<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996
REGISTRATION NO. 333-12407
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
VIROPHARMA INCORPORATED
(FORMERLY "VIROPHARMA, INC.")
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 2834 23-2789550
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
76 GREAT VALLEY PARKWAY
MALVERN, PA 19355
(610) 651-0200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
CLAUDE H. NASH
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VIROPHARMA, INC.
76 GREAT VALLEY PARKWAY
MALVERN, PA 19355
(610) 651-0200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES OF ALL COMMUNICATIONS TO:
DAVID R. KING JEFFREY S. MARCUS
MORGAN, LEWIS & BOCKIUS LLP LAURA M. PERZ
2000 ONE LOGAN SQUARE MORRISON & FOERSTER LLP
PHILADELPHIA, PA 19103-6993 1290 AVENUE OF THE AMERICAS
(215) 963-5000 NEW YORK, NY 10104-0012
(212) 468-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
und er the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
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.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 AN 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 SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Dated November 8, 1996
2,250,000 Shares
[LOGO OF VIROPHARMA INCORPORATED APPEARS HERE]
Common Stock
-------------
All of the shares of Common Stock, $.002 par value per share ("Common
Stock'), offered hereby are being sold by ViroPharma Incorporated ("ViroPharma"
or the "Company").
Of the 2,250,000 shares of Common Stock offered hereby, 208,333 shares are
being reserved for purchase by Boehringer Ingelheim Pharmaceuticals, Inc.
("Boehringer Ingelheim") at the initial public offering price pursuant to its
intention to make an equity investment of $2.5 million in the Company. See
"Prospectus Summary--The Offering." Prior to this offering, there has been no
public market for the Common Stock of the Company. It is estimated that the
initial public offering price will be between $11.00 and $13.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. Application has been made to list the Common
Stock on The Nasdaq National Market under the symbol "VPHM."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OFRISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
-------------
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.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (3).................................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $500,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase an aggregate of up to 337,500
additional shares, at the Price to Public, less Underwriting Discounts and
Commissions, to cover over-allotments, if any. If all such additional
shares are purchased, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-------------
The Common Stock is offered by the several Underwriters named herein when, as
and if received and accepted by them, and subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for such shares will be made at the
offices of Cowen & Company, New York, New York on or about , 1996.
-------------
COWEN & COMPANY J.P. MORGAN & CO.
, 1996
<PAGE>
[Photo collage of child, medical equipment and bottle with the label "For
Investigational Use Only" and diagram depicting RNA replication]
VIROPHARMA
DEVELOPING ANTIVIRAL PHARMACEUTICALS FOR DISEASES CAUSED BY RNA VIRUSES
RNA viruses are responsible for the majority of human viral diseases.
ViroPharma discovers and develops proprietary small molecule inhibitors of RNA
virus replication.
Pleconaril, ViroPharma's most advanced compound, is currently in Phase II for
viral meningitis and "summer flu."
Some of the Company's drug candidates are currently undergoing clinical trials
while others are in research or preclinical development. To date, the Company
has not completed the development, or generated revenues from sales, of any
products.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in forward-looking statements. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed in "Risk Factors."
THE COMPANY
ViroPharma Incorporated ("ViroPharma" or the "Company") is a development
stage company engaged in the discovery and development of proprietary antiviral
pharmaceuticals for the treatment of diseases caused by RNA viruses. The
Company has focused its initial drug development and discovery activities on
six RNA virus diseases: viral meningitis, "summer flu," the common cold,
influenza, hepatitis C and viral pneumonia. Each year, the majority of the
world's population is afflicted by at least one of these diseases, for which
antiviral therapies are currently either inadequate or unavailable. The
Company's most advanced compound, pleconaril, previously designated VP 63843,
is currently being developed for the treatment of three of these diseases.
ViroPharma has completed a Phase IIa clinical trial which demonstrated that
pleconaril is safe and efficacious in "summer flu." The Company is conducting a
Phase IIb clinical trial with pleconaril for viral meningitis and preclinical
studies with this compound for the common cold. The Company has additional
compounds in research and preclinical stages of development for the treatment
of influenza, hepatitis C and viral pneumonia. ViroPharma believes its drug
discovery and development technologies and expertise have potential
applicability to a broad range of diseases caused by RNA viruses.
RNA viruses are responsible for the majority of human viral diseases, causing
illnesses ranging from acute and chronic ailments to fatal infections. RNA
viruses continue to emerge, spreading from rural and developing regions of the
world to urbanized centers. Despite efforts by the scientific and medical
communities to develop vaccines and pharmaceuticals to prevent and treat
certain of these diseases, medicines are currently inadequate or are not
available for the majority of RNA virus diseases. The Company believes the
significance and prevalence of RNA virus diseases, and the limited availability
and effectiveness of current antiviral pharmaceuticals, has created a
compelling need for new pharmaceuticals to treat these diseases.
ViroPharma, based on its number of experienced RNA virologists and its
exclusive focus on RNA virology, believes it is a leader in RNA virology and
RNA antiviral drug discovery and development. The Company has focused its drug
discovery and development efforts on identifying and advancing inhibitors of
the process of viral RNA uncoating and replication. The Company believes that
this process represents an extremely attractive target for therapeutic
intervention in disease caused by RNA viruses. For RNA viruses to cause
disease, they must replicate. Therefore, inhibiting RNA virus replication can
prevent, limit or stop disease. The viral activities involved in this
replication process are unique to RNA viruses, yet universal among all RNA
viruses. Therefore, technologies used for the development of inhibitors of this
process have potential applicability to a broad range of diseases caused by RNA
viruses. ViroPharma has discovered and characterized RNA uncoating and
replication activities, identified critical molecular targets, developed novel
high throughput screening assays and discovered and optimized proprietary small
molecule compounds identified by screening chemical libraries, including the
Company's specialized library. The Company believes that the technologies used
by the Company have never been applied to develop an approved pharmaceutical
product.
ViroPharma's most advanced product candidate, pleconaril, based on
preclinical studies, is a potent, broad-spectrum, orally-active inhibitor of
the RNA viruses that cause viral meningitis, "summer flu" and the common cold.
In the Company's Phase IIa clinical trial using a "summer flu" disease model,
pleconaril demonstrated efficacy with respect to all five clinical endpoints
evaluated in the trial. The Company commenced a Phase IIb clinical trial of
pleconaril for viral meningitis in June 1996. ViroPharma is also conducting
preclinical studies
3
<PAGE>
for an intranasal formulation of pleconaril to treat the common cold and
expects to file an investigational new drug application with the U.S. Food and
Drug Administration for this formulation in late 1997. No serious adverse
events attributable to pleconaril have been observed in 83 participants in the
clinical trials conducted by the Company to date. In addition to pleconaril,
the Company is conducting preclinical studies or research on antiviral
compounds for influenza, hepatitis C and viral pneumonia.
The Company's objective is to become the leading discoverer, developer and
marketer of proprietary antiviral pharmaceuticals for RNA virus diseases
through the implementation of the following strategies: (1) focusing on RNA
virus diseases to capitalize on the significant market opportunity that they
present, (2) broadly applying its technological expertise in RNA virology to
establish a substantial product pipeline, (3) conducting parallel drug
assessments to accelerate, and enhance the efficiency of, drug discovery and
development, (4) pursuing disease indications for rapid demonstration of
efficacy to expedite product development and (5) pursuing strategic
relationships by leveraging its leadership position in RNA virology to enhance
its drug discovery capabilities and in-licensing opportunities and facilitate
the commercialization of its products. The Company has entered into an
agreement with respect to patents held by Sanofi S.A. ("Sanofi") to secure the
exclusive development and marketing rights for pleconaril, previously
designated VP 63843, in the United States and Canada for use in a broad class
of disease indications. Pleconaril was discovered at Sanofi by scientists who
are now with ViroPharma. The Company has also entered into a collaborative drug
discovery and development agreement with Boehringer Ingelheim Pharmaceuticals,
Inc. ("Boehringer Ingelheim") for one hepatitis C target identified by
ViroPharma. In addition, the Company is collaborating with other pharmaceutical
and technology companies, as well as academic institutions, to access enabling
technologies and compound libraries as they pertain to the treatment of RNA
virus diseases.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby................... 2,250,000 shares(1)
Common Stock to be outstanding after the
offering..................................... 8,820,951 shares(2)
Use of proceeds............................... For the further development of
pleconaril, including clinical
trials and certain pre-
marketing activities, ongoing
research and development
programs and general corporate
purposes, which may include
capital equipment expenditures.
Proposed Nasdaq National Market Symbol........ VPHM
</TABLE>
- --------
(1) Includes 208,333 shares being reserved for purchase by Boehringer Ingelheim
in this offering at the initial public offering price pursuant to its
intention to make an equity investment of $2.5 million in the Company.
(2) Excludes (i) 410,283 shares issuable upon exercise of options outstanding
as of September 30, 1996 at a weighted average exercise price of $0.64 per
share and (ii) shares issuable upon exercise of warrants to purchase Series
B Preferred Stock that will not be exercised in connection with the
offering but will be converted into warrants to purchase 21,675 shares of
Common Stock at an exercise price of $2.94 per share. Includes 497,250
unvested shares of Common Stock purchased by certain founders of the
Company. See "Management--Executive Compensation," "Management--Stock
Option Plan," "Certain Transactions--Transactions with Founders" and
"Description of Capital Stock--Warrants."
4
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 5,
1994 NINE MONTHS
(INCEPTION) YEAR ENDED
THROUGH ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1995 1996
------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA:
License fee............... -- -- -- $ 1,000,000
Grant revenue............. $ -- $ 90,813 $ -- 212,615
--------- ----------- ----------- -----------
Total revenues............ -- 90,813 -- 1,212,615
--------- ----------- ----------- -----------
Operating expenses:
Research and develop-
ment................... 75,779 2,930,106 1,209,177 4,265,571
General and administra-
tive................... 243,318 1,091,299 503,883 1,026,630
--------- ----------- ----------- -----------
Total operating expenses.. 319,097 4,021,405 1,713,060 5,292,201
--------- ----------- ----------- -----------
Net loss.................. $(319,097) $(3,854,862) $(1,676,615) $(3,937,613)
========= =========== =========== ===========
Pro forma net loss per
share(1)................. $ (.88) $ (.81)
Shares used in computing
pro forma net loss per
share(1)................. 4,381,740 6,415,331
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(2)(3)
----------- ------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments................. $ 8,057,132 $8,057,132 $32,667,132
Working capital................... 6,680,726 6,680,726 31,047,137
Total assets...................... 8,724,828 8,724,828 33,091,239
Long-term capital leases.......... 144,014 144,014 144,014
Mandatorily redeemable convertible
preferred stock.................. 15,895,612 -- --
Total stockholders' equity (defi-
cit)............................. (9,120,138) 6,775,474 31,385,474
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements.
(2) Reflects the Preferred Stock Conversion (as defined below).
(3) Gives effect to the Warrant Exercise and reflects the sale of 2,250,000
shares of Common Stock offered by the Company at an assumed initial public
offering price of $12.00 per share and the application of estimated net
proceeds therefrom. See "Use of Proceeds."
----------------
Except as otherwise noted, all information contained in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) gives
effect to the exercise in full of warrants to purchase shares of Series B
Preferred Stock, which will expire upon the closing of the offering (the
"Warrant Exercise"), and a .51-for-one stock split of the Common Stock to be
effected prior to the offering (the "Reverse Stock Split") and (iii) reflects
the conversion of all outstanding shares of Series A Convertible Preferred
Stock, par value $0.001 per share (the "Series A Preferred Stock"), Series B
Convertible Preferred Stock, par value $0.001 per share (the "Series B
Preferred Stock"), including those acquired in the Warrant Exercise, and Series
C Convertible Preferred Stock, par value $0.001 per share (the "Series C
Preferred Stock," and, together with the Series A Preferred Stock and Series B
Preferred Stock, the "Redeemable Preferred Stock"), into an aggregate of
5,669,781 shares of Common Stock upon the closing of this offering (the
"Preferred Stock Conversion"). All references to "ViroPharma" or to the
"Company" refer to ViroPharma Incorporated, a Delaware corporation.
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. The following factors, in addition to the other information in
this Prospectus, should be considered carefully in evaluating the Company and
its business before purchasing shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in forward-looking statements. Factors that might cause or
contribute to such a difference include, but are not limited to, those
discussed in the following risk factors.
EARLY STAGE OF DEVELOPMENT; CONTINUING OPERATING LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company is a development stage company which currently has no sources of
operating revenues and has incurred net operating losses since its inception
in 1994. At September 30, 1996, the Company had an accumulated deficit of
approximately $8.1 million. Such losses have resulted principally from costs
incurred in research, development and clinical trials and general and
administrative costs associated with the Company's operations. The Company
expects that operating losses will continue at increasing levels for at least
the next several years as its research, product development, clinical testing
and marketing activities expand. Such losses will continue unless and until
such time as product approvals are obtained and product sales generate
sufficient revenue to offset expenses. The Company's ability to achieve
profitability will depend, in part, on its ability to successfully develop,
clinically test and obtain regulatory approvals for its drug candidates, as
well as its ability to manufacture and market any approved products either by
itself or in collaboration with others. There can be no assurance that the
Company will successfully complete its product development efforts in a timely
manner, if at all, that it will receive any regulatory approvals required for
the clinical development, commercial manufacture or marketing of its proposed
products or that product sales based on such regulatory approvals will be
profitable to the Company. Accordingly, the extent of future losses and the
time required to achieve profitability is highly uncertain. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ABSENCE OF PRODUCTS; PRODUCT DEVELOPMENT RISKS
The Company has not completed the development of any products. Some of the
Company's drug candidates are currently undergoing clinical trials while
others are in research or preclinical development. The Company's drug
candidates, other than pleconaril, are not expected to be commercially
available for at least several years, if at all, and pleconaril is not
expected to be commercially available for at least three years, if at all. The
Company has not begun to market or generate revenues from the
commercialization of any products. The majority of the Company's drug
candidates will require significant additional research and development and
laboratory testing prior to submission of any regulatory application, and all
of its drug candidates will require significant clinical testing and
regulatory approval prior to commercialization. There can be no assurance that
the Company will be permitted by regulatory authorities to conduct additional
clinical testing of the Company's compounds or that, if permitted, such
additional clinical testing will prove that such drugs are safe and
efficacious to the extent necessary to permit the Company to obtain marketing
approvals for them from regulatory authorities. There can be no assurance that
the results of preclinical studies and completed clinical trials will be
indicative of results obtained in future clinical trials. Adverse or
inconclusive clinical trial results concerning any of the Company's drug
candidates could result in increased costs and significantly delay the filing
for marketing approval for such drug candidates with the United States Food
and Drug Administration (the "FDA") or result in a filing for a narrower
indication. In such event, further studies would be required with respect to
other indications to support any filing of a supplemental application covering
such indications. There can be no assurance that the Company's research and
development, preclinical testing or clinical trials will be successfully
completed, that regulatory approvals will be obtained or will be as broad as
sought, that the Company's products will be capable of being produced in
commercial quantities at reasonable costs or that any products, if introduced,
will achieve market acceptance. Any problems or delays relating to research
and development, regulatory approval and manufacturing, and the failure to
address such problems or delays, could have a material adverse effect on the
Company. See "Business--Product Development and Research."
6
<PAGE>
The Company's drug candidates and future product development efforts are
subject to the risks of failure inherent in the development of pharmaceutical
products. These risks include the possibilities that any or all of the
Company's drug candidates will be found to be ineffective, unsafe, toxic or
otherwise fail to either meet applicable regulatory standards or receive
necessary regulatory approvals or clearances. There can be no assurance that
unacceptable toxicities or side effects will not occur at any dose level at
any time in the course of toxicological studies or human clinical trials of
the Company's drugs. The appearance of any such unacceptable toxicities or
side effects in toxicology studies or human clinical trials could cause the
Company or regulatory authorities to interrupt, limit, delay or abort the
development of any of the Company's drugs and could ultimately prevent their
approval for any of the targeted indications. Even after receiving approval,
products may later exhibit adverse effects that prevent their widespread use
and necessitate their withdrawal from the market. There can be no assurance
that any products under development by the Company will be safe when
administered to patients. Furthermore, there is a risk that the Company's drug
candidates, even if safe and effective, will be difficult to develop into
commercially viable products, difficult to manufacture on a large scale or
uneconomical to market and that proprietary rights of third parties may
preclude the Company from marketing such drug candidates. Moreover, the
Company's competitors may succeed in developing technologies or products that
are more effective or cost effective than those of the Company. Rapid
technological changes or developments by others may result in the Company's
drug candidates becoming obsolete or noncompetitive. See "--Competition," "--
Rapid Technological Change and Uncertainty" and "Business--Competition."
DEPENDENCE ON MOST ADVANCED DRUG CANDIDATE
The Company's research and development resources are primarily dedicated to
its most advanced drug candidate, pleconaril. Significant delays in the
Company's clinical trials of pleconaril, unfavorable results in such trials,
failure to obtain regulatory approval for the commercialization of pleconaril
or any related product or failure to achieve market acceptance of pleconaril
or any related product could have a material adverse effect upon the Company.
There can be no assurance that pleconaril will be successfully developed.
Although the Company is currently seeking to develop other drug candidates and
expand the number of drug candidates it has under development, there can be no
assurance that it will be successful in such development or expansion.
Furthermore, the proceeds of this offering are not expected to be sufficient
to complete all clinical studies and other required testing for pleconaril or
any other of the Company's product development candidates. See "--Government
Regulation; No Assurance of Regulatory Approval" and "Business--Product
Development and Research."
UNCERTAINTY REGARDING CLINICAL TRIALS
The results of preclinical studies and initial clinical trials of the
Company's product candidates are not necessarily predictive of the results
from large-scale clinical trials. The Company must demonstrate through
preclinical studies and clinical trials that its product candidates are safe
and effective for use in each target indication before the Company can obtain
regulatory approvals for the commercial sale of those products. These studies
and trials may be very costly and time-consuming.
The rate of completion of clinical trials is dependent upon, among other
factors, the rate of enrollment of patients. Because some of the Company's
drug candidates are targeted at diseases which are more prevalent in certain
seasons, failure to accrue an adequate number of clinical patients during the
appropriate season could cause significant delays and increased costs. Such
delays and increased costs could have a material adverse effect on the
Company's drug development program. Furthermore, there can be no assurance
that if the Company's clinical trials are completed, the Company will be able
to submit a New Drug Application (an "NDA") as scheduled or that any such
application will be approved by the FDA in a timely manner, if at all. The
cost to the Company of conducting human clinical trials for any potential
product can vary dramatically based on a number of factors, including the
order and timing of clinical indications pursued and the extent of development
and financial support, if any, from corporate collaborators. The Company may
have difficulty obtaining sufficient patient populations, clinicians or
support to conduct its clinical trials as planned and may have to expend
substantial additional funds to obtain access to such resources, or delay or
modify its plans significantly.
7
<PAGE>
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The production and marketing of products under development by the Company,
as well as its ongoing research and development activities, are and will be
subject to regulation by governmental agencies, including the FDA in the
United States and similar regulatory authorities in other countries. Any
potential therapeutic product developed by the Company will be subject to
rigorous preclinical and clinical testing and approval pursuant to regulations
administered by the FDA, comparable agencies in other countries and, to a
lesser extent, by state regulatory authorities. The approval process for the
Company's drug candidates will involve significant time and expenditures.
There can be no assurance that the Company will be able to successfully
complete the clinical development of, and file its NDA for, pleconaril or any
other drug candidate. See "Business--Government Regulation."
Rigorous preclinical and clinical testing and the regulatory approval
process can take many years and require the expenditure of substantial
resources. There can be no assurance that the FDA or other regulatory
authority approval for any product candidates developed by the Company will be
granted on a timely basis or at all. Any delay in obtaining, or any failure to
obtain, such approvals would materially and adversely affect the marketing of
the Company's drug candidates and the Company's business, financial position
and results of operations. In addition, legislation may be enacted, or
regulations promulgated, in the future which might adversely affect the
Company's ability to develop, manufacture or market its drug candidates. If
regulatory approval of a drug is obtained, such approval may be conditioned
upon certain limitations and restrictions on the drug's use. Any FDA approvals
that may be granted will be subject to continual review, and later discovery
of previously unknown problems may result in withdrawal of products from
marketing. Failure of the Company to comply with applicable regulatory
requirements can, among other things, result in warning letters, fines,
withdrawal of regulatory approvals, product recalls, seizure of products,
operating restrictions, injunctions or criminal prosecution. See "Business--
Government Regulation."
UNCERTAIN ABILITY TO MEET CAPITAL NEEDS
The Company will require substantial additional funds for its research,
preclinical and clinical testing, operating expenses, regulatory applications,
manufacturing, marketing and sales programs. The Company's capital
requirements will depend on numerous factors, including the progress of its
research and development programs, the progress of preclinical and clinical
testing, the time and cost involved in obtaining regulatory approvals, the
cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments, changes and developments in the Company's existing
collaborative, licensing and other relationships, the terms of any new
collaborative, licensing and other arrangements that the Company may establish
and the development of commercialization activities and arrangements.
Moreover, the Company's fixed commitments, including salaries and fees for
current employees and consultants, rent, payments under license agreements and
other contractual commitments, are substantial and are likely to increase as
additional agreements are entered into and additional personnel are retained.
The Company believes that the net proceeds of this offering, together with
proceeds from the collaborative drug discovery and development agreement with
Boehringer Ingelheim, available cash, grant revenue and interest income,
should be adequate to fund its current and anticipated levels of operations
through mid-1998. However, the Company's cash requirements may vary materially
and could be significantly higher than those now planned because of results of
research and development and drug candidate testing, relationships with
strategic partners, changes in the focus and direction of the Company's
research and development programs, competitive and technological advances, the
FDA and foreign regulatory requirements and other factors. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Business--Strategic
Relationships," "Business--Patents," "Management" and Notes to Financial
Statements.
The Company will need to raise substantial additional capital to fund its
future operations. The proceeds of this offering are not expected to be
sufficient to complete all clinical studies and other required testing for
pleconaril or any other of the Company's product candidates. The Company will
likely seek such additional
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funding through public or private financing or collaborative, licensing and
other arrangements with corporate partners. If additional funds are raised by
issuing equity securities, further dilution to existing stockholders will
result, and future investors may be granted rights superior to those of
existing stockholders. There can be no assurance, however, that additional
financing will be available when needed or, if available, will be available on
acceptable terms. Insufficient funds may prevent the Company from executing
its business plan or may require the Company to delay, scale back or eliminate
certain of its research and product development programs or license to third
parties rights to develop or commercialize products or technologies that the
Company would otherwise seek to develop or commercialize itself.
DEPENDENCE ON CORPORATE COLLABORATIONS; NEED FOR ADDITIONAL COLLABORATORS
The Company's strategy for the research, development and commercialization
of its drug candidates may require the Company to enter into various
arrangements with corporate and academic collaborators, licensors, licensees
and others, and the Company may, therefore, be dependent upon the subsequent
success of these third parties in performing their responsibilities. The
Company has obtained, and intends to obtain in the future, licensed rights to
certain proprietary technologies and compounds from other entities,
individuals and research institutions, to which it will be obligated to pay
license fees and, if it develops products based upon the licensed technology,
to also make milestone payments and pay royalties. There can be no assurance
that the Company will be able to enter into collaborative, license or other
arrangements that the Company deems necessary or appropriate to develop and
commercialize its drug candidates, or that any or all of the contemplated
benefits from such collaborative, license or other arrangements will be
realized. Certain of the collaborative, license or other arrangements that the
Company may enter into in the future may place responsibility on the Company's
collaborative partners for preclinical testing and human clinical trials and
for the preparation and submission of applications for regulatory approval for
potential pharmaceutical or other products. Should any collaborative partner
fail to develop or successfully commercialize any drug candidate to which it
has rights, the Company's business may be materially adversely affected.
Moreover, these arrangements may require the Company to transfer certain
material rights to such corporate partners, licensees and others. In the event
that the Company decides to license or sublicense certain of its commercial
rights, there can be no assurance that such arrangements will not result in
reduced product revenue to the Company. There can be no assurance that any
revenues or profits will be derived from the Company's collaborative and other
arrangements, that any of the Company's current strategic arrangements will
continue or that the Company will enter into any future collaborations.
Furthermore, there can be no assurance that current or future collaborators
will not pursue alternative technologies or drug candidates either on their
own or in collaboration with others, including the Company's competitors, as a
means for developing treatments for the diseases sought to be addressed by the
Company's programs. See "Business--Strategic Relationships."
UNCERTAIN ABILITY TO PROTECT PATENTS AND PROPRIETARY TECHNOLOGY AND
INFORMATION
Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
market place, the pharmaceutical industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products
and processes. The Company's ability to compete effectively depends, in part,
on its ability to protect its proprietary technology, both in the United
States and abroad. The Company intends to file applications as appropriate for
patents covering the composition of matter or uses of its drug candidates or
its proprietary processes. The Company has five patent applications pending
with the U.S. Patent and Trademark Office ("PTO"), and the Company has
licensed the exclusive rights to antiviral agents which are the subject of two
issued U.S. patents and two related Canadian patent applications. The Company
will be dependent on the licensor to prosecute such patent applications and
may be dependent on the licensor to protect such patent rights. The Company
intends to file patent applications in certain foreign jurisdictions on
inventions developed by the Company. There can be no assurance that the PTO
will grant the Company's pending patent applications or that the Company will
obtain any patents on its proprietary products for which it subsequently
applies. No assurance can be given that any patents issued to, or licensed by,
the Company will not be challenged, invalidated or circumvented by other
parties, or that the rights granted thereunder will provide any competitive
advantage. Furthermore, there can be
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no assurance that others will not independently develop similar products,
duplicate any of the Company's products or, if patents are issued to the
Company, design around the patented products developed by the Company.
The Company also relies on trade secrets, know-how and continuing
technological advancements to support its competitive position. Although the
Company has entered into confidentiality and invention rights agreements with
its employees, consultants, advisors and collaborators, no assurance can be
given that such agreements will be honored or that the Company will be able to
effectively protect its rights to its unpatented trade secrets and know-how.
Moreover, there can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets and know-how. In addition, many of
the Company's scientific and management personnel have been recruited from
other pharmaceutical companies where they were conducting research in areas
similar to those being pursued by the Company. As a result, the Company and
these individuals could be subject to allegations of trade secret violations
and similar claims.
In addition, to facilitate development of its proprietary technology base,
the Company may be required to obtain licenses to patents or other proprietary
rights from other parties, and such requirements could substantially delay the
Company's drug development or commercialization. There can be no assurance
that the patents of other parties will not have a material adverse effect on
the ability of the Company to do business or that any licenses required under
any patents or proprietary rights of other parties would be made available on
acceptable terms, if at all. If the Company does not obtain any such required
licenses, it could encounter delays in introducing products to market or may
be unable to develop, manufacture or sell products requiring such licenses.
The Company has not conducted any searches or made any independent
investigations of the existence of any patents or proprietary rights of other
parties.
The Company may, from time to time, collaborate with, and support research
conducted by, universities and governmental research organizations. There can
be no assurance that the Company will have, or be able to acquire, exclusive
rights to the inventions or technical information derived from such
collaborations or that disputes will not arise as to rights in related
research programs conducted by the Company or such collaborators. See
"Business--Strategic Relationships."
In addition, the Company could incur substantial costs in defending any
patent infringement suits or in asserting any patent rights, including those
licensed to the Company by third parties, and in defending suits against it or
its employees relating to ownership of or rights to intellectual property,
even if the outcome is not adverse to the Company. Such disputes could
substantially delay the Company's drug development or commercialization. The
PTO or a private party could institute an interference proceeding involving
the Company in connection with one or more of the Company's patents or patent
applications, and such proceedings could result in an adverse decision as to
priority of invention, in which case the Company would not be entitled to a
patent on the invention at issue in the interference proceeding. The PTO or a
private party could also institute reexamination proceedings involving the
Company in connection with one or more of the Company's patents, and such
proceedings could result in an adverse decision as to the validity or scope of
the patents. See "Business--Patents."
ABSENCE OF MARKETING AND SALES CAPABILITY
For certain products under development, the Company intends to conduct
marketing activities through its own sales force. The Company has no marketing
and sales staff and has no experience with respect to marketing its proposed
products. Significant additional expenditures, management resources and time
will be required to develop a sales force, and there can be no assurance that
the Company will be successful either in developing a sales force or
penetrating the markets for any proposed products it may develop. The Company
has entered, and in the future may enter, into marketing, distribution,
manufacturing, development or other third party arrangements, which grant
rights that may be exclusive to certain products to corporate partners in
return for royalties to be received on sales, if any. There can be no
assurance that the Company will be able to enter into any additional
arrangements, that any such arrangements will be successful or that the
Company will be able to obtain additional capital to conduct such activities
directly. See "Risk Factors--Dependence on Corporate Collaborations; Need for
Additional Collaborators" and "Business--Marketing."
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UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS; NEED FOR
REIMBURSEMENT
The future revenues and profitability of, and availability of capital for,
pharmaceutical companies such as the Company will be affected by the
continuing efforts of governmental and private third-party payors to contain
or reduce the costs of health care through various means. There have been, and
the Company expects there will continue to be, a number of federal, state and
foreign proposals to control the cost of drugs through governmental
regulation. It is uncertain what form any health care reform legislation may
take or what actions federal, state, foreign, and private payors may take in
response to the proposed reforms. The Company cannot predict when, if ever,
any suggested reforms will be implemented or the effect of any implemented
reform on the Company's business. Moreover, there can be no assurance that any
implemented reform will not have a material adverse effect on the Company's
business, financial position or results of operations.
The Company's ability to commercialize any products successfully will
depend, in part, on the extent to which reimbursement for the cost of such
products and related treatments will be available from government health
administration authorities, such as Medicare and Medicaid in the United
States, private health insurers and other organizations. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products, particularly for indications for which there is no current
effective treatment or for which medical care typically is not sought, and
there can be no assurance that adequate third-party coverage will be available
to enable the Company to maintain price levels sufficient to realize an
appropriate return on its investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of the Company's products, the market acceptance of
those products could be adversely affected.
COMPETITION
There are many entities, both public and private, including well-known,
large pharmaceutical companies, chemical companies, biotechnology companies
and research institutions, engaged in developing pharmaceuticals for human
therapeutic applications similar to the applications targeted by the Company.
Many of these companies have substantially greater financial, research and
development, manufacturing, marketing and human resources experience than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in conducting preclinical testing and
human clinical trials of new pharmaceutical products and in obtaining FDA and
other regulatory approvals of products. Accordingly, certain of the Company's
competitors may succeed in obtaining regulatory approval for products more
rapidly or effectively than the Company. Such companies may succeed in
developing products that are more effective or less costly than any that may
be developed by the Company and also may prove to be more successful than the
Company in the manufacture and marketing of any such products. See "Business--
Competition."
RAPID TECHNOLOGICAL CHANGE AND UNCERTAINTY
The Company is engaged in the pharmaceutical business, which is
characterized by extensive research efforts and rapid technological progress.
New developments in molecular biology, medicinal chemistry and other fields of
biology and chemistry are expected to continue at a rapid pace in both
industry and academia. There can be no assurance that research and discoveries
by others will not render some or all of the Company's programs or drug
candidates non-competitive or obsolete.
The Company's proposed business strategy is based, in part, upon the
application of the Company's technology platform, which encompasses various
elements from the fields of biotechnology and chemistry, and the application
of these technologies to the discovery and development of pharmaceutical
products for the treatment of infectious human diseases. This strategy is
subject to the risks inherent in the development of new products using new and
emerging technologies and approaches. There are no approved drugs on the
market for the treatment of certain of the disease indications being targeted
by the Company, and the Company believes that the technologies being used by
the Company have never been applied to develop an approved pharmaceutical
product. There can be no assurance that unforeseen problems will not develop
with the
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Company's technologies or applications, that the Company will be able to
successfully address technological challenges it encounters in its research
and development programs or that commercially feasible products will
ultimately be developed by the Company. See "--Competition" and "Business--
Competition."
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that the Company's drug candidates, if approved by
the FDA and other regulatory authorities, will achieve market acceptance. The
degree of market acceptance will depend upon a number of factors, including
the receipt and timing of regulatory approvals, the availability of third-
party reimbursement and the establishment and demonstration in the medical
community of the clinical safety, efficacy and cost-effectiveness of the
Company's drug candidates and their advantages over existing technologies and
therapeutics. There can be no assurance that the Company will be able to
manufacture and successfully market its drug candidates even if they perform
successfully in clinical applications. Furthermore, there can be no assurance
that physicians or the medical community in general will accept and utilize
any therapeutic products that may be developed by the Company.
ABSENCE OF MANUFACTURING CAPABILITIES
The Company presently does not have the internal capability to manufacture
pharmaceutical products under the current Good Manufacturing Practices ("GMP")
prescribed by the FDA. The Company believes that it has sufficient quantities
of bulk drug substance to complete its clinical program for the viral
meningitis indication. The Company is working with Sanofi for the manufacture
of bulk drug substance and is also evaluating alternatives for the manufacture
of drug product. FDA pre-approval inspection is required for all commercial
manufacturing sites.
Any contract manufacturers that the Company may use must adhere to GMP
regulations enforced by the FDA through its facilities inspection program.
These facilities must pass a pre-approval plant inspection before the FDA will
issue a pre-market approval of the product. Moreover, while the Company does
not currently intend to manufacture any pharmaceutical products itself, it may
choose to do so in the future. The Company has no experience in the
manufacture of pharmaceutical products for clinical trials or commercial
purposes. Should the Company decide to manufacture products itself, the
Company would be subject to the regulatory requirements described above, would
be subject to risks regarding delays or difficulties encountered in
manufacturing any such pharmaceutical products and would require substantial
additional capital. In addition, there can be no assurance that the Company
will be able to manufacture any such products successfully and in a cost-
effective manner. See "Business--Manufacturing" and "Business--Government
Regulation."
If the Company should encounter delays or difficulties with contract
manufacturers in producing, packaging or distributing its proposed products,
market introduction and subsequent sales of such products would be adversely
affected and the Company may have to seek alternative sources of supply. In
the event that the Company is required to seek alternative sources of supply,
it may incur additional costs or delays in product commercialization. If the
Company changes the source or location of supply or modifies the manufacturing
process, regulatory authorities will require the Company to demonstrate that
the product produced by the new source or from the modified process is
equivalent to the product used in any clinical trials conducted by the
Company. If the product is not shown to be equivalent, the Company's ability
to seek FDA or other regulatory approval could be delayed until additional
clinical trials are completed. Furthermore, there can be no assurance that the
Company will be able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. No assurance can be given that the
manufacturers utilized by the Company will be able to provide the Company with
sufficient quantities of its products or that the products supplied to the
Company will meet the Company's specifications or delivery and other
requirements.
DEPENDENCE ON KEY PERSONNEL
Because of the specialized scientific nature of the Company's business, the
Company is highly dependent upon its ability to attract and retain qualified
scientific, technical and managerial personnel. There is intense
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competition for qualified personnel in the pharmaceutical field, and there can
be no assurance that the Company will be able to continue to attract and
retain qualified personnel necessary for the development of its business. The
loss of the services of existing personnel, as well as the failure to recruit
additional key scientific, technical and managerial personnel in a timely
manner would be detrimental to the Company's research and development programs
and to its business. Much of the know-how developed by the Company resides in
its scientific and technical personnel and is not readily transferable to
other personnel. The Company does not maintain "key man" life insurance on any
of its employees. Furthermore, the Company's anticipated growth and expansion
into areas and activities requiring additional expertise, such as marketing,
will require the addition of new management personnel. The failure to attract
and retain such personnel could adversely affect the Company's business. See
"Business--Human Resources" and "Management."
ENVIRONMENTAL MATTERS AND HAZARDOUS MATERIALS
The Company's research and development processes involve the controlled use
of hazardous, infectious and radioactive materials. The Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials and wastes. There can be
no assurance that the Company will not be required to incur significant costs
to comply with environmental laws, rules, regulations and policies or that the
business, financial position or results of operations of the Company will not
be materially and adversely affected by current or future environmental laws,
rules, regulations and policies or by any releases or discharges of materials
which could be hazardous.
In its research activities, the Company utilizes radioactive and other
materials that could be hazardous to human health, safety or the environment.
These materials and various wastes resulting from their use are stored at the
Company's facility pending ultimate use and disposal. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with federal, state and local laws, rules regulations and
policies, the risk of accidental injury or contamination from these materials
cannot be entirely eliminated. In the event of such an accident, the Company
could be held liable for any resulting damages, and any such liability could
exceed the Company's resources. The Company does not maintain a separate
insurance policy for these types of risks.
PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE
The Company's business exposes it to potential product liability risks which
are inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company maintains claims made insurance against product
liability and defense costs incurred in connection with clinical testing in
the amount of five million dollars per occurrence and five million dollars in
the aggregate. The Company does not currently have any insurance coverage with
regard to the commercial sale of products. There can be no assurance that
claims against the Company arising with respect to clinical testing or sale of
products will be successfully defended, that the insurance carried by the
Company, if any, will be sufficient or that the Company will be able to obtain
additional, or maintain its current level of, product liability insurance on
acceptable terms. In addition, there can be no assurance that any
collaborators and licensees of the Company will agree to indemnify the Company
from, be adequately insured against or have a sufficient net worth to protect
the Company from product liability claims. A successful claim against the
Company in excess of the Company's insurance coverage could have a material
adverse effect on the Company.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock and there can be no assurance that an active public market for
the Company's Common Stock will develop or, if one does develop, that it will
be sustained in the future. The initial public offering price of the Common
Stock will be determined by negotiations between the Company and the
Underwriters based on a number of factors that may not be indicative of future
market price. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. In addition, the
market price of the Common Stock is likely to be
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highly volatile as is frequently the case with publicly traded emerging growth
companies and biopharmaceutical companies. Announcements by the Company or its
competitors of technological innovations or new products, existing and future
collaborations, scientific discoveries and results of clinical trials, as well
as government regulatory action, developments or disputes concerning patent or
proprietary rights, market conditions and period-to-period fluctuations in
financial results, could have a significant impact on the Company's business
and the market price of the Common Stock. In addition, the stock market has
experienced extreme price and volume fluctuations. This volatility has
significantly affected the market prices of securities of many
biopharmaceutical companies. These broad market fluctuations may adversely
affect the market price of the Company's Common Stock.
CONTROL BY EXISTING STOCKHOLDERS
Upon the closing of this offering, directors and officers of the Company,
who in the aggregate currently own beneficially 5,908,958 shares of Common
Stock (excluding outstanding options and warrants to purchase shares of Common
Stock), will own beneficially in the aggregate shares of Common Stock
representing approximately 66.9% of the outstanding shares of Common Stock.
Accordingly, the Company's officers and directors together will have the
ability to elect a majority of the Company's directors and thereby control the
officers and management of the Company and will be able to control effectively
all matters requiring stockholder approval, including amendments to the
Company's Certificate of Incorporation, mergers, share exchanges, the sale of
all or substantially all of the Company's assets, going private transactions
and other fundamental transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. See
"Principal Stockholders."
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE; ANTI-TAKEOVER PROVISIONS
In addition to its authorized shares of Common Stock, upon the closing of
this offering, the Company's Amended and Restated Certificate of Incorporation
will authorize the issuance of up to 5,000,000 shares of preferred stock
("Preferred Stock"). No shares of Preferred Stock of the Company will be
outstanding upon the closing of this offering, and the Company has no present
intention to issue any shares of Preferred Stock. However, because the rights
and preferences of any series of Preferred Stock may be set by the Board of
Directors at its sole discretion, the rights and preferences of any such
Preferred Stock may be superior to those of the Common Stock and thus may
adversely affect the rights of the holders of Common Stock. See "Description
of Capital Stock--Preferred Stock."
Upon the closing of this offering, the Company's Amended and Restated
Certificate of Incorporation and By-Laws and the Delaware General Corporation
Law will contain certain provisions that could prevent or delay the
acquisition of the Company by means of a tender offer, proxy contest or
otherwise, or could discourage a third party from attempting to acquire
control of the Company, even if such events would be beneficial to the
interests of the stockholders. These provisions, among other things will (i)
divide the Board of Directors into three classes, each of which serves for a
staggered three-year term, (ii) prohibit the removal of directors without
cause by the stockholders and (iii) grant the Board of Directors the
authority, without action by the stockholders, to fix the rights and
preferences of, and issue shares of, Preferred Stock. The Company is also
subject to Section 203 of the Delaware General Corporation Law which contains
certain anti-takeover provisions which prohibit a "business combination"
between a corporation and an "interested stockholder" within three years of
the stockholder's becoming an "interested stockholder" except in certain
limited circumstances. The business combination provisions of Section 203 of
the Delaware General Corporation Law may have the effect of deterring merger
proposals, tender offers or other attempts to effect changes in control of the
Company that are not negotiated and approved by the Board of Directors. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of 8,820,951
shares of Common Stock outstanding (9,158,451 shares if the Underwriters'
over-allotment option is exercised in full). All the
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shares of Common Stock offered hereby will be freely tradeable without
restriction or registration under the Securities Act of 1933, as amended (the
"Securities Act"), by persons other than "affiliates" of the Company, as
defined under the Securities Act. The 6,570,951 shares of Common Stock
outstanding are "restricted securities" as that term is defined by Rule 144 as
promulgated under the Securities Act, and may under certain circumstances be
sold in the public market without registration pursuant to Rule 144.
Under Rule 144 (and subject to the conditions thereof), no restricted shares
of Common Stock will become eligible for sale upon completion of this
offering; approximately 1,173,000 shares will become eligible for sale between
December 29, 1996 and January 31, 1997, of which all such shares will be
subject to lockup restrictions as described below and 663,000 shares will be
subject in varying degrees to the additional restrictions contained in stock
purchase agreements (see "Certain Transactions--Transactions with Founders");
approximately 3,600,600 shares will become eligible for sale between June 16,
1997 and October 2, 1997; and the remaining 1,797,351 shares will be eligible
for sale after 1997. Moreover, upon completion of this offering the Company
will have outstanding options to purchase 410,283 shares of Common Stock and
outstanding warrants to purchase 21,675 shares of Common Stock. The Company's
officers and directors and all other stockholders, option holders and warrant
holders have agreed in writing that they will not, directly or indirectly,
offer, sell or otherwise dispose of any shares of Common Stock or rights to
acquire Common Stock (other than (i) with respect to employees of the Company,
pursuant to certain employee compensation arrangements such as employee stock
option and stock purchase plans or (ii) to a transferee that agrees to be
similarly bound) for a period of 180 days after the date of this Prospectus,
without the prior written consent of Cowen & Company. See "Management--
Executive Compensation--Option Grants and Year-End Values," "Description of
Capital Stock--Warrants," "Shares Eligible for Future Sale" and
"Underwriting."
The Securities and Exchange Commission has proposed an amendment to Rule 144
which would reduce the holding period required for shares subject to Rule 144
to become eligible for sale in the public market from two years to one year,
and from three years to two years in the case of Rule 144(k). If this proposal
is adopted, an additional 3,600,600 shares of Common Stock will become
eligible for sale to the public beginning 180 days after the date of this
Prospectus.
Stockholders of the Company will be entitled to certain piggyback and demand
registration rights with regard to 5,669,781 shares of Common Stock upon the
closing of this offering. In addition, the founders of the Company will be
entitled to certain piggyback registration rights with regard to 828,750
shares of Common Stock. By exercising such registration rights, subject to
certain limitations, such holders could cause a significant number of shares
to be registered and sold in the public market. Such sales may have an adverse
effect on the market price for the Common Stock and could impair the Company's
ability to raise capital through an offering of its equity securities. All
such rights in connection with this offering have been waived.
Prior to this offering, there has been no public market for the Common Stock
of the Company, and no predictions can be made of the effect, if any, that the
sale or availability for sale of additional shares of Common Stock, under Rule
144, pursuant to registration rights or otherwise, will have on the trading
price of the Common Stock. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could adversely affect the trading price of the Common Stock and could impair
the Company's future ability to raise capital through an offering of its
equity securities.
NO DIVIDENDS
The Company has not declared or paid dividends on its Common Stock since its
inception and does not intend to declare or pay any dividends to its
stockholders in the foreseeable future. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DILUTION
Upon completion of this offering, purchasers of Common Stock in this
offering will incur immediate dilution of $8.44 in the per share net tangible
book value of their Common Stock from the assumed initial public offering
price. See "Dilution."
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THE COMPANY
The Company is a development stage company which was incorporated in
Delaware on September 16, 1994 and commenced operations on December 5, 1994.
The Company's executive offices and research facility are located at 76 Great
Valley Parkway, Malvern, Pennsylvania 19355. Its telephone number is (610)
651-0200, and the Internet e-mail address is [email protected]. ViroPharma
also has a home page on the World Wide Web.
"ViroPharma" and the Company's logo are trademarks of the Company. The
Company has filed applications to register these trademarks in the United
States. All other brand names or trademarks appearing in this Prospectus are
the property of their respective owners.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $24,610,000 ($28,376,500 if
the Underwriters' over-allotment option is exercised in full), at an assumed
initial public offering price of $12.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company.
The Company intends to use the net proceeds of this offering, along with its
currently available cash, to fund further development of pleconaril, including
approximately $18.5 million to fund the ongoing clinical trials and certain
related pre-marketing activities. In addition, the Company currently intends
to use approximately $2.5 million of the net proceeds of this offering to
support the collaborative drug discovery and development efforts with
Boehringer Ingelheim for one hepatitis C target identified by ViroPharma. The
Company intends to use the balance of the net proceeds of this offering for
ongoing research and development programs and general corporate purposes,
which may include capital equipment expenditures. The Company also expects
from time to time to evaluate the possible acquisition of products, businesses
and technologies which complement the Company's business. The Company does not
currently have any understandings, commitments or agreements with respect to
any such possible acquisitions.
The amounts actually expended for any single purpose will vary significantly
depending upon numerous factors, including the progress of the Company's
research and development programs, the results of preclinical and clinical
studies, the timing of regulatory approvals, technological advances,
determinations as to commercial potential of product candidates and the status
of competitive products. In addition, expenditures will be dependent upon the
establishment of collaborative arrangements with other companies, the
availability of financing and other factors. See "Business--Product
Development and Research."
The Company believes that the net proceeds of this offering, together with
the proceeds from the collaborative drug discovery and development agreement
with Boehringer Ingelheim, available cash, grant revenue and expected interest
income, will be adequate to fund its current and anticipated levels of
operations through mid-1998. This estimate is based on assumptions about
numerous factors, including the factors described above. In addition, future
unanticipated events may make shifts in the allocation of funds necessary or
desirable. The proceeds of this offering are not expected to be sufficient to
complete all clinical studies and other required testing for pleconaril or any
other of the Company's product candidates. Moreover, additional funding will
be required before the Company is able to generate positive cash flows from
commercial activities. The Company does not have any commitments or
arrangements to obtain any additional funds, and there can be no assurance
that required funds will be available to the Company. See "Risk Factors--
Uncertain Ability to Meet Capital Needs."
Pending the application of the proceeds of this offering, the Company
intends to invest such proceeds in short-term interest-bearing United States
government securities and in short-term, interest-bearing investment grade
securities. The Company intends to invest and use the net proceeds so as not
to be considered an investment company under the Investment Company Act of
1940.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
does not anticipate paying cash dividends in the foreseeable future. The
Company currently intends to retain any future earnings for use in the
operations, development and growth of its business.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (i) on an actual basis, assuming completion of the Reverse
Stock Split, (ii) on a pro forma basis, to reflect the Preferred Stock
Conversion and (iii) such pro forma capitalization as adjusted to give effect
to the Warrant Exercise and the sale by the Company of the 2,250,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$12.00 per share (after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company) and the receipt and
initial application of the net proceeds of $24,610,000 therefrom, as set forth
in "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Long-term capital leases................ $ 144,014 $ 144,014 $ 144,014
Mandatorily redeemable convertible pre-
ferred stock(1)........................ 15,895,612 -- --
Stockholders' equity:
Preferred stock, $.001 par value,
5,000,000 shares authorized, no shares
issued and outstanding, pro forma as
adjusted.............................. -- -- --
Common Stock, par value $.002 per
share, 27,000,000 shares authorized;
901,170 shares issued and outstanding,
actual; 6,489,354 shares issued and
outstanding, pro forma; and 8,820,951
shares issued and outstanding pro
forma as adjusted(2).................. 1,802 12,978 17,642
Additional paid-in capital (deficit)... (44,734) 15,839,702 40,445,038
Deferred compensation.................. (1,017,296) (1,017,296) (1,017,296)
Unrealized gain on investment securi-
ties.................................. 51,662 51,662 51,662
Deficit accumulated during the develop-
ment stage............................ (8,111,572) (8,111,572) (8,111,572)
----------- ----------- -----------
Total stockholders' equity (deficit)... (9,120,138) 6,775,474 31,385,474
----------- ----------- -----------
Total capitalization.................. $ 6,919,488 $ 6,919,488 $31,529,488
=========== =========== ===========
</TABLE>
- --------
(1) Prior to this offering, the Company's outstanding Redeemable Preferred
Stock consists of 675,000 shares of Series A Preferred Stock, 7,060,000
shares of Series B Preferred Stock and 3,222,222 shares of Series C
Preferred Stock. Concurrently with the closing of this offering, all
outstanding shares of Preferred Stock and all shares to be issued in the
Warrant Exercise will be converted into shares of Common Stock. See
"Description of Capital Stock."
(2) Excludes (i) 410,283 shares issuable upon exercise of options outstanding
as of September 30, 1996 at a weighted average exercise price of $0.64 per
share and (ii) shares issuable upon exercise of warrants to purchase
Series B Preferred Stock that will not be exercised in connection with the
offering but will be converted into warrants to purchase 21,675 shares of
Common Stock at an exercise price of $2.94 per share. Includes 497,250
issued but unvested shares of Common Stock purchased by certain of the
founders of the Company. See "Management--Executive Compensation,"
"Management--Stock Option Plan," "Certain Transactions--Transactions with
Founders" and "Description of Capital Stock."
17
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
dilution in the net tangible book value of their Common Stock from the assumed
initial public offering price. The net tangible book value of the Company's
Common Stock as of September 30, 1996 was $6,775,474, or $1.04 per share. "Net
tangible book value" per share is equal to the Company's net tangible assets
(tangible assets less total liabilities) divided by the 6,489,354 shares of
the Company's Common Stock outstanding (after reflecting the Preferred Stock
Conversion). "Dilution per share" represents the difference between the
assumed initial public offering price per share of the Common Stock and the
pro forma net tangible book value per share of the Company after giving effect
to this offering. After giving effect to the Warrant Exercise and reflecting
the Preferred Stock Conversion and the sale of 2,250,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering
price of $12.00 per share (after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company) and the
initial application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1996 would have been
$31,385,474 or $3.56 per share. The change represents an immediate increase in
net tangible book value of $2.52 per share to existing stockholders and an
immediate dilution of $8.44 per share to new investors purchasing the shares
of Common Stock in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $12.00
Net tangible book value per share before the offering............ $1.04
Increase per share attributable to new investors................. $2.52
-----
Pro forma net tangible book value per share after the offering..... $ 3.56
------
Dilution per share to new investors................................ $ 8.44
======
</TABLE>
The following table summarizes on a pro forma basis as of September 30,
1996, the differences between existing stockholders after giving effect to the
Warrant Exercise and reflecting the Preferred Stock Conversion and purchasers
of shares in this offering with respect to the number of shares of Common
Stock purchased from the Company, the total consideration paid and the average
price per share paid.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)... 6,570,951 74% $14,656,225 35% $ 2.23
New investors.............. 2,250,000 26 27,000,000 65 $12.00
--------- --- ----------- ---
Total.................... 8,820,951 100% $41,656,225 100%
========= === =========== ===
</TABLE>
- --------
(1) After giving effect to the Warrant Exercise and reflecting the Preferred
Stock Conversion.
The above information excludes (i) 410,283 shares of Common Stock issuable
upon exercise of options outstanding as of September 30, 1996 at a weighted
average exercise price of $0.64 per share and (ii) shares issuable upon
exercise of warrants to purchase Series B Preferred Stock that will not be
exercised in connection with the offering but will be converted into warrants
to purchase 21,675 shares of Common Stock at an exercise price of $2.94 per
share. The foregoing includes 497,250 issued but unvested shares of Common
Stock purchased by certain of the founders of the Company. See "Management--
Executive Compensation," "Management--Stock Option Plan," "Certain
Transactions--Transactions with Founders" and "Description of Capital Stock."
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Balance Sheet
Data" as of December 31, 1994 and 1995, and under the caption "Statement of
Operations Data" for the period from December 5, 1994 (inception) through
December 31, 1994 and the year ended December 31, 1995 are derived from
financial statements of the Company which have been audited by KPMG Peat
Marwick LLP, independent certified public accountants. The selected financial
data as of September 30, 1996 and for the nine-month periods ended September
30, 1995 and 1996 are derived from unaudited financial statements. Such
unaudited financial statements include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth herein. Operating results for the nine months ended September 30, 1996
are not necessarily indicative of the results to be expected for the year
ending December 31, 1996. The data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations, the Financial Statements and the Notes thereto and
the other financial information included elsewhere in this Prospectus. The
Company is considered a "development stage company" as described in Note 1 of
the Company's Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 5,
1994 NINE MONTHS
(INCEPTION) ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------------
1994 1995 1995 1996
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
License fee.............. -- -- -- $1,000,000
Grant revenue............ $ -- $ 90,813 $ -- 212,615
--------- ----------- ----------- -----------
Total revenues........... -- 90,813 -- 212,615
--------- ----------- ----------- -----------
Operating expenses:
Research and
development............. 75,779 2,930,106 1,209,177 4,265,571
General and
administrative.......... 243,318 1,091,299 503,883 1,026,630
--------- ----------- ----------- -----------
Total operating
expenses................ 319,097 4,021,405 1,713,060 5,292,201
Interest income, net..... -- 75,730 36,445 141,973
--------- ----------- ----------- -----------
Net loss................. $(319,097) $(3,854,862) $(1,676,615) $(3,937,613)
========= =========== =========== ===========
Pro forma net loss per
share(1)................ $ (.88) $ (.81)
Shares used in computing
pro forma net loss per
share(1)................ 4,381,740 6,415,331
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
--------- ----------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................ $ 22,870 $ 4,713,426 $8,057,132
Working capital (deficit)............... (243,172) 3,270,375 6,680,726
Total assets............................ 24,870 4,873,845 8,724,828
Long-term capital leases................ -- -- 144,014
Mandatorily redeemable convertible
preferred stock........................ 60,000 7,416,604 15,895,612
Total stockholders' equity (deficit).... (303,172) (4,089,758) (9,120,138)
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risk and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors."
Since inception, the Company has devoted substantially all of its resources
to its research and product development programs. ViroPharma has generated no
revenues from product sales and has been dependent upon funding primarily from
equity financing. The Company has not been profitable since inception and has
incurred a cumulative net loss of approximately $8.1 million through September
30, 1996. Losses have resulted principally from costs incurred in research and
development activities and general and administrative expenses. The Company
expects to incur additional operating losses over at least the next several
years. The Company expects such losses to increase over historical levels as
the Company's research and development expenses increase due to further
clinical trials and preclinical development of the Company's most advanced
drug candidate, pleconaril, and further research and development related to
other product candidates. The Company's ability to achieve profitability is
dependent on developing and obtaining regulatory approvals for its product
candidates, successfully commercializing such product candidates, which may
include entering into collaborative agreements for product development and
commercialization, and securing contract manufacturing services.
RESULTS OF OPERATIONS
Nine months ended September 30, 1996 and 1995
The Company received a non-refundable technology access fee of $1,000,000
from Boehringer Ingelheim and earned $212,615 of grant revenue in the nine
months ended September 30, 1996. The Company earned no revenues during the
nine months ended September 30, 1995. Net interest income increased to
$141,973 for the nine months ended September 30, 1996 from $36,445 for the
nine months ended September 30, 1995, principally due to larger invested
balances.
Research and development expenses increased to $4,265,571 for the nine
months ended September 30, 1996 from $1,209,177 for the nine months ended
September 30, 1995. The increase was principally due to clinical trials
related to pleconaril and the advancement of drug candidates for the Company's
influenza and hepatitis C programs.
General and administrative expenses increased to $1,026,630 for the nine
months ended September 30, 1996 from $503,883 for the nine months ended
September 30, 1995. The increase was principally due to increased facilities
costs and salary expenses, as well as to increased costs associated with
financing transactions and the pursuit of corporate collaborations.
The net loss increased to $3,937,613 for the nine months ended September 30,
1996 from $1,676,615 for the nine months ended September 30, 1995.
Year ended December 31, 1995 and period ended December 31, 1994
The Company commenced operations on December 5, 1994. Therefore, the period
ended December 31, 1994 was 26 days long. Comparisons between such period and
the complete year 1995 may not be meaningful.
Grant revenue for the year ended December 31, 1995 was $90,813. The Company
earned no revenues for the period ended December 31, 1994.
Research and development expenses increased to $2,930,106 for the year ended
December 31, 1995 from $75,779 for the period ended December 31, 1994. The
increase was due to 12 months of expenses being reflected in the latter
period, as well as expenses related to the commencement of clinical
development of pleconaril and increased spending related to the Company's drug
discovery efforts.
General and administrative expenses increased to $1,091,299 for the year
ended December 31, 1995 from $243,318 for the period ended December 31, 1994.
The increase was due to 12 months of expenses being reflected in the latter
period, as well as to increased facilities costs and costs associated with
financing transactions and the pursuit of corporate collaborations.
20
<PAGE>
Interest income aggregated $75,730 in 1995. There was no interest income in
1994.
Net loss for the year ended December 31, 1995 was $3,854,862. Net loss for
the period ended December 31, 1994 was $319,097.
LIQUIDITY AND CAPITAL RESOURCES
The Company commenced operations in December 1994. The Company is a
development stage company and to date has not generated revenues from product
sales. The cash flows used in operations are for research and development
activities and the supporting general and administrative expenses. Through
September 30, 1996, the Company has used approximately $6.3 million in
operating activities. The Company invests its cash in short-term investments.
Through September 30, 1996, the Company has used approximately $4.2 million in
investing activities, primarily for short-term investments. Through September
30, 1996, the Company has financed its operations primarily through private
placements of Redeemable Preferred Stock and Common Stock totaling
approximately $14.4 million. At September 30, 1996, the Company had cash and
cash equivalents and short-term investments aggregating approximately $8.1
million.
The Company leases its corporate and research and development facilities
under an operating lease expiring in 1997. The Company has a one year renewal
option through October 1998, subject to lessor consent. If the Company does
not renew its lease upon expiration, the Company believes that it can lease
adequate facilities on terms acceptable to the Company. The Company also
leases substantially all of its equipment under two master lease agreements,
which provide access to a total of approximately $1.3 million in financing, of
which amounts aggregating approximately $650,000 are currently outstanding.
The Company anticipates utilizing all of its available financing under these
lease agreements. The Company is required to repay amounts outstanding under
the two leases within periods ranging from 32 to 48 months. The Company is
required to make a milestone payment to Sanofi of up to $2 million upon the
earlier of a future milestone event as defined in the agreement with Sanofi or
December 1998. In addition, the Company would also be required to make certain
significant additional payments, including royalties, as defined, should
agreed-upon future milestones be attained.
The Company believes that the net proceeds of this offering, together with
the $1 million technology access fee received in August 1996 and future
proceeds from the collaborative drug discovery and development agreement with
Boehringer Ingelheim (including advances creditable against future milestone
payments), available cash, grant revenue and expected interest income, will be
adequate to fund its current and anticipated levels of operations through mid-
1998. The Company will require additional financing for operations and
expansion of its facilities prior to achieving positive cash flows from its
commercial activities. The proceeds of this offering are not expected to be
sufficient to complete all clinical studies and other required testing for
pleconaril or any other of the Company's product candidates. To obtain this
financing, the Company may seek to access the public or private equity markets
or enter into additional arrangements with corporate collaborators. To the
extent the Company raises additional capital by issuing equity securities,
ownership dilution to existing stockholders may result. There can be no
assurance, however, that additional financing will be available on acceptable
terms from any source. See "Risk Factors--Uncertain Ability to Meet Capital
Needs," "Use of Proceeds" and "Business--Strategic Relationships--Boehringer
Ingelheim Pharmaceuticals, Inc."
Based on "change in ownership" provisions of the Tax Reform Act of 1986, net
operating loss and research and development credit carryforwards may be
subject to annual limitations that could reduce the Company's ability to
utilize these carryforwards.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the FASB issued SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 presents companies with the alternative
of retaining the current accounting for stock-based compensation or adopting a
new accounting method based on the estimated fair value of equity instruments
granted to employees during the year. Companies that do not adopt the fair
value based method of accounting will be required to adopt the disclosure
provisions of SFAS 123 for the year ending December 31, 1996. The Company will
continue applying its current accounting principles and will present the
required footnote disclosures commencing in the 1996 financial statements.
21
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in forward-looking statements. Factors that might cause or
contribute to such differences include, but are not limited to, those
discussed in "Risk Factors."
OVERVIEW
ViroPharma is engaged in the discovery and development of proprietary
antiviral pharmaceuticals for the treatment of diseases caused by RNA viruses.
The Company has focused its initial drug development and discovery activities
on six RNA virus diseases: viral meningitis, "summer flu," the common cold,
influenza, hepatitis C and viral pneumonia. Each year, the majority of the
world's population is afflicted by at least one of these diseases, for which
therapies are currently either inadequate or unavailable. The Company's most
advanced compound, pleconaril, previously designated VP 63843, is currently
being developed for the treatment of three of these diseases. ViroPharma has
completed a Phase IIa clinical trial which demonstrated that pleconaril is
safe and efficacious in "summer flu." The Company is conducting a Phase IIb
clinical trial with pleconaril for viral meningitis and preclinical studies
with this compound for the common cold. The Company has additional compounds
in research and preclinical stages of development for treatment of influenza,
hepatitis C and viral pneumonia. ViroPharma believes its drug discovery and
development technologies and expertise have potential applicability to a broad
range of diseases caused by RNA viruses.
RNA viruses are responsible for the majority of human viral diseases,
causing illnesses ranging from acute and chronic ailments to fatal infections.
RNA viruses continue to emerge, spreading from rural and developing regions of
the world to urbanized centers. Despite efforts by the scientific and medical
communities to develop vaccines and pharmaceuticals to prevent and treat
certain of these diseases, medicines are currently inadequate or are not
available for the majority of RNA virus diseases. The Company believes the
significance and prevalence of RNA virus diseases, and the limited
availability and effectiveness of current antiviral therapeutics, has created
a compelling need for antiviral pharmaceuticals to treat these diseases.
DISEASES CAUSED BY RNA VIRUSES
Viruses are intracellular parasites that require a living host cell within
which to reproduce. They are composed of genetic material enclosed in a
protective protein coat. The genetic material of a virus, which may be in the
form of either deoxyribonucleic acid ("DNA") or ribonucleic acid ("RNA"), is
unique and characteristic of that virus and provides the blueprint for virus
reproduction.
There are three fundamental classes of viruses: DNA viruses, retroviruses
and RNA viruses. DNA viruses store their genetic material as DNA and replicate
their DNA in a manner similar to human cells. Retroviruses and RNA viruses
store their genetic material as RNA. Retroviruses reproduce by first
converting their RNA into DNA in infected cells, then converting this DNA back
into RNA. RNA viruses, on the other hand, have the unique ability to directly
reproduce their RNA to create new RNA virus offspring through a process known
as RNA replication. This ability to directly replicate RNA distinguishes RNA
viruses from DNA viruses, retroviruses and human cells.
Infection by viruses, and their ensuing replication, can lead to disease.
Viral epidemics, pandemics, acute outbreaks and chronic diseases continue to
cause an enormous amount of human suffering and death. DNA viruses cause
diseases such as herpes, hepatitis B and papillomas (warts). The retrovirus
HIV (human immunodeficiency virus) causes AIDS. RNA viruses, however, are
responsible for the majority of human viral diseases, causing a multitude of
illnesses ranging from acute and chronic ailments to fatal infections.
22
<PAGE>
The following is a list of selected diseases caused by RNA viruses:
<TABLE>
RNA VIRUS DISEASES
<S> <C> <C>
Bronchiolitis Hemorrhagic conjunctivitis Myocarditis
Dengue fever Hemorrhagic fevers Pneumonia
Diarrhea diseases Hepatitis C, A, D, and E Rabies
Ebola fever Influenza Rhinovirus common cold
Encephalitis Lassa fever Rubella
Enterovirus "summer flu" Measles Tick fevers
Hantavirus pulmonary syndrome Meningitis Yellow fever
</TABLE>
The Company has focused its initial drug development and discovery
activities on the italicized diseases.
[Please note that the italicized diseases are: Enterovirus "summer flu",
Hepatitis C, Influenza, Meningitis, Pneumonia and Rhinovirus common cold. The
language in these brackets is for purposes of the EDGAR filing only and will
not appear in the printed copy of the prospectus.]
The medical community has attempted to address several of these diseases
with vaccines, which are prophylactic in nature and intended to prevent
disease, and antiviral pharmaceuticals, which are therapeutic in nature and
intended to treat disease. For most RNA virus diseases, however, medicines are
either inadequate or simply not available.
Vaccines are designed to prevent disease by eliciting a protective antiviral
immune response in vaccinated individuals. This response involves the
production by the body of specific antibodies and white blood cells, both of
which attempt to destroy the virus and virus-infected cells. Vaccines do not
exist for most RNA virus diseases. Of those that are available, most are
unable to effectively control disease for one or more reasons. Many viruses
constantly and rapidly change their outer surface, thereby rendering existing
vaccines obsolete. Moreover, many individuals at greatest risk for serious
disease, including the young, the elderly and the immunocompromised, fail to
respond to vaccines. Finally, existing vaccines are not readily available to
certain susceptible populations and, even when available, are often not widely
used.
Antiviral pharmaceuticals to treat RNA virus diseases are limited. While
there are, in some cases, medicines available to reduce disease symptoms,
there are few drugs to effectively treat the underlying disease. Of these,
amantadine and the related drug rimantadine are used for influenza, ribavirin
has been used for viral pneumonia due to respiratory syncytial virus ("RS
virus"), and interferon alfa ("IFN") is currently used to treat hepatitis due
to hepatitis C virus ("HCV"). Additionally, immunoglobulin products are
occasionally used for treatment of some RNA virus diseases. The Company
believes that each of these therapeutics has limited utility in its respective
indication for several reasons, including adverse side effects, limited
antiviral specificity and difficulties in drug administration.
Based on the significance and prevalence of disease associated with RNA
virus infections and the limited means to prevent or treat these diseases, the
Company believes that there is a significant market opportunity for the
development of effective therapeutics for RNA virus diseases. Moreover, the
continued emergence of RNA virus diseases and the recent spread of RNA viruses
from rural and developing regions of the world to urbanized centers
underscores the compelling need for new antiviral pharmaceuticals.
TREATING RNA VIRUS DISEASES
The RNA Virus Replication Process
Essential to the discovery and development of antiviral pharmaceuticals is
the ability to analyze the virus in a laboratory setting and to dissect the
molecular and biochemical events critical to virus replication. The
manipulation of RNA viruses and, in particular, the virus's RNA genome,
requires special techniques and skills. Historically, technical limitations
have hampered investigation of RNA virus replication. Consequently, the
scientific community's understanding of the molecular events of RNA virus
replication is incomplete. However, significant recent advancements in
biological and molecular technologies related to the manipulation of RNA and
RNA viruses have enabled the Company to pursue the discovery and development
of effective treatments for RNA virus diseases.
23
<PAGE>
The Company believes that the process of viral RNA uncoating and replication
represents an extremely attractive target for the therapeutic intervention in
disease caused by RNA viruses. For RNA viruses to cause disease, they must
replicate. This process of RNA replication is depicted in the following
diagram.
- --------------------------------------------------------------------------------
RNA VIRUS REPLICATION
[RNA VIRUS REPLICATION DIAGRAM APPEARS HERE]
[The following is required for the EDGAR filing and will not appear in the
printed prospectus: This diagram depicts schematically the life cycle of a
generic RNA virus. The diagram is centered with a light gray oval figure
representing a generic cell. Overlaid on this oval figure are six arrows,
numbers 1 through 6, traversing the oval figure from the upper left to the lower
right. Preceding the first arrow numbered "1" and outside the oval figure is a
single virus particle depicted schematically as a 10-sided icosahedral shape.
Beyond arrow 1, just inside the oval figure and in front of arrow "2" is an
identical 10-sided icosahedral shaped virus. Beyond arrow 2 and in front of
arrow "3" is a vertical single helical ribbon depicting viral RNA, at the bottom
which are several small solid circular shapes depicting proteins attached to the
helical ribbon. Beyond arrow 3 and in front of arrow "4" is a vertical double
helical ribbon depicting two intertwined strands of viral RNA, at the bottom of
which are several small solid circular shapes depicting proteins attached to the
double helical ribbon. Beyond arrow 4 and in front of arrow "5" is a vertical
single helical ribbon depicting viral RNA, at the bottom of which is a partially
assembled 10-sided shape into which the ribbon appears to be entering and at the
top of which are several small solid circular shapes depicting proteins attached
to the helical ribbon. Beyond arrow 5 and in front of arrow "6" near to, but
within, the lower right border of the oval cell figure are several identical and
intact 10-sided icosahedral shaped viruses. Beyond arrow "6" are numerous
identical 10-sided icosahedral shaped viruses emanating from the lower right
portion of the oval cell figure and also outside the oval cell figure in the
lower right portion of the diagram.]
WHEN AN RNA VIRUS ENTERS A CELL (1), ITS RNA IS RELEASED FROM THE VIRUS'S
COAT (2), ALLOWING THE UNIQUE MULTI-STEP PROCESS OF RNA REPLICATION TO
PROCEED (3-4), AFTER WHICH NEW RNA VIRUS OFFSPRING ARE CREATED (5) AND
SUBSEQUENTLY RELEASED FROM THE INFECTED CELL (6). EACH RNA VIRUS OFFSPRING
THAT INFECTS A NEW CELL REPEATS THIS REPLICATION PROCESS.
- --------------------------------------------------------------------------------
Inhibiting RNA virus replication can prevent, limit or stop disease. In
addition to thwarting disease, the direct inhibition of viral RNA uncoating
and replication will reduce the possibility for generation of drug-resistant
virus offspring and decrease virus transmission from infected individuals to
healthy persons. RNA replication is a complicated process involving several
viral proteins that must act together in a coordinated fashion. Due to the
nature of this process, changes or mutations in these proteins are not readily
tolerated. Consequently, viral proteins required for RNA replication are not
only specific to the virus, they are among the least variable proteins of the
virus. This is in contrast to the highly variable viral surface proteins
generally involved in immune responses to virus infections. This invariability
of the viral proteins responsible for viral RNA replication represents an
important attribute in their selection as molecular targets for antiviral drug
discovery and development.
The ViroPharma Approach
ViroPharma, based on its number of experienced RNA virologists and its
exclusive focus on RNA virology, believes that it is a leader in RNA virology
and RNA antiviral drug discovery and development. As a result of its focus on,
and expertise in, RNA virus replication, unique molecular target selection and
assay development technologies, and its development and possession of
proprietary chemical inhibitors and its specialized chemical library, the
Company believes that it is well-positioned to develop effective antiviral
pharmaceuticals for RNA virus diseases.
While the RNA replication process is common among all RNA viruses, the
detailed molecular and biochemical mechanisms of RNA replication are currently
not fully understood. However, the Company has used its experience in RNA
virology, RNA virus uncoating and RNA replication, along with recent advances
in biological, molecular and informatics technologies, to gain an
understanding of several aspects of the RNA virus uncoating and replication
process. Company scientists have elucidated fundamental processes involved in
virus uncoating and used this knowledge to design compounds to inhibit these
processes. They have also succeeded in discovering new virus enzyme activities
that are essential to RNA replication, which are the subject of a U.S.
24
<PAGE>
patent application filed by the Company. Company scientists have further
characterized several RNA virus replication activities and used the resulting
information to develop novel drug screening assays. The Company's assays are
optimized for high sensitivity and specificity and are validated for
reproducibility. These assays are automated using state-of-the-art robotics
technologies to facilitate the high throughput screening of large chemical
libraries. Using its novel assays, the Company has discovered proprietary
small molecule compounds that inhibit the targeted virus-specific activities.
Once active compounds are identified, the Company advances such compounds to
clinical drug candidates through a process of chemical optimization. This
process involves the rapid generation of an expanded chemical analog series
based on the initial active compounds and utilizes an array of technologies
including computer-assisted pharmacophore modeling and drug design techniques,
two-dimensional and three-dimensional structure and substructure chemical
database searches and conventional medicinal chemistry, combinatorial
chemistry and automated high capacity chemical synthetic methods. The Company
then evaluates analog series in various biochemical and biological assays that
assess compound selectivity, potency, safety and bioavailability. Importantly,
the Company chemically optimizes active compounds for these four key
parameters in parallel, not sequentially. The Company believes that its
combination of chemical and biological technologies and parallel compound
optimization process allows it to accelerate drug discovery and development.
The generation of large numbers of specific chemical analogs by the Company
also enables it to rapidly expand its valuable chemical library that is biased
toward inhibitors of enzymes and activities essential to RNA replication. The
Company believes that this library provides a significant advantage in its
efforts to discover inhibitors for additional RNA virus diseases. The Company
believes that the technologies used by the Company have never been applied to
develop an approved pharmaceutical product.
STRATEGY
The Company's objective is to become the leading discoverer, developer and
marketer of proprietary antiviral pharmaceuticals for RNA virus diseases. The
Company seeks to achieve this objective through the implementation of the
following strategies:
. Focus on RNA Virus Diseases. RNA viruses cause the majority of human
viral diseases, yet few effective antiviral drugs are available to
address these diseases. Based on the significance and prevalence of
disease associated with RNA viruses and the limited means to effectively
prevent or treat these diseases, the Company believes there is a
significant market opportunity for the development of effective
therapeutics for RNA virus diseases. The Company has focused its
resources to capitalize on this market opportunity.
. Broadly Apply Technological Expertise in RNA Virology. The Company has
leading expertise in RNA antiviral drug discovery, focusing on RNA
replication and involving the selection of specific molecular targets
and the development of novel drug screening assays, proprietary chemical
inhibitors and a specialized chemical library. Since RNA replication is
unique to RNA viruses, yet common to all RNA viruses, this process
provides a broadly applicable platform for drug discovery. The Company
intends to continue to expand and apply its expertise in RNA virology,
RNA replication, chemical synthesis methodologies and antiviral drug
design.
. Conduct Parallel Drug Discovery Assessments. The key parameters in the
drug discovery process are selectivity, potency, safety and
bioavailability. The Company accelerates and enhances the efficiency of
its drug discovery programs by simultaneously optimizing chemical
compounds for each of these parameters during the drug discovery
process.
. Pursue Indications for Rapid Demonstration of Efficacy. In order to
expedite drug development, the Company initially targets disease
indications based upon the likelihood for rapid demonstration of
efficacy in clinical trials. The Company then pursues follow-on clinical
development for expanded disease indications.
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. Pursue Strategic Relationships by Leveraging RNA Virology Expertise. The
Company leverages its leadership position in RNA virus antiviral drug
discovery and development through strategic relationships with
pharmaceutical companies, specialized technology companies and academic
institutions. With these relationships, the Company enhances its drug
discovery capabilities and in-licensing opportunities and facilitates
the commercialization of its potential products.
PRODUCT DEVELOPMENT AND RESEARCH
The Company has focused its initial drug discovery and development
activities on six RNA virus diseases: viral meningitis, "summer flu," the
common cold, influenza, hepatitis C and viral pneumonia. The Company has drug
candidates in various stages of research and development for each of these RNA
virus diseases. The following chart sets forth the target disease indications
and the status of the Company's lead product candidates:
<TABLE>
- ---------------------------------------------------------------------------------------------
<CAPTION>
DISEASE INDICATION PRODUCT CANDIDATE DEVELOPMENT STATUS(1)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Viral Meningitis Pleconaril (oral) Phase IIb clinical trial commenced June 1996
"Summer Flu" Pleconaril (oral) Phase IIa clinical trial completed April 1996;
Phase IIb clinical trial anticipated late 1997
Common Cold Pleconaril (intranasal) Preclinical; IND filing anticipated late 1997
Influenza VP 14221 series Preclinical safety and pharmacokinetics studies
Hepatitis C VP 31593 series Chemical optimization
Viral Pneumonia VP 36676 series Research
--------
(1) For a discussion of preclinical testing and of human clinical trials, see
"--Government Regulation."
- ----------------------------------------------------------------------------------------------
</TABLE>
The Company's most advanced product candidate , pleconaril, based on
preclinical studies, is a potent, broad spectrum, orally active inhibitor of
enteroviruses and rhinoviruses. Enteroviruses and rhinoviruses are closely
related members of a large, very prevalent group of RNA viruses that are
responsible for widespread human disease. According to the Centers for Disease
Control (the "CDC"), there are 10 to 15 million enterovirus infections every
year in the United States. Enteroviruses cause viral meningitis, "summer flu,"
encephalitis, myocarditis, pericarditis, hand-foot-and-mouth disease,
herpangina, otitis media and perinatal enteroviral disease. Rhinoviruses are
responsible for up to 50% of all acute respiratory illnesses and are the
leading cause of the common cold.
The Company is developing pleconaril for three indications: viral
meningitis, "summer flu" and the common cold. While antibiotics are commonly
prescribed by physicians to patients with these diseases, they are ineffective
at treating these virus infections. Prescription and over-the-counter cough
and cold remedies, analgesics and antipyretics are also used to reduce
symptoms of the "summer flu" and common cold, but do not treat the underlying
diseases. Currently, there are no antiviral therapies available for any of the
diseases caused by enteroviruses or rhinoviruses. Pleconaril is not expected
to be commercially available for at least three years, if at all.
ViroPharma scientists have demonstrated that pleconaril inhibits enterovirus
and rhinovirus replication by a novel, virus-specific mode of action. The
compound binds to a specific site inside the coat protein of the virus,
thereby preventing the release of the viral RNA inside the cell and blocking
the initiation of the RNA replication process. In preclinical studies
conducted by the Company, pleconaril was shown to effectively inhibit the cell
culture replication of 96% of the rhinoviruses and enteroviruses isolated from
332 human patients. The patient population from which these viruses were
isolated exhibited the complete range of diseases caused by these viruses,
including a number of fatal infections. Moreover, orally administered
pleconaril protected mice from lethal infection by enteroviruses in three
distinct animal model systems. Based on these results, the Company believes
that pleconaril will be effective against a broad spectrum of rhinoviruses and
enteroviruses. There can be no assurance that pleconaril will be clinically
efficacious against diseases caused by these viruses. See "Risk Factors--
Uncertainty Regarding Clinical Trials."
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<PAGE>
In Phase I single ascending dose studies with a capsule formulation of
pleconaril, plasma concentrations of drug increased proportionally to the oral
dose administered up to the highest dose tested (1000 mg). Maximum drug plasma
levels 20 times that required to inhibit the replication of the majority of
the clinical virus isolates referred to above were achieved with a single 200
mg dose. In Phase I multidose studies conducted by the Company, doses up to
400 mg administered three times per day for seven consecutive days were well-
tolerated by all subjects in the study. No serious adverse events attributable
to the drug were observed in the 50 subjects who received pleconaril during
the course of these Phase I studies. There can be no assurance that
unacceptable toxicities or side effects will not occur during development or
that any product will be effective or safe when administered to patients.
The Company has developed an oral liquid formulation of pleconaril, which
the Company has demonstrated is bioequivalent to the capsule formulation used
in Phase I studies. The liquid formulation is self-preserving, stable and
contains only GRAS (Generally Regarded As Safe) ingredients. This formulation
provides considerable flexibility in dosing and will be used in clinical
trials for both the viral meningitis and "summer flu" indications. The Company
is also developing an intranasal formulation of pleconaril for use in the
common cold indication. Currently, the Company is exploring delivery systems
for its intranasal formulation.
The Company entered into an agreement with Sanofi under which it received
exclusive rights to develop and market all products relating to pleconaril,
previously designated VP 63843, and related compounds for use in enterovirus
and rhinovirus disease indications in the United States and Canada, as well as
a right of first refusal in respect of any other indications. Pleconaril was
discovered at Sanofi by scientists now with ViroPharma. See "--Strategic
Relationships--Sanofi S.A." and "--Patents." Pleconaril has been approved as a
generic name for the Company's compound VP 63843 by the United States Names
Council (USAN) and is awaiting final approval from the World Health
Organization ("WHO").
Viral Meningitis
Infection of the central nervous system by enteroviruses can cause
meningitis, which is characterized by a severe headache, stiffness of the neck
or back, fever, nausea and malaise. The disease is typically severe and
requires emergency medical care. The disease occasionally progresses to
serious neurologic sequelae, particularly among infants infected before age
one year. There is currently no antiviral pharmaceutical for viral meningitis.
In order to establish the incidence and clinical course of enteroviral
meningitis and assess potential clinical endpoints for future drug efficacy
studies, the Company conducted an Adult Viral Meningitis Observational Study
at three medical centers (the University of Colorado, the University of
Pennsylvania and the University of Virginia) during the 1995 summer
enterovirus season. The results of this study demonstrated the severity and
duration of the illness. Adults presenting at emergency rooms complaining of
severe headaches were confirmed to be enterovirus-infected by detection of
viral RNA in their cerebrospinal fluid. Approximately 80% of these
enterovirus-infected patients required hospitalization, with an average stay
of four days. Patients were unable to resume full normal activities for an
average of 16 days. All subjects received some form of analgesic (70% received
a narcotic) for an average of seven days to manage their severe headache pain.
From this study, the Company estimates that 500,000 Americans contract
enteroviral meningitis annually.
Based on the results of two Phase I studies and the Phase IIa study for
enterovirus disease described below, the Company is currently evaluating the
oral liquid formulation of pleconaril in an international multi-center, double
blind, placebo controlled Phase IIb trial for treatment of viral meningitis.
The Company initiated this study at sites in the United States in June 1996
and anticipates initiating the study in Australia and South Africa in November
1996. There can be no assurance that this trial will be successfully completed
or completed in a timely manner. See "Risk Factors--Absence of Products;
Product Development Risks," "Risk Factors--Dependence on Most Advanced Drug
Candidate" and "Risk Factors--Uncertainty Regarding Clinical Trials."
"Summer Flu"
The "summer flu" is an upper respiratory illness caused by enteroviruses and
characterized initially by a sore throat and cough, followed by a general
influenza-like syndrome. While this disease occurs throughout the year, it is
most prevalent in the summer. The clinical illness can persist for several
weeks and typically results in
27
<PAGE>
a physician visit. According to the CDC, there are an estimated 10 to 15
million cases of enterovirus infection each year in the United States, many of
which result in "summer flu." There is currently no antiviral pharmaceutical
for the enterovirus "summer flu."
During the spring of 1996, the Company conducted a Phase IIa Enterovirus
Challenge Study with pleconaril. In this double blind, placebo controlled
"summer flu" model study, the oral capsule formulation of pleconaril
demonstrated clinical effectiveness. Eight hours after the randomized
administration of either placebo or pleconaril, 33 volunteers were infected
with the enterovirus coxsackievirus A21. Subjects were then administered
either placebo or a 200 mg dose of pleconaril twice daily for seven days.
Placebo-treated subjects developed notable cold symptoms, while pleconaril-
treated volunteers showed pronounced and clinically significant reductions in
disease measures, including symptoms and virus load. Assessment of clinical
disease by five measures (subject and physician rating of disease symptoms,
nasal mucus production, fever and virus load in nasal secretions) showed, in
all cases, a significant reduction in the pleconaril-treated group. Depicted
in the graph below are the results of these disease measures for both the
placebo-treated (light bars) and pleconaril-treated (dark bars) subjects.
PHASE IIA STUDY-DISEASE MEASURE REDUCTIONS
[CHART OF PHASE IIA STUDY-DISEASE MEASURE REDUCTIONS APPEARS HERE]
[The following is required for the EDGAR filing and will not appear in the
printed prospectus: This histogram-format graph contains five two-column sets
along the horizontal axis. The left column of each set, depicted in light gray,
represents disease measure data for test subjects from the "Placebo"-treated
group: the right column of each set depicted in dark gray, represents disease
measure data for test subjects from the "Pleconaril"-treated group. Below the
column sets are the following five captions: "Subject Rating", "Physician
Rating", "Mucus Weight", "Fever" and "Virus Load". The vertical axis is
indicated at "% of Subjects Exceeding Disease Measure Threshold" and ranges from
0% to 100%. These Disease Measure Thresholds are defined in the legend to the
graph as follows: "Subject Rating Greater than or Equal to 5 (Scale: 0-10),
Physician Rating Greater than or Equal to 10 (Scale: 0-33), Mucus Weight Greater
than or Equal to 10g (Range: 0-54g), Fever Greater than or Equal to 100 degrees
F (Range: normal - 102.3 degrees F), Virus Load Greater than or Equal to 4
log/10/ (Range: 0-6.3 log/10/)." The values for the "Subject Rating" columns are
67% and 13% for the Placebo and Pleconaril groups, respectively. The values for
the "Physician Rating" columns are 53% and 0% for the Placebo and Pleconaril
groups, respectively. The values for the "Mucus Weight" columns are 67% and 0%
for the Placebo and Pleconaril groups, respectively. The values for the "Fever"
columns are 40% and 7% for the Placebo and Pleconaril groups, respectively. The
values for the "Virus Load" columns are 93% and 13% for the Placebo and
Pleconaril groups, respectively.]
The Company anticipates advancing the pleconaril oral liquid formulation
into a Phase IIb multicenter, placebo controlled, dose ranging clinical
efficacy trial for the "summer flu" indication in the second half of 1997.
There can be no assurance that this trial will be initiated, successfully
completed or completed in a timely manner. See "Risk Factors--Absence of
Products; Product Development Risks," "Risk Factors--Dependence on Most
Advanced Drug Candidate" and "Risk Factors--Uncertainty Regarding Clinical
Trials."
Common Cold
Rhinoviruses are the leading cause of the common cold. Many people
experience two or three colds per year with the accompanying symptoms of
sneezing, nasal obstruction, nasal discharge, headache and general malaise.
The median duration of illness is seven days, with symptoms persisting for two
weeks in approximately 25% of persons. Complications associated with
rhinovirus infections include otitis media, pneumonia and asthmatic
exacerbations resulting in serious respiratory distress. Although there are
cold remedies, analgesics and antipyretics that may reduce cold symptoms,
there is no antiviral pharmaceutical to treat the common cold.
The Company's clinical development plan for the intranasal formulation of
pleconaril contemplates initially treating the common cold in patients with
asthma. This strategy provides an opportunity for both prophylactic and
therapeutic dosing in this population. Should the product be approved for use
in this patient population, the
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<PAGE>
Company would expect to expand clinical development to include the general
population. The Company plans to conduct a preclinical nasal irritation study
and select a manufacturer for the intranasal formulation of pleconaril in
1997. Subsequent thereto, the Company anticipates filing an Investigational
New Drug ("IND") application for the intranasal formulation of pleconaril for
the common cold indication in late 1997. There can be no assurance that these
activities will be initiated, successfully completed or completed in a timely
manner. See "Risk Factors--Absence of Products; Product Development Risks,"
"Risk Factors--Dependence on Most Advanced Drug Candidate" and "Risk Factors--
Uncertainty Regarding Clinical Trials."
Influenza
Influenza virus is a major cause of human illness. In the United States,
approximately 10% to 20% of the population is infected with the influenza
virus each year. This disease is characterized by the sudden onset of
headache, chills and a dry cough, which is rapidly followed by fever,
significant myalgias and malaise. Fever and upper respiratory tract symptoms
generally last for three to five days, while the cough and weakness persist
for an additional one to two weeks. Influenza can also be fatal. According to
the WHO, approximately 10,000 to 40,000 deaths occur each year in the United
States as a result of influenza. The very young, elderly and
immunocompromised, and those with medical conditions such as cardiovascular
disease, pulmonary disease and pregnancy, are at greatest risk for serious or
fatal complications associated with influenza virus infections. The National
Science and Technology Council currently estimates that the direct medical
costs due to influenza in the United States are $5 billion per year.
Immunization for influenza has demonstrated only limited success in
controlling the disease. Due to the highly variable nature of the influenza
virus surface proteins, vaccines used one year are ineffective and obsolete
the next. New vaccines with components predicted to be important in the next
year's influenza season must be developed, manufactured and administered each
year. Even when forecasts result in vaccines with components closely matching
that year's actual circulating influenza virus strain, the immunity induced by
these vaccines is incomplete and short-lived. Reinfection with the same virus
strain or a variant strain can occur and result in disease in previously
immunized individuals. Finally, compliance with national immunization
campaigns has generally been insufficient to prevent epidemics.
Current drugs approved for use in the prevention and treatment of influenza
include amantadine and its closely related analog, rimantadine. Both drugs are
associated with certain central nervous system and gastrointestinal side
effects. In addition, treated individuals can produce drug-resistant virus and
transmit infection to other persons with whom they come in contact.
The Company's principal molecular target in its influenza virus program is
the viral RNA transcriptase complex, which is required by the virus for RNA
replication. The Company has developed a quantitative high throughput drug
screening assay that simultaneously measures several essential virus-encoded
replication activities. Using this assay, ViroPharma scientists have
discovered several specific inhibitors of influenza virus replication. The
Company has applied its chemical optimization process to establish structure-
activity relationships for these inhibitors with respect to potency and
selectivity. The Company's preclinical acute safety studies conducted to date
indicate that several of its lead compounds, currently designated the VP 14221
Series, are well tolerated. The Company has also commenced bioavailability
studies on this series. In addition, ViroPharma has filed two patent
applications related to its active influenza virus compounds and is preparing
additional patent applications for influenza virus compounds. There can be no
assurance that clinical trials for this compound series will be initiated or,
if initiated, will lead to a determination that the compound is safe and
efficacious. No assurance can be given that such patents will issue. See "Risk
Factors--Absence of Products; Product Developments Risks," "Risk Factors--
Uncertainty Regarding Clinical Trials," "Risk Factors--Uncertain Ability to
Protect Patents and Proprietary Technology and Information" and "--Patents."
Hepatitis C
HCV, first identified in 1989, is recognized as a major cause of chronic
hepatitis worldwide. According to the CDC, there are currently approximately
3.5 million HCV infected individuals in the United States, with
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<PAGE>
150,000 new cases identified each year. The WHO estimates that an additional
10 million individuals are infected with HCV in Europe and a total of 100
million people are infected worldwide. Populations in some geographic areas,
such as Japan, Spain, Hungary, Saudi Arabia, Southern Italy and Egypt, have
particularly high rates of infection. One study of Egyptian blood donors has
shown an infection rate of 19.2%. Approximately 80% of HCV infected persons
will develop chronic hepatitis, of which 20% will progress to liver cirrhosis.
Chronic HCV infection can also lead to the development of hepatocellular
carcinoma and liver failure.
There is currently no vaccine for HCV. HCV is an immunologically diverse
virus, with many naturally occurring variants in circulation. Such diversity,
in combination with HCV's ability to change its surface proteins, may
represent the mechanism by which the virus escapes attack by the immune system
and establishes persistent infections.
IFN is currently the only approved drug in the United States for treatment
of hepatitis due to HCV. While IFN treatment has been reported to improve
serum liver enzyme response in 20% to 40% of patients, the remainder do not
respond to IFN treatment. For patients who do respond, a sustained improvement
of liver function reportedly is seen in only 10% to 20% of patients; the
majority of patients relapse upon cessation of IFN treatment. Thus, while IFN
represents the first treatment for chronic hepatitis C, its effectiveness is
limited and its cure rate is low. Nevertheless, the Company estimates the
current market for IFN use in the treatment of hepatitis C to be over $1
billion worldwide.
The Company focuses on several key enzyme targets involved in the HCV RNA
replication process. Company scientists have discovered several key enzyme
activities associated with particular HCV proteins. These activities have been
characterized and used to establish validated high throughput assays. The HCV
RNA helicase activity represents one such target. As a result of screening
compounds in the HCV RNA helicase assay, the Company has identified several
active and selective compounds, currently designated the VP 31593 Series, and
has begun chemical optimization on such compounds. Based on its RNA helicase-
related technology, the Company has established a collaborative drug discovery
and development agreement with Boehringer Ingelheim. The Company is also
developing assays for additional HCV molecular targets. The Company has filed
two patent applications related to the HCV inhibitor compound series and
anticipates that it will file several additional patent applications within
the next year. No assurance can be given that such patents will issue. See
"Risk Factors--Dependence on Corporate Collaborations; Potential Need for
Additional Collaborators," "Risk Factors--Uncertain Ability to Protect Patents
and Proprietary Technology and Information," "--Strategic Relationships--
Boehringer Ingelheim Pharmaceuticals, Inc." and "--Patents."
Viral Pneumonia
RS virus is the major pediatric viral respiratory tract pathogen, causing
pneumonia and bronchiolitis in infants and young children. During seasonal
epidemics, approximately 250,000 infants contract RS virus pneumonia, and up
to 35% are hospitalized. Of those hospitalized, mortality rates of up to 5%
have been reported. Children with underlying conditions such as prematurity,
congenital heart disease, bronchopulmonary dysplasia and various congenital or
acquired immunodeficiency syndromes are at greatest risk of serious RS virus
morbidity and mortality. RS virus is also implicated as a significant cause of
mortality in the elderly.
Vaccines are not currently available for prevention of RS virus disease.
Recently, the prophylactic use of an intravenous hyperimmune globulin infusion
was approved for RS virus disease in certain high risk infants. Ribavirin,
administered by aerosol to minimize the drug's adverse effects, is generally
reserved for only the most serious cases of RS virus pneumonia and
bronchiolitis. In both cases, drug administration can be difficult and
inconvenient in young patients.
The Company has developed a high throughput drug screening assay for RS
virus replication. Company scientists have discovered several inhibitory
compounds, currently designated the VP 36676 Series, with high potency and
selectivity in initial profiling evaluations. Based on these discoveries, the
Company intends to commence chemical optimization in late 1996. There can be
no assurance that such chemical optimization will
30
<PAGE>
be initiated, successfully completed or completed in a timely manner. See
"Risk Factors--Absence of Products; Product Development Risks," "Risk
Factors--Dependence on Most Advanced Drug Candidate" and "Risk Factors--
Uncertainty Regarding Clinical Trials."
Other Potential RNA Virus Disease Targets
The Company believes that its drug discovery technologies and development
expertise are potentially applicable to a broad range of RNA virus diseases.
The Company also believes that certain RNA virus diseases represent immediate
extensions of the Company's current research and development programs. In
addition to viral meningitis and "summer flu," enteroviruses cause a broad
range of diseases for which the Company's most advanced drug candidate,
pleconaril, may be effective. Of these, the Company is currently considering
exploratory clinical trials for pleconaril for hand-foot-and-mouth disease,
enterovirus neonatal sepsis and persistent meningoencephalitis in antibody-
deficient individuals. There can be no assurance that the Company will pursue
one or more of these indications or, if the Company does pursue one or more of
these indications, that the Company will be able to successfully identify drug
development candidates. See "Risk Factors--Absence of Products; Product
Development Risks" and "Risk Factors--Uncertainty Regarding Clinical Trials."
Similarly, the Company's lead anti-influenza compound series acts by a
virus-specific mechanism that may make it potentially applicable to a large
family of viruses called bunyaviruses. Bunyaviruses cause widespread disease
globally including encephalitis, hemorrhagic fevers and the recently
identified hantavirus pulmonary syndrome. In the midwestern United States
alone, there are approximately 300,000 infections of La Crosse encephalitis
virus annually resulting in approximately 900 deaths. In Asia and Eastern
Europe, a bunyavirus called hantavirus is responsible for Korean hemorrhagic
fever, a serious influenza-like illness in which approximately 33% of the
affected individuals develop hemorrhagic disease and 5% to 10% die. In 1993,
in the southwest United States, a new hantavirus emerged that causes
hantavirus pulmonary syndrome, a serious respiratory disease that is fatal in
approximately 50% of cases. This new virus has now been detected in more than
20 states in the United States and has recently appeared in Argentina, Brazil
and Canada.
In addition, assays and inhibitor compounds derived from the Company's HCV
program may accelerate antiviral drug discovery for the related virus group
called flaviviruses. There are 38 flaviviruses associated with human disease,
including the dengue fever viruses, yellow fever virus and Japanese
encephalitis virus. Importantly, the epidemiology of these diseases is
changing. For example, with global urbanization, the incidence of dengue fever
has increased dramatically. Dengue fever viruses typically cause a severe
influenza-like illness and, in a more serious form, can cause a fatal
hemorrhagic disease. Prior to 1970, only nine countries reported outbreaks of
fatal dengue hemorrhagic fever. Presently, at least 38 countries have reported
incidences of this serious form of dengue fever virus disease. The WHO
estimates that there are 20 million cases of dengue fever each year, of which
500,000 require hospitalization.
There are currently no approved antiviral pharmaceuticals for any of the
diseases mentioned above.
STRATEGIC RELATIONSHIPS
ViroPharma pursues strategic relationships by leveraging its RNA virology
expertise, while seeking to maintain independence and flexibility in the
development and commercialization of its products. The Company has entered
into several development and licensing agreements and research collaborations
and continues to seek opportunities to enhance its ability to discover,
develop and commercialize RNA antiviral drugs. There can be no assurance that
the Company will be able to enter into additional beneficial relationships or
maintain its current relationships.
Currently, the Company is a party to a licensing and co-marketing agreement
with one multinational pharmaceutical company, a drug discovery and
development agreement with another multinational pharmaceutical company and
several licensing and collaborative agreements with various pharmaceutical and
technology companies and academic institutions for certain biological and
chemical technologies. From time to time, the Company engages in discussions
regarding additional strategic relationships. Currently, the Company does not
have any understandings, agreements or commitments to enter into any
additional strategic relationships.
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<PAGE>
Sanofi S.A.
In December 1995, the Company entered into an agreement with Sanofi under
which it received exclusive rights to develop and market all products relating
to pleconaril, previously designated VP 63843, and related compounds for use
in enterovirus and rhinovirus disease indications in the United States and
Canada, as well as a right of first refusal in respect of any other
indications. The Company's rights include rights to use all of Sanofi's
patents, know-how and trademarks relating to pleconaril. The Company paid
Sanofi a licensing fee of $1,000,000 in February 1996 and is obligated to make
a milestone payment of up to $2,000,000 upon the earlier of enrollment of the
first patient in a Phase III trial or December 22, 1998. In addition, the
Company is required to make milestone payments upon the achievement of certain
other development milestones and, until the expiration of the last patent on
pleconaril or any related drug, royalty payments on any sales of products
developed under the agreement in the United States and Canada. Sanofi is
required to pay the Company royalties on sales in all other territories of the
world during the term of the agreement (as described below) and must reimburse
certain of the milestone fees previously paid by the Company upon submission
of pleconaril for regulatory approval in Japan. The Company believes that the
royalty rates payable by both the Company and Sanofi are comparable to the
rates generally payable by other companies under similar arrangements. See "--
Patents."
Upon the completion of data analysis from the Company's Phase IIb trials,
Sanofi has the option to co-develop the drug in the European Union. If Sanofi
chooses to co-develop, Sanofi must make certain royalty payments to the
Company based on sales in the European Union. If Sanofi does not choose to co-
develop, it must make royalty payments to the Company based on such sales at a
higher royalty rate and will be required to reimburse a percentage of all
previously paid milestone fees and reduce future milestone fees by the same
percentage.
The Sanofi agreement terminates on the later of the expiration of the last
patent on pleconaril or any related drug in the United States or Canada or ten
years following the commencement of the Company's sale of the drug in the
United States or Canada, or earlier under certain circumstances. The term
automatically renews for successive five year terms unless six months' prior
written notice of termination is given by either party. Pursuant to the
agreement, the Company is required to purchase its entire supply of pleconaril
drug substance from Sanofi. The Company has the right to manufacture, or
contract with third parties to manufacture, any drug product derived from the
pleconaril drug substance. See "--Manufacturing."
Boehringer Ingelheim Pharmaceuticals, Inc.
In July 1996, the Company entered into a collaborative drug discovery and
development agreement with Boehringer Ingelheim for one hepatitis C target
identified by ViroPharma. Under this agreement, the Company granted to
Boehringer Ingelheim the exclusive worldwide rights to develop and
commercialize compounds discovered under the agreement. In return, Boehringer
Ingelheim paid a technology access fee of $1,000,000 to the Company and is
required to make research and milestone payments to the Company in connection
with the Company's transfer of HCV screening and assay technology and at
various stages in the development of compounds under this agreement. In
addition, Boehringer Ingelheim is required to make royalty payments to the
Company on sales of products developed and marketed under this agreement
beginning on the date a given product is first sold in a given country and
ending on the date that the last patent covering such product in such country
expires (or 12 years from the first sales in such country if a patent is never
issued for such product in such country). The amounts of required royalty
payments vary depending on which party originated the compound for the
product. The Company believes that the royalty rates payable under this
agreement are comparable to royalty rates generally payable by other companies
under similar agreements. The term of the agreement is two years.
Boehringer Ingelheim intends to make an equity investment of $2.5 million in
the Company, and the Company has reserved for purchase by Boehringer Ingelheim
208,333 shares of Common Stock in this offering at the initial public offering
price.
Other Collaborative Agreements
The Company is a party to collaborative drug discovery agreements with
various pharmaceutical and technology companies, including Chiroscience Ltd.
and NPS Pharmaceuticals, Inc. Generally, under these
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agreements, the collaborators make available enabling technologies and
compounds from their chemical libraries, and ViroPharma applies such technology
and compounds to RNA virus diseases using the Company's proprietary RNA
replication assays. If a successful drug is discovered, these agreements
typically provide for good faith negotiations to establish the terms and
conditions of a mutually acceptable collaboration agreement. Generally, any
such resulting collaborative agreement will base the economic benefits to the
parties upon the relative contribution by each party to a drug's discovery and
development.
The Company has established material transfer and licensing agreements and
research collaborations with academic institutions and their affiliates,
including the Academy of Sciences of the Czech Republic, Northwestern
University, Pennsylvania State University, Renssalear Polytechnic Institute,
the University of Florida and Washington University. Generally, these
agreements provide for the licensing to the Company of materials for either (i)
an initial fee and certain other fees payable by the Company, with no future
commercial rights for the institution or (ii) an initial fee payable by the
Company and certain rights to negotiate collaborative agreements for drug
development and commercialization.
PATENTS
ViroPharma believes that patent protection and trade secret protection are
important to its business and that the Company's future will depend, in part,
on its ability to maintain its technology licenses, maintain trade secret
protection, obtain patents and operate without infringing the proprietary
rights of others both in the United States and abroad. The Company currently
has filed with the PTO a patent application for technology for identifying
inhibitors of RNA viruses, two patent applications covering compounds active
against HCV and two patent applications covering compounds active against
influenza viruses. The Company has also obtained a license from Sanofi, which
grants the Company exclusive rights under two issued United States patents and
two related Canadian patent applications to develop, manufacture and market
antiviral compounds in the United States and Canada. Pleconaril, which is
currently in clinical trials, is covered by one of the licensed United States
patents, which expires in 2012, and one of the licensed Canadian patent
applications. The Company will be dependent on Sanofi to prosecute such patent
applications and may be dependent on Sanofi to protect such patent rights.
As patent applications in the United States are maintained in secrecy until
patents issue and as publication of discoveries in the scientific or patent
literature often lag behind the actual discoveries, the Company cannot be
certain that it was the first to make the inventions covered by each of its
pending patent applications or that it was the first to file patent
applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. There can be no assurance that patents will issue from any
of the Company's patent applications or, should patents issue, that the Company
will be provided with adequate protection against potentially competitive
products. Furthermore, there can be no assurance that should patents issue,
they will be of commercial value to the Company, or that the PTO or private
parties, including competitors, will not successfully challenge the Company's
patents or circumvent the Company's patent position. In the absence of adequate
patent protection, the Company's business may be adversely affected by
competitors who develop comparable technology or products.
Moreover, pursuant to the terms of the Uruguay Round Agreements Act, patents
filed on or after June 8, 1995 have a term of twenty years from the date of
such filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to
the Company's products as patent applications in the biopharmaceutical sector
often take considerable time to issue. Under the Drug Price Competition and
Patent Term Restoration Act of 1984, a patent which claims a product, use or
method of manufacture covering drugs and certain other products may be extended
for up to five years to
compensate the patent holder for a portion of the time required for FDA review
of the product. This law also establishes a period of time, following NDA
approval, during which the FDA may not accept or approve applications for
certain similar or identical drugs from other sponsors unless those sponsors
provide their own safety and effectiveness data. There can be no assurance that
the Company will be able to take advantage of either the patent term extension
or marketing exclusivity provisions of this law.
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In order to protect the confidentiality of the Company's technology,
including trade secrets and know-how and other propietary technical and
business information, the Company requires all of its employees, consultants,
advisors and collaborators to enter into confidentiality agreements that
prohibit the use or disclosure of information that is deemed confidential. The
agreements also oblige the Company's employees, consultants, advisors and
collaborators to assign to the Company ideas, developments, discoveries and
inventions made by such persons in connection with their work with the
Company. There can be no assurance that confidentiality will be maintained or
disclosure prevented by these agreements or that the Company's proprietary
information or intellectual property will be protected thereby or that others
will not independently develop substantially equivalent proprietary
information or intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with those being developed by the Company. Therefore, the Company's drug
candidates may give rise to claims that they infringe the patents or
proprietary rights of other parties existing now and in the future.
Furthermore, to the extent that ViroPharma or its consultants or research
collaborators use intellectual property owned by others in work performed for
the Company, disputes may also arise as to the rights in such intellectual
property or in related or resulting know-how and inventions. An adverse claim
could subject the Company to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. There
can be no assurance that any license required under any such patents or
proprietary rights would be made available on terms acceptable to the Company,
if at all. If the Company does not obtain such licenses, it may encounter
delays in product market introductions, or may find that the development,
manufacture or sale of products requiring such licenses may be precluded. In
addition, the Company could incur substantial costs in defending itself in
legal proceedings instituted before the PTO or in a suit brought against it by
a private party based on such patents or proprietary rights, or in suits by
the Company asserting its patent or proprietary rights against another party,
even if the outcome is not adverse to the Company. The Company has not
conducted any searches or made any independent investigations of the existence
of any patents or proprietary rights of other parties. See "Risk Factors--
Uncertain Ability to Protect Patents and Proprietary Technology and
Information."
MANUFACTURING
The Company does not currently have manufacturing capabilities, nor does the
Company intend to develop such capabilities for any products in the near
future. The Company believes that internal manufacturing capabilities will not
be necessary to successfully commercialize its products.
Pleconaril drug substance is prepared from readily available materials using
well-established synthetic processes. Technology involved in the production of
pleconaril is proprietary and covered by a patent licensed to the Company by
Sanofi. The Company has an agreement with Sanofi for the supply of pleconaril
drug substance for clinical trials. Sanofi is required to supply the Company's
needs at cost during drug development and at cost plus a reasonable mark-up
for any commercial sales in the United States and Canada. The Company is
obligated to purchase pleconaril drug substance exclusively from Sanofi. In
the event that Sanofi is unable to satisfy the Company's requirements and the
Company is required to find an additional or alternative source, there may be
additional cost and delay in product development or commercialization. The
Company anticipates that its current supply of pleconaril drug substance will
be sufficient to complete its planned Phase II and III clinical trials for
viral meningitis and its planned Phase II clinical trials for "summer flu."
The Company believes that it will be able to obtain drug substance from Sanofi
and, if necessary, other manufacturers, for the production of pleconaril drug
product on terms acceptable to the Company. The Company intends to contract
third party manufacturers for the preparation of other compounds and drug
substances and products for preclinical research and commercial production.
See "Risk Factors--Absence of Manufacturing Capabilities" and "--Strategic
Relationships--Sanofi S.A."
The Company is currently negotiating with several contractors for the
commercial manufacture of the liquid formulation of pleconaril drug product.
The Company has established quality control guidelines, which require that
third party manufacturers under contract produce the drug product in
accordance with the FDA's GMP requirements.
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The Company maintains confidentiality agreements with potential and existing
manufacturers in order to protect its proprietary rights related to
pleconaril.
MARKETING
ViroPharma does not currently have a sales and marketing organization. Under
its agreement with Sanofi, the Company has the right to market and sell
pleconaril for all enterovirus and rhinovirus indications in the United States
and Canada. Because patients with viral meningitis typically present in a
hospital emergency room setting, the Company is contemplating establishing a
focused sales force to service this concentrated, hospital-based market. There
can be no assurance that the Company will be successful in developing a sales
force, penetrating the markets for any proposed products or achieving market
acceptance of its products. The success and commercialization of the Company's
other potential products will be dependent, in part, upon the ability of the
Company to maintain its existing arrangement with Boehringer Ingelheim, which
governs marketing of the Company's proposed product for hepatitis C, and to
enter into additional collaborative agreements for other potential products.
The Company presently intends to co-market and co-promote products developed
for the "summer flu" and the common cold indications in the United States and
Canada, if and when such products are approved by regulatory agencies. There
can be no assurance that any such marketing arrangements will be available on
terms acceptable to the Company, if at all, that such third parties would
perform adequately their obligations as expected, or that any revenue would be
derived from such arrangements. See "Risk Factors--Absence of Marketing and
Sales Capability," "Risk Factors--No Assurance of Market Acceptance" and "--
Strategic Relationships."
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the Company's ongoing research and
product development activities and in the manufacturing and marketing of the
Company's drug candidates. All of the Company's products will require
regulatory approval by governmental agencies, principally the FDA, prior to
commercialization. In particular, therapeutic products for human use are
subject to rigorous preclinical and clinical testing and other approval
requirements by the FDA and similar health authorities in foreign countries.
Various federal statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, recordkeeping and marketing of such
products. The process of obtaining these approvals and the subsequent
compliance with appropriate statutes and regulations require the expenditure
of substantial resources. Any failure by the Company or its collaborators,
licensors or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of products then being developed
by the Company and its ability to receive product or royalty revenues.
The steps required before a new drug may be commercially distributed in the
United States, include (i) conducting appropriate preclinical laboratory and
animal tests, (ii) submitting to the FDA an IND application which must be
approved before clinical trials may commence, (iii) conducting controlled
human clinical trials that establish the safety and efficacy of the drug
product, (iv) filing a New Drug Application (an "NDA") with the FDA and (v)
obtaining FDA approval of the NDA prior to any commercial sale or shipment of
the drug. This process can take a number of years and involve the expenditure
of substantial resources. The results of preclinical studies and initial
clinical trials are not necessarily predictive of the results from large-scale
clinical trials, and clinical trials may require substantial additional funds,
delays or modifications due to, among other factors, difficulty in obtaining
sufficient patient populations, clinicians or support. 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 GMP requirements and be
subject to inspection by the FDA. Moreover, the submission of applications for
approval may require additional time to complete manufacturing stability
studies. Foreign manufacturing establishments distributing drugs in the United
States also must comply with GMP requirements and list their products with the
FDA. They are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA. See "Risk Factors--Government
Regulation; No Assurance of Regulatory Approval."
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Upon approval in the United States, a drug may only be marketed for the
approved indications in the approved dosage forms and dosages. The FDA also
may require post-marketing testing and surveillance to monitor safety and
efficacy history of the approved product and continued compliance with
regulatory requirements. Adverse experiences with the product must be reported
to the FDA. Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety or efficacy of
the product occur following approval.
The FDA also mandates that drugs be manufactured in conformity with GMP
regulations. In complying with the GMP regulations, 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 to ensure compliance with applicable GMP requirements. Failure to
comply subjects the manufacturer to possible FDA action, such as warning
letters, suspension of manufacturing, seizure of the product, voluntary recall
of a product or injunctive action. The Company currently relies on, and
intends to continue to rely on, third parties to manufacture compounds and
products. Such third parties will be required to comply with GMP requirements.
Even after FDA approval has been obtained, and often as a condition to
expedited approval, further studies, including post-marketing studies, may be
required. Results of post-marketing studies may limit or expand the further
marketing of the products. Further, if there are any modifications to the
drug, including changes in indication, manufacturing process, manufacturing
facility or labeling, an NDA supplement may be required to be submitted to the
FDA.
Products marketed outside the United States which are manufactured in the
United States may be subject to certain FDA regulations, as well as regulation
by the country in which the products are to be sold. If products are marketed
abroad, the Company will also be subject to foreign regulatory requirements
governing clinical trials and pharmaceutical sales, which may vary from
country to country. In connection with certain of its strategic relationships,
the Company's collaborators may be responsible for the foreign regulatory
approval process of the Company's drugs, although the Company may be legally
liable for noncompliance.
The Company is also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use 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 extent of government regulation which might
result from future legislation or administrative action cannot be accurately
predicted. Moreover, although the Company believes that its safety procedures
for handling and disposing of such materials comply with current federal,
state and local laws, rules regulations and policies, the risk of accidental
injury or contamination from these materials cannot be entirely eliminated.
Moreover, the Company anticipates that Congress, state legislatures and the
private sector will continue to review and assess controls on health care
spending. Any such proposed or actual changes could cause the Company or its
collaborators to limit or eliminate spending on development projects and may
otherwise impact the Company. Additionally, in both domestic and foreign
markets, sales of the Company's proposed products will depend, in part, upon
the availability of reimbursement from third-party payors, such as government
health administration authorities, managed care providers, private health
insurers and other organizations. Significant uncertainty often exists as to
the reimbursement status of newly approved health care products. In addition,
third-party payors are increasingly challenging the price and cost
effectiveness of medical products and services. There can be no assurance that
the Company's proposed products will be considered cost effective or that
adequate third-party reimbursement will be available to enable the Company to
maintain price levels sufficient to realize an appropriate return on its
investment in product research and development. See "Risk Factors--Uncertainty
of Pharmaceutical Pricing and Related Matters; Need for Reimbursement."
36
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COMPETITION
The pharmaceutical and biopharmaceutical industries are intensely
competitive and are characterized by rapid technological progress. Certain
pharmaceutical and biopharmaceutical companies and academic and research
organizations currently engage in, or have engaged in, efforts related to the
discovery and development of new antiviral medicines. Significant levels of
research in chemistry and biotechnology occur in universities and other
nonprofit research institutions. These entities have become increasingly
active in seeking patent protection and licensing revenues for their research
results. They also compete with the Company in recruiting skilled scientific
talent. Many companies are developing therapies to treat viral diseases and,
in this regard, are in competition with the Company. The Company believes that
its ability to compete successfully will be based on its ability to create and
maintain scientifically advanced technology, develop proprietary products,
attract and retain scientific personnel, obtain patent or other protection for
its products, obtain required regulatory approvals and manufacture and
successfully market its products either alone or through outside parties. Some
of the Company's competitors have substantially greater financial, research
and development, manufacturing, marketing and human resources and greater
experience in drug discovery, development, clinical trial management, FDA
regulatory review, manufacturing and marketing than ViroPharma. Moreover, the
Company believes that the technologies used by the Company have never been
applied to develop an approved pharmaceutical product. See "Risk Factors--
Competition" and "Risk Factors--Rapid Technological Change and Uncertainty."
HUMAN RESOURCES
As of September 30, 1996, ViroPharma had 30 full-time employees, including
12 persons with Ph.D. or M.D. degrees. Twenty-four of ViroPharma's employees
are engaged in research and development activities at the Company's laboratory
facility in Malvern, Pennsylvania. A significant number of the Company's
management and professional employees have had prior experience with
pharmaceutical, biotechnology or medical products companies. None of the
Company's employees is covered by collective bargaining agreements. The
Company believes that its relations with its employees are good. There can be
no assurance that the Company will be able to continue to attract and retain
qualified personnel, and the Company does not maintain "key man" life
insurance on any of its employees. See "Risk Factors--Dependence on Key
Personnel."
FACILITIES
The Company's principal facility consists of approximately 17,000 square
feet of leased laboratory and office space in Malvern, Pennsylvania. The lease
expires in October 1997, with a one year renewal option, subject to lessor
consent. The Company believes its present facilities will be adequate for
operations through 1998. If the Company does not renew its lease upon
expiration, the Company believes it can obtain adequate laboratory and office
space on acceptable terms in the Malvern area.
LEGAL PROCEEDINGS
The Company has no pending legal proceedings. There can be no assurance that
any future claims against the Company will be successfully defended, that the
insurance carried by the Company will be sufficient or that collaborators and
licensees will fully protect the Company from product liability or other
claims.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Claude H. Nash, Ph.D. .. 53 Chief Executive Officer, President and Director
Mark A. McKinlay,
Ph.D. ................. 45 Vice President, Research & Development and Secretary
Marc S. Collett,
Ph.D. ................. 45 Vice President, Discovery Research
Johanna A. Griffin,
Ph.D. ................. 52 Vice President, Business Development
Guy D. Diana, Ph.D. .... 61 Vice President, Chemistry Research
Jon M. Rogers, M.D. .... 44 Vice President, Clinical Research
Vincent J. Milano....... 33 Executive Director, Finance & Administration and Treasurer
Frank Baldino, Jr.,
Ph.D.(2)............... 43 Director
Steve Dow(1)............ 41 Director
Jon N. Gilbert.......... 34 Director
Ann H. Lamont(1)........ 40 Director
Christopher Moller,
Ph.D.(2)............... 43 Director
David I. Scheer(2)...... 43 Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Claude H. Nash, Ph.D., a co-founder of the Company, has served as Chief
Executive Officer, President and director since the Company's commencement of
operations in December 1994. From 1983 until 1994, Dr. Nash served as Vice
President, Infectious Disease and Tumor Biology at Schering-Plough Research
Institute. Dr. Nash received his Ph.D. from Colorado State University.
Mark A. McKinlay, Ph.D., a co-founder of the Company, has served as Vice
President, Research & Development and Secretary since the Company's
commencement of operations in December 1994. From 1989 through 1994, Dr.
McKinlay served in several positions, including Senior Director, at Sterling
Winthrop Pharmaceuticals Research Division. Dr. McKinlay received his Ph.D.
from Rensselear Polytechnic Institute.
Marc S. Collett, Ph.D., a co-founder of the Company, has served as Vice
President, Discovery Research of the Company since the Company's commencement
of operations in December 1994. From 1993 until he co-founded the Company, he
served as Senior Director, Viral Therapeutics at PathoGenesis Corporation.
Prior to joining PathoGenesis Corporation, Dr. Collett served as Director,
Virology & Antibody Engineering and Director, Biochemical Virology at
MedImmune, Inc., where he was employed from 1988 to 1993. Dr. Collett received
his Ph.D. from the University of Michigan.
Johanna A. Griffin, Ph.D., a co-founder of the Company, has served as Vice
President, Business Development since June 1995 and, from the Company's
commencement of operations in December 1994 until June 1995, served as
Executive Director, Business Development. From 1990 until she joined the
Company, Dr. Griffin served as Director of Molecular Biology at Boehringer
Ingelheim Pharmaceuticals, Inc. Dr. Griffin received her Ph.D. from the
University of Alabama at Birmingham.
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<PAGE>
Guy D. Diana, Ph.D., a co-founder of the Company, has served as Vice
President, Chemistry Research since June 1995 and, from the Company's
commencement of operations in December 1994 until June 1995, as Executive
Director, Chemistry Research. Prior to joining ViroPharma, he worked at
Sterling Winthrop for 33 years, most recently as a Senior Fellow in Medicinal
Chemistry, where he led the team that discovered pleconaril. Dr. Diana
received his Ph.D. from Rice University.
Jon M. Rogers, M.D., has served as Vice President, Clinical Research since
joining ViroPharma in June 1996. From February 1995 until he joined the
Company, Dr. Rogers was Vice President of medical and scientific affairs for
the pharmaceuticals and diagnostics divisions of Boehringer Mannheim
Corporation. From August 1989 through February 1995, Dr. Rogers served in
various positions at Sterling Winthrop, the latest being Senior Director of
Clinical Research. Dr. Rogers received his M.D. from the University of
Cincinnati College of Medicine.
Vincent J. Milano has served as Executive Director, Finance & Administration
of the Company since joining ViroPharma in April 1996 and as Treasurer since
July 1996. From 1985 until he joined the Company, Mr. Milano was with KPMG
Peat Marwick LLP, where he was Senior Manager since 1991. Mr. Milano is a
Certified Public Accountant. Mr. Milano received his B.S. in accounting from
Rider College.
Frank Baldino, Jr., Ph.D., has served as a director of the Company since
June 1995. Since 1987, Dr. Baldino has served as President, CEO and director
of Cephalon, Inc., an integrated specialty biopharmaceutical company that
discovers, develops, and markets products to treat neurological disorders. Dr.
Baldino is also a director of Integrated Systems Consulting Group, Inc. He
received his Ph.D. from Temple University.
Steve Dow has served as a director of the Company since June 1995. Since
1983, he has been a general partner of Sevin Rosen Funds, a venture capital
firm whose affiliates are principal stockholders in the Company. Mr. Dow also
serves on the Board of Directors of Citrix Systems and Arqule, Inc.
Jon N. Gilbert has served as a director of the Company since September 1996.
Mr. Gilbert is a general partner of Frazier & Company L.P., a private equity
firm specializing in health care, which he joined at its inception in 1991.
Mr. Gilbert received his M.B.A. from Dartmouth College.
Ann H. Lamont, a co-founder of the Company, has served as director of the
Company since June 1995. Since 1986, Ms. Lamont has served as general partner
and managing member of certain limited partnerships affiliated with Oak
Investment Partners, a venture capital organization whose affiliates are
principal stockholders in the Company. Ms. Lamont also serves on the Board of
Directors of Avecor Cardiovascular, Inc.
Christopher Moller, Ph.D., has served as a director of the Company since
June 1995. Since January 1990, Dr. Moller has served as managing director of
Technology Leaders II Management L.P. and its predecessors, venture capital
limited partnerships whose affiliates are principal stockholders in the
Company. Dr. Moller received his Ph.D. from the University of Pennsylvania
School of Medicine.
David I. Scheer, a co-founder of the Company, has served as a director of
the Company since June 1995. Mr. Scheer has served as president of Scheer &
Company, Inc., a research, analytical and strategic consulting services firm
which he founded in 1981.
All of the directors were elected to the Board of Directors pursuant to an
Amended and Restated Shareholders' Voting Agreement, dated as of May 31, 1996,
by and among the Company and certain of its stockholders and executive
officers. The agreement, which will terminate upon the completion of this
offering, provides for the designation of one director each by Oak Investment
Partners VI, Limited Partnership, Sevin Rosen Fund IV, L.P., TL Ventures and
Frazier & Company, Inc., the designation of two directors by the holders of
all outstanding shares of the Redeemable Preferred Stock and Common Stock,
voting together as a single class, and the designation of one director by the
holders of all of the outstanding shares of Common Stock, which
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<PAGE>
director was required to be the Chief Executive Officer of the Company. Ms.
Lamont was designated to be a director by Oak Investment Partners VI, Limited
Partnership, Mr. Dow was designated to be a director by Sevin Rosen Fund IV,
L.P., Dr. Moller was designated to be a director by TL Ventures and Mr.
Gilbert was designated to be a director by Frazier & Company, Inc. In
addition, Dr. Baldino and Mr. Scheer were designated to be directors by the
holders of all outstanding shares of Redeemable Preferred Stock and Common
Stock voting as a single class, and Dr. Nash was designated to be a director
by the holders of Common Stock.
Each director is elected to hold office until the next annual meeting of
stockholders and until his or her respective successor is elected and
qualified. Upon the closing of this offering, the Board of Directors will be
divided into three classes. Each class of directors will serve (after a
transitional period in which the first class will serve until their successors
have been elected and qualified at the 1997 annual meeting of stockholders,
the second class will serve until their successors have been elected and
qualified at the 1998 annual meeting of stockholders and the third class will
serve until their successors have been elected and qualified at the 1999
annual meeting of stockholders) for a term of three years and until their
successors have been elected and qualified. Officers serve at the discretion
of the Board of Directors. The terms of Dr. Moller and Mr. Scheer will expire
at the 1997 annual meeting of stockholders, the terms of Mr. Dow and Ms.
Lamont will expire at the 1998 annual meeting, and the terms of Dr. Baldino,
Mr. Gilbert and Dr. Nash will expire at the 1999 annual meeting.
SCIENTIFIC ADVISORY BOARD
The Company has assembled a Scientific Advisory Board consisting of
individuals with demonstrated expertise in particular fields who periodically
advise the Company on matters relating to long-term scientific planning,
research and development activities and technological matters. Several of the
advisors have had previous scientific working relationships with members of
the Company's management team.
Most of the members of the Scientific Advisory Board are employed by or have
consulting agreements with entities other than the Company, some of which
entities may in the future compete with the Company, and are expected to
devote only a small portion of their time to the Company. They are not
expected to participate actively in the Company's affairs or in the
development of the Company's technology. Certain of the institutions with
which such members of the Scientific Advisory Board are affiliated may adopt
new regulations or policies that limit the ability of the members to consult
with the Company. The loss of the services of certain of the members could
adversely affect the Company, to the extent that the Company is pursuing
research or development in areas of a member's expertise. In addition, since
the Company has not entered into non-competition agreements with all members
of the Scientific Advisory Board, if any member of the Scientific Advisory
Board were to consult with or become employed by any competitor of the
Company, the Company could be materially adversely affected.
Pursuant to several of the scientific advisory/consulting agreements entered
into with some of such members of the Scientific Advisory Board, any
inventions or other intellectual property discovered by the members may not
become the property of the Company but may remain the property of such persons
or of such persons' employers. In addition, the institutions with which such
members are affiliated may make available the research services of their
personnel, including the members of the Scientific Advisory Board, to
competitors of the Company pursuant to sponsored research agreements.
Competitors of the Company may gain access to trade secrets and other
proprietary information developed by the Company and disclosed to the members
of the Scientific Advisory Board. Thus, assistance provided by the various
members is generally limited to advice and consultation unless the Company has
entered into separate collaborative arrangements with the entities with which
the members are affiliated. See "Risk Factors--Uncertain Ability to Protect
Patents and Proprietary Technology and Information," "Business--Patents" and
"Business--Strategic Relationships."
The members of the Company's Scientific Advisory Board are as follows:
Hugh E. Black, D.V.M., Ph.D. is President of Hugh E. Black & Associates,
Inc. In 1994, Dr. Black retired from Schering-Plough Research Institute where
he served as Vice President, Drug Safety and Metabolism.
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<PAGE>
Dr. Black received his D.V.M. degree from the University of Toronto and his
Ph.D. degree in veterinary pathology from Ohio State University.
Gary L. Davis, M.D., is Professor of Medicine and the Director of the
Hepatobiliary Diseases Section of the Gastroenterology, Hepatology, and
Nutrition Division at the University of Florida College of Medicine in
Gainesville. Dr. Davis received his M.D. degree from the University of
Minnesota.
James B. Flanegan, Ph.D., is Professor of Molecular Genetics and
Microbiology at the University of Florida College of Medicine in Gainesville.
Dr. Flanegan received his Ph.D. degree in biochemistry from the University of
Michigan.
Frederick G. Hayden, M.D., is the S. Stuart Richardson Professor of Clinical
Virology in Internal Medicine and Professor of Internal Medicine and Pathology
at the University of Virginia School of Medicine in Charlottesville. Dr.
Hayden received his M.D. degree from Stanford University School of Medicine.
Michael D. Hayre, D.V.M., is Director of the Laboratory Animal Research
Center, The Rockefeller University in New York. Dr. Hayre received his D.V.M.
degree from Tuskegee University.
Robert A. Lamb, Ph.D., Sc.D., is the John Evans Professor of Molecular and
Cell Biology at Northwestern University and a Howard Hughes Medical Institute
Investigator. Dr. Lamb received his Ph.D. in virology and Sc.D. degree from
the University of Cambridge, England.
Charles M. Rice, Ph.D., is Professor in the Department of Molecular
Microbiology at Washington University School of Medicine in St. Louis,
Missouri. Dr. Rice received his Ph.D. degree in biochemistry from the
California Institute of Technology.
Michael G. Rossmann, Ph.D., is the Hanley Professor of Biological Sciences
at Purdue University in West Lafayette, Indiana. Dr. Rossmann received his
Ph.D. degree in chemical crystallography from the University of Glasgow.
Harley A. Rotbart, M.D. is Professor in the Departments of Pediatrics and
Microbiology at the University of Colorado Health Science Center in Denver.
Dr. Rotbart received his M.D. degree from Cornell University Medical College.
Richard Whitley, M.D., is the Loeb Eminent Scholar and Professor of
Pediatrics, Microbiology and Medicine at University of Alabama at Birmingham.
Dr. Whitley received his M.D. degree from George Washington University School
of Medicine.
Members of the Scientific Advisory Board receive consulting fees for their
services. In addition, to date, the Company has granted an aggregate of 73,950
options to members of the Scientific Advisory Board, of which 2,550 have been
exercised.
DIRECTOR COMPENSATION AND BOARD COMMITTEES
Non-employee directors not affiliated with investors in the Company receive
$1,000 plus travel costs for each meeting of the Board of Directors they
attend.
In connection with the founding of the Company, Dr. Nash and Scheer &
Company, Inc., an affiliate of Mr. Scheer, purchased 331,500 and 165,750
shares of Common Stock in December 1994, respectively. Dr. Nash and Scheer &
Company, Inc. paid $0.002 per share for the Common Stock, then valued at $0.10
per share. Dr. Nash's
41
<PAGE>
shares vest in four equal annual installments commencing on the first
anniversary of the date of issuance. The Company has the option to repurchase
all unvested shares for $0.10 per share. In addition, pursuant to a right
granted in December 1994, Dr. Baldino purchased 51,000 shares of Common Stock
in January 1996 at $0.10 per share. The shares vest in four equal annual
installments commencing on the date of issuance. The restrictions on Dr.
Baldino's shares are identical to the restrictions on Dr. Nash's shares. See
"Certain Transactions--Transactions with Founders" and "Certain Transactions--
Right Grant and Exercise."
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees
of and consultants to the Company, and an Audit Committee, which reviews the
results and scope of the audit and other services provided by the Company's
independent auditors.
Mr. Dow, Ms. Lamont, Dr. Moller and Mr. Scheer are parties to
indemnification agreements with the Company. Pursuant to the agreements, the
directors are to be indemnified against liabilities and expenses incurred in
connection with their services to the Company to the fullest extent permitted
by Delaware law. Such indemnification is subject to the director's meeting the
applicable standard of care and to a determination to indemnify by a majority
of disinterested directors (as defined in the agreements) or by independent
counsel (also as defined in the agreements).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no compensation committee interlocks with other entities or
insider participation on the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation paid or earned during the fiscal year ended December 31, 1995 to
the Company's chief executive officer and the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) COMPENSATION
--------------------------- ---- --------- ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Claude H. Nash............... 1995 $180,000 -- -- --
Chief Executive Officer and
President
Mark McKinlay................ 1995 165,000 -- -- --
Vice President Research &
Development and Secretary
Marc S. Collett.............. 1995 145,000 -- -- --
Vice President, Discovery
Research
Johanna A. Griffin........... 1995 125,000 -- -- --
Vice President, Business
Development
Guy D. Diana................. 1995 125,000 -- -- --
Vice President, Chemistry
Research
</TABLE>
- --------
(1) In 1995, each Named Executive Officer also received cash payments for
deferred compensation for services performed in December 1994. Drs. Nash,
McKinlay, Collett, Griffin and Diana received payments of $6,923, $6,346,
$5,576, $4,807 and $4,807, respectively.
(2) Excludes perquisites and other personal benefits, securities or property
which are, in the aggregate, less than 10% of the total annual salary and
bonus.
42
<PAGE>
Option Grants and Year-End Values
There were no options granted to the Named Executive Officers during the
fiscal year ended December 31, 1995, no Named Executive Officers owned any
stock options, whether exercisable or unexercisable, as of the fiscal year
ended December 31, 1995, and no options were exercised by any of the Named
Executive Officers during the fiscal year ended December 31, 1995.
On January 1, 1996, the Company granted options to purchase 38,250 and
51,000 shares of Common Stock to Drs. Collett and McKinlay, respectively. On
April 1, 1996 and June 1, 1996, the Company granted options to purchase 33,150
and 34,425 shares of Common Stock to Mr. Milano and Dr. Rogers, respectively,
in connection with their commencement of employment with the Company. In
addition, on July 1, 1996, the Company granted options to purchase 17,850,
9,180, 9,180, 19,763, 8,288 and 1,722 shares to Drs. Nash, McKinlay, Collett,
Griffin, Diana and Rogers, respectively, and options to purchase 1,658 shares
to Mr. Milano. The exercise price per share of the options granted in January
and April is $0.20, the exercise price per share of the options granted in
June is $0.45 and the exercise price per share of the options granted in July
is $2.16. All of these options were granted under the Company's 1995 Stock
Option Plan, have a term of ten years from the date of grant and are subject
to earlier termination in certain events related to the termination of
employment. The options vest in four equal annual installments commencing,
except with respect to Mr. Milano's options granted in April 1996, on the
first anniversary of grant. Mr. Milano's April options vest in four equal
installments, with the first installment vesting on the closing of this
offering and the remaining three installments vesting annually thereafter
commencing on the second anniversary of the date of grant.
The difference between an assumed initial public offering price per share of
$12.00 and the exercise price per share multiplied by the total number of
options outstanding is: $175,644 for Dr. Nash, $692,131 for Dr. McKinlay,
$541,681 for Dr. Collett, $194,468 for Dr. Griffin, $81,554 for Dr. Diana and
$414,544 for Dr. Rogers. The value of Mr. Milano's options exercisable upon
the closing of this offering is $97,798, and the value of Mr. Milano's
remaining, unexercisable options is $309,710.
STOCK OPTIONS
The Company adopted the 1995 Stock Option Plan on September 20, 1995 (the
"Plan"). The Plan provides for grants of stock options ("Options") to
employees of the Company or its subsidiaries and consultants and advisors who
perform valuable services to the Company or its subsidiaries. The purposes of
the Plan are (i) to further the growth and success of the Company and its
subsidiaries by enabling selected employees of, and consultants and advisors
to, the Company and any subsidiaries to acquire shares of Common Stock,
thereby increasing their personal interest in the Company's growth and success
and (ii) to provide a means of rewarding outstanding performance by such
persons to the Company and/or its subsidiaries.
General. Subject to adjustment in certain circumstances as discussed below,
the Plan authorizes up to 1,200,000 shares of Common Stock for issuance
pursuant to the terms of the Plan. If and to the extent Options granted under
the Plan expire or are terminated or cancelled without having been fully
exercised, the shares of Common Stock subject to such unexercised portion of
such Options again will be available for grant under the Plan. Options to
purchase an aggregate of 171,360 shares of Common Stock were granted prior to
adoption of the Plan pursuant to non-qualified stock option agreements.
Administration of the Plan. The Plan is administered and interpreted by a
committee (the "Committee") of the Board of Directors of the Company
consisting of two or more persons appointed by the Board of Directors from
among its members, each of whom is a "non-employee director" as defined in
Rule 16b-3 under the Securities Exchange Act of 1934, as amended. The
Committee has the full power and authority to take all actions and to make all
determinations required or provided for under the Plan, any Option or any
Option agreement ("Option Agreement") entered into under the Plan and all such
other actions and determinations not inconsistent with the specific terms and
provisions of the Plan deemed by the Committee to be necessary or appropriate
to the administration of the Plan, any Option or any Option Agreement entered
into under the Plan. The Committee has plenary authority, in its discretion,
to determine (i) the persons to whom Options will be granted, (ii) the
43
<PAGE>
time or times at which Options will be granted, (iii) the number of shares
subject to each Option, (iv) the Option price, (v) the time or times when each
Option will become exercisable and the duration of the exercise period and
(vi) any restrictions on sale and repurchase rights which will be placed upon
the shares of Common Stock purchased upon exercise of an Option. In addition,
the Committee has the authority to provide for acceleration of the
exercisability of Options at any time prior to termination of such Options.
The members of the Compensation Committee currently serve as this Committee.
See "--Director Compensation and Committees."
Grants. Options granted under the Plan may consist of (i) options intended
to qualify as incentive stock options ("ISOs") within the meaning of section
422 of the Internal Revenue Code of 1986 (the "Code") or (ii) so-called
"nonqualified stock options" that are not intended to so qualify ("NQSOs").
Eligibility for Participation. Options may be granted to officers and
employees of, or consultants or advisors to, the Company or its subsidiaries.
As of September 30, 1996, 30 employees were eligible for grants under the
Plan. Officers and employees are eligible to receive ISOs or NQSOs, and
consultants and advisors are eligible to receive NQSOs only. As of September
30, 1996, 260,343 Options were outstanding and held by all participants as a
group, at an average exercise price of $0.64 per share. (As of September 30,
1996, 149,940 options issued prior to adoption of the Plan pursuant to non-
qualified stock option agreements were also outstanding.)
Options. The option exercise price of any ISO granted under the Plan will
not be less than the fair market value of the underlying shares of Common
Stock on the date of grant, except that the option exercise price of an ISO
granted to an employee who owns more than 10% of the total combined voting
power of all classes of the stock of the Company or its subsidiaries may not
be less than 110% of the fair market value of the underlying shares of Common
Stock on the date of grant. The option exercise price of an NQSO may be
greater than, equal to or less than the fair market value of the underlying
shares of Common Stock on the date of grant, but in any case not less than the
minimum price under applicable state law. The Committee will determine the
term of each Option; provided, however, that the exercise period for ISOs may
not exceed ten years from the date of grant and the exercise period of an ISO
granted to a person who owns more than 10% of the voting stock of the Company
may not exceed five years from the date of grant. Unless otherwise provided by
the Committee, Options granted under the Plan vest at a rate of 25% per year
over a four-year period. All options granted to date vest at a rate of 25% per
year over a four-year period, except that 8,288 options granted to Mr. Milano
vest immediately upon the completion of this offering and 5,100 options in the
aggregate granted to two consultants to the Company vest upon the achievement
of certain agreed-upon milestones. The option exercise price must be paid in
full at the time the notice of exercise of the Option is delivered to the
Company and must be tendered in the form specified by the Committee which may
be (i) in cash by bank certified, cashier's or personal check, (ii) by
delivery of shares of Common Stock owned by the participant and having a fair
market value on the date of exercise equal to the Option price or (iii) any
combination of (i) and (ii). Options are nontransferable except by will or the
laws of descent and distribution. An optionee whose relationship with the
Company or any subsidiary ceases for any reason (other than termination for
cause, death or total disability, as such terms are defined in the Plan) may
exercise Options in the three-month period following such cessation (unless
such Options terminate or expire sooner by their terms), or in such longer
period determined by the Committee in the case of NQSOs. In the event an
optionee's relationship terminates on account of disability or death, such
optionee (or his or her executors or legal representatives) may exercise such
Option during the 12-month period following such disability or death.
Amendment and Termination of the Plan. The Board of Directors may at any
time modify and amend the Plan; provided, however, that stockholder approval
is required for any amendment which (i) changes the class of persons eligible
for the grant of Options, (ii) increases (other than pursuant to the
adjustment provisions discussed below) the maximum number of shares subject to
Options granted under the Plan, or (iii) materially increases benefits
accruing to participants under the Plan, within the meaning of Rule 16b-3
under the Exchange Act. The Board of Directors may terminate the Plan at any
time. The Plan will terminate on September 20, 2005, unless
44
<PAGE>
terminated earlier by the Board of Directors or extended, although any
termination will not affect Options outstanding at such date.
Adjustment Provisions. Subject to the change of control provisions below, in
the event of certain transactions identified in the Plan, the Company may
appropriately adjust (i) the number and kind of shares for the acquisition of
which Options may be granted under the Plan and (ii) the number and kind of
shares for which Options are outstanding. Any such adjustment in outstanding
Options will not change the aggregate option exercise price payable with
respect to shares subject to the unexercised portion of the outstanding
Options but will include a corresponding adjustment in the option exercise
price per share.
Change of Control of the Company. Upon the dissolution or liquidation of the
Company, a merger, consolidation, or reorganization of the Company with one or
more other corporations in which the Company is not the surviving corporation,
a sale or other transfer of substantially all of the assets of the Company to
another corporation or any transaction (including, without limitation, a
merger or reorganization in which the Company is the surviving corporation)
approved by the Board of Directors that results in any person or entity (other
than persons and affiliates who meet certain requirements) owning 80 percent
or more of the combined voting power, or 80 percent or more of the total
value, of all classes of stock of the Company, the Plan and all Options
outstanding thereunder shall terminate, except to the extent provision is made
in writing in connection with such transaction for the continuation of the
Plan and/or the assumption of such Options theretofore granted, or for the
substitution for such Options of new options covering the stock of a successor
corporation, or a parent or subsidiary thereof, with appropriate adjustment as
to the number and kinds of shares and exercise prices, in which event the Plan
and Options theretofore granted will continue in the manner and under the
terms so provided. In the event of any such termination of the Plan, each
individual holding an Option will have the right (subject to the Plan's
general limitations on exercise), immediately before the occurrence of such
termination and during such period occurring before such termination as the
Committee, in its sole discretion, determines and designates, to exercise such
Option in whole or in part, subject to the limitations on the exercisability
of an Option (including the acceleration of such exercisability). The
Committee shall send written notice of an event that will result in such a
termination to all individuals who hold Options not later than the time at
which the Company gives notice thereof to its stockholders.
Section 162(m). Under Section 162(m) of the Code, the Company may be
precluded from claiming a federal income tax deduction for total remuneration
in excess of $1,000,000 paid to the chief executive officer or to any of the
other four most highly compensated officers in any one year. Total
remuneration would include amounts received upon the exercise of stock options
granted under the Plan. An exception does exist, however, for "performance-
based compensation," including amounts received upon the exercise of stock
options pursuant to a plan approved by stockholders that meets certain
requirements. The Plan is intended to meet the requirements of Treasury
Regulation section 1.162-27(f), and the Options granted under the Plan are
intended to meet the requirements of "performance-based compensation."
401(K) PROFIT SHARING PLAN & TRUST
Effective July 1, 1995, the Company adopted the ViroPharma 401(k) Employee
Savings Plan (the "401(k) Plan"), a tax-qualified plan covering all of its
employees who have completed three months of service with the Company. Each
employee may elect to reduce his or her current compensation by up to 15%,
subject to the statutory limit (a maximum of $9,500 in 1996) and have the
amount of the reduction contributed to the 401(k) Plan. The 401(k) Plan
provides that the Company may, as determined from time to time by the Board of
Directors, provide a discretionary contribution, which will be allocated based
on the proportion of the employee's compensation for the plan year to the
aggregate compensation for the plan year for all eligible employees. All
employee contributions to the 401(k) Plan are fully vested at all times. The
401(k) Plan permits distributions upon hardship, termination of employment,
death, disability or retirement. The 401(k) Plan does not permit loans. As of
the fiscal year ended December 31, 1995, the Company had made no contributions
to the 401(k) Plan.
45
<PAGE>
CONFIDENTIALITY AND INVENTIONS AGREEMENTS
The Company has entered into confidentiality and inventions agreements with
each of its employees. The agreements provide that, among other things, all
inventions, discoveries and ideas made or conceived by an employee during
employment which are useful to the Company or related to the business of the
Company or which were made or conceived with the use of the Company's time,
material, facilities or trade secret information, belong exclusively to the
Company, without additional compensation to the employee. The agreements also
have confidentiality provisions in favor of the Company and a noncompetition
provision in favor of the Company during employment.
46
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH FOUNDERS
Drs. Nash, Collett, McKinlay, Griffin and Diana, Ms. Lamont and Mr. Scheer
founded the Company in December 1994. In connection with the founding of the
Company, Drs. Nash, Collett, McKinlay, Griffin and Diana purchased 331,500,
102,000, 102,000, 63,750 and 63,750 shares of Common Stock, respectively, in
December 1994 pursuant to restricted stock purchase agreements. Each paid
$.002 per share for the Common Stock, then valued at $0.10 per share. The
shares vest in four equal annual installments commencing on the first
anniversary of the date of the issuance. If the valuation of the Company is
greater than $50,000,000 in connection with certain fundamental transactions,
such as a merger in which the Company is not the surviving entity, a merger in
which the Company survives, but fifty percent or more of the voting stock
outstanding prior to the merger is transferred to new holders, or a sale of
all or substantially all of the assets of the Company, all such shares vest
immediately. Prior to vesting, the stockholders have full voting and dividend
rights, but unvested shares may not be transferred, with certain exceptions
for, among others, transfers to family members and to trusts for family
members. The Company has the option to repurchase all unvested shares owned by
a particular founder for $0.10 per share upon termination of that founder's
service to the Company as an employee, non-employee director or non-employee
consultant. However, the Company has covenanted with certain investors not to
make repurchases that would limit such investors' qualification under Section
1202 of the Code. To make such a repurchase, the Company would need to obtain
a waiver from such investors. In addition, for two years following the initial
public offering, the holders of shares of such stock, whether vested or
unvested, are required to agree not to transfer their shares for up to 180
days after the effective date of a registration statement filed pursuant to
the Securities Act of 1933.
Also in connection with the founding of the Company, Scheer & Company, Inc.,
an affiliate of Mr. Scheer, purchased 165,750 shares of Common Stock. Scheer &
Company, Inc. paid $.002 per share. In addition, Scheer & Company, Inc.
purchased an 8.5% Convertible Demand Promissory Note from the Company in the
principal amount of $162,500. In December 1994, Scheer & Company, Inc.
assigned $158,795 of the principal amount of the note to Oak Investment
Partners VI, Limited Partnership and $3,705 of the principal amount of the
note to Oak VI Affiliates Fund, Limited Partnership. In June 1995, the note
was converted into 325,000 shares of Series A Preferred Stock at $0.50 per
share. The Company was never required to pay any interest on the note.
See "Management--Executive Compensation" for a description of option grants
in 1996 to certain of the founders, "Management--Director Compensation and
Committees" for a description of the Company's indemnification agreements with
certain directors, including Ms. Lamont and Mr. Scheer, and "Executive
Compensation--Agreements with Employees" for a description of the Company's
confidentiality and inventions agreements with all employees, including Drs.
Nash, Collett, McKinlay, Griffin and Diana. See "--Financings" for a
description of the founders' participation in the Company's equity financings.
FINANCINGS
Since December 1994, various officers, directors and greater than 5%
stockholders have participated in the Company's equity financings. For
information regarding beneficial ownership of the Company's securities by
officers, directors and greater than 5% stockholders of the Company, see
"Principal Stockholders." These financings have included the following:
Between December 1994 and January 1995, the Company sold 675,000 shares of
its Series A Preferred Stock at $0.50 per share to a limited number of
accredited investors in a private placement. In connection with this offering,
Drs. Nash, Collett, McKinlay, Griffin and Diana purchased 140,000, 120,000,
20,000, 50,000 and 20,000 shares of Series A Preferred Stock, respectively.
See "--Transactions with Founders" for a description of the acquisition by
these individuals of Common Stock of the Company pursuant to restricted stock
purchase agreements and the acquisition of Series A Preferred Stock by Oak
Investment Partners VI, Limited Partnership
47
<PAGE>
and Oak VI Affiliates Fund, Limited Partnership. All outstanding shares of
Series A Preferred Stock will automatically convert into an aggregate of
344,250 shares of Common Stock upon the closing of this offering.
Between June 1995 and October 1995, the Company sold 7,060,000 shares of
Series B Preferred Stock at $1.00 per share to a limited number of accredited
investors in a private placement. In connection with this financing, Oak
Investment Partners VI, Limited Partnership, Sevin Rosen Fund IV L.P. and
Technology Leaders, L.P. each purchased two 9.5% Convertible Demand Promissory
Notes from the Company in the principal amounts of $100,000 and $50,000, and
Dr. Nash purchased a 9.5% Convertible Demand Promissory Note in the principal
amount of $30,000. All the notes were cancelled on the first closing date of
the sale of Series B Preferred Stock in partial or full payment for the shares
purchased at such closing by each party. In connection with their purchases of
notes, the Company issued to each of Oak Investment Partners VI, Limited
Partnership, Sevin Rosen Fund IV L.P. and Technology Leaders, L.P. warrants to
purchase 49,998 shares of Series B Preferred Stock and to Dr. Nash a warrant
to purchase 10,000 shares of Series B Preferred Stock, all with exercise
prices of $1.00 per share. Oak Investment Partners VI, Limited Partnership
subsequently transferred rights to purchase 760 shares under the first warrant
and 380 shares under the second warrant to its affiliate, Oak VI Affiliates
Fund Limited Partnership. Technology Leaders L.P. later transferred its
warrants to its successor fund and an affiliate as follows: Technology Leaders
II, L.P. received warrants to purchase 18,577 and 9,287 shares, respectively,
and Technology Leaders II Offshore C.V. received warrants to purchase 14,756
and 7,378 shares, respectively. All such warrants will be exercised prior to
the completion of this offering and the Series B Preferred Stock issued upon
such exercise will automatically convert into an aggregate of 81,597 shares of
Common Stock upon the closing of this offering.
Also, in connection with the Series B financing, Oak Investment Partners VI,
Limited Partnership and Oak VI Affiliates Fund Limited Partnership purchased
1,964,400 and 45,600 shares of Series B Preferred Stock, respectively, Sevin
Rosen Fund IV L.P. and Sevin Rosen Bayless Management Company purchased
2,000,000 and 10,000 shares of Series B Preferred Stock, respectively,
Technology Leaders II L.P. and Technology Leaders II Offshore C.V. purchased
1,114,600 and 885,400 shares of Series B Preferred Stock, respectively, and
New York Life Insurance Company purchased 1,000,000 shares of Series B
Preferred Stock. In addition, Dr. Nash purchased 30,000 shares of Series B
Preferred Stock. All outstanding shares of Series B Preferred Stock will
automatically convert into an aggregate of 3,600,600 shares of Common Stock
upon the closing of this offering.
In May 1996, the Company sold 3,222,222 shares of Series C Preferred Stock
at $2.25 per share to a limited number of accredited investors in a private
placement. In connection with the financing, Oak Investment Partners VI,
Limited Partnership and Oak VI Affiliates Fund, Limited Partnership purchased
497,830 and 11,615 shares of Series C Preferred Stock, respectively, Sevin
Rosen Fund IV L.P. and Sevin Rosen Bayless Management Company purchased
424,099 and 2,222 shares of Series C Preferred Stock, respectively, Technology
leaders II L.P. and Technology Leaders II Offshore C.V. purchased 245,062 and
194,669 shares of Series C Preferred Stock, respectively and Frazier
Healthcare II L.P. and New York Life Insurance Company purchased 1,500,000 and
214,503 shares of Series C Preferred Stock, respectively. In addition, Drs.
Nash, Collett, Griffin and Diana and Scheer & Company, Inc. purchased 28,889,
31,112, 11,111, 11,111 and 10,000 shares of Series C Preferred Stock,
respectively. All outstanding shares of Series C Preferred Stock will
automatically convert into an aggregate of 1,643,333 shares of Common Stock
upon closing of this offering.
RIGHT GRANT AND EXERCISE
Pursuant to a right granted in December 1994, Dr. Baldino purchased 51,000
shares of Common Stock under a January 1996 restricted stock purchase
agreement at $0.10 per share. The shares vest in four equal annual
installments commencing on the date issuance. The restrictions on the shares
are identical to the restrictions on the shares of Common Stock issued to
founders. See "--Transactions with Founders".
See "Executive Compensation--Option Grants and Year-End Values" for a
description of option grants to executive officers.
48
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 30, 1996, as adjusted for the
sale by the Company of the Common Stock offered hereby, by (i) each person or
group who is known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
Executive Officers and (iv) all current executive officers and directors as a
group.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL(1)
----------------------
NUMBER OF SHARES BEFORE THE AFTER THE
BENEFICIALLY OWNED(1) OFFERING OFFERING(2)
--------------------- ---------- -----------
<S> <C> <C> <C>
5% STOCKHOLDERS
- ---------------
Oak Investment Partners VI, 1,471,067 22.4 16.7
Limited Partnership(3)..........
One Gorham Island
Westport, Connecticut 06880
Technology Leaders II L.P.(4).... 1,269,763 19.3 14.4
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Sevin Rosen Fund IV L.P.(5)...... 1,268,022 19.3 14.4
13455 Noel Road, Suite 1670
Dallas, Texas 75240
Frazier Healthcare II, L.P.(6)... 765,000 11.6 8.7
Two Union Square
601 Union Street, Suite 2110
Seattle, Washington 98101
New York Life Insurance Company.. 619,397 9.4 7.0
51 Madison Avenue
New York, New York 10016
Claude H. Nash(7)................ 438,033 6.7 5.0
76 Great Valley Parkway
Malvern, PA 19355
EXECUTIVE OFFICERS AND DIRECTORS
- --------------------------------
Ann H. Lamont(3)................. 1,471,067 22.4 16.7
Christopher Moller(4)............ 1,269,763 19.3 14.4
Steve Dow(5)..................... 1,268,022 19.3 14.4
Robert Kupor(6).................. 765,000 11.6 8.7
Claude H. Nash(7)................ 438,033 6.7 5.0
Marc S. Collett(8)............... 179,067 2.7 2.0
David I. Scheer(9)............... 170,850 2.6 1.9
Mark A. McKinlay(10)............. 112,200 1.7 1.3
Johanna A. Griffin(11)........... 94,917 1.4 1.1
Guy D. Diana(12)................. 79,617 1.2 1.0
Frank Baldino, Jr.(13)........... 51,000 * *
Vincent J. Milano(14)............ 9,422 * *
Jon M. Rogers.................... -- -- --
All directors and executive
officers as a group
(13 persons)(15)................ 5,908,958 89.9 66.9
</TABLE>
- --------
* Less than one percent.
49
<PAGE>
(1) Gives effect to the Warrant Exercise and reflects the Preferred Stock
Conversion. Applicable percentage of ownership is based on 6,570,951
shares of Common Stock outstanding as of September 30, 1996 and 8,820,951
shares of Common Stock to be outstanding upon consummation of this
offering. In accordance with the rules of the Securities and Exchange
Commission, shares underlying options to purchase Common Stock that are
exercisable as of the date of this Prospectus or exercisable within 60
days thereafter are deemed outstanding and to be beneficially owned by
the person holding such option for purposes of computing such person's
percentage ownership, but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Includes 1,412,609 shares of Common Stock owned by Oak Investment
Partners VI, Limited Partnership and 32,959 shares of Common Stock owned
by Oak VI Affiliates Fund, Limited Partnership. Assumes the exercise of
warrants to purchase Series B Preferred Stock owned by Oak Investment
Partners VI, Limited Partnership and Oak VI Affiliates Fund, Limited
Partnership, respectively, and the automatic conversion of such shares of
Series B Preferred Stock into a total of 25,499 shares of Common Stock
upon completion of this offering. Ms. Lamont is a managing member of Oak
Associates VI, LLC and Oak VI Affiliates, LLC, the general partners of
Oak Investment Partners VI, Limited Partnership and Oak VI Affiliates
Fund, Limited Partnership, respectively. Ms. Lamont shares voting and
investment power with respect to the limited partnerships with the other
managing members of Oak Associates VI, LLC and Oak VI Affiliates, LLC,
respectively. Ms. Lamont disclaims beneficial ownership of shares in
which she has no pecuniary interest. See "Description of Capital Stock--
Warrants--Warrants to Be Exercised."
(4) Includes 693,428 shares of Common Stock owned by Technology Leaders II
L.P. and 550,836 shares of Common Stock owned by Technology Leaders II
Offshore C.V. Assumes the exercise of warrants to purchase Series B
Preferred Stock owned by Technology Leaders II L.P. and Technology
Leaders II Offshore C.V., respectively, and the automatic conversion of
such shares of Series B Preferred Stock into a total of 25,499 shares of
Common Stock upon completion of this offering. Dr. Moller is Managing
Director of Technology Leaders II Management L.P., which is the general
partner of Technology Leaders II L.P. and of Technology Leaders II
Offshore C.V. Dr. Moller shares voting and investment power with the
other managing directors of the general partner of the stockholders and
disclaims beneficial ownership of shares in which he has no pecuniary
interest. See "Description of Capital Stock--Warrants--Warrants to Be
Exercised."
(5) Includes 1,236,290 shares of Common Stock owned by Sevin Rosen Fund IV
L.P. and 6,233 shares of Common Stock owned by Sevin Rosen Bayless
Management Company. Assumes the exercise of warrants to purchase Series B
Preferred Stock owned by Sevin Rosen Fund IV L.P. and the automatic
conversion of such shares of Series B Preferred Stock into 25,499 shares
of Common Stock upon completion of this offering. Mr. Dow is general
partner of SRB Associates IV L.P., general partner of Sevin Rosen IV L.P.
and an officer of Sevin Rosen Bayless Management Company. He shares
voting and investment power with the other general partners and officers,
as applicable, and disclaims beneficial ownership of shares in which he
has no pecuniary interest. See "Description of Capital Stock--Warrants--
Warrants to Be Exercised."
(6) Dr. Kupor was recently replaced as a director of the Company by Jon N.
Gilbert. Mr. Gilbert is a member of Frazier Management, L.L.C., which is
the managing member of FHMII, LLC, which, in turn, is the general partner
of Frazier Healthcare II, L.P. Mr. Gilbert shares voting and investment
power with the other members of Frazier Management, L.L.C. and disclaims
beneficial ownership of shares in which he has no pecuniary interest.
(7) Includes 248,625 issued but unvested shares of Common Stock purchased by
Dr. Nash upon the founding of the Company in December 1994. Assumes the
exercise of warrants to purchase Series B Preferred Stock and the
automatic conversion of such shares of Series B Preferred Stock into
5,100 shares of Common Stock upon completion of this offering. See
"Certain Transactions--Transactions with Founders" and "Description of
Capital Stock--Warrants--Warrants to Be Exercised."
(8) Includes 76,500 issued but unvested shares of Common Stock purchased by
Dr. Collett upon the founding of the Company in December 1994. See
"Certain Transactions--Transactions with Founders."
(9) All 170,850 shares are owned by Scheer & Company, Inc., of which Mr.
Scheer is a co-founder and president.
50
<PAGE>
(10) Includes 76,500 issued but unvested shares of Common Stock purchased by
Dr. McKinlay upon the founding of the Company in December 1994. See
"Certain Transactions--Transactions with Founders."
(11) Includes 47,813 issued but unvested shares of Common Stock purchased by
Dr. Griffin upon the founding of the Company in December 1994. See
"Certain Transactions--Transactions with Founders."
(12) Includes 47,813 issued but unvested shares of Common Stock purchased by
Dr. Diana upon the founding of the Company in December 1994. See "Certain
Transactions--Transactions with Founders."
(13) Includes 38,250 issued but unvested shares of Common Stock purchased by
Dr. Baldino in January 1996. See "Certain Transactions--Right Grant and
Exercise."
(14) Represents 1,134 shares of Common Stock and options to purchase 8,288
shares of Common Stock, which will be exercisable upon the closing of
this offering.
(15) Includes 497,250 issued but unvested shares of Common Stock purchased by
the founders of the Company. Includes options to purchase 8,288 shares of
Common Stock, which will be exercisable upon the closing of this
offering. See "Certain Transactions--Transactions with Founders."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
See the Certificate of Incorporation, as amended (the "Certificate"), and
By-Laws of the Company, copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part, for additional
information relating to the description of capital stock below.
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 32,000,000 shares, including 27,000,000 shares of
Common Stock, par value $0.002 per share, and 5,000,000 shares of Preferred
Stock, par value $0.001 per share. At September 30, 1996, there were 901,170
shares of Common Stock outstanding held of record by 17 stockholders and
10,957,222 shares of Redeemable Preferred Stock outstanding, of which 675,000
were designated Series A Preferred Stock, 7,060,000 were designated Series B
Preferred Stock (7,283,494 including shares of Series B Preferred Stock
underlying outstanding warrants to purchase Series B Preferred Stock) and
3,222,222 were designated Series C Preferred Stock. Immediately after the
Warrant Exercise, the Preferred Stock Conversion and the sale of the 2,250,000
shares of Common Stock offered hereby, there will be issued and outstanding
8,820,951 shares of Common Stock and no shares of Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Upon the closing of this offering, elections of
directors will be determined by a plurality of the votes cast and the Board of
Directors will be divided into three classes, as nearly equal in number as
possible. The Certificate may be amended as permitted by law. Except as
otherwise required by law, all other matters are determined by a majority of
the votes cast. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock (none of which will be outstanding upon the
closing of this offering). Upon the liquidation, dissolution or winding up of
the Company, subject to any preferential liquidation rights of outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
the net assets of the Company available after the payment of all debts and
other liabilities. Holders of the Common Stock have no preemptive,
subscription, redemption or conversion rights. The shares of Common Stock
which will be outstanding upon the Preferred Stock Conversion and the shares
offered by the Company in the Offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. See "Risk Factors--Availability
of Preferred Stock for Issuance; Anti-Takeover Provisions," "--Preferred Stock
and "--Anti-Takeover Provisions."
PREFERRED STOCK
Upon the closing of this offering and the Preferred Stock Conversion, the
Company will have authorized 5,000,000 shares of Preferred Stock, which the
Board of Directors has discretion to issue in such series and with such
preferences and rights as it may designate without the approval of the holders
of Common Stock. Such preferences and rights may be superior to those of the
holders of Common Stock. For example, the holders of Preferred Stock may be
given a preference in payment upon liquidation of the Company, or for the
payment or accumulation of dividends before any distributions are made to the
holders of Common Stock. Assuming the Preferred Stock Conversion, as of the
date of this Prospectus, no Preferred Stock has been issued by the Company,
and the Company has no plans, agreements or understandings for the issuance of
any shares of any series of Preferred Stock. For a description of the possible
anti-takeover effects of the Preferred Stock, see "Risk Factors--Availability
of Preferred Stock for Issuance; Anti-Takeover Provisions" and "--Anti-
Takeover Provisions."
52
<PAGE>
WARRANTS
Warrants to Remain Outstanding
Pursuant to a Warrant Agreement, dated as of September 13, 1995, the Company
issued a warrant to purchase 42,500 shares of Series B Preferred Stock to
Comdisco, Inc. ("Comdisco"), an equipment supplier in connection with a Master
Lease Agreement between the Company and the equipment supplier (the "Equipment
Warrant"). Upon the closing of this offering, the Equipment Warrant will
automatically become exercisable for 21,675 shares of Common Stock. The
Equipment Warrant is exercisable at a price of $2.94 per share and expires
five years from the effective date of this Prospectus. At Comdisco's
discretion, the purchase price may be paid in cash or by surrender of shares
purchasable on exercise pursuant to a formula in the agreement. The number of
shares of Common Stock purchasable under the warrant and the exercise price of
the warrant are subject to adjustment in the event of certain
recapitalizations, reorganizations, stock splits and combinations and in the
event of certain dilutive issuances of capital stock by the Company. In
addition, if the total cost of equipment leased under the Master Lease
Agreement exceeds $750,000, Comdisco will be entitled to purchase additional
shares under the warrant, as determined by a formula in the Warrant Agreement.
Warrants to Be Exercised
In connection with the purchase of 9.5% Convertible Demand Promissory Notes
by three private investors and Dr. Nash prior to their purchase of Series B
Preferred Stock in June 1995, the Company issued warrants to purchase 49,998
shares of Series B Preferred Stock to each of three private investors (two of
whom subsequently transferred all or a portion of their warrants to successors
or affiliates) and warrants to purchase 10,000 shares of Series B Preferred
Stock to Dr. Nash. The exercise price of the warrants is $1.00 per share. At
the warrant holders' discretion, the purchase price may be paid in cash, by
wire transfer, by cancellation of indebtedness or, if the fair market value of
the Series B Preferred Stock is greater than the exercise price, by surrender
of shares purchasable on exercise pursuant to a formula in the agreement. By
their terms, the warrants expire upon the closing of a firm commitment
underwritten public offering pursuant to an effective registration statement
at a price per share of $9.80 and resulting in aggregate net proceeds of not
less than $10,000,000. The Company expects the warrants to expire upon the
closing of this offering and has notified the warrant holders of the warrants'
pending expiration as required by their warrant agreements. The Company
expects all such warrants to be exercised prior to the completion of this
offering, with the subsequent automatic conversion of the Series B Preferred
Stock into an aggregate of 81,597 shares of Common Stock.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Certificate provides that a director of the Company shall not
be personally liable to the Company or its stockholders for monetary damages
for a breach of fiduciary duty as a director, except for liability (i) for any
breach of such person's duty of loyalty, (ii) for acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law,
(iii) for the payment of unlawful dividends and certain other actions
prohibited by Delaware corporate law and (iv) for any transaction resulting in
receipt by such person of an improper personal benefit.
The Company is in the process of obtaining a directors' and officers'
liability insurance policy which provides directors and officers with
insurance coverage for losses arising from claims based on breaches of duty,
negligence, error and other wrongful acts. At present, there is no pending
litigation or proceeding, and the Company is not aware of any threatened
litigation or proceeding, involving any director, officer, employee or agent
where indemnification will be required or permitted under the Certificate or
By-Laws. For a description of the Company's indemnification agreements with
certain of its directors, see "Certain Transactions--Transactions with
Founders."
ANTI-TAKEOVER PROVISIONS
Classified Board and Other Matters
Upon the closing of this offering, the Company's Board of Directors will be
divided into three classes, as nearly equal in number as possible. Each class
of directors will serve, after a transitional period in which the
53
<PAGE>
first class will serve until their successors have been elected and qualified
at the 1997 annual meeting of stockholders, the second class will serve until
their successors have been elected and qualified at the 1998 annual meeting of
stockholders and the third class will serve until their successors have been
elected and qualified at the 1999 annual meeting of stockholders, for a term
of three years and until their successors have been elected and qualified.
Accordingly, the Company's officers and directors, together holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election and may exert
considerable influence over the management and policies of the Company and all
matters requiring stockholder approval, including fundamental transactions.
Moreover, under the Delaware General Corporation Law and the Certificate,
stockholders may remove a director only for cause. The classification of the
Board of Directors, the voting control of the officers and directors and the
limitation on the removal of directors could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
acquiring, control of the Company.
In addition, the ability of the Board of Directors to establish the rights
of, and to issue, substantial amounts of Preferred Stock without the need for
stockholder approval, which Preferred Stock may be used to create voting
impediments with respect to changes in control of the Company or dilute the
stock ownership of holders of Common Stock seeking to obtain control of the
Company, may have the effect of discouraging, delaying or preventing a change
in control of the Company. See "Risk Factors--Availability of Preferred Stock
for Issuance; Anti-Takeover Provisions," "--Common Stock" and "--Preferred
Stock."
Section 203 of Delaware General Corporation Law
Upon the consummation of the offering made hereby, the Company will be
subject to the provisions of Section 203 of the Delaware General Corporation
Law, an anti-takeover law ("Delaware 203"). In certain circumstances, Delaware
203 prevents certain Delaware corporations, including those whose securities
are listed on the Nasdaq National Market, from engaging in a "business
combination" (which includes a merger or sale of more than 10% of the
corporation's assets) with any "Interested Stockholder" (generally, a
stockholder who owns 15% or more of the corporation's outstanding voting
stock) for three years following the date on which such stockholder became an
"Interested Stockholder," unless (i) the business combination or transaction
which resulted in the Interested Stockholder's becoming an Interested
Stockholder is approved by the corporation's board of directors prior to the
date the Interested Stockholder becomes an Interested Stockholder or (ii) the
transaction is approved by the board of directors and the holders of at least
66 2/3% of the outstanding voting stock of the corporation (excluding shares
held by the Interested Stockholder). The statutory ban does not apply if, upon
consummation of the transaction in which any person becomes an Interested
Stockholder, the Interested Stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares held by persons who are both
directors and officers or by certain employee stock plans). A Delaware
corporation may "opt out" of Delaware 203 with an express provision either in
its original certificate of incorporation or in its certificate of
incorporation or by-laws resulting from a stockholders' amendment approved by
at least a majority of the outstanding voting shares. The Company is a
Delaware corporation that, upon the consummation of this offering, will be
subject to Delaware 203 and has not "opted out" of its provisions. The
business combination provisions of Section 203 of the Delaware General
Corporation law may have the effect of deterring merger proposals, tender
offers or other attempts to effect changes in control of the Company that are
not negotiated and approved by the Board of Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the shares of Common Stock will be
StockTrans, Inc.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have a total of 8,820,951
shares of Common Stock outstanding (9,158,451 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,250,000
shares of Common Stock offered hereby (2,587,500 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or registration under the Securities Act by persons other than
"affiliates" of the Company, as defined under the Securities Act. The
remaining 6,570,951 shares of Common Stock outstanding are "restricted
securities" as that term is defined by Rule 144 as promulgated under the
Securities Act and may not be resold except pursuant to an effective
registration statement or an applicable exemption from registration, including
Rule 144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned restricted securities
for at least two years, including persons who may be deemed "affiliates" of
the Company, is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (approximately 88,210 shares after the sale of Common Stock
offered hereby) or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding such sale, provided that certain
public information about the Company as required by the rule is then available
and the seller complies with certain other requirements. In addition, under
Rule 144(k) a person who is not an affiliate, has not been an affiliate within
three months prior to sale and has beneficially owned the shares proposed to
be sold for at least three years, is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
Under Rule 144 (and subject to the conditions thereof), no restricted shares
of Common Stock will become eligible for sale upon completion of this
offering; approximately 1,173,000 shares will become eligible for sale between
December 29, 1996 and January 31, 1997, of which all shares will be subject to
lockup restrictions as described below and 663,000 shares will be subject in
varying degrees to the additional restrictions of stock purchase agreements;
approximately 3,600,600 shares will become eligible for sale between June 16,
1997 and October 2, 1997; and the remaining 1,797,350 shares will be eligible
for sale after 1997. See "Certain Transactions--Transactions with Founders."
The Securities and Exchange Commission has proposed an amendment to Rule 144
which would reduce the holding period required for shares subject to Rule 144
to become eligible for sale in the public market from two years to one year,
and from three years to two years in the case of Rule 144(k). If this proposal
is adopted, an additional 3,600,600 shares of Common Stock will become
eligible for sale to the public beginning 180 days after the date of this
Prospectus.
The Company's officers and directors and all other stockholders, option
holders and warrant holders have agreed that they will not, directly or
indirectly, offer, sell or otherwise dispose of any shares of Common Stock or
rights to acquire Common Stock (other than (i) with respect to employees of
the Company, pursuant to certain employee compensation arrangements such as
employee stock option and stock purchase plans or (ii) to a transferee that
agrees to be similarly bound) for a period of 180 days from the date of this
Prospectus, without the prior written consent of Cowen and Company. See
"Underwriting."
As of September 30, 1996, options to purchase a total of 410,283 shares of
Common Stock were outstanding with a weighted average exercise price of $0.64
per share, of which options to purchase 16,320 shares of Common Stock were
exercisable. In addition, options to purchase 8,288 shares of Common Stock
will become exercisable upon the closing of this offering. An additional
939,657 shares of Common Stock were available for future option grants under
the Company's stock option plan as of September 30, 1996. The Company has also
granted warrants to purchase Common Stock. In addition to the warrants to
purchase 159,994 shares of Series B Preferred Stock which the Company expects
to be exercised in the Warrant Exercise, the Company has issued warrants to
purchase 42,500 shares of Series B Preferred Stock at $1.50 per share. Upon
the closing of this offering, the warrants will be exercisable for 21,675
shares of Common Stock at $2.94 per share. All shares subject to options and
warrants are subject to lock-up agreements. See "Management--Stock Option
Plan," "Description of Capital Stock--Warrants" and "Underwriting."
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<PAGE>
Rule 701 under the Securities Act provides an exemption from the
registration requirements of the Act of offers and sales of securities issued
pursuant to certain compensatory benefit plans or written contracts of a
company not subject to the reporting requirements of Sections 13 or 15(d) of
the Securities Exchange Act of 1934, as amended. The rule also provides that
beginning 90 days after the date of this Prospectus, shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than affiliates subject only to the manner of sale provisions of Rule 144, and
by affiliates subject to all provisions of Rule 144 except its two-year
minimum holding period. The Company also intends to file one or more
registration statements on Form S-8 under the Securities Act to register
shares of Common Stock subject to stock options, which would also permit the
resale of the shares acquired upon the exercise of such options.
As of the date hereof, stockholders of the Company are entitled to certain
piggyback and demand registration rights with regard to 10,957,222 shares of
outstanding Preferred Stock, which will automatically convert into 5,588,184
shares of Common Stock upon the closing of this offering. In addition, the
founders of the Company are entitled to certain piggyback registration rights
with regard to 828,750 outstanding shares of Common Stock. By exercising such
registration rights, subject to certain limitations, such holders could cause
a significant number of shares to be registered and sold in the public market.
Such sales may have an adverse effect on the market price for the Common Stock
and could impair the Company's ability to raise capital through an offering of
its equity securities. All such rights in connection with this offering have
been waived.
In addition, Rule 144A permits unlimited resales of restricted shares under
certain circumstances involving Qualified Institutional Buyers, which are
generally defined as institutions with over $100 million invested in
securities. Such resales can be made without regard to any volume or other
restrictions.
Prior to this offering, there has been no public market for the Common Stock
of the Company and no predictions can be made of the effect, if any, that the
sale or availability for sale of additional shares of Common Stock, under Rule
144, pursuant to registration rights or otherwise, will have on the trading
price of the Common Stock. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could adversely affect the trading price of the Common Stock and could impair
the Company's future ability to raise capital through an offering of its
equity securities.
56
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their representatives,
Cowen & Company and J.P. Morgan Securities Inc. (the "Representatives"), have
severally agreed to purchase from the Company the following respective number
of shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ----------- ----------------
<S> <C>
Cowen & Company................................................
J.P. Morgan Securities Inc.....................................
---------
Total........................................................ 2,250,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of Common Stock offered hereby if any such shares are
purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters initially propose to offer the shares of Common Stock to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain dealers.
After the initial public offering, the offering price and other selling terms
may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 337,500
additional shares of Common Stock at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus to cover over-allotments, if any. To the extent the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by it shown in the above table bears to
2,250,000, and the Company will be obligated, pursuant to the option, to sell
such shares to the Underwriters. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the Common
Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 2,250,000 shares are
being offered.
Of the 2,250,000 shares of Common Stock offered hereby, 208,333 shares are
being reserved for purchase by Boehringer Ingelheim at the initial public
offering price pursuant to its intention to make an equity investment of $2.5
million in the Company.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act, as amended.
The Company, its officers, directors and all other stockholders, option
holders and warrant holders of the Company have entered into agreements
providing that, for a period of 180 days after the date of this Prospectus,
they will not, without the prior written consent of Cowen & Company, offer,
sell or otherwise dispose of any shares of Common Stock or any rights to
acquire Common Stock (other than (i) with respect to employees of the Company,
pursuant to certain employee compensation arrangements such as employee stock
option and stock purchase plans or (ii) to a transferee that agrees to be
similarly bound). See "Shares Eligible for Future Sale."
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<PAGE>
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations among the Company and the
Representatives of the Underwriters. Among the factors to be considered in
such negotiations will be prevailing market conditions, the market
capitalizations and stages of development of other companies which the Company
and the Representatives of the Underwriters believe to be comparable to the
Company, estimates of the business potential of the Company, the state of the
Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Morrison & Foerster LLP, New York, New York.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995 and
for the period from December 5, 1994 (inception) to December 31, 1994 and the
year 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 has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents
of any contract or other document referred to are not necessarily complete and
in each instance reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, and each such
statement is qualified in all respects by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. The Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all or any part thereof may be obtained
at prescribed rates from the public reference section of the Commission,
Washington, D.C. 20549. In addition, the Commission maintains a site on the
World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
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<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Financial Statements:
Balance Sheets at December 31, 1994 and 1995 and September 30, 1996 (un-
audited)............................................................... F-3
Statements of Operations for the period December 5, 1994 (inception) to
December 31, 1994, the year ended December 31, 1995, the nine months
ended September 30, 1995 and 1996 (unaudited) and the period December
5, 1994 (inception) to September 30, 1996 (unaudited) ................. F-4
Statements of Stockholders' Equity (Deficit) for the period December 5,
1994 (inception) to December 31, 1994, the year ended December 31,
1995, and the nine months ended September 30, 1996 (unaudited)......... F-5
Statements of Cash Flows for the period December 5, 1994 (inception) to
December 31, 1994, the year ended December 31, 1995, the nine months
ended September 30, 1995 and 1996 (unaudited) and the period December
5, 1994 (inception) to September 30, 1996 (unaudited).................. F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
ViroPharma Incorporated:
We have audited the accompanying balance sheets of ViroPharma Incorporated
(A Development Stage Company) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity (deficit) and cash
flows for the period from December 5, 1994 (inception) to December 31, 1994
and the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ViroPharma Incorporated (A
Development Stage Company) as of December 31, 1994 and 1995, and the results
of its operations and its cash flows for the period from December 5, 1994
(inception) to December 31, 1994 and the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
April 25, 1996, except as to the second and
third paragraph of Note 7, which are
as of May 31, 1996 and Note 12 which is
as of November 5, 1996.
F-2
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND
SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
PRO FORMA
SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 22,870 337,044 4,009,810 4,009,810
Short-term investments...... -- 4,376,382 4,047,322 4,047,322
Other current assets........ 2,000 103,948 185,345 185,345
Deferred offering costs..... -- -- 243,589 243,589
-------- ---------- ---------- ----------
Total current assets..... 24,870 4,817,374 8,486,066 8,486,066
Equipment and leasehold im-
provements, net............. -- -- 182,291 182,291
Other assets................. -- 56,471 56,471 56,471
-------- ---------- ---------- ----------
Total assets............. $ 24,870 4,873,845 8,724,828 8,724,828
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable 2,207 310,560 562,566 562,566
Notes payable (including re-
lated party amount of
$162,500 in 1994; none in
1995 and 1996)............. 162,500 37,500 -- --
Obligation under capital
lease--current............. -- -- 36,596 36,596
Accrued expenses and other
current liabilities........ 103,335 1,198,939 1,206,178 1,206,178
-------- ---------- ---------- ----------
Total current liabili-
ties.................... 268,042 1,546,999 1,805,340 1,805,340
Obligation under capital
lease--noncurrent........... -- -- 144,014 144,014
-------- ---------- ---------- ----------
268,042 1,546,999 1,949,354 1,949,354
-------- ---------- ---------- ----------
Mandatorily redeemable
convertible preferred stock,
par value $.001 per share,
(at redemption value which
includes accretion of $0,
$19,104 and $1,248,112 at
December 31, 1994 and 1995
and September 30, 1996,
respectively), issuable in
Series A, B and C.
Authorized 5,800,000 shares
in 1994; 10,315,000 shares
in 1995 and 12,000,000
shares in 1996; issued and
outstanding 120,000 shares
in 1994, 7,735,000 shares in
1995 and 10,957,222 shares
in 1996 (converts into
5,588,184 pro forma common
shares at September 30, 1996
upon consummation of the
offering contemplated
herein)..................... 60,000 7,416,604 15,895,612 --
-------- ---------- ---------- ----------
Stockholders' equity (defi-
cit):
Common stock, par value
$.002 per share. Authorized
8,300,000 shares in 1994;
12,790,000 shares in 1995
and 27,000,000 shares in
1996; issued and
outstanding 828,750 shares
at December 31, 1994 and
1995, and 901,170 shares at
September 30, 1996
(6,489,354 pro forma common
shares at September 30,
1996 upon conversion)...... 1,657 1,657 1,802 12,978
Additional paid-in capital
(deficit).................. 79,593 103,577 (44,734) 15,839,702
Notes receivable on common
stock...................... (1,625) -- -- --
Deferred compensation....... (63,700) (47,775) (1,017,296) (1,017,296)
Unrealized gains on avail-
able for sales securities.. -- 26,742 51,662 51,662
Deficit accumulated during
the development stage...... (319,097) (4,173,959) (8,111,572) (8,111,572)
-------- ---------- ---------- ----------
Total stockholders'
equity (deficit)........ (303,172) (4,089,758) (9,120,138) 6,775,474
-------- ---------- ---------- ----------
Commitments
Total liabilities and
stockholders' equity
(deficit)............... $ 24,870 4,873,845 8,724,828 8,724,828
======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
PERIOD DECEMBER 5, 1994 (INCEPTION) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995,
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
AND THE PERIOD DECEMBER 5, 1994 (INCEPTION) TO SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD
DECEMBER 5, DECEMBER 5,
1994 NINE MONTHS 1994
(INCEPTION) TO YEAR ENDED ENDED SEPTEMBER 30, (INCEPTION) TO
DECEMBER 31, DECEMBER 31, ------------------------ SEPTEMBER 30,
1994 1995 1995 1996 1996
-------------- ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License Fee........... -- -- -- 1,000,000 1,000,000
Grant revenue......... $ -- 90,813 -- 212,615 303,428
--------- ---------- ---------- ---------- ----------
Total revenues...... -- 90,813 -- 1,212,615 1,303,428
--------- ---------- ---------- ---------- ----------
Operating expenses
incurred in the
development stage:
Research and develop-
ment................. 75,779 2,930,106 1,209,177 4,265,571 7,271,456
General and adminis-
trative.............. 243,318 1,091,299 503,883 1,026,630 2,361,247
--------- ---------- ---------- ---------- ----------
Total operating ex-
penses............. 319,097 4,021,405 1,713,060 5,292,201 9,632,703
--------- ---------- ---------- ---------- ----------
Loss from opera-
tions.............. (319,097) (3,930,592) 1,713,060 (4,079,586) (8,329,275)
Interest income, net.... -- 75,730 36,445 141,973 217,703
--------- ---------- ---------- ---------- ----------
Net loss............ $(319,097) (3,854,862) (1,676,615) (3,937,613) (8,111,572)
========= ========== ========== ========== ==========
Accretion of redemption
value attributable to
mandatorily redeemable
convertible preferred
stock.................. -- 19,104 14,328 1,229,008 1,248,112
--------- ---------- ---------- ---------- ----------
Net loss allocable to
common shareholders.... $(319,097) (3,873,966) (1,690,943) (5,166,621) (9,359,684)
========= ========== ========== ========== ==========
Pro forma (unaudited):
Pro forma net loss per
share................ $ (.88) $ (.81)
========== ==========
Shares used in
computing pro forma
net loss per share... 4,381,740 6,415,331
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD DECEMBER 5, 1994 (INCEPTION) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------
UNREALIZED DEFICIT
NOTES GAINS ON ACCUMULATED TOTAL
ADDITIONAL RECEIVABLE AVAILABLE DURING THE STOCKHOLDERS'
NUMBER PAID-IN ON COMMON DEFERRED FOR SALE DEVELOPMENT EQUITY
OF SHARES AMOUNT CAPITAL STOCK COMPENSATION SECURITIES STAGE (DEFICIT)
--------- ------ ---------- ---------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 5,
1994 (inception)....... -- -- -- -- -- -- -- --
Issuance of common
stock to founders..... 828,750 $1,657 79,593 (1,625) (79,625) -- -- --
Amortization of
deferred
compensation.......... -- -- -- -- 15,925 -- -- 15,925
Net loss for period.... -- -- -- -- -- -- (319,097) (319,097)
------- ------ ---------- ------ ---------- ------ ---------- ----------
Balance, December 31,
1994................... 828,750 $1,657 79,593 (1,625) (63,700) -- (319,097) (303,172)
Proceeds from notes
receivable............ -- -- -- 1,625 -- -- -- 1,625
Issuance costs of
Series A and B
preferred stock....... -- -- (46,912) -- -- -- -- (46,912)
Unrealized gains on
available for sale
securities............ -- -- -- -- -- 26,742 -- 26,742
Amortization of
deferred
compensation.......... -- -- -- -- 15,925 -- -- 15,925
Accretion of redemption
value attributable to
mandatorily redeemable
convertible preferred
stock................. -- -- (19,104) -- -- -- -- (19,104)
Value attributed to
issuance of warrants.. 90,000 90,000
Net loss............... -- -- -- -- -- -- (3,854,862) (3,854,862)
------- ------ ---------- ------ ---------- ------ ---------- ----------
Balance, December 31,
1995................... 828,750 1,657 103,577 -- (47,775) 26,742 (4,173,959) (4,089,758)
Deferred compensation
resulting from grant
of options
(unaudited)........... -- -- 1,084,905 -- (1,084,905) -- -- --
Amortization of
deferred compensation
(unaudited)........... -- -- -- -- 115,384 -- -- 115,384
Issuance costs of
Series C preferred
stock (unaudited)..... -- -- (27,100) -- -- -- -- (27,100)
Unrealized gain on
available for sale
securities
(unaudited)........... -- -- -- -- -- 24,920 -- 24,920
Exercise of common
stock grant and
options (unaudited)... 72,420 145 6,955 -- -- -- -- 7,100
Warrant expense
(unaudited)........... -- -- 15,937 -- -- -- -- 15,937
Accretion of redemption
value attributable to
mandatorily redeemable
convertible preferred
stock (unaudited)..... -- -- (1,229,008) -- -- -- -- (1,229,008)
Net loss (unaudited)... -- -- -- -- -- -- (3,937,613) (3,937,613)
------- ------ ---------- ------ ---------- ------ ---------- ----------
Balance, September 30,
1996 (unaudited)....... 901,170 $1,802 (44,734) -- (1,017,296) 51,662 (8,111,572) (9,120,138)
======= ====== ========== ====== ========== ====== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
PERIOD DECEMBER 5, 1994 (INCEPTION) TO DECEMBER 31, 1994,
THE YEAR ENDED DECEMBER 31, 1995,
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 (UNAUDITED)
AND THE PERIOD DECEMBER 5, 1994 (INCEPTION) TO SEPTEMBER 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 5, PERIOD
1994 DECEMBER 5,
(INCEPTION) NINE MONTHS 1994
TO YEAR ENDED ENDED SEPTEMBER 30, (INCEPTION) TO
DECEMBER 31, DECEMBER 31, ------------------------ SEPTEMBER 30,
1994 1995 1995 1996 1996
------------ ------------ ----------- ----------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash flows used in operating ac-
tivities:
Net loss............... $(319,097) (3,854,862) (1,676,615) (3,937,613) (8,111,572)
Adjustments to recon-
cile net loss to net
cash used in operating
activities:
Non-cash compensation
expense............... 15,925 15,925 11,944 115,384 147,234
Non-cash warrant val-
ue.................... -- 90,000 -- 15,937 105,937
Depreciation........... -- -- -- 32,815 32,815
Changes in assets and
liabilities:
Other current assets.. (2,000) (101,948) (93,395) (81,397) (185,345)
Other assets.......... -- (56,471) (36,000) -- (56,471)
Accounts payable...... 2,207 308,353 119,587 252,006 562,566
Accrued expenses and
other current liabil-
ities................ 103,335 1,095,604 107,705 7,239 1,206,178
--------- ----------- ---------- ---------- -----------
Net cash used in oper-
ating activities..... (199,630) (2,503,399) (1,566,774) (3,595,629) (6,298,658)
--------- ----------- ---------- ---------- -----------
Net cash used in invest-
ing activities:
Purchase of equipment.. -- -- -- (215,106) (215,106)
Purchase of short-term
investments........... -- (11,018,731) (2,086,421) (3,963,023) (11,745,631)
Sales of short-term in-
vestments............. -- 4,363,754 -- -- 4,363,754
Maturities of short-
term investments...... -- 2,305,337 -- 4,317,003 3,386,217
--------- ----------- ---------- ---------- -----------
Net cash used in in-
vesting activities... -- (4,349,640) (2,086,421) 138,874 (4,210,766)
--------- ----------- ---------- ---------- -----------
Net cash provided by financing activi-
ties:
Net proceeds from issu-
ance of preferred
stock................. 60,000 6,648,088 3,158,854 7,222,900 13,930,988
Net proceeds from issu-
ance of common stock.. -- -- -- 7,100 7,100
Deferred offering
costs................. -- -- -- (243,589) (243,589)
Proceeds received on
notes receivable...... -- 1,625 1,625 -- 1,625
Proceeds from notes
payable............... 162,500 517,500 480,000 12,500 692,500
Payment of notes
payable............... -- -- -- (50,000) (50,000)
Obligation under capi-
tal lease............. -- -- -- 180,610 180,610
--------- ----------- ---------- ---------- -----------
Net cash provided by
financing activi-
ties................. 222,500 7,167,213 3,640,479 7,129,521 14,519,234
--------- ----------- ---------- ---------- -----------
Net increase (decrease)
in cash and cash equiv-
alents................. 22,870 314,174 (12,716) 3,672,766 4,009,810
Cash and cash equiva-
lents at beginning of
period................. -- 22,870 22,870 337,044 --
--------- ----------- ---------- ---------- -----------
Cash and cash equiva-
lents (deficit) at end
of period.............. $ 22,870 337,044 (10,154) 4,009,810 4,009,810
========= =========== ========== ========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
<TABLE>
<CAPTION>
PERIOD
DECEMBER 5, NINE MONTHS DECEMBER 5,
1994 ENDED 1994
(INCEPTION) TO YEAR ENDED SEPTEMBER 30, (INCEPTION)
DECEMBER 31, DECEMBER 31, ----------------------- TO SEPTEMBER 30,
1994 1995 1995 1996 1996
-------------- ------------ ----------- ----------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Conversion of Note Payable to Se-
ries A and Series B Preferred
Stock............................. $ -- 642,500 642,500 -- 642,500
Note issued for 828,750 common
shares............................ 1,625 -- -- -- 1,625
Deferred compensation.............. 79,625 -- -- 1,084,905 1,164,530
Accretion of redemption value at-
tributable to mandatorily redeem-
able preferred stock.............. -- 19,104 -- 1,229,008 1,248,112
Unrealized gains (losses) on
available for sale securities..... -- 26,742 -- 24,920 51,662
======= ======= ======= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(INFORMATION AS OF SEPTEMBER 30, 1996 AND WITH RESPECT TO
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
(1) ORGANIZATION AND BUSINESS ACTIVITIES
ViroPharma Incorporated (a development stage company) (the "Company")
commenced operations on December 5, 1994. The Company is a biopharmaceutical
company engaged in the discovery and development of proprietary antiviral
pharmaceuticals for the treatment of RNA viruses. The Company is considered a
"development stage company", as defined in Statement of Financial Accounting
Standards ("SFAS") No. 7. The accompanying financial statements include the
results of operations of the Company from December 5, 1994 (inception) to
September 30, 1996.
The Company is devoting substantially all of its efforts towards conducting
drug discovery and development, conducting clinical trials, pursuing
regulatory approval for products under development, recruiting personnel,
raising capital and building infrastructure. In the course of such activities,
the Company has sustained operating losses and expects such losses to continue
for the foreseeable future. The Company has not generated any significant
revenues or product sales and has not achieved profitable operations or
positive cash flow from operations. The Company's deficit accumulated during
the development stage aggregated $8,111,572 through September 30, 1996. There
is no assurance that profitable operations, if ever achieved, could be
sustained on a continuing basis.
The Company plans to continue to finance its operations with a combination
of stock issuances, such as the initial public offering contemplated herein
("Offering"), private placements and follow-on public offerings, license
payments, payments from strategic research and development arrangements and,
in the longer term, revenues from product sales. There are no assurances,
however, that the Company will be successful in obtaining an adequate level of
financing needed for the long-term development and commercialization of its
planned products.
(2) BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States (U.S.) financial
institutions, including commercial paper of U.S. companies, with both a cost
and fair value of $248,659 and $1,727,691 at December 31, 1995 and September
30, 1996, respectively.
Short-term investments:
Short-term investments consist primarily of debt securities backed by the
U.S. government. The Company's entire short-term investment portfolio is
currently classified as available for sale and is stated at fair value as
determined by quoted market values. Changes in the net unrealized holding
gains and losses are included as a separate component of stockholders' equity
(deficit). For purposes of determining gross realized gains and losses, the
cost of temporary investments sold is based upon specific identification. The
Company has not experienced any significant realized gains or losses on its
investments through September 30, 1996.
Concentration of credit risk:
The Company invests its excess cash and short-term investments in accordance
with a policy objective that seeks to ensure both liquidity and safety of
principal. The policy limits investments to certain types of
F-7
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
instruments issued by the U.S. government and institutions with strong
investment grade credit ratings and places restrictions in their terms and
concentrations by type and issuer.
Equipment and leasehold improvements:
The Company leases certain of its equipment and facilities under operating
leases. Operating lease payments are charged to operations over the related
period that such leased equipment is utilized in service.
Assets and liabilities related to capital leases are recorded at the present
value of the future minimum rental payments using interest rates appropriate
at the inception of the lease. Capital lease amortization is included with
depreciation and amortization expense.
Expenditures for repairs and maintenance are expensed as incurred.
Patent costs:
Patent application and maintenance costs are expensed as incurred.
Research and development:
Research and product development costs are expensed as incurred.
Licensed technology:
Costs incurred in obtaining the license rights to technology in the research
and development stage are expensed as incurred and in accordance with the
specific contractual terms of such license agreements.
Accounting for income taxes:
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.
Revenue recognition:
Revenue from grant agreements is recognized in the period in which the
related expenses are incurred and in accordance with the Company's obligations
under the terms of the respective grant.
The $1,000,000 license fee revenue recognized in the nine-month period ended
September 30, 1996 is a non-refundable technology access fee received from
Boehringer Ingelheim Pharmaceuticals Inc. ("BI") in September 1996.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-based compensation:
In October 1995, the FASB issued SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 presents companies with the alternative
of retaining the current accounting for stock-based compensation or adopting a
new accounting method based on the estimated fair value of equity instruments
granted to employees during the year. Companies that do not adopt the fair
value based method of accounting will be required to adopt the disclosure
provisions of SFAS 123 for the year ending December 31, 1996. It is the
F-8
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Company's present intention to continue applying its current accounting for
stock based compensation and to present the required footnote disclosures
commencing in the 1996 financial statements.
Pro forma net loss per share (unaudited):
Pro forma net loss per share is computed using the weighted average number
of common shares and common equivalent shares (using the treasury stock
method) outstanding and gives effect to certain adjustments described below.
Common equivalent shares from stock options and warrants and convertible
preferred stock are excluded from the computation as their effect is
antidilutive, except that, pursuant to Securities and Exchange Commission
(SEC) Staff Accounting Bulletins and SEC staff policy, common and common
equivalent shares issued during the 12-month period prior to the proposed
Offering at prices below the anticipated Offering price are presumed to have
been issued in contemplation of the Offering and have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and a proposed Offering price of $12). In the
computation of pro forma net loss per share, accretion of the redemption value
attributable to mandatorily redeemable preferred stock is not included as an
increase to net loss.
Pursuant to the policy of the SEC staff, the calculation of shares used in
computing pro forma net loss per share also includes all Series of mandatorily
redeemable convertible preferred stock that will automatically convert into
shares of common stock upon completion of the Offering (using the treasury
stock and if-converted method) from their respective original dates of
issuance.
The following table sets forth the calculation of total number of shares
used in the computation of pro forma net loss per common share:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Weighted average common shares outstanding......... 828,750 894,170
Incremental shares assumed to be outstanding re-
lated to common stock, stock options and warrants
granted based on the treasury stock method........ 264,451 264,451
Convertible preferred stock ....................... 3,288,539 5,256,710
--------- ---------
Weighted average common and common equivalent
shares used in computation of pro forma net loss
per common share.................................. 4,381,740 6,415,331
========= =========
</TABLE>
Pro forma balance sheet (unaudited):
Upon the closing of the Offering, all of the outstanding shares of Series A,
B and C Mandatorily Redeemable Preferred Stock ("Redeemable Preferred Stock")
will automatically convert into 5,588,184 shares of common stock. The
unaudited pro forma presentation of the September 30, 1996 balance sheet has
been prepared assuming the conversion of the Redeemable Preferred Stock into
common stock as of September 30, 1996, the most recent balance sheet included
in the accompanying financial statements.
Interim financial statements (unaudited):
The balance sheet at September 30, 1996, the statements of operations and
statements of cash flows for the nine months ended September 30, 1995 and 1996
and the period from December 5, 1994 (inception) to September 30, 1996 and the
statement of stockholders' equity (deficit) for the nine months ended
September 30, 1996 are unaudited. In the opinion of management of the Company,
such unaudited financial statements include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of financial
results for the interim periods. The results of operations for the nine months
ended September 30, 1996 are not necessarily indicative of results to be
expected for the entire year.
F-9
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(3) SHORT-TERM INVESTMENTS
Short-term investments consist of fixed income securities with original
maturities of greater than three months but less than one year including U.S.
treasury instruments of agencies of the U.S. government and high-grade
commercial paper. At December 31, 1995 and September 30, 1996, all of the
short-term investments were deemed as "available for sale" investments.
The following summarizes the "available for sale" investments at December
31, 1995 and September 30, 1996:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Obligations of the U.S.
government and agencies of
the U.S. :
December 31, 1995........... $4,349,640 $26,742 -- $4,376,382
========== ======= === ==========
September 30, 1996 (unau-
dited)..................... $3,995,660 $51,662 -- $4,047,322
========== ======= === ==========
</TABLE>
(4) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at
December 31, 1994 and 1995 and September 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
<S> <C> <C> <C>
License fee payable........................... $ -- $1,036,000 $ 999,999
Payroll and payroll taxes payable............. 23,278 72,986 7,940
Other current liabilities..................... 80,057 89,953 198,239
-------- ---------- ----------
$103,335 $1,198,939 $1,206,178
======== ========== ==========
</TABLE>
(5) LICENSE AND RESEARCH AGREEMENTS
In December 1995, the Company entered into a license agreement with Sanofi
S.A. ("Sanofi") for its most advanced drug candidate. Under the Sanofi
agreement, the Company was required to pay a license fee of $1,000,000. This
amount was charged to operations in 1995 and paid in February 1996. In
addition, the Company is required to make a milestone payment of up to
$2,000,000 upon the earlier of a future milestone event, as defined, or three
years from the date of the agreement. The $2,000,000 milestone payment is
being charged to operations on a pro-rata monthly basis commencing in December
1995 over eighteen months, the expected timeframe in which the milestone is
anticipated to be achieved.
In connection with the Sanofi agreement, the Company would also be required
to make certain significant additional payments, including royalties, as
defined, should agreed-upon future milestones be attained. At the present
time, there can be no assurance that such future milestones will be attained.
During 1995, the Company entered into various licensing, research and other
agreements. Under these agreements, the Company is working in collaboration
with various other parties. Should any discoveries be made under such
arrangements, the Company would be required to negotiate the licensing of the
technology for the development of the respective discoveries. The Company is
committed to pay certain amounts aggregating $46,000 over a two-year period
under one of these agreements. There are no funding commitments under any
other agreement other than Sanofi.
F-10
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(6) NOTES PAYABLE
In December 1994, the Company entered into a noninterest bearing note for
$162,500, which note was converted by the holder into Series A Preferred Stock
in June 1995.
In 1995, the Company secured a $50,000 note payable to the Ben Franklin
Technology Fund. At December 31, 1995 and June 30, 1996, outstanding
borrowings under such facility aggregated $37,500 and $54,500 respectively.
The Company is required to make quarterly payments of 3% of Company revenues,
as defined and in accordance with a repayment schedule. The repayment schedule
incorporates an interest payment (9.5% interest rate) in the amounts due. The
first payment is due in January 1996. The loan, which is subordinated to the
current preferred shareholders, is secured by the Company's intellectual
property (see Note 13).
(7) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company completed the sale of its Series A (675,000 shares) and Series B
(7,060,000 shares) mandatorily redeemable convertible preferred stock at per
share prices of $.50 and $1.00, respectively. Aggregate net proceeds from
these transactions totaled approximately $7,350,000, which included a $162,500
promissory note with an investor which was converted into Series A Preferred
Stock in June 1995.
On May 31, 1996, The Company sold 3,222,222 shares of Series C mandatorily
redeemable convertible preferred stock at a per share price of $2.25 for
aggregate net proceeds of approximately $7,223,000.
The holders of the Redeemable Preferred Stock are entitled to certain
preferences over common stock including a liquidation preference of $.50 for
Series A, $1.00 for Series B, and $2.25 for Series C plus dividends, if and
when declared but unpaid, and redemption of the Redeemable Preferred Stock
upon demand of holders of at least 67% of the then outstanding Redeemable
Preferred Stock. Redeemable Preferred Stockholders were originally entitled to
cumulative dividends, only from and after March 1, 2000. Such right to
cumulative dividends was revoked by the Redeemable Preferred Stockholders in
conjunction with the Series C Preferred Stock agreement consummated on May 31,
1996. The Redeemable Preferred Stock is automatically convertible on a one-
for-one basis (the resulting common stock will be adjusted for the .51 for 1
common stock split (the "Reverse Stock Split")) immediately upon the closing
of an initial public offering of the common stock of the Company at a per
share price of not less than $5 per share (adjusted for the Reverse Stock
Split) and for aggregate Offering proceeds of not less than $15 million. Due
to the mandatory redemption feature of the Redeemable Preferred Stock, these
securities are classified at their accreted redemption value outside of
stockholders' equity (deficit) in the accompanying balance sheets.
Dividends on Redeemable Preferred Stock do not accrue unless declared by the
Company. The Company has not declared any dividends on Redeemable Preferred
Stock.
Commencing April 1, 2004, The Company is required to redeem 50% of the then
outstanding Redeemable Preferred Stock (100% on or after April 1, 2005) upon
demand of holders of at least 67% of the then outstanding Redeemable Preferred
Stock. The redemption price is equal to the greater of the (i) liquidation
amount, as noted above or (ii) fair market value of such preferred stock at
such point in time as determined by an independent valuation.
The difference between the deemed current fair market value of the
Redeemable Preferred Stock and the liquidation amount is being accreted on a
pro-rata basis in the accompanying financial statements over the period from
issuance of such respective classes of Redeemable Preferred Stock through
April 1, 2004, the earliest mandatory redemption date. Such calculations will
continue to be evaluated by the Company for possible future changes in the
deemed fair market value of such Redeemable Preferred Stock until April 1,
2004, or the consummation of the Offering.
F-11
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1996, the Redeemable Preferred Stock consist of the
following: Series A--authorized and issued 675,000 shares; Series B--
authorized 7,283,744 shares and issued 7,060,000 shares; and Series C--
authorized and issued 3,222,222 shares. In addition, there are 819,034
additional authorized shares of Preferred Stock not designated to a specific
class of Preferred Stock as of September 30, 1996.
The Company also secured $480,000 in bridge financing loans in March and May
1995, which amounts were converted to Series B preferred stock in June 1995.
In 1995, in connection with the bridge financing, the Company issued 159,994
warrants to Series B investors to purchase Series B preferred stock at the
fair value of the Series B preferred stock at the date of issuance ($1.00 per
share). Such warrants will be exercised concurrent with the proposed Offering
contemplated herein. The deemed fair value of such warrants at their issuance
date aggregated $90,000, which amount was charged to operations in 1995.
(8) COMMON STOCK AND COMMON STOCK OPTIONS
Upon inception of the Company in December 1994, certain members of
management and a co-founder/director purchased 828,750 shares of common stock.
Management purchased 663,000 shares which vest annually over a four-year
period. The Company has the right to repurchase any unvested shares at the
original price paid for such shares should the employee leave the Company
before such shares are fully vested. A co-founder/director purchased 165,750
shares. The difference between the deemed fair value and the price paid
($.002) per share, for the aforementioned common stock at inception in
December 1994 was $79,625. Compensation expense related to these shares of
common stock aggregated $15,925 in both 1994 and 1995 and $11,944 in 1996,
respectively. Pursuant to a right granted in December 1994, a director
purchased in January 1996, 51,000 shares of common stock at $.10 per share,
pursuant to a restricted stock purchase agreement.
The Company has adopted the 1995 Stock Option Plan (the "Plan") to provide
eligible individuals with an opportunity to acquire or increase an equity
interest in the Company and to encourage such individuals to continue in the
employment of the Company. Prior to the adoption of the Plan, stock options
granted in 1994 and 1995 were non-qualified stock options. Stock options are
granted at the deemed fair market value of the stock on the day immediately
preceding the date of grant. Stock options are exercisable for a period not to
exceed ten years from the date of grant. Vesting of the stock options occurs,
generally 25% per year, over four years. There are 1,200,000 shares reserved
under the Plan.
Stock option activity from December 5, 1994 (inception) to September 30,
1996 is as follows:
<TABLE>
<CAPTION>
STOCK PER
OPTIONS SHARE
------- --------
<S> <C> <C>
Balance, December 5, 1994 (inception)......................... -- --
Granted..................................................... 150,349 $ .10
Exercised................................................... -- --
Cancelled................................................... -- --
-------
Balance, December 31, 1994.................................... 150,349 .10
Granted..................................................... 12,750 .20
Exercised................................................... -- --
Cancelled................................................... -- --
-------
Balance, December 31, 1995.................................... 163,099 .10-.20
Granted (unaudited)......................................... 268,604 .20-2.16
Exercised (unaudited)....................................... (21,420) .10
Cancelled (unaudited)....................................... -- --
-------
Balance, September 30, 1996 (unaudited)....................... 410,283 .10-2.16
=======
Options exercisable at September 30, 1996 (unaudited)....... 16,320 .10
=======
</TABLE>
F-12
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Various executive officers and certain employees of the Company were granted
options to acquire 268,604 shares of common stock at exercise prices ranging
from $.20 to $2.16 per share during the period January 1, 1996 through
September 30, 1996. The exercise price of the options was equal to the fair
market value of the Common Stock on the date of grant, as determined by the
Board of Directors. However, for financial statement purposes, the difference
between a deemed value in the range of $2.35 to $8.82 per share and the
respective exercise prices at the grant dates has been recorded as deferred
compensation ($1,084,905) and is being amortized over the four-year vesting
period. Compensation expense for the aforementioned options aggregated
$103,440 for the nine months ended September 30, 1996.
(9) INCOME TAXES
At December 31, 1995, the Company had available for Federal and state income
tax purposes net operating loss carryforwards of approximately $1,207,000.
Such carryforwards, which expire through 2010 and 1997, respectively, are
available to reduce future Federal and state taxable income, if any.
Based on "change in ownership" provisions of the Tax Reform Act of 1986, net
operating loss and research and development credit carryforwards may be
subject to annual limitations that could reduce the Company's ability to
utilize these carryforwards in the future.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1994 and 1995 are shown below. At December 31, 1995, a
valuation allowance of $1,607,846 has been recognized to offset the deferred
tax assets as realization of such assets is uncertain. The change in the
valuation allowance for 1994 and 1995 was an increase of $127,559 and
$1,480,287, respectively.
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 66,352 $ 549,171
Capitalized research and development costs............ -- 1,033,238
Compensatory stock grants............................. 22,770 --
Capitalized start-up costs............................ 63,917 50,917
--------- -----------
Total deferred tax assets........................... $ 153,039 $ 1,633,326
Deferred tax liability:
Employee compensation................................. 25,480 25,480
--------- -----------
Net deferred tax assets................................. $ 127,559 $ 1,607,846
Valuation allowance..................................... (127,559) (1,607,846)
--------- -----------
Total deferred tax assets........................... $ -- $ --
========= ===========
</TABLE>
(10) 401(K) PROFIT SHARING PLAN
In 1995, the Company adopted a 401(k) Profit Sharing Plan (the "401(k)
Plan") available to all employees meeting certain eligibility criteria. The
401(k) Plan permits participants to contribute up to 15% of their compensation
not to exceed the limits established by the Internal Revenue Code. All
contributions made by participants vest immediately in the participants'
account. The Company did not contribute to the 401(k) Plan in 1995 or during
the nine months ended September 30, 1996.
(11) COMMITMENTS
In September 1995, the Company entered into a lease arrangement for the
financing of certain lab equipment, leasehold improvements, computers and
office equipment. The terms range from three to four years.
F-13
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The maximum amount that can be financed under this arrangement is $750,000. In
connection with this arrangement, 63,750 warrants to purchase Series B
preferred stock were originally granted to the lessor at the original Series B
issuance price of $1.00 per share. The deemed fair value of such warrants at
their issuance date aggregated $63,750, which amount is being amortized to
operations over the terms of the lease arrangement. The number of warrants and
the related $1.00 exercise price will be adjusted based on a formula to
reflect the increase in per share price of the Series C Preferred Stock over
Series B Preferred Stock (42,500 warrants at an exercise price of $1.50 per
share).
In October 1995, the Company entered into an operating lease agreement for
its present corporate facilities. The lease term is for two years with a one
year renewal option, subject to lessor consent.
In December 1995, the Company entered into a lease arrangement for the
financing of certain equipment. The terms of this arrangement are for four
years from the date of funding. The maximum amount that can be financed under
this arrangement is $620,000, which includes $120,000 of used equipment which
the Company is obligated to purchase at the end of the lease term for $24,000.
The initial financing occurred in January 1996.
Leased capital assets at September 30, 1996 are as follows:
<TABLE>
<S> <C>
Equipment and leasehold improvements............................ $215,106
Less accumulated amortization................................... (32,815)
--------
$182,291
========
</TABLE>
The Company's future minimum lease payments under the aforementioned leases
for years subsequent to December 31, 1995 are as follows:
<TABLE>
<CAPTION>
MINIMUM
ANNUAL PAYMENTS
------------------
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ --------- --------
<S> <C> <C>
1996................................................. $280,715 $ 35,252
1997................................................. 234,899 70,503
1998................................................. 75,850 70,503
1999................................................. 75,850 58,344
2000 and thereafter.................................. -- 2,374
-------- --------
Total minimum lease payments......................... $667,314 $236,976
========
Amounts representing interest........................ (44,572)
--------
Present value of net minimum lease payments.......... $192,404
Current portion...................................... 48,390
--------
Long-term portion.................................... $144,014
========
</TABLE>
Rent expense for the period from December 5, 1994 (date of inception) to
December 31, 1994, the year ended December 31, 1995 and the nine month period
ended September 30, 1996 aggregated $20,000, $271,000 and $243,000,
respectively.
F-14
<PAGE>
VIROPHARMA INCORPORATED
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(12) REVERSE STOCK SPLIT
The Company effected the Reverse Stock Split of its common stock on a .51-
for-1 basis on November 5, 1996. All common share, per share and pro forma per
share amounts in the accompanying financial statements have been retroactively
adjusted to reflect the Reverse Stock Split. Preferred stock amounts have not
been retroactively adjusted to reflect the Reverse Stock Split.
(13) SUBSEQUENT EVENTS (UNAUDITED)
Initial Public Offering:
In July 1996, the Board of Directors authorized the filing of a registration
statement for the Offering with the SEC for the sale of up to 3,450,000 shares
of common stock. If the Offering is consummated under terms presently
anticipated, all shares of Series A, B and C Redeemable Preferred Stock
outstanding as of the closing date of the Offering will be automatically
converted into shares of common stock on a one-for-one basis, as adjusted for
the Reverse Stock Split.
Preferred Stock and Common Stock:
In May 1996, the Board of Directors authorized and the stockholders approved
an amendment to the Restated Certificate of Incorporation whereby the Company
was authorized to issue up to 27,000,000 shares of common stock and 12,000,000
shares of Preferred Stock.
Corporate Partner Agreement:
In July 1996, the Company entered into a collaborative drug discovery and
development agreement with BI for one hepatitis C target identified by the
Company. Under this agreement, the Company granted to BI the exclusive
worldwide rights to develop and commercialize compounds discovered under the
agreement. In return, BI paid a technology access fee of $1,000,000 to the
Company and is required to make research and milestone payments to the Company
in connection with the Company's transfer of HCV screening and assay
technology and at various stages in the development of compounds under the
agreement. In addition, BI is required to make royalty payments to the Company
on sales of products developed and marketed under this agreement.
Ben Franklin Technology Fund:
In August 1996, the Company paid the Ben Franklin Technology Fund loan
aggregating $54,500.
F-15
<PAGE>
[GRAPHIC DEPICTING MAP OF WORLD OVERLAID WITH COLUMNS LISTING GLOBAL RNA VIRUS
DISEASES, WITH THE SIX DISEASES THE COMPANY IS CURRENTLY TARGETING HIGHLIGHTED
IN A DIFFERENT COLOR, AND AN INSET DEPICTING RNA REPLICATION]
VIROPHARMA
OPPORTUNITY AND TECHNOLOGY
RNA viruses, which cause the majority of human vi-
ral diseases, continue to emerge throughout the
world, spreading from rural and developing regions
to urbanized centers, and threaten the health of
increasing numbers of people.
ViroPharma is developing antiviral pharmaceuticals
for diseases caused by RNA viruses. The Company has
focused its initial drug discovery and development
activities on the six RNA virus diseases high-
lighted above. ViroPharma believes that its
technologies are potentially applicable to a broad
range of RNA virus diseases.
ViroPharma is using its expertise in RNA virology,
RNA replication and automated high throughput assay
development to discover novel small molecule inhib-
itors of RNA virus replication. Using medicinal,
combinatorial and automated synthetic chemistry
technologies in conjunction with drug design and
computational chemistry methodologies and parallel
biological assessments, ViroPharma optimizes new
inhibitor compounds for the treatment of RNA virus
diseases.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS NOT CONTAINED
HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY
OF THE UNDERWRITERS OR BY ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE
SECURITIES OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors ............................................................ 6
The Company.............................................................. 16
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 22
Management............................................................... 38
Certain Transactions..................................................... 47
Principal Stockholders................................................... 49
Description of Capital Stock............................................. 52
Shares Eligible for Future Sale.......................................... 55
Underwriting............................................................. 57
Legal Matters............................................................ 58
Experts.................................................................. 58
Additional Information................................................... 58
Index to Financial Statements............................................ F-1
</TABLE>
--------------------
UNTIL _____, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,250,000 Shares
[LOGO OF VIROPHARMA INCORPORATED APPEARS HERE]
Common Stock
--------------------
PROSPECTUS
--------------------
COWEN & COMPANY
J.P. MORGAN & CO.
_________, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 11,600.00
National Association of Securities Dealers, Inc. filing fee..... 3,864.00
The Nasdaq Stock Market Listing Fee............................. 40,397.00
Transfer Agent and Registrar Fees............................... 5,000.00
Printing and engraving expenses................................. 110,000.00
Legal fees and expenses......................................... 210,000.00
Accounting fees and expenses.................................... 100,000.00
Blue Sky fees and expenses (including legal fees)............... 15,000.00
Miscellaneous................................................... 4,139.00
-----------
Total......................................................... $500,000.00
===========
</TABLE>
--------
* To be supplied by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law and the Company's By-Laws provide for
indemnification of the Company's directors and officers for liabilities and
expenses that they may incur in such capacities. In general, directors and
officers are indemnified with respect to actions taken in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
the Company, and with respect to any criminal action or proceeding, actions
that the indemnitee had no reasonable cause to believe were unlawful.
Reference is made to the Company's By-Laws filed as Exhibit 3.2 hereto.
In addition, certain directors of the Company are parties to indemnification
agreements with the Company. Pursuant to the agreements, such directors are to
be indemnified against liabilities and expenses incurred in connection with
their services to the Company to the fullest extent permitted by Delaware law.
Such indemnification is subject to the director's meeting the applicable
standard of care and to a determination to indemnify by a majority of
disinterested directors (as defined in the agreements) or by independent
counsel (also as defined in the agreements).
The Underwriting Agreement provides that the Underwriter is obligated, under
certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1994, the registrant has issued and sold the following
unregistered securities:
1. Upon the founding of the Company in December 1994, certain founders of
the Company purchased an aggregate of 675,750 shares of Common Stock
pursuant to restricted stock purchase agreements. Each purchaser paid
$0.002 per share of Common Stock, then valued at $0.10 per share. In
addition, an affiliate of a founder purchased 165,750 shares of Common
Stock. The affiliate paid $0.002 per share.
II-1
<PAGE>
2. From December 1994 to January 1995, the Company sold 350,000 shares of
Series A Preferred Stock for an aggregate price of $175,000, or $0.50 per
share, to certain of the founders of the Company. All of such outstanding
shares of Series A Preferred Stock will convert into an aggregate of
178,500 shares of Common Stock upon completion of this offering.
3. In December 1994, the Company sold an 8.5% Convertible Demand
Promissory Note in the principal amount of $162,500 to an affiliate of a
founder of the Company. In December 1994, the founder assigned the note to
two affiliates of another founder, who converted their notes into a total
of 325,000 shares of Series A Preferred Stock at $0.50 per share in June
1995. All of such outstanding shares of Series A Preferred Stock will
convert into an aggregate of 165,750 shares of Common Stock upon completion
of this offering.
4. Pursuant to a right granted in December 1994, a director purchased
51,000 shares of Common Stock under a January 1996 restricted stock
purchase agreement at $0.10 per share.
5. In March and May 1995, the Company sold two 9.5% Convertible Demand
Promissory Notes in the principal amounts of $100,000 and $50,000 to each
of three private investors and one 9.5% Convertible Promissory Note in the
principal amount of $30,000 to an executive officer. All the notes were
cancelled in connection with such investors' and executive officer's
purchase of Series B Preferred Stock described in paragraph 7 below, in
partial or full payment for the shares.
6. In connection with the purchase of the 9.5% Convertible Demand
Promissory Notes, the Company issued warrants to purchase 49,998 shares of
Series B Preferred Stock, respectively, to each of the three private
investors and 10,000 shares to the executive officer. Two of the private
investors subsequently transferred all or portions of the warrants to
successors or affiliates. The Company expect all such warrants to be
exercised prior to the closing of this offering.
7. Between June 1995 and October 1995, the Company sold 7,060,000 shares
of Series B Preferred Stock for an aggregate of $7,060,000, or $1.00 per
share, to private investors and an executive officer of the Company. All of
such outstanding shares of Series B Preferred Stock will convert into an
aggregate of 3,600,600 shares of Common Stock upon the closing of this
offering.
8. In September 1995, the Company issued a warrant to purchase 42,500
shares of Series B Preferred Stock at $1.50 per share to an equipment
supplier in connection with a Master Lease Agreement between the Company
and the equipment supplier. Upon the closing of this offering, the warrant
will automatically become exercisable for 21,675 shares of Common Stock at
$2.94 per share.
9. In May 1996, the Company sold 3,222,222 shares of Series C Preferred
Stock for an aggregate of $7,249,999.50, or $2.25 per share, to private
investors and the executive officers of the Company. All of such
outstanding shares of Series C Preferred Stock will convert into an
aggregate of 1,643,333 shares of Common Stock on a one-for-one basis upon
the closing of this offering.
10. From 1994 to the present, the Company has granted options to acquire
an aggregate of 454,142 shares of Common Stock, at exercise prices ranging
from $0.10 to $9.00, to various directors, officers, employees and non-
employees. To date, options to purchase 21,420 shares of Common Stock have
been exercised.
The Company believes that the transactions described above were exempt from
registration under Sections 3(a)(9), 3(b) or 4(2) of the Securities Act
because the subject securities were, respectively, either (i) exchanged by the
issuer with its existing security holders exclusively, with no commission or
other remuneration being paid or given directly or indirectly for soliciting
such exchange, (ii) issued pursuant to a compensatory benefit plan pursuant to
Rule 701 under the Securities Act or (iii) sold to a limited group of persons,
each of whom was believed to have been a sophisticated investor or had a pre-
existing business or personal relationship with the Company or its management
and was purchasing for investment without a view to further distribution.
Restrictive legends were placed on stock certificates evidencing the shares
and/or agreements relating to the right to purchase such shares described
above.
Specifically, the Company believes that the transactions described in
paragraph 1 and certain transactions described in paragraphs 2, 3, 5, 6, 7, 8
and 9 were exempt from registration under Section 4(2) of the Securities Act.
The Company believes that the transactions relating to the conversion of the
preferred stock and the notes
II-2
<PAGE>
described in paragraphs 2, 3, 5, 6, 7 and 9 were or will be exempt from
registration under Section 3(a)(9) of the Securities Act. In respect of the
right described in paragraph 4 and the options described in paragraph 10, the
Company is relying upon the fact that such grants were not sales or, if such
grants were sales, they and the exercises described were exempt from
registration under Sections 4(2) and 3(b) of the Securities Act. The Company
intends to file registration statements on Form S-8 under the Securities Act
to register all of the shares of Common Stock underlying the Company's
outstanding options.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1* Form of Underwriting Agreement.
3.1** Form of Amended and Restated Certificate of Incorporation of the
Company, to be effective upon the consummation of the offering.
3.2** By-Laws of the Company.
5.1*** Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of Common Stock being registered.
10.1**++ 1995 Stock Option Plan.
10.2**++ ViroPharma 401(k) Employee Savings Plan, effective July 1, 1995.
10.3** Lease dated September 19, 1995 between the Company and Centocor
Property Management Corp. II.
10.4** Master Lease Agreement dated September 13, 1995 between the Company
and Comdisco, Inc.
10.5** Master Equipment Lease No. 053-0005 dated December 1, 1995 between
the Company and Phoenix Leasing Incorporated.
10.6**+ Agreement dated December 22, 1995 between the Company and Sanofi.
10.7**+ Collaborative Research Agreement dated as of July 23, 1996 between
the Company and Boehringer Ingelheim Pharmaceuticals, Inc.
10.8** Form of Employment Agreement.
10.9** Form of Indemnification Agreement.
10.10** Form of Employee Stock Purchase Agreement.
10.11** Restricted Stock Purchase Agreement dated as of January 17, 1996, by
and between the Company and Frank Baldino, Jr.
10.12** Series B Convertible Preferred Stock Purchase Agreement dated as of
June 16, 1995 among the Company and each of the entities on the
"Schedule of Purchasers" attached thereto as Schedule A.
10.13** Series C Convertible Preferred Stock Purchase Agreement dated as of
May 30, 1996 among the Company and each of the individuals and
entities on the "Schedule of Purchasers" attached thereto as Schedule
A.
10.14** Form of Warrants to Purchase Series B Preferred Stock dated March 3,
1995 and May 12, 1995.
10.15** Warrant Agreement dated as of September 13, 1995 between the Company
and Comdisco, Inc.
10.16** Amended and Restated Investors' Rights Agreement, dated as of May 30,
1996, by and among the Company and the persons identified on Schedule
A, Schedule B and the Schedule of Founders thereto.
10.17* Form of Amendment to Employee Stock Purchase Agreement.
10.18* Amendment to Restricted Stock Purchase Agreement dated as of January
17, 1996, among the Company and Frank Baldino, Jr., dated as of
January 17, 1996.
23.1* Consent of KPMG Peat Marwick LLP.
23.2*** Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit
5.1).
24** Power of Attorney (included on signature page).
27** Financial Data Schedule
</TABLE>
II-3
<PAGE>
- --------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an application for confidential
treatment filed with the Commission pursuant to Rule 406 under the
Securities Act.
++ Compensation plans and arrangements for executives and others.
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant 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 Securities Act and will be
governed by the final adjudication of such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN MALVERN,
PENNSYLVANIA ON NOVEMBER 8, 1996.
Viropharma, Inc.
By: /s/ Claude H. Nash, Ph.D.
---------------------------------
CLAUDE H. NASH, PH.D.
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE(S) DATE
---------- -------- ----
<S> <C> <C>
/s/ Claude H. Nash, Ph.D. Chief Executive
- ------------------------------------- Officer, President and November 8, 1996
CLAUDE H. NASH, PH.D. Director (Principal
Executive Officer)
/s/ Vincent J. Milano Executive Director,
- ------------------------------------- Finance & November 8, 1996
VINCENT J. MILANO Administration and
Treasurer
(Principal
Financial and
Accounting Officer)
* Director
- ------------------------------------- November 8, 1996
FRANK BALDINO, JR., PH.D.
* Director
- ------------------------------------- November 8, 1996
STEVE DOW
* Director
- ------------------------------------- November 8, 1996
JON N. GILBERT
* Director
- ------------------------------------- November 8, 1996
ANN H. LAMONT
* Director
- ------------------------------------- November 8, 1996
CHRISTOPHER MOLLER, PH.D.
* Director
- ------------------------------------- November 8, 1996
DAVID I. SCHEER
*By: /s/ Vincent J. Milano
---------------------------------- November 8, 1996
VINCENT J. MILANO ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1* Form of Underwriting Agreement.
3.1** Form of Amended and Restated Certificate of Incorporation of the
Company, to be effective upon the consummation of the Offering.
3.2** By-Laws of the Company.
5.1*** Opinion of Morgan, Lewis & Bockius LLP regarding legality of the
shares of Common Stock being registered.
10.1**++ 1995 Stock Option Plan.
10.2**++ ViroPharma 401(k) Employee Savings Plan, effective July 1, 1995.
10.3** Lease dated September 19, 1995 between the Company and Centocor
Property Management Corp. II.
10.4** Master Lease Agreement dated September 13, 1995 between the Company
and Comdisco, Inc.
10.5** Master Equipment Lease No. 053-0005 dated December 1, 1995 between
the Company and Phoenix Leasing Incorporated.
10.6**+ Agreement dated December 22, 1995 between the Company and Sanofi.
10.7**+ Collaborative Research Agreement dated as of July 23, 1996 between
the Company and Boehringer Ingelheim Pharmaceuticals, Inc.
10.8** Form of Employment Agreement.
10.9** Form of Indemnification Agreement.
10.10** Form of Employee Stock Purchase Agreement.
10.11** Restricted Stock Purchase Agreement dated as of January 17, 1996, by
and between the Company and Frank Baldino, Jr.
10.12** Series B Convertible Preferred Stock Purchase Agreement dated as of
June 16, 1995 among the Company and each of the entities on the
"Schedule of Purchasers" attached thereto as Schedule A.
10.13** Series C Convertible Preferred Stock Purchase Agreement dated as of
May 30, 1996 among the Company and each of the individuals and
entities on the "Schedule of Purchasers " attached thereto as
Schedule A.
10.14** Form of Warrants to Purchase Series B Preferred Stock dated March 3,
1995 and May 12, 1995.
10.15** Warrant Agreement dated as of September 13, 1995 between the Company
and Comdisco, Inc.
10.16** Amended and Restated Investors' Rights Agreement, dated as of May 30,
1996, by and among the Company and the persons identified on Schedule
A, Schedule B and the Schedule of Founders thereto.
10.17* Form of Amendment to Employee Stock Purchase Agreement.
10.18* Amendment to Restricted Stock Purchase Agreement dated as of January
17, 1996, among the Company and Frank Baldino, Jr., dated as of
January 17, 1996.
23.1* Consent of KPMG Peat Marwick LLP.
23.2*** Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit
5.1).
24** Power of Attorney (included on signature page).
27** Financial Data Schedule
</TABLE>
- --------
* Filed herewith.
** Previously filed.
*** To be filed by amendment.
+ Portions of this exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an application for confidential
treatment filed with the Commission pursuant to Rule 406 under the
Securities Act.
++ Compensation plans and arrangements for executives and others.
II-6
<PAGE>
EXHIBIT 1
2,250,000 Shares
VIROPHARMA INCORPORATED
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
November __, 1996
COWEN & COMPANY
J.P. MORGAN SECURITIES INC.
As Representatives of the several Underwriters
c/o Cowen & Company
Financial Square
New York, NY 10005
Dear Sirs:
1. Introductory. ViroPharma Incorporated, a Delaware corporation (the
------------
"Company"), proposes to sell, pursuant to the terms of this
Agreement, to the several underwriters named in Schedule A hereto
(the "Underwriters" or, each, an "Underwriter"), an aggregate of
2,250,000 shares of Common Stock, par value $0.002 per share (the
"Common Stock"), of the Company. The aggregate of 2,250,000 shares
so proposed to be sold is hereinafter referred to as the "Firm
Stock." The Company also proposes to sell to the Underwriters, upon
the terms and conditions set forth in Section 3 hereof, up to an
additional 337,500 shares of Common Stock (the "Optional Stock").
The Firm Stock and the Optional Stock are hereinafter collectively
referred to as the "Stock." Cowen & Company ("Cowen") and J.P.
Morgan Securities Inc. ("J.P. Morgan") are acting as representatives
of the several Underwriters and in such capacity are hereinafter
referred to as the "Representatives."
2. Representations and Warranties of the Company. The Company
----------------------------------------------
represents and warrants to, and agrees with, the several
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-12407) in
the form in which it became or becomes effective and also in
such form as it may be when any post-effective amendment
thereto shall become effective with
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Two
respect to the Stock, including any preeffective prospectuses
included as part of the registration statement as originally
filed or as part of any amendment or supplement thereto, or
filed pursuant to Rule 424 under the Securities Act of 1933,
as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder, copies
of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of
the Securities Act and the Rules and Regulations and has been
filed with the Commission under the Securities Act; one or
more amendments to such registration statement, including in
each case an amended preeffective prospectus, copies of which
amendments have heretofore been delivered to you, have been so
prepared and filed. If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared
effective before the offering of the Stock may commence, the
term "Registration Statement" as used in this Agreement means
the registration statement as amended by said post-effective
amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement
relating to the Stock that is filed and declared effective
pursuant to Rule 462(b) under the Securities Act. The term
"Prospectus" as used in this Agreement means the prospectus in
the form included in the Registration Statement or, (A) if the
prospectus included in the Registration Statement omits
information in reliance on Rule 430A under the Securities Act
and such information is included in a prospectus filed with
the Commission pursuant to Rule 424(b) under the Securities
Act, the term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement
as supplemented by the addition of the Rule 430A information
contained in the prospectus filed with the Commission pursuant
to Rule 424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act are
delivered pursuant to Rule 434 under the Securities Act, then
(i) the term "Prospectus" as used in this Agreement means the
"prospectus subject to completion" (as such term is defined in
Rule 434(g) under the Securities Act) as supplemented by (a)
the addition of Rule 430A information or other information
contained in the form of prospectus delivered pursuant to Rule
434(b)(2) under the Securities Act or (b) the information
contained in the term sheets described in Rule 434(b)(3) under
the Securities Act, and (ii) the date of such prospectuses
shall be deemed to be the date of the term sheets. The term
"Preeffective
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Three
Prospectus" as used in this Agreement means the prospectus
subject to completion in the form included in the Registration
Statement at the time of the initial filing of the
Registration Statement with the Commission, and as such
prospectus shall have been amended from time to time prior to
the date of the Prospectus.
(b) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Preeffective
Prospectus, and, at its date of issue, each Preeffective
Prospectus conformed in all material respects with the
requirements of the Securities Act and the Rules and
Regulations and did not include 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,
not misleading, other than any such nonconformance or untrue
statement or omission in a Preeffective Prospectus which has
been corrected in the Prospectus; and, when the Registration
Statement becomes effective and at all times subsequent
thereto up to and including each of the Closing Dates (as
hereinafter defined), the Registration Statement and the
Prospectus and any amendments or supplements thereto contained
and will contain all material statements and information
required to be included therein by the Securities Act and the
Rules and Regulations and conformed and will conform in all
material respects to the requirements of the Securities Act
and the Rules and Regulations and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement
thereto, included or will include any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to
information contained in or omitted from any Preeffective
Prospectus or the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the
Company by or on behalf of any Underwriter, directly or
through you, specifically for use in the preparation thereof;
there is no franchise, lease, contract, agreement or document
required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed therein as required;
and all descriptions of any such franchises, leases,
contracts, agreements or documents contained in the
Registration
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Four
Statement are accurate and complete descriptions of such
documents in all material respects.
(c) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except
as set forth or contemplated in the Prospectus, the Company
has not incurred any material liabilities or obligations,
direct or contingent, nor entered into any material
transactions not in the ordinary course of business, and there
has not been any material adverse change in the condition
(financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company
or any material change in the capital stock, short-term or
long-term debt of the Company.
(d) The financial statements, together with the related notes, set
forth in the Prospectus and elsewhere in the Registration
Statement present fairly, in all materials respects, the
financial position of the Company (a development stage
company) as of December 31, 1994 and 1995, and the results of
its operations and its cash flows for the period from December
5, 1994 (inception) to December 31, 1994 and the year ended
December 31, 1995, in conformity with generally accepted
accounting principles. The selected financial and statistical
data set forth in the Prospectus under the captions
"Prospectus Summary--Summary Financial Data" and "Selected
Financial Data" fairly present, on the basis stated in the
Registration Statement, the information set forth therein.
(e) To the Company's knowledge, KPMG Peat Marwick LLP, who have
expressed their opinions on the audited financial statements
included in the Registration Statement and the Prospectus, are
independent public accountants as required by the Securities
Act and the Rules and Regulations.
(f) The Company has been duly organized and is validly existing
and in good standing as a corporation under the laws of the
State of Delaware, with power and authority (corporate and
other) to own or lease its properties and to conduct its
business as described in the Prospectus; and the Company is
duly qualified to do business and in good standing as a
foreign corporation in all other jurisdictions where its
ownership or leasing of properties or the conduct of its
business requires such qualification, except where the failure
to comply would not have a material adverse
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November__, 1996
Page Five
effect on the Company. The Company has all requisite power and
authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications,
licenses and permits of and from all public regulatory or
governmental agencies and bodies to own, lease and operate its
properties and conduct its business as now being conducted,
and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a
materially burdensome restriction not disclosed in the
Registration Statement and the Prospectus. The Company does
not own or control, directly or indirectly, any corporation,
association or other entity.
(g) The Company's authorized and outstanding capital stock is on
the date hereof, and will be on the Closing Date, as set forth
under the heading "Capitalization" in the Prospectus (except
for shares of common stock issued between the date hereof and
the Closing Date pursuant to the Company's employee stock
option plans or upon conversion of shares of the Company's
Preferred Stock); the outstanding shares of common stock of
the Company conform in all material respects to the
description thereof in the Prospectus and have been duly
authorized, validly issued, are fully paid and nonassessable
and have been issued in compliance with all federal and state
securities laws and were not issued in violation of or subject
to any preemptive rights or similar rights to subscribe for or
purchase securities and conform to the description thereof
contained in the Prospectus. Except as disclosed in and or
contemplated by the Prospectus and the financial statements of
the Company and related notes thereto included in the
Prospectus, the Company does not have outstanding any options
or warrants to purchase, or any preemptive rights or other
rights to subscribe for or to purchase any securities or
obligations convertible into, or any contracts or commitments
to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations, except
for options granted subsequent to the date of information
provided in the Prospectus pursuant to the Company's employee
and stock option plans as disclosed in the Prospectus. The
description of the Company's stock option and other stock
plans or arrangements, and the options or other rights granted
or exercised thereunder, as set forth in the Prospectus,
accurately and fairly presents in all material respects the
information required to be shown with respect to such plans,
arrangements, options and rights.
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November__, 1996
Page Six
(h) The Stock to be issued and sold by the Company to the
Underwriters hereunder has been duly and validly authorized
and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid
and nonassessable and free of any preemptive or similar rights
and will conform in all material respects to the description
thereof in the Prospectus.
(i) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a
party or of which any property of the Company is subject,
which, if determined adversely to the Company, might
individually or in the aggregate (i) prevent or adversely
affect the transactions contemplated by this Agreement, (ii)
suspend the effectiveness of the Registration Statement, (iii)
prevent or suspend the use of the Preeffective Prospectus in
any jurisdiction or (iv) result in a material adverse change
in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of
operations of the Company and, to the Company's knowledge,
there is no valid basis for any such legal or governmental
proceeding; and to the Company's knowledge no such proceedings
are threatened or contemplated against the Company by
governmental authorities or others. The Company is not a party
nor subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body or
other governmental agency or body.
(j) The execution, delivery and performance of this Agreement and
the consummation of the transactions herein contemplated (A)
will not result in any violation of, or conflict with, the
provisions of the certificate of incorporation, by-laws or
other organizational documents of the Company, or any law,
order, rule or regulation of any court or governmental agency
or body having jurisdiction over the Company or any of its
properties or assets, (B) will not conflict with or result in
a breach or violation of any of the terms or provisions of or
constitute a default under any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to
which the Company is a party or by which it or any of its
properties is or may be bound, or result in the creation of a
lien.
(k) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and
the consummation of the transactions
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November__, 1996
Page Seven
contemplated hereby, except such as may be required by the
National Association of Securities Dealers, Inc. (the "NASD")
or under the Securities Act or the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or the securities or
"Blue Sky" laws of any jurisdiction in connection with the
purchase and distribution of the Stock by the Underwriters.
(l) The Company has the full corporate power and authority to
enter into this Agreement and to perform its obligations
hereunder (including to issue, sell and deliver the Stock),
and this Agreement has been duly and validly authorized,
executed and delivered by the Company and is a valid and
binding obligation of the Company, enforceable against the
Company in accordance with its terms, except to the extent
that rights to indemnity and contribution hereunder may be
limited by federal or state securities laws or the public
policy underlying such laws.
(m) The Company is in all material respects in compliance with,
and conducts its business in conformity with, all applicable
federal, state, local and foreign laws, and rules and
regulations of any applicable court or governmental agency or
body; to the knowledge of the Company, otherwise than as set
forth in the Registration Statement and the Prospectus, no
prospective change in any of such federal or state laws, rules
or regulations has been adopted which, when made effective,
would have a material adverse effect on the operations of the
Company.
(n) The Company has filed all necessary federal, state, local and
foreign income, payroll, franchise and other tax returns and
has paid all taxes shown as due thereon or with respect to any
of its properties, except in such cases where the failure to
file such returns or make such payments would not have a
material adverse effect on the financial position, business or
operations of the Company, and there is no tax deficiency that
has been, or to the knowledge of the Company is likely to be,
asserted against the Company or any of its properties or
assets that would have a material adverse effect on the
financial position, business or operations of the Company.
(o) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company
because of the filing or effectiveness of the Registration
Statement or otherwise, except for
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November__, 1996
Page Eight
persons and entities who have expressly waived such right or
who have been given proper notice and have failed to exercise
such right within the time or times required under the terms
and conditions of such right.
(p) Neither the Company nor, to the Company's knowledge, any of
its officers, directors or affiliates has taken, directly or
indirectly, any action designed or intended to stabilize or
manipulate the price of any security of the Company, or which
caused or resulted in, or which might in the future reasonably
be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company.
(q) The Company owns or possesses the right to use all patents,
trademarks, trademark registrations, service marks, service
mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights described in the
Prospectus as being owned by it or necessary for the conduct
of its business, and the Company is not aware of any claim to
the contrary or any challenge by any other person to the
rights of the Company with respect to the foregoing. To the
Company's knowledge, the Company's business as now conducted
does not in any material respect infringe or conflict with
patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses or other intellectual property or
franchise right of any person. Except as described in the
Prospectus, the Company is not aware of any claim against the
Company alleging the infringement by the Company of any
patent, trademark, service mark, trade name, copyright, trade
secret, license in or other intellectual property right or
franchise right of any person.
(r) The Company has performed all material obligations required to
be performed by it to date under all contracts filed as
exhibits to the Registration Statement, and neither the
Company nor to the Company's knowledge any other party to such
contract is in default under or in breach of any such
obligations. The Company has not received any notice of such
default or breach.
(s) The Company is not involved in any labor dispute nor is any
such dispute threatened. The Company is not aware that (A) any
executive, key employee or significant group of employees of
the Company plans to terminate employment with the Company or
(B) any such executive or key employee is subject to any
noncompete, nondisclosure, confidentiality,
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November__, 1996
Page Nine
employment, consulting or similar agreement that would be
violated by the present or proposed business activities of the
Company and its subsidiaries. The Company does not have or
expect to have any liability for any prohibited transaction or
funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other
plan which is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), to which the
Company makes or ever has made a contribution and in which any
employee of the Company is or has ever been a participant.
With respect to such plans, the Company is in compliance in
all material respects with all applicable provisions of ERISA.
(t) The Company has obtained the written agreement described in
Section 8(j) of this Agreement from each of its officers,
directors and holders of Common Stock listed on Schedule B
hereto.
(u) The Company does not own any real property. The Company has,
and the Company as of the Closing Date will have, good and
marketable title to all personal property owned by it which is
material to the business of the Company, free and clear of all
liens, encumbrances and defects except such as are described
the Prospectus or such as would not have a material adverse
effect on the Company; and any real property and buildings
held under lease by the Company, or will be as of each of the
Closing Dates, held by it under valid, subsisting and
enforceable leases with such exceptions as would not have a
material adverse effect on the Company, in each case except as
described in or contemplated by the Prospectus.
(v) Except as otherwise described in the Prospectus, the Company
is insured by insurers of recognized financial responsibility
against such property damage, losses and risks and in such
amounts as are customary in the businesses in which it is
engaged or proposes to engage after giving effect to the
transactions described in the Prospectus; and the Company does
not have any reason to believe that it will not be able to
renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business
or operations of the Company, except as described in or
contemplated by the Prospectus.
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November__, 1996
Page Ten
(w) Other than as contemplated by this Agreement, there is no
broker, finder or other party that has been engaged by the
Company or any officer, director or agent of the Company and
is entitled to receive from the Company any brokerage or
finder's fee or other fee or commission as a result of any of
the transactions contemplated by this Agreement.
(x) The Company has complied with all provisions of Section
517.075 Florida Statutes (Chapter 92-198; Laws of Florida).
(y) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the
recorded accounting for assets is compared with existing
assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(z) To the Company's knowledge, neither the Company nor any
employee or agent of the Company has made any payment of funds
of, or on behalf of, the Company or received or retained any
funds in violation of any law, rule or regulation, which
payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus.
(aa) The Company is not, nor, after application of the net proceeds
of this offering as described under the caption "Use of
Proceeds" in the Prospectus, will it become an "investment
company" or an entity "controlled" by an "investment company"
as such terms are defined in the Investment Company Act of
1940, as amended.
(bb) The Company has provided you with its financial statements for
the quarters ended March 31, 1996, June 30, 1996 and September
30, 1996.
(cc) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by the
Company as to the matters covered thereby.
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November__, 1996
Page Eleven
3. Purchase by, and Sale and Delivery to, Underwriters; Closing Dates.
------------------------------------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions
herein set forth, the Company agrees to sell to the Underwriters the
Firm Stock, and the Underwriters agree, severally and not jointly,
to purchase the Firm Stock from the Company, the number of shares of
Firm Stock to be purchased by each Underwriter being set opposite
its name in Schedule A, subject to adjustment in accordance with
Section 13 hereof.
(b) The purchase price per share to be paid by the Underwriters to
the Company will be the price per share set forth in the table
on the cover page of the Prospectus under the heading
"Proceeds to Company" (the "Purchase Price").
(c) The Company will deliver the Firm Stock to the Representatives
for the respective accounts of the several Underwriters (in
the form of definitive certificates, issued in such names and
in such denominations as the Representatives may direct by
notice in writing to the Company given at or prior to 12:00
Noon, New York Time, on the second full business day preceding
the First Closing Date (as defined below) or, if no such
direction is received, in the names of the respective
Underwriters or in such other names as Cowen may designate
(solely for the purpose of administrative convenience) and in
such denominations as Cowen may determine, against payment of
the aggregate Purchase Price therefor by wire transfer in same
day funds to the account of the Company, at the offices of
Morrison & Foerster llp, 1290 Avenue of the Americas, New
York, New York 10104. The time and date of the delivery and
closing shall be at 10:00 A.M., New York Time, on
_______________, 1996, in accordance with Rule 15c6-1 of the
Exchange Act. The time and date of such payment and delivery
are herein referred to as the "First Closing Date." The First
Closing Date and the location of delivery of, and the form of
payment for, the Firm Stock may be varied by agreement between
the Company and Cowen. The First Closing Date may be postponed
pursuant to the provisions of Section 13.
(d) The Company shall make the certificates for the Stock
available to the Representatives for examination on behalf of
the Underwriters not later than 10:00 A.M., New York Time, on
the business day preceding the First
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twelve
Closing Date at the offices of Cowen, Financial Square, New
York, New York 10005.
(e) It is understood that Cowen or J.P. Morgan, individually and
not as Representatives of the several Underwriters, may (but
shall not be obligated to) make payment to the Company on
behalf of any Underwriter or Underwriters, for the Stock to be
purchased by such Underwriter or Underwriters. Any such
payment by Cowen or J.P. Morgan shall not relieve such
Underwriter or Underwriters from any of its or their other
obligations hereunder.
(f) The several Underwriters agree to make an initial public
offering of the Firm Stock at the initial public offering
price as soon after the effectiveness of the Registration
Statement as in their judgment is advisable. The
Representatives shall promptly advise the Company of the
making of the initial public offering.
(g) Solely for the purpose of covering any over-allotments in
connection with the distribution and sale of the Firm Stock as
contemplated by the Prospectus, the Company hereby grants to
the Underwriters an option to purchase, severally and not
jointly, up to the aggregate of 337,500 shares of Optional
Stock. The price per share to be paid for the Optional Stock
shall be the Purchase Price. The option granted hereby may be
exercised as to all or any part of the Optional Stock at any
time, [and from time to time] not more than thirty (30) days
subsequent to the effective date of this Agreement. No
Optional Stock shall be sold and delivered unless the Firm
Stock previously has been, or simultaneously is, sold and
delivered. The right to purchase the Optional Stock or any
portion thereof may be surrendered and terminated at any time
upon notice by the Underwriters to the Company.
(h) The option granted hereby may be exercised by the Underwriters
by giving written notice from Cowen to the Company setting
forth the number of shares of the Optional Stock to be
purchased by them and the date and time for delivery of and
payment for the Optional Stock. Each date and time for
delivery of and payment for the Optional Stock (which may be
the First Closing Date, but not earlier) is herein called the
"Option Closing Date" and shall in no event be earlier than
two (2) business days nor later than ten (10) business days
after written notice is given. (The
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Thirteen
Option Closing Date and the First Closing Date are herein called
the "Closing Dates.") All purchases of Optional Stock from the
Company shall be made on a pro rata basis. Optional Stock shall
be purchased for the account of each Underwriter in the same
proportion as the number of shares of Firm Stock set forth
opposite such Underwriter's name in Schedule A hereto bears to
the total number of shares of Firm Stock (subject to adjustment
by the Underwriters to eliminate odd lots). Upon exercise of the
option by the Underwriters, the Company agrees to sell to the
Underwriters the number of shares of Optional Stock set forth in
the written notice of exercise and the Underwriters agree,
severally and not jointly and subject to the terms and conditions
herein set forth, to purchase the number of such shares
determined as aforesaid.
(i) The Company will deliver the Optional Stock to the Underwriters
(in the form of definitive certificates, issued in such names and
in such denominations as the Representatives may direct by notice
in writing to the Company given at or prior to 12:00 Noon, New
York Time, on the second full business day preceding the Option
Closing Date or, if no such direction is received, in the names
of the respective Underwriters or in such other names as Cowen
may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine,
against payment of the aggregate Purchase Price therefor by wire
transfer in same day funds to the account of the Company, at the
offices of Morrison & Foerster llp, 1290 Avenue of the Americas,
New York, New York 10104. The Company shall make the certificates
for the Optional Stock available to the Underwriters for
examination not later than 10:00 A.M., New York Time, on the
business day preceding the Option Closing Date at the offices of
Cowen, Financial Square, New York, New York 10005. The Option
Closing Date and the location of delivery of, and the form of
payment for, the Optional Stock may be varied by agreement
between the Company and Cowen. The Option Closing Date may be
postponed pursuant to the provisions of Section 13.
4. Covenants and Agreements of the Company. The Company covenants and
---------------------------------------
agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives
have determined not to proceed pursuant to Rule 430A of the Rules
and Regulations, use all commercially reasonable efforts to cause
the
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Fourteen
Registration Statement to become effective, (ii) if the
Company and the Representatives have determined to proceed
pursuant to Rule 430A of the Rules and Regulations, use all
commercially reasonable efforts to comply with the provisions of
and make all requisite filings with the Commission pursuant to
Rule 430A and Rule 424 of the Rules and Regulations and (iii) if
the Company and the Representatives have determined to deliver
Prospectuses pursuant to Rule 434 of the Rules and Regulations,
to use all commercially reasonable efforts to comply with all the
applicable provisions thereof. The Company will advise the
Representatives promptly as to the time at which the Registration
Statement becomes effective, will advise the Representatives
promptly of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of
the institution of any proceedings for that purpose, and will use
all commercially reasonable efforts to prevent the issuance of
any such stop order and to obtain as soon as possible the lifting
thereof, if issued. The Company will advise the Representatives
promptly of the receipt of any comments of the Commission or any
request by the Commission for any amendment of or supplement to
the Registration Statement or the Prospectus or for additional
information and will not at any time file any amendment to the
Registration Statement or supplement to the Prospectus which
shall not previously have been submitted to the Representatives a
reasonable time prior to the proposed filing thereof or to which
the Representatives shall reasonably object in writing or which
is not in compliance with the Securities Act and the Rules and
Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or
supplements to the Registration Statement or the Prospectus which
in the opinion of the Representatives may be necessary to enable
the several Underwriters to continue the distribution of the
Stock and will use all commercially reasonable efforts to cause
the same to become effective as promptly as possible; provided,
however, that the expense of the preparation and delivery of any
prospectus required for use nine (9) months or more after the
effective date of the Registration Statement shall be borne by
the Underwriters required to deliver such prospectus.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to
be delivered under the Securities Act, any event relating to or
affecting the Company occurs as a
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Fifteen
result of which the Prospectus or any other prospectus as then in
effect would include an untrue statement of a material fact, or
omit to state any material fact necessary to make the statements
therein not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Securities Act, the
Company will promptly notify the Representatives thereof and will
prepare an amended or supplemented prospectus which will correct
such statement or omission; and in case any Underwriter is
required to deliver a prospectus relating to the Stock nine (9)
months or more after the effective date of the Registration
Statement, the Company upon the request of the Representatives
and at the expense of such Underwriter will prepare promptly such
prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the
Securities Act; provided, however, that the expense of the
preparation and delivery of any prospectus required for use nine
(9) months or more after the effective date of the Registration
Statement shall be borne by the Underwriters required to deliver
such prospectus.
(d) The Company will deliver to the Representatives, at or before
the Closing Dates, signed copies of the Registration Statement,
as originally filed with the Commission, and all amendments
thereto including all financial statements and exhibits thereto,
and will deliver to the Representatives such number of copies of
the Registration Statement, including such financial statements
but without exhibits, and all amendments thereto, as the
Representatives may reasonably request. The Company will deliver
or mail to or upon the order of the Representatives, from time to
time until the effective date of the Registration Statement, as
many copies of the Preeffective Prospectus as the Representatives
may reasonably request. The Company will deliver or mail to or
upon the order of the Representatives on the date of the initial
public offering, and thereafter from time to time during the
period when delivery of a prospectus relating to the Stock is
required under the Securities Act, as many copies of the
Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request;
provided, however, that the expense of the preparation and
delivery of any prospectus required for use nine (9) months or
more after the effective date of the Registration Statement shall
be borne by the Underwriters required to deliver such prospectus.
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Sixteen
(e) The Company will make generally available to its shareholders
as soon as practicable, but not later than fifteen (15) months
after the effective date of the Registration Statement, an
earning statement which will be in reasonable detail (but which
need not be audited) and which will comply with Section 11(a) of
the Securities Act, covering a period of at least twelve (12)
months beginning after the "effective date" (as defined in Rule
158 under the Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable
the Stock to be registered or qualified for offering and sale by
the Underwriters and by dealers under the securities laws of such
U.S., Canadian and foreign jurisdictions as the Representatives
may designate and at the request of the Representatives will make
such applications and furnish such consents to service of process
or other documents as may be required of it as the issuer of the
Stock for that purpose; provided, however, that the Company shall
not be required to qualify to do business or to file a general
consent (other than that arising out of the offering or sale of
the Stock) to service of process in any such jurisdiction where
it is not now so subject. The Company will, from time to time,
prepare and file such statements and reports as are or may be
required of it as the issuer of the Stock to continue such
qualifications in effect for so long a period as the
Representatives may reasonably request for the distribution of
the Stock; provided, however, that the expense of the preparation
and delivery of any prospectus required for use nine (9) months
or more after the effective date of the Registration Statement
shall be borne by the Underwriters required to deliver such
prospectus. The Company will advise the Representatives promptly
after the Company becomes aware of the suspension of the
qualifications or registration of (or any such exception relating
to) the Common Stock of the Company for offering, sale or trading
in any jurisdiction or of any initiation or threat of any
proceeding for any such purpose, and in the event of the issuance
of any orders suspending such qualifications, registration or
exception, the Company will, with the cooperation of the
Representatives use all commercially reasonable efforts to
obtain the withdrawal thereof.
(g) The Company will furnish to its shareholders annual reports
containing financial statements certified by independent public
accountants in reasonable detail which may be unaudited. During
the period of five (5) years from the date hereof, the Company
will deliver to the
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Seventeen
Representatives and, upon request, to each of the other
Underwriters, as soon as they are available, copies of each
annual report of the Company and each other report furnished by
the Company to its shareholders and will deliver to the
Representatives, (i) as soon as they are available, copies of any
other reports (financial or other) which the Company shall
publish or otherwise make available to any of its shareholders as
such, (ii) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the
Commission or any national securities exchange and (iii) from
time to time such other publicly available information concerning
the Company as you may request.
(h) The Company will use all commercially reasonable efforts to list
the Stock, subject to official notice of issuance, on the Nasdaq
National Market concurrently with the effectiveness of the
Registration Statement.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
(j) The Company will not offer, sell, contract to sell or grant an
option to purchase any shares of Common Stock or securities
convertible into or exercisable or exchangeable for Common Stock
(including, without limitation, Common Stock of the Company which
may be deemed to be beneficially owned by the Company in
accordance with the Rules and Regulations) during the 180 days
following the date on which the price of the Common Stock to be
purchased by the Underwriters is set, other than [(I) the
Company's sale of Common Stock hereunder (ii) to employees,
directors, consultants and advisers of the Company, pursuant to
stock option plans, employee stock purchase plans or in
connection with other employee compensation arrangements
currently in effect, (iii) in connection with acquisitions,
research and development agreements or other agreements, in each
case with the written consent of Cowen] and (iv) the Company's
issuance of Common Stock upon the exercise of warrants and stock
options which are presently outstanding and described in the
Prospectus.
(k) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of Rules and Regulations, the Company will
furnish a copy thereof to the counsel for the Underwriters and
receive and consider its
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Eighteen
comments thereon, and will deliver promptly to the
Representatives a signed copy of each report on Form SR filed by
it with the Commission.
(l) The Company will apply the net proceeds from the sale of the
Stock as set forth in the description under "Use of Proceeds" in
the Prospectus.
(m) The Company will supply you with copies of all correspondence
to and from, and all documents issued to and by, the Commission
in connection with the registration of the Stock under the
Securities Act.
(n) Prior to each of the Closing Dates, the Company will issue no
press release or other communications directly or indirectly and
hold no press conference with respect to the Company, the
financial condition, results of operations, business, prospects,
assets or liabilities of the Company, or the offering of the
Stock, without your prior written consent.
(o) During the period of five (5) years hereafter, the Company will
furnish to the Representatives, and upon request of the
Representatives, to each of the Underwriters: (i) as soon as
practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of
income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on
Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or
other report filed by the Company with the Commission, or the
NASD or any securities exchange; and (iii) as soon as available,
copies of any report or communication of the Company mailed
generally to holders of its Common Stock.
5. Payment of Expenses. (a) The Company will pay (directly or by
-------------------
reimbursement) all costs, fees and expenses incurred in connection with
or incident to the performance of its obligations under this Agreement
and in connection with the transactions contemplated hereby, including
but not limited to: (i) all expenses and taxes incident to the issuance
and delivery of the Stock to the Representatives; (ii) all expenses
incident to the registration of the Stock under the Securities Act;
(iii) the costs of preparing stock certificates (including printing and
engraving costs); (iv) all fees and expenses of the registrar and
transfer agent of the Stock; (v) all necessary issue, transfer and
other stamp taxes in connection with the
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Nineteen
issuance and sale of the Stock to the Underwriters; (vi) fees and
expenses of the Company's counsel and the Company's independent
accountants; (vii) all costs and expenses incurred in connection with
the preparation, printing, filing, shipping and distribution of the
Registration Statement, each Preeffective Prospectus and the Prospectus
(including all exhibits and financial statements) and all amendments
and supplements provided for herein, the "Agreement Among Underwriters"
between the Representatives and the Underwriters, the Master Selected
Dealers' Agreement, the Underwriters' Questionnaire and the Blue Sky
memoranda (including related fees and expenses of counsel to the
Underwriters) and this Agreement; (viii) all filing fees, reasonable
attorneys' fees and expenses incurred by the Company or the
Underwriters in connection with exemptions from the qualifying or
registering (or obtaining qualification or registration of) all or any
part of the Stock for offer and sale under the Blue Sky or other
securities laws of such U.S. states or territories, Canadian provinces
and other jurisdictions as the Representatives may designate; (ix)
reasonable fees and expenses of counsel to the Underwriters in
connection with filings made with the NASD; and (x) all other costs and
expenses incident to the performance of its obligations hereunder which
are not otherwise specifically provided for in this Section.
(b) In addition to its other obligations under Section 6(a) hereof,
the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 6(a), it will reimburse each
Underwriter on a quarterly basis for all reasonable legal or
other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the
Company's obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be
held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so
held to have been improper, each Underwriter shall promptly
return it to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Citibank N.A., New York,
New York (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter in a timely
manner as provided below shall bear interest at the Prime Rate
from the due date for such reimbursement. This expense
reimbursement agreement will be in addition to any other
liability which
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty
the Company may otherwise have. The request for reimbursement
will be sent to the Company.
(c) In addition to its other obligations under Section 6(b) hereof,
each Underwriter severally agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry
or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in
Section 6(b) hereof which relates to information furnished to the
Company pursuant to Section 2(b) hereof, it will reimburse the
Company (and, to the extent applicable, each officer, director or
controlling person on a quarterly basis for all reasonable legal
or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the
extent applicable, each officer, director or controlling person)
for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, the Company (and, to
the extent applicable, each officer, director or controlling
person) shall promptly return it to the Underwriters together
with interest, compounded daily, determined on the basis of the
Prime Rate. Any such interim reimbursement payments which are not
made to the Company within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the date
of such request. This indemnity agreement will be in addition to
any liability which such Underwriter may otherwise have.
(d) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in paragraph
(a) and/or (b) of this Section 5, including the amounts of any
requested reimbursement payments and the method of determining
such amounts, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the
Code of Arbitration Procedure of the NASD. Any such arbitration
must be commenced by service of a written demand for arbitration
or written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-One
party responding to said demand or notice is authorized to do so.
Such an arbitration would be limited to the operation of the
interim reimbursement provisions contained in paragraph (a)
and/or (b) of this Section 5 and would not resolve the ultimate
propriety or enforceability of the obligation to reimburse
expenses which is created by the provisions of Section 6.
6. Indemnification and Contribution. (a) The Company agrees to
--------------------------------
indemnify and hold harmless each Underwriter and each person, if any,
who controls such Underwriter within the meaning of the Securities Act
and the respective officers, directors, partners, employees,
representatives and agents of such Underwriter (collectively, the
"Underwriter Indemnified Parties" and, each, an "Underwriter
Indemnified Party"), against any losses, claims, damages, liabilities
or expenses (including the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred in
connection therewith), joint or several, which may be based upon the
Securities Act, or any other statute or at common law, (i) on the
ground or alleged ground that any Preeffective Prospectus, the
Registration Statement or the Prospectus (or any Preeffective
Prospectus, the Registration Statement or the Prospectus as from time
to time amended or supplemented) includes or allegedly includes an
untrue statement of a material fact or omits to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, unless such statement or omission
was made in reliance upon, and in conformity with, written information
furnished to the Company by any Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof, or
(ii) [for any act or failure to act or any alleged act or failure to
act by any Underwriter in connection with, or relating in any manner
to, the Stock or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage,
liability or expense arising out of or based upon matters covered by
clause (i) above (provided that the Company shall not be liable under
this clause (ii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim,
damage or liability or expense resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct]. The Company will
be entitled to participate at its own expense in the defense or, if it
so elects, to assume the defense of any suit brought to enforce any
such liability, but if the Company elects to assume the defense, such
defense shall be conducted by counsel chosen by it and reasonably
acceptable to the Underwriters. In the event the Company elects to
assume the defense of any such suit and retain such counsel, any
Underwriter Indemnified Parties, defendant or defendants in the suit,
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-Two
may retain additional counsel but shall bear the fees and expenses of
such counsel unless (i) the Company shall have specifically authorized
the retaining of such counsel or (ii) the parties to such suit include
any such Underwriter Indemnified Parties, and the Company and such
Underwriter Indemnified Parties at law or in equity have been advised
by counsel to the Underwriters that a conflict of interest preventing
counsel selected by the Company from representing the Underwriters, in
which case the Company shall not be entitled to assume the defense of
such suit notwithstanding its obligation to bear the fees and expenses
of such counsel. This indemnity agreement is not exclusive and will be
in addition to any liability which the Company might otherwise have and
shall not limit any rights or remedies which may otherwise be available
at law or in equity to each Underwriter Indemnified Party.
(b) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement and each
person, if any, who controls the Company within the meaning of
the Securities Act (collectively, the "Company Indemnified
Parties") against any losses, claims, damages, liabilities or
expenses (including, unless the Underwriter or Underwriters elect
to assume the defense, the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred
in connection therewith), joint or several, which arise out of or
are based in whole or in part upon the Securities Act, the
Exchange Act or any other federal, state, local or foreign
statute or regulation, or at common law, on the ground or alleged
ground that any Preeffective Prospectus, the Registration
Statement or the Prospectus (or any Preeffective Prospectus, the
Registration Statement or the Prospectus, as from time to time
amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein not misleading, but only insofar as any such statement or
omission was made in reliance upon, and in conformity with,
written information furnished to the Company by such Underwriter,
directly or through the Representatives, specifically for use in
the preparation thereof. For all purposes of this Agreement, the
amounts of the selling concession and reallowance set forth in
the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the
Representative specifically for inclusion in the preliminary
prospectus, the Registration Statement or the Prospectus. In no
case, however, is such Underwriter to be liable with
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-Three
respect to any claims made against any Company Indemnified Party
against whom the action is brought unless such Company
Indemnified Party shall have notified such Underwriter in writing
within a reasonable time after the summons or other first legal
process giving information of the nature of the claim shall have
been served upon the Company Indemnified Party, but failure to
notify such Underwriter of such claim shall not relieve it from
any liability which it may have to any Company Indemnified Party
otherwise than on account of its indemnity agreement contained in
this paragraph. Such Underwriter shall be entitled to participate
at its own expense in the defense or, if it so elects, to assume
the defense of any suit brought to enforce any such liability,
but, if such Underwriter elects to assume the defense, such
defense shall be conducted by counsel chosen by it. In the event
that any Underwriter elects to assume the defense of any such
suit and retain such counsel, the Company Indemnified Parties and
any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees
and expenses of any additional counsel retained by them,
respectively. The Underwriter against whom indemnity may be
sought shall not be liable to indemnify any person for any
settlement of any such claim effected without such Underwriter's
consent. This indemnity agreement is not exclusive and will be in
addition to any liability which such Underwriter might otherwise
have and shall not limit any rights or remedies which may
otherwise be available at law or in equity to any Company
Indemnified Party.
(c) If the indemnification provided for in this Section 6 is
applicable by its terms, but unavailable or insufficient to hold
harmless an indemnified party under subsection (a) or (b) above
in respect of any losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses (or actions in respect
thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Stock. If,
however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also
the relative fault of the Company
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-Four
on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and
the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied
by the Company or the Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and
the Underwriters agree that it would not be just and equitable
if contribution were determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or
by any other method of allocation which does not take account of
the equitable considerations referred to above. The amount paid
or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or expenses (or actions in respect
thereof) referred to above shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party
in connection with investigating, defending, settling or
compromising any such claim. Notwithstanding the provisions of
this subsection (c), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total
price at which the shares of the Stock underwritten by it and
distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The Underwriters'
obligations to contribute are several in proportion to their
respective underwriting obligations and not joint. No person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation.
7. Survival of Indemnities, Representations, Warranties, etc. The
----------------------------------------------------------
respective indemnities, covenants, agreements, representations,
warranties and other
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-Five
statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, the Company or
any of its officers or directors or any controlling person, and shall
survive delivery of and payment for the Stock.
8. Conditions of Underwriters' Obligations. Except as otherwise stated
---------------------------------------
herein, the respective obligations of the several Underwriters
hereunder shall be subject to the accuracy, at and as of the date
hereof and at and as of each of the Closing Dates, of the
representations and warranties made herein by the Company, to
compliance at and as of each of the Closing Dates by the Company with
its covenants and agreements herein contained and other provisions
hereof to be satisfied at or prior to each of the Closing Dates, and to
the following additional conditions:
(a) The Registration Statement shall have become effective and no
stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been
initiated or, to the knowledge of the Company or the
Representatives, shall be threatened by the Commission, and any
request for additional information on the part of the Commission
(to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable
satisfaction of the Commission. Any filings of the Prospectus, or
any supplement thereto, required pursuant to Rule 424(b) or Rule
434 of the Rules and Regulations, shall have been made in the
manner and within the time period required by Rule 424(b) and
Rule 434 of the Rules and Regulations, as the case may be.
(b) The Representatives shall have been satisfied that there shall
not have occurred any material change prior to each of the
Closing Dates in the condition (financial or otherwise),
properties, business, management, prospects, net worth or results
of operations of the Company, or any change in the capital stock,
short-term or long-term debt of the Company, such that (i) the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains an untrue statement of fact which,
in the reasonable opinion of the Representatives, is material, or
omits to state a fact which, in the reasonable opinion of the
Representatives, is required to be stated therein or is necessary
to make the statements therein not misleading, or (ii) it is
unpracticable in the
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-Six
reasonable judgment of the Representatives to proceed with the
public offering or purchase the Stock as contemplated hereby.
(c) The Representatives shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company
which is material and adverse to the Company or which affects or
may affect the Company's ability to perform its obligations under
this Agreement shall have been instituted or threatened and there
shall have occurred no material adverse development in any
existing such action, suit or proceeding.
(d) At the time of execution of this Agreement, the Representatives
shall have received from KPMG Peat Marwick llp, independent
certified public accountants, a letter, dated the date hereof, in
form and substance satisfactory to the Underwriters.
(e) The Representatives shall have received from KPMG Peat Marwick
llp, independent certified public accountants, letters, dated
each of the Closing Dates, to the effect that such accountants
reaffirm, as of each of the Closing Dates, and as though made on
each of the Closing Dates, the statements made in the letter
furnished by such accountants pursuant to paragraph (d) of this
Section 8.
(f) The Representatives shall have received from Morgan, Lewis &
Bockius llp, counsel for the Company, and Dunn, Dorfman, Herrell
& Skillman, patent counsel for the Company, opinions, dated each
of the Closing Dates, to the effect set forth in Exhibit I and
Exhibit II, respectively, hereto.
(g) The Representatives shall have received from Morrison & Foerster
llp, counsel for the Underwriters, opinions dated each of the
Closing Dates with respect to the incorporation of the Company,
the validity of the Stock, the Registration Statement and the
Prospectus and such other related matters as it may reasonably
request, and the Company shall have furnished to such counsel
such documents as they may request for the purpose of enabling
them to pass upon such matters.
(h) The Representatives shall have received certificates, dated
each of the Closing Dates, of the chief executive officer or the
President and the chief financial or accounting officer of the
Company to the effect that:
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-Seven
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or
contemplated under the Securities Act;
(ii) Neither any Preeffective Prospectus, as of its date, nor
the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, as of the time when the
Registration Statement became effective and at all times
subsequent thereto up to the delivery of such
certificate, included any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements
therein not misleading;
(iii) The representations and warranties of the Company in this
Agreement are true and correct in all material respects
at and as of each of the Closing Dates, and the Company
has complied in all material respects with all the
covenants and agreements and performed or satisfied all
the conditions on its part to be performed or satisfied
at or prior to the Closing Dates; and
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus,
and except as disclosed in or contemplated by the
Prospectus, (i) there has not been any material adverse
change or a development involving a material adverse
change in the condition (financial or otherwise),
properties, business, management, prospects, net worth or
results of operations of the Company and the Company has
not entered into any material transactions not in the
ordinary course of business; (ii) the business and
operations conducted by the Company and its subsidiaries
have not sustained a loss by strike, fire, flood,
accident or other calamity (whether or not insured) of
such a character as to interfere materially with the
conduct of the business and operations of the Company;
(iii) no legal or governmental action, suit or proceeding
is pending or threatened against the Company which is
material to the Company, whether or not arising from
transactions in the ordinary course of business, or which
may materially and adversely affect the transactions
contemplated by this Agreement; (iv) the Company has not
incurred any material liability or obligation, direct,
contingent or indirect, made any change in its capital
stock (except pursuant to its stock plans),
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Twenty-Eight
made any material change in its short-term or funded
debt or repurchased or otherwise acquired any of the
Company's capital stock; and (v) the Company has not
declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable
to stockholders of record on a date prior to the Closing
Date.
(i) The Company shall have furnished to the Representatives such
additional certificates as the Representatives may have
reasonably requested as to the accuracy, at and as of each of the
Closing Dates, of the representations and warranties made herein
by it and as to compliance at and as of each of the Closing Dates
by it with its covenants and agreements herein contained and
other provisions hereof to be satisfied at or prior to each of
the Closing Dates, and as to satisfaction of the other conditions
to the obligations of the Underwriters hereunder.
(j) Cowen shall have received the written agreements, substantially
in the form of Exhibit III hereto, of the officers, directors and
all other holders of Common Stock that each will not offer, sell,
assign, transfer, encumber, contract to sell, grant an option to
purchase or otherwise dispose of, other than by operation of law,
any shares of Common Stock or rights to acquire shares of Common
Stock (including, without limitation, Common Stock which may be
deemed to be beneficially owned by such officer, director or
holder in accordance with the Rules and Regulations) during the
180 days following the date of the final Prospectus (except (i)
pursuant to employee benefit or stock option plans (ii) or to a
transferee who agrees to be similarly bound).
(k) The Nasdaq National Market shall have approved the Stock for
listing, subject only to official notice of issuance.
(l) All opinions, certificates, letters and other documents will
be in compliance with the provisions hereunder only if they are
satisfactory in form and substance to the Representatives. The
Company will furnish to the Representatives conformed copies of
such opinions, certificates, letters and other documents as the
Representatives shall reasonably request. If any of the
conditions hereinabove provided for in this Section shall not
have been satisfied when and as required by this Agreement, this
Agreement may be terminated by the Representatives by notifying
the Company of such termination in writing or by telegram at or
prior to each
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November____, 1996
Page Twenty-Nine
of the Closing Dates, but Cowen, on behalf of the
Representatives, shall be entitled to waive any of such
conditions.
9. Conditions of Company's Obligations. The obligations of the Company
-----------------------------------
to deliver the Stock shall be subject to the conditions that the
Registration Statement shall have become effective and no stop order
suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or the Representatives, shall be threatened
by the Commission.
10. Effective Date. This Agreement shall become effective immediately
--------------
as to Sections 5, 6, 7,11, 12, 13, 15, 16, 17, 18 and 19 and, as to
all other provisions, at 11:00 a.m. New York City time on the first
full business day following the effectiveness of the Registration
Statement or at such earlier time after the Registration Statement
becomes effective as the Representatives may determine by notice to
the Company or by release of any of the Stock for sale to the public.
For the purposes of this Section 10, the Stock shall be deemed to have
been so released upon the release of any press release in respect of
commencement of the Offering relating to the Stock or upon the release
by you of telegrams (i) advising Underwriters that the shares of Stock
are released for public offering or (ii) offering the Stock for sale
to securities dealers, whichever may occur first.
11. Termination. (a) This Agreement (except for the provisions of
-----------
Section 5) may be terminated by the Company at any time before it
becomes effective in accordance with Section 10 by notice to the
Representatives and may be terminated by the Representatives at any
time before it becomes effective in accordance with Section 10 by
notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement, there
shall be no liability of any party to this Agreement to any other
party, other than as provided in Sections 5, 6 and 12 and other than
as provided in Section 13 as to the liability of defaulting
Underwriters.
(b) This Agreement may be terminated after it becomes effective by
the Representatives by notice to the Company if at or prior to
the First Closing Date (i) trading in securities on the New York
Stock Exchange shall have been suspended or minimum or maximum
prices shall have been established on such exchange, or a banking
moratorium shall have been declared by New York or United States
authorities; (ii) trading of any securities of the Company shall
have been suspended in any market;
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November __, 1996
Page Thirty
(iii) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power or of
any other insurrection or armed conflict involving the United
States or (B) any change in financial markets or any calamity or
crisis which, in the judgment of the Representatives, makes it
impractical or inadvisable to offer or sell the Stock on the
terms contemplated by the Prospectus; (iv) there shall have been
any development or prospective development involving particularly
the business or properties or securities of the Company or the
transactions contemplated by this Agreement, which, in the
judgment of the Representatives, makes it impracticable or
inadvisable to offer or deliver the Stock on the terms
contemplated by the Prospectus; (v) there shall be any litigation
or proceeding, pending or threatened, against the Company or
involving its property, which, in the judgment of the
Representatives, makes it impracticable or inadvisable to offer
or deliver the Stock on the terms contemplated by the Prospectus;
or (vi) there shall have occurred any of the events specified in
the immediately preceding clauses (i) - (v) together with any
other such event that makes it, in the judgment of the
Representatives, impractical or inadvisable to offer or deliver
the Stock on the terms contemplated by the Prospectus.
12. Reimbursement of Underwriters. Notwithstanding any other provisions
-----------------------------
hereof, if this Agreement shall not become effective by reason of any
election of the Company pursuant to Section 11(a) or shall be
terminated by the Representatives under Section 8 or Section 11(b),
the Company will bear and pay the expenses specified in Section 5
hereof and, in addition to its obligations pursuant to Section 6
hereof, the Company will reimburse the reasonable out-of-pocket
expenses of the several Underwriters (including reasonable fees and
disbursements of counsel for the Underwriters) incurred in connection
with this Agreement and the proposed purchase of the Stock, and
promptly upon demand the Company will pay such amounts to you as
Representatives.
13. Substitution of Underwriters. (a) If any Underwriter or
----------------------------
Underwriters shall default in its or their obligations to purchase
shares of Stock hereunder and the aggregate number of shares which
such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed ten percent (10%) of the total number of
shares underwritten, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to
purchase the shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase. If any Underwriter or Underwriters
shall so default and the aggregate
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November ___, 1996
Page Thirty-One
number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares
underwritten and arrangements satisfactory to the Representatives and
the Company for the purchase of such shares by other persons are not
made within forty-eight (48) hours after such default, this Agreement
shall terminate.
(b) If the remaining Underwriters or substituted Underwriters are
required hereby or agree to take up all or part of the shares of
Stock of a defaulting Underwriter or Underwriters as provided in
this Section 13, (i) the Company shall have the right to postpone
the Closing Dates for a period of not more than five (5) full
business days in order that the Company may effect whatever
changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the
respective numbers of shares to be purchased by the remaining
Underwriters or substituted Underwriters shall be taken as the
basis of their underwriting obligation for all purposes of this
Agreement.
(c) Nothing herein contained shall relieve any defaulting
Underwriter of its liability to the Company or the other
Underwriters for damages
occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 13 shall be without liability
on the part of any non-defaulting Underwriter or the Company,
except for expenses to be paid or reimbursed pursuant to Section
5 and except for the provisions of Section 6.
14. Notices. All communications hereunder shall be in writing and, if
-------
sent to the Underwriters shall be mailed, delivered or telegraphed and
confirmed to you, as their Representatives, c/o Cowen & Company at
Financial Square, New York, NY 10005, except that notices given to an
Underwriter pursuant to Section 6 hereof shall be sent to such
Underwriter at the address furnished by the Representatives or, if
sent to the Company, shall be mailed, delivered or telegraphed and
confirmed to ViroPharma Incorporated, 76 Great Valley Parkway,
Malvern, PA 19355, attention: President.
15. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the several Underwriters, the Company and their
respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November ___, 1996
Page Thirty-Two
shall be construed to give any person other than the persons mentioned
in the preceding sentence any legal or equitable right, remedy or
claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof
being intended to be and being for the sole and exclusive benefit of
such persons and for the benefit of no other person; except that the
obligations of the Company under Section 6 shall also be for the
benefit of the person or persons, if any, who control any Underwriter
or Underwriters within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, and the indemnities of the several
Underwriters under Section 6 shall also be for the benefit of each
director of the Company, each of its officers who has signed the
Registration Statement and the person or persons, if any, who control
the Company within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act.
16. Applicable Law. This Agreement shall be governed by and construed
--------------
in accordance with the laws of the State of New York.
17. Authority of the Representatives. In connection with this
--------------------------------
Agreement, you will act for and on behalf of the several Underwriters,
and any action taken under this Agreement by Cowen, as Representative,
will be binding on all the Underwriters.
18. Partial Unenforceability. The invalidity or unenforceability of any
------------------------
Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this
Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such
minor changes) as are necessary to make it valid and enforceable.
19. General. (a) This Agreement constitutes the entire agreement of
-------
the parties to this Agreement and supersedes all prior written or oral
and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
(b) In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The Section
headings in this Agreement are for the convenience of the parties
only and will not affect the construction or interpretation of
this Agreement. This Agreement may be amended or modified, and
the observance of any term of this
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November ___, 1996
Page Thirty-Three
Agreement may be waived, only by a writing signed by the Company
and the Representatives.
20. Counterparts. This Agreement may be signed in two (2) or more
------------
counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
<PAGE>
Cowen & Company
J.P. Morgan Securities Inc.
November ___, 1996
Page Thirty-Four
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
VIROPHARMA INCORPORATED
By:
-------------------------------
Claude H. Nash
President
Accepted and delivered in New York
as of the date first above written.
COWEN & COMPANY
J.P. MORGAN SECURITIES INC.
Acting on their own behalf
and as Representatives of the several
Underwriters referred to in the
foregoing Agreement.
By: COWEN & COMPANY
By: Cowen Incorporated,
its general partner
By:
---------------------------------
John P. Dunphy
Managing Director - Syndicate
By: J.P. MORGAN SECURITIES INC.
By:
---------------------------------
Name:
Title:
<PAGE>
AMENDMENT TO EMPLOYEE STOCK PURCHASE AGREEMENT
Amendment to Employee Stock Purchase Agreement dated as of December 29,
1994, among VIROPHARMA, INC., a Delaware corporation (the "Corporation"), and
Mr. Claude Nash (the "Purchaser"), dated as of June 15, 1995 (this "Amendment").
WITNESSETH:
-----------
WHEREAS, on December 29, 1994, the Corporation and the Purchaser entered
into an Employee Stock Purchase Agreement (the "Purchase Agreement"), whereby,
among other things, the Corporation issued and sold to the Purchaser, and the
Purchaser purchased from the Corporation, 650,000 shares of the Common Stock,
par value $0.001 per share, of the Corporation (the "Shares"), subject to the
terms and conditions thereof, including vesting in accordance therewith, rights
of repurchase in the event of the termination of Purchaser, and a right of first
refusal of the Corporation, in the event of a "transfer" (as defined in the
Purchase Agreement") by the Purchaser; and
WHEREAS, the Corporation currently intends to issue and sell to certain
institutional investors shares of Series B Convertible Preferred Stock, par
value $0.001 per share, of the Corporation (the "Series B Shares"), pursuant to
the terms and subject to the conditions of that certain Series B Convertible
Preferred Stock Purchase Agreement (the "Series B Agreement"), dated as of even
date herewith, among the Corporation and each of the "Purchasers" whose names
are set forth on Schedule A thereto; and
WHEREAS, it is a condition precedent to the Purchasers obligations to
acquire the Series B Shares at the "First Closing" (as defined in the Series B
Agreement) that, among other things, the Purchaser and the Corporation enter
into this Amendment for purposes of, among other things, terminating the
Corporation's right to repurchase a Purchaser's shares after such shares shall
vest in accordance with the terms of the Purchase Agreement, and providing for
the automatic vesting of such Shares upon the occurrence of certain events;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. Amendment of Repurchase Right. Section V of the Purchase Agreement is
-----------------------------
hereby deleted in its entirety, and substituted therefor shall be the following
Section V:
5.1 Grant. The Corporation is hereby granted the right (the
-----
"Repurchase Right"), exercisable at any time during the sixty (60) day
period following the date the Purchaser ceases for any reason to be a
Service Provider (as defined below) to the Corporation (or its assignees)
to repurchase at the Purchase Price all or (at the discretion of the
Corporation and with the consent of the Purchaser) any portion of the
Purchased Shares in which the Purchaser has not acquired a vested interest
in accordance with the vesting provisions of Section 5.3 (such shares to be
hereinafter called the "Unvested Shares"). The Corporation
<PAGE>
shall not have any Repurchase Right with respect to any portion of the Purchased
Shares in which the Purchaser has acquired a vested interest in accordance with
the vesting provisions of Section 5.3 (the "Vested Shares"). For purposes of
this Agreement, the Purchaser shall be deemed to be a "Service Provider" to the
Corporation for so long as the Purchaser renders periodic services to the
Corporation or one or more of its parent or subsidiary corporations, whether as
an employee, non-employee member of the board of directors, or an independent,
non-employee consultant.
5.2 Exercise of the Repurchase Right. The Repurchase Right shall be
---------------------------------
exercisable by written notice delivered to the Owner of the Purchased Shares at
any time during the sixty (60) day period specified in Section 5.1. The notice
shall indicate the number of Unvested Shares to be repurchased and the date on
which the repurchase is to be effected, such date to be not more than thirty
(30) days after the date of notice. To the extent one or more certificates
representing Purchased Shares may have been previously delivered out of escrow
to the Owner, then the Owner shall, prior to the close of business on the date
specified for the repurchase, deliver to the Secretary of the Corporation the
certificates representing the Purchased Shares to be repurchased, each
certificate to be properly endorsed for transfer. The Corporation (or its
assignees) shall, concurrently with the receipt of such stock certificates
(either from escrow in accordance with Section 7.3 or from Owner as herein
provided), pay to Owner in cash or cash equivalents (including the cancellation
of any purchase-money indebtedness), an amount equal to the Purchase Price
previously paid for the Unvested Shares which are to be purchased.
5.3 Termination of the Repurchase Right.
-----------------------------------
(a) The Repurchase Right shall terminate with respect to any Purchased
Shares for which it is not timely exercised under Section 5.2. In addition, the
Repurchase Right provided in Section 5.1 shall terminate, and cease to be
exercisable, with respect to any and all Purchased Shares in which the Purchaser
vests in accordance with the schedule below. Accordingly, provided the Purchaser
continues to be a Service Provider to the Corporation, the Purchaser shall
acquire a vested interest in, and the Repurchase Right provided in Section 5.1
shall lapse with respect to, the Purchased Shares in accordance with the
following provisions:
(i) The Purchaser shall not acquire any vested interest in, nor
shall the Repurchase Right provided in Section 5.1 lapse with respect to, any
Purchased Shares during the initial twelve (12) month period measured from and
after the date hereof (the "Vesting Measurement Date").
(ii) Upon the expiration of the initial twelve (12) month period
measured from the Vesting Measurement Date, the Purchaser shall acquire a vested
interest in, and the Repurchase Right provided in Section 5.1 shall lapse with
respect to, that number of Purchased Shares equal to twenty-five percent (25%)
of the Purchased Shares.
-2-
<PAGE>
(iii) From and after twelve (12) months following the expiration
of the initial twelve (12) month period measured from the Vesting Measurement
Date, the Purchaser shall acquire a vested interest in, and the Repurchase Right
provided in Section 5.1 shall lapse with respect to, the remaining Purchased
Shares in a series of successive annual installments each equal to twenty-five
percent (25%) of the number of Purchased Shares issued by the Corporation to the
Purchaser as of the date hereof.
(b) All Purchased Shares as to which the Repurchase Right provided in
Section 5.1 lapses shall, however, continue to be subject to (i) the First
Refusal Right of the Corporation and its assignees under Article VI hereof and
(ii) the market stand-off provisions of Section 3.3 above.
5.4 Additional Shares or Substituted Securities. In the event of any
-------------------------------------------
stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration, any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which is by reason
of any such transaction distributed with respect to the Purchased Shares shall
be immediately subject to the Repurchase Right, but only to the extent the
Purchased Shares are at the time Unvested Shares. Appropriate adjustments to
reflect the distribution of such securities or property shall be made to the
number of Purchased Shares hereunder and to the price per share to be paid upon
the exercise of the Repurchase Right in order to reflect the effect of any such
transaction upon the Corporation's capital structure; provided, however, that
-------- -------
the aggregate Purchase Price shall remain the same.
5.5 Corporate Transaction.
---------------------
(a) In the event of any of the following transactions:
(i) a merger or acquisition in which the Corporation is not
the surviving entity, except for a transaction the principal purpose of which is
to change the State in which the Corporation is incorporated,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation, or
(iii) any reverse merger in which the Corporation is the
surviving entity but in which at least fifty percent (50%) or more of the
Corporation's outstanding voting stock is transferred to holders different from
those who held the stock immediately prior to such merger, and in each case, the
valuation of the Company exceeds $50,000,000 (in each case, provided such
valuation is exceeded, a "Corporate Transaction") then the Repurchase Right
shall lapse in its entirety and the Purchaser shall acquire a vested interest in
all such Purchased Shares upon the consummation of such Corporate Transaction.
Otherwise, the Purchased Shares shall remain subject to the Repurchase Right
pursuant to an
-3-
<PAGE>
assignment by the Corporation to the successor corporation (or its parent
company) in connection with such Corporate Transaction, in which case the
Purchased Shares shall vest in accordance with Section 5.3 hereof.
(b) To the extent the Repurchase Right remains in effect
following a corporate transaction which is not deemed a "Corporate
Transaction" as defined in Section 5.5(a) hereof, the Repurchase Right
shall apply to the new capital stock or other property received in exchange
for the Purchased Shares in consummation of the Corporate Transaction, but
only to the extent the Purchased Shares are at the time covered by such
right. Appropriate adjustments shall be made to the price per share payable
upon exercise of the Repurchase Right to reflect the effect of the
Corporate Transaction upon the Corporation's capital structure; provided,
--------
however, that the aggregate Purchase Price shall remain the same.
-------
5.6 Legend. In addition to the legends required by Section 2.4
------
above, all certificates representing Purchased Shares subject to the
Corporation's Repurchase Right shall be endorsed with the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN
COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER OF THE SHARES (OR THE
PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS CERTAIN
REPURCHASE RIGHTS TO THE COMPANY UPON TERMINATION OF THE REGISTERED
HOLDER'S SERVICES WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL
UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER
HEREOF WITHOUT CHARGE."
2. Amendment of Right of First Refusal. Section VI of the Purchase
-----------------------------------
Agreement is hereby deleted in its entirety and substituted therefor shall be
the following:
6.1 Grant. The Corporation is hereby granted the right of first
-----
refusal (the "First Refusal Right"), exercisable in connection with any
proposed sale or other transfer of all or any part of the Purchased Shares
which have become Vested Shares in accordance with Section 5.3 hereof. For
purposes of this Article VI, the term "transfer" shall include any
assignment, pledge, encumbrance or other disposition for value of the
Purchased Shares intended to be made by the Owner, but shall not include
any of the permitted transfers under Section 4.1 above.
-4-
<PAGE>
6.2 Notice of Intended Disposition. In the event the Owner desires to
------------------------------
accept a bona fide third-party offer for any or all of the Purchased Shares (the
shares subject to such offer to be hereinafter called, solely for the purposes
of this Article VI, the "Target Shares"), Owner shall promptly (i) deliver to
the Secretary of the Corporation written notice (the "Disposition Notice") of
the offer and the basic terms and conditions thereof, including the proposed
purchase price thereof, and (ii) provide satisfactory proof that the disposition
of the Target Shares to the third party offeror would not be in contravention of
the provision set forth in Articles II and III of this Agreement.
6.3 Exercise Right. The Corporation (or its assignees) shall, for a
--------------
period of thirty (30) days following receipt of the Disposition Notice, have the
right to repurchase any or all of the Target Shares specified in the Disposition
Notice upon substantially the same terms and conditions specified therein. Such
right shall be exercisable by written notice (the "Exercise Notice") delivered
to Owner prior to the expiration of the thirty (30) day exercise period. If
such right is exercised with respect to all the Target Shares specified in the
Disposition Notice, then the Corporation (or its assignees) shall effect the
repurchase of the Target Shares, including payment of the purchase price, not
more than ten (10) business days after delivery of the Exercise Notice; and at
such time Owner shall deliver to the Corporation the certificates representing
the Target Shares to be repurchased, each certificate to be properly endorsed
for transfer. To the extent any of the Target Shares are at the time held in
escrow under Article VII hereof, the certificates for such shares shall
automatically be released from escrow and surrendered to the Corporation for
cancellation. The Target Shares so purchased shall thereupon be cancelled and
cease to be issued and outstanding shares of the Corporation's Common Stock.
Should the purchase price specified in the Disposition Notice be payable in
property other than cash or evidences of indebtedness, the Corporation (or its
assignees) shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If the Owner and the Corporation
(or its assignees) cannot agree on such cash value within ten (10) days after
the Corporation's receipt of the Disposition Notice, the valuation shall be made
by an appraiser of recognized standing selected by the Owner and the Corporation
(or its assignees), or, if they cannot agree on an appraiser within twenty (20)
days after the Corporation's receipt of the Disposition Notice, each shall
select an appraiser of recognized standing and the two appraisers shall
designate a third appraiser of recognized standing, whose appraisal shall be
determinative of such value. The cost of such appraisal shall be shared equally
by the Owner and the Corporation. The Closing shall then be held on the latter
of (i) the fifth (5th) business day following delivery of the Exercise Notice or
(ii) the fifteenth (15th) day after such cash valuation shall have been made.
6.4 Non-Exercise of Right. In the event the Exercise Notice is not given
---------------------
to the Owner within thirty (30) days following the date of the Corporation's
receipt of the Disposition Notice, the Owner shall have a period of thirty (30)
days thereafter, in which to sell or otherwise dispose of the Target Shares upon
terms and conditions (including the
-5-
<PAGE>
purchase price) no more favorable to third-party purchaser than those specified
in the Disposition Notice; provided, however, that any such sale or disposition
--------- -------
shall not be effected in contravention of the provisions of Article 11 of this
Agreement. To the extent any of the Target Shares are at the time held in
escrow pursuant to Article VII below, the certificates for such shares shall
automatically be released from escrow and surrendered to the Owner. The third
party purchaser shall acquire the Target Shares free and clear of all the terms
and provisions of this Agreement (including the Corporation's Repurchase Right
under Article V and the Corporation's (or its assignees') First Refusal Right
hereunder). In the event the Owner does not sell or otherwise dispose of all or
any portion of the Target Shares within the specified thirty (30) day period,
the Corporation's (or its assignees') First Refusal Right shall continue to be
applicable to any subsequent disposition of the Target Shares by the Owner until
such right lapses in accordance with Section 6.7 below.
6.5 Partial Exercise of Right. In the event the Corporation (or its
-------------------------
assignees) makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
the Owner shall have the option, exercisable by written notice to the
Corporation delivered within twenty (20) days after the date of the Disposition
Notice, to effect the sale of the Target Shares pursuant to one of the following
alternatives:
(a) Sale or other disposition of all the Target Shares to a third-
party purchaser in compliance with the requirements of Section 6.4, as if the
Corporation did not exercise the First Refusal Right hereunder; or
(b) sale to the Corporation (or its assignees) of the portion of the
Target Shares which the Corporation (or its assignees) has or have elected to
purchase, such sale to be effected in substantial conformity with the provisions
of Section 6.3.
Failure of Owner to deliver timely notification to the Corporation under
this Section 6.5 shall be deemed to be an election by Owner to sell the Target
Shares pursuant to alternative (b) above.
6.6 Recapitalization.
----------------
(a) In the event of any stock dividend, stock split, recapitalization
or other transaction affecting the Corporation's outstanding Common Stock as a
class effected without receipt of consideration, then any new, substituted or
additional securities or other property which is by reason of such transaction
distributed with respect to the Purchased Shares shall be immediately subject to
the Corporation's First Refusal Right hereunder, but only to the extent the
Purchased Shares are at a time covered by such right.
(b) In the event of a Corporate Transaction (as defined in Section 5.6
above), the Corporation's First Refusal Right shall remain in full force and
effect and shall
-6-
<PAGE>
apply to the new capital stock or other property received in exchange for
the Purchased Shares in consummation of the Corporate Transaction, but only
to the extent the Purchased Shares are at the time covered by such right.
6.7 Termination. The First Refusal Right under this Article VI shall
-----------
terminate and cease to have effect upon the earlier to occur of (i) the
first date on which the shares of the Corporation's Common Stock are held
of record by more than five hundred (500) persons, or (ii) the closing of a
firm commitment underwritten public offering pursuant to an effective
registration under the 1933 Act covering the offer and sale of Common Stock
in the aggregate amount of at least $10,000,000 (or such lesser amount as
may be approved by the Corporation's Board of Directors, which shall
include a majority of the directors designated by holders of the Series B
Shares, pursuant to Section C.3(b) of Article FOURTH of the Company's
Certificate of Incorporation). However, the market stand-off provisions of
Section 3.3 above shall continue to remain in full force and effect
following the termination of the First Refusal Right hereunder.
6.8 Legend. All certificates representing Purchased Shares subject
------
to the Right of First Refusal shall be endorsed with the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN
COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDERS OF THE SHARES (OR THE
PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE
CORPORATION CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER
OF THE SHARES. THE SECRETARY OF THE CORPORATION WILL UPON WRITTEN
REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT
CHARGE."
3. Amendment to Section 8.1. Section 8.1 of the Purchase Agreement is
------------------------
hereby deleted in its entirety and substituted therefor shall be the following:
8.1 Assignment. The Corporation may assign its Repurchase Rights under
Article V and/or its First Refusal Right under Article VI to one or more
persons or entities selected by the Corporation's Board of Directors,
including (without
-7-
<PAGE>
limitation) one or more stockholders of the Corporation; provided,
--------
however, that any assignment of such Repurchase Rights and/or Rights
-------
of First Refusal shall not apply to any subsequent Repurchase Right or
Right of First Refusal in favor of the Corporation.
4. Effectiveness. This Amendment shall become as of the date first
-------------
written above, upon the later to occur of the following: (i) such time as the
Company shall have received from the Purchaser at least three (3) duly executed
and delivered copies of this Amendment, and (ii) such time as the Corporation
shall have consummated the "First Closing" (as that term is defined in the
Series B Agreement) of the purchase and sale of the Series B Shares.
5. Limited Amendment. Except as modified hereby, the Purchase Agreement
-----------------
shall remain unmodified and shall continue to be in full force and effect in
accordance with its terms.
6. Governing Law. This Amendment shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware, as such laws are applied to
contracts entered into and performed in such state.
7. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but both of which, when
taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
VIROPHARMA, INC.
By: Claude Nash
----------------
/s/ Claude Nash
---------------------
Claude Nash
-8-
<PAGE>
AMENDMENT TO RESTRICTED STOCK PURCHASE AGREEMENT
Amendment to Restricted Stock Purchase Agreement dated as of January 17,
1996, among VIROPHARMA, INC., a Delaware corporation (the "Corporation"), and
Frank Baldino, Jr. (the "Purchaser"), dated as of January 17, 1996 (this
"Amendment").
W I T N E S S E T H:
WHEREAS, on January 17, 1996, the Corporation and the Purchaser entered
into a Restricted Stock Purchase Agreement (the "Purchase Agreement"), whereby,
among other things, the Corporation issued and sold to the Purchaser, and the
Purchaser purchased from the Corporation, 100,000 shares of the Common Stock,
par value $0.001 per share, of the Corporation, subject to the terms and
conditions thereof, including vesting in accordance therewith, rights of
repurchase in the event of the termination of Purchaser, and a right of first
refusal of the Corporation, in the event of a "transfer" (as defined in the
Purchase Agreement) by the Purchaser; and
WHEREAS, the Purchaser and the Corporation intended to enter into the
Purchase Agreement on the same terms, with the exception of the purchase price
and the vesting schedule, as the Employee Stock Purchase Agreements, dated as of
December 29, 1995, and amended as of June 15, 1995, (the "Employee Purchase
Agreements"), among the Corporation and various employees; and
WHEREAS, the Employee Purchase Agreements were amended on June 15, 1995 in
connection with the issuance and sale to certain institutional investors of
shares of Series B Convertible Preferred Stock, par value $0.001 per share, of
the Corporation (the "Series B Shares"), pursuant to the terms and subject to
the conditions of that certain Series B Convertible Preferred Stock Purchase
Agreement, dated as of June 15, 1995, among the Corporation and each of the
"Purchasers" whose names are set forth on Schedule A thereto; and
WHEREAS, the Employee Purchase Agreements were amended, among other things,
to terminate the Corporation's right to repurchase a purchaser's shares after
such shares vest in accordance with the terms of the Employee Purchase Agreement
and to provide for the automatic vesting of such shares upon the occurrence of
certain events; and
WHEREAS, the Purchase Agreement as initially entered into does not reflect
these amendments to the Employee Purchase Agreements;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. Amendment of Repurchase Right. Section V of the Purchase Agreement is
-----------------------------
hereby deleted in its entirety, and substituted therefor shall be the following
Section V:
<PAGE>
5.1 Grant. The Corporation is hereby granted the right (the "Repurchase
-----
Right"), exercisable at any time during the sixty (60) day period following the
date the Purchaser ceases for any reason to be a Service Provider (as defined
below) to the Corporation (or its assignees) to repurchase at the Purchase Price
all or (at the discretion of the Corporation and with the consent of the
Purchaser) any portion of the Purchased Shares in which the Purchaser has not
acquired a vested interest in accordance with the vesting provisions of Section
5.3 (such shares to be hereinafter called the "Unvested Shares"). The
Corporation shall not have any Repurchase Right with respect to any portion of
the Purchased Shares in which the Purchaser has acquired a vested interest in
accordance with the vesting provisions of Section 5.3 (the "Vested Shares"). For
purposes of this Agreement, the Purchaser shall be deemed to be a "Service
Provider" to the Corporation for so long as the Purchaser renders periodic
services to the Corporation or one or more of its parent or subsidiary
corporations, whether as an employee, non-employee member of the board of
directors, or an independent, non-employee consultant.
5.2 Exercise of the Repurchase Right. The Repurchase Right shall be
--------------------------------
exercisable by written notice delivered to the Owner of the Purchased Shares at
any time during the sixty (60) day period specified in Section 5.1. The notice
shall indicate the number of Unvested Shares to be repurchased and the date on
which the repurchase is to be effected, such date to be not more than thirty
(30) days after the date of notice. To the extent one or more certificates
representing Purchased Shares may have been previously delivered out of escrow
to the Owner, then the Owner shall, prior to the close of business on the date
specified for the repurchase, deliver to the Secretary of the Corporation the
certificates representing the Purchased Shares to be repurchased, each
certificate to be properly endorsed for transfer. The Corporation (or its
assignees) shall, concurrently with the receipt of such stock certificates
(either from escrow in accordance with Section 7.3 or from Owner as herein
provided), pay to Owner in cash or cash equivalents (including the cancellation
of any purchase-money indebtedness) an amount equal to the Purchase Price
previously paid for the Unvested Shares which are to be purchased.
5.3 Termination of the Repurchase Right.
-----------------------------------
(a) The Repurchase Right shall terminate with respect to any
Purchased Shares for which it is not timely exercised under Section 5.2. In
addition, the Repurchase Right provided in Section 5.1 shall terminate, and
cease to be exercisable, with respect to any and all Purchased Shares in which
the Purchaser vests in accordance with the schedule below. Accordingly, provided
the Purchaser continues to be a Service Provider to the Corporation, the
Purchaser shall acquire a vested interest in, and the Repurchase Right provided
in Section 5.1 shall lapse with respect to, the Purchased Shares in accordance
with the following provisions:
-2-
<PAGE>
(i) as of the date hereof (the "Vesting Measurement Date"), the
Purchaser shall acquire a vested interest in, and there shall be no Repurchase
Right with respect to, twenty-five percent of the Purchased Shares, and
(ii) upon the expiration of the initial twelve (12) month period
measured from the Vesting Measurement Date, the Purchaser shall acquire a vested
interest in, and the Repurchase Right provided in Section 5.1 shall lapse with
respect to, the remaining Purchased Shares in a series of successive annual
installments each equal to twenty-five percent (25%) of the number of Purchased
Shares issued by the Corporation to the Purchaser as of the date hereof.
(b) All Purchased Shares as to which the Repurchase Right provided in
Section 5.1 lapses shall, however, continue to be subject to (i) the First
Refusal Right of the Corporation and its assignees under Article VI hereof and
(ii) the market stand-off provisions of Section 3.3 above.
5.4 Additional Shares or Substituted Securities. In the event of any
-------------------------------------------
stock dividend, stock split, recapitalization or other change affecting the
Corporation's outstanding Common Stock as a class effected without receipt of
consideration, any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which is by reason
of any such transaction distributed with respect to the Purchased Shares shall
be immediately subject to the Repurchase Right, but only to the extent the
Purchased Shares are at the time Unvested Shares. Appropriate adjustments to
reflect the distribution of such securities or property shall be made to the
number of Purchased Shares hereunder and to the price per share to be paid upon
the exercise of the Repurchase Right in order to reflect the effect of any such
transaction upon the Corporation's capital structure; provided, however, that
-------- -------
the aggregate Purchase Price shall remain the same.
5.5 Corporate Transaction.
---------------------
(a) In the event of any of the following transactions:
(i) a merger or acquisition in which the Corporation is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State in which the Corporation is incorporated,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation, or
(iii) any reverse merger in which the Corporation is the
surviving entity but in which at least fifty percent (50%) or more of the
Corporation's outstanding voting stock is transferred to holders different from
those who held the stock immediately prior to such merger, and in each case, the
valuation of the Company exceeds $50,000,000
-3-
<PAGE>
(in each case, provided such valuation is exceeded, a "Corporate
Transaction") then the Repurchase Right shall lapse in its entirety and the
Purchaser shall acquire a vested interest in all such Purchased Shares upon
the consummation of such Corporate Transaction. Otherwise, the Purchased
Shares shall remain subject to the Repurchase Right pursuant to an
assignment by the Corporation to the successor corporation (or its parent
company) in connection with such Corporate Transaction, in which case the
Purchased Shares shall vest in accordance with Section 5.3 hereof.
(b) To the extent the Repurchase Right remains in effect
following a corporate transaction which is not deemed a "Corporate
Transaction" as defined in Section 5.5(a) hereof, the Repurchase Right
shall apply to the new capital stock or other property received in exchange
for the Purchased Shares in consummation of the Corporate Transaction, but
only to the extent the Purchased Shares are at the time covered by such
right. Appropriate adjustments shall be made to the price per share payable
upon exercise of the Repurchase Right to reflect the effect of the
Corporate Transaction upon the Corporation's capital structure; provided,
--------
however, that the aggregate Purchase Price shall remain the same.
-------
5.6 Legend. In addition to the legends required by Section 2.4
------
above, all certificates representing Purchased Shares subject to the
Corporation's Repurchase Right shall be endorsed with the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN
COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER OF THE SHARES (OR THE
PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS CERTAIN
REPURCHASE RIGHTS TO THE COMPANY UPON TERMINATION OF THE REGISTERED
HOLDER'S SERVICES WITH THE COMPANY. THE SECRETARY OF THE COMPANY WILL
UPON WRITTEN REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER
HEREOF WITHOUT CHARGE."
2. Amendment of Right of First Refusal. Section VI of the Purchase
-----------------------------------
Agreement is hereby deleted in its entirety and substituted therefor shall be
the following:
6.1 Grant. The Corporation is hereby granted the right of first
-----
refusal (the "First Refusal Right"), exercisable in connection with any
proposed sale or other transfer of all or any part of the Purchased Shares
which have become Vested Shares in accordance with
-4-
<PAGE>
Section 5.3 hereof. For purposes of this Article VI, the term "transfer" shall
include any assignment, pledge, encumbrance or other disposition for value of
the Purchased Shares intended to be made by the Owner, but shall not include any
of the permitted transfers under Section 4.1 above.
6.2 Notice of Intended Disposition. In the event the Owner desires to
------------------------------
accept a bona fide third-party offer for any or all of the Purchased Shares (the
shares subject to such offer to be hereinafter called, solely for the purposes
of this Article VI, the "Target Shares"), Owner shall promptly (i) deliver to
the Secretary of the Corporation written notice (the "Disposition Notice") of
the offer and the basic terms and conditions thereof, including the proposed
purchase price thereof, and (ii) provide satisfactory proof that the disposition
of the Target Shares to the third party offeror would not be in contravention of
the provision set forth in Articles II and III of this Agreement.
6.3 Exercise Right. The Corporation (or its assignees) shall, for a
--------------
period of thirty (30) days following receipt of the Disposition Notice, have the
right to repurchase any or all of the Target Shares specified in the Disposition
Notice upon substantially the same terms and conditions specified therein. Such
right shall be exercisable by written notice (the "Exercise Notice") delivered
to Owner prior to the expiration of the thirty (30) day exercise period. If
such right is exercised with respect to all the Target Shares specified in the
Disposition Notice, then the Corporation (or its assignees) shall effect the
repurchase of the Target Shares, including payment of the purchase price, not
more than ten (10) business days after delivery of the Exercise Notice; and at
such time Owner shall deliver to the Corporation the certificates representing
the Target Shares to be repurchased, each certificate to be properly endorsed
for transfer. To the extent any of the Target Shares are at the time held in
escrow under Article VII hereof, the certificates for such shares shall
automatically be released from escrow and surrendered to the Corporation for
cancellation. The Target Shares so purchased shall thereupon be cancelled and
cease to be issued and outstanding shares of the Corporation's Common Stock.
Should the purchase price specified in the Disposition Notice be payable in
property other than cash or evidences of indebtedness, the Corporation (or its
assignees) shall have the right to pay the purchase price in the form of cash
equal in amount to the value of such property. If the Owner and the Corporation
(or its assignees) cannot agree on such cash value within ten (10) days after
the Corporation's receipt of the Disposition Notice, the valuation shall be made
by an appraiser of recognized standing selected by the Owner and the Corporation
(or its assignees), or, if they cannot agree on an appraiser within twenty (20)
days after the Corporation's receipt of the Disposition Notice, each shall
select an appraiser of recognized standing and the two appraisers shall
designate a third appraiser of recognized standing, whose appraisal shall be
determinative of such value. The cost of such appraisal shall be shared equally
by the Owner and the Corporation. The Closing shall then be held on the latter
of (i) the fifth (5th) business day following delivery of the Exercise Notice or
(ii) the fifteenth (15th) day after such cash valuation shall have been made.
-5-
<PAGE>
6.4 Non-Exercise of Right. In the event the Exercise Notice is not given
---------------------
to the Owner within thirty (30) days following the date of the Corporation's
receipt of the Disposition Notice, the Owner shall have a period of thirty (30)
days thereafter, in which to sell or otherwise dispose of the Target Shares upon
terms and conditions (including the purchase price) no more favorable to third-
party purchaser than those specified in the Disposition Notice; provided,
--------
however, that any such sale or disposition shall not be effected in
- -------
contravention of the provisions of Article II of this Agreement. To the extent
any of the Target Shares are at the time held in escrow pursuant to Article VII
below, the certificates for such shares shall automatically be released from
escrow and surrendered to the Owner. The third party purchaser shall acquire the
Target Shares free and clear of all the terms and provisions of this Agreement
(including the Corporation's Repurchase Right under Article V and the
Corporation's (or its assignees') First Refusal Right hereunder). In the event
the Owner does not sell or otherwise dispose of all or any portion of the Target
Shares within the specified thirty (30) day period, the Corporation's (or its
assignees') First Refusal Right shall continue to be applicable to any
subsequent disposition of the Target Shares by the Owner until such right lapses
in accordance with Section 6.7 below.
6.5 Partial Exercise of Right. In the event the Corporation (or its
-------------------------
assignees) makes a timely exercise of the First Refusal Right with respect to a
portion, but not all, of the Target Shares specified in the Disposition Notice,
the Owner shall have the option, exercisable by written notice to the
Corporation delivered within twenty (20) days after the date of the Disposition
Notice, to effect the sale of the Target Shares pursuant to one of the following
alternatives:
(a) Sale or other disposition of all the Target Shares to a third-
party purchaser in compliance with the requirements of Section 6.4, as if the
Corporation did not exercise the First Refusal Right hereunder; or
(b) Sale to the Corporation (or its assignees) of the portion of the
Target Shares which the Corporation (or its assignees) has or have elected to
purchase, such sale to be effected in substantial conformity with the provisions
of Section 6.3.
Failure of Owner to deliver timely notification to the Corporation under
this Section 6.5 shall be deemed to be an election by Owner to sell the Target
Shares pursuant to alternative (b) above.
6.6 Recapitalization.
----------------
(a) In the event of any stock dividend, stock split, recapitalization
or other transaction affecting the Corporation's outstanding Common Stock as a
class effected without receipt of consideration, then any new, substituted or
additional securities or other property which is by reason of such transaction
distributed with respect to the Purchased Shares shall
-6-
<PAGE>
be immediately subject to the Corporation's First Refusal Right hereunder,
but only to the extent the Purchased Shares are at a time covered by such
right.
(b) In the event of a Corporate Transaction (as defined in
Section 5.5 above), the Corporation's First Refusal Right shall remain in
full force and effect and shall apply to the new capital stock or other
property received in exchange for the Purchased Shares in consummation of
the Corporate Transaction, but only to the extent the Purchased Shares are
at the time covered by such right.
6.7 Termination. The First Refusal Right under this Article VI shall
-----------
terminate and cease to have effect upon the earlier to occur of (i) the
first date on which the shares of the Corporation's Common Stock are held
of record by more than five hundred (500) persons, or (ii) the closing of a
firm commitment underwritten public offering pursuant to an effective
registration under the 1933 Act covering the offer and sale of Common Stock
in the aggregate amount of at least $10,000,000, (or such lesser amount as
may be approved by the Corporation's Board of Directors, which shall
include a majority of the directors designated by holders of the Series B
Shares pursuant to Section IV.C.3(b) of the Company's Certificate of
Incorporation). However, the market stand-off provisions of Section 3.3
above shall continue to remain in full force and effect following the
termination of the First Refusal Right hereunder.
6.8 Legend. All certificates representing Purchased Shares subject
------
to the Right of First Refusal shall be endorsed with the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, ENCUMBERED OR IN ANY MANNER DISPOSED OF, EXCEPT IN
COMPLIANCE WITH THE TERMS OF A WRITTEN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDERS OF THE SHARES (OR THE
PREDECESSOR IN INTEREST TO THE SHARES). SUCH AGREEMENT GRANTS TO THE
CORPORATION CERTAIN RIGHTS OF FIRST REFUSAL UPON AN ATTEMPTED TRANSFER
OF THE SHARES. THE SECRETARY OF THE CORPORATION WILL UPON WRITTEN
REQUEST FURNISH A COPY OF SUCH AGREEMENT TO THE HOLDER HEREOF WITHOUT
CHARGE."
3. Amendment to Section 7.3(d). Section 7.3 of the Purchase Agreement is
---------------------------
hereby deleted in its entirety and substituted therefor shall be the following:
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<PAGE>
(d) As the interest of the Owner in the Purchased Shares (or any
other assets or securities issued with respect thereto) vests in accordance
with the provisions of Article V hereof, the certificates for such vested
shares (as well as all other vested assets and securities) shall be
released from escrow and delivered to the Owner in accordance with the
following schedule:
(i) the initial release of vested shares from escrow shall
be effected within thirty (30) days following the Vesting Measurement Date,
(ii) subsequent releases of vested shares (or other vested
assets and securities) from escrow shall be effected at annual intervals
thereafter, with the first such subsequent annual release to occur twelve (12)
months after the Vesting Measurement Date, and
(iii) upon any earlier termination of the Corporation's
Repurchase Right in accordance with the applicable provisions of Article V
hereof, the Purchased Shares (or other assets or securities) at the time held in
escrow hereunder shall promptly be released to the Owner as fully vested shares
or other property.
4. Amendment to Section 8.1. Section 8.1 of the Purchase Agreement is
------------------------
hereby deleted in its entirety and substituted therefor shall be the following:
8.1 Assignment. The Corporation may assign its Repurchase Rights
----------
under Article V and/or its First Refusal Right under Article VI to one or
more persons or entities selected by the Corporation's Board of Directors,
including (without limitation) one or more stockholders of the Corporation;
provided, however, that any assignment of such Repurchase Rights and/or
-------- -------
Rights of First Refusal shall not apply to any subsequent Repurchase Right
or Right of First Refusal in favor of the Corporation.
5. Effectiveness. This Amendment shall become effective as of the date
-------------
first written above, upon such time as the Company shall have received from the
Purchaser at least three (3) duly executed and delivered copies of this
Amendment.
6. Limited Amendment. Except as modified hereby, the Purchase Agreement
-----------------
shall remain unmodified and shall continue to be in full force and effect in
accordance with its terms.
7. Governing Law. This Amendment shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware, as such laws are applied to
contracts entered into and performed in such state.
8. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but both of which, when
taken together, shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first written above.
VIROPHARMA, INC.
/s/ Claude H. Nash
---------------------------------------
Claude H. Nash
President and Chief Executive Officer
/s/ Frank Baldino, Jr.
---------------------------------------
Frank Baldino, Jr.
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<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
ViroPharma Incorporated
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
November 8, 1996
