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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]
Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
OR
[_]
Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 0-21699
VIROPHARMA INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-2347624
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
405 Eagleview Boulevard 19341
Exton, Pennsylvania (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: 610-458-7300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
None registered:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.002
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days: YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $72,596,322 as of March 1,
1999, based upon the closing sale price per share of the Common Stock as
quoted on The Nasdaq Stock Market. This amount excludes 2,567,349 shares of
Common Stock held by directors, officers and stockholders with representatives
on the board of directors whose ownership exceeds ten percent of the Common
Stock outstanding at March 1, 1998. Exclusion of shares held by any person
should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the registrant, or that such person is controlled by or under
common control with the registrant.
The number of shares of the registrant's Common Stock outstanding as of
March 1, 1999 was 11,569,594.
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement (the "Proxy Statement") for the
registrant's 1999 Annual Meeting of Stockholders to be held on May 14, 1999
are incorporated by reference in Part III of this Annual Report on Form 10-K.
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VIROPHARMA INCORPORATED
FORM 10-K ANNUAL REPORT
For Fiscal Year Ended December 31, 1998
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
PART I
Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 28
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners and Management 28
Item 13. Certain Relationships and Related Transactions 28
8
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 29
Index to Financial Statements and Schedules F-1
</TABLE>
Unless the context indicates otherwise, the terms "ViroPharma" and "Company"
refer to ViroPharma Incorporated. "ViroPharma" is a trademark and service mark
of the Company. The Company has filed applications to register the trademark
and service mark in the United States and Canada. All other brand names or
trademarks appearing in this Annual Report on Form 10-K are the property of
their respective owners.
<PAGE>
PART I
Business
ITEM 1. BUSINESS
Overview
ViroPharma Incorporated ("ViroPharma" or the "Company") was incorporated in
Delaware in September 1994 and commenced operations in December 1994. The
Company's executive offices and research facility are located at 405 Eagleview
Boulevard, Exton, PA 19341. The Company is a development stage pharmaceutical
company committed to the commercialization, development and discovery of new
antiviral medicines. The Company has focused its current drug development and
discovery activities on a number of ribonucleic acid ("RNA") virus diseases,
including viral meningitis, viral respiratory infection, the common cold,
respiratory syncytial virus ("RSV") pneumonia and hepatitis C.
ViroPharma's most advanced product candidate, pleconaril, is currently being
developed for the treatment of common RNA virus diseases. Preclinical studies
have demonstrated that pleconaril is a potent, broad-spectrum, orally-active
inhibitor of several RNA viruses. In April 1996, ViroPharma completed a Phase
II challenge study in viral respiratory infection ("VRI") with pleconaril, in
which all evaluated disease measures were significantly reduced in treated
subjects. In June 1997, ViroPharma completed a Phase II clinical trial for
viral meningitis which demonstrated that pleconaril significantly reduced
disease duration.
In January 1999 and November 1998, respectively, ViroPharma reported the
preliminary results from the first two (of a total of four) clinical trials
for viral meningitis that the Company expects to use in connection with a New
Drug Application: one in adolescents/adults and the second in pediatric
patients. In the adult study, patients treated with 200 mg TID of pleconaril
experienced both a statistically significant and clinically beneficial
reduction in disease duration when measured by headache, the Company's primary
endpoint in the adult study. Pleconaril-treated patients experienced a
clinical benefit within 24 hours after initiation of therapy. The median
duration of headache for pleconaril-treated patients was reduced by 2 days in
patients with confirmed enteroviral meningitis (p = 0.04) and by 1 day in all
randomized patients (p = 0.03). The median duration of headache was 9 days in
the placebo-treated patients. Of all pleconaril-treated patients with
confirmed enteroviral meningitis, 75% achieved the primary endpoint within 9
days versus 13 days in the placebo group. Of all pleconaril-treated patients
in the all randomized patient population, 75% achieved the primary endpoint
within 10 days versus 13 days in the placebo group. Fewer patients treated
with 200 mg TID of pleconaril reported adverse events than placebo-treated
patients. The nature of the majority of the adverse events reported in the
study were similar to symptoms of the disease. The Company is continuing to
analyze the adult study. Preliminary results from the analysis of some
alternative disease measures indicate a clinically beneficial reduction of
disease symptoms and duration in pleconaril-treated patients.
In the pediatric study, patients treated with 2.5m./kg TID of pleconaril
experienced both a statistically significant and clinically beneficial
reduction in disease duration when measured by the elimination of all measured
major meningitis symptoms (p = 0.03), and by a caregiver's assessment of the
patient's illness (p = 0.05). The Company expects that the elimination of all
measured major meningitis symptoms will be the primary endpoint in its ongoing
pediatric viral meningitis study. The pediatric study did not demonstrate a
statistically significant reduction in disease duration when measured by
headache. There were no overall differences in adverse event rates between
placebo and 2.5mg/kg TID pleconaril treated groups in the pediatric study.
The Company selected 200 TID mg as the optimal dose for its ongoing studies
based on the results of a higher dose studied in its first pediatric trial. In
addition to patients who were treated with the lower dose of pleconaril, in
both studies some patients received 400 mg TID (or 5mg/kg TID in pediatrics)
of pleconaril. In these higher dose groups, there was a slight increase in
adverse events when compared to placebo groups. Data from the higher dose
groups will be used in pleconaril's safety analysis.
1
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In July 1998, ViroPharma commenced two additional clinical trials for viral
meningitis that the Company expects to use in connection with a New Drug
Application, one in adolescents/adults and one in pediatric patients.
ViroPharma has completed enrollment in three clinical trials for viral
respiratory infection, including one clinical trials in patients with asthma.
The Company has additional compounds in research and preclinical stages of
development for the treatment of RSV pneumonia and hepatitis C.
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.
Diseases Caused By 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 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.
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. The Company has currently focused its discovery research on
diseases caused by RNA viruses.
The following is a list of selected diseases caused by RNA viruses:
RNA Virus Diseases
<TABLE>
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Bronchiolitis Hemorrhagic conjunctivitis Rhinovirus common cold
Dengue fever Hemorrhagic fevers RSV Pneumonia
Diarrhea diseases Hepatitis C, A, D and E Rubella
Ebola fever Influenza Tick fevers
Encephalitis Measles Viral meningitis
Enterovirus hand-foot-and-mouth Myocarditis Viral pharyngitis
Hantavirus pulmonary syn-
drome Otitis Media Viral Respiratory Infection
Rabies Yellow fever
</TABLE>
The Company has focused its current drug development and discovery activities
on the italicized diseases.
2
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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.
The Company believes that the process of viral RNA uncoating and replication
represents an attractive target for the therapeutic intervention in disease
caused by RNA viruses. For RNA viruses to cause disease, they must replicate.
Inhibiting RNA virus replication can prevent, limit or stop disease. In
addition to thwarting disease, the direct inhibition of viral RNA uncoating
and replication should 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 is focused on RNA virology and RNA antiviral drug discovery and
development. While the RNA uncoating and replication process is common among
all RNA viruses, the detailed molecular and biochemical mechanisms involved
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 essential
virus enzyme activities that are critical to RNA replication. 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.
3
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Product Development and Research
The Company has focused its current drug discovery and development
activities on a number of RNA virus diseases in pediatrics and adults
including viral meningitis, viral respiratory infection, chronic
meningoencephalitis, RSV and hepatitis C. 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)
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Viral Meningitis Pleconaril Phase II clinical trial completed
Phase III clinical trial in adolescents/adults completed
Second Phase III clinical trial in adolescents/adults ongoing
Phase III clinical trial in pediatric patients completed
Second Phase III clinical trial in pediatric patients ongoing
Viral Respiratory Infec-
tion Pleconaril Phase II challenge study completed
Enrollment completed for two Phase II clinical trials
Enrollment completed for Phase II clinical trial in patients
with asthma
Chronic
Meningoencephalitis Pleconaril Open label compassionate use program ongoing
Hepatitis C VP 50406 series Preclinical development
RSV Pneumonia VP 14637 series Preclinical development
</TABLE>
(1) For a discussion of preclinical testing and the phases of human clinical
trials, see "--Government Regulation."
The Company's most advanced product candidate, pleconaril, based on
preclinical studies, is a potent, broad spectrum, orally active inhibitor of
picornaviruses. Enteroviruses and rhinoviruses are closely related members of
the picornavirus family, a large, very prevalent group of RNA viruses that are
responsible for widespread human disease. Picornaviruses are the leading cause
of upper respiratory infections. Enteroviruses cause viral meningitis, viral
respiratory infection, myocarditis, pericarditis, encephalitis, herpangina and
neonatal 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 currently developing pleconaril for several indications,
including viral meningitis and viral respiratory infection.
The Company has developed oral liquid and oral solid formulations of
pleconaril. The oral liquid formulation currently is being used in clinical
trials for several indications, including viral meningitis and viral
respiratory infection.
Since August 1996, the Company has conducted an open label program for
pleconaril so that people with life-threatening or seriously disabling
diseases caused by picornaviruses may receive pleconaril on a compassionate
use basis. As of December 31, 1998, a total of 48 patients (8 with
myocarditis, 21 with chronic meningoencephalitis in patients with immune
deficiency, 6 with neonatal enteroviral disease, 3 with poliomyelitis
syndromes, 5 with enterovirus infections after bone marrow transplantation, 1
with rhinovirus pneumonia, 3 with encephalitis and 1 with post-polio syndrome)
have been treated with pleconaril in the open-label program. A short course of
pleconaril therapy appears to have produced a sustained clinical and
virological remission of the infection in the majority of these treated
patients, including over 80% of patients with immune deficiency suffering from
chronic meningoencephalitis.
The Company has entered into an agreement with Sanofi S.A. ("Sanofi") under
which it has received exclusive rights to develop and market all products
relating to pleconaril 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 in the United
States and Canada. Pleconaril was discovered at Sanofi by scientists now with
ViroPharma. See "--Strategic Relationships--Sanofi S.A." and "--Patents."
4
<PAGE>
Viral Meningitis
Infection of the central nervous system by enteroviruses can cause
meningitis, which is characterized by the abrupt onset of severe headache,
stiffness of the neck or back, fever, muscle pain, nausea, vomiting and
malaise. The disease requires emergency medical care. The disease occasionally
progresses to serious neurologic sequelae, particularly among infants. There
is currently no antiviral pharmaceutical for the treatment of viral
meningitis.
In June 1997, ViroPharma completed a Phase II clinical trial for viral
meningitis which demonstrated that pleconaril significantly reduced disease
duration. In January 1999 and November 1998, respectively, ViroPharma reported
the preliminary results from the first two (of a total of four) clinical
trials for viral meningitis that the Company expects to use in connection with
a New Drug Application: one in adolescents/adults and the second in pediatric
patients. In the adult study, patients treated with 200 mg of pleconaril
experienced both a statistically significant and clinically beneficial
reduction in duration of disease, measured by reduction in duration of
headache, the Company's primary endpoint in this study. Pleconaril-treated
patients experienced a clinical benefit within 24 hours after initiation of
therapy. The median duration of headache for pleconaril-treated patients was
reduced by 2 days in patients with confirmed enteroviral meningitis (p = 0.04)
and by 1 day in all randomized patients (p = 0.03). The median duration of
headache was 9 days in the placebo-treated patients. Of all pleconaril-treated
patients with confirmed enteroviral meningitis, 75% achieved the primary
endpoint within 9 days versus 13 days in the placebo group. Of all pleconaril-
treated patients in the all randomized patient population, 75% achieved the
primary endpoint within 10 days versus 13 days in the placebo group. Fewer
patients treated with 200 mg of pleconaril reported adverse events than
placebo-treated patients. The nature of the majority of the adverse events
reported in the study were similar to symptoms of the disease. The Company is
continuing to analyze the adult study. Preliminary results from the analysis
of some alternative disease measures indicate a clinically beneficial
reduction of disease symptoms and duration in pleconaril-treated patients. In
the pediatric study, patients treated with 2.5mg/kg of pleconaril experienced
both a statistically significant and clinically beneficial reduction in
disease duration when measured by the elimination of major meningitis symptoms
(p = 0.03), the primary endpoint that the Company expects to use in its
ongoing pediatric viral meningitis study described below, and by a caregiver's
assessment of the patient's illness (p = 0.05). The pediatric study did not
demonstrate a statistically significant reduction in disease duration when
measured by headache. There were no overall differences in adverse event rates
between placebo and pleconaril treated groups in the pediatric study.
ViroPharma is currently conducting two additional clinical trials for viral
meningitis that the Company expects to use in connection with a New Drug
Application, one in adolescents/adults and one in pediatric patients.
Viral Respiratory Infection
Viral respiratory infection is an upper respiratory illness characterized
initially by sore throat and cough, often followed by systemic symptoms of
body aches, feverishness and weakness. A predominate cause of viral
respiratory infections is picornaviruses. Picornavirus infections in
respiratory compromised patients is potentially life threatening. For example,
picornavirus infections in patients with asthma may result in severe
respiratory distress, decreased effectiveness of asthma medications and
hospitalization. The clinical illness can persist for several weeks and may
result in a physician office visit. There is currently no antiviral
pharmaceutical for the treatment of viral respiratory infections.
In April 1996, ViroPharma completed a Phase II challenge study in viral
respiratory infection with pleconaril, in which all evaluated disease measures
were significantly reduced in treated subjects. The Company has completed
enrollment in three clinical trials for the viral respiratory infection
indication, including one clinical trial in patients with moderate to severe
asthma. Asthmatics often develop pronounced lower airway dysfunction lasting
for weeks to months following a viral respiratory infection. There can be no
assurance that these trials will be successfully completed or completed in a
timely manner. See "--Risk Factors--Product Development Risks," "--Risk
Factors--Dependence on Pleconaril" and "--Risk Factors--Clinical Trial Risks."
5
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RSV Pneumonia
RSV is a major viral respiratory tract pathogen in infants and young
children, causing pneumonia and bronchiolitis. 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 RSV morbidity and mortality. RSV infections may also
cause hospitalization due to pneumonia in the elderly. RSV infections are also
common and frequently fatal in patients who are immunosuppressed due to
cancer, bone marrow or other solid organ transplantation.
Vaccines are not currently available for prevention of RSV disease.
Recently, the prophylactic use of an intravenous hyperimmune globulin infusion
was approved for RSV disease in certain high risk infants. Ribavirin,
administered by aerosol to minimize the drug's adverse effects, is generally
reserved for treatment of only the most serious cases of RSV pneumonia and
bronchiolitis. In both cases, drug administration can be difficult and
inconvenient in young patients.
Company scientists have discovered several compound series that potently and
specifically inhibit the replication of RSV. The Company has chemically
optimized several of these compounds and is conducting preclinical development
activities with its RSV inhibitor compounds. There can be no assurance that
such studies will be successfully completed or completed in a timely manner or
will lead to the clinical evaluation of a compound in this series. The Company
has filed one international patent related to RSV inhibitor compounds under
the Patent Cooperation Treaty ("PCT") which has designated all available PCT
countries including the United States. No assurance can be given that any
patent related to RSV inhibitor compounds will issue. See "--Risk Factors--
Product Development Risks," "--Risk Factors--Dependence on Pleconaril" and "--
Risk Factors--Clinical Trial Risks."
Hepatitis C
HCV, first identified in 1989, is recognized as a major cause of chronic
hepatitis worldwide. Approximately 85% of HCV infected persons will develop
chronic hepatitis, of which 20% will progress to liver cirrhosis and liver
failure. Chronic HCV infection can also lead to the development of
hepatocellular carcinoma and liver failure.
Company scientists have discovered and characterized several key HCV-encoded
enzyme activities that are essential to viral RNA replication. These
activities include, but are not limited to, the HCV RNA helicase and RNA
polymerase activities. The Company has established validated high throughput
assays for these activities, and has identified several potent, selective and
chemically distinct inhibitor compounds of these activities. The Company has
initiated preclinical development activities for its HCV inhibitor compounds.
The Company has filed nine patent applications with the United States Patent
and Trademark Office ("PTO"), and one patent application in certain foreign
jurisdictions, related to its HCV technology and inhibitor compound series.
The PTO has granted patents on two of these applications. No assurance can be
given that any additional patents will issue. See "--Risk Factors--Dependence
on Corporate Collaborations," and "--Risk Factors--"Patent and Proprietary
Technology Risks," and "--Patents."
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 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 development agreement with an
international pharmaceutical manufacturing 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.
6
<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 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 in the United States and
Canada. The Company's rights include rights to use all of Sanofi's patents,
know-how and trademarks relating to pleconaril. In June 1998, Sanofi chose to
have the Company be solely responsible for all development and development
costs of pleconaril. As a result of this decision by Sanofi, the Company will
receive a higher royalty on sales of pleconaril by Sanofi outside of the
United States and Canada, and Sanofi reimbursed the Company $400,000 for a
license fee previously paid by the Company. Also, if foreign regulatory
authorities require significant additional studies of pleconaril for use in
the European Union, the Company would be required to conduct such studies at
its own expense.
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. The milestone events contemplate regulatory submissions of new drug
applications and regulatory approvals in various jurisdictions. There can be
no assurance that any such milestones will be attained. Sanofi must reimburse
certain of the milestone fees previously paid by the Company upon submission
of pleconaril for regulatory approval in Japan. Also, 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."
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. In addition,
Sanofi has the right to terminate the agreement in the event that there is a
change of control that would materially and adversely affect the development,
manufacturing and marketing of the products under the agreement. The term
automatically renews for successive five year terms unless six months' prior
written notice of termination is given by either party. The Company also has
the right to manufacture, or contract with third parties to manufacture, any
drug product derived from the pleconaril drug substance. See "--
Manufacturing."
Collaborative Agreements
The Company is a party to collaborative drug discovery agreements with
various pharmaceutical and technology companies. Generally, under these
agreements, the collaborators make available enabling technologies and
compounds from their chemical libraries, and the Company 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.
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, in most cases, 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.
In August 1998, the Company's Collaborative Research Agreement (the
"Collaboration Agreement") with Boehringer Ingelheim Pharmaceuticals, Inc.
("BI") expired. The Company entered into an agreement with BI, effective as of
the expiration of the Collaboration Agreement, that permits each of the
parties to continue the development of all compounds that each party brought
to the collaboration, and all inventions jointly discovered by the parties
during the term of the Collaboration Agreement, without obligation to
compensate the other party.
7
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In October 1997, the Company received $1,000,000 from BI as an advance on a
future milestone in connection with the agreement. Such amount will be due and
payable in August 2000. The advance bears interest at 8.5% and is evidenced by
a convertible promissory note. If amounts due under the note are not paid as
described in the note, BI may convert the then outstanding principal balance
and accrued interest thereon into shares of the Company's Common Stock based
on the last sale price of such Common Stock on the date immediately prior to
the date on which the Company is notified of BI's intention to convert the
promissory note.
Patents
The Company 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 received two issued U.S. patents covering compounds active against HCV,
one issued U.S. patent covering compounds active against bovine diarrheal
virus (a disease related to HCV) and two issued U.S. patents for compounds
active against influenza. The Company currently has twelve pending patent
applications covering technology for identifying inhibitors of RNA viruses,
compounds active against influenza viruses, compounds active against HCV, and
compounds active against related RNA viruses such as RSV and bovine diarrheal
virus diseases. The Company also has filed a patent application for technology
for identifying inhibitors of RNA viruses, a patent application covering
compounds active against influenza viruses and a patent application covering
compounds active against bovine diarrheal virus in certain foreign
jurisdictions. The Company has also obtained a license from Sanofi, which
grants the Company exclusive rights for use in enterovirus and rhinovirus
applications 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 any additional patents will issue
from any of the Company's patent applications or, should any 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
private parties, including competitors, will not successfully challenge the
Company's patents or circumvent the Company's patent position in the United
States or abroad. 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 sponsor may
obtain marketing exclusivity for a period of time following Food and Drug
Administration ("FDA") approval of certain drug applications, regardless of
patent status, if the drug is a new chemical entity or if new clinical studies
were used to support the marketing application for the drug. Pursuant to the
FDA Modernization Act of 1997, the period of exclusivity can be extended if
the applicant performs certain studies in pediatric patients. This marketing
exclusivity prevents a third party from obtaining FDA approval for a similar
or identical drug under an Abbreviated New Drug Application ("ANDA") or a
"505(b)(2)" New Drug Application. The statute also allows a patent owner to
obtain an extension of applicable patent terms for a period equal to one-half
the period of time elapsed between the filing of an Investigational New Drug
Application ("IND") and the filing of the corresponding New Drug Application
("NDA") plus the period of time between
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the filing of the NDA and FDA approval, with a five year maximum patent
extension. 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.
In order to protect the confidentiality of the Company's technology,
including trade secrets and know-how and other proprietary 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 the Company 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--
Patent and Proprietary Technology Risks."
Manufacturing
The Company currently does not 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. In
April 1997, the Company entered into a Development Agreement with SELOC France
for the manufacture of pleconaril bulk drug substance and the development of a
process for commercial-scale production of pleconaril ("Development
Agreement"). In March 1998, the Company and SELOC France entered into an
Addendum to the Development Agreement for the manufacture of validation
batches of bulk drug substance and the preparation of certain documentation
that will be required in connection with the Company's NDA for pleconaril.
The Company has used an oral liquid formulation of pleconaril in its recent
clinical trials. In the event that there is a delay in the manufacture of
validation batches of the oral liquid formulation, or if the Company is unable
to negotiate successfully agreements with suppliers for the oral liquid
formulations of pleconaril, there may be a delay in product development or
commercialization. If there are delays in the production of stability batches
or validation batches for the oral solid formulation of pleconaril, the
Company may be delayed in obtaining FDA approval for the oral solid
formulation until the oral solid formulation has demonstrated chemical
stability for the requisite period or until such validation batches have been
successfully manufactured. Moreover, if the Company is unable to demonstrate
to the FDA's satisfaction that the oral solid formulation of pleconaril is
bioequivalent to the oral liquid formulation used in its clinical trials, the
Company may be delayed in obtaining FDA approval for the oral solid
formulation until such bioequivalence is demonstrated.
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The Company anticipates that its current supply of pleconaril drug
substance, together with the bulk drug substance that the Company will receive
under the SELOC Addendum, will be sufficient to complete its formulation
development activities and its ongoing clinical trials. The Company believes
that it will be able to obtain additional drug substance from SELOC France
and, if necessary, other manufacturers for the production of pleconaril drug
product on terms acceptable to the Company. In the event that SELOC France is
unable to satisfy the Company's requirements and the Company is required to
find an additional or alternative source of supply, there may be additional
cost and delay in product development or commercialization.
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 Good Manufacturing Practices ("GMP") requirements.
The Company maintains confidentiality agreements with potential and existing
manufacturers in order to protect its proprietary rights related to
pleconaril. For the preparation of other compounds, the Company intends to
contract with third-party manufacturers for preclinical research, manufacture
of drug substances for clinical development and manufacture of drug products
for commercial sale. See "--Risk Factors--Absence of Manufacturing
Capabilities" and "--Strategic Relationships--Sanofi S.A."
Marketing
Under its agreement with Sanofi, the Company has the exclusive right to
market and sell pleconaril for all enterovirus and rhinovirus indications in
the United States and Canada. The Company is currently conducting market
research on the multiple disease indications for which pleconaril is being
developed. The Company is also implementing its pre-launch plan, building its
core group of advisors and developing an educational platform for this novel
therapy. The Company currently is conducting an analysis of its target market
and sales force size which will assist the Company in deciding whether to seek
a sales partner for certain disease indications, establish its own sales force
or pursue both alternatives. To continue to implement its commercialization
strategy, the Company currently is building its marketing staff. The Company
currently does not have a sales staff. The success and commercialization of
the Company's other potential products will be dependent, in part, upon the
ability of the Company to enter into additional collaborative agreements for
other potential products. There can be no assurance that the Company will be
successful in developing a sales force, entering into collaborative
arrangements, penetrating the markets for any proposed products or achieving
market acceptance of its products. 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 Capabilities" and "--Risk
Factors--Market Acceptance Risk" 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 also will affect the manufacturing and
marketing of any drug candidate that is approved. All of the Company's
products will require regulatory approval by governmental agencies before
commercialization. In particular, therapeutic products for human use are
subject to rigorous preclinical and clinical testing and other approval
requirements of the Federal Food, Drug, and Cosmetic Act ("FFDCA"),
implemented by the FDA, as well as similar statutory and regulatory
requirements of foreign countries. Various other federal statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, recordkeeping and marketing of such products. Obtaining these
marketing approvals and subsequently complying with ongoing statutory and
regulatory requirements is costly and time-consuming. Any failure by the
Company or its collaborators, licensors or licensees to obtain, or any delay
in obtaining, regulatory approval or in complying with other requirements
could adversely affect the marketing of products then being developed by the
Company and its ability to receive product or royalty revenues.
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The steps required before a new drug may be distributed commercially in the
United States include: (i) conducting appropriate preclinical laboratory and
animal tests, (ii) submitting an IND to the FDA which must be made effective
before clinical trials may commence, (iii) conducting controlled human
clinical trials that establish the safety and efficacy of the drug product,
(iv) filing 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 be subject to additional costs, delays or modifications due to,
among other factors, difficulty in obtaining enough patients, clinical
investigators or support. The FDA has issued regulations intended to
accelerate the approval process for the development, evaluation and marketing
of new therapeutic products intended to treat life-threatening or severely
debilitating diseases, especially where no alternative therapies exist. If
applicable, this procedure may shorten the traditional drug development
process in the United States. Notwithstanding these new provisions, however,
approval may be denied by FDA or additional trials may be required. FDA also
may seek an applicant's agreement to perform post-approval clinical studies.
In addition to obtaining FDA approval for each indication to be treated with
each product, each domestic drug manufacturing establishment must register
with the FDA, list its drug products with the FDA, comply with current Good
Manufacturing Practices ("GMPs") and permit inspections by the FDA. Moreover,
the submission of applications for approval may require additional time to
complete manufacturing stability studies. Foreign establishments manufacturing
drugs for distribution in the United States also must list their products with
the FDA and comply with GMPs. They also are subject to periodic inspection by
the FDA or by local authorities under agreement with the FDA. See "--Risk
Factors--Government Regulation."
Upon approval in the United States, a drug may be marketed only in those
dosage forms and dosages and for those indications approved in the NDA,
although information may be distributed about certain off-label indications in
limited circumstances. In addition to continued compliance with standard
regulatory requirements, the FDA also may require post-marketing testing and
surveillance to monitor the safety and efficacy of the marketed product.
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 are
discovered following approval.
The FFDCA also mandates that drugs be manufactured consistent with GMPs. In
complying with the GMP regulations, manufacturers must continue to spend time,
money and effort in production, recordkeeping, quality control, and auditing
to ensure that the marketed product meets applicable specifications and other
requirements. The FDA periodically inspects drug manufacturing facilities to
ensure compliance with GMPs. 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, as
well as possible civil penalties. 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 GMPs.
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. If the Company proposes 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 manufactured in the U.S. for distribution abroad will be subject to
FDA regulations regarding export, as well as to the requirements of the
country to which they are shipped. These latter requirements are likely to
cover the conduct of clinical trials, the submission of marketing
applications, and all aspects of product manufacture and marketing. Such
requirements can vary significantly from country to country. As part of
certain of the Company's 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.
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The Company also is 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. 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.
The extent of government regulation which might result from future
legislation or administrative action cannot be accurately predicted. In this
regard, although the Food and Drug Administration Modernization Act of 1997
("FDAMA") modified and created requirements and standards under the FFDCA with
the intent of facilitating product development and marketing, FDA is still in
the process of developing regulations implementing FDAMA. Consequently, the
actual effect of these developments on the Company's business is uncertain and
unpredictable.
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--Pricing
and Reimbursement Risks."
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. Antiviral therapeutics for certain of the disease indications for
which the Company is developing therapeutics are currently available. For
example, amantadine and rimantadine are available for prophylaxes and early
treatment of influenza; ribavirin is approved for treatment, and intravenous
immune globulin (RSV-IGIV) and palivizumab for prophylaxes, of RSV infections
in certain high-risk patients; and interferon alone and in combination with
ribavirin is approved for treatment of hepatitis C. The Company believes,
however, that based on the characteristics of existing treatments, there is a
clear need for new agents with superior therapeutic efficacy to treat these
viral diseases. In addition to approved products, other companies are
developing therapies to treat these viral diseases, including compounds in
clinical development for influenza and for prophylactic treatment of RSV in
high-risk patients, and compounds in preclinical studies for RSV, rhinovirus
infections and hepatitis C. The Company's 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 the Company. See "--Risk Factors--Competition" and "--Risk
Factors--Rapid Technological Change."
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Human Resources
As of March 1, 1999, the Company had 84 full-time employees, including 16
persons with Ph.D. or M.D. degrees. 65 of the Company's employees are engaged
in research and development activities at the Company's laboratory facility in
Exton, 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."
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Risk Factors
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to present or anticipated scientific progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financings and
collaborations, personnel, manufacturing requirements and capabilities, and
other statements regarding matters that are not historical facts or statements
of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially. We do not intend to update our forward-looking
statements to reflect future events or developments.
. We Have Never Been Profitable and Anticipate that We Will Incur Continued
Losses for the Foreseeable Future. We are a development stage company with no
current source of product revenue. Moreover, we have incurred losses in each
year since our inception in 1994. As of December 31, 1998, we had an
accumulated deficit of approximately $48.4 million. We do not know when or if
we will achieve product revenue. Furthermore, we expect to continue to
experience substantial losses at increasing levels for the next several years
as we expand our research, product development, clinical testing and marketing
activities. Our ability to achieve profitability will depend, in part, on our
ability to develop, clinically test and obtain regulatory approvals for our
product candidates. In addition, we will need to successfully manufacture and
market any approved products to achieve profitability. We do not know when or
if we will complete our product development efforts, receive regulatory
approval of any of our product candidates or successfully manufacture and
market any approved products. As a result, we are unable to predict the extent
of any future losses or the time required to achieve profitability.
. We are Subject to Risks Related to Product Development Which May Adversely
Effect our Ability to Commercialize our Products. To date, we have not
completed the development of any approved products. We expect our lead drug
candidate, pleconaril, to require approximately one to two more years of
development, testing and regulatory review before it is commercially
available. Furthermore, we do not expect any of our other drug candidates to
be commercially available for at least several years, if at all. Some of our
drug candidates are currently undergoing clinical trials, while others are
still in research or preclinical development. All of our drug candidates
require significant research and development, laboratory testing, clinical
testing and regulatory approval prior to commercialization. Additional
clinical testing, if permitted by governmental authorities, may not
demonstrate that a drug candidate is safe and effective. Furthermore, positive
preclinical or clinical trial results may not be indicative of future clinical
trial results.
Adverse, inconclusive or inconsistent clinical trial results could prevent
regulatory approval, increase the cost and timing of regulatory approval or
result in additional studies or a filing for a narrower indication.
The development of any of our drug candidates is subject to many risks,
including the risk that:
. the product candidate is found to be ineffective or unsafe;
. the clinical test results for a product candidate delay or prevent
regulatory approval;
. the product candidate cannot be developed into a commercially viable
product;
. the product candidate is difficult to manufacture;
. the product candidate later exhibits adverse effects that prevent
widespread use or require withdrawal from the market;
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. third party competitors hold proprietary rights that preclude us from
marketing the product; and
. third party competitors will market a more clinically effective or more
cost-effective product.
. We Depend Heavily on Pleconaril Which is Still in the Clinical Trial Stage
and May Never Be Approved for Commercial Use. Our future success greatly
depends upon the success of pleconaril. To date, we have primarily dedicated
our resources to its development. While we have other drug candidates under
development, we may be unsuccessful in developing these candidates. Many
factors could negatively affect the success of our development efforts related
to pleconaril, including:
. significant delays in our clinical trials;
. unfavorable results from our clinical trials;
. failure to obtain regulatory approval for the commercialization of
pleconaril or any related product; and
. failure to achieve market acceptance of pleconaril or any related
product.
. Clinical Studies are Costly, Time-Consuming and Uncertain. The results of
preclinical studies and initial clinical trials of our product candidates are
not necessarily predictive of the results of large-scale clinical trials.
Preclinical studies, initial clinical trials and large-scale clinical trials
must demonstrate that our product candidates are safe and effective for use in
each target indication before we can obtain regulatory approval for
commercialization. These studies and trials may be very costly and time-
consuming.
The rate of completion of clinical trials depends upon many factors,
including the rate of enrollment of patients. The acute nature of our disease
targets, the fact that some of these diseases have peak incidence rates during
certain times of the year, and the difficulties in anticipating where disease
outbreaks will occur, may impact patient enrollment in our clinical trials. If
we are unable to accrue an adequate number of clinical patients during the
appropriate period, we may need to delay our clinical trials and incur
significant additional costs. Even if we complete our clinical trials, we may
be unable to submit a New Drug Application with the FDA as scheduled. If
submitted, a New Drug Application would require FDA approval. We expect that
the elimination of all measured major meningitis symptoms will be the primary
endpoint for our ongoing pediatric meningitis study for pleconaril, however,
the FDA may not agree with our determination or analysis.
The cost of human clinical trials varies dramatically based on a number of
factors, including:
. the order and timing of clinical indications pursued;
. the extent of development and financial support from corporate
collaborators;
. the number of patients required for enrollment; and
. the difficulty in obtaining sufficient patient populations and
clinicians.
In addition, we depend upon contract research organizations to perform
significant aspects of our studies and clinical trials.
. We May Not be Able to Obtain the Regulatory Approvals Required to
Commercialize Any of Our Product Candidates. Numerous governmental
authorities, including the FDA in the United States, regulate our business and
activities. Federal, state and foreign governmental agencies have imposed
rigorous preclinical and clinical testing and approval requirements for our
product candidates, which require significant time and expenditures. In
general, the process of obtaining government approval is time consuming and
costly.
Governmental authorities may delay or deny the approval of any of our drug
candidates. In addition, governmental authorities may enact new legislation or
regulations that could limit or restrict our development efforts. A delay or
denial of regulatory approval for any of our drug candidates, particularly
pleconaril, could materially affect our business. Even if we receive approval
of a product candidate, it may be conditioned upon
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certain limitations and restrictions as to the drug's use and may be subject
to continuous review. If we fail to comply with any applicable regulatory
requirements, we could be subject to penalties, including:
. warning letters;
. fines;
. product recalls;
. withdrawal of regulatory approval;
. operating restrictions;
. injunctions; and
. criminal prosecution.
. We Need Additional Funding and May Not Have Access to Capital. We will need
to raise substantial additional funds to continue our business activities. We
have incurred losses from operations since inception and we expect to incur
additional operating losses at an increasing rate over at least the next
several years. We expect this increase to result from further research and
development activities related to pleconaril and our other product candidates.
Our capital requirements will depend upon numerous factors, including:
. the progress of our 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;
. the effect of competing technological and market developments;
. the effect of changes and developments in our existing collaborative,
licensing and other relationships;
. the terms of any new collaborative, licensing and other arrangements
that we may establish; and
. the development of commercialization activities and arrangements.
Our business activities require significant fixed commitments, which are
likely to increase substantially. For example, as we build our marketing and
sales staffs, our fixed commitments for employee salaries will increase
substantially. Our cash requirements may vary materially from those now
planned as a result of a number of factors, including:
. results of research and development and drug candidate testing;
. relationships with strategic partners;
. changes in focus and direction of our research and development
programs;
. competitive and technological advances; and
. FDA and foreign regulatory requirements.
We will need to raise substantial additional capital to fund our future
operations. We may be unable to raise sufficient funds to complete our
development, marketing and sales activities for pleconaril or any of our other
proposed products. Potential funding sources include:
. public and private securities offerings;
. debt financing, such as bank loans; and
. collaborative, licensing and other arrangements with third parties.
Collaborative arrangements may require us to grant product development
programs or licenses to third parties for products that we might otherwise
seek to develop or commercialize ourselves.
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We may not be able to find sufficient funding on acceptable terms. If we
cannot, we may need to delay, reduce or eliminate current research and
development programs.
. We Are Still Developing our Marketing and Sales Strategies. We currently do
not have our own sales staff, and we are in the process of building a
marketing staff. We are conducting market research on the multiple disease
indications for which pleconaril is being developed. We intend to establish
our marketing strategy based upon the results of such research, the
information gained from our clinical trials and other relevant analyses. We
may elect to use a third party marketing partner for certain disease
indications, establish our own sales force or both. The development of a
marketing and sales capability will require significant expenditures,
management resources and time. Even if we are able to develop a sales force or
find a suitable marketing partner, we may not successfully penetrate the
markets for any of our proposed products.
We have entered into, and may in the future enter into, marketing,
distribution, manufacturing, development and other third party arrangements.
Third party arrangements may require us to grant certain rights to third
parties, including exclusive marketing rights to certain products, or may have
other terms that are unacceptable or burdensome to us.
. We Depend on Third Party Manufacturers Which May Restrict our Ability to
Commercialize Products. We do not have the internal capability to manufacture
pharmaceutical products under the FDA's current Good Manufacturing Practices
("GMP"). In April 1997, we entered into a Development Agreement with SELOC
France for the manufacture of pleconaril bulk drug substance and the
development of a process for commercial-scale production of pleconaril. In
addition, SELOC France will assist us in the preparation of certain
documentation that will be required in connection with our New Drug
Application for pleconaril. We anticipate that our current supply of
pleconaril drug substance, together with the bulk drug substance that we will
receive under our agreement with SELOC, will be sufficient to complete our
formulation development activities and our currently ongoing clinical trials.
We believe that we can obtain additional drug substance from SELOC France and,
if necessary, other manufacturers for the production of pleconaril drug
product on acceptable terms. If SELOC France is unable to satisfy our
requirements and we are required to find an additional or alternative source
of supply, there may be additional cost and delay in product development and
commercialization of pleconaril.
We are also evaluating alternatives for the commercial manufacture of drug
substance and drug product. The FDA requires pre-approval inspection for all
commercial manufacturing sites.
We have used an oral liquid formulation of pleconaril in our clinical
trials, and we have also developed an oral solid formulation of pleconaril. A
delay in manufacturing validation batches of the oral liquid formulation, or a
failure to negotiate agreements with suppliers for the oral liquid
formulations of pleconaril, will delay product development and
commercialization. The chemical stability of the oral solid formulation must
be tested. We also must demonstrate that the oral solid formulation is
bioequivalent to the oral liquid formulation. A delay in the required
stability testing or in manufacturing validation batches, or a failure to
demonstrate chemical stability and bioequivalency will cancel or delay the
commercialization of the oral solid formulation of pleconaril.
Any contract manufacturers that we may use must adhere to GMP regulations,
which are enforced by the FDA through its facilities inspection program. These
facilities must pass a plant inspection before the FDA will issue a pre-market
approval of the product. Moreover, while we may choose to manufacture products
in the future, we have no experience in the manufacture of pharmaceutical
products for clinical trials or commercial purposes. If we decide to
manufacture products, we would be subject to the regulatory requirements
described above. In addition, we would require substantial additional capital
and would be subject to delays or difficulties encountered in manufacturing
pharmaceutical products.
If we encounter delays or difficulties with contract manufacturers,
packagers or distributors, market introduction and subsequent sales of our
products could be delayed. In addition, we may need to seek alternative
sources of supply. If so, we may incur additional costs or delays in product
commercialization. If we change the
17
<PAGE>
source or location of supply or modify the manufacturing process, regulatory
authorities will require us 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 that we had conducted.
We may not be able to enter into alternative supply arrangements at
commercially acceptable rates, if at all. Moreover, the manufacturers utilized
by us may not provide sufficient quantities of product that meet our
specifications or delivery, cost and other requirements.
. We Depend on Collaborations with Third Parties Which May Reduce our Product
Revenues or Restrict our Ability to Commercialize Products. We may enter into
various arrangements with corporate and academic collaborators, licensors,
licensees and others. As a result, our ultimate success may depend upon the
success of these third parties. We have obtained, and intend to obtain in the
future, licensed rights to certain proprietary technologies and compounds from
other entities, individuals and research institutions, to which we may be
obligated to pay license fees, make milestone payments and pay royalties. We
may be unable to enter into collaborative, license or other arrangements that
we need to develop and commercialize our drug candidates. Moreover, we may not
realize the contemplated benefits from such collaborative, license or other
arrangements. These arrangements may place responsibility on our collaborative
partners for preclinical testing, human clinical trials, the preparation and
submission of applications for regulatory approval, or for marketing, sales
and distribution support for product commercialization. These arrangements may
also require us to transfer certain material rights to corporate partners,
licensees and others. Any license or sublicense of our commercial rights may
reduce our product revenue. Moreover, we may not derive any revenues or
profits from these arrangements. In addition, our current strategic
arrangements may not continue and we may be unable to enter into future
collaborations. Collaborators may also pursue alternative technologies or drug
candidates either on their own or in collaboration with others in direct
competition with us.
. We Depend on Patent and Proprietary Rights Which May Offer Only Limited
Protection Against Potential Infringement. The pharmaceutical industry places
considerable importance on obtaining patent and trade secret protection for
new technologies, products and processes. Our success depends, in part, on our
ability to develop and maintain a strong patent position for our products and
technologies both in the United States and in other countries. We intend to
file applications as appropriate for patents covering the composition of
matter of our drug candidates, the proprietary processes for producing such
compositions, and the uses of our drug candidates. We have five issued U.S.
patents and twelve pending U.S. patent applications. We have licensed from
Sanofi S.A. the exclusive U.S. and Canadian rights to antiviral agents for use
in enterovirus and rhinovirus indications, which are the subject of two issued
U.S. patents and two related Canadian patent applications owned by Sanofi S.A.
We depend upon Sanofi S.A. to prosecute such patent applications and protect
such patent rights. We also have filed four patent applications in certain
foreign jurisdictions.
In order to protect our proprietary technology and processes, we also rely
on trade secrets, know-how and continuing technological advancements. We have
entered into confidentiality agreements with our employees, consultants,
advisors and collaborators. However, these parties may not honor these
agreements and we may not be able to successfully protect our rights to
unpatented trade secrets and know-how. Others may independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to our trade secrets and know-how.
Many of our scientific and management personnel were previously employed by
competing companies. As a result, such companies may allege trade secret
violations and similar claims against us.
To facilitate development of our proprietary technology base, we may need to
obtain licenses to patents or other proprietary rights from other parties. If
we are unable to obtain such licenses, our product development efforts may be
delayed.
We may collaborate with universities and governmental research organizations
which, as a result, may acquire certain rights to any inventions or technical
information derived from such collaboration.
18
<PAGE>
We may incur substantial costs in asserting any patent rights and in
defending suits against us related to intellectual property rights. Such
disputes could substantially delay our drug development or commercialization
activities. The U.S. Patent and Trademark Office or a private party could
institute an interference proceeding relating to our patents or patent
applications. An opposition or revocation proceeding could be instituted in
the patent offices of foreign jurisdictions. An adverse decision in any such
proceeding could result in the loss of our rights to a patent or invention.
. We May Not Receive Third-Party Reimbursement for Any of our Product
Candidates. Our future revenues, profitability and access to capital 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. We
expect a number of federal, state and foreign proposals to control the cost of
drugs through governmental regulation. We are unsure of the form that any
health care reform legislation may take or what actions federal, state,
foreign, and private payors may take in response to the proposed reforms.
Therefore, we cannot predict the effect of any implemented reform on our
business.
Our 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. Adequate third-party coverage may not be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product research and development. If
adequate coverage and reimbursement levels are not provided by government and
third-party payors for use of our products, our products may fail to achieve
market acceptance.
. We Face Intense 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 applications similar to those targeted by us.
Many of these companies have substantially greater resources and experience
than we have. Accordingly, our competitors may succeed in obtaining regulatory
approval for products more rapidly and more effectively than we do.
Competitors may succeed in developing products that are more effective and
less costly than any that may be developed by us and also may prove to be more
successful in the manufacture and marketing of products.
. We May Not be Able to Keep Pace with Technological Changes in the
Biopharmaceutical Industry Which May Prevent Us from Commercializing our Drug
Candidates. Our business 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. Research and discoveries by
others may render some or all of our programs or drug candidates non-
competitive or obsolete.
Our business strategy is based, in part, upon the application of our
technology platform to discover and develop 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 us.
Unforeseen problems may develop with our technologies or applications. We
may not be able to successfully address technological challenges that we
encounter in our research and development programs and may not ultimately
develop commercially feasible products.
. Our Drug Candidates, Including Pleconaril, May Not Be Accepted by the
Market Which Would Adversely Affect our Business. Our drug candidates, if
approved by the FDA and other regulatory authorities, may not achieve market
acceptance. The degree of market acceptance will depend upon a number of
factors, including:
. the receipt and timing of regulatory approvals;
19
<PAGE>
. the availability of third-party reimbursement; and
. the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of drug candidates,
as well as their advantages over existing technologies and
therapeutics.
We may not be able to successfully manufacture and market our drug
candidates even if they perform successfully in clinical applications.
Furthermore, physicians or the medical community in general may not accept and
utilize any of our therapeutic products.
. We Depend on Key Personnel Whom We May Not Be Able to Recruit or
Retain. Because of the specialized scientific nature of our business, we are
highly dependent upon qualified scientific, technical and managerial
personnel. There is intense competition for qualified personnel in the
pharmaceutical field. Therefore, we may not be able to attract and retain the
qualified personnel necessary for the development of our 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 our research and development programs and to
our business. We do not maintain "key man" life insurance on any of our
employees.
Our anticipated growth and expansion into new areas and activities will
require additional expertise and the addition of new qualified personnel.
. We Are Subject to Environmental Risks Which May Adversely Affect Our
Business. Our research and development processes involve the controlled use of
hazardous, infectious and radioactive materials. We are 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. We may be required to
incur significant costs to comply with environmental laws, rules, regulations
and policies. In addition, our business may be adversely affected by current
or future environmental laws, rules, regulations and policies or by any
releases or discharges of materials that could be hazardous.
We utilize radioactive and other materials that could be hazardous to human
health, safety or the environment. We store these materials and various wastes
resulting from their use at our facility pending ultimate use and disposal.
Although we believe that our 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. If such an accident occurs, we could
be held liable for any resulting damages, and any such liability could exceed
our resources. We do not maintain a separate insurance policy for these types
of risks.
. We Are Subject to Product Liability Claims Which May Adversely Affect Our
Business. The administration of drugs to humans, whether in clinical trials or
after marketing clearance is obtained, can result in product liability claims.
Product liability claims can be expensive, difficult to defend and may result
in large judgments or settlements against us. In addition, third party
collaborators and licensees may not protect us from product liability claims.
Although we maintain product liability insurance, claims could exceed the
coverage obtained. Even if a claim is not successful, defending such a claim
may be time-consuming and expensive.
ITEM 2. PROPERTIES
The Company's principal facility consists of approximately 48,400 square
feet of leased laboratory and office space in Exton, Pennsylvania. The
Company's lease for such facility expires in 2008 and has two five year
renewal options. The Company also has the right under the lease, under certain
circumstances, to expand the facility to 86,500 square feet and to purchase
the facility.
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Executive Officers of the Registrant
The executive officers of the Company and their respective ages and
positions with the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Claude H. Nash............. 56 Chief Executive Officer, President and
Chairman of the Board of Directors
Marc S. Collett, Ph.D...... 47 Vice President, Discovery Research
Guy D. Diana, Ph.D......... 63 Vice President, Chemistry Research
Thomas F. Doyle............ 38 Vice President, General Counsel and Secretary
Johanna A. Griffin, Ph.D... 54 Vice President, Business Development
Michael Kelly.............. 34 Executive Director, Marketing
Mark A. McKinlay, Ph.D. ... 47 Vice President, Research & Development
Vincent J. Milano.......... 35 Vice President, Chief Financial Officer and
Treasurer
</TABLE>
Claude H. Nash, a co-founder of the Company, has served as Chairman of the
Board of Directors since February 1997, and 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 Corporation, a
pharmaceutical company. Dr. Nash received his Ph.D. from Colorado State
University.
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, a
biotechnology company. Prior to joining PathoGenesis Corporation, Dr. Collett
served as Director, Virology & Antibody Engineering and Director, Biochemical
Virology at MedImmune, Inc., a biotechnology company, where he was employed
from 1988 to 1993. Dr. Collett received his Ph.D. from the University of
Michigan.
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 Incorporated, a pharmaceutical company, 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.
Thomas F. Doyle has served as Vice President, General Counsel since November
1997, as Secretary since February 1997 and as Executive Director, Counsel
since joining the Company in November 1996. From 1990 until he joined the
Company, Mr. Doyle was a corporate attorney with the law firm of Pepper,
Hamilton & Scheetz. Mr. Doyle received his J.D. from Temple University School
of Law. Prior to attending Temple University, Mr. Doyle was a Certified Public
Accountant. Mr. Doyle received his B.S. in accounting from Mt. St. Mary's
College.
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., a pharmaceutical company. Dr. Griffin
received her Ph.D. from the University of Alabama at Birmingham.
21
<PAGE>
Michael Kelly has served as Executive Director, Marketing since joining the
Company in April 1997. From 1991 until he joined the Company, Mr. Kelly held
various positions at TAP Pharmaceuticals, a pharmaceutical company, the latest
being Manager of Hospital Account Executives within the Mid-Atlantic Region.
Mr. Kelly received his B.S. in Marketing from the Trenton State College and
his M.B.A. from Rider College.
Mark A. McKinlay, Ph.D., a co-founder of the Company, has served as Vice
President, Research & Development since the Company's commencement of
operations in December 1994, and served as Secretary from December 1994 until
February 1997. From 1989 through 1994, Dr. McKinlay served in several
positions, including Senior Director, at Sterling Winthrop Pharmaceuticals
Research Division, a division of Sterling Winthrop Incorporated, a
pharmaceutical company. Dr. McKinlay received his Ph.D. from Renssalear
Polytechnic Institute.
Vincent J. Milano has served as Vice President, Chief Financial Officer
since November 1997, as Vice President, Finance & Administration of the
Company since February 1997, as Treasurer since July 1996, and as Executive
Director, Finance & Administration from April 1996 until February 1997. From
1985 until he joined the Company, Mr. Milano was with KPMG Peat Marwick LLP,
independent certified public accountants, 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.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
The Company's Common Stock is traded on the National Market segment of The
Nasdaq Stock Market under the symbol "VPHM." The Company commenced trading on
The Nasdaq Stock Market on November 19, 1996. The following table sets forth
the high and low sale prices as quoted on The Nasdaq Stock Market since the
fourth quarter of 1996.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1997
First Quarter............................................. $ 13.75 $ 9.00
Second Quarter............................................ $ 18.75 $ 9.688
Third Quarter............................................. $22.625 $ 14.00
Fourth Quarter............................................ $ 22.75 $ 16.00
1998
First Quarter............................................. $ 21.75 $ 16.5
Second Quarter............................................ $26.125 $19.625
Third Quarter............................................. $ 24.25 $ 14.00
Fourth Quarter............................................ $ 20.00 $ 7.875
1999
January 1 through February 28............................. $ 13.00 $ 7.00
</TABLE>
Holders and Dividends
There were approximately 71 record holders of the Company's Common Stock as
of March 1, 1999. The Company has not declared or paid cash dividends on its
Common Stock since its inception and does not intend to do so in the
foreseeable future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation" in Item 7 of this Annual Report on Form
10-K.
Recent Sales of Unregistered Securities
In November 1998, the Company issued 17,623 shares of Common Stock pursuant
to a cashless exercise of warrants that were otherwise exercisable on a cash
basis for 21,675 shares of Common Stock. No underwriter or placement agent was
involved in these transactions. The issuance of Common Stock upon exercise of
the warrants was made in reliance on Section 4(2) of the Securities Act of
1933, as amended.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the caption "Balance Sheet
Data" as of December 31, 1994, 1995, 1996, 1997 and 1998, and under the
caption "Statement of Operations Data" for the period from December 5, 1994
(inception) through December 31, 1994 and the years ended December 31, 1995,
1996, 1997 and 1998 are derived from financial statements of the Company which
have been audited by KPMG LLP, independent certified public accountants. 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 Report. The Company is considered a "development
stage company" as described in Note 1 of the Company's Financial Statements.
<TABLE>
<CAPTION>
Period from
December 5,
1994
(inception)
through Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1994 1995 1996 1997 1998
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
License fee and mile-
stones revenue......... $ 0 $ 0 $ 1,000,000 $ 1,500,000 $ 1,500,000
Grant revenue........... 0 90,813 436,081 0 0
---------- ----------- ----------- ------------ ------------
Total revenues.......... 0 90,813 1,436,081 1,500,000 1,500,000
---------- ----------- ----------- ------------ ------------
Operating expenses:
Research and develop-
ment................... 75,779 2,930,106 6,694,703 10,928,976 25,130,232
General and administra-
tive................... 243,318 1,091,299 1,421,524 3,341,081 4,375,800
---------- ----------- ----------- ------------ ------------
Total operating ex-
penses................. 319,097 4,021,405 8,116,227 14,270,057 29,506,032
Interest income, net.... 0 75,730 285,142 1,320,174 1,603,916
---------- ----------- ----------- ------------ ------------
Net loss................ $ (319,097) $(3,854,862) $(6,395,004) $(11,449,883) $(26,402,116)
========== =========== =========== ============ ============
Net loss per share: (1)
Basic................. $ (4.67) $ (3.89) $ (1.13) $ (2.30)
Diluted............... (3.52) (3.44) (1.13) (2.30)
Shares used in computing
net loss per share: (1)
Basic................. 828,750 2,053,114 10,092,590 11,485,589
Diluted............... 1,099,396 2,323,760 10,092,590 11,485,589
---------- ----------- ----------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1994 1995 1996 1997 1998
-------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and short-term
investments............ $ 22,870 $4,713,426 $22,547,679 $43,368,462 $20,011,782
Working capital (defi-
cit)................... (243,172) 3,270,375 20,001,703 37,209,028 11,490,395
Total assets............ 24,870 4,873,845 23,452,879 46,275,480 23,657,401
Loan payable-
noncurrent............. 0 0 0 416,667 1,822,917
Long-term capital
leases................. 0 0 104,571 53,186 2,807
Mandatorily redeemable
convertible preferred
stock.................. 60,000 7,416,604 0 0 0
Total stockholders' eq-
uity (deficit)......... (303,172) (4,089,758) 20,605,161 39,150,871 12,836,031
</TABLE>
- --------
(1) See Note 2 of Notes to Financial Statements.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Our disclosure and analysis in this report contains some forward-looking
statements. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to present or anticipated scientific progress,
development of potential pharmaceutical products, future revenues, capital
expenditures, research and development expenditures, future financings and
collaborations, personnel, manufacturing requirements and capabilities, and
other statements regarding matters that are not historical facts or statements
of current condition.
Any or all of our forward-looking statements in this report may turn out to
be wrong. They can be affected by inaccurate assumptions we might make or by
known or unknown risks and uncertainties. Many factors mentioned in the
discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially. We do not intend to update our forward-looking
statements to reflect future events or developments.
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 does not expect any revenues from product sales
for at least the next eighteen-month period. The Company has not been
profitable since inception and has incurred a cumulative net loss of
$48,420,962 through December 31, 1998. 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, primarily due to expected increases in the
Company's research and development expenses, further clinical trials of the
Company's most advanced drug candidate, pleconaril (including any significant
additional studies for approval in the European Union, if any are required),
and milestone payments that may be payable under the terms of the Company's
Agreement with Sanofi, S.A. in respect of pleconaril. Also, the Company
expects to incur expenses related to its marketing and market research
activities for pleconaril, its development of a marketing and sales staff 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.
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 primarily for research and
development activities and the supporting general and administrative expenses.
Through December 31, 1998, the Company has used approximately $38.6 million in
operating activities. The Company invests its cash in short-term investments.
Through December 31, 1998, the Company has used approximately $22.6 million in
investing activities, including $18.8 million in short-term investments and
$3.3 million in equipment purchases and new construction. Through December 31,
1998, the Company has financed its operations primarily through public
offerings of Common Stock, private placements of redeemable preferred stock,
two bank loans, equipment lease lines and a milestone advance totaling
approximately $62.3 million. At December 31, 1998, the Company had cash and
cash equivalents and short-term investments aggregating approximately $20
million.
The Company leases its corporate and research and development facilities
under an operating lease expiring in 2008. The Company moved to its current
location in March 1998. The Company also has the right to expand the facility
and, under certain circumstances, to purchase the new facility at a purchase
price based on a predetermined formula. The Company has financed substantially
all of its equipment under two master lease
25
<PAGE>
agreements and two bank loans. The first bank loan, which was consummated in
February 1997, is for $600,000, is payable in equal annual installments over
72 months and bears interest at approximately 9%. The second bank loan, which
was consummated in December 1998, is for $500,000, is payable in equal annual
installments over 60 months and bears interest at approximately 7.5%. The
Company is required to repay amounts outstanding under the two leases within
periods ranging from 32 to 48 months. As of March 1, 1999, outstanding
borrowings under these arrangements are approximately $1,000,000.
Under the Company's agreement with Sanofi S.A. ("Sanofi"), the Company is
required to make certain payments to Sanofi, including royalties, as defined,
should agreed-upon future milestones be attained. The milestone events
contemplate regulatory submissions of new drug applications and regulatory
approvals in various jurisdictions. There can be no assurance that any such
milestones will be attained.
The Company and SELOC France entered into an Addendum to their Development
Agreement in 1998 (the "SELOC Addendum"). Under the SELOC Addendum, SELOC has
manufactured two validation batches of pleconaril drug substance, and the
Company anticipates that SELOC will manufacture a third validation batch of
bulk drug substance in 1999. SELOC also is assisting the Company under the
SELOC Addendum in preparing the pleconaril drug master file and is preparing
certain documentation that will be required in connection with the Company's
New Drug Application for pleconaril. The Company estimates that $1.0 million
will be payable under the Addendum in 1999.
On October 9, 1997, the Company received $1,000,000 from Boehringer
Ingelheim Pharmaceuticals, Inc. ("BI") as an advance on a future milestone in
connection with a Collaborative Research Agreement (the "Agreement"). The
Agreement expired in August 1998. Such amount is due and payable in August
2000. The loan bears interest at 8.5% and is evidenced by a convertible
promissory note. If amounts due under the note are not paid as described in
the note, BI may convert the then outstanding principal balance and accrued
interest thereon into shares of the Company's common stock based on the last
sale price of such common stock on the date immediately prior to the date on
which the Company is notified of BI's intention to convert the promissory
note.
The Company has incurred losses from its operations since inception. 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, primarily due to expected increases in the Company's research and
development expenses, further clinical trials and clinical development of the
Company's most advanced drug candidate, pleconaril (including any significant
additional studies for approval in the European Union, if any are required),
and milestone payments that may be payable under the terms of the Company's
Agreement with Sanofi, S.A. in respect of pleconaril. Also, the Company
expects to incur expenses related to its marketing and market research
activities for pleconaril, its development of a marketing and sales staff and
further research and development related to other product candidates. The
Company will require additional financing for operations and expansion of its
facilities prior to achieving positive cash flows from its commercial
activities. The Company expects that it will need additional financing to
complete all clinical studies for pleconaril, for the development and required
testing of the Company's other product candidates, and to develop its
marketing and sales staffs. To obtain this financing, the Company expects 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.
Results of Operations
Years ended December 31, 1998 and 1997
The Company earned and received two milestone payments for $1,500,000 from
BI for each of the years ended December 31, 1998 and 1997. Net interest income
increased to $1,603,916 for the year ended December 31, 1998 from $1,320,174
for the year ended December 31, 1997, principally due to larger invested
balances provided by the proceeds of a follow-on public offering in July 1997.
26
<PAGE>
Research and development expenses increased to $25,130,232 for the year
ended December 31, 1998 from $10,928,976 for the year ended December 31, 1997.
The increase was principally due to the cost of ongoing multiple clinical
trials, including the manufacture of bulk drug substance for stability and
validation batches, related to pleconaril being conducted in the year ended
December 31, 1998. The Company recorded $1,200,000 as a reduction to research
and development expenses in the year ended December 31, 1998 for the
adjustment to a milestone payable to Sanofi and the reimbursement from Sanofi
for a previously paid license fee. Such amounts were originally recorded as
research and development expenses in prior periods. Also, the Company had more
scientists conducting discovery research in the year ended December 31, 1998
compared to the year ended December 31, 1997 in the area of advancement of
drug candidates for the Company's RSV pneumonia and hepatitis C programs. In
addition, the Company incurred increased expenses for pre-clinical activities
for the RSV pneumonia discovery research program in the year ended December
31, 1998 versus the year ended December 31, 1997.
General and administrative expenses increased to $4,375,800 for the year
ended December 31, 1998 from $3,341,081 for the year ended December 31, 1997.
The increase is principally due to increased marketing and market research
expenses related to pleconaril, salary expenses and facilities costs related
to the Company's move to its current facilities in March 1998.
The net loss increased to $26,402,116 for the year ended December 31, 1998
from $11,449,883 for the year ended December 31, 1997.
Years ended December 31, 1997 and 1996
The Company earned and received two milestone payments aggregating
$1,500,000 in 1997 from BI. The Company received a non-refundable technology
access fee of $1,000,000 from BI and earned $436,081 of grant revenue for the
year ended December 31, 1996. Net interest income increased to $1,320,174 for
the year ended December 31, 1997 from $285,142 for the year ended December 31,
1996, principally due to larger invested balances provided by the proceeds of
the Company's two public offerings in November 1996 and in July 1997.
Research and development expenses increased to $10,928,976 for the year
ended December 31, 1997 from $6,694,703 for the year ended December 31, 1996.
The increase was principally due to the cost of multiple clinical trials
related to pleconaril, and the advancement of drug candidates for the
Company's RSV pneumonia, influenza, and hepatitis C programs.
General and administrative expenses increased to $3,341,081 for the year
ended December 31, 1997 from $1,421,524 for the year ended December 31, 1996.
The increase was principally due to increased salary expenses, costs of being
a public company for a full fiscal year, facilities costs, and increased costs
associated with the pursuit of corporate collaborations.
The net loss increased to $11,449,883 for the year ended December 31, 1997
from $6,395,004 for the year ended December 31, 1996.
Year 2000 Impact
The Company has assessed the potential impact of the year 2000 issue on the
ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. To date, the Company has not
expended material amounts on the year 2000 issue. Any of the Company's
programs or computer-supported operations that recognize a date using "00" as
the year 1900 rather than the year 2000 could result in errors or system
failures. The Company utilizes a number of computer programs across its entire
operation, including computer programs of third parties with whom the Company
does business. The Company has completed its assessment, and currently
believes that costs of addressing this issue will not have a material adverse
impact on the Company's financial position or results of operations. However,
if the Company and third parties upon which it relies are unable to address
this issue in a timely manner, it could result in a material
27
<PAGE>
financial risk to the Company. In order to assure that this does not occur,
the Company is seeking confirmation from all companies providing drug
development or manufacturing products or services to ViroPharma that these
companies have taken appropriate steps to eliminate year 2000 computer risks.
The Company plans to devote all resources required to resolve any significant
year 2000 issues in a timely manner.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company required by this item are attached
to this Report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and regarding compliance
with Section 16 of the Securities Exchange Act of 1934 required by this Item
will be set forth in the Company's Proxy Statement, to be filed within 120
days after the end of the fiscal year covered by this Annual Report on Form
10-K, and is incorporated by reference to the Company's Proxy Statement.
The information concerning the Company's executive officers required by this
Item is incorporated by reference herein to the section of this Report in Part
I, Item 4 entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in the Company's
Proxy Statement, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and is incorporated by reference
to the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth in the Company's
Proxy Statement, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and is incorporated by reference
to the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the Company's
Proxy Statement, to be filed within 120 days after the end of the fiscal year
covered by this Annual Report on Form 10-K, and is incorporated by reference
to the Company's Proxy Statement
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this report:
(1) Financial Statements. The Financial Statements listed in the
accompanying Index to Financial Statements appearing on page F-1 are filed
as part of this Annual Report on Form 10-K.
(2) Financial Statement Schedules. All schedules are omitted because they
are not applicable, or not required, or because the required information is
included in the Financial Statements or notes thereto.
(3) Exhibits. The following is a list of Exhibits filed as part of this
Annual Report on Form 10-K. Where so indicated by footnote, Exhibits which
were previously filed are incorporated by reference. For Exhibits
incorporated by reference, the location of the Exhibit in the previous
filing is indicated in parentheses.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Second Amended and Restated Certificate of Incorporation of the
Company.(1) (Exhibit 3.1)
3.2* Certificate of Designation establishing and designating the Series
A Junior Participating Preferred Shares.
3.3 By-Laws of the Company, as amended.(1) (Exhibit 3.3)
4.1 Rights Agreement, dated as of September 10, 1998, between
ViroPharma Incorporated and StockTrans, Inc., as Rights Agent.
(Exhibit 4.1)(4)
10.1++ ViroPharma Incorporated Stock Option Plan (5)
10.2+ Agreement dated December 22, 1995 between the Company and Sanofi.
(1) (Exhibit 10.6)
10.3 Form of Employment Agreement. (1) (Exhibit 10.8)
10.4 Form of Indemnification Agreement. (1) (Exhibit 10.9)
10.5 Restricted Stock Purchase Agreement dated as of January 17, 1996,
by and between the Company and Frank Baldino, Jr. (1) (Exhibit
10.11)
10.6 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. (1)
(Exhibit 10.12)
10.7 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. (1) (Exhibit 10.13)
10.8 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. (1)
(Exhibit 10.16)
10.9 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. (1) (Exhibit 10.18)
10.10 Development Agreement dated as of April 16, 1997, by and among
SELOC AG, SICOR, S.A. and the Company. (2) (Exhibit 10.19)
10.11 First Amendment to Agreement dated as of February 21, 1997 by and
between Sanofi and the Company. (2) (Exhibit 10.20)
10.12 Promissory Note of Jon M. Rogers and Traci J. Rogers, dated as of
June 12, 1997. (2) (Exhibit 10.21)
10.13 Lease, dated July 21, 1997, between the Company and The Hankin
Group. (2) (Exhibit 10.23)
10.14 Purchase Option Agreement, dated July 21, 1997, between the
Company and The Hankin Group. (2) (Exhibit 10.24)
10.15 Escrow Agreement, dated July 21, 1997, among the Company, The
Hankin Group and Manito Abstract Company, Inc. (2) (Exhibit 10.25)
10.16 Consulting Agreement dated July 31, 1997 between the Company and
Frank Baldino, Jr. (2) (Exhibit 10.27)
10.17 Promissory Note of Vincent J. Milano and Christie A. Milano, dated
August 20, 1997. (3) (Exhibit 10.29)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.18 Consulting Agreement dated November 13, 1997 between the Company
and David J. Williams. (6) (Exhibit 10.26)
10.19 Promissory Note of Michael Kelly and Joan C. Kelly, dated February
18, 1998. (7) (Exhibit 10.27)
10.20 Addendum to Development Agreement dated as of March 1, 1998
between the Company and SELOC France. (8) (Exhibit 10.28)
11* Statement of Computation of Loss Per Share.
23* Consent of KPMG LLP.
24* Power of Attorney (included on signature page).
27* Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
+ 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 of 1933, as amended.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333-
12407), as amended, initially filed on September 20, 1996.
(2) Filed as an Exhibit to Registration Statement on Form S-1 (File No. 333-
30005), as amended, initially filed on June 25, 1997.
(3) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended
September 30, 1997.
(4) Filed as an Exhibit to the Company's Current Report on Form 8-K filed with
the Commission on September 21, 1998.
(5) Filed as an Annex to the Company's Proxy Statement filed with the
Commission on April 15, 1998.
(6) Filed as an Exhibit to Registrant's Form 10-K for the year ended December
31, 1997.
(7) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended March
31, 1998.
(8) Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended June
30, 1998.
Copies of the exhibits are available to stockholders from Thomas F. Doyle,
Vice President, General Counsel and Secretary, ViroPharma Incorporated, 405
Eagleview Boulevard, Exton, Pennsylvania 19341. There will be a fee to cover
the Company's expenses in furnishing the exhibits.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company for the quarter ended
December 31, 1998.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VIROPHARMA INCORPORATED
/s/ Vincent J. Milano
By:__________________________________
Vincent J. Milano
Vice President, Chief Financial
Officer
and Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Claude H. Nash and Vincent J. Milano as
his or her attorney-in-fact, with the full power of substitution, for him or
her in any and all capacities, to sign any amendments to this Report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes,
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Claude H. Nash President, Chief Executive March 29, 1999
______________________________________ Officer and Chairman of
Claude H. Nash the Board (Principal
Executive Officer)
/s/ Vincent J. Milano Vice President, Chief March 29, 1999
______________________________________ Financial Officer and
Vincent J. Milano Treasurer (Principal
Financial and Accounting
Officer)
/s/ Claude H. Nash Director March 29, 1999
______________________________________
Claude H. Nash
/s/ Frank Baldino, Jr., Ph.D. Director March 29, 1999
______________________________________
Frank Baldino, Jr., Ph.D.
/s/ Robert J. Glaser Director March 29, 1999
______________________________________
Robert J. Glaser
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Ann H. Lamont Director March 29, 1999
______________________________________
Ann H. Lamont
/s/ Howard Pien Director March 29, 1999
______________________________________
Howard Pien
/s/ David J. Williams Director March 29, 1999
______________________________________
David J. Williams
</TABLE>
32
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Independent Auditors' Report.......................................... F-2
Balance Sheets at December 31, 1997 and 1998.......................... F-3
Statements of Operations and Comprehensive Loss for the years ended
December 31, 1996, 1997 and 1998, and the period December 5, 1994
(Inception) to December 31, 1998..................................... F-4, F-5
Statements of Stockholders' Equity (Deficit) for the period December
5, 1994 (Inception) to December 31, 1995, and the years ended
December 31, 1996, 1997, and 1998.................................... F-6
Statements of Cash Flows for the years ended December 31, 1996, 1997
and 1998, and the period December 5, 1994 (Inception) to December 31,
1998................................................................. F-7
Notes to Financial Statements......................................... F-8
</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, 1997 and 1998, and the
related statements of operations, comprehensive loss, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1998 and for the period December 5, 1994 (Inception) to December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ViroPharma Incorporated (A
Development Stage Company) as of December 31, 1997 and 1998, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1998 and for the period December 5, 1994 (Inception)
to December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Princeton, New Jersey
February 23, 1999
F-2
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Balance Sheets
December 31, 1997 and 1998
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................ $ 4,204,330 $ 1,076,682
Short-term investments........................... 39,164,132 18,935,100
Notes receivable from officers--current.......... 33,691 39,205
Other current assets............................. 461,631 435,054
------------ ------------
Total current assets........................... 43,863,784 20,486,041
Equipment and leasehold improvements, net.......... 1,084,720 2,477,105
Construction in progress........................... 860,975 --
Restricted investments............................. 300,000 550,000
Notes receivable from officers--noncurrent......... 84,102 62,356
Other assets....................................... 81,899 81,899
------------ ------------
Total assets................................... $ 46,275,480 $ 23,657,401
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................. $ 919,970 $ 1,442,756
Loans payable--current........................... 100,000 200,000
Obligation under capital lease--current.......... 61,487 50,379
Milestone advance................................ 1,000,000 --
Accrued expenses and other current liabilities... 4,573,299 7,302,511
------------ ------------
Total current liabilities...................... 6,654,756 8,995,646
Loans payable--noncurrent.......................... 416,667 1,822,917
Obligation under capital lease--noncurrent......... 53,186 2,807
------------ ------------
7,124,609 10,821,370
------------ ------------
Stockholders' equity:
Preferred stock, par value $.001 per share.
Authorized 5,000,000 shares in 1997 and 1998;
none issued and outstanding..................... -- --
Common stock, par value $.002 per share.
Authorized 27,000,000 shares in 1997 and 1998;
issued and outstanding 11,464,106 at December
31, 1997 and 11,516,794 at December 31, 1998.... 22,928 23,034
Additional paid-in capital....................... 61,322,384 61,373,998
Deferred compensation............................ (451,721) (247,601)
Unrealized gains on available for sale
securities...................................... 276,126 107,562
Deficit accumulated during the development
stage........................................... (22,018,846) (48,420,962)
------------ ------------
Total stockholders' equity..................... 39,150,871 12,836,031
Commitments
Total liabilities and stockholders' equity..... $ 46,275,480 $ 23,657,401
============ ============
</TABLE>
- --------
See accompanying notes to financial statements.
F-3
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Statements of Operations
The years ended December 31, 1996, 1997 and 1998,
and the period December 5, 1994 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Period
December 5,
1994
Year ended December 31, (Inception) to
--------------------------------------- December 31,
1996 1997 1998 1998
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues:
License fee and
milestones revenue... $ 1,000,000 $ 1,500,000 $ 1,500,000 $ 4,000,000
Grant revenue......... 436,081 -- -- 526,894
----------- ------------ ------------ ------------
Total revenues...... 1,436,081 1,500,000 1,500,000 4,526,894
----------- ------------ ------------ ------------
Operating expenses
incurred in the
development stage:
Research and
development.......... 6,694,703 10,928,976 25,130,232 45,759,796
General and
administrative....... 1,421,524 3,341,081 4,375,800 10,473,022
----------- ------------ ------------ ------------
Total operating
expenses........... 8,116,227 14,270,057 29,506,032 56,232,818
----------- ------------ ------------ ------------
Loss from
operations......... (6,680,146) (12,770,057) (28,006,032) (51,705,924)
Interest income, net.... 285,142 1,320,174 1,603,916 3,284,962
----------- ------------ ------------ ------------
Net loss............ $(6,395,004) $(11,449,883) $(26,402,116) $(48,420,962)
=========== ============ ============ ============
Accretion of redemption
value attributable to
mandatorily redeemable
convertible preferred
stock.................. 1,597,341 -- -- 1,616,445
----------- ------------ ------------ ------------
Net loss allocable to
common stockholders.... $(7,992,345) $(11,449,883) $(26,402,116) $(50,037,407)
=========== ============ ============ ============
Net loss per share:
Basic................. $ (3.89) $ (1.13) $ (2.30)
=========== ============ ============
Diluted............... $ (3.44) $ (1.13) $ (2.30)
=========== ============ ============
Shares used in computing
net loss per share:
Basic................. 2,053,114 10,092,590 11,485,589
=========== ============ ============
Diluted............... 2,323,760 10,092,590 11,485,589
=========== ============ ============
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Statements of Comprehensive Loss
The years ended December 31, 1996, 1997 and 1998,
and the period December 5, 1994 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Period
December 5,
1994
Year ended December 31, (Inception) to
--------------------------------------- December 31,
1996 1997 1998 1998
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net loss................ $(6,395,004) $(11,449,883) $(26,402,116) $(48,420,962)
----------- ------------ ------------ ------------
Other comprehensive
income (loss):
Unrealized holding
gains (losses)
arising during
period............... 58,311 276,126 107,562 468,741
Less: reclassification
adjustment for gains
included in net
loss................. 26,742 58,311 276,126 361,179
----------- ------------ ------------ ------------
Unrealized gains
(losses) on available
for sale securities.... 31,569 217,815 (168,564) 107,562
----------- ------------ ------------ ------------
Comprehensive loss...... $(6,363,435) $(11,232,068) $(26,570,680) $(48,313,400)
----------- ------------ ------------ ------------
</TABLE>
- --------
See accompanying notes to financial statements.
F-5
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
Period December 5, 1994 (Inception) to December 31, 1995, and the years ended
December 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
Unrealized Deficit
Common Stock Notes gains (losses) accumulated
------------------- Additional receivable on available during the Total
Number of paid-in on common Deferred for sale development stockholders'
Shares Amount capital stock compensation securities stage equity (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) -- -- --
Issuance costs
of Series A and
B preferred
stock.......... -- -- (46,912) -- -- -- -- (46,912)
Proceeds from
notes
receivable..... -- -- -- 1,625 -- -- -- 1,625
Unrealized gains
on available
for sale
securities..... -- -- -- -- -- 26,742 -- 26,742
Amortization of
deferred
compensation... -- -- -- -- 31,850 -- -- 31,850
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........ -- -- -- -- -- -- (4,173,959) (4,173,959)
---------- -------- ------------ ------- ---------- -------- ------------- ------------
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........ -- -- 753,461 -- (753,461) -- -- --
Amortization of
deferred
compensation... -- -- -- -- 139,899 -- -- 139,899
Unrealized gains
on available
for sale
securities..... -- -- -- -- -- 31,569 -- 31,569
Issuance costs
of Series C
preferred
stock.......... -- -- (27,100) -- -- -- -- (27,100)
Exercise of
common stock
grant and
options........ 72,420 145 6,955 -- -- -- -- 7,100
Value attributed
to issuance of
warrants....... -- -- 19,920 -- -- -- -- 19,920
Accretion of
redemption
value
attributable to
mandatorily
redeemable
convertible
preferred
stock.......... -- -- (1,597,341) -- -- -- -- (1,597,341)
Conversion of
preferred stock
to common
stock.......... 5,588,191 11,177 16,253,022 -- -- -- -- 16,264,199
Issuance of
common stock,
net of issuance
costs.......... 2,587,500 5,175 16,246,502 -- -- -- -- 16,251,677
Net loss........ -- -- -- -- -- -- (6,395,004) (6,395,004)
---------- -------- ------------ ------- ---------- -------- ------------- ------------
Balance, December
31, 1996........ 9,076,861 18,154 31,758,996 -- (661,337) 58,311 (10,568,963) 20,605,161
Amortization of
deferred
compensation... -- -- -- -- 209,616 -- -- 209,616
Unrealized gains
on available
for sale
securities..... -- -- -- -- -- 217,815 -- 217,815
Exercise of
common stock
options........ 15,450 31 7,070 -- -- -- -- 7,101
Value attributed
to issuance of
warrants....... -- -- 15,936 -- -- -- -- 15,936
Issuance of
common stock,
net of issuance
costs.......... 2,300,000 4,600 29,510,475 -- -- -- -- 29,515,075
Cashless
exercise of
warrants....... 71,795 143 (143) -- -- -- -- --
Consulting
expense related
to option
grants......... -- -- 30,050 -- -- -- -- 30,050
Net loss........ -- -- -- -- -- -- (11,449,883) (11,449,883)
---------- -------- ------------ ------- ---------- -------- ------------- ------------
Balance, December
31, 1997........ 11,464,106 22,928 61,322,384 -- (451,721) 276,126 (22,018,846) 39,150,871
Amortization of
deferred
compensation... 204,120 204,120
Unrealized loss
on available
for sale
securities..... -- -- -- -- -- (168,564) -- (168,564)
Exercise of
common stock
options and
warrants....... 52,688 106 23,613 -- -- -- -- 23,719
Value attributed
to issuance of
warrants....... -- -- 15,936 -- -- -- -- 15,936
Consulting
expense related
to option
grants......... -- -- 12,065 -- -- -- -- 12,065
Net loss........ -- -- -- -- -- -- (26,402,116) (26,402,116)
---------- -------- ------------ ------- ---------- -------- ------------- ------------
Balance, December
31, 1998........ 11,516,794 $ 23,034 $ 61,373,998 -- $ (247,601) $107,562 $ (48,420,962) $ 12,836,031
========== ======== ============ ======= ========== ======== ============= ============
</TABLE>
- -------
See accompanying notes to financial statements.
F-6
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Statements of Cash Flows
The years ended December 31, 1996, 1997 and 1998, and the period December 5,
1994 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Period
December 5,
1994
Year ended December 31, (Inception) to
---------------------------------------- December 31,
1996 1997 1998 1998
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(6,395,004) $(11,449,883) $(26,402,116) $(48,420,962)
Adjustments to recon-
cile net loss to net
cash used in operating
activities:
Non-cash compensation
expense............... 139,899 209,616 204,120 585,485
Non-cash warrant val-
ue.................... 19,920 15,936 15,936 141,792
Non-cash consulting ex-
pense................. -- 30,050 12,065 42,115
Depreciation and amor-
tization expense...... 58,022 288,278 428,165 774,465
Changes in assets and
liabilities:
Other current assets... (93,223) (264,460) 26,577 (435,054)
Notes receivable from
officers.............. -- (117,793) 16,232 (101,561)
Other assets........... 20,471 (45,899) -- (81,899)
Accounts payable....... 45,611 563,799 522,786 1,442,756
Accrued expenses and
other current liabili-
ties.................. 1,135,087 2,239,273 2,835,462 7,408,761
------------ ------------ ------------ ------------
Net cash used in oper-
ating activities..... (5,069,217) (8,531,083) (22,340,773) (38,644,102)
------------ ------------ ------------ ------------
Cash flows from invest-
ing activities:
Purchase of equipment.. (730,052) (700,969) (959,575) (2,390,596)
Construction in pro-
gress................. -- (860,975) -- (860,975)
Purchase of short-term
investments........... (15,335,938) (61,108,260) (26,206,929) (113,669,858)
Sales of short-term in-
vestments............. -- 5,316,660 -- 9,680,414
Maturities of short-
term investments...... 8,006,520 28,282,652 46,017,397 84,611,906
------------ ------------ ------------ ------------
Net cash provided by
(used in) investing
activities .......... (8,059,470) (29,070,892) 18,850,893 (22,629,109)
------------ ------------ ------------ ------------
Cash flows from financ-
ing activities:
Net proceeds from issu-
ance of preferred
stock................. 7,223,155 -- -- 13,931,243
Net proceeds from issu-
ance of common stock.. 16,258,777 29,522,176 23,719 45,804,672
Proceeds from milestone
advance............... -- 1,000,000 -- 1,000,000
Proceeds from loan pay-
able.................. -- 600,000 500,000 1,100,000
Payment of loan pay-
able.................. -- (83,333) (100,000) (183,333)
Proceeds received on
notes receivable...... -- -- -- 1,625
Proceeds from notes
payable............... 12,500 -- -- 692,500
Payment of notes pay-
able.................. (50,000) -- -- (50,000)
Obligation under capi-
tal lease............. 157,521 (42,848) (61,487) 53,186
------------ ------------ ------------ ------------
Net cash provided by
financing activi-
ties................. 23,601,953 30,995,995 362,232 62,349,893
------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash equiv-
alents................. 10,473,266 (6,605,980) (3,127,648) 1,076,682
Cash and cash equiva-
lents at beginning of
period................. 337,044 10,810,310 4,204,330 --
------------ ------------ ------------ ------------
Cash and cash equiva-
lents at end of peri-
od..................... $ 10,810,310 $ 4,204,330 $ 1,076,682 $ 1,076,682
============ ============ ============ ============
Supplemental disclosure
of noncash transac-
tions:
Conversion of Note Pay-
able to Series A and
Series B Preferred
Stock................. -- -- -- $ 642,500
Conversion of
mandatorily redeemable
convertible preferred
stock to common
shares................ $ 16,264,199 -- -- $ 16,264,199
Notes issued for
828,750 common
shares................ -- -- -- $ 1,625
Deferred compensation.. $ 753,461 -- -- $ 833,086
Accretion of redemption
value attributable to
mandatorily redeemable
convertible preferred
stock................. $ 1,597,341 -- -- $ 1,616,445
Conversion of milestone
advance to loan pay-
able.................. -- -- $ 1,000,000 $ 1,000,000
Unrealized gains (loss-
es) on available for
sale securities....... $ 31,569 $ 217,815 $ (168,564) $ 107,562
</TABLE>
- --------
See accompanying notes to financial statements.
F-7
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
December 31, 1997 and 1998
1. Organization and Business Activities
ViroPharma Incorporated (a development stage Company) (the "Company")
commenced operations on December 5, 1994. The Company is a development stage
pharmaceutical company engaged in the discovery and development of new
antiviral medicines.
The Company is devoting substantially all of its efforts towards conducting
drug discovery and development, raising capital, conducting clinical trials,
pursuing regulatory approval for products under development, recruiting
personnel 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 $48,420,962 through December 31, 1998. 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, 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.
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
and comprehensive loss. For purposes of determining gross realized gains and
losses, the cost of short-term investments sold is based upon specific
identification. The Company has not experienced any significant realized gains
or losses on its investments through December 31, 1998.
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 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
Equipment and leasehold improvements are recorded at cost. Depreciation and
amortization is computed on a straight-line basis over the useful lives of the
assets or the lease term, whichever is shorter, ranging from two to ten years.
F-8
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
2. Basis of Accounting and Summary of Significant Accounting Policies, cont.
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.
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--collaborative research, contract and license agreements
Collaborative research revenue from cost-reimbursement and grant agreements
are recorded when earned, up to the contractual limits. Contract and licensing
revenue is recognized when milestones are met and the Company's specific
performance obligations have been satisfied in accordance with the terms of
the respective agreements. Cash received that is related to future performance
under such contracts is deferred and recognized as revenue when earned.
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.
Reverse stock split
On November 5, 1996, the Company effected a reverse stock split of its
common stock on a .51-for-1 basis. All common share and pro forma per share
amounts in the accompanying financial statements have been retroactively
adjusted to reflect the reverse stock split for all periods presented.
Preferred stock amounts have not been retroactively adjusted to reflect the
reverse stock split.
F-9
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
2. Basis of Accounting and Summary of Significant Accounting Policies, cont.
Stock-based compensation
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the
current market price of the underlying stock over the exercise price. Such
compensation amounts are amortized over the respective vesting periods of the
option grant. The Company adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to provide
pro forma net income (loss) and pro forma earnings (loss) per share
disclosures for employee stock option grants as if the fair-value based method
defined in SFAS No. 123 had been applied.
Net loss per share
Basic earnings per share ("EPS") is calculated by dividing earnings (loss)
by the weighted average shares outstanding. Diluted EPS would also include the
effect of dilution to earnings of convertible securities and stock options.
Net loss per share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding plus the effect of an
adjustment described below.
Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 98 ("SAB 98") issued in February 1998 and SEC staff policy, all
common stock issued during the periods prior to the Company's initial public
offering ("IPO") for nominal consideration are to be included in the
calculation of basic net loss per share as if they were outstanding for all
periods through the IPO. Common stock and potential common stock issued during
the periods prior to the IPO for nominal consideration have been included in
the calculation of diluted net loss per share, even though anti-dilutive, as
if outstanding for all periods through that of the IPO. 1996 per share data
reflects this guidance. The difference between basic and diluted net loss per
share is attributed to potential common stock issued for nominal consideration
for 270,646 shares in 1996 (none in 1997 and 1998). In the computation of net
loss per share for 1996, accretion of the redemption value attributable to
mandatorily redeemable convertible preferred stock is included as an increase
to net loss.
Comprehensive Loss
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
presentation of comprehensive loss and its components in a full set of
financial statements. Comprehensive loss consists of net loss and net
unrealized gains (losses) on securities and is presented in the statements of
comprehensive loss. The Statement requires only additional disclosures in the
financial statements; it does not affect the Company's financial position or
results of operations. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
F-10
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
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, 1997 and 1998, all of the short-term
investments were deemed as "available for sale" investments.
The following summarizes the "available for sale" investments at December
31, 1997 and 1998:
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Cost gains losses Fair value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Obligations of the U.S.
Government and agencies
of the U.S.............. 17,275,719 133,962 11,179 17,398,502
Commercial paper......... 21,612,287 159,196 5,853 21,765,630
----------- -------- ------- -----------
December 31, 1997...... $38,888,006 $293,158 $17,032 $39,164,132
=========== ======== ======= ===========
Obligations of the U.S.
Government and agencies
of the U.S.............. 1,953,858 50,522 -- 2,004,380
Commercial paper......... 16,873,680 70,769 13,729 16,930,720
----------- -------- ------- -----------
December 31, 1998...... $18,827,538 $121,291 $13,729 $18,935,100
=========== ======== ======= ===========
</TABLE>
4. Equipment, Leasehold Improvements and Construction in Progress
Equipment, leasehold improvements and construction in progress consist of
the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Computers and equipment............................ $1,283,391 $2,266,787
Leasehold improvements............................. 147,629 899,838
---------- ----------
1,431,020 3,166,625
Less accumulated depreciation and amortization..... 346,300 689,520
---------- ----------
$1,084,720 $2,477,105
Construction in Progress........................... 860,975 --
========== ==========
</TABLE>
Included in equipment and leasehold improvements at December 31, 1997 and
1998 is approximately $215,000 of assets held under capital lease.
5. Notes Receivable from Officers
During 1997 and 1998, the Company loaned approximately $165,000 to three
officers of the Company to defray relocation expenses incurred by them in
connection with their employment by the Company. Each loan is evidenced by a
promissory note, bears interest at the lowest Federal Applicable Rate and
comes due in full on the date of such officer's resignation from the Company
or in monthly installments beginning on the date of termination of such
officer's employment with the Company (other than by resignation), and
extending over a period of between 18 months and 192 months thereafter,
depending upon when the termination of employment occurs. On each anniversary
of the date of the respective loans, 25% of the original principal amount of
the loans will be forgiven by the Company so long as the applicable officer is
in the Company's employ.
F-11
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
6. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
---------- ----------
<S> <C> <C>
License and milestone fees payable................. $2,000,000 $ --
Clinical development and research.................. 2,106,650 6,970,839
Marketing.......................................... -- 122,484
Payroll and payroll taxes payable.................. 282,525 116,580
Other current liabilities.......................... 184,124 92,608
---------- ----------
$4,573,299 $7,302,511
========== ==========
</TABLE>
7. Loans Payable
In February 1997, the Company entered into a $600,000 loan agreement with a
bank of which $516,667 is outstanding at December 31, 1997, and $416,667 is
outstanding at December 31, 1998. The term of the loan is six years, with
principal and interest due monthly. The interest rate is approximately 9% and
is secured by certain equipment and a $300,000 certificate of deposit.
In December 1998, the Company entered into a $500,000 loan agreement with a
bank. The term of the loan is five years, with principal and interest due
monthly. The interest rate is approximately 7.25% and is secured by certain
equipment and a $250,000 certificate of deposit.
In October 1997, the Company received a $1,000,000 payment as an advance on
a future milestone in connection with a collaborative drug discovery and
development agreement with Boehringer Ingelheim Pharmaceuticals Inc. ("BI").
The agreement expired in August 1998. Such amount is due and payable in August
2000. The loan bears interest at 8.5% and is evidenced by a convertible
promissory note. If amounts due under the note are not paid as described in
the note, BI may convert the then outstanding principal balance and accrued
interest thereon into shares of the Company's common stock based on the last
sale price of such common stock on the date immediately prior to the date on
which the Company is notified of BI's intention to convert the promissory
note.
8. 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, pleconaril. The Company
was required to make a milestone payment of either $1.2 million or $2 million,
depending on whether or not Sanofi elected to participate in the development
of pleconaril. During 1997, the Company deemed it probable that Sanofi would
elect to participate in the development of pleconaril and accordingly, at
December 31, 1997, had accrued $2 million. In June 1998, Sanofi chose to have
the Company be solely responsible for all development and development costs of
pleconaril. As a result of this decision by Sanofi, the Company will receive a
higher royalty on sales of pleconaril by Sanofi outside of the United States
and Canada, and Sanofi reimbursed the Company $400,000 for a license fee
previously paid by the Company. Accordingly, the Company reduced a milestone
payable to Sanofi by $800,000 and recorded the $400,000 reimbursement of the
previously paid license fee. These amounts were recorded as a reduction of
research and development expenses. The Company made a milestone payment in
1998 of $1.2 million. Under the Company's agreement with Sanofi, the Company
is required to make certain additional payments to Sanofi, including
royalties, as defined, should agreed-upon future milestones be attained. The
milestone events contemplate regulatory submissions of new drug applications
and regulatory approvals in various jurisdictions.
F-12
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
8. License and Research Agreements, cont.
There can be no assurance that any such milestones will be attained. Also, if
foreign regulatory authorities require significant additional studies of
pleconaril for use in the European Union, the Company would be required to
conduct such studies at its own expense.
The Company has 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. There are no
significant funding commitments under any other agreement other than Sanofi.
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 non-refundable technology access fee of
$1,000,000 to the Company and was required to make certain research and
milestone payments, as defined, 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. The Company earned
$1,500,000 in each of 1997 and 1998 for achieving two milestones in each year.
In 1996, the Company recognized approximately $340,000 of grant revenue from
a not-for-profit entity for which a former director of the Company serves as
an officer.
9. Common Stock and Common Stock Options
On July 23, 1997, the Company completed a follow-on public offering of
common stock. The Company sold 2,300,000 shares (including 300,000 shares
exercised by the underwriters for the overallotment). Net proceeds
approximated $29,515,000.
On November 22, 1996, the Company completed its Initial Public Offering
(IPO) of common stock. The Company sold 2,587,500 shares (including 337,500
shares exercised by the underwriters for the overallotment). Net proceeds
approximated $16,250,000.
Upon inception of the Company in December 1994, certain members of
management and a co-founder/director purchased 828,750 shares of common stock.
Management purchased 663,000 of these shares which vest annually over a four-
year period. The Company has the right to repurchase any unvested shares at
the original price paid for such shares should the employee leave the Company
before such shares are fully vested. A co-founder/director purchased 165,750
shares. The difference between the deemed fair value and the price paid
($.002) per share for the aforementioned common stock at inception in December
1994 was $79,625, which amount was recorded as deferred compensation.
Compensation expense related to these shares of common stock aggregated
$15,925 in each of 1995, 1996, 1997, and 1998. 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.
In 1995, the Company adopted a Stock Option Plan, and amended and restated
the Stock Option Plan in 1998 (as amended and restated, 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. 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 2,000,000 shares reserved under the Plan.
F-13
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
9. Common Stock and Common Stock Options, cont.
Stock option activity for the years ended December 31, 1996, 1997, and 1998
is as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
average average
Exercise remaining exercise
price per Share contractual price
share options life (years) per share
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1995..... .10-.20 163,710
Granted...................... .20-5.25 293,493
Exercised.................... .10 (21,420)
Canceled..................... -- --
Balance, December 31, 1996..... .10-5.25 435,783
=========
Granted...................... 8.75-22.50 335,233
Exercised.................... .10-.8.75 (15,450)
Canceled..................... 2.16-8.75 (555)
---------
Balance, December 31, 1997..... .10-22.50 755,011
=========
Granted...................... 9.94-23.50 330,700
Exercised.................... .10-.8.75 (35,065)
Canceled..................... 2.16-8.75 (500)
---------
Balance, December 31, 1998..... .10-22.50 1,050,146
=========
Options outstanding as of De-
cember 31, 1998:.............. .10-.20 235,387 6.51 $ .15
.45 36,873 7.42 .45
2.16 91,097 7.51 2.16
5.25 22,205 7.84 5.25
8.75 229,500 8.00 8.75
9.88-14.75 55,900 8.64 11.26
15.13-22.50 374,184 9.11 17.87
23.50 5,000 9.54 23.50
---------
Balance, December 31, 1998..... 1,050,146 8.03 9.33
=========
Options exercisable as of De-
cember 31, 1998:.............. .10-.20 163,553 $ .13
.45 18,437 .45
2.16 43,290 2.16
5.25 10,475 5.25
8.75 57,375 8.75
9.88-14.75 11,363 11.60
15.13-22.50 67,321 19.75
---------
Options exercisable at December
31, 1998...................... $ .10-22.50 371,814 $ 5.76
=========
</TABLE>
At December 31, 1998, there were 877,919 shares available for grant under
the Plan. In January 1999, the Company granted 301,400 options to its
employees. Such options were granted at exercise prices equal to the fair
market value at the grant date.
During 1996, various executive officers and certain employees of the Company
were granted options to acquire 270,644 shares of common stock at exercise
prices ranging from $.20 to $2.16 per share. The exercise price of the options
was equal to the fair market value of the Common Stock on the date of grant,
as determined
F-14
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
9. Common Stock and Common Stock Options, cont.
by the Board of Directors. However, for financial statement purposes, the
difference between a deemed value in the range of $2.35 to $5.25 per share and
the respective exercise prices at the grant dates has been recorded as
deferred compensation ($753,461) and is being amortized over the four-year
vesting period. Compensation expense for the aforementioned options aggregated
$123,974 for the year ended December 31, 1996, $193,691 for the year ended
December 31, 1997, and $188,195 for the year ended December 31, 1998.
The per share weighted-average fair value of stock options granted during
1996, 1997 and 1998 was $4.45, $8.66, and $14.82 per share, respectively, on
the date of grant. Such fair values were determined using the Black-Scholes
option-pricing model and are based on the following weighted-average
assumptions: an expected dividend yield of 0% and a risk-free interest rate of
7.5%, for 1996 and 1997, and 5.0% for 1998, volatility of 50% for 1996, 68%
for 1997, and 79% for 1998 and an expected option life of ten years for 1996,
1997 and 1998.
The Company applies APB Opinion No. 25 in accounting for its stock option
plan. Had the Company determined compensation cost for options granted based
on the fair value at the grant date under SFAS No. 123, the Company's net loss
and pro forma net loss per share would have been increased to the pro forma
amounts under SFAS No. 123 indicated below:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Net loss allocable to common
stockholders:
As reported.................... $(7,992,345) $(11,449,883) $(26,402,116)
Pro forma under SFAS No 123.... $(8,121,554) $(12,308,195) $(28,511,508)
=========== ============ ============
Net loss per share:
Basic:
As reported.................. $ (3.89) $ (1.13) $ (2.30)
Pro forma under SFAS No.
123......................... $ (3.96) $ (1.22) $ (2.48)
=========== ============ ============
Diluted:
As reported.................. $ (3.44) $ (1.13) $ (2.30)
Pro forma under SFAS No.
123......................... $ (3.50) $ (1.22) $ (2.48)
=========== ============ ============
</TABLE>
Pro forma net loss reflects only options granted in 1995, 1996, 1997 and
1998. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss amounts
presented above because compensation cost is incurred under SFAS No. 123 over
the respective vesting period of such options, and options granted by the
Company prior to January 1, 1995 are not reflected in the pro forma net loss
figures above.
10. Preferred Stock
Through 1996, the Company completed the sale of its Series A (675,000
shares), Series B (7,060,000 shares) and Series C (3,222,222 shares)
mandatorily redeemable convertible preferred stock (the "Preferred Stock") at
per share prices of $.50, $1.00 and $2.25, respectively. Aggregate net
proceeds from these transactions totaled approximately $14,573,000.
On November 22, 1996, all mandatorily redeemable convertible preferred stock
was converted into 5,588,191 shares of common stock on a .51 for 1 basis in
connection with completion of the Company's IPO.
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). The deemed fair value of such warrants at
F-15
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
10. Preferred Stock, cont.
their issuance date aggregated $90,000, which amount was charged to operations
in 1995. In June 1997, certain holders of warrants exercisable for shares of
the Company's common stock exercised such warrants on a cashless basis for an
aggregate of 71,795 shares of common stock that were otherwise exercisable on
a cash basis for 81,597 shares of common stock.
The difference between the deemed fair market value of the Preferred Stock
and the liquidation amount was accreted on a pro-rata basis in the
accompanying financial statements through the consummation of the Company's
IPO in November 1996, at which point all shares of Preferred Stock were
converted into 5,588,191 common shares. All rights with respect to the
Preferred Stock ceased upon consummation of the IPO.
The Company adopted a Stockholders' Rights Plan (the "Plan") in September
1998. In connection with the Plan, the Company designated from its Preferred
Stock, par value $.001 per share, Series A Junior Participating Preferred
Shares, par value $.001 per share (the "Series A Preferred Shares"), and
reserved 200,000 Series A Preferred Shares for issuance under the Plan. The
Company declared a dividend distribution of one right for each outstanding
share of common stock. The rights entitle stockholders to purchase one one-
hundredth of a share of Series A Junior Participating Preferred stock. The
rights expire in 2008. At December 31, 1998, the rights were neither
exercisable nor traded separately from the company's common stock, and become
exercisable only if a person or group becomes the beneficial owner of 20% or
more of the Company's common stock or announces a tender offer which would
result in ownership of 20% or more of the Company's common stock.
11. Income Taxes
As of December 31, 1998, the Company has approximately $10,500,000 of
Federal and $9,126,000 of state net operating loss carryforwards available to
offset future taxable income. The federal and state net operating loss
carryforwards will begin expiring in the year 2009 and 1999, respectively, if
not utilized. In addition, the utilization of the state net operating loss
carryforwards is subject to a $1 million annual limitation.
Based on "change in ownership" provisions of the Tax Reform Act of 1986, net
operating loss 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, 1997 and 1998 are shown below. Due to the uncertainty of
the Company's ability to realize the benefit of the deferred tax assets, the
net deferred tax assets are fully offset by a valuation allowance at December
31, 1998 and 1997. The change in the valuation allowance for 1997 and 1998 was
an increase of $4,502,933 and $10,466,032, respectively.
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 1,562,687 $ 4,182,587
Capitalized research and development costs....... 6,213,699 14,952,831
Expenses not currently deductible................ 880,000 --
Capitalized start up costs....................... 24,917 11,917
----------- -----------
Total gross deferred tax assets................ 8,681,303 19,147,335
=========== ===========
Deferred tax liability:
Employee compensation............................ 25,480 25,480
----------- -----------
Net deferred tax assets........................ 8,655,823 19,121,855
Valuation allowance................................ (8,655,823) (19,121,855)
----------- -----------
Net deferred taxes............................. -- --
=========== ===========
</TABLE>
F-16
<PAGE>
ViroPharma Incorporated
(A Development Stage Company)
Notes to Financial Statements
12. 401(k) Profit Sharing Plan
In 1998, the Company adopted a new 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 participant's
account. The Company contributed $47,768 to the 401(k) Plan in 1998 (none in
1996 or 1997).
13. Commitments
In March 1998, the Company entered into a lease for laboratory and office
space. The term of the new lease is ten years with two five-year renewal
options. The Company also has the right, under certain circumstances, to
purchase the new facility.
In September 1995, the Company entered into a lease arrangement for the
financing of certain lab equipment, leasehold improvements, computers and
office equipment. The repayment terms range from three to four years. 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 term of the lease arrangement. The number of warrants and
the related exercise price were adjusted based on a formula to reflect the
increase in per share price of the Series C Preferred Stock over Series B
Preferred Stock and the .51 for 1 reverse stock split to 21,675 warrants to
purchase common stock at an exercise price of $2.94 per share. All warrants
were exercised in 1998.
In December 1995, the Company entered into a capital lease arrangement for
the financing of certain equipment. The repayment terms of this arrangement
are for four years from the date of funding. The equipment financed under this
arrangement aggregated $111,000, which the Company is obligated to purchase at
the end of the lease term for $22,000.
The Company's future minimum lease payments under the aforementioned leases
for years subsequent to December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending Operating Capital
December 31, leases leases
------------ ---------- -------
<S> <C> <C>
1999.................................................. $ 746,636 $54,039
2000.................................................. 666,911 2,870
2001.................................................. 652,834 --
2002.................................................. 647,592 --
2003.................................................. 647,592 --
Thereafter............................................ 2,698,300 --
---------- -------
Total minimum lease payments........................ $6,059,865 $56,909
========== =======
Amounts representing interest........................... $(3,723)
-------
Present value of net minimum lease payments............. $53,186
Current portion......................................... $50,379
-------
Long term portion....................................... $ 2,807
=======
</TABLE>
Rent expense for the years ended December 31, 1996, 1997, and 1998
aggregated $335,000, $394,000, and $760,000, respectively.
F-17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
3.2 Certificate of Designation establishing and designating the Series A
Junior Participating Preferred Shares.
11 Statement of Computation of Loss Per Share.
23 Consent of KPMG LLP.
24 Power of Attorney (included on signature page).
27 Financial Data Schedule.
</TABLE>
<PAGE>
ViroPharma Incorporated
Computation of Net Loss Per Share
<TABLE>
<CAPTION>
1995 1996 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss (3,854,862) (6,395,004) (11,449,883) (26,402,116)
Accretion of redemption value
attributable to mandatorily
redeemable convertible preferred
stock. 19,104 1,597,341 -- --
Net loss allocable to shareholders (3,873,966) (7,992,345) (11,449,883) (26,402,116)
Weighted average shares outstanding 828,750 2,053,114 10,092,590 11,485,589
Shares assumed to be outstanding related to
stock options and warrants granted for nominal
consideration 270,646 270,646 -- --
Shares used in computing diluted net loss per share 1,099,396 2,323,760 10,092,590 11,485,589
Net loss per share
Basic (4.67) (3.89) (1.13) (2.30)
Diluted (3.52) (3.44) (1.13) (2.30)
</TABLE>
<PAGE>
Independent Auditors' Consent
The Board of Directors
ViroPharma Incorporated:
We consent to incorporation by reference in the registration statements (No.
333-34129 and No. 333-60951) on Form S-8 of ViroPharma Incorporated (A
Development Stage Company) of our report dated February 23, 1999 relating to the
balance sheets of ViroPharma Incorporated (A Development Stage Company) as of
December 31, 1997 and 1998, and the related statements of operations,
comprehensive loss, stockholders' equity (deficit) and cash flows for each of
the years in the three-year period ended December 31, 1998, and for the period
December 5, 1994 (Inception) to December 31, 1998, which report appears in the
December 31, 1998, Annual Report on Form 10-K of ViroPharma Incorporated (A
Development Stage Company).
Princeton, New Jersey
March 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,076,682
<SECURITIES> 18,935,100
<RECEIVABLES> 101,561
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,486,041
<PP&E> 3,166,625
<DEPRECIATION> 689,520
<TOTAL-ASSETS> 23,657,401
<CURRENT-LIABILITIES> 8,995,646
<BONDS> 0
0
0
<COMMON> 23,034
<OTHER-SE> 12,812,997
<TOTAL-LIABILITY-AND-EQUITY> 23,657,401
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,506,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151,712
<INCOME-PRETAX> (26,402,116)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,402,116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,402,116)
<EPS-PRIMARY> (2.30)
<EPS-DILUTED> (2.30)
</TABLE>
<PAGE>
EXHIBIT A
---------
RESOLUTION OF THE BOARD OF DIRECTORS OF
VIROPHARMA INCORPORATED
ESTABLISHING & DESIGNATING
SERIES A JUNIOR PARTICIPATING PREFERRED SHARES
AS A SERIES OF THE PREFERRED STOCK
RESOLVED, that pursuant to the authority expressly vested in the Board of
Directors of ViroPharma Incorporated (the "Corporation") by Article Fourth of
the Amended and Restated Certificate of Incorporation of the Corporation, the
Board of Directors hereby fixes and determines the voting rights, designations,
preferences, qualifications, privileges, limitations, restrictions, options,
conversion rights and other special or relative rights of the first series of
the Preferred Stock, par value $.001 per share, which shall consist of 200,000
shares and shall be designated as Series A Junior Participating Preferred Shares
(the "Series A Preferred Shares").
Special Terms of the Series A Preferred Shares
- ----------------------------------------------
Section 1. Dividends and Distributions.
---------------------------
(a) The rate of dividends payable per share of Series A Preferred Shares on
the first day of January, April, July and October in each year or such other
quarterly payment date as shall be specified by the Board of Directors (each
such date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of the Series A Preferred Shares, shall be
(rounded to the nearest cent) equal to the greater of (i) $1.00 or (ii) subject
to the provision for adjustment hereinafter set forth, 100 times the aggregate
per share amount of all cash dividends, and 100 times the aggregate per share
amount (payable in cash, based upon the fair market value at the time the non-
cash dividend or other distribution is declared or paid as determined in good
faith by the Board of Directors) of all non-cash dividends or other
distributions other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock, $.002 par value, of the Corporation
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of the Series A Preferred Shares. Dividends
on the Series A Preferred Shares shall be paid out of funds legally available
for such purpose. In the event the Corporation shall at any time after
September 10, 1998 (the "Rights Declaration Date") (i) declare any dividend on
Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding
shares of Common Stock, or (iii) combine the outstanding shares of Common Stock
into a smaller number of shares, then in each such case the amounts to which
holders of Series A Preferred Shares were entitled immediately prior to such
event under clause (ii) of the preceding sentence shall be adjusted by
multiplying each such amount by a fraction the numerator of which is the number
of shares of Common Stock outstanding immediately after
-A-1-
<PAGE>
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
(b) Dividends shall begin to accrue and be cumulative on outstanding Series
A Preferred Shares from the Quarterly Dividend Payment Date next preceding the
date of issue of such Series A Preferred Shares, unless the date of issue of
such shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of Series A Preferred Shares entitled to receive a quarterly dividend and before
such Quarterly Dividend Payment Date, in either of which events such dividends
shall begin to accrue and be cumulative from such Quarterly Dividend Payment
Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on
the Series A Preferred Shares in an amount less than the total amount of such
dividends at the time accrued and payable on such shares shall be allocated pro
rata on a share-by-share basis among all such shares at the time outstanding.
Section 2. Voting Rights. In addition to any other voting rights required
-------------
by law, the holders of Series A Preferred Shares shall have the following voting
rights:
(a) Subject to the provision for adjustment hereinafter set forth, each
Series A Preferred Share shall entitle the holder thereof to 100 votes on all
matters submitted to a vote of the stockholders of the Corporation. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare any dividend on Common Stock payable in shares of Common Stock, (ii)
subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, then in each
such case the number of votes per share to which holders of Series A Preferred
Shares were entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) In the event that dividends upon the Series A Preferred Shares shall
be in arrears to an amount equal to six full quarterly dividends thereon, the
holders of such Series A Preferred Shares shall become entitled to the extent
hereinafter provided to vote noncumulatively at all elections of directors of
the Corporation, and to receive notice of all stockholders' meetings to be held
for such purpose. At such meetings, to the extent that directors are being
elected, the holders of such Series A Preferred Shares voting as a class shall
be entitled solely to elect two members of the Board of Directors of the
Corporation; and all other directors of the Corporation shall be elected by the
other stockholders of the Corporation entitled to vote in the election of
directors. Such voting rights of the holders of such Series A Preferred Shares
shall continue until all accumulated and unpaid dividends thereon shall have
been paid or funds sufficient therefor set aside, whereupon all such voting
rights of the holders of shares of such series shall cease, subject to being
again revived from time to time upon the reoccurrence of the conditions above
described as giving rise thereto.
-A-2-
<PAGE>
At any time when such right to elect directors separately as a class shall
have so vested, the Corporation may, and upon the written request of the holders
of record of not less than 20% of the then outstanding total number of shares of
all the Series A Preferred Shares having the right to elect directors in such
circumstances shall, call a special meeting of holders of such Series A
Preferred Shares for the election of directors. In the case of such a written
request, such special meeting shall be held within 90 days after the delivery of
such request, and, in either case, at the place and upon the notice provided by
law and in the By-laws of the Corporation; provided, that the Corporation shall
not be required to call such a special meeting if such request is received less
than 120 days before the date fixed for the next ensuing annual or special
meeting of stockholders of the Corporation. Upon the mailing of the notice of
such special meeting to the holders of such Series A Preferred Shares, or, if no
such meeting be held, then upon the mailing of the notice of the next annual or
special meeting of stockholders for the election of directors, the number of
directors of the Corporation shall, ipso facto, be increased to the extent, but
only to the extent, necessary to provide sufficient vacancies to enable the
holders of such Series A Preferred Shares to elect the two directors hereinabove
provided for, and all such vacancies shall be filled only by vote of the holders
of such Series A Preferred Shares as hereinabove provided. Whenever the number
of directors of the Corporation shall have been increased, the number as so
increased may thereafter be further increased or decreased in such manner as may
be permitted by the By-laws and without the vote of the holders of Series A
Preferred Shares, provided that no such action shall impair the right of the
holders of Series A Preferred Shares to elect and to be represented by two
directors as herein provided.
So long as the holders of Series A Preferred Shares are entitled hereunder
to voting rights, any vacancy in the Board of Directors caused by the death or
resignation of any director elected by the holders of Series A Preferred Shares,
shall, until the next meeting of shareholders for the election of directors, in
each case be filled by the remaining director elected by the holders of Series A
Preferred Shares having the right to elect directors in such circumstances.
Upon termination of the voting rights of the holders of Series A Preferred
Shares, the terms of office of all persons who shall have been elected directors
of the Corporation by vote of the holders of Series A Preferred Shares or by a
director elected by such holders shall forthwith terminate.
(c) Except as otherwise provided herein, in the certificate of
incorporation of the Corporation or by law, the holders of Series A Preferred
Shares and the holders of Common Stock (and the holders of shares of any other
series or class entitled to vote thereon) shall vote together as one class on
all matters submitted to a vote of stockholders of the Corporation.
Section 3. Reacquired Shares. Any Series A Preferred Shares purchased or
-----------------
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued Preferred Stock and may be
reissued as part of a new series of Preferred Stock to be created by resolution
or resolutions of the Board of Directors.
-A-3-
<PAGE>
Section 4. Liquidation, Dissolution or Winding Up. In the event of any
--------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, the holders of Series A Preferred Shares shall be entitled to
receive the greater of (a) $1.00 per share, plus accrued dividends to the date
of distribution, whether or not earned or declared, or (b) an amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of Common
Stock. In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on Common Stock payable in shares of
Common Stock, (ii) subdivide the outstanding shares of Common Stock, or (iii)
combine the outstanding shares of Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event pursuant to clause (b) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 5. Consolidation, Merger, etc. In case the Corporation shall
--------------------------
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case the Series A
Preferred Shares shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 100 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time after the Rights Declaration Date (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding shares of Common Stock, or (iii) combine the outstanding shares of
Common Stock into a smaller number of shares, then in each such case the amount
set forth in the preceding sentence with respect to the exchange or change of
shares of Series A Preferred Shares shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 6. No Redemption. The Series A Preferred Shares shall not be
-------------
redeemable.
Section 7. Ranking. The Series A Preferred Shares shall rank junior to
-------
all other series of the Corporation's Preferred Stock as to the payment of
dividends and the distribution of assets, unless the terms of any such series
shall provide otherwise.
Section 8. Fractional Shares. Series A Preferred Shares may be issued in
-----------------
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Shares.
-A-4-
