PROSPECTUS
HEMISPHERX BIOPHARMA, INC.
3,908,334 SHARES OF COMMON STOCK
1,729,227 SHARES OF COMMON STOCK UNDERLYING WARRANTS
This Prospectus relates to the possible resale from time to time by certain
selling securityholders ("Selling Securityholders") of up to (i) 3,908,334
shares of Common Stock; and (ii) 1,729,227 shares of Common Stock underlying
warrants ("Warrants"), and to additional securities as follows: (i) 290,544
warrants and stock options (collectively, "C Warrants") which were registered in
the Company's registration statement declared effective April 18, 1997 ("April
Registration"); (ii) 310,544 shares of Common Stock issued and issuable upon
exercise of the C Warrants which were registered in the April Registration;
(iii) 178,294 shares of Common Stock issued upon exercise of various warrants
("R Warrants") which were registered in the April Registration; (iv) 150,000
shares of Common Stock underlying E Warrants which were registered in the April
Registration; (v) 2,500,000 shares of Common Stock issued and issuable upon
conversion of the Company's Series E Preferred Stock, $.01 par value ("E
Preferred") which were registered in the April registration; (iv) 6,213,000
shares of Common Stock underlying the Company's Class A Redeemable Warrants
("Class A Warrants") which were registered in the Company's initial public
offering dated November 2, 1995 ("IPO"); (ii) 462,000 Units underlying an
Underwriter's Unit Purchase Option ("Option") issued pursuant to the IPO; (iii)
462,000 shares of Common Stock underlying Units included in the Option; (iv)
462,000 Class A Warrants underlying the Units included in the Option; and (v)
462,000 shares of Common Stock underlying Class A Warrants underlying the Units
included in the Option. The Warrants, C Warrants, R Warrants, E Warrants,
Option, and E Preferred are collectively referred to herein as the
"Derivatives". Derivatives and the Common Stock underlying them are collectively
referred to herein as the "Securities". This Prospectus also relates to such
presently indeterminate number of additional shares of Common Stock as may be
issuable upon conversion or exercise of the Derivatives, or payment of dividends
on the E Preferred, based upon fluctuations in the conversion price of the E
Preferred, stock splits, stock dividends or similar transactions, in accordance
with Rule 416 under the Securities Act of 1933, as amended ("Securities Act").
The Company will not receive any proceeds from the possible resales by the
Selling Securityholders of their respective Securities. The Company will receive
gross proceeds of up to $7,680,989 upon exercise of the Derivatives. There can
be no assurance that any Derivatives will be exercised.
The Selling Securityholders may sell their Securities 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 Securities 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 Securities 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 Securities to which this Prospectus relates.
The Company's Common Stock and Warrants are quoted on the American Stock
Exchange ("AMEX") under the symbols HEB and HEB/WS, respectively. On February 4,
1998 the last sale price of the Common Stock and Class A Warrants as reported on
AMEX was $3.875 and $1.375, 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")
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 February 18, 1998
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information can be inspected and copied at the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Room 1204, Everett McKinley Dirksen Building,
219 South Dearborn Street, Chicago, Illinois 60604; and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained at prescribed rates from the Public Reference Section of the Commission
at its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549.
This Prospectus does not contain all of the information set forth in the
Registration Statements of which this Prospectus is a part and which the Company
has filed with the Commission. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement, including the exhibits filed as a part thereof, copies of which can
be inspected at, or obtained at prescribed rates from the Public Reference
Section of the Commission at the address set forth above. Additional updating
information with respect to the Company may be provided in the future by means
of appendices or supplements to the Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus is delivered, upon written or oral request of
such person, a copy of any and all of the information that has been or may be
incorporated herein by reference (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference into such documents).
Requests should be directed to American Bingo & Gaming Corp., 515 Congress
Avenue, Suite 1200, Austin, Texas 78701 (512) 472-2041.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company with the
Commission and are incorporated herein by reference:
(a) The Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1996;
(b) The Company's Quarterly Report on Form 10-Q for the three month period
ended March 31, 1997;
(c) The Company's Quarterly Report on Form 10-Q for the six month period
ended June 30, 1997;
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(d) The Company's Quarterly Report on Form 10-Q for the nine month period
ended September 30, 1997;
(e) The Company's Registration Statement on Form S-1, File No. 333-24983,
which was declared effective by the Commission on April 18, 1997;
(f) The Company's 1997 Proxy Statement dated August 19, 1997;
(g) The description of the Company's Common Stock contained in the
Company's Registration Statement on Form S-1, Registration No. 33-93314; and
(h) All other reports filed by the Company pursuant to Section 13(a) and
15(d) of the Exchange Act since the Company's fiscal year ended December 31,
1996.
All documents filed by the Company with the Commission pursuant to sections
13, 14 or 15(d) of the Exchange Act subsequent hereto, but prior to the
termination of the offering of securities made by this Prospectus shall be
deemed to be incorporated by reference herein and to be part hereof from their
respective dates of filing.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus, to
the extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
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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".
THE COMPANY
Hemispherx Biopharma, Inc. ("Company") is a biopharmaceutical company using
nucleic acid technologies to develop therapeutic products for the treatment of
viral diseases and certain cancers. Nucleic acid compounds represent a 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
specifically-configured ribonucleic acid ("RNA"). One of the Company's double
stranded RNA drug products, trademarked Ampligen, a parenteral drug product, is
in advanced 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. Sales on a pre-approval, cost recovery
basis have been initiated in Belgium, Canada and the United States. The Company
is presently exploring additional distributor relationships for Europe, the
United States and Asia to set the stage for wider market penetration.
SAB/Bioclones, the Company's partner in certain countries, is initiating trials
of Ampligen in South Africa and Australia.
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 know 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 and ME/CFS followed by HBV in the U.S., Canada, Europe and
Japan. Ampligen has also 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, 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, 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
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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 for its use in liver
infections.
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 currently conducting a Phase II clinical trial of Ampligen in the U.S. for
the treatment of HIV infection. The drug technology is designed to enhance the
patient's own immune system, thereby fighting the invasive viral agent more
effectively and resulting in more durable long term benefits.
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 500,000 cases. The Company has entered into an agreement
with a Canadian pharmaceutical firm pursuant to which the Canadian company will
provide various services in connection with the distribution of Ampligen on a
cost recovery basis as authorized under the Canadian emergency drug release
program. Presently the Company is receiving revenues from sales of Ampligen to
patients in an open label clinical trial being conducted in Belgium. The Company
is currently discussing open-label and placebo controlled trials with the FDA.
The Company is unaware of any other new drugs which are under development for
treatment of ME/CFS. Today, ME/CFS accounts for a significant portion of people
entering chronic disability status, especially in the western U.S. Thus, this
presently untreatable illness constitutes a significant impact on the overall
cost of health care.
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 believes that approximately 25,000 new cases of renal cell carcinoma
will be diagnosed in the U.S. each year. 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. The HPB has authorized the Company
to charge patients for the cost of the Ampligen administered to renal cell
patients in the context of clinical trials. Based on estimates prepared by the
American Cancer Society, the Company believes that approximately 34,000 new
cases of malignant melanoma will be diagnosed in the U.S. each year. 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.
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On May 1, 1997, the Company received permission from the FDA to recover
costs from ME/CFS patients in the Company's AMP-511 open-label treatment
protocol. In June 1997, five (5) clinical sites across the United States had
been approved to participate in this protocol. The cost of Ampligen to the
patient is $2,100 for the first eight weeks of treatment and $2,400 for each
additional eight-week period thereafter. This treatment protocol has begun to
enroll ME/CFS patients at these centers in the U.S. The Company has been in
discussion with the FDA on the design of a controlled ME/CFS clinical trial
(AMP-516).
In November 1995, the Company sold 5,313,000 Units at $3.50 per Unit in its
initial public offering. Each Unit consists of one share of Common Stock and one
Class A Warrant.
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). As of December
31, 1997, 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.
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.
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RECENT DEVELOPMENTS
In October 1997, the Company raised an aggregate of $10,005,000 in gross
proceeds through two private offerings to "accredited investors", as that term
is defined in Rule 501 of the Securities Act, pursuant to Regulation D of the
Securities Act and Rule 506 promulgated thereunder. The terms of the two
offerings are as follows:
1. Pursuant to the Term Sheet dated September 2, 1997, the Company
sold 2,840,000 shares of Common Stock at $2.50 per share, through Hermitage
Capital, Inc., the Company's placement agent ("Hermitage"), thereby raising
$7,100,000. Hermitage received as compensation, 6% of the gross proceeds
and 200,000 warrants exercisable at $4.00 per share and expiring on
December 31, 2000. The shares of Common Stock and the shares underlying the
warrants are subject to 12 month lock-up agreements.
2. Pursuant to the Term Sheet dated September 22, 1997, the Company
sold 968,334 shares of Common Stock at $3.00 per share, and one warrant for
every ten shares purchased. The warrants are exercisable at $4.00 per share
and expire on December 31, 2000. The Company offered its securities through
finders and broker/dealers, and paid commissions of 6% on sales, and one
warrant for every ten shares sold. The Company raised $2,905,000 and issued
96,833 warrants to various investors and 88,234 warrants to various
finders.
In March 1997, the Company sold 5,000 shares of E Preferred at $1,000 per
share in a private transaction pursuant to Regulation D of the Securities Act of
1933, as amended ("Securities Act") and Rule 506 promulgated thereunder. The
proceeds from such offering were used to retire all outstanding shares of the
Company's Series D Preferred Stock.
In July 1996, the Company sold 6,000 shares of Series D Preferred Stock at
$1,000 per share in a private transaction pursuant to Regulation D of the
Securities Act and Rule 506 promulgated thereunder. The Company filed a
registration statement on Form S-1, which was declared effective by the
Commission on September 16, 1996, registering 2,427,275 shares of Common Stock
underlying the Series D Preferred Stock and 890,543 Shares underlying certain
other warrants and options.
The Company's corporate headquarters are located at 1617 JFK Boulevard,
Philadelphia, Pennsylvania 19103. The Company's telephone number is (215)
988-0080.
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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:
1. 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.
2. 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
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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 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.
3. 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 24 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
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available from operations and if the Company is not able to secure additional
sources of financing on acceptable terms, the Company's business could be
materially adversely affected.
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
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.
4. 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. 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. due to the wide incidence of the disease. In
the event that the
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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
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.
5. 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
12
<PAGE>
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.
6. 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 December 31, 1996, the Company's accumulated deficit was
approximately $48 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.
7. 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
clinical research quantities to production
13
<PAGE>
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.
8. Manufacturing Experience and Capacity.
Ampligen is currently produced only in limited quantities for use in its
clinical trials, however, the Company is engaged with its partner, Bioclones (as
defined below) and other suppliers to increase production capacity. 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 portion of the manufacturing and production
process. A pilot facility in South Africa is being expanded to provide an
increased supply of Ampligen raw material. While the Company believes that
construction of the commercial facility will begin in 1998, 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.
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.
9. 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
14
<PAGE>
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
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.
10. 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 limited 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.
11. 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
15
<PAGE>
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. In addition, Dr. Smith does not have a written employment agreement
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.
12. 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 Allegheny University
and has obtained certain of its technology for Oragen products through a license
with Temple University. 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.
16
<PAGE>
13. Impact of Potential AMEX Delisting on Marketability of Securities;
Broker-Dealer Sales of the Company's Securities.
The Company's Common Stock and Class A Warrants trade on AMEX. AMEX has
rules which establish criteria for the continued listing of securities on AMEX.
Generally, AMEX will consider delisting or suspending a company based on, among
other things, the following criteria: stockholders' equity, operating losses,
reduced market value of publicly held shares, substantial disposition of assets,
and total number of shareholders.
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 AMEX. If the Company's securities are
delisted, 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 likely 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.
14. 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 currently
maintain worldwide product liability insurance coverage.
15. 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
17
<PAGE>
pharmaceutical products. The Company cannot predict what, if any, legislation
will ultimately be adopted or the 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.
16. 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
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.
17. 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 Common Stock and Warrants, 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 Common Stock and Warrants.
18
<PAGE>
18. Shares Eligible for Future Sale; Registration Rights.
A substantial amount of the Company's outstanding Common Stock are
restricted securities, as that term is defined in Rule 144 promulgated under the
Securities Act ("Rule 144"). Absent registration under the Securities Act or the
availability of an exemption under the Securities Act, the sale of such shares
is subject to Rule 144. In general, under Rule 144, subject to the satisfaction
of certain other conditions, a person, including an affiliate of the Company,
who has beneficially owned restricted shares of Common Stock for at least one
year is entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class, if the Common Stock is quoted on a stock exchange, the average
weekly trading volume during the four calendar weeks preceding the sale. A
person who presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least two years is entitled to sell such
shares under Rule 144(k), without regard to any of the volume limitations
described above. In addition, the Company has issued warrants to purchase
2,750,000 shares of Common Stock ("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. Certain holders of Common
Stock have executed lock up agreements with the Company. 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 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.
19. Current Prospectus and State Registration Required to Exercise Class A
Warrants.
The Class A Warrants may not be exercised by the holders thereof unless at
the time of exercise a registration statement covering the shares of Common
Stock issuable upon exercise of the Class A Warrants is effective and such
shares of Common Stock have been registered under the Securities Act and
qualified, or deemed to be exempt, under the securities laws of the states of
residence of the respective holders of such Class A Warrants. While the Class A
Warrants are being registered herewith, there can be no assurance, however, that
such registration statement will remain current or that such Class A Warrants
will be properly qualified under applicable state securities laws, the failure
of which may result in the exercise of the Class A Warrants and the resale or
other disposition of Common Stock issued upon such exercise becoming unlawful.
20. Potential Adverse Effect of Redemption of Class A Warrants.
The Class A Warrants may be redeemed by the Company at any time commencing
two years from the date of this Prospectus and ending five years from the date
of this Prospectus,
19
<PAGE>
at a redemption price of $.05 per Class A Warrant upon 30 days' prior written
notice provided the closing bid price of the Common Stock on AMEX (or another
national securities exchange) for 20 consecutive trading days ending within 10
days of the notice of redemption equals or exceeds $9.00 per share subject to
adjustment. Redemption of the Class A Warrants could force the holders to
exercise the Class A Warrants and pay the exercise price at a time when it may
be disadvantageous for the holders to do so, to sell the Class A Warrants at the
then current market price when they might otherwise wish to hold the Class A
Warrants, or to accept the redemption price, which is likely to be substantially
less than the market value of the Class A Warrants at the time of redemption.
21. Exercise of Derivatives May Have Dilutive Effect on Market.
The Derivatives provide for, during their term, an opportunity for the
holder to profit from a rise in the market price, of which there is no
assurance, with resulting dilution in the ownership interest in the Company held
by the then present stockholders. Holders of Derivatives most likely would
exercise or convert the Derivatives and purchase the underlying Common Stock at
a time when the Company may be able to obtain capital by a new offering of
securities on terms more favorable than those provided by such Derivatives, in
which event the terms on which the Company may be able to obtain additional
capital would be affected adversely.
22. 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.
23. 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.
20
<PAGE>
USE OF PROCEEDS
The Company will not receive proceeds from any sale of the Selling
Securityholder Securities. The proceeds to be received by the Company from the
exercise of the Derivatives (assuming all of such securities are exercised),
will be $7,680,989. The Company intends to use such proceeds for general
corporate purposes. Pending use of the proceeds, they will be invested in short
term, interest bearing securities or money market funds.
21
<PAGE>
DILUTION
The following discussion assumes that all of the Derivatives are exercised:
As of September 30, 1997, the net tangible book value of the Common Stock,
based on the balance sheet at September 30, 1997, as adjusted for the net
proceeds of the September 2, 1997 and September 22, 1997 private placement of
Common Stock, was $9,926,716 or $.48 per share. Net tangible book value per
share represents the amount of the tangible assets, $11,340,870, less the amount
of its liabilities, $1,414,154, divided by the number of shares of Common Stock
outstanding, 20,501,993 (as adjusted). Without taking into account any other
changes in the net tangible book value of the Company after September 30, 1997,
upon the exercise of all of the Derivatives (2,169,771), and the receipt of the
net proceeds therefrom ($7,680,989), the pro forma net tangible book value of
the Common Stock, would be $17,607,705. Upon dividing the pro forma net tangible
book value by the pro forma amount of Common Stock outstanding (22,671,764), the
pro forma net tangible book value per share is $.78 per share, representing an
immediate increase in the net tangible book value of $.30 per share to the
present shareholders. Dilution to new investors, since new investors will
purchase shares at varying and fluctuating prices, represents the difference
between the market price of the Common Stock and the pro forma net tangible book
value per share after the issuance of all the shares of Common Stock issuable
upon exercise of the Derivatives.
22
<PAGE>
RESALES BY SELLING SECURITYHOLDERS
This Prospectus relates to the proposed resale by the Selling
Securityholders of the Securities. The following table sets forth as of January
29, 1998 certain information with respect to the persons for whom the Company is
registering the Securities 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. The Company will not receive any of the proceeds
from the sale of the Securities. If the Derivatives are exercised, the Company
would receive $7,680,989.
<TABLE>
<CAPTION>
Securities Securities
Owned Prior Securities Owned
to Offering(1) Offered Herein After Offering
---------------- --------------- ---------------
Name of Selling Common Deriv- Common Deriv-
Securityholders Stock atives Stock atives Number %
- --------------- ----- ------ ----- ------ ------ -
<S> <C> <C> <C> <C> <C> <C> <C>
Seymour Cohn(2) 119,808 119,808 119,808 119,808 0 *
Myron Cherry(3) 14,306 10,000 11,536 10,000 2,770 *
Charles Moore(4) 42,304 42,304 42,304 42,304 0 *
Maurice Schlang(5) 138,432 118,432 138,432 118,432 0 *
Julian & Eunice Cohen 20,255 0 1,536 0 18,719 *
Investments LP
Sidney Stoneman 20,255 0 1,536 0 18,719 *
Michael C. Burrows 354,042 0 3,072 0 350,970 1.7%
Frank B. Carr 21,791 0 1,536 0 20,255 *
Michael J. Dubilier 144,919 0 6,145 0 0 *
Keys Foundation 45,337 0 6,145 0 0 *
Maryann Charlap 10,553 0 10,553 0 0 *
Carter Investments, LC(6) 78,564 0 960 0 77,604 *
Maryann Charlap & Abraham E. 191,028 0 1,275 0 189,753 *
Ostrovsky & E. Paul Charlap,
TTEES FBO E. Paul Charlap
FLF Associates 72,000 0 72,000 0 0 *
Gerald Tsai 43,200 0 43,200 0 0 *
Lincoln Trust 97,776 0 28,800 0 68,976 *
Bost & Co. FBO Fairfax 250,000 250,000 250,000(7) 0 0 *
County Public Schools
Topworks & Co. FBO Montgomery 250,000 250,000 250,000(7) 0 0 *
County Employee Retirement
System
Ell & Co. FBO AT&T 750,000 750,000 750,000(7) 0 0 *
Investment Management Corp.
Jerome Belson 1,565,000 125,000 225,000(8) 0 1,340,000 6.5%
Alan Howard 25,000 25,000 25,000(7) 0 0 *
Michael Lauer 66,000 30,000 66,000(9) 0 0 *
Lancer Offshore, Inc. 685,000 345,000 685,000(10) 0 0 *
Lancer Voyage Fund 90,000 50,000 90,000(11) 0 0 *
Lancer Partners, LP 325,000 0 325,000 0 0 *
Lindemann Capital Partners, LP 150,000 0 150,000(7) 0 0 *
Joseph Giamanco 247,500 0 247,500(12) 0 0 *
Joseph C. Roselle 265,000 0 265,000(13) 0 0 *
Hermitage Capital 336,000 336,000 336,000(14) 0 0 *
Richard Maser 80,000 0 80,000 0 0 *
Stephen P. DePalma 40,000 0 40,000 0 0 *
Ronald Menello 10,000 0 10,000 0 0 *
Gary Herman 40,000 0 40,000 0 0 *
Lancer Partners, LP 280,000 0 280,000 0 0 *
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Securities Securities
Owned Prior Securities Owned
to Offering(1) Offered Herein After Offering
---------------- --------------- ---------------
Name of Selling Common Deriv- Common Deriv-
Securityholders Stock atives Stock atives Number %
- --------------- ----- ------ ----- ------ ------ -
<S> <C> <C> <C> <C> <C> <C>
Martin Garvey 4,000 0 4,000 0 0 *
The Peninsula Group 1,000,000 0 1,000,000 0 0 *
John W. Hunter 500,000 0 500,000 0 0 *
Jennie Raphael 20,000 0 20,000 0 0 *
Thermo Electron 40,000 0 40,000 0 0 *
Emile Chabala 60,000 0 60,000 0 0 *
Richard A. Brown 260,000 26,000 286,000(15) 0 0 *
Alexander J. Brown Trust 40,000 4,000 44,000(15) 0 0 *
Robin L. Brown TTEE
Donald P. Carlin 100,000 10,000 110,000(15) 0 0 *
Fernand B. Baer, Jr. 50,000 5,000 55,000(15) 0 0 *
Stanley Lobel 33,334 3,333 36,667(15) 0 0 *
Lynn Hecht Schaffran 15,000 1,500 16,500(15) 0 0
Ralph Worthington IV 50,000 5,000 55,000(15) 0 0 *
Dated 6/16/86 IRA,
US Trust TTEE
Dr. Stanley and Joan Levin 20,000 2,000 22,000(15) 0 0 *
Wayne Johnson 20,000 2,000 22,000(15) 0 0 *
Barry Rodgveller 11,000 1,100 12,100(15) 0 0 *
Barry Rodgveller SEP-IRA 32,000 3,200 35,200(15) 0 0 *
Steven Fuerst 10,000 1,000 11,000(15) 0 0 *
David R. Fulton 10,000 1,000 11,000(15) 0 0 *
Joan R. Baer and Arthur B. Baer 10,000 1,000 11,000(15) 0 0 *
TTEES Joan Rich Baer, Inc.
Pension Plan U/A/D 1/1/78
Warner Family Trust 100,000 10,000 110,000(15) 0 0 *
Thomas N. Warner TTEE
Mervyn L. Keces 10,000 1,000 11,000(15) 0 0 *
& Associates, Inc. Defined
Benefit Pension Plan, Mervyn
Keces TTEE
William R. Brink 30,000 3,000 33,000(15) 0 0 *
Joseph Michael Cafiero and 33,000 3,300 36,300(15) 0 0 *
Veronica Walsh Cafiero JT
Bernice Brauser 50,000 5,000 55,000(15) 0 0 *
Michael Bartlett 10,000 1,000 11,000(15) 0 0 *
Maxwell Stolzberg 10,000 1,000 11,000(15) 0 0 *
Alan J. Rubin 30,000 3,000 33,000(15) 0 0 *
Bruce E. Toll 24,000 2,400 26,400(15) 0 0 *
Randall W. Krafft 10,000 1,000 11,000(15) 0 0 *
Amanda Bering 7,500 7,500 7,500(16) 0 0 *
Gonzalo Mocorrea 2,500 2,500 2,500(16) 0 0 *
Leroy Gilford 4,000 4,000 4,000(16) 0 0 *
Gilford Securities 27,417 27,417 27,417(16) 0 0 *
Baer & Company 27,417 27,417 27,417(16) 0 0 *
Gregory and Carol Serras 2,700 2,700 2,700(16) 0 0 *
Z/A Associates 30,700 30,700 30,700(16) 0 0 *
Bridge Ventures, Inc.(17) 778,160 254,660 292,160(18) 0 486,000 2.4%
Stephen Drescher 300,000 300,000 300,000(19) 0 0 *
Stanley Zaslow 15,000 15,000 15,000(20) 0 0 *
Marty Clare 2,500 2,500 2,500(20) 0 0 *
Israel Cohen 10,000 10,000 10,000(20) 0 0 *
Ralph Esposito 10,000 10,000 10,000(20) 0 0 *
Gerald Brauser 75,000 75,000 75,000(21) 0 0 *
Research Works 60,000 60,000 60,000(22) 0 0 *
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Securities Securities
Owned Prior Securities Owned
to Offering(1) Offered Herein After Offering
---------------- --------------- ---------------
Name of Selling Common Deriv- Common Deriv-
Securityholders Stock atives Stock atives Number %
- --------------- ----- ------ ----- ------ ------ -
<S> <C> <C> <C> <C> <C> <C>
Mitchell Reisman 5,000 5,000 5,000(23) 0 0 *
Robert Conaboy 6,000 6,000 6,000(23) 0 0 *
Alisa Conaboy 6,000 6,000 6,000(23) 0 0 *
Shamrock Group 600,000 600,000 600,000(24) 0 0 *
</TABLE>
- -------------
** 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 within 60 days of January 29, 1998. 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) Represents (i) a C Warrant to purchase 119,808 shares of Common Stock
exercisable during the four year period commencing November 2, 1995, at an
exercise price of $10.85 per share; and (ii) Common Stock underlying said C
Warrant.
(3) Includes (i) a C Warrant to purchase 5,000 shares of Common Stock
exercisable at any time commencing November 1, 1994 and expiring December
31, 1998, at an exercise price of $1.75 per share; (ii) a C Warrant to
purchase 5,000 shares of Common Stock exercisable at any time commencing
March 20, 1995 and expiring March 31, 1999, at an exercise price of $1.75
per share; (iii) 1,536 shares of Common Stock underlying R Warrants,
exercisable during the four year period commencing December 31, 1993 at an
exercise price of $1.75 per share; and (iv) 10,000 shares of Common Stock
underlying said C Warrants.
(4) Represents (i) two C Warrants to purchase 20,000 shares of Common Stock
each, exercisable during the five year period commencing November 2, 1995,
at an exercise price of $2.00 per share; (ii) a stock option for the
purchase of 2,304 shares of Common Stock exercisable during the ten year
period commencing April 16, 1996, at an exercise price of $4.34 per share;
(iii) 40,000 shares of Common Stock underlying said C Warrants; and (iv)
2,304 shares of Common Stock underlying said stock option.
25
<PAGE>
(5) Includes (i) a C Warrant to purchase 100,000 shares of Common Stock
exercisable during the five year period commencing November 2, 1995, at an
exercise price of $2.00 per share; (ii) a stock option for the purchase of
18,432 shares of Common Stock exercisable during the ten year period
commencing January 25, 1995, at an exercise price of $4.34 per share; (iii)
100,000 shares of Common Stock underlying said C Warrants; and (iv) 18,432
shares of Common Stock underlying said stock option.
(6) Dr. Carter, President and Chief Executive Officer of the Company, is a
member of Carter Investments LC.
(7) Represents shares of Common Stock underlying E Preferred.
(8) Includes 125,000 shares of Common Stock underlying E Preferred
(9) Includes 30,000 shares of Common Stock underlying E Preferred
(10) Includes 345,000 shares of Common Stock underlying E Preferred.
(11) Includes 50,000 shares of Common Stock underlying E Preferred.
(12) Includes 137,500 shares of Common Stock underlying E Preferred.
(13) Includes 25,000 shares of Common Stock underlying E Preferred.
(14) Represents (i) 150,000 shares of Common Stock underlying E Warrants
exercisable at $3.00 per share during the three year period commencing
March 1, 1997; and (ii) 186,000 shares of Common Stock underlying Warrants
exercisable through December 31, 2000 at $4.00 per share.
(15) Includes shares of Common Stock underlying Warrants exercisable through
December 31, 2000 at $4.00 per share.
(16) Represents shares of Common Stock underlying Warrants exercisable through
December 31, 2000 at $4.00 per share.
(17) Harris Freedman, a Company Vice President, is an officer of Bridge
Ventures, Inc.
(18) Represents (i) 254,660 shares of Common Stock underlying Warrants
exercisable through October 15, 2004 at $3.50 per share; and (ii) 37,500
shares of Common Stock underlying E Preferred.
(19) Represents shares of Common Stock underlying Warrants exercisable through
October 15, 1999 at $3.50 per share.
26
<PAGE>
(20) Represents shares of Common Stock underlying Warrants exercisable through
October 15, 2004 at $3.50 per share.
(21) Represents shares of Common Stock underlying Warrants exercisable through
March 31, 2000 and May 31, 2000 at $1.75 per share.
(22) Represents shares of Common Stock underlying Warrants exercisable through
January 8, 2001 at $4.00 per share.
(23) Represents shares of Common Stock underlying Warrants exercisable through
March 1, 2001 at $3.50 per share.
(24) Represents shares of Common Stock underlying Warrants exercisable through
August 15, 2001 at $2.50 per share.
PLAN OF DISTRIBUTION
The Selling Securityholders may offer and sell shares of Common Stock and
Warrants from time to time in the discretion of the Selling Securityholders on
AMEX or in the over-the-counter market or otherwise at prices and at terms then
prevailing or at prices related to the then current market price, or at
negotiated prices. The distribution of the shares of Common Stock and Warrants
may be effected from time to time in one or more transactions including, without
limitation: (a) a block trade in which the broker-dealer so engaged will attempt
to sell the Common Stock and Warrants as agent, but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) face-to-face or
other direct transactions between the Selling Securityholders and purchasers
without a broker-dealer or other intermediary. In effecting sales,
broker-dealers or agents engaged by the Selling Securityholders may arrange for
other broker-dealers or agents to participate. From time to time, one or more of
the Selling Securityholders may pledge, hypothecate or grant a security interest
in some or all of the common Stock owned by them, and the pledgees, secured
parties or persons to whom such securities have been hypothecated shall, upon
foreclosure in the event of default, be deemed to be Selling Securityholders
hereunder. In addition, the Selling Securityholders may from time to time sell
short the Common Stock of the Company, and in such instances, this Prospectus
may be delivered in connection with such short sale and the Common Stock offered
hereby may be used to cover such short sale.
Sales of Selling Securityholders' Common Stock and Warrants may also be
made pursuant to Rule 144 under the Securities Act, where applicable. The
Selling Securityholders' shares may also be offered in one or more underwritten
offerings, on a firm commitment or best efforts basis. The Company will receive
no proceeds from the sale of Common Stock by the Selling Securityholders.
27
<PAGE>
To the extent required under the Securities Act, the aggregate amount of
Selling Securityholders' Common Stock and Warrants being offered and the terms
of the offering, the names of any such agents, brokers, dealers or underwriters
and any applicable commission with respect to a particular offer will be set
forth in an accompanying Prospectus supplement. Any underwriters, dealers,
brokers or agents participating in the distribution of the Common Stock and
Warrants may receive compensation in the form of underwriting discounts,
concessions, commissions or fees from a Selling Securityholder and/or purchasers
of Selling Securityholders' shares of Common Stock and/or Warrants, for whom
they may act. In addition, sellers of Selling Securityholders' shares of Common
Stock and/or Warrants may be deemed to be underwriters under the Securities Act
and any profits on the sale of Selling Securityholders' shares of Common Stock
or Warrants by them may be deemed to be discounts or commissions under the
Securities Act. Selling Securityholders may have other business relationships
with the Company and its subsidiaries or affiliates in the ordinary course of
business.
From time to time each of the Selling Securityholders may transfer, pledge,
donate or assign Selling Securityholders' shares of Common Stock and Warrants to
lenders, family members and others and each of such persons will be deemed to be
a "Selling Securityholder" for purposes of this Prospectus. The number of
Selling Securityholders' shares of Common Stock and Warrants beneficially owned
by those Selling Securityholders who so transfer, pledge, donate or assign
Selling Securityholders' shares of Common Stock or Warrants will decrease as and
when they take such actions. The plan of distribution for Selling
Securityholders' shares of Common Stock and Warrants sold hereunder will
otherwise remain unchanged, except that the transferees, pledgees, donees or
other successors will be Selling Securityholders hereunder.
Including, and without limiting the foregoing, in connection with
distributions of the Common Stock, a Selling Securityholder may enter into
hedging transactions with broker-dealers and the broker-dealers may engage in
short sales of the Common Stock in the course of hedging the positions they
assume with such Selling Securityholder. A Selling Securityholder may also enter
into option or other transactions with broker-dealers that involve the delivery
of the Common Stock to the broker-dealers, who may then resell or otherwise
transfer such Common Stock. A Selling Securityholder may also loan or pledge the
Common Stock to a broker-dealer and the broker-dealer may sell the Common Stock
so loaned or upon default may sell or otherwise transfer the pledged Common
Stock.
Under applicable rule and regulations under the Exchange Act, any person
engaged in the distribution of the Common Stock may not bid for or purchase
shares of Common Stock during a period which commences one business day (5
business days, if the Company's public float is less than $25 million or its
average daily trading volume is less than $100,000) prior to such person's
participation in the distribution, subject to exceptions for certain passive
market making activities. In addition and without limiting the foregoing, each
Selling Securityholder will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including, without limitation,
Regulation M which provisions may limit the timing of purchases and sales of
shares of the Company's Common Stock by such Selling Securityholder.
28
<PAGE>
The Company is bearing all costs relating to the registration of the shares
of Common Stock (other than fees and expenses, if any, of counsel or other
advisors to the Selling Securityholders). Any commissions, discounts or other
fees payable to broker-dealers in connection with any sale of the shares of
Common Stock and Warrants will be borne by the Selling Securityholder selling
such shares of Common Stock or Warrants.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock and Warrants of the
Company is Continental Stock Transfer & Trust Co., 2 Broadway, New York, New
York 10004.
LEGAL MATTERS
The legality of the shares offered hereby has been passed upon for the
Company by Silverman, Collura, Chernis & Balzano, P.C., 381 Park Avenue South,
Suite 1601, New York, New York 10016.
EXPERTS
The consolidated financial statements of the Company and subsidiaries as of
December 31, 1995 and 1996, and for each of the years in the three year period
ended December 31, 1996, have been incorporated by reference herein in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, also incorporated by reference herein, and upon the authority of
said firm as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company,
the Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expense
incurred or paid by a director, officer, or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Company in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by a controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issues.
29
<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. 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
----
Available Information..........................................................3
Prospectus Summary.............................................................5
Risk Factors...................................................................9
Use of Proceeds...............................................................21
Dilution......................................................................22
Resales by Selling Securityholders............................................23
Plan of Distribution..........................................................27
Transfer Agent................................................................29
Legal Matters.................................................................29
Experts.......................................................................29
Disclosure of Commission Position on Indemnification..........................29
--------------------
30
