows and Michael Dubilier in exchange for and forgiveness of $632,434 of
the March through May 1993 demand promissory notes.
II-2
<PAGE>
(6) In June 1993, the Company issued and sold an aggregate of 16,667
shares of Series C Preferred Stock at $12,00 per share, for an aggregate of
$200,004, to Canaan Venture and Canaan Offshore.
(7) In August through December 1993, the Company issued and sold
convertible promissory notes in the aggregate principal amount of
$1,000,000 and warrants to purchase an aggregate of 16,900 shares of Common
Stock or 18,337 shares of Series C Preferred Stock at the lower of (i)
$13.02 or $12.00 per share, respectively, or (ii) the per share price of
Common Stock in the initial public offering, for an aggregate of $1,100,000
to Maryann Charlap Azzato, Michael Dubilier, Keys Foundation and William A.
Carter.
(8) In October 1993, the Company issued and sold an aggregate of
25,000 shares of Series C Preferred Stock at $12.00 per share, for an
aggregate of $300,000 to Canaan Venture and Canaan Offshore.
(9) In December 1993, the Company issued an aggregate of 433,343
shares of Series C Preferred Stock at $5.00 per share for an aggregate of
$2,166,719 in settlement of $632,434 in principal plus unpaid interest of
the June 1993, convertible promissory notes held by Maryann Charlap Azzato,
William A. Carter, Michael C. Burrows and Michael Dubilier, $400,000 in
principal plus unpaid interest of the May, June and July 1993 convertible
promissory notes held by Julian and Eunice Cohen Investments Limited
Partnership, Sidney Stoneman, Frank B. Carr and Keys Foundation, $1,082,000
in principal plus unpaid interests on the August, September, October,
November and December 1993 convertible promissory notes held by Maryann
Charlap Azzato, Michael Dubilier, Keys Foundation and William A. Carter.
The above conversion includes 10,457 shares of Series C Preferred Stock in
satisfaction of $52,285 of accrued unpaid interest.
(10) In December 1993, the Company agreed to issue 42,502 shares of
Series C Preferred Stock issued at $5.00 per share for an aggregate amount
of $212,510 to certain vendors and suppliers in payment of some or all
indebtedness due them. These suppliers include Broadgate and Associates,
Richard Piani, Austin Darragh and Paul Actor.
(11) In January 1994, William A. Carter sold 122,880 shares of Common
Stock at $3.26 per share to Canaan Ventures and Canaan Offshore Ventures,
Keys Foundation, FLF Associates, Michael Dubilier and Coughlin.
(12) In January 1994, the Company executed an agreement to issue and
sell 100,000 shares of Series C Preferred Stock at $5.00 per share to
William A. Carter and Maryann Charlap Azzato purchased 3,600 shares of
Series C Preferred Stock at $5.00 per share pursuant to a standby financing
commitment.
(13) As of March 31, 1994, the Company entered into an agreement with
certain convertible promissory note holders to convert upon the
effectiveness of the initial public offering an aggregate of $2,400,000
debt principal plus accrued but unpaid interest into Series C Preferred
Stock at $5.00 per share for an aggregate total of 519,224 shares.
II-3
<PAGE>
This debt consisted of (i) $1,920,000 in principal plus unpaid interest on
the December 1992 convertible promissory notes held by FLF Associates and
Gerald Tsai, Jr.; and (ii) $480,000 in principal plus unpaid interest on
the February 1993 convertible promissory note held by Lincoln Trust
company, Custodian FBO Gerald Tsai. In February 1995, the terms of this
transaction were restructured, and a settlement agreement was entered into
by the parties. See "Risk Factors - Legal Proceedings," "Risk Factors - No
Assurance of Certain Debt Conversions" and "Certain Transactions."
(14) On February 26, 1994, the Company was in default with respect to
the principal payment and quarterly interest payments in arrears under the
February 26, 1992, $5 million convertible note. An amendment to the terms
of the note has been executed to waive the events of default as follows:
(1) convert $2 million in principal into 1,131,290 shares of Series B
Preferred stock upon the consummation of the contemplated initial public
offering on or before February 26, 1995 and full repayment of the remaining
principal balance of the note, together with any accrued unpaid interest
thereon (ii) unpaid interest after June 30, 1994 shall be paid in the form
of 60,284 shares of Series B Preferred stock on a quarterly basis if the
contemplated initial public offering has not closed and the Company
receives at least $1,000,000 under the Bridge Financing (iii) the due date
of the remaining principal balance and accrued unpaid interest is to be
extended to February 26, 1995 or the completion of an initial public
offering, whichever is earlier (iv) increase the warrants to the warrant
holders to 325,523 shares of the Company's Series B Preferred Stock or
300,000 under the Bridge Financing (iii) the due date of the remaining
principal balance and accrued unpaid interest is to be extended to February
26, 1995 or the completion shares of the Company's Series B Preferred Stock
or 300,000 shares of the Company's Common Stock at an exercise price of
$1.84 and $2.00, respectively, with an expiration date of vie years
following the effective date of an initial public offering (v) require that
20 percent of certain gross proceeds, other than Bridge Financing and sale
of Series C Preferred Stock be used to repay the note (vi) issue additional
warrants to purchase in aggregate 130,210 shares of the Company's Series B
Preferred Stock or 120,000 shares of the Company's Common Stock at an
exercise price of $1.84 and $2.00, respectively with an expiration date of
five years following the effective date of an initial public offering (vii)
required the Company to register 20 percent of the original conversion
shares in a registration statement with gross proceeds to the Company of at
least $10,000,000 at the Company's expense, limited to 111,250 shares per
quarter during the six month period following the lock-up period as
defined.
(15) In April 1994, the Company executed an agreement to issue and
sell 40,000 shares of Series C Preferred Stock at a price of $5.00 per
share to Maryann Charlap Azzato pursuant to a private placement of the
Company's securities. As of March 31, 1995, Ms. Azzato has purchased 30,000
shares of Series C Preferred Stock at a price of $5.00 per share.
(16) In April 1994 Maryann Charlap Azzato sold 46,080 shares of Common
Stock at $3.26 per share to Four Partners Associates, Gerald Tsai and Keys
Foundation.
II-4
<PAGE>
(17) In April 1994, Maryann Charlap Azzato, guaranteed payment of two
promissory notes in the aggregate amount of $76,000 payable by the Company
representing payments due in connection with the Temple Agreement (the
"Temple Notes"). In return for the guarantee, HEM assigned its rights,
patents and related technology in its Oragen and Diagen products to Ms.
Charlap Azzato, which rights will revert to the Company upon repayment of
the principal on the Temple Notes, 12% interest, and Ms. Charlap Azzati's
fees and expenses. The Company also received a right of first refusal with
respect to the sales or assignment by Ms. Charlap Azzato of this
technology. In May and June 1994, Temple Agreement and nonpayment of
certain invoices in the approximate amount of $1,500. In July 1994, Temple
notified the Company that it considered the Temple Agreement terminated.
(18) In May 1994, the Company executed a loan agreement with Bridge
Ventures, Inc. ("Bridge Ventures") in the amount of $100,000. In
consideration for this unsecured loan, the Company issued two-year options
to purchase 92,160 shares of the Company's Common Stock at $2.72 per share.
The loan term is 60 days or repayment from the proceeds of the next
financing in excess of $500,000. The Company has granted certain rights to
the Company optionholder to have the options registered under the Act. In
August 1994, Bridge Ventures converted its note into 200,000 shares of
Common Stock and received a warrant to purchase 200,000 shares of Common
Stock of the Company at $3.50 per share. In addition, the Company converted
a $50,000 consulting fee payable to Bridge Ventures into 100,000 shares of
Common Stock.
(19) From July to November 1994, the Company sold 2,050,000 shares of
Common Stock for an aggregate consideration of $1,025,000 to 26 accredited
investors. In conjunction with the financing, the Company agreed to
collateralize various patents until the earlier of an executed initial
public stock offering or the consummation of corporate alliances, or
licensing arrangements which provide significant operating capital or
clinical development funding to the Company. In connection with the
financing, the Company issued warrants to purchase 300,000 shares of Common
Stock at an exercise price of $3.50 per share to Stephen J. Drescher in
November 1994 in exchange for general consulting services.
(20) In September 1994, Maryann Charlap Azzato, entered into an
agreement with Lloyd DeVos, a stockholder, former director and holder of a
note in the principal amount of $100,000 (the "DeVos Note") in order to
settle a lawsuit filed against the Company and Dr. Carter by Mr. DeVos in
the United States District Court for the Southern District of New York
alleging breach of contract, conversion and certain violations of the
federal securities laws in connection with issuance of Mr. DeVos' note.
Pursuant to the settlement agreement, principal and interest on the DeVos
Note were repaid by Ms. Azzato as well as certain expenses incurred by Mr.
DeVos in the approximate amount of $2,600 and 1,536 shares of Common Stock
of the Company were transferred to Mr. DeVos in exchange for the assignment
to Ms. Azzato by Mr. DeVos of his right to repayment by the Company of the
DeVos Note and warrant to purchase 1,667 shares of Series C Preferred
Stock. In addition, certain options to purchase 6,912 shares of Common
Stock of the Company previously issued to Mr. DeVos were delivered
II-5
<PAGE>
to Mr. DeVos. In exchange for the above agreement, Mr. DeVos, the Company
and Dr. Carter executed mutual releases of all claims and Mr. DeVos
dismissed the suit.
(21) In October 1994 in connection with the execution of the SAB
Agreement, the Company granted Cedric C. Philipp, a Director of the
Company, an option to purchase 20,000 shares of Common Stock at a price of
$3.50 per share.
(22) In October 1994, the Company received loans in the aggregate
amount of $750,000 from Jordan Belfort and the Belfort Family Trust. The
loans were repaid by the Company without interest from the proceeds of the
Bridge Loans.
(23) In October and November 1994, the Company granted Rule 701
Warrants to purchase 20,000 shares of Common Stock at $3.50 per share to
Maryann Charlap Azzato, E. Gerald Kay, Cedric C. Philipp and Peter Rodino
III. IN addition, the Company granted the following Rule 701 Warrants to
William A Carter, 200,000 Rule 701 Warrants to Sharon Will; and 400,000
Rule 701 Warrants to Harris Freedman.
(24) In November 1994, the Company restructured a $100,000 note issued
to Myron Cherry (the "Cherry Note"), a stockholder and former director of
the Company pursuant to which the repayment date of the principal amount of
the Cherry Note was extended to the closing date of this Public Offering
and the accrued but unpaid interest subsequent to September 30, 1993 shall
be converted into Common Stock of the Company at a price of $5.43 per
share. In the event that this Public Offering is not completed by February
28, 1995, the principal amount will be repaid by the Company of Bridge
Ventures Inc. by March 6, 1995. In addition, the Company issued to Mr.
Cherry 5,000 immediately exercisable warrants with an exercise price of
$3.50 per share and Bridge Ventures agreed that the unpaid principal on the
Cherry Note would be collateralized by the Company's patents on the same
terms as the Bridge Financing arranged by Bridge Ventures. Harris Freedman,
a Vice President of the Company, is an officer of Bridge Ventures. In March
1995, the Company and Myron Cherry agreed to extend until March 31, 1995
the maturity date of the $100,000 note issued to him. In exchange for the
extension of the maturity date, the Company issued warrants to purchase
5,000 shares of Common Stock at $3.50 per share to Mr. Cherry. In June
1995, the Company repaid the principal amount due on the Cherry Note; in
July 1995, the Company repaid the accrued interest due on the Cherry Note.
(25) Between February and April 1995, the Company issued Bridge Notes
in the aggregate principal amount of $1,500,000 to 17 accredited investors.
The Bridge Notes bear interest at 8% per year and are due the earlier of
the closing of this Public Offering August 1, 1996. In consideration for
making the loans, the Company granted to the holders of the Bridge Notes
Bridgeholder Options to purchase an aggregate of 1,000,000 Bridge Units.
Each Bridge Unit contains one share of Common Stock, on Class A Redeemable
Warrant and one Class B Redeemable Warrant. The Bridgeholder Options are
immediately exercisable upon the effectiveness of this Public Offering and
remain exercisable for five years thereafter.
II-6
<PAGE>
(26) In February 1995, the Company entered a settlement agreement with
FLF Associates, Gerald Tsai and Lincoln Trust (the "Tisch/Tsai Entities")
to restructure the December 1992 and February 1993 promissory notes in the
aggregate principal amount of $2,400,000 and settle certain threatened
claims made by the Tisch/Tsai Entities against the Company. This debt
restructuring consisted of (i) the repayment by the Company of $1,200,000
in principal, (ii) the issuance of replacement notes in the aggregate
principal amount of $600,000 to the Tisch/Tsai Entities which notes are due
on the earlier of the closing of this Public Offering or May 28, 1996 and
bear interest at the rate of 8% per annum, which interest is payable in
quarterly installments from an interest reserve established by the Company,
(iii) the conversion of $600,000 of principal into 344,828 shares of Series
C Preferred Stock at the rate of $1.74 per share, (iv) the amendment and
restatement of certain warrants issued in connection with the original
notes in order to increase the number of shares of stock issuable
thereunder by 32,0000 shares to provide for warrants to purchase a total of
144,000 shares of Common Stock at an exercise price of $4.00 and $2.00 per
share, respectively, which warrants are exercisable until December 31,
1997, and (v) the release by all parties of any claims. The replacement
notes were secured by a pledge by Dr. William A. Carter of 112,925 shares
of Series C Preferred Stock and 240,756 shares of Common Stock. The Company
may have been in default of these notes. See "Risk Factors--Possible
Default on Certain Debt."
(27) In March 1995, the Company issued a note in the Principal amount
of $200,000 bearing interest at the rate of 12% per year to Gerald A.
Brauser, (the "Original Brauser Note"). The Original Brauser Note also
provided for the issuance of warrants to purchase 50,000 shares of the
Company's Common Stock at $1.75 per share. In May 1995, the Company
restructured the Original Brauser Note in exchange for the Company issuing
to MR. Brauser (i) a promissory note (the "New Brauser Note"),
collateralized by the Company's patent estate, in the principal amount of
$100,000 bearing interest at a rate of 12% per year, (ii) a warrant to
purchase 25,000 shares of Common Stock at a price of $1.75 per share, (iii)
100,000 shares of Common Stock at $.50 per share, and (iv) a Bridge Loan in
the amount of $50,000 as well as a Bridgeholder Option to purchase 33,340
Bridge Units. The New Brauser Note was originally due on the earlier of
June 30, 1995 or the Company's receipt of a certain payment from
SAB/Bioclones but has been amended to extend the date on which repayment is
due to the earlier of November 2, 1995 or the closing of this Public
Offering.
(28) In May 1995, the Company and certain officers, directors and
shareholders entered into a Standby Financing Agreement pursuant to which
the parties agreed to provide an aggregate of $5,500,000 in financing to
the Company during 1995 in the event that existing and additional financing
is insufficient to cover the cash needs of the Company through December 31,
1995. In exchange for entering into the Standby Financing Agreement, the
Company issued warrants to purchase an aggregate of 2,750,000 shares of
Common Stock at $1.75 per share to the parties. In September 1995, the
parties to the 1995 Standby Financing Agreement, including Dr. Carter and
Mr. Kay, agreed to extend their obligations through December 31, 1996.
II-7
<PAGE>
(29) In June 1995, the Company entered into an agreement with the Sage
Group pursuant to which the Sage Group agreed to identify distribution
partners for the Company. In connection with this agreement, the Company
agreed to issue warrants to purchase 100,000 shares of Common Stock
exercisable at $1.75 per share under certain conditions.
(30) In June 1996, the Company issued 6,000 shares of its Series D
Preferred Stock (the "Preferred Stock") to GFL Advantage Fund Limited, a
foreign investment fund at a price of $1,000 per share. The Preferred Stock
is convertible into Common Stock.
(b) No underwriters were engaged in connection with the sales of securities
described in Item 15(a).
The issuances of securities set forth in Item 15(a) were deemed exempt from
registration under the Act in reliance upon Section 4(2) of the Act and the
rules and regulations promulgated thereunder as transactions by an issuer not
involving a public offering. The purchasers of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in such transactions. All recipients had adequate access, through their
relationships with the Company or otherwise, to information about the
Registrant.
Item 16. Exhibits and Financial Statement Schedule
(a) The following exhibits marked with an * are filed herewith:
Exhibit No. Description
----------- -----------
(1)1.1 Form of Underwriting Agreement
(1)1.2 Form of Selected Dealer Agreement
(1)1.3 Form of Agreement Among Underwriters
(1)3.1 Amended and Restated Certificate of Incorporation of
Registrant, as amended, along with Certificates of
Designations, Rights and Preferences of Series A1, A2, B and C
Preferred Stock, as amended
(1)3.2 By-laws of Registrant, as amended
3.3* Certificate of Designations of Series D Preferred Stock
(1)4.1 Specimen certificate representing Registrant's Common Stock
(1)4.2 Form of Class A Redeemable Warrant Certificate
II-8
<PAGE>
(1)4.3 Form of Underwriter's Unit Option Purchase Agreement
(1)4.4 Form of Class A Redeemable Warrant Agreement with Continental
Stock Transfer and Trust Company
5.1* Opinion of Silverman, Collura & Chernis, P.C. with respect to
legality of the securities of the Registrant being registered
(1)10.1 Registration Rights Agreement, dated as of May 9, 1989
(1)10.2 Subordination Agreement, dated as of September 18, 1992
(1)10.3 Series A1 and Series A2 Preferred Stock Purchase Agreement,
dated as of January 22, 1991
(1)10.4 Sixth Amendment Agreement, dates as of March 31, 1994,
amending the Series A1 and Series A2 Preferred Stock Purchase
Agreement
(1)10.5 Seventh Amendment Agreement, dated as of January 1, 1995,
amending the Series A1 and Series A2 Preferred Stock Purchase
Agreement
(1)10.6 Form of Series C Preferred Stock Subscription Agreement, dated
as of June 22, 1993
(1)10.7 Form of Series C Debt Subscription Agreement, dates as of June
30, 1993
(1)10.8 Form of Note issued with respect to Series C Debt Subscription
Agreement, dated as of June 30, 1993
(1)10.9 Form of Warrant issued with respect to Series C Debt
Subscription Agreement, dated as of June 30, 1993
(1)10.10 Cohn Restructuring Agreement, dated as of March 31, 1994
(1)10.11 Form of Warrant issued with respect to Cohn Restructuring
Agreement, dated as of March 31, 1994
(1)10.12 Note issued with respect to Cohn Restructuring Agreement,
dated as of March 31, 1994
(1)10.13 Letter Agreement, dated April 14, 1994 between the Registrant
and Maryann Charlap and Promissory Notes
(1)10.14 Letter Agreement, dated July 13, 1994 between Bridge Ventures,
Inc. and the Registrant
II-9
<PAGE>
(1)10.15 Letter Agreement dated September 20, 1994 between Maryann
Charlap and Lloyd DeVos
(1)10.16 Letter Agreement, dated November 1, 1994 among the Registrant,
Bridge Ventures, Inc. and Myron Cherry
(1)10.17 Form of Bridge Loan Agreement and Promissory Note
(1)10.18 [Intentionally left blank]
(1)10.19 Form of Registration Rights Agreement issued pursuant to 1994
Common Stock Financing Subscription Agreement
(1)10.20 Form of Proxy issued pursuant to 1994 Common Stock Financing
Subscription Agreement
(1)10.21 Standby Financing Agreement, dated June 2, 1995, as amended
September 20, 1995
(1)10.22 Tisch/Tsai Entities Stock Pledge Agreement, dated February 28,
1995
(1)10.23 Tisch/Tsai Entities Settlement Agreement, dated February 28,
1995
(1)10.24 Form of Promissory Note with Tisch/Tsai Entities
(1)10.25 Form of Warrant with Tisch/Tsai Entities
(1)10.26 Letter Agreement, dated May 4, 12995 between the Registrant
and Gerald Brauser
(1)10.27 Brauser Note, dated May 2, 1995
(1)10.28 1990 Stock Option Plan
(1)10.29 1992 Stock Option Plan
(1)10.30 1993 Employee Stock Purchase Plan
(1)10.31 Form of Confidentiality, Invention and Non-Compete Agreement
(1)10.32 Form of Clinical Research Agreement
(1)10.33 Form of Collaboration Agreement
(1)10.34 Employment Agreement by and between the Registrant and John R.
Rapoza, dated May 18, 1992
II-10
<PAGE>
(1)10.35 Employment Agreement by and between the Registrant and James
R. Owen, dated September 21, 1992
(1)10.36 Amended and Restated Employment Agreement by and between the
Registrant and Dr. William A. Cater, dated as of July 1, 1993
(1)10.37 Employment Agreement by and between Registrant and Harris
Freedman, dated August 1, 1994
(1)10.38 Employment Agreement by and between the Registrant and Sharon
Will, dated August 1 1994
(1)10.39 License Agreement by and between the Registrant and the Johns
Hopkins University, dated December 31, 1980
(1)10.40 Technology Transfer, Paten License and Supply Agreement by and
between the Registrant, Pharmacia LKB Biotechnology Inc.,
Pharmacio P-L Biochemicals Inc. and E.I. du Pont de Nemours
and Company, dated November 24, 1987
(1)10.41 Pharmaceutical Use Agreement, by and between the Registrant
and Temple University, dated August 3, 1988
(1)10.42 Assignment and Research Support Agreement by and between the
Registrant, Hahnemann University and Dr. David Strayer, Dr.
Isadore Brodsky and Dr. David Gillespie, dated June 30, 1989
(1)10.43 Lease Agreement between the Registrant and Red Gate III
Limited Partnership, dated November 1, 1989, relating to the
Registrant's Rockville, Maryland facility
(1)10.44 Fee Agreement between the Registrant and Choate, Hall &
Stewart, dated January 27, 1993
(1)10.45 Settlement and Release Agreement between the Registrant and
Lloyd DeVos, dated August 18, 1994
(1)10.46 Agreement between the Registrant and Bioclones (Proprietary)
Limited
(1)10.47 Licensing Agreement with Core BioTech Corp.
(1)10.48 Licensing Agreement with BioPro Corp.
(1)10.49 Licensing Agreement with BioAegean Corp.
(1)10.50 Letter Agreement, dated may 12, 1992, between the Registrant
and Dr. Werner E.G. Muller
II-11
<PAGE>
(1)10.51 Amendment, dated August 3, 1995, to Agreement between the
Registrant and Bioclones (Proprietary) Limited (contained in
Exhibit 10.46)
(1)10.52 Agreement, dated July 16, 1995, between the Registrant,
Vernacular Communications, Inc. Gerald Souham, Mitchell L.
Reisman, Craig S. O'Keefe and Robert C. Conaboy
(1)10.53 Agreement, dated June 27, 1995, between the Registrant and The
Sage Group
(1)10.54 Form of Indemnification Agreement
(1)10.55 Agreement, dated September 13, 1995, between the Registrant
and River Pharma Inc.
10.56* Series D Preferred Stock Subscription Agreement, dated June
28, 1996
10.57* Series D Preferred Stock Registration Rights Agreement, dated
June 28, 1996
10.58* GFL Advantage Fund Limited Common Stock Purchase Warrant,
dated June 28, 1996
(1)11 Calculation of Earnings Per Share
(1)14.1 Material Foreign Patents
(1)21 Subsidiaries of the Registrant
24.1* Consent of Silverman, Collura & Chernis, P.C. (included in
Exhibit 5.1)
24.2* Consent of KMPG Peat Marwick LLP
25* Power of Attorney is included on the signature pages of the
Registration Statement
(1) Incorporated by reference from Registration Statement on Form S-1
(Registration No. 33-93314) filed by the Company with the Securities and
Exchange Commission on November 2, 1995.
b. Financial Statement Schedules.
All schedules are omitted from this Registration Statement because they are
not required or the required information is included in the Consolidated
Financial Statement or the Notes thereto.
II-12
<PAGE>
Item 17. Undertakings.
(a) Rule 415 Offerings.
The undersigned issuer hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii) Includes any additional or changed material information on
the plan of distribution.
provided, however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
in a post-effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the issuer of expenses incurred or paid by a director, officer or controlling
person of the issuer in the successful defense of any action, suit or
proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such court.
II-13
<PAGE>
(2) For determining any liability under the Securities Act of 1933, as
amended, treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form S-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Philadelphia, State of Pennsylvania, on July 25, 1996.
HEMISPHERX BIOPHARMA, INC.
By: s\William A. Carter, M.D.
---------------------------------------
William A. Carter, M.D., CEO
POWER OF ATTORNEY
Each person whose signature appear below constitutes and appoints William
A. Carter, M.D. his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution for him and in his name, place and stead, in
any and all capacities to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, and to take such actions in, and file with
the appropriate authorities in, whatever states said attorney-in-fact and agent
shall determine, such applications, statements, consents and other documents as
may be necessary or expedient to register securities of the Company for sale,
granting unto said attorney-in-fact and agent full power and authority to do so
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes may lawfully do or
cause to be done by virtue hereof and the Registrant hereby confers like
authority on its behalf.
In accordance with the requirements of the Securities Act of 1933, this
Registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
--------- ----- ----
Principal Executive Officer
and Chairman of the Board
and as Power of Attorney
s\William A. Carter, M.D. for Members of the Board July 25, 1996
- -------------------------
William A. Carter, M.D.
Principal Financial Officer and
s\Robert E. Peterson Principal Accounting Officer July 25, 1996
- -------------------------
Robert E. Peterson
Special Advisor to the Board
s\Cedric C. Philipp Associate Secretary and Director July 25, 1996
- -------------------------
Cedric C. Philipp
II-15
<PAGE>
Secretary and Director July __, 1996
_______________________
Peter W. Rodino III
s\Richard C. Piani Director July 25, 1996
- ---------------------
Richard C. Piani
s\E. Gerald Kay Director July 25, 1996
- ---------------------
E. Gerald Kay
II-16
HEMISPHERx BIOPHARMA, INC.
CERTIFICATE OF DESIGNATIONS
OF
SERIES D CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation Law
of the State of Delaware)
------
Hemispherx BioPharma, Inc., a Delaware corporation (the "Corporation"), in
accordance with the provisions of Section 103 of the General Corporation Law of
the State of Delaware (the "DGCL") DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of the
Corporation by the Certificate of Incorporation, as amended, of the Corporation,
the Board of Directors of the Corporation, pursuant to a unanimous written
consent of Directors, dated July 2, 1996, adopted a resolution providing for the
creation of a series of the Corporation's Preferred Stock, $.01 par value, which
series is designated "Series D Convertible Preferred Stock," which resolution is
as follows:
RESOLVED, that pursuant to authority vested in the Board of Directors of
the Corporation by the Certificate of Incorporation, as amended, the Board of
Directors does hereby provide for the creation of a series of the Preferred
Stock, $.01 par value (hereafter called the " Preferred Stock"), of the
Corporation, and to the extent that the voting powers and the designations,
preferences and relative, participating, optional or other special rights
thereof and the qualifications, limitations or restrictions of such rights have
not been set forth in the Certificate of Incorporation, as amended, of the
Corporation, does hereby fix the same as follows:
SERIES D CONVERTIBLE PREFERRED STOCK
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series D Convertible Preferred Stock" (the "Series D Convertible
Preferred Stock"), and the number of shares constituting the Series D
Convertible Preferred Stock shall be 6,000, and shall not be subject to
increase.
Section 2. Stated Capital. The amount to be represented in stated capital
at all times for each share of Series D Convertible Preferred Stock shall be the
sum of (i) $1,000, (ii) to the extent legally available, the accrued but unpaid
dividends on such share of Series D Convertible Preferred Stock, and (iii) to be
<PAGE>
determined on at least a quarterly basis, an amount equal to the accrued and
unpaid interest on dividends in arrears through the date of determination (as
provided in Section 4).
Section 3. Rank. All Series D Convertible Preferred Stock shall rank (i)
senior to the Common Stock, par value $.001 per share (the "Common Stock"), of
the Corporation, now or hereafter issued, as to payment of dividends and
distribution of assets upon liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, and (ii) on a parity with any
additional series of preferred stock of any class which the Board of Directors
or the stockholders may from time to time authorize, both as to payment of
dividends and as to distributions of assets upon liquidation, dissolution, or
winding up of the Corporation, whether voluntary or involuntary.
Section 4. Dividends and Distributions. (a) The holders of shares of Series
D Convertible Preferred Stock shall be entitled to receive, when, as, and if
declared by the Board of Directors of the Corporation (the "Board of Directors"
or the "Board") out of funds legally available for such purpose, dividends at
the rate of $50.00 per annum per share, and no more, which shall be fully
cumulative, shall accrue without interest (except as otherwise provided herein
as to dividends in arrears) from the date of original issuance and shall be
payable in cash quarterly on January 1, April 1, July 1, and October 1 of each
year commencing October 1, 1996 (except that if any such date is a Saturday,
Sunday, or legal holiday, then such dividend shall be payable on the next
succeeding day that is not a Saturday, Sunday, or legal holiday) to holders of
record as they appear on the stock books of the Corporation on such record
dates, not more than 20 nor less than 10 days preceding the payment dates for
such dividends, as shall be fixed by the Board. Dividends on the Series D
Convertible Preferred Stock shall be paid in cash or, subject to the limitations
in Section 4(b) hereof, shares of Common Stock of the Corporation or any
combination of cash and shares of Common Stock, at the option of the Corporation
as hereinafter provided. The amount of the dividends payable per share of Series
D Convertible Preferred Stock for each quarterly dividend period shall be
computed by dividing the annual dividend amount by four. The amount of dividends
payable for the initial dividend period and any period shorter than a full
quarterly dividend period shall be computed on the basis of a 360-day year of
twelve 30-day months. Dividends not paid on a payment date, whether or not such
dividends have been declared, will bear interest at the rate of 12% per annum
until paid. No dividends or other distributions, other than dividends payable
solely in shares of Common Stock or other capital stock of the Corporation
ranking junior as to dividends to the Series D Convertible Preferred Stock
(collectively, the "Junior Dividend Stock"), shall be paid or set apart for
payment on any shares of Junior Dividend Stock, and no purchase, redemption, or
-2-
<PAGE>
other acquisition shall be made by the Corporation of any shares of Junior
Dividend Stock unless and until all accrued and unpaid dividends on the Series D
Convertible Preferred Stock and interest on dividends in arrears at the rate
specified herein shall have been paid or declared and set apart for payment.
If at any time any dividend on any capital stock of the Corporation ranking
senior as to dividends to the Series D Convertible Preferred Stock (the "Senior
Dividend Stock") shall be in default, in whole or in part, no dividend shall be
paid or declared and set apart for payment on the Series D Convertible Preferred
Stock unless and until all accrued and unpaid dividends with respect to the
Senior Dividend Stock, including the full dividends for the then current
dividend period, shall have been paid or declared and set apart for payment,
without interest. No full dividends shall be paid or declared and set apart for
payment on any class or series or the Corporation's capital stock ranking, as to
dividends, on a parity with the Series D Convertible Preferred Stock (the
"Parity Dividend Stock") for any period unless all accrued but unpaid dividends
(and interest on dividends in arrears at the rate specified herein) have been,
or contemporaneously are, paid or declared and set apart for such payment on the
Series D Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series D Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series D Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series D
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series D Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series D
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 4 shall not be
deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(b) If the Corporation elects in the exercise of its sole discretion to
issue shares of Common Stock in payment of dividends on the Series D Convertible
Preferred Stock, the Corporation shall issue and dispatch, or cause to be issued
and dispatched, to each holder of such shares a certificate representing the
number of whole shares of Common Stock arrived at by dividing the per share
Computed Price of such shares of Common Stock into the total amount of cash
-3-
<PAGE>
dividends such holder would be entitled to receive if the aggregate dividends on
the Series D Convertible Preferred Stock held by such holder which are being
paid in shares of Common Stock were being paid in cash; provided, however, that
if certificates representing shares of Common Stock are issued and dispatched to
holders of Series D Convertible Preferred Stock subsequent to the third trading
day after a dividend payment date, the percentage used to calculate the Computed
Price will be reduced by one for each trading day after the third trading day
following such dividend payment date to the date of dispatch of shares of Common
Stock. No fractional shares of Common Stock shall be issued in payment of
dividends. In lieu thereof, the Corporation may issue a number of shares of
Common Stock to each holder which reflects a rounding to the nearest whole
number of shares of Common Stock or may pay cash. The Corporation shall not
exercise its right to issue shares of Common Stock in payment of dividends on
Series D Convertible Preferred Stock if:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held in the Corporation's
treasury, is insufficient to pay the portion of such dividends to be paid
in shares of Common Stock;
(ii) the issuance or delivery of shares of Common Stock as a dividend
payment would require registration with or approval of any governmental
authority under any law or regulation, and such registration or approval
has not been effected or obtained;
(iii) the shares of Common Stock to be issued as a dividend payment
have not been authorized for listing, upon official notice of issuance, on
any securities exchange or market on which the Common Stock is then listed;
or have not been approved for quotation if the Common Stock is traded in
the over-the-counter market;
(iv) the Computed Price (determined without regard to the proviso to
the definition thereof) is less than the par value of the shares of Common
Stock;
(v) the shares of Common Stock (A) cannot be sold or transferred
without restriction by unaffiliated holders who receive such shares of
Common Stock as a dividend payment or (B) are no longer listed on a
national securities exchange, on the Nasdaq National Market or the Nasdaq
SmallCap Market; or
(vi) the issuance of shares of Common Stock in payment of dividends on
Series D Convertible Preferred Stock held by any GFL Person (as defined in
Section 9(a) hereof) would result in any GFL Person beneficially owning
-4-
<PAGE>
more than 4.9% of the Common Stock, determined as provided in the proviso
to the second sentence of Section 9(a) hereof.
Shares of Common Stock issued in payment of dividends on Series D
Convertible Preferred Stock pursuant to this Section shall be, and for all
purposes shall be deemed to be, validly issued, fully paid and nonassessable
shares of Common Stock of the Corporation; the issuance and delivery thereof is
hereby authorized; and the dispatch thereof will be, and for all purposes shall
be deemed to be, payment in full of the cumulative dividends to which holders
are entitled on the applicable dividend payment date.
"Computed Price" of shares of Common Stock on any date means the product
obtained by multiplying (x) the Conversion Percentage (as defined in Section
9(b)) as in effect on such date times (y) the arithmetic mean of the per share
Closing Price (as defined in Section 9(b)) of the Common Stock for the five
consecutive trading days ending on the fifth trading day prior to the applicable
dividend payment date; provided however, that, notwithstanding the foregoing, in
no event shall the Computed Price be less than $.001 per share.
Section 5. Liquidation Preference. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series D Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series D Convertible
Preferred Stock equal to the sum of (i) all dividends accrued and unpaid thereon
to the date of final distribution to such holders, (ii) accrued and unpaid
interest on dividends in arrears to the date of distribution, and (iii)
$1,000.00 (collectively, "the Liquidation Preference"), and no more, before any
payment shall be made or any assets distributed to the holders of Common Stock
or any other class or series of the Corporation's capital stock ranking junior
as to liquidation rights to the Series D Convertible Preferred Stock
(collectively, the "Junior Liquidation Stock"); provided, however, that such
rights shall accrue to the holders of Series D Convertible Preferred Stock only
in the event that the Corporation's payments with respect to the liquidation
preference of the holders of capital stock of the Corporation ranking senior as
to liquidation rights to the Series D Convertible Preferred Stock (the "Senior
Liquidation Stock") are fully met. After the liquidation preferences of the
Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series D Convertible Preferred Stock and any other class or series of the
Corporation's capital stock having parity as to liquidation rights with the
Series D Convertible Preferred Stock (the "Parity Liquidation Stock" ) in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
-5-
<PAGE>
liquidation price of the shares of the Series D Convertible Preferred Stock and
the Parity Liquidation Stock, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities, or other property in and of itself will be considered a liquidation,
dissolution, or winding up of the Corporation.
Section 6. No Mandatory Redemption. The shares of Series D Convertible
Preferred Stock shall not be subject to mandatory redemption by the Corporation.
Section 7. No Sinking Fund. The shares of Series D Convertible Preferred
Stock shall not be subject to the operation of a purchase, retirement, or
sinking fund.
Section 8. Optional Redemption. So long as the Corporation is in compliance
in all material respects with its obligations to the holders of shares of Series
D Convertible Preferred Stock (including, without limitation, its obligations
under the Registration Rights Agreement between the Corporation and the original
holder of the Series D Convertible Preferred Stock (the "Registration Rights
Agreement") and the provisions of this Certificate of Designations), the
Corporation shall have the right, exercisable on not less than 15 days or more
than 20 days written notice to the holders of record of the shares of Series D
Convertible Preferred Stock to be redeemed, at any time and from time to time
after the Registration Effective Date (as defined in Section 9(b)) to redeem all
of the shares or any part of not less than 600 shares (or such lesser number of
shares of Series D Convertible Preferred Stock as shall remain outstanding at
the time of exercise of such redemption right) of Series D Convertible Preferred
Stock in accordance with this Section 8. Any notice of redemption (a "Notice of
Redemption") under this Section shall be delivered to the holders of the shares
of Series D Convertible Preferred Stock at their addresses appearing on the
records of the Corporation; provided, however, that any failure or defect in the
giving of notice to any such holder shall not affect the validity of notice to
or the redemption of shares of Series D Convertible Preferred Stock of any other
holder. Any Notice of Redemption may, subject to the 15 and 20 day restrictions
stated above, be given prior to the Registration Effective Date, but in any such
case may not specify a Redemption Date (as herein defined) prior to a date which
is after the Registration Effective Date. Any Notice of Redemption shall state
(1) that the Corporation is exercising its right to redeem all or a portion of
the outstanding shares of Series D Convertible Preferred Stock pursuant to this
Section 8, (2) the number of shares of Series D Convertible Preferred Stock held
by such holder which are to be redeemed, (3) the Redemption Price (as
hereinafter defined) per share of Series D Convertible Preferred Stock to be
redeemed, determined in accordance with this Section and (4) the date of
-6-
<PAGE>
redemption of such shares of Series D Convertible Preferred Stock, determined in
accordance with this Section (the "Redemption Date"). On the Redemption Date,
the Corporation shall make payment or cause to be paid in immediately available
funds of the applicable Redemption Price (as hereinafter defined) to each holder
of shares of Series D Convertible Preferred Stock to be redeemed to or upon the
order of such holder as specified by such holder in writing to the Corporation
at least one business day prior to the Redemption Date. If the Corporation
exercises its right to redeem all or a portion of the outstanding shares of
Series D Convertible Preferred Stock the Corporation shall make payment or cause
to be paid to the holders of the shares of Series D Convertible Preferred Stock
to be redeemed in respect of each share of Series D Convertible Preferred Stock
to be redeemed of an amount equal to the greater of (a) the sum of (A) the
amount of the Liquidation Preference of such share of Series D Convertible
Preferred Stock determined as of the applicable Redemption Date and (B) $333.33
and (b) an amount equal to the product obtained by multiplying (x) the number of
shares of Common Stock which would, but for the redemption pursuant to this
Section 8, be issuable on conversion in accordance with Section 9(a) of one
share of Series D Convertible Preferred Stock and any accrued and unpaid
dividends thereon and any accrued and unpaid interest on dividends thereon in
arrears if a notice of conversion were given by the holder of such Series D
Convertible Preferred Stock on the Redemption Date times (y) the arithmetic
average of the Closing Price (as defined in Section 9(b)) of the Common Stock
for the five consecutive trading days ending one trading day prior to the
Redemption Date (such greater amount being referred to herein as the "Redemption
Price"). Upon redemption of less than all of the shares of Series D Convertible
Preferred Stock evidenced by a particular certificate, promptly, but in no event
later than three business days after surrender of such certificate to the
Corporation, the Corporation shall issue a replacement certificate for the
shares of Series D Convertible Preferred Stock which have not been redeemed.
Only whole shares of Series D Convertible Preferred Stock may be redeemed. If
the Corporation exercises its right to redeem less than all outstanding shares
of Series D Convertible Preferred Stock, then such redemption shall be made, as
nearly as practical, pro rata among the holders of record of the Series D
Convertible Preferred Stock. Except as otherwise permitted by Section 9 hereof
in connection with a conversion of shares of Series D Convertible Preferred
Stock pursuant to Section 9(a), no share of Series D Convertible Preferred Stock
as to which the holder exercises the right of conversion pursuant to Section 9
hereof may be redeemed by the Corporation pursuant to this Section 8 on or after
the date of exercise of such conversion right regardless of whether the Notice
of Redemption shall have been given prior to the date of exercise of such
conversion right.
-7-
<PAGE>
Section 9. Conversion.
(a) Conversion at Option of Holder. The holders of the Series D Convertible
Preferred Stock may, upon surrender of the certificates therefor, convert any or
all of their shares of Series D Convertible Preferred Stock into fully paid and
nonassessable shares of Common Stock and such other securities and property as
hereinafter provided. Commencing on the date which is 76 days after the date of
initial issuance of shares of Series D Convertible Preferred Stock (the
"Issuance Date") and at any time thereafter, each share of Series D Convertible
Preferred Stock initially may be converted at the principal executive offices of
the Corporation, the office of any transfer agent for the Series D Convertible
Preferred Stock, if any, the office of any transfer agent for the Common Stock
or at such other office or offices, if any, as the Board of Directors may
designate, into such number of whole fully paid and nonassessable shares of
Common Stock (calculated as to each conversion to the nearest 1/100th of a
share) determined by dividing (x) the sum of (i) the Conversion Amount, (ii)
accrued but unpaid dividends to the Conversion Date on the share of Series D
Convertible Preferred Stock being converted, and (iii) accrued but unpaid
interest on the dividends on the share of Series D Convertible Preferred Stock
being converted in arrears to the Conversion Date by (y) the lower of (1) the
product of (A) the Conversion Percentage times (B) the arithmetic average of the
Closing Price of the Common Stock on the five consecutive trading days
immediately preceding the Conversion Date or (2) $4.00 (subject to equitable
adjustments for stock splits, stock dividends, combinations, recapitalizations,
reclassifications and similar events occurring on or after the date of filing of
this Certificate of Designations with the Secretary of State of the State of
Delaware), in each case subject to adjustment as hereinafter provided (the
"Conversion Rate"); provided, however, that in no event shall GFL Advantage Fund
Limited ("Advantage") be entitled to convert any shares of Series D Convertible
Preferred Stock in excess of that number of shares of Series D Convertible
Preferred Stock upon conversion of which the sum of (1) the number of shares of
Common Stock beneficially owned by Advantage or any person associated or
affiliated with, or serving as an adviser to Advantage (each a "GFL Person" and
collectively, the "GFL Persons") (other than shares of Common Stock deemed
beneficially owned through the ownership of unconverted shares of Series D
Convertible Preferred Stock and unexercised Warrants) and (2) the number of
shares of Common Stock issuable upon the conversion of the number of shares of
Series D Convertible Preferred Stock with respect to which the determination in
this proviso is being made, would result in beneficial ownership by any GFL
Person of more than 4.9% of the outstanding shares of Common Stock. For purposes
of the proviso to the immediately preceding sentence, beneficial ownership shall
be determined in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended, and Regulation 13D-G thereunder, except as otherwise provided
in clause (1) of the proviso to the immediately preceding sentence. The
-8-
<PAGE>
"Conversion Price" shall be equal to the Conversion Amount divided by the
Conversion Rate. Notwithstanding any other provision of this Section 9, in
connection with each conversion by any holder of shares of Series D Convertible
Preferred Stock, in lieu of issuing shares of Common Stock on conversion of up
to one-half of the shares of Series D Convertible Preferred Stock to be
converted by such holder in such conversion, the Company shall have the right,
exercisable by notice as herein provided to a holder of Series D Convertible
Preferred Stock who shall have given a notice of conversion, to redeem up to
one-half of the shares of Series D Convertible Preferred Stock at a price per
share equal to the Redemption Price (as calculated in accordance with Section 8
hereof). Notice of any redemption pursuant to this Section 9(a) in connection
with a particular conversion shall be given not later than one day after the
Corporation receives the notice of conversion in connection with such
conversion, may be sent by telephone line facsimile transmission to such number
as the Corporation shall have obtained from such holder for this purpose, and
shall be effective only upon actual receipt by such holder. A notice of
redemption pursuant to this Section 9(a) shall state (1) the number of shares of
Series D Convertible Preferred Stock to be redeemed and (2) the Redemption Price
per share. The Redemption Price for any redemption pursuant to this Section 9(a)
shall be paid by wire transfer of immediately available funds to such account as
the holder exercising such conversion right shall have specified to the
Corporation for this purpose and shall be paid not later than one business day
after the Corporation shall have given a notice of redemption pursuant to this
Section 9(a). Time is of the essence for any notice of redemption or payment of
the Redemption Price pursuant to this Section 9(a). If the Corporation shall not
give timely or proper notice of a redemption or shall fail to pay in full
Redemption Price of all shares of Series D Convertible Preferred Stock to be
redeemed, then such shares of Series D Convertible Preferred Stock shall be
converted into shares of Common Stock in accordance herewith and notwithstanding
any wire by the Corporation of any such defect or failure.
(b) Certain Definitions.
As used herein, the "Closing Price" of any security on any date shall mean
the closing bid price of such security on such date on the principal securities
exchange on which such security is traded.
"Computation Date" means (1) the date which is 90 days after the Closing
Date, unless the Registration Statement required to be filed by the Corporation
pursuant to Section 2(a) of the Registration Rights Agreement theretofore has
been declared effective by the SEC, and, (2) if the Registration Statement
required to be filed by the Corporation pursuant to Section 2(a) of the
-9-
<PAGE>
Registration Rights Agreement has not theretofore been declared effective by the
SEC, each date which is 30 days after a Computation Date.
As used herein, the "Conversion Amount" initially shall be equal to
$1,000.00, subject to adjustment as hereinafter provided.
As used herein, "Conversion Date" shall mean the date on which the notice
of conversion is actually received by the Corporation, in case of a conversion
at the option of the holder pursuant to Section 9(a).
As used herein, "Conversion Percentage" shall mean 75 percent, except that,
if the Registration Statement is not ordered effective by the SEC within 90 days
after the Issuance Date, then the percentage stated above in this paragraph
shall be reduced by two and one half percentage points on each Computation Date
or by a pro rated portion of such two and one half percentage points in the case
of any Computation Date which is less than 30 days subsequent to a prior
Computation Date; provided, however, that if the arithmetic average of the
Closing Price on the five consecutive trading days immediately preceding a
particular Conversion Date is $2.00 (subject to equitable adjustments for stock
splits, stock dividends, combinations, recapitalizations, reclassifications and
similar events occurring on or after the date of filing of this Certificate of
Designations with the Secretary of State of the State of Delaware) or less, then
the Conversion Percentage applicable to such Conversion Date shall mean 100
percent, regardless of the actual amount otherwise determined pursuant hereto.
As used herein, "Registration Effective Date" shall mean, with respect to
any share of Series D Convertible Preferred Stock, the date on which the
Registration Statement required to be filed by the Corporation with the SEC
pursuant to Section 2(a) of the Registration Rights Agreement is first ordered
effective by the SEC.
As used herein, "Registration Statement" shall mean the Registration
Statement required to be filed by the Corporation with the SEC pursuant to
Section 2(a) of the Registration Rights Agreement.
As used herein, "SEC" shall mean the United States Securities and Exchange
Commission.
(c) Other Provisions. Notwithstanding anything in this Section 9 to the
contrary, no change in the Conversion Amount shall actually be made until the
cumulative effect of the adjustments called for by this Section 9 since the date
of the last change in the Conversion Amount would change the Conversion Amount
by more than 1%. However, once the cumulative effect would result in such a
-10-
<PAGE>
change, then the Conversion Rate shall actually be changed to reflect all
adjustments called for by this Section 9 and not previously made.
Notwithstanding anything in this Section 9, no change in the Conversion Amount
shall be made that would result in a Conversion Price of less than the par value
of the Common Stock into which shares of Series D Convertible Preferred Stock
are at the time convertible.
The holders of shares of Series D Convertible Preferred Stock at the close
of business on the record date for any dividend payment to holders of Series D
Convertible Preferred Stock shall be entitled to receive the dividend payable on
such shares on the corresponding dividend payment date notwithstanding the
conversion thereof after such dividend payment record date or the Corporation's
default in payment of the dividend due on such dividend payment date; provided,
however, that shares of Series D Convertible Preferred Stock surrendered for
conversion during the period between the close of business on any record date
for a dividend payment and the opening of business on the corresponding dividend
payment date must be accompanied by payment of an amount equal to the dividend
payable on such shares on such dividend payment date. A holder of shares of
Series D Convertible Preferred Stock on a record date for a dividend payment who
(or whose transferee) tenders any of such shares for conversion into shares of
Common Stock on or after such dividend payment date will receive the dividend
payable by the Corporation on such shares of Series D Convertible Preferred
Stock on such date, and the converting holder need not include payment of the
amount of such dividend upon surrender of shares of Series D Convertible
Preferred Stock for conversion. Except as provided above, no adjustment shall be
made in respect of cash dividends on Common Stock or Series D Convertible
Preferred Stock that may be accrued and unpaid at the date of surrender for
conversion.
The right of the holders of Series D Convertible Preferred Stock to convert
their shares shall be exercised by delivering to the Corporation or its agent,
as provided above, a written notice, duly signed by or on behalf of the holder,
stating the number of shares of Series D Convertible Preferred Stock to be
converted. Promptly, but in no event later than 10 business days after delivery
of a notice of conversion, such holder shall surrender for such purpose to the
Corporation or its agent, as provided above, certificates representing shares to
be converted, duly endorsed in blank or accompanied by proper instruments of
transfer. If such holder shall fail to deliver certificates representing shares
to be converted in such form on or prior to such tenth business day, such notice
of conversion shall not be effective, unless otherwise agreed by the
Corporation, but such failure shall not affect such holder's right to convert
such shares at a date after the date such notice of conversion was given. The
Corporation shall pay any tax arising under United States federal, state or
local law in connection with any conversion of shares of Series D Convertible
Preferred Stock except that the Corporation shall not, however, be required to
-11-
<PAGE>
pay any tax which may be payable in respect of any transfer involved in the
issue and delivery upon conversion of shares of Common Stock or other securities
or property in a name other than that of the holder of the shares of the Series
D Convertible Preferred Stock being converted, and the Corporation shall not be
required to issue or deliver any such shares or other securities or property
unless and until the person or persons requesting the issuance thereof shall
have paid to the Corporation the amount of any such tax or shall have
established to the satisfaction of the Corporation that such tax has been paid.
The Corporation (and any successor corporation) shall take all action
necessary so that a number of shares of the authorized but unissued Common Stock
(or common stock in the case of any successor corporation) sufficient to provide
for the conversion of the Series D Convertible Preferred Stock outstanding upon
the basis hereinbefore provided are at all times reserved by the Corporation (or
any successor corporation), free from preemptive rights, for such conversion,
subject to the provisions of the next succeeding paragraph. If the Corporation
shall issue any securities or make any change in its capital structure which
would change the number of shares of Common Stock into which each share of the
Series D Convertible Preferred Stock shall be convertible as herein provided,
the Corporation shall at the same time also make proper provision so that
thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Series D Convertible Preferred Stock on the new basis. If at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all of the outstanding shares of Series D
Convertible Preferred Stock, the Corporation promptly shall seek such corporate
action as may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.
In case of any consolidation or merger of the Corporation with any other
corporation (other than a wholly-owned subsidiary of the Corporation) in which
the Corporation is not the surviving corporation, or in case of any sale or
transfer of all or substantially all of the assets of the Corporation, or in the
case of any share exchange pursuant to which all of the outstanding shares of
Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series D Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series D
Convertible Preferred Stock into the kind and amount of shares of stock and
other securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of the number of shares of Common Stock
into which such shares of Series D Convertible Preferred Stock could have been
converted immediately prior to the effective date of such consolidation, merger,
sale, transfer, or share exchange. If, in connection with any such
-12-
<PAGE>
consolidation, merger, sale, transfer, or share exchange, each holder of shares
of Common Stock is entitled to elect to receive either securities, cash, or
other assets upon completion of such transaction, the Corporation shall provide
or cause to be provided to each holder of Series D Convertible Preferred Stock
the right to elect the securities, cash, or other assets into which the Series D
Convertible Preferred Stock held by such holder shall be convertible after
completion of any such transaction on the same terms and subject to the same
conditions applicable to holders of the Common Stock (including, without
limitation, notice of the right to elect, limitations on the period in which
such election shall be made, and the effect of failing to exercise the
election). The Corporation shall not effect any such transaction unless the
provisions of this paragraph have been complied with. The above provisions shall
similarly apply to successive consolidations, mergers, sales, transfers, or
share exchanges.
If a holder shall have given a notice of conversion of shares of Series D
Convertible Preferred Stock, upon surrender of certificates representing shares
of Series D Convertible Preferred Stock for conversion, the Corporation shall
issue and deliver to such person certificates for the Common Stock issuable upon
such conversion within three business days after such surrender of certificates
and the person converting shall be deemed to be the holder of record of the
Common Stock issuable upon such conversion, and all rights with respect to the
shares surrendered shall forthwith terminate except the right to receive the
Common Stock or other securities, cash, or other assets as herein provided.
No fractional shares of Common Stock shall be issued upon conversion of
Series D Convertible Preferred Stock but, in lieu of any fraction of a share of
Common Stock which would otherwise be issuable in respect of the aggregate
number of such shares surrendered for conversion at one time by the same holder,
the Corporation at its option (a) may pay in cash an amount equal to the product
of (i) the arithmetic average of the Closing Price of a share of Common Stock on
the three consecutive trading days before the Conversion Date and (ii) such
fraction of a share or (b) may issue an additional share of Common Stock.
The "Closing Price" for each day shall be the closing price regular way on
such day as reported on the New York Stock Exchange Composite Tape, or, if the
Common Stock is not listed or admitted to trading on such Exchange, on the
principal national securities exchange on which Common Stock is listed or
admitted to trading, or, if not listed or admitted to trading on any national
securities exchange, the closing bid price as reported on the Nasdaq National
Market (or, if not so reported, the closing price), or, if not admitted for
quotation on the Nasdaq National Market, the average of the high bid and low
asked prices on such day as recorded by the National Association of Securities
Dealers, Inc. through the National Association of Securities Dealers Automated
-13-
<PAGE>
Quotations System ("NASDAQ"), or if the National Association of Securities
Dealers, Inc. through NASDAQ shall not have reported any bid and asked prices
for the Common Stock on such day, the average of the bid and asked prices for
such day as furnished by any New York Stock Exchange member firm selected from
time to time by the Corporation for such purposes, or, if no such bid and asked
prices can be obtained from any such firm, the fair market value of one share of
Common Stock on such day as determined in good faith by the Board of Directors.
Such determination by the Board of Directors shall be conclusive.
The Conversion Amount shall be adjusted from time to time under certain
circumstances, subject to the provisions of the first three sentences of the
first paragraph of this Section 9(c), as follows:
(i) In case the Corporation shall issue rights or warrants on a pro rata
basis to all holders of the Common Stock entitling such holders to subscribe for
or purchase Common Stock on the record date referred to below at a price per
share less than the average daily Closing Prices of the Common Stock on the 30
consecutive business days commencing 45 business days before the record date
(the "Current Market Price"), then in each such case the Conversion Amount in
effect on such record date shall be adjusted in accordance with the formula
C1 = C x (O + N)/(O + (N x P)/M)
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the record date.
N = the number of additional shares of Common Stock issuable pursuant to
the exercise of such rights or warrants.
P = the offering price per share of the additional shares (which amount
shall include amounts received by the Corporation in respect of
the issuance and the exercise of such rights or warrants).
M = the Current Market Price per share of Common Stock on the record
date.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
-14-
<PAGE>
If any or all such rights or warrants are not so issued or expire or terminate
before being exercised, the Conversion Amount then in effect shall be readjusted
appropriately.
(ii) In case the Corporation shall, by dividend or otherwise, distribute to
all holders of its Junior Stock (as hereinafter defined) evidences of its
indebtedness or assets (including securities, but excluding any warrants or
subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
C1 = C x M(M - F)
where
C1 = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Market Price per share of Common Stock on the record
date mentioned below.
F = the aggregate amount of such cash dividend and/or the fair market
value on the record date of the assets or securities to be distributed
divided by the number of shares of Common Stock outstanding on the
record date. The Board of Directors shall determine such fair market
value, which determination shall be conclusive.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series D Convertible Preferred Stock.
(iii) All calculations hereunder shall be made to the nearest cent or to
the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to the fifth
paragraph of this Section 9(c), the holder of any Series D Convertible Preferred
Stock thereafter surrendered for conversion shall become entitled to receive
securities, cash, or assets other than Common Stock, the number or amount of
such securities or property so receivable upon conversion shall be subject to
-15-
<PAGE>
adjustment from time to time in a manner and on terms nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
subparagraphs (i) to (iii) above.
Except as otherwise provided above in this Section 9, no adjustment in the
Conversion Amount shall be made in respect of any conversion for share
distributions or dividends theretofore declared and paid or payable on the
Common Stock.
Whenever the Conversion Amount is adjusted as herein provided, the
Corporation shall send to each transfer agent, if any, for the Series D
Convertible Preferred Stock and the Common Stock, and to the principal
securities exchange, if any, on which the Series D Convertible Preferred Stock
and the Common Stock is traded, or the Nasdaq National Market if the Series D
Convertible Preferred Stock or Common Stock is admitted for a quotation thereon,
a statement signed by the Chairman of the Board, the President, or any Vice
President of the Corporation and by its Treasurer or its Secretary or Assistant
Secretary stating the adjusted Conversion Amount determined as provided in this
Section 9, and any adjustment so evidenced, given in good faith, shall be
binding upon all stockholders and upon the Corporation. Whenever the Conversion
Amount is adjusted, the Corporation will give notice by mail to the holders of
record of Series D Convertible Preferred Stock, which notice shall be made
within 45 days after the effective date of such adjustment and shall state the
adjustment and the Conversion Amount. Notwithstanding the foregoing notice
provisions, failure by the Corporation to give such notice or a defect in such
notice shall not affect the binding nature of such corporate action of the
Corporation.
Whenever the Corporation shall propose to take any of the actions specified
in the fifth paragraph of this Section 9(c) or in subparagraphs (i) or (ii) of
the ninth paragraph of this Section 9(c) which would result in any adjustment in
the Conversion Amount under this Section 9(c), the Corporation shall cause a
notice to be mailed at least 20 days prior to the date on which the books of the
Corporation will close or on which a record will be taken for such action, to
the holders of record of the outstanding Series D Convertible Preferred Stock on
the date of such notice. Such notice shall specify the action proposed to be
taken by the Corporation and the date as of which holders of record of the
Common Stock shall participate in any such actions or be entitled to exchange
their Common Stock for securities or other property, as the case may be. Failure
by the Corporation to mail the notice or any defect in such notice shall not
affect the validity of the transaction.
Notwithstanding any other provision of this Section 9, no adjustment in the
Conversion Amount need be made (a) for a transaction referred to in
subparagraphs (i) or (ii) of the ninth paragraph of this Section 9(c) if holders
of Series D Convertible Preferred Stock are to participate in the transaction or
-16-
<PAGE>
distribution on a basis and with notice that the Board of Directors determines
such transaction to be fair to the holders of the Series D Convertible Preferred
Stock and appropriate in light of the basis on which holders of the Common Stock
or, in the case of a transaction referred to in said subparagraph (ii), holders
of Junior Stock participate in the transaction; (b) for sales of Common Stock
pursuant to a plan for reinvestment of dividends and interest, provided that the
purchase price in any such sale is at least equal to the fair market value of
the Common Stock at the time of such purchase, or pursuant to any plan adopted
by the Corporation for the benefit of its employees, directors, or consultants;
or (c) after such time as a holder of shares of Series D Convertible Preferred
Stock becomes entitled to receive only cash upon conversion of such shares (in
which case no interest shall accrue on the amount of such cash for any period
prior to the date which is three business days after surrender of the
certificates for such shares for conversion).
(d) Mandatory Conversion. So long as the Corporation shall be in compliance
in all material respects with its obligations to the holders of the Series D
Convertible Preferred Stock (including its obligations under the Registration
Rights Agreement and the provisions of this Certificate of Designations) and so
long as the Registration Statement shall be effective, on the date which is 730
days after the date the Registration Statement is first ordered effective by the
SEC (the "Mandatory Conversion Date") all of the shares of Series D Convertible
Preferred Stock then outstanding shall be converted, in accordance with the
provisions, and subject to the limitations, of Section 9(a), into shares of
Common Stock to the extent the same are at such time convertible into shares of
Common Stock. On the Mandatory Conversion Date, the Corporation shall mail by
first class mail or otherwise deliver to each holder of Series D Convertible
Preferred Stock a notice (a "Section 9(d) Notice"), which shall state (1) the
number of shares of Series D Convertible Preferred Stock held by such holder
which have been converted into shares of Common Stock in accordance with this
Section 9(d) and (2) the Mandatory Conversion Date. If the Corporation shall
give a Section 9(d) Notice, then, unless theretofore converted by the holder in
accordance herewith or redeemed by the Corporation, and, so long as the
Registration Statement shall remain effective on the Mandatory Conversion Date
and the Corporation shall be in compliance in all material respects with its
obligations to the holders of the Series D Convertible Preferred Stock
(including its obligations under the Registration Rights Agreement and the
provisions of this Certificate of Designations) on the Mandatory Conversion
Date, on the Mandatory Conversion Date properly set forth therein, all shares of
Series D Convertible Preferred Stock which on the Mandatory Conversion Date are
convertible in accordance with Section 9(a) hereof, shall be converted into such
number of shares of Common Stock as shall be determined pursuant to this Section
9 as if the conversion of such number of shares of Series D Convertible
Preferred Stock were made by the holders thereof in accordance herewith and as
-17-
<PAGE>
if the Mandatory Conversion Date were the Conversion Date. Upon the surrender of
certificates for shares of Series D Convertible Preferred Stock by the holder
after a Section 9(d) Notice is given, the Corporation shall issue and, within
three trading days after such surrender, deliver to or upon the order of such
holder that number of shares of Common Stock for the number of shares of Series
D Convertible Preferred Stock converted, together with accrued and unpaid
dividends thereon to the date of conversion and accrued and unpaid interest on
dividends on such shares which are in arrears, as shall be determined in
accordance herewith. In connection with any conversion of shares of Series D
Convertible Preferred Stock pursuant to this Section 9(d), the Corporation shall
not have the right provided in Section 9(a) to redeem any portion of such shares
for cost in lieu of such conversion.
(e) Conversion at Option of Corporation. So long as the Corporation shall
be in compliance in all material respects with its obligations to the holders of
the Series D Convertible Preferred Stock (including its obligations under the
Registration Rights Agreement and the provisions of this Certificate of
Designations) and so long as the Registration Statement required to be filed
under the Registration Rights Agreement shall be effective, the Corporation
shall have the right, exercisable at any time after the date which is 360 days
after the Registration Effective Date by at least 15 business days but not more
than 20 business days prior notice (a "Corporation Conversion Notice") to the
holders of the Series D Convertible Preferred Stock to require the holders of
the Series D Convertible Preferred Stock to convert, in accordance with the
provisions, and subject to the limitations, of this Section 9, all or any part
of the outstanding shares of Series D Convertible Preferred Stock into shares of
Common Stock to the extent the same are at such time convertible into shares of
Common Stock. The Corporation Conversion Notice shall state (1) the number of
shares of Series D Convertible Preferred Stock which the Corporation seeks to
require to be converted into shares of Common Stock and (2) the date for such
conversion (the "Corporation Conversion Date"). If the Corporation shall give a
Corporation Conversion Notice, then, unless theretofore converted by the holder
or redeemed by the Corporation in accordance herewith, and, so long as the
Registration Statement shall remain effective on the Corporation Conversion Date
and the Corporation shall be in compliance in all material respects with its
obligations to the holders of the Series D Convertible Preferred Stock
(including its obligations under the Registration Rights Agreement and the
provisions of this Certificate of Designations) on the Conversion Date, such
shares of Series D Convertible Preferred Stock subject to this provision shall
be converted into such number of shares of Common Stock as shall be determined
pursuant to this Section 9 as if the conversion of such number of shares of
Series D Convertible Preferred Stock were made by the holders thereof in
accordance herewith without any further action on the part of the holders of
such shares of Series D Convertible Preferred Stock. Upon receipt by the
-18-
<PAGE>
Corporation of certificates for shares of Series D Convertible Preferred Stock
converted into shares of Common Stock in accordance with this Section 9(e) after
a Corporation Conversion Notice is given, the Corporation shall issue and,
within three trading days after such surrender, deliver to or upon the order of
such holder (1) that number of shares of Common Stock for the number of shares
of Series D Convertible Preferred Stock converted, together with accrued and
unpaid dividends thereon to the date of conversion and accrued and unpaid
interest on dividends on such shares which are in arrears, as shall be
determined in accordance herewith and (2) a new certificate for the balance of
shares of Series D Convertible Preferred Stock, if any. In connection with any
conversion of shares of Series D Convertible Preferred Stock pursuant to this
Section 9(e), the Corporation shall not have the right provided in Section 9(a)
to redeem any portion of such shares for cash in lieu of such conversion.
(f) Conversion Into Units. Notwithstanding any other provision to the
contrary contained herein, if, at the time of any conversion pursuant to any
provision of this Section 9 the Common Stock is not trading on the Nasdaq
SmallCap Market ("Nasdaq") separate from units ("Units" ), each Unit consisting
of one share of Common Stock and one Class A Redeemable Common Stock Purchase
Warrant to purchase one share of Common Stock (the "Common Stock Purchase
Warrants"), then upon any such conversion, in lieu of issuance of shares of
Common Stock, the Company shall issue a number of Units determined as provided
in this Section 9(f). Any Common Stock Purchase Warrant issued upon conversion
of shares of Series D Convertible Preferred Stock issued pursuant to the Warrant
Agreement, dated November 2, 1995, by and between the Corporation and
Continental Stock Transfer & Trust Company, as Warrant Agent (the "Warrant
Agreement"), shall be in the form specified in the Warrant Agreement. If at any
time shares of Series D Convertible Preferred Stock shall be convertible into
Units as provided in this Section 9(f), then the number of Units to be issued on
conversion of each share of Series D Convertible Preferred Stock shall be
determined based on the Closing Price of the Units. All other provisions of this
Section 9 relating to conversion of shares of Series D Convertible Preferred
Stock shall be applicable to the Units as if they were shares of Common Stock.
Section 10. Voting Rights. Except as otherwise required by law, shares of
Series D Convertible Preferred Stock shall not be entitled to vote on any
matter.
The affirmative vote or consent of the holders of a majority of the
outstanding shares of the Series D Convertible Preferred Stock, voting
separately as a class, will be required for (1) any amendment, alteration, or
repeal, whether by merger or consolidation or otherwise, of the Corporation's
Certificate of Incorporation if the amendment, alteration, or repeal materially
and adversely affects the powers, preferences, or special rights of the Series D
-19-
<PAGE>
Convertible Preferred Stock, or (2) the creation and issuance of any Senior
Dividend Stock or Senior Liquidation Stock; provided, however, that any increase
in the authorized preferred stock of the Corporation or the creation and
issuance of any stock which is both Junior Dividend Stock and Junior Liquidation
Stock or any other capital stock of the Corporation ranking on a parity with the
Series D Convertible Preferred Stock shall not be deemed to affect materially
and adversely such powers, preferences, or special rights.
Section 11. Outstanding Shares. For purposes of this Certificate of
Designations, all shares of Series D Convertible Preferred Stock shall be deemed
outstanding except (i) from the date of surrender of certificates representing
shares of Series D Convertible Preferred Stock for conversion into Common Stock,
all shares of Series D Convertible Preferred Stock converted into Common Stock;
(ii) from the date of registration of transfer, all shares of Series D
Convertible Preferred Stock held of record by the Corporation or any subsidiary
or Affiliate (as defined herein) of the Corporation and (iii) from the
Redemption Date, all shares of Series D Convertible Preferred Stock which are
redeemed, so long as in each case the Redemption Price of such shares of Series
D Convertible Preferred Stock shall have been paid by the Corporation as and
when required hereby. For the purposes of this Certificate of Designations,
"Affiliate" means any person directly or indirectly controlling or controlled by
or under direct or indirect common control with the Corporation. "Control" is
the power to direct the management and policies of a person, directly or through
one or more intermediaries, whether through the ownership of voting securities,
by contract, or otherwise.
-20-
<PAGE>
IN WITNESS WHEREOF, Hemispherx BioPharma, Inc. has caused its corporate
seal to be hereunto affixed and this certificate to be signed by William A.
Carter, M.D., its President, this 3rd day of July, 1996.
HEMISPHERX BIOPHARMA, INC.
By s/William A.Carter
-----------------------------
William A. Carter
-21-
[LETTERHEAD OF SILVERMAN, COLLURA & CHERNIS, P.C.]
July 26, 1996
Hemispherx Biopharma, Inc.
1617 JFK Boulevard
Philadelphia, Pennsylvania 19103
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Hemispherx Biopharma, Inc. (the "Company"),
a Delaware corporation, pursuant to a Registration Statement on Form S-1, as
filed with the Securities and Exchange Commission on July 26, 1996 (the
"Registration Statement"), covering 2,770 shares of the Company's Common Stock,
$.001 par value (the "Common Stock"), 890,543 shares of Common Stock underlying
Common Stock Purchase Warrants (the "Warrants") and 2,427,275 shares of Common
Stock underlying Series D Preferred Stock (the "Preferred Stock"). The Common
Stock, Warrants and Preferred Stock are hereinafter referred to as the
"Securities".
In acting as counsel for the Company and arriving at the opinions as
expressed below, we have examined and relied upon originals or copies, certified
or otherwise identified to our satisfaction, of such records of the Company,
agreements and other instruments, certificates of officers and representatives
of the Company, certificates of public officials and other documents as we have
deemed necessary or appropriate as a basis for the opinions expressed herein.
In connection with our examination we have assumed the genuineness of
all signatures, the authenticity of all documents tendered to us as originals,
the legal capacity of natural persons and the conformity to original documents
of all documents submitted to us as certified or photostated copies.
Based on the foregoing, and subject to the qualifications and
limitations set forth herein, it is our opinion that:
1. The Company has authority to issue the Securities in the manner and
under the terms set forth in the Registration Statement.
<PAGE>
SILVERMAN, COLLURA & CHERNIS, P.C.
Hemispherx Biopharama, Inc.
July 26, 1996
Page 2
2. The Securities have been duly authorized and when issued, delivered
and paid for in accordance with their respective terms, will be validly
issued, fully paid and non-assessable.
We express no opinion with respect to the laws other than those of the
State of New York and Federal Laws of the United States of America, and we
assume on responsibility as to the applicability thereto, the effect thereon, of
the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and its use as part of the Registration Statement.
We are furnishing this opinion to the Company solely for its benefit in
connection with the Registration Statement. It is not to be used, circulated,
quoted or otherwise referred to for any other purpose. Other than the Company no
one is entitled to reply on this opinion.
Very truly yours,
SILVERMAN, COLLURA & CHERNIS, P.C.
s\ Silverman, Collura & Chernis, P.C.
SUBSCRIPTION AGREEMENT
(GFL Advantage Fund Limited)
THIS SUBSCRIPTION AGREEMENT, dated as of the date of acceptance set
forth below, by and between HEMISPHERx BIOPHARMA, INC., a Delaware corporation,
with headquarters located at 1617 JFK Boulevard, Philadelphia, Pennsylvania,
19103 (the "Company"), and the undersigned (the "Buyer").
W I T N E S S E T H:
WHEREAS, the Company and the Buyer are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D as promulgated by the Securities and Exchange
Commission (the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"); and
WHEREAS, the Buyer wishes to purchase, upon the terms and subject to
the conditions of this Agreement, shares of non-voting, convertible preferred
stock of the Company which will be convertible into shares of Common Stock,
$.001 par value (the "Common Stock") or units (the "Units" ) consisting of one
Class A Redeemable Common Stock Purchase Warrant (the "Class A Warrant") and one
share of Common Stock (the "Unit Share"), and, in connection therewith, to
receive warrants to purchase 100,000 shares of Common Stock, subject to
acceptance of this Agreement by the Company;
NOW THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO SUBSCRIBE; PURCHASE PRICE; WARRANTS.
a. Subscription and Warrants. The undersigned hereby agrees to purchase
from the Company the number of shares (the "Preferred Shares") of Series D
Convertible Preferred Stock, $.01 par value (the "Preferred Stock"), of the
Company set forth on the signature page of this Agreement, having the terms and
conditions as set forth in the form of Certificate of Designations attached
hereto as Annex I (the "Certificate of Designations") at the price per share and
for the aggregate purchase price set forth on the signature page of this
Agreement. The purchase price for the Preferred Shares shall be payable in
United States Dollars. The shares of Common Stock issuable upon conversion of
the Preferred Stock and the Unit Shares comprising a part of a Unit are referred
to herein as the "Conversion Shares." In addition to the issuance of the
Preferred Shares, the Company shall issue to the Buyer on the Closing Date (as
herein defined) warrants to purchase 100,000 shares of Common Stock, such
warrants to be in the form attached hereto as Annex II (the "Warrants"). The
shares of Common Stock issuable upon exercise of the Warrants and the Class A
Warrants are referred to herein as the "Warrant Shares." The Conversion Shares
<PAGE>
and the Warrant Shares are referred to herein collectively as the "Common
Shares." The Common Shares and the Preferred Shares are referred to herein
collectively as the "Shares." The Shares, the Units and the Warrants are
referred to herein collectively as the "Securities."
b. Form of Payment. The Buyer shall pay the purchase price for the
Preferred Shares by delivering good funds in United States Dollars to the escrow
agent (the "Escrow Agent") identified in the Joint Escrow Instructions attached
hereto as Annex III (the "Joint Escrow Instructions"). Such delivery of funds
shall be made against delivery by the Company of the certificates for the
Preferred Shares registered in the name of the Buyer. Promptly following payment
by the Buyer to the Escrow Agent of the purchase price of the Preferred Shares,
but in no event later than the Closing Date, the Company shall deliver
certificates for the Preferred Shares, registered in the name of the Buyer, to
the Escrow Agent. By signing this Agreement, the Buyer and the Company each
agrees to all of the terms and conditions of, and becomes a party to, the Joint
Escrow Instructions, all of the provisions of which are incorporated herein by
this reference as if set forth in full.
c. Method of Payment. Payment of the purchase price for the Preferred
Shares shall be made by wire transfer of funds to:
Citibank, N.A.
153 East 53rd Street
New York, New York 10043
ABA#021000089
For Further Credit to A/C#37179446
for credit to the account of Brian W. Pusch Attorney Escrow Account
Reference: GFL/Hemispherx
Not later than 4:00 p.m., New York City time, on the date which is one New York
Stock Exchange trading day after the Company shall have accepted this Agreement
and returned a signed counterpart of this Agreement to the Buyer, the Buyer
shall deposit with the Escrow Agent the aggregate purchase price for the
Preferred Shares.
2. BUYER REPRESENTATIONS, WARRANTIES, ETC.; ACCESS TO INFORMATION;
INDEPENDENT INVESTIGATION.
The Buyer represents and warrants to, and covenants and agrees with,
the Company as follows:
a. The Buyer is purchasing the Preferred Shares and acquiring the
Warrants for its own account for investment only and not with a view towards the
public sale or distribution thereof;
-2-
<PAGE>
b. The Buyer is an "accredited investor" as that term is defined in
Rule 501 of the General Rules and Regulations under the 1933 Act by reason of
Rule 501(a)(3);
c. All subsequent offers and sales of the Securities by the Buyer shall
be made pursuant to registration of the Securities being offered and sold under
the 1933 Act or pursuant to an exemption from registration;
d. The Buyer understands that the Preferred Shares and the Warrants are
being offered and sold, and the Common Shares and Units are being offered, to it
in reliance on specific exemptions from the registration requirements of United
States federal and state securities laws and that the Company is relying upon
the truth and accuracy of, and the Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Preferred Shares and the Warrants and to
receive an offer of the Common Shares and the Units;
e. The Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Preferred Shares and the
Warrants and the offer of the Common Shares which have been requested by the
Buyer. The Buyer and its advisors, if any, have been afforded the opportunity to
ask questions of the Company and have received complete and satisfactory answers
to any such inquiries. Without limiting the generality of the foregoing, the
Buyer has had the opportunity to obtain and to review the Company's (1) Annual
Report on Form 10-K for the fiscal year ended December 31, 1995, (2) Quarterly
Report on Form 10-Q for the fiscal quarter ended March 31, 1996 and (3) the
Company's definitive Proxy Statement for its 1996 Annual Meeting of
Stockholders, in each case as filed with the SEC. The Buyer understands that its
investment in the Shares involves a high degree of risk;
f. The Buyer understands that no United States federal or state agency
or any other government or governmental agency has passed on or made any
recommendation or endorsement of the Securities;
g. This Agreement has been duly and validly authorized, executed and
delivered on behalf of the Buyer and is a valid and binding agreement of the
Buyer enforceable in accordance with its terms, subject as to enforceability to
general principles of equity and to bankruptcy, insolvency, moratorium and other
similar laws affecting the enforcement of creditors' rights generally; and
h. The Buyer is not purchasing the Preferred Shares for the purpose of
covering any short sale of the Common Stock, put option relating to the Common
Stock or other certificate or instrument with the Conversion Shares.
-3-
<PAGE>
3. COMPANY REPRESENTATIONS, ETC.
The Company represents and warrants to the Buyer that:
a. Concerning the Securities. The Securities have been duly authorized
and the Preferred Shares, when issued and paid for in accordance with this
Agreement, and the Common Shares, when issued upon conversion of the Preferred
Shares or exercise of the Warrants or Class A Warrants, as the case may be, will
be duly and validly issued, fully paid and non-assessable and will not subject
the holder thereof to personal liability by reason of being such holder. There
are no preemptive rights of any stockholder of the Company, as such, to acquire
any of the Securities. The Units are listed for trading on the Nasdaq SmallCap
Market ("Nasdaq") and (1) the Company and the Units meet the criteria for
continued listing and trading on Nasdaq; (2) the Company has not been notified
since January 1, 1994 by the National Association of Securities Dealers, Inc. of
any failure or potential failure to meet the criteria for continued listing and
trading on Nasdaq and (3) no suspension of trading in the Units is in effect.
The Company has no reason to believe that the Common Stock will be ineligible
for listing on Nasdaq or that it will fail to become listed on Nasdaq within 30
days from the Closing Date as required by Section 4(e) hereof.
b. Subscription Agreement; Registration Rights Agreement; Warrants;
Units. This Agreement, the Registration Rights Agreement, the form of which is
attached hereto as Annex IV (the "Registration Rights Agreement"), the Units,
the Warrant Agreement dated November 2, 1995 between the Company and Continental
Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agreement"), and
the Warrants have been duly and validly authorized by the Company, this
Agreement has been duly executed and delivered on behalf of the Company and this
Agreement and the Warrant Agreement are and the Registration Rights Agreement,
the Units and the Warrants, when executed and delivered by the Company, will be,
valid and binding agreements of the Company enforceable in accordance with their
respective terms, subject as to enforceability to general principles of equity
and to bankruptcy, insolvency, moratorium and other similar laws affecting the
enforcement of creditors' rights generally.
c. Non-contravention. The execution and delivery of this Agreement by
the Company and the consummation by the Company of the issuance of the Shares
and the Warrants and the other transactions contemplated by this Agreement, the
Registration Rights Agreement and the terms of the Preferred Stock, the Warrants
and the Units do not and will not conflict with or result in a breach by the
Company of any of the terms or provisions of, or constitute a default under, the
certificate of incorporation or by-laws of the Company, or any indenture,
-4-
<PAGE>
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its properties or assets are bound,
or any applicable law, rule or regulation or any applicable decree, judgment or
order of any court, United States federal or state regulatory body,
administrative agency or other governmental body having jurisdiction over the
Company or any of its properties or assets.
d. Approvals. No authorization, approval or consent of any court,
governmental body, regulatory agency, self-regulatory organization, or stock
exchange or market or the stockholders of the Company is required to be obtained
by the Company for the issuance and sale of the Shares and the Warrants as
contemplated by this Agreement, the Preferred Stock, the Units and the Warrants.
e. Information Provided. The information provided by or on behalf of
the Company to the Buyer and referred to in Section 2(e) of this Agreement does
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstance under which they are made, not misleading.
f. Absence of Certain Changes. Since December 31, 1995, there has been
no material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Company, except as disclosed in the documents referred to in Section 2(e)
hereof.
g. Absence of Litigation. There is no action, suit, proceeding, inquiry
or investigation before or by any court, public board or body pending or, to the
knowledge of the Company or any of its subsidiaries, threatened against or
affecting the Company or any of its subsidiaries, wherein an unfavorable
decision, ruling or finding would have a material adverse effect on the
properties, business, condition (financial or other), results of operations or
prospects of the Company and its subsidiaries taken as a whole or the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents.
4. CERTAIN COVENANTS AND ACKNOWLEDGMENTS.
a. Transfer Restrictions. The Buyer acknowledges that (1) the Preferred
Shares and the Warrants have not been and are not being registered under the
provisions of the 1933 Act and, except as provided in the Registration Rights
Agreement, the Common Shares have not been and are not being registered under
the 1933 Act, and may not be transferred unless (A) subsequently registered
thereunder or (B) the Buyer shall have delivered to the Company an opinion of
counsel, reasonably satisfactory in form, scope and substance to the Company, to
-5-
<PAGE>
the effect that the Warrants or the Shares to be sold or transferred may be sold
or transferred pursuant to an exemption from such registration; (2) any sale of
the Shares or the Warrants made in reliance on Rule 144 promulgated under the
1933 Act may be made only in accordance with the terms of said Rule and further,
if said Rule is not applicable, any resale of such Shares or Warrants under
circumstances in which the seller, or the person through whom the sale is made,
may be deemed to be an underwriter, as that term is used in the 1933 Act, may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (3) neither the Company nor any other
person is under any obligation to register the Shares (other than pursuant to
the Registration Rights Agreement) or the Warrants under the 1933 Act or to
comply with the terms and conditions of any exemption thereunder (other than
pursuant to Section 4(d) hereof and pursuant to the Registration Rights
Agreement).
b. Restrictive Legend. The Buyer acknowledges and agrees that the
certificates for the Preferred Shares, the Warrants, and, until such time as the
Common Shares have been registered under the 1933 Act as contemplated by the
Registration Rights Agreement, the certificates for the Common Shares, may bear
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of the certificates for the Shares and the
Warrants):
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended. The
securities have been acquired for investment and may not be sold,
transferred or assigned in the absence of an effective registration
statement for the securities under the Securities Act of 1933, as
amended, or an opinion of counsel that registration is not required
under said Act.
c. Registration Rights Agreement. The parties hereto agree to enter
into the Registration Rights Agreement on or before the Closing Date.
d. Form D. The Company agrees to file a Form D with respect to the
Shares as required under Regulation D and to provide a copy thereof to the Buyer
promptly after such filing. The Buyer agrees to cooperate with the Company in
connection with such filing and, upon request of the Company, to provide all
information relating to the Buyer required for such filing.
e. Authorization for Trading; Reporting Status. Within 30 days from the
Closing Date, the Company shall cause the Common Shares to be authorized for
trading on Nasdaq. So long as the Buyer beneficially owns any of the Preferred
Shares, the Warrants, the Units or the Common Shares, the Company shall file all
reports required to be filed with the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and the Company
-6-
<PAGE>
shall not terminate its status as an issuer required to file reports under the
1934 Act even if the 1934 Act or the rules and regulations thereunder would
permit such termination.
f. Use of Proceeds. The Company will use the proceeds from the sale of
the Preferred Shares and the exercise of the Warrants for the Company's internal
working capital purposes.
g. Blue Sky Laws. On or before the Closing Date, the Company shall take
such action as shall be necessary to qualify, or to obtain an exemption for, the
Preferred Shares and the Warrants for sale to the Buyer pursuant to this
Agreement and the Common Shares for sale to the Buyer on conversion of the
Preferred Shares and comprising a portion of the Units and on exercise of the
Warrants and Class A Warrants under such of the securities or "blue sky" laws of
jurisdictions in the United States as shall be applicable to the sale of the
Preferred Shares and Warrants to the Buyer pursuant to this Agreement, the
issuance of the Common Shares to the Buyer on conversion of the Preferred Shares
and comprising a portion of the Units and exercise of the Warrants and Class A
Warrants. The Company shall furnish copies of all filings, applications, orders
and grants or confirmations of exemptions relating to such securities or "blue
sky" laws on or prior to the Closing Date.
h. Certain Expenses. If the closing occurs, the Company shall pay or
reimburse the Buyer for all reasonable legal fees and expenses of counsel to the
Buyer for the preparation and negotiation of, and closing under, this Agreement
(but not to exceed $10,000). The obligations of the Company under the provisions
of this Section 4(g) shall be in addition to the obligation of the Company for
expenses under the Registration Rights Agreement.
i. Certain Trading Restrictions. The Buyer agrees that, prior to the
conversion in full or redemption of all Preferred Shares owned by the Buyer, the
Buyer shall not engage in short sales or other similar transactions with respect
to the Common Stock other than in the ordinary course of selling shares of
Common Stock in connection with conversions of shares of Preferred Stock.
j. Proxy Appointment. Effective on the acquisition of any Conversion
Shares, the Buyer shall irrevocably appoint William A. Carter, M.D., Chief
Executive Officer and Chairman of the Board of the Company, with full power of
substitution, as the Buyer's attorney-in-fact to vote all Conversion Shares in
the name of the Buyer on the records of the Company on any matter to be voted
upon by the stockholders of the Company, other than any matter with respect to
which the holders of Common Stock are entitled under the General Corporation Law
of the State of Delaware, to exercise dissenters' rights of appraisal, such
proxy to terminate on the earliest of (1) the date on which the aggregate market
-7-
<PAGE>
capitalization of the outstanding shares of Common Stock shall have been
$300,000,000 or more for 20 consecutive trading days, (2) the date the Company
shall have received a bona fide offer relating to a merger, consolidation or
other acquisition of the Company or its assets, or a tender offer for shares of
the Common Stock which, if consummated, would value the outstanding shares of
Common Stock at $300,000,000 or more or (3) such date as shall be required
pursuant to Section 14(a) of the 1934 Act and the rules and regulations of the
SEC thereunder. On or before the Closing Date, the Buyer shall deliver to the
Company an Irrevocable Proxy in the form attached hereto as Annex V. In no event
shall such proxy restrict the sale by the Buyer of any Conversion Shares and
upon any bona fide sale by the Buyer of Conversion Shares for value, such proxy
shall terminate as to the Conversion Shares so sold.
5. TRANSFER AGENT INSTRUCTIONS; CONVERSION PROCEDURE.
a. Transfer Agent Instructions. Promptly following the delivery by the
Buyer of the aggregate purchase price for the Preferred Shares in accordance
with Section 1(c) hereof, and prior to the Closing Date the Company will
irrevocably instruct its transfer agent to issue certificates for the Common
Shares from time to time upon conversion of the Preferred Shares and exercise of
the Warrants in such amounts as specified from time to time to the transfer
agent in the Conversion Certificates surrendered in connection with such
conversions and referred to in Section 5(b) of this Agreement or in the
subscription forms attached to the Warrants, as the case may be, such
certificates to bear the restrictive legend specified in Section 4(b) of this
Agreement prior to registration of the Common Shares under the 1933 Act,
registered in the name of the Buyer or its nominee and in such denominations to
be specified by the Buyer in connection with each Unit or conversion of
Preferred Shares or exercise of Warrants, as the case may be. The Company
warrants that no instruction other than such instructions referred to in this
Section 5 and stop transfer instructions to give effect to Section 4(a) hereof
prior to registration of the Common Shares under the 1933 Act will be given by
the Company to the transfer agent and that the Common Shares shall otherwise be
freely transferable on the books and records of the Company as and to the extent
provided in this Agreement. Nothing in this Section 5(a) shall affect in any way
the Buyer's obligations and agreement to comply with all applicable securities
laws upon resale of the Shares. If the Buyer provides the Company with an
opinion of counsel reasonably satisfactory in form, scope and substance to the
Company that registration of a resale by the Buyer of any of the Securities in
accordance with clause (1)(B) of Section 4(a) of this Agreement is not required
under the 1933 Act (which opinion expressly states that it may be relied upon by
the Company and its counsel in delivering instructions to the Company's transfer
agent), the Company shall permit the transfer of such Securities and, in the
case of the Common Shares, promptly, but in no event later than three days after
receipt of such opinion, instruct the Company's transfer agent to issue one or
-8-
<PAGE>
more share certificates in such name and in such denominations as specified by
the Buyer. The provisions of Section 3(n) of the Registration Rights Agreement
shall supersede this Section 5(a) once said Section 3(n) becomes applicable.
b. Conversion Procedure. In connection with the exercise of conversion
rights relating to the Preferred Shares, if the Common Shares issuable upon
conversion of the Preferred Shares have not been registered under the 1933 Act
prior to such conversion, the Buyer or any subsequent holder of the Preferred
Shares shall, in addition to any other requirement imposed by the terms of the
Preferred Shares as set forth in the Certificate of Designation, complete, sign
and furnish to the Company a conversion certificate in the form attached hereto
as Annex VI.
6. STOCK DELIVERY INSTRUCTIONS.
The certificates for the Preferred Shares and Warrants shall be
delivered by the Company to the Escrow Agent pursuant to Section 1(b) hereof on
a delivery against payment basis at the closing.
7. CLOSING DATE.
The date and time of the issuance and sale of the Preferred Shares and
issuance of Warrants (the "Closing Date") shall be 12:00 noon, New York City
time, on the date which is three New York Stock Exchange trading days after the
date on which the Buyer has deposited the purchase price for the Preferred
Shares with the Escrow Agent in accordance with Section 1(c) hereof, or such
other mutually agreed to time. The closing shall occur on the Closing Date at
the offices of the Escrow Agent.
8. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL AND ISSUE.
The Buyer understands that the Company's obligations to sell the
Preferred Shares to the Buyer and to issue the Warrants to the Buyer pursuant to
this Agreement is conditioned upon:
a. The receipt and acceptance by the Company of this Agreement as
evidenced by execution of this Agreement by the Company and delivery of an
executed counterpart of this Agreement to the Buyer or its legal counsel;
b. Delivery by the Buyer to the Escrow Agent of good funds as payment
in full of an amount equal to the purchase price for the Preferred Shares in
accordance with Section 1(c) hereof; and
c. The accuracy on the Closing Date of the representations and
warranties of the Buyer contained in this Agreement as if made on the Closing
Date and the performance by the Buyer on or before the Closing Date of all
-9-
<PAGE>
covenants and agreements of the Buyer required to be performed on or before such
Closing Date.
9. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The Company understands that the Buyer's obligation to purchase the
Preferred Shares and to acquire the Warrants on the Closing Date is conditioned
upon:
a. Delivery by the Company to the Escrow Agent of the certificates for
the Preferred Shares and the Warrants in accordance with this Agreement;
b. The accuracy on the Closing Date of the representations and
warranties of the Company contained in this Agreement as if made on the Closing
Date and the performance by the Company on or before the Closing Date of all
covenants and agreements of the Company required to be performed on or before
such Closing Date; and
c. Receipt by the Buyer on the Closing Date of an opinion of counsel
for the Company, dated the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer, to the effect set forth in Annex VII attached hereto.
10. GOVERNING LAW; MISCELLANEOUS. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of New York. A
facsimile transmission of this signed Agreement bearing a signature on behalf of
a party hereto shall be legal and binding on such party. The headings of this
Agreement are for convenience of reference and shall not form part of, or affect
the interpretation of, this Agreement. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement or the validity or enforceability of this Agreement
in any other jurisdiction. This Agreement may be amended only by an instrument
in writing signed by the party to be charged with enforcement. Any notices
required or permitted to be given under the terms of this Agreement shall be
sent by mail or delivered personally (which shall include telephone line
facsimile transmission) or by courier and shall be effective five days after
being placed in the mail, if mailed, or upon receipt, if delivered personally or
by courier, in each case addressed to a party at such party's address shown in
the introductory paragraph or on the signature page of this Agreement (facsimile
number 215-988-1739, in the case of the Company, and 703-834-6627, in the case
of the Buyer) or such other address as a party shall have provided by notice to
the other party in accordance with this provision and, in the case of notice to
the Company, with a copy to Silverman, Collura & Chernis, P.C., 381 Park Avenue
South, 16th Floor, New York, New York 10016, Attention: Michael Freedman, Esq.
(facsimile number 212-779-8858) and, in the case of notice to the Buyer, with a
-10-
<PAGE>
copy to Law Offices of Brian W Pusch, Penthouse Suite, 29 West 57th Street, New
York, New York 10019 (facsimile number 212-980-7055). The Buyer hereby
designates as its address for any notice required or permitted to be given to
the Buyer pursuant to the Certificate of Designations the following: GFL
Advantage Fund Limited, c/o Genesee Advisers, 12007 Sunrise Valley Drive, Suite
460, Reston, Virginia 22091 (facsimile number 703-476-7711), until the Buyer
shall designate another address for such purpose. The Buyer shall have the right
to assign it rights and obligations under this Agreement with respect to the
purchase of all or any portion of the Preferred Shares and Warrants to another
investment fund, provided such assignee, by written instrument duly executed by
such assignee, assumes all obligations of the Buyer hereunder with respect to
the purchase of the portion of the Preferred Shares and Warrants so assigned and
makes the same representations and warranties with respect thereto as the Buyer
makes in this Agreement, whereupon the Buyer shall be relieved of any further
obligations, responsibilities and liabilities with respect to the purchase of
all or the portion of the Preferred Shares and Warrants the obligation for the
purchase of which has been so assigned. In the case of any such assignment, the
Company shall agree in writing with such assignee to make available to such
assignee the benefits of the Registration Rights Agreement with respect to the
Common Shares issuable on conversion of the Preferred Shares or comprising a
portion of a Unit upon conversion of the Preferred Shares and on exercise of the
Warrants and Class A Warrants with respect to which the purchase under this
Agreement has been so assigned.
-11-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
or one of its officers thereunto duly authorized as of the date set forth below.
NUMBER OF SHARES: 6,000
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE: $6,000,000.00
NAME OF BUYER: GFL ADVANTAGE FUND LIMITED
SIGNATURE /s/ C.P. Kroon
-------------------------
C.P Kroon
Title: i.a. of A.P. de Groot/President
----------------------------------
Date: 6/28/96
----------------------------------
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
This Agreement has been accepted as of the date set forth below.
HEMISPHERX BIOPHARMA, INC.
By:___________________
Title:________________
Date: ________________
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the Buyer
or one of its officers thereunto duly authorized as of the date set forth below.
NUMBER OF SHARES: 6,000
PRICE PER SHARE: $1,000.00
AGGREGATE PURCHASE PRICE: $6,000,000.00
NAME OF BUYER: GFL ADVANTAGE FUND LIMITED
SIGNATURE
_____________________________
Title:
_____________________________
Date:
_____________________________
Address: c/o CITCO
Kaya Flamboyan 9
Curacao, Netherlands Antilles
This Agreement has been accepted as of the date set forth below.
HEMISPHERX BIOPHARMA, INC.
By: s/ William A. Carter
-----------------------
Title: President
--------------------
Date: 6/28/96
--------------------
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of June 28, 1996 (this
"Agreement"), is made by and between HEMISPHERx BIOPHARMA, INC., a Delaware
corporation (the "Company"), and the person named on the signature page hereto
(the "Initial Investor").
W I T N E S S E T H:
WHEREAS, in connection with the Subscription Agreement, dated as of June
28, 1996, between the Initial Investor and the Company (the "Subscription
Agreement"), the Company has agreed, upon the terms and subject to the
conditions of the Subscription Agreement, to issue and sell to the Initial
Investor an aggregate of 6,000 shares (the "Preferred Shares") of preferred
stock of the Company as provided in the Subscription Agreement, which shares of
Preferred Stock are convertible into shares (the "Conversion Shares") of Common
Stock, $.001 par value per share (the "Common Stock" ), or Units, of the
Company, and to issue to the Initial Investor warrants (the "Warrants") to
purchase 100,000 shares (subject to adjustment) of Common Stock (the "Warrant
Shares" and, together with the Conversion Shares, the "Shares") of Common Stock;
and
WHEREAS, to induce the Initial Investor to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"Securities Act"), and applicable state securities laws with respect to the
Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investor hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Investor" means the Initial Investor and any transferee or assignee
who agrees to become bound by the provisions of this Agreement in accordance
with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the Securities Act and pursuant to Rule 415 under the Securities
Act or any successor rule providing for offering securities on a continuous
basis ("Rule 415"), and the declaration or ordering of effectiveness of such
Registration Statement by the United States Securities and Exchange Commission
(the "SEC").
<PAGE>
(iii) "Registrable Securities" means the Shares and any shares of Common
Stock issued by the Company to any Investor as a dividend on the Preferred
Shares, the shares of Common Stock included in a Unit or any shares of Common
Stock issued by the Company to any holder of Common Stock Purchase Warrants.
(iv) "Registration Statement" means a registration statement of the Company
under the Securities Act.
(v) "Units" mean the units to be issued by the Company upon conversion of
the Preferred Shares pursuant to the terms of the Preferred Shares, each Unit
consisting of (i) one share of Common Stock and (ii) one Class A Redeemable
Common Stock Purchase Warrant to purchase one share of Common Stock (the "Common
Stock Purchase Warrant").
(b) As used in this Agreement, the term Investor includes (i) each Investor
(as defined above) and (ii) each person who is a permitted transferee or
assignee of the Registrable Securities pursuant to Section 9 of this Agreement.
(c) Capitalized terms defined in the introductory paragraph or the recitals
to this Agreement shall have the respective meanings therein provided.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Subscription Agreement.
2. Registration.
(a) Mandatory Registration. The Company shall prepare, and on or prior to
the date which is 21 days after the date of the closing under the Subscription
Agreement (the "Closing Date"), file with the SEC a Registration Statement
covering at least 2,427,275 shares of Common Stock as Registrable Securities,
and which Registration Statement shall state that, in accordance with Rule 416
under the Securities Act, such Registration Statement also covers such
indeterminate number of additional shares of Common Stock as may become issuable
upon conversion of the Preferred Shares and exercise of the Warrants to prevent
dilution resulting from stock splits, stock dividends or similar transactions or
by reason of changes in the conversion price of the Preferred Shares and the
exercise price of the Warrants in accordance with the respective terms thereof.
If for three consecutive trading days the number of shares included in the
Registration Statement required to be filed as provided in the first sentence of
this Section 2(a) shall not be sufficient to cover the number of Units issuable
on conversion in full of the unconverted Preferred Shares, then promptly, but in
no event later than 15 days after such insufficiency shall occur, the Company
shall file with the SEC an additional Registration Statement on Form S-1 (or, if
eligible at the time, Form S-3) or other applicable form covering such
-2-
<PAGE>
number of Units as shall be sufficient to permit such conversion and exercise.
If at any time the Preferred Shares become convertible into Units and if for
three consecutive trading days the number of shares included in the Registration
Statement required to be filed shall not be sufficient to cover the number of
Units issuable on conversion in full of the unconverted Preferred Shares, then
promptly, but in no event later than 15 days after such insufficiency shall
occur, the Company shall file with the SEC an additional Registration Statement
on Form S-1 (or, if eligible at the time, Form S-3) or other applicable form
covering such number of Units as shall be sufficient to permit such conversion
and exercise. For all purposes of this Agreement (other than Section 2(b)
hereof) such additional Registration Statements shall be deemed to be the
Registration Statement required to be filed by the Company pursuant to Section
2(a) of this Agreement, and the Company and the Investors shall have the same
rights and obligations (other than Section 2(c) hereof) with respect to such
additional Registration Statements as they shall have with respect to the
initial Registration Statement required to be filed by the Company pursuant to
this Section 2(a). The Company shall be permitted to include any additional
shares of Common Stock in any registration effected pursuant to this Section
2(a).
(b) Adjustment in Conversion Price. If the Registration Statement covering
the Registrable Securities required to be filed by the Company pursuant to
Section 2(a) hereof is not effective within 90 days after the Closing Date, then
the conversion price of the Preferred Shares shall be adjusted as provided in
the Certificate of Designations for the Preferred Shares.
(c) Piggy-Back Registrations. If at any time the Company shall determine to
prepare and file with the SEC a Registration Statement relating to an offering
for its own account or the account of others under the Securities Act of any of
its equity securities, other than on Form S-4 or Form S-8 or their then
equivalents relating to equity securities to be issued solely in connection with
any acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, the Company shall
send to each Investor, who is entitled to registration rights under this Section
2(a) written notice of such determination and, if within twenty (20) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, except that if, in
connection with any underwritten public offering for the account of the Company
the managing underwriter(s) thereof shall impose a limitation on the number of
shares of Common Stock which may be included in the Registration Statement
because, in such underwriter(s)' judgment, such limitation is necessary to
effect an orderly public distribution, then the Company shall be obligated to
include in such Registration Statement only such limited portion of the
Registrable Securities with respect to which such Investor has requested
-3-
<PAGE>
inclusion hereunder. Any exclusion of Registrable Securities shall be made pro
rata among the Investors seeking to include Registrable Securities, in
proportion to the number of Registrable Securities sought to be included by such
Investors; provided, however, that the Company shall not exclude any Registrable
Securities unless the Company has first excluded all outstanding securities the
holders of which are not entitled by right to inclusion of securities in such
Registration Statement; and provided further, however, that, after giving effect
to the immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement. No right to registration
of Registrable Securities under this Section 2(c) shall be construed to limit
any registration required under Section 2(a) hereof. The obligations of the
Company under this Section 2(c) may be waived by Investors holding a majority in
interest of the Registrable Securities and shall expire after the Company has
afforded the opportunity for the Investors to exercise registration rights under
this Section 2(c) for two registrations; provided, however, that any Investor
who shall have had any Registrable Securities excluded from any Registration
Statement in accordance with this Section 2(c) shall be entitled to include in
an additional Registration Statement filed by the Company the Registrable
Securities so excluded. Notwithstanding any other provision of this Agreement,
if the Registration Statement required to be filed pursuant to Section 2(a) of
this Agreement shall have been ordered effective by the SEC and thereafter the
Company shall have complied in all material respects with its obligations under
this Agreement in respect of such Registration Statement, then the Company shall
not be obligated to register any Registrable Securities on any Registration
Statement referred to in this Section 2(c).
3. Obligations of the Company. In connection with the registration of the
Registrable Securities, the Company shall:
(a) use its best efforts to cause each Registration Statement relating to
Registrable Securities to become effective as soon as possible after such
Registration Statement is filed with the SEC, and keep the Registration
Statement effective pursuant to Rule 415 at all times until the later of (1) in
the case of any Registrable Securities, the earlier of (i) such date as is three
years after the date such Registration Statement is first ordered effective by
the SEC and (ii) the date on which all Registrable Securities have been sold by
the Investors under circumstances in which the buyers may resell the Registrable
Securities without registration under the Securities Act and, (2) in the case of
Registrable Securities that are Warrant Shares, the later of (i) the date which
is three years after the date such Registration Statement if first ordered
effective by the SEC (but in no event later than the date on which all
Registrable Securities that are Warrant Shares have been sold by the Investors
-4-
<PAGE>
under circumstances in which the buyers may resell the Registrable Securities
that are Warrant Shares without registration under the Securities Act), in case
the Warrants have been exercised in full on a net exercise basis and (ii) the
date which is three years after the latest exercise of the Warrants for cash
(but in no event later than the date on which all Registrable Securities that
are Warrant Shares have been sold by the Investors under circumstances in which
the buyers may resell the Registrable Securities that are Warrant Shares without
registration under the Securities Act) (the "Termination Date"), which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the prospectus
used in connection with the Registration Statement as may be necessary to keep
the Registration Statement effective at all times until the Termination Date,
and, during such period, comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities of the Company covered
by the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in the Registration
Statement;
(c) furnish to each Investor whose Registrable Securities are included in
the Registration Statement and its legal counsel, (1) promptly after the same is
prepared and publicly distributed, filed with the SEC or received by the
Company, one copy of the Registration Statement and any amendment thereto, each
preliminary prospectus and prospectus and each amendment or supplement thereto,
each letter written by or on behalf of the Company to the SEC or the staff of
the SEC and each item of correspondence from the SEC or the staff of the SEC
relating to such Registration Statement (other than any portion of any thereof
which contains information for which the Company has sought confidential
treatment) and (2) such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents, as such Investor may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such other securities or
blue sky laws of such jurisdictions as the Investors who hold a majority in
interest of the Registrable Securities being offered reasonably request, (ii)
prepare and file in those jurisdictions such amendments (including
post-effective amendments) and supplements to such registrations and
-5-
<PAGE>
qualifications as may be necessary to maintain the effectiveness thereof at all
times until the Termination Date, (iii) take such other actions as may be
necessary to maintain such registrations and qualifications in effect at all
times until the Termination Date and (iv) take all other actions reasonably
necessary or advisable to qualify the Registrable Securities for sale in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (I) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (II) subject itself to general taxation in any such
jurisdiction, (III) file a general consent to service of process in any such
jurisdiction, (IV) provide any undertakings that cause more than nominal expense
or burden to the Company or (V) make any change in its charter or by-laws, which
in each case the Board of Directors of the Company determines to be contrary to
the best interests of the Company and its stockholders;
(e) as promptly as practicable after becoming aware of such event, notify
each Investor of the happening of any event of which the Company has knowledge,
as a result of which the prospectus included in the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and use its best efforts promptly to prepare a supplement or
amendment to the Registration Statement to correct such untrue statement or
omission, and deliver such number of copies of such supplement or amendment to
each Investor as such Investor may reasonably request;
(f) as promptly as practicable after becoming aware of such event, notify
each Investor who holds Registrable Securities being sold of the issuance by the
SEC of any stop order or other suspension of effectiveness of the Registration
Statement at the earliest possible time;
(g) permit a single firm of counsel designated as selling stockholders'
counsel by the Investors who hold a majority in interest of the Registrable
Securities being sold to review the Registration Statement and all amendments
and supplements thereto a reasonable period of time prior to their filing with
the SEC, at the selling stockholders' expense;
(h) make generally available to its security holders as soon as practical,
but not later than ninety (90) days after the close of the period covered
thereby, an earnings statement (in form complying with the provisions of Rule
158 under the Securities Act) covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter next following the effective
date of the Registration Statement;
-6-
<PAGE>
(i) make available for inspection by any Investor, any underwriter
participating in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or underwriter
(collectively, the "Inspectors"), all pertinent financial and other records,
pertinent corporate documents and properties of the Company (collectively, the
"Records"), as shall be reasonably necessary to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in confidence and shall not make any disclosure
(except to an Investor) of any Record or other information which the Company
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (ii) the release of such Records is ordered pursuant to a subpoena or
other order from a court or government body of competent jurisdiction or (iii)
the information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement. The
Company shall not be required to disclose any confidential information in such
Records to any Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the Company)
with the Company with respect thereto, substantially in the form of this Section
3(k). Each Investor agrees that it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to the Company and allow
the Company, at its expense, to undertake appropriate action to prevent
disclosure of, or to obtain a protective order for, the Records deemed
confidential. The Company shall hold in confidence and shall not make any
disclosure of information concerning an Investor provided to the Company
pursuant to Section 4(e) hereof unless (i) disclosure of such information is
necessary to comply with federal or state securities laws, (ii) the disclosure
of such information is necessary to avoid or correct a misstatement or omission
in any Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction or (iv) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that disclosure
of such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
notice to such Investor, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, such information;
(j) use its best efforts (i) to cause all the Registrable Securities
covered by the Registration Statement to be listed on the Nasdaq SmallCap Market
-7-
<PAGE>
or such other principal securities market on which securities of the same class
or series issued by the Company are then listed or traded or (ii) if securities
of the same class or series as the Registrable Securities are not then listed on
the Nasdaq SmallCap Market or any such other securities market, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities;
(k) provide a transfer agent and registrar, which may be a single entity,
for the Registrable Securities not later than the effective date of the
Registration Statement;
(l) cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing Registrable Securities to be
offered pursuant to the Registration Statement and enable such certificates to
be in such denominations or amounts the Investors may reasonably request and
registered in such names as the Investors may request; and, within three
business days after a Registration Statement which includes Registrable
Securities is ordered effective by the SEC, the Company shall deliver, and shall
cause legal counsel selected by the Company to deliver, to the transfer agent
for the Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an instruction in the
form attached hereto as Exhibit 1 (without substantive additions thereto) and an
opinion of such counsel in the form attached hereto as Exhibit 2 (without
substantive additions thereto); and
(m) take all other reasonable actions necessary to expedite and facilitate
disposition by the Investor of the Registrable Securities pursuant to the
Registration Statement.
4. Obligations of the Investors. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it and the intended method of disposition of the Registrable Securities
held by it as shall be reasonably required to effect the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request. At least four (4) days prior
to the first anticipated filing date of the Registration Statement, the Company
shall notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if any of such Investor's
Registrable Securities are eligible for inclusion in the Registration Statement.
-8-
<PAGE>
If at least one (1) business day prior to the filing date the Company has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration Statement without
including Registrable Securities of such Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement;
(c) Each Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(e) or 3(f),
such Investor will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(e) or 3(f) and, if so directed by the
Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice; and
5. Expenses of Registration. All expenses, other than fees and expenses of
investment bankers and other than brokerage commissions, incurred in connection
with registrations, filings or qualifications pursuant to Section 3, including,
without limitation, all registration, listing and qualifications fees, printers
and accounting fees and the fees and disbursements of counsel for the Company
and the Investors, shall be borne by the Company; provided, however, that the
Investors shall bear the fees and out-of-pocket expenses of the one legal
counsel selected by the Investors pursuant to Section 2(b) hereof.
6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers, if any, of such Investor, each person, if
any, who controls any Investor within the meaning of the Securities Act or the
Exchange Act, any underwriter (as defined in the Securities Act) for the
Investors, the directors, if any, of such underwriter and the officers, if any,
of such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims, damages, expenses or
-9-
<PAGE>
liabilities (joint or several) incurred (collectively, "Claims") to which any of
them may become subject under the Securities Act, the Exchange Act or otherwise,
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations in the Registration Statement, or
any post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereof or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any preliminary prospectus if used prior to the effective date of such
Registration Statement, or contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to the restrictions set forth in Section 6(d) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (I) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (II) with respect to any preliminary prospectus
shall not inure to the benefit of any such person from whom the person asserting
any such Claim purchased the Registrable Securities that are the subject thereof
(or to the benefit of any person controlling such person) if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected in the prospectus, as then amended or supplemented, if such
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof; and (III) shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
-10-
<PAGE>
the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.
(b) In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to indemnify and hold harmless, to the
same extent and in the same manner set forth in Section 6(a), the Company, each
of its directors, each of its officers who signs the Registration Statement,
each person, if any, who controls the Company within the meaning of the
Securities Act or the Exchange Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such stockholder or underwriter
within the meaning of the Securities Act or the Exchange Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
to which any of them may become subject, under the Securities Act, the Exchange
Act or otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and such Investor will reimburse any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this Section 6(b) shall not apply to amounts paid in settlement of
any Claim if such settlement is effected without the prior written consent of
such Investor, which consent shall not be unreasonably withheld; provided,
further, however, that the Investor shall be liable under this Section 6(b) for
only that amount of a Claim as does not exceed the amount, if any, by which (1)
the net proceeds to such Investor as a result of the sale of Registrable
Securities pursuant to such Registration Statement exceed (2) the purchase price
paid by such Investor for the Registrable Securities sold by such Investor
pursuant to such Registration Statement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9. Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section 6(b)
with respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact contained
in the preliminary prospectus was corrected on a timely basis in the prospectus,
as then amended or supplemented.
(c) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
-11-
<PAGE>
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay for only one separate legal counsel for the Investors; such legal counsel
shall be selected by the Investors holding a majority in interest of the
Registrable Securities included in the Registration Statement to which the Claim
relates. The failure to deliver written notice to the indemnifying party within
a reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action. The indemnification required by
this Section 6 shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as such expense, loss, damage or
liability is incurred and is due and payable.
7. Contribution. To the extent any indemnification by an indemnifying party
is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
8. Reports under Exchange Act. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
-12-
<PAGE>
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to transferees or assignees of all or
any portion of such securities which was issued upon conversion of at least
1,000 Preferred Shares, or any transferee of any portion of the Preferred Shares
which is at least 1,000 Preferred Shares, or any combination thereof, only if:
(a) the Investor agrees in writing with the transferee or assignee to assign
such rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (i) the
name and address of such transferee or assignee and (ii) the securities with
respect to which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities laws, and (d) at or before the time the
Company received the written notice contemplated by clause (b) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein.
10. Amendment of Registration Rights. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold a majority in interest of
the Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Investor and the Company.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
-13-
<PAGE>
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
(b) Notices required or permitted to be given hereunder shall be in writing
and shall be deemed to be sufficiently given when personally delivered (by hand,
by courier, by telephone line facsimile transmission or other means) or sent by
certified mail, return receipt requested, properly addressed and with proper
postage pre-paid (i) if to the Company, at Hemispherx BioPharma, Inc., 1617 JFK
Boulevard, Philadelphia, Pennsylvania 19103, Attention: Chief Executive Officer,
(ii) if to the Initial Investor, at the address set forth under its name in the
Subscription Agreement and (iii) if to any other Investor, at such address as
such Investor shall have provided in writing to the Company, or at such other
address as each such party furnishes by notice given in accordance with this
Section 11(b), and shall be effective, when personally delivered, upon receipt
and, when so sent by certified mail, four days after deposit with the United
States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein. This Agreement supersedes all prior agreements and understandings among
the parties hereto with respect to the subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
-14-
<PAGE>
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
(i) The Company acknowledges that any failure by the Company to perform its
obligations under this Agreement (and no other agreement), including, without
limitation, the Company's obligations under Section 3(l), or any delay in such
performance could result in both direct and consequential damages to the
Investors and the Company agrees that, in addition to any other liability the
Company may have by reason of any such failure or delay, the Company shall be
liable for all direct and consequential damages caused by any such failure or
delay.
(j) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
day and year first above written.
HEMISPHERX BIOPHARMA, INC.
By /s/ William A Carter
---------------------------
Name: William A. Carter
Title: President
INITIAL INVESTOR:
NAME: GFL ADVANTAGE FUND
LIMITED
By__________________________
Name:
Title:
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed by their respective officers thereunto duly authorized as of
day and year first above written.
HEMISPHERX BIOPHARMA, INC.
By___________________________
Name:
Title:
INITIAL INVESTOR:
NAME: GFL ADVANTAGE FUND
LIMITED
By s/C.P. Kroon
----------------------------
Name:C.P. Kroon
Title: i.a. of Arno de Groot
President
<PAGE>
EXHIBIT 1
to
Registration
Rights Agreement
[Company Letterhead]
[Date]
[Name and address of Transfer Agent]
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and direction to
you (1) to transfer or re-register the certificates for the shares of Common
Stock, $.001 par value per share (the "Common Stock"), of Hemispherx BioPharma,
Inc., a Delaware corporation (the "Company"), represented by certificate number
_______ for _______ shares (the "Outstanding Common Shares") of Common Stock
presently registered in the name of [Name of Investor] upon surrender of such
certificate to you, notwithstanding the legend appearing on such certificate,
(2) to issue shares (the " Conversion Common Shares") of Common Stock to or upon
the order of the holders of record from time to time of shares (the "Preferred
Shares") of Series D Convertible Preferred Stock, $.01 par value per share, of
the Company upon surrender to you for conversion of certificates for Preferred
Shares and a properly completed and duly executed Notice of Conversion in the
form enclosed herewith and (3) to issue shares (the "Warrant Common Shares") of
Common Stock to or upon the order of the holders of record from time to time of
warrants (the "Warrants") to purchase shares of Common Stock of the Company upon
surrender to you of Warrants and a properly completed and duly executed Form of
Subscription in the form enclosed herewith. The transfer or re-registration of
certificates for the Outstanding Common Shares by you should be made at such
time as you are requested to do so by the record holder of the Outstanding
Common Shares. The certificate issued upon such transfer or re-registration
should be registered in such name as requested by the holder of record of the
certificate surrendered to you and should not bear any legend which would
restrict the transfer of the shares represented thereby. In addition, you are
hereby directed to remove any stop-transfer instruction relating to the
Outstanding Common Shares. Certificates for the Conversion Common Shares and the
Warrant Common Shares should not bear any restrictive legend and should not be
subject to any stop-transfer restriction.
Contemporaneously with the delivery of this letter, the Company is
delivering to you an opinion of __________ as to registration of the resale of
the Outstanding Common Shares, the Conversion Common Shares and the Warrant
Common Shares under the Securities Act of 1933, as amended.
1-1
<PAGE>
Should you have any questions concerning this matter, please contact me.
Very truly yours,
HEMISPHERX BIOPHARMA, INC.
By: _____________________________
Name:
Title:
Enclosure
cc: [Name of Investor]
1-2
<PAGE>
EXHIBIT 2
to
Registration
Rights Agreement
[Date]
[Name and address
of transfer agent]
HEMISPHERX BIOPHARMA, INC.
Shares of Common Stock
Ladies and Gentlemen:
We are counsel to Hemispherx BioPharma, Inc., a Delaware corporation (the
"Company"), and we understand that [Name of Investor] (the "Holder") has
purchased from the Company an aggregate of shares (the "Preferred Shares") of
the Company's Series D Convertible Preferred Stock, $.01 par value per share,
represented by Certificate Nos. , and , respectively convertible into shares of
Common Stock, $.001 par value (the "Common Stock"), and warrants to purchase
shares of Common Stock (the "Warrants"). The Preferred Shares were purchased by
the Holder pursuant to a Subscription Agreement, dated as of July __, 1996,
between the Holder and the Company (the "Subscription Agreement"). Pursuant to a
Registration Rights Agreement, dated as of July __, 1996, between the Company
and the Holder (the "Registration Rights Agreement") entered into in connection
with the purchase by the Holder of the Preferred Shares pursuant to the
Subscription Agreement, the Company agreed with the Holder, among other things,
to register for resale by the Holder shares (the "Common Shares") of Common
Stock issuable upon conversion of the Preferred Shares and on exercise of the
Warrants under the Securities Act of 1933, as amended (the "Securities Act"),
upon the terms provided in the Registration Rights Agreement. In connection with
the exercise by the Holder of its registration rights under the Registration
Rights Agreement, on __________, 1996 the Company filed a Registration Statement
on Form S- (File No. 333- ) (the "Registration Statement") with the Securities
and Exchange Commission (the "SEC") relating to the Common Shares, which names
the Holder as a selling stockholder thereunder. [If notice from SEC is
available: The Company has received a notice from the SEC that the Registration
Statement has been declared effective. A copy of such notice is attached
hereto.]
Based on the foregoing, we are of the opinion that the Common Shares have
been registered under the Securities Act.
2-1
<PAGE>
This opinion has been furnished to you in connection with the
above-referenced transaction and may not be used for any other purpose or by any
other person. We assume no responsibility to inform you of events or changes
occurring after the date hereof.
[Other appropriate language to be included.]
Very truly yours,
cc: [Name of Investor]
2-2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT.
Right to Purchase 100,000 Shares
of Common Stock of Hemispherx
BioPharma, Inc.
HEMISPHERx BIOPHARMA, INC.
Common Stock Purchase Warrant
HEMISPHERX BIOPHARMA, INC., a Delaware corporation (the "Company") hereby
certifies that, for value received, GFL Advantage Fund Limited or registered
assigns (the "Holder"), is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time after the date
hereof, and before 5:00 p.m., New York City time, on the Expiration Date (as
hereinafter defined), 100,000 fully paid and nonassessable shares of Common
Stock, $.001 par value per share, of the Company at a purchase price per share
equal to the Purchase Price (as hereinafter defined). The number of such shares
of Common Stock and the Purchase Price are subject to adjustment as provided in
this Warrant.
As used herein the following terms, unless the context otherwise requires,
have the following respective meanings:
(a) The term "Business Day" as used herein shall mean a day on which
the New York Stock Exchange is open for business.
(b) The term "Common Stock" includes the Company's Common Stock, $.001
par value per share, as authorized on the date hereof, and any other
securities into which or for which the Common Stock may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger,
sale of assets or otherwise.
(c) The term "Company" shall include Hemispherx BioPharma, Inc. and
any corporation that shall succeed to or assume the obligation of
Hemispherx BioPharma, Inc. hereunder.
<PAGE>
(d) The term "Expiration Date" refers to November 2, 2000.
(e) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate
or otherwise) which the Holder of this Warrant at any time shall be
entitled to receive, or shall have received, on the exercise of this
Warrant, in lieu of or in addition to Common Stock, or which at any time
shall be issuable or shall have been issued in exchange for or in
replacement of Common Stock or Other Securities pursuant to Section 4.
(f) The term "Purchase Price" shall mean $4.00, subject to adjustment
as provided in this Warrant.
1. Exercise of Warrant.
1.1 Exercise at Option of Holder. (a) This Warrant may be exercised by the
Holder hereof in full or in part at any time or from time to time during the
exercise period specified in the first paragraph hereof until the Expiration
Date by surrender of this Warrant and the subscription form annexed hereto (duly
executed) by such Holder, to the Company at its principal office, accompanied by
payment, in cash or by certified or official bank check payable to the order of
the Company in the amount obtained by multiplying (a) the number of shares of
Common Stock designated by the Holder in the subscription form by (b) the
Purchase Price then in effect. On any partial exercise the Company will
forthwith issue and deliver to or upon the order of the Holder hereof a new
Warrant or Warrants of like tenor, in the name of the Holder hereof or as such
Holder (upon payment by such Holder of any applicable transfer taxes) may
request, providing in the aggregate on the face or faces thereof for the
purchase of the number of shares of Common Stock for which such Warrant or
Warrants may still be exercised. Notwithstanding anything to the contrary
contained herein, if, at any time shares of Series D Convertible Preferred
Stock, $.01 par value ("Preferred Stock"), of the Company issued by the Company
to GFL Advantage Fund Limited ("Advantage") are converted into units ("Units")
comprised of one share of Common Stock and one Class A Redeemable Common Stock
Purchase Warrant (rather than being converted solely into shares of Common
Stock), then the number of shares of Common Stock into which this Warrant is
exercisable shall be reduced simultaneously with each such conversion by an
amount proportionately by the percentage of the aggregate stated value of
Preferred Stock so converted equal to the product obtained by multiplying (1)
the number of shares of Common Stock which initially may be purchased upon
exercise of this Warrant (as the same shall have been adjusted in accordance
with Section 5) times (2) a fraction, the numerator of which shall be the number
of shares of Preferred Stock converted into Units in such conversion and the
denominator of which shall be 6,000.
-2-
<PAGE>
(b) Notwithstanding any other provision of this Warrant, in no event shall
Advantage be entitled at any time to purchase a number of shares of Common Stock
on exercise of this Warrant in excess of that number of shares upon purchase of
which the sum of (1) the number of shares of Common Stock beneficially owned by
Advantage, or any person associated with, or serving as an adviser to Advantage
(each a "GFL Person" and collectively, the "GFL Persons") (other than shares of
Common Stock deemed beneficially owned through the ownership of the unexercised
portion of this Warrant and shares of Preferred Stock beneficially owned by all
GFL Persons) and (2) the number of shares of Common Stock issuable upon exercise
of the portion of this Warrant with respect to which the determination in this
sentence is being made, would result in beneficial ownership by any GFL Person
of more than 4.9% of the outstanding shares of Common Stock. For purposes of the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(1) of the immediately preceding sentence.
1.2 Net Issuance. Notwithstanding anything to the contrary contained in
Section 1.1, the Holder may elect to exercise this Warrant in whole or in part
by receiving shares of Common Stock equal to the net issuance value (as
determined below) of this Warrant, or any part hereof, upon surrender of this
Warrant at the principal office of the Company together with notice of such
election, in which event the Company shall issue to the Holder a number of
shares of Common Stock computed using the following formula:
X = (Y (A-B))/A
Where: X = the number of shares of Common Stock to be issued to the
Holder
Y = the number of shares of Common Stock as to which this
Warrant is to be exercised
A = the current fair market value of one share of Common
Stock calculated as of the last trading day immediately
preceding the exercise of this Warrant
B = the Purchase Price
As used herein, current fair market value of Common Stock as of a specified
date shall mean with respect to each share of Common Stock the average of the
closing bid prices of the Common Stock on the principal securities market on
which the Common Stock may at the time be traded over a period of five Business
-3-
<PAGE>
Days consisting of the day as of which the current fair market value of a share
of Common Stock is being determined (or if such day is not a Business Day, the
Business Day next preceding such day) and the four consecutive Business Days
prior to such day. If on the date for which current fair market value is to be
determined the Common Stock is not eligible for trading on any securities
market, the current fair market value of Common Stock shall be the highest price
per share which the Company could then obtain from a willing buyer (not a
current employee or director) for shares of Common Stock sold by the Company,
from authorized but unissued shares, as determined in good faith by the Board of
Directors of the Company, unless prior to such date the Company has become
subject to a merger, acquisition or other consolidation pursuant to which the
Company is not the surviving party, in which case the current fair market value
of the Common Stock shall be deemed to be the value received by the holders of
the Company's Common Stock for each share thereof pursuant to the Company's
acquisition.
2. Delivery of Stock Certificates, etc., on Exercise. As soon as
practicable after the exercise of this Warrant, and in any event within three
days thereafter, the Company at its expense (including the payment by it of any
applicable issue or stamp taxes) will cause to be issued in the name of and
delivered to the Holder hereof, or as such Holder (upon payment by such Holder
of any applicable transfer taxes) may direct, a certificate or certificates for
the number of fully paid and nonassessable shares of Common Stock (or Other
Securities) to which such Holder shall be entitled on such exercise, in such
denominations as may be requested by such Holder, plus, in lieu of any
fractional share to which such Holder would otherwise be entitled, cash equal to
such fraction multiplied by the then current fair market value (as determined in
accordance with subsection 1.2) of one full share, together with any other stock
or other securities any property (including cash, where applicable) to which
such Holder is entitled upon such exercise pursuant to Section 1 or otherwise.
3. Adjustment for Dividends in Other Stock, Property, etc.;
Reclassification, etc. In case at any time or from time to time, all the holders
of Common Stock (or Other Securities) shall have received, or (on or after the
record date fixed for the determination of stockholders eligible to receive)
shall have become entitled to receive, without payment therefor,
(a) other or additional stock or other securities or property (other
than cash) by way of dividend, or
(b) any cash (excluding cash dividends payable solely out of earnings
or earned surplus of the Company), or
(c) other or additional stock or other securities or property
(including cash) by way of spin-off, split-up, reclassification,
recapitalization, combination of shares or similar corporate rearrangement,
-4-
<PAGE>
other than additional shares of Common Stock (or Other Securities) issued as a
stock dividend or in a stock-split (adjustments in respect of which are provided
for in Section 5), then and in each such case the Holder of this Warrant, on the
exercise hereof as provided in Section 1, shall be entitled to receive the
amount of stock and other securities and property (including cash in the cases
referred to in subdivisions (b) and (c) of this Section 3) which such Holder
would hold on the date of such exercise if on the date hereof the Holder had
been the holder of record of the number of shares of Common Stock called for on
the face of this Warrant and had thereafter, during the period from the date
hereof to and including the date of such exercise, retained such shares and all
such other or additional stock and other securities and property (including cash
in the case referred to in subdivisions (b) and (c) of this Section 3)
receivable by the Holder as aforesaid during such period, giving effect to all
adjustments called for during such period by Section 4.
4. Adjustment for Reorganization, Consolidation, Merger, etc. In case at
any time or from time to time, the Company shall (a) effect a reorganization,
(b) consolidate with or merge into any other person, or (c) transfer all or
substantially all of its properties or assets to any other person under any plan
or arrangement contemplating the dissolution of the Company, then, in each such
case, as a condition of such reorganization, consolidation, merger, sale or
conveyance, the Company shall give at least 30 days notice to the Holder of such
pending transaction whereby the Holder shall have the right to exercise this
Warrant prior to any such reorganization, consolidation, merger, sale or
conveyance. Any exercise of this Warrant pursuant to notice under this paragraph
shall be conditioned upon the closing of such reorganization, consolidation,
merger, sale or conveyance which is the subject of the notice and the exercise
of this Warrant shall not be deemed to have occurred until immediately prior to
the closing of such transaction.
5. Adjustment for Extraordinary Events. In the event that the Company shall
(i) issue additional shares of the Common Stock as a dividend or other
distribution on outstanding Common Stock, (ii) subdivide or reclassify its
outstanding shares of Common Stock, or (iii) combine its outstanding shares of
Common Stock into a smaller number of shares of Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such
event, be adjusted by multiplying the then Purchase Price by a fraction, the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such event and the denominator of which shall be the number
of shares of Common Stock outstanding immediately after such event, and the
product so obtained shall thereafter be the Purchase Price then in effect. The
Purchase Price, as so adjusted, shall be readjusted in the same manner upon the
happening of any successive event or events described herein in this Section 5.
-5-
<PAGE>
The Holder of this Warrant shall thereafter, on the exercise hereof as provided
in Section 1, be entitled to receive that number of shares of Common Stock
determined by multiplying the number of shares of Common Stock which would be
issuable on such exercise as of immediately prior to such issuance by a fraction
of which (i) the numerator is the Purchase Price in effect immediately prior to
such issuance and (ii) the denominator is the Purchase Price in effect on the
date of such exercise.
6. Further Assurances. The Company will take all action that may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of stock, free from all taxes, liens and
charges with respect to the issue thereof, on the exercise of all or any portion
of this Warrant from time to time outstanding.
7. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend on, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company or any transfer of all
or substantially all of the assets of the Company to or consolidation or
merger of the Company with or into any other person, or
(c) any voluntary or involuntary dissolution, liquidation or
winding-up of the Company,
then and in each such event the Company will mail or cause to be mailed to the
Holder, at least ten days prior to such record date, a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the time, if any is
to be fixed, as of which the holders of record of Common Stock (or Other
Securities) shall be entitled to exchange their shares of Common Stock (or Other
Securities) for securities or other property deliverable on such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
-6-
<PAGE>
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall also state that the action in question or the
record date is subject to the effectiveness of a registration statement under
the Securities Act of 1933, as amended (the "Securities Act"), or a favorable
vote of stockholders if either is required. Such notice shall be mailed at least
ten days prior to the date specified in such notice on which any such action is
to be taken or the record date, whichever is earlier.
8. Reservation of Stock, etc., Issuable on Exercise of Warrants. The
Company will at all times reserve and keep available, solely for issuance and
delivery on the exercise of this Warrant, all shares of Common Stock (or Other
Securities) from time to time issuable on the exercise of this Warrant.
9. Transfer of Warrant. This Warrant shall inure to the benefit of the
successors to and assigns of the Holder. This Warrant and all rights hereunder,
in whole or in part, is registrable at the office or agency of the Company
referred to below by the Holder hereof in person or by his duly authorized
attorney, upon surrender of this Warrant properly endorsed.
10. Register of Warrants. The Company shall maintain, at the principal
office of the Company (or such other office as it may designate by notice to the
Holder hereof), a register in which the Company shall record the name and
address of the person in whose name this Warrant has been issued, as well as the
name and address of each successor and prior owner of such Warrant. The Company
shall be entitled to treat the person in whose name this Warrant is so
registered as the sole and absolute owner of this Warrant for all purposes.
11. Exchange of Warrant. This Warrant is exchangeable, upon the surrender
hereof by the Holder hereof at the office or agency of the Company referred to
in Section 10, for one or more new Warrants of like tenor representing in the
aggregate the right to subscribe for and purchase the number of shares of Common
Stock which may be subscribed for purchase hereunder, each of such new Warrants
to represent the right to subscribe for and purchase such number of shares as
shall be designated by said Holder hereof at the time of such surrender.
-7-
<PAGE>
12. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of any such loss, theft or destruction of this Warrant, on
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, on surrender
and cancellation of this Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
13. Redemption. (a) So long as the Registration Statement (the
"Registration Statement") required to be filed by the Company with the
Securities and Exchange Commission (the "SEC") pursuant to Section 2(a) of the
Registration Rights Agreement, dated as of June 28, 1996, between the Company
and Advantage (the "Registration Rights Agreement") shall be effective and the
Company shall be in compliance in all material respects with its obligations
under the Registration Rights Agreement, this Warrant, the terms of the
Preferred Stock and the Subscription Agreement, dated as of June 28, 1996, by
and between the Company and Advantage (the "Subscription Agreement"), in each
case at the time of exercise of the Company's rights as herein provided and at
all times thereafter until the Redemption Date (as herein defined), if the
Closing Price (as defined below) for 20 consecutive trading days ending not
later than the date which is 90 days after the Registration Statement is first
ordered effective by the SEC (the "SEC Effective Date") is greater than $6.00
(subject to equitable adjustment for stock splits, stock dividends,
subdivisions, combinations, reclassifications and similar events occurring after
the date of original issuance of this Warrant), then the Company shall have the
right, exercisable at any time on or prior to the date which is 92 days after
the SEC Effective Date, by not less than sixty (60) days prior notice, to redeem
this Warrant at a redemption price equal to the product obtained by multiplying
(x) the number of shares of Common Stock which may be purchased upon exercise of
this Warrant (determined without regard to any limitations in Section 1.1(b) of
this Warrant) times (y) an amount equal to $.001. All of this Warrant must be
redeemed, if any of this Warrant is redeemed pursuant to this paragraph (a).
(b) So long as the Registration Statement shall be effective and the
Company shall be in compliance in all material respects with its obligations
under the Registration Rights Agreement, this Warrant, the terms of the
Preferred Stock and the Subscription Agreement, in each case at the time of
exercise of the Company's rights as herein provided and at all times thereafter
until the Redemption Date (as herein defined), in lieu of redemption of this
Warrant under Section 13(a), the Company shall have the right, exercisable at
any time on or prior to the date which is 90 days after the SEC Effective Date
on not less than sixty (60) days prior notice, to redeem this Warrant at a
redemption price equal to the net redemption value (determined in accordance
with Section 1.2) of the entire unexercised portion of this Warrant, in which
event, the Company shall pay cash or, at the election of the Company, issue a
number of shares of Common Stock having a Computed Value equal to, the amount
computed using the following formula:
R = Y (A-B)
-8-
<PAGE>
Where: R = the net redemption value, expressed in dollars, of the
entire unexercised portion of this Warrant
Y = the number of shares of Common Stock as to which this
Warrant is at the time unexercised
A = the current fair market value of one share of Common Stock
calculated as of the last trading day immediately preceding
Redemption Date
B = the Purchase Price
All of this Warrant must be redeemed, if any of this Warrant is redeemed
pursuant to this paragraph (b).
(c) If the Company shall desire to exercise its right to redeem this
Warrant in accordance with paragraph (a) or (b) of this Section, it shall, not
later than the latest date on which the Company is permitted to exercise such
redemption rights in accordance with paragraph (a) or (b) of this Section, as
applicable, and prior to the 60th day before the date fixed for redemption,
deliver personally (which shall include a telephone line facsimile transmission)
or mail a notice of redemption to the Holder of this Warrant, first class,
postage prepaid, at the Holder's address as it shall appear on the records of
the Warrant register referred to in Section 10. Any notice mailed in the manner
provided herein shall be deemed to have been duly given only when actually
received by the Holder. The notice of redemption shall specify (i) whether the
redemption is pursuant to paragraph (a) or (b) of this Section, (ii) the
redemption price or the manner of determining the same, (iii) the date fixed for
redemption, (iv) the place where this Warrant shall be delivered and the
redemption price paid, (v) that the right to exercise this Warrant shall
terminate at 5:00 p.m., New York City time, on the business day immediately
preceding the Redemption Date and (vi) in the case of a redemption pursuant to
paragraph (b) of this Section, whether the redemption price is to be paid in
cash or shares of Common Stock. The date fixed for the redemption of this
Warrant shall be the Redemption Date.
(d) Any right to exercise this Warrant shall terminate at 5:00 p.m., New
York City time, on the business day immediately preceding the Redemption Date.
On and after the Redemption Date, the Holder shall have no further rights with
respect to the portion of this Warrant so redeemed except to receive, upon
surrender of this Warrant, the applicable redemption price for the portion of
this Warrant so redeemed.
(e) From and after the Redemption Date, the Company shall, at the place
specified in the notice of redemption, upon presentation and surrender to the
Company by or on behalf of the Holder of this Warrant, deliver or cause to be
delivered to or upon the written order of the Holder a sum in cash equal to the
-9-
<PAGE>
applicable redemption price. From and after the Redemption Date and upon the
deposit or setting aside by the Company of a sum sufficient to redeem this
Warrant (or, in the case of a redemption pursuant to Section 13(b), shares of
Common Stock having a Computed Value equal to the applicable redemption price or
a combination of cash and shares of Common Stock equal to the applicable
redemption price), this Warrant shall terminate and become void and all rights
hereunder with respect hereto, except the right to receive payment of the
applicable redemption price, shall cease.
(f) If the Company elects, in accordance with Section 13(b) to make payment
of all or any part of the applicable redemption price in fully paid and
nonassessable shares of Common Stock (hereinafter sometimes called the "Stock
Payment Option"), the Company shall be permitted to exercise the Stock Payment
Option if the issuance of shares of Common Stock upon such exercise of the Stock
Payment Option shall have been authorized by the Board of Directors of the
Company and none of the following conditions are present:
(i) the number of shares of Common Stock authorized, unissued and
unreserved for all purposes, or held in the Company's treasury, is
insufficient to pay the redemption price in Common Stock;
(ii) the issuance or delivery of shares of Common Stock pursuant to
the Stock Payment Option or the public resale of such shares by the Holder
would require registration with or approval of any governmental authority
under any law or regulation, and such registration or approval has not been
effected or obtained; provided, however, that with respect to compliance
with the securities or blue sky laws of the states of the United States,
the requirements of this clause (ii) shall be deemed satisfied if at the
applicable time the Company is in compliance with Section 3(d) of the
Registration Rights Agreement;
(iii) the shares of Common Stock to be issued upon exercise of the
Stock Payment Option have not been authorized for listing, upon official
notice of issuance, on any national securities exchange on which the Common
Stock is then listed; have not been authorized for listing, upon official
notice of issuance, on the Nasdaq National Market or the Nasdaq SmallCap
Market, if the Common Stock is traded on either such market or have not
been approved for quotation if the Common Stock is traded in the
over-the-counter market;
(iv) the Computed Price is less than the par value of the Common
Stock;
-10-
<PAGE>
(v) the Common Stock is neither (i) listed or admitted for trading on
a national securities exchange nor (ii) quoted on the Nasdaq National
Market or the Nasdaq SmallCap Market; or
(vi) the issuance of shares of Common Stock in payment of the
applicable redemption price would result in any GFL Person beneficially
owning more than 4.9% of the Common Stock, determined as provided in
Section 1.1(b) hereof.
(g) If the Stock Payment Option is elected, the Company shall issue and
dispatch or cause to be dispatched to the Holder one or more certificates for
the aggregate number of whole shares of Common Stock determined by dividing the
Computed Price into the net redemption value of this Warrant or the portion of
the net redemption value of this Warrant to be paid in shares of Common Stock.
No fractional shares will be issued in payment of the applicable redemption
price. In lieu thereof, the Company may issue a number of shares of Common Stock
which reflects a rounding up to the next whole number or may pay lawful money of
the United States of America. The shares of Common Stock issued or to be issued
by the Company in payment of the applicable redemption price are sometimes
referred to hereinafter as the "Payment Shares."
(h) If the Company exercises the Stock Payment Option, the Company shall
deliver to the Holder, on or prior to the date on which Payment Shares are to be
dispatched to the Holder, an Officers' Certificate setting forth (i) the total
amount of the applicable redemption price to which the Holder is entitled, (ii)
the portion of the applicable redemption price being made in Payment Shares,
(iii) the number of Payment Shares allocable to such payment, as calculated
pursuant to Section 13(g), (iv) any rounding adjustment to such number or any
payment necessary to be made pursuant to Section 13(g), (v) a brief statement of
the facts requiring such adjustment and (vi) a brief statement that none of the
conditions set forth in Section 13(f) has occurred and is existing. Such
Officer's Certificate shall be accompanied by the certificates and instruments,
each duly issued in the name of the Holder, representing the Payment Shares.
Such Officers' Certificate shall be conclusive evidence of the correctness of
the calculation of the number of Payment Shares allocable to the payments to
which such Officers' Certificate relates and of any adjustments to such number
made pursuant to Section 13(g) in the absence of manifest error. In addition, on
or before the pertinent payment date, the Company shall cause the transfer agent
for the Common Stock to prepare and issue the certificates representing the
Payment Shares in the name of the Holder or as directed by the Holder before
being so delivered by the Company.
(i) The Payment Shares, when dispatched pursuant to and in compliance with
this Section 13, shall be, and for all purposes shall be deemed to be, validly
issued, fully paid and nonassessable shares of Common Stock; the issuance and
-11-
<PAGE>
delivery thereof is in all respects hereby authorized; and the dispatch thereof,
together with lawful money of the United States of America, if any, paid in lieu
of fractional shares of such Common Stock, will be, and for all purposes shall
be deemed to be, in full discharge and satisfaction of the Company's obligation
to pay the applicable redemption price to which such Payment Shares relate.
(j) As used in this Section 13, the following terms shall have the meanings
provided herein:
(1) "Closing Price" means the last reported bid price for one share of
the Common Stock, as reported, quoted or determined by the first of the
following to apply: the New York Stock Exchange, the American Stock
Exchange, the Nasdaq National Market and the Nasdaq SmallCap Market.
(2) "Computed Price" means the arithmetic average of the Closing Price
for the five consecutive trading days ending one trading day prior to the
Redemption Date.
(3) "Officer" means the Chairman or Vice Chairman of the Board, the
Chief Executive Officer, the President, any Vice President, the Controller
or the Chief Financial Officer of the Company.
(4) "Officers' Certificate" means a certificate signed by an Officer.
14. Warrant Agent. The Company may, by written notice to the Holder,
appoint an agent having an office in the United States of America, for the
purpose of issuing Common Stock (or Other Securities) on the exercise of this
Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 11,
and replacing this Warrant pursuant to Section 12, or any of the foregoing, and
thereafter any such issuance, exchange or replacement, as the case may be, shall
be made at such office by such agent.
15. Remedies. The Company stipulates that the remedies at law of the Holder
of this Warrant in the event of any default or threatened default by the Company
in the performance of or compliance with any of the terms of this Warrant are
not and will not be adequate, and that such terms may be specifically enforced
by a decree for the specific performance of any agreement contained herein or by
an injunction against a violation of any of the terms hereof or otherwise.
16. No Rights or Liabilities as a Stockholder. This Warrant shall not
entitle the Holder hereof to any voting rights or other rights as a stockholder
of the Company. No provision of this Warrant, in the absence of affirmative
-12-
<PAGE>
action by the Holder hereof to purchase Common Stock, and no mere enumeration
herein of the rights or privileges of the Holder hereof, shall give rise to any
liability of such Holder for the Purchase Price or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
17. Notices, etc. All notices and other communications from the Company to
the registered Holder of this Warrant shall be mailed by first class certified
mail, postage prepaid, at such address as may have been furnished to the Company
in writing by such Holder or at the address shown for such Holder on the
register of Warrants referred to in Section 10.
18. Investment Representations. By acceptance of this Warrant, the Holder
represents to the Company that this Warrant is being acquired for the Holder's
own account and for the purpose of investment and not with a view to, or for
sale in connection with, the distribution thereof, nor with any present
intention of distributing or selling the Warrant or the Common Stock issuable
upon exercise of the Warrant. The Holder acknowledges that the Holder has been
afforded the opportunity to meet with the management of the Company and to ask
questions of, and receive answers from, such management and the Company's
counsel about the business and affairs of the Company and concerning the terms
and conditions of the offering of this Warrant, and to obtain any additional
information, to the extent that the Company possessed such information or could
acquire it without unreasonable effort or expense, necessary to verify the
accuracy of the information otherwise obtained by or furnished to the Holder
hereof in connection with the offering of this Warrant. The Holder hereof
asserts that it may be considered to be a sophisticated investor, is familiar
with the risks inherent in speculative investments such as in the Company, has
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the investment in this Warrant and
the Common Stock issuable upon exercise of this Warrant, and is able to bear the
economic risk of the investment. The Holder acknowledges and agrees that this
Warrant and, except as otherwise provided in the Registration Rights Agreement,
the Common Stock issuable upon exercise of this Warrant (if any) have not been
(and at the time of acquisition by the Holder, will not have been or will not
be), registered under the Securities Act or under the securities laws of any
state, in reliance upon certain exemptive provisions of such statutes. The
Holder recognizes and acknowledges that such claims of exemption are based, in
part, upon the representations of the Holder contained herein. The Holder
further recognizes and acknowledges that because this Warrant and, except as
provided in the Registration Rights Agreement, the Common Stock issuable upon
exercise of this Warrant (if any) are unregistered, they may not be eligible for
resale, and may only be resold in the future pursuant to an effective
registration statement under the Securities Act and any applicable state
securities laws, or pursuant to a valid exemption from such registration
-13-
<PAGE>
requirements. Unless the shares of Common Stock have theretofore been registered
for resale under the Securities Act, the Company may require, as a condition to
the issuance of Common Stock upon the exercise of this Warrant (i) in the case
of an exercise in accordance with Section 1.1 hereof, a confirmation as of the
date of exercise of the Holder's representations pursuant to this Section 18, or
(ii) in the case of an exercise in accordance with Section 1.2 hereof, an
opinion (in form and substance reasonably satisfactory to the Company) of
counsel reasonably satisfactory to the Company that the shares of Common Stock
to be issued upon such exercise may be issued without registration under the
Securities Act.
19. Legend. Unless theretofore registered for resale under the Securities
Act, each certificate for shares issued upon exercise of this Warrant shall bear
the following legend:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended. The securities have been
acquired for investment and may not be sold, transferred or assigned in the
absence of an effective registration statement for the securities under the
Securities Act of 1933, as amended, or an opinion of counsel that
registration is not required under said Act.
20. Miscellaneous. This Warrant and any terms hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement or such change, waiver, discharge or termination
is sought. This Warrant shall be construed and enforced in accordance with and
governed by the internal laws of the State of Delaware. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof. The invalidity or unenforceability of any
provision hereof shall in no way affect the validity or enforceability of any
other provision.
-14-
<PAGE>
IN WITNESS WHEREOF, Hemispherx BioPharma, Inc. has caused this Warrant to
be executed on its behalf by one of its officers thereunto duly authorized.
Dated: July 3, 1996 HEMISPHERX BIOPHARMA, INC.
By: /s/ William A. Carter
---------------------------
Title: President
<PAGE>
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO HEMISPHERX BIOPHARMA, INC.
1. The undersigned Holder of the attached original, executed Warrant hereby
elects to exercise its purchase right under such Warrant with respect to
______________ shares of Common Stock, as defined in the Warrant, of Hemispherx
BioPharma, Inc., a Delaware corporation (the "Company").
2. The undersigned Holder
(a) elects to pay the aggregate purchase price for such shares of Common
Stock (the "Exercise Shares") (i) by lawful money of the United States
or the enclosed certified or official bank check payable in United
States dollars to the order of the Company in the amount of
$___________, or (ii) by wire transfer of United States funds to the
account of the Company in the amount of $____________, which transfer
has been made before or simultaneously with the delivery of this Form
of Subscription pursuant to the instructions of the Company;
or
(b) elects to receive shares of Common Stock having a value equal to the
value of the Warrant calculated in accordance with Section 1.2 of the
Warrant.
3. Please issue a stock certificate or certificates representing the
appropriate number of shares of Common Stock in the name of the
undersigned or in such other names as is specified below:
Name: _____________________________________
Address: _____________________________________
_____________________________________
Dated:____________ ___, _____ ____________________________
(Signature must conform to
name of Holder as specified
on the face of the Warrant)
_____________________________
_____________________________
(Address)
Consent of Independent Auditors
The Board of Directors
Hemispherx Biopharma, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
July 24, 1996
