-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LOBsffNCUqGNOyk//KohQyZe2rz6PUG96i3BvGfDHqB+L8+tUkY/WxIVZd/jbOgi aJ+rkexhmZonvtoncfQzLw== 0000950116-96-000609.txt : 20020722 0000950116-96-000609.hdr.sgml : 20020722 19960702135900 ACCESSION NUMBER: 0000950116-96-000609 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960702 DATE AS OF CHANGE: 20020722 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMARILLO BIOSCIENCES INC CENTRAL INDEX KEY: 0001014763 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 751974352 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 000-20791 FILM NUMBER: 96590151 BUSINESS ADDRESS: STREET 1: 800 W 9TH AVE CITY: AMARILLO STATE: TX ZIP: 79101-3206 BUSINESS PHONE: 8063761741 MAIL ADDRESS: STREET 1: AMARILLO BIOSCIENCES INC STREET 2: 800 W 9TH AVE CITY: AMARILLO STATE: TX ZIP: 79101-3206 SB-2/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1996 REGISTRATION NO. 333-04413 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ------ AMARILLO BIOSCIENCES, INC. (Name of Small Business Issuer in its Charter) Texas 8731 75-1974352 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification No.)
800 West 9th Avenue Amarillo, Texas 79101 (806) 376-1741 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) Dr. Joseph M. Cummins, DVM, PhD Amarillo Biosciences, Inc. 800 West 9th Avenue Amarillo, Texas 79101 (806) 376-1741 (Name, Address and Telephone Number of Agent for Service) ------ Copies to: ROBERT E. FISCHER, ESQ. ROBERT J. MITTMAN, ESQ. Lowenthal, Landau, Fischer & Bring, P.C. Tenzer Greenblatt LLP 250 Park Avenue 405 Lexington Avenue New York, New York 10177 New York, New York 10174 (212) 986-1116 (212) 885-5000 Facsimile No. (212) 986-0604 Facsimile No. (212) 885-5001 Approximate Date of Proposed Sale to the Public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. /X/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /_____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /_____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. CALCULATION OF REGISTRATION FEE
=================================================================================================== Proposed Proposed Maximum Maximum Offering Aggregate Amount of Title of Each Class of Amount to be Price per Offering Registration Securities to be Registered Registered Unit(1) Price(1) Fee - --------------------------------------------------------------------------------------------------- Shares of Common Stock, par value $.01 per share ........................... 2,300,000 shares (2) $5.00 $11,500,000 $3,965.52 Underwriter's Warrants to Purchase Shares of Common Stock (3) ......... 200,000 warrants $.001 $200 (4) Shares of Common Stock, par value $.01 per share(5) .................. 200,000 shares $8.10 $1,620,000 $ 558.62 Total ................................................................................. $4,524.14 Less Amount Previously Paid ........................................................... $4,448.28 Total Due ............................................................................. $ 75.86 =====================================================================================================
(1) Estimated solely for purposes of calculating the registration fee. (2) Includes 300,000 shares which the Underwriter has the option to purchase from the Registrant solely to cover over-allotments. (3) Represents warrants to be issued by the Registrant and purchased by the Underwriter at the time of delivery and acceptance of the shares of Common Stock offered hereby. (4) None, pursuant to Rule 457(g). (5) Reserved for issuance upon exercise of the Underwriter's Warrants. 2 AMARILLO BIOSCIENCES, INC. ------ CROSS REFERENCE SHEET ------
Form SB-2 Item Nos. and Caption Prospectus Caption ----------------------------------------------------------- ------------------------------------------------- 1. Front of Registration Statement and Outside Front Cover of Prospectus ........................................ Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus ............................................ Inside Front and Outside Back Cover Pages 3. Summary Information and Risk Factors .................. Prospectus Summary; Risk Factors 4. Use of Proceeds ....................................... Use of Proceeds 5. Determination of Offering Price ....................... Underwriting 6. Dilution .............................................. Dilution 7. Selling Security-Holders .............................. * 8. Plan of Distribution .................................. Outside Front Cover Page; Underwriting 9. Legal Proceedings ..................................... * 10. Directors, Executive Officers, Promoters and Control Persons ............................................... Management 11. Security Ownership of Certain Beneficial Owners and Management ............................................ Principal Shareholders Description of Common Stock; Shares Eligible For Future 12. Description of Securities ............................. Sale 13. Interest of Named Experts and Counsel ................. Legal Matters; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities ............................ * 15. Organization Within Last Five Years ................... * 16. Description of Business ............................... Prospectus Summary; Business 17. Management's Discussion and Analysis or Plan of Operation .............................................. Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property ............................... Business 19. Certain Relationships and Related Transactions ........ Certain Transactions 20. Market for Common Equity and Related Stockholder Matters * 21. Executive Compensation ................................ Management 22. Financial Statements .................................. Consolidated Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................. *
- ------ * Not applicable. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. PRELIMINARY PROSPECTUS DATED JULY 2, 1996 SUBJECT TO COMPLETION [LOGO] 2,000,000 SHARES AMARILLO BIOSCIENCES, INC. COMMON STOCK Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that any such market will develop. It is anticipated that the Common Stock will be quoted on the NASDAQ Small Cap Market ("NASDAQ") under the symbol "AMAR." For a discussion of the factors considered in determining the initial public offering price, see "Underwriting." Of the shares of Common Stock being sold in this offering, 600,000 shares have been reserved for sale, at the initial offering price, to Hayashibara Biochemical Laboratories, Inc. ("HBL"), a principal shareholder and supplier of the Company, or its designees. In addition, the Company has agreed to use $1,000,000 of the proceeds of this offering to pay a portion of the indebtedness owed by the Company to HBL. See "Use of Proceeds," "Principal Shareholders" and "Certain Transactions." ------ THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 6 AND "DILUTION" ON PAGE 17. ------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =============================================================================== Price Underwriting Proceeds to Discounts and to Public Commissions(1) Company(2) - ------------------------------------------------------------------------------- Per Share .......................... $5.00 $.50 $4.50 - ------------------------------------------------------------------------------- Total(3) ........................... $10,000,000 $1,000,000 $9,000,000 =============================================================================== (1) In addition, the Company has agreed to pay to the Underwriter a 3% nonaccountable expense allowance, to sell to the Underwriter warrants (the "Underwriter's Warrants") to purchase up to 200,000 shares of Common Stock and to retain the Underwriter as a financial consultant. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses, including the nonaccountable expense allowance in the amount of $300,000 ($345,000 if the Underwriter's over-allotment option is exercised in full), estimated at $825,000, payable by the Company. (3) The Company has granted the Underwriter an option, exercisable within 45 days from the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock, on the same terms as set forth above, solely for the purpose of covering over-allotments, if any. If the Underwriter's over-allotment option is exercised in full, the total price to public, underwriting discounts and commissions and proceeds to Company will be $11,500,000, $1,150,000 and $10,350,000 respectively. See "Underwriting." The shares of Common Stock are being offered, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter reserves the right to withdraw, cancel or modify the offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the shares of Common Stock offered hereby will be made at the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, on or about , 1996. ------ WHALE SECURITIES CO., L.P. The date of this Prospectus is , 1996 A graphic image of a man appears here showing the path of IFN|ga taken orally. Four circles surrounding the image display drawings of (i) a profile of the head of a person suffering from Sjogren's syndrome, (ii) the mouth of an individual with oral mucositis, (iii) an IFN|ga molecule and (iv) a microscopic view of a portion of a liver infected with the hepatitis virus. In addition to the graphic images, the following text appears: "The Company is currently focusing its research on human health indications for the use of low dose oral natural interferon alpha ("IFN|ga"). Based upon initial results, the Company intends to focus its development activities on the applications discussed below: Sjogren's Syndrome. Sjogren's syndrome is a chronic autoimmune disorder characterized by severe dryness of the eyes and mouth. The Company believes oral IFN|ga therapy helps to relieve the dryness associated with Sjogren's syndrome and may effectively supplement or be used in lieu of existing treatments. Oral Mucositis. Oral mucositis is a condition characterized by inflammation and sometimes ulcerations of the mucosal lining of the mouth. It is often associated with the use of chemotherapy or radiation therapy on cancer patients. The Company has filed and there is now in effect an Investigational New Drug Application for the use of IFN|ga to treat oral mucositis. Hepatitis B and Hepatitis C. Hepatitis is a family of diseases in which inflammation of the liver occurs. Hepatitis B and hepatitis C are two of the most common viruses which cause hepatitis. The Company believes that low dose oral IFN|ga therapy for chronic active hepatitis B disease might be as beneficial a treatment for the disease as parenteral IFN|ga and will be more economical. The Company believes that, by pretreating hepatitis C patients with low dose oral IFN|ga, the response rate of those patients to parenteral IFN|ga treatment may increase." AVAILABLE INFORMATION As of the date of this Prospectus, the Company will become subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will file reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Company intends to furnish its shareholders with annual reports containing audited financial statements and such other reports as the Company deems appropriate or as may be required by law. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Each prospective investor is urged to read this Prospectus in its entirety. Unless otherwise indicated, all share and per share information in this Prospectus (i) gives retroactive effect to a 10-for-1 stock split effected in May 1993 and a 20% stock dividend effected in May 1996, and (ii) assumes that the Underwriter's over-allotment option is not exercised. See "Underwriting" and Notes 1 and 13 of Notes to Consolidated Financial Statements. For definitions of certain terms used in this Prospectus see the Glossary beginning on page 46. THE COMPANY Amarillo Biosciences, Inc., a development-stage company (the "Company"), is engaged in developing biologics for the treatment of human and animal diseases. The Company is currently focusing its research on human health indications for the use of low dose oral natural interferon alpha ("IFN|ga"), particularly for the treatment of Sjogren's syndrome, oral mucositis in cancer patients and hepatitis B and C ("Primary Development Projects"). The Company believes that significant worldwide opportunities exist for the development of low dose oral natural IFN|ga as an inexpensive, non-toxic, efficacious alternative to the treatment of disease by injection of high doses of IFN|ga. In addition, the Company believes that low dose oral natural IFN|ga can be an effective treatment for diseases or conditions for which current therapies are inadequate. The Company owns or licenses eleven United States patents relating to low dose oral natural IFN|ga. Since 1992, the Company has filed, and there now are in effect, seven Investigational New Drug Applications covering indicated uses for low dose oral IFN|ga, including treatment of Sjogren's syndrome and oral mucositis. The Company is seeking regulatory approvals in certain foreign countries to test and/or market low dose oral IFN|ga for the treatment of hepatitis B and C. The Company is also testing oral IFN|ga in cats with herpesvirus-1 infection, dogs with keratoconjunctivitis sicca and cattle with shipping fever or mastitis and has filed, and there are now in effect, Investigational New Animal Drug Notices for these and other indications for the product in animals. The Company is also testing a topical IFN|ga as a treatment for genital warts in humans. The Company has formed a strategic alliance with Hayashibara Biochemical Laboratories, Inc. ("HBL") of Okayama, Japan, a subsidiary of Hayashibara Company, Ltd., a privately-owned Japanese holding corporation with diversified subsidiaries. To date, the Company has received from HBL research funding in the amount of $9,000,000. HBL has also purchased from the Company an aggregate of 461,520 shares of Common Stock for a total purchase price of $1,443,800 and has made loans to the Company aggregating $3,000,000, of which $1,000,000 borrowed after March 31, 1996 will be repaid simultaneously with the consummation of this offering. Pursuant to a Joint Development and Manufacturing/Supply Agreement between HBL and the Company (the "Development Agreement"), HBL manufactures and supplies exclusively to the Company IFN|ga for oral use in the development of human applications under the Company's patents for worldwide markets outside of Japan and for animal applications worldwide. The Company also has a non-exclusive license from HBL to use HBL's patented technology to produce IFN|ga lozenges with anhydrous maltose. This formulation significantly prolongs the stability of IFN|ga activity at room temperature. In addition, HBL has agreed to supply its IFN|ga exclusively to the Company in North America for non-oral (topical and parenteral) use. The Company has also entered into manufacturing and supply and license agreements with Interferon Sciences, Inc. ("ISI") of New Brunswick, New Jersey, a subsidiary of National Patent Development, Inc., under which ISI, among other things, supplies exclusively to the Company, IFN|ga for oral use in animals. The Company's objective is to exploit its proprietary technology to become a leader in the field of low dose oral IFN|ga applications. The Company's business strategy is to pursue those indications for low dose oral IFN|ga treatment for which initial clinical research has indicated the treatment is efficacious and 3 which in the opinion of the Company have the greatest commercial potential and are most likely to be approved by the United States Food and Drug Administration (the "FDA"). To the extent possible, the Company will attempt to minimize the cost to the Company of obtaining FDA approval by utilizing forms of IFN|ga already approved (in other dosage forms and for different indications) by the Japanese Ministry of Health and Welfare for human use or by the FDA for animal use. The Company believes that such minimized costs will be the result of more information available for use in preparing applications for approval. The Company will attempt to gain market share for approved products by forming alliances with strong marketing partners. The Company is in the development stage and currently has no products approved for commercial use other than in Kenya. The Company's long-term viability, profitability and growth will depend upon successful commercialization of products resulting from its research and product development activities. To date, although the Company has recorded contract revenue relating to research and development pursuant to the Development Agreement, the Company has generated only limited revenues from product sales and licensing. Moreover, the Company has incurred significant losses, including losses of $129,239 and $311,579 for the years ended December 31, 1994 and 1995, respectively, and $4,943,168 for the period from June 25, 1984 (inception) through March 31, 1996. For the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996, the Company recorded contract revenues of $2,480,093, $1,361,395 and $402,574, respectively, as research and development and administrative costs were incurred. As of March 31, 1996, all but $14,566 of the $9,000,000 in research funding provided by HBL from 1992 to 1994 pursuant to the Development Agreement had been recognized as contract revenue. HBL has no obligation to provide additional research funding to the Company nor does the Company currently have such a commitment from any other person. Inasmuch as the Company will continue to have a high level of research and development and general and administrative expenses (including compensation expense in 1996 of $515,156 relating to the issuance of restricted stock to three officers of the Company simultaneously with the sale of the Common Stock offered hereby) and will not have matching contract revenues as such expenditures are incurred, the Company anticipates that, commencing in the second quarter of 1996, losses will increase significantly and losses will continue until such time, if ever, as the Company is able to generate sufficient revenues to support its operations. The Company believes that its ability to generate sufficient revenues primarily depends on the success of the Company in completing development and obtaining regulatory approvals for the commercial sale of products, including approval of any manufacturing facilities established or maintained by the Company or its suppliers that produce such products. There can be no assurance that any of such events will occur, that the Company will attain revenues from commercialization of its products or that the Company will ever achieve profitable operations. See "Risk Factors." The Company was incorporated in June 1984 in the State of Texas under the name of Amarillo Cell Culture Company, Incorporated. In May 1996, the Company changed its name to Amarillo Biosciences, Inc. The executive offices of the Company are located at 800 West 9th Avenue, Amarillo, Texas 79101 and its telephone number is (806) 376-1741. Unless the context otherwise requires, all references in this Prospectus to the Company include its wholly-owned subsidiaries, Vanguard Biosciences Inc., Veldona USA Inc., Veldona Inc., Veldona Africa Inc., Veldona Poland Inc. and Amarillo Cell of Canada Inc. THE OFFERING Common Stock offered........... 2,000,000 shares Common Stock to be outstanding after the offering (1)....... 5,114,232 shares Use of Proceeds................ The Company intends to use approximately $6,350,000 of the net proceeds of this offering for research and development, $1,000,000 for repayment of certain short-term indebtedness to HBL and the balance for working capital and general corporate purposes. See "Use of Proceeds." 4 Risk Factors................... The securities offered hereby are speculative and involve a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed NASDAQ symbol......... AMAR - ------ (1) Includes 79,000 shares of Common Stock to be issued to three officers of the Company simultaneously with the sale of the Common Stock offered hereby pursuant to their employment agreements. Does not include (i) 200,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants; (ii) an aggregate of 115,500 shares of Common Stock reserved for issuance upon the exercise of stock options to be outstanding under the Company's 1996 Employee Stock Option Plan and the Company's Outside Director and Advisor Stock Option Plan (collectively, the "Plans"), none of which options are currently exercisable; or (iii) an aggregate of 134,500 shares of Common Stock reserved for issuance upon exercise of stock options which are available for future grant under the Plans. See "Management -- Employment Agreements," "-- Stock Option Plans," "Principal Shareholders," "Certain Transactions" and "Underwriting." SUMMARY CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information set forth below is derived from the consolidated financial statements appearing elsewhere in this Prospectus. Such information should be read in conjunction with such financial statements, including the notes thereto. CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Cumulative From June 25, 1984 (Inception) Three Months Ended March Through Year Ended December 31, 31, March 31, ---------------------------- -------------------------- --------------- 1994 1995 1995 1996 1996 ------------ ------------ ----------- ----------- --------------- Total revenues ........ $2,653,331 $2,006,262 $ 647,069 $ 415,728 $10,570,886 Total expenses ........ 2,782,570 2,317,841 722,003 402,921 15,514,054 Net income (loss) ..... (129,239) (311,579) (74,934) 12,807 (4,943,168) Net loss per share .... (.04) (.10) (.02) -- Weighted average shares outstanding .......... 3,005,592 3,034,339 3,031,609 3,035,232
CONSOLIDATED BALANCE SHEET DATA:
March 31, 1996 ------------------------------- December 31, 1995 Actual As Adjusted(1) ----------------- ------------- -------------- Cash and cash equivalents ....................... $ 1,108,527 $ 724,280 $ 8,664,280 Working capital (deficiency) .................... (18,035) (2,585) 8,062,102 Total assets .................................... 1,791,060 1,424,004 9,364,004 Total liabilities ............................... 3,152,957 2,743,094 2,618,407 Deficit accumulated during the development stage . (4,955,975) (4,943,168) (5,448,481) Shareholders' equity (deficit) .................. (1,361,897) (1,319,090) 6,745,597
- ------ (1) Gives effect to the sale of 2,000,000 shares of Common Stock offered hereby and the anticipated application of the estimated net proceeds therefrom, including the payment of $235,000 to satisfy withholding tax obligations of the Company arising in a transaction required under the employment agreements of three officers in which the Company shall also issue 79,000 shares of Common Stock to such officers. Subsequent to March 31, 1996, the Company borrowed $1,000,000 from HBL, which amount will be repaid from the proceeds of this offering. See "Use of Proceeds" and "Certain Transactions." 5 RISK FACTORS The shares of Common Stock offered hereby are speculative and involve a high degree of risk, including, but not necessarily limited to, the risk factors described below. Each prospective investor should carefully consider the following risk factors inherent in and affecting the business of the Company and this offering before making an investment decision. Except for the historical information contained herein, the discussion in this Prospectus contains forward- looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as those discussed elsewhere in this Prospectus. Development Stage Company; Uncertainty of Product Development; Limited Relevant Operating History. The Company is in the development stage and currently has no products approved for commercial use other than in Kenya. The Company's long-term viability, profitability and growth will depend upon successful commercialization of products resulting from its research and product development activities. The Company will not be able to sell significant quantities of any product until such time, if ever, as it receives regulatory approval to commercially market the product. All of the Company's products will require significant additional development, laboratory and clinical testing and investment prior to obtaining such approvals for any product and prior to commercialization. The Company does not expect to receive regulatory approvals in the United States for any product for at least three years. Moreover, adverse or inconclusive results in clinical trials could significantly delay or ultimately preclude any such approvals and, even if obtained, there can be no assurance that any product approval will lead to the successful commercialization of such product. Further, as a development stage company, the Company has a limited relevant operating history upon which an evaluation of its prospects can be made. Such prospects must be considered in light of the risks, expenses and difficulties frequently encountered in establishing a new business in the evolving, heavily regulated pharmaceutical industry, which is characterized by an increasing number of market entrants, intense competition and a high failure rate. In addition, significant challenges are often encountered in shifting from development to commercialization of new products. See "Business." History of Significant Losses; Anticipated Future Losses; Limited Product Revenues. To date, although the Company has recorded contract revenues relating to research and development pursuant to the Development Agreement, the Company has generated only limited revenues from product sales and licensing. Moreover, the Company has incurred significant losses, including losses of $129,239 and $311,579 for the years ended December 31, 1994 and 1995, respectively, and $4,943,168 for the period from June 25, 1984 (inception) through March 31, 1996. For the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996, the Company recorded contract revenues of $2,480,093, $1,361,395 and $402,574, respectively, as research and development and administrative costs were incurred. As of March 31, 1996, all but $14,566 of the $9,000,000 in research funding provided by HBL from 1992 to 1994 pursuant to the Development Agreement had been recognized as contract revenue. HBL has no obligation to provide additional research funding to the Company nor does the Company currently have such a commitment from any other person. Inasmuch as the Company will continue to have a high level of research and development and general and administrative expenses (including compensation expense in 1996 of $515,156 relating to the issuance of restricted stock to three officers of the Company simultaneously with the sale of the Common Stock offered hereby) and will not have matching contract revenues as such expenditures are incurred, the Company anticipates that, commencing in the second quarter of 1996, losses will increase significantly and losses will continue until such time, if ever, as the Company is able to generate sufficient revenues to support its operations. The Company believes that its ability to generate sufficient revenues primarily depends on the success of the Company in completing development and obtaining regulatory approvals for the commercial sale of products, including approval of any manufacturing facilities established or maintained by the Company or its suppliers that produce such products. There can be no assurance that any of such events will occur, that the Company will attain revenues from commercialization of its products or that the Company will ever achieve profitable operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and Consolidated Financial Statements. Significant Capital Requirements; Dependence on Proceeds of this Offering; Need for Additional Capital. The Company's capital requirements have been and will continue to be significant. To fund its capital 6 requirements to date, the Company has been dependent primarily on (i) an aggregate of $9,000,000 in funding received from HBL under the Development Agreement, (ii) the net cash proceeds of private placements of the Company's Common Stock, aggregating approximately $3,500,000 and (iii) loans from HBL aggregating $3,000,000, of which $1,000,000 borrowed after March 31, 1996 will be repaid with a portion of the proceeds of this offering. The Company is dependent upon the proceeds of this offering to fund its research and development as well as other working capital requirements. The Company anticipates, based on its currently proposed plans and assumptions relating to its operations (including assumptions regarding the progress of its research and development and the timing and costs associated with the Primary Development Projects), that the net proceeds of this offering, together with the Company's existing capital resources, will be sufficient to satisfy the Company's estimated cash requirements for at least 12 months following the consummation of this offering. The Company estimates that an aggregate of $11,100,000 will be needed over approximately the next three years to complete its Primary Development Projects. Such amount is in excess of the net proceeds of this offering and the existing capital of the Company. Therefore, unless the Company generates significant revenues during such period, which the Company believes is unlikely, the Company will need additional financing to fully fund such development. The Company has no current arrangements with respect to, or sources of, additional financing and it is not anticipated that any of the officers, directors or shareholders of the Company (including HBL) will provide any portion of the Company's future financing requirements. There can be no assurance that, when needed, additional financing will be available to the Company on commercially reasonable terms, or at all. In the event that the Company's plans change, its assumptions change or prove inaccurate, or if the net proceeds of this offering, together with other capital resources, otherwise prove to be insufficient to fund operations, the Company could be required to seek additional financing sooner than currently anticipated. Any inability to obtain additional financing when needed would have a material adverse effect on the Company, including possibly requiring the Company to significantly curtail or possibly cease its operations. In addition, any additional equity financing may involve substantial dilution to the Company's then existing shareholders. See "Use of Proceeds," "Dilution," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and "Certain Transactions." Patent Claims Made By Roche. Hoffmann La-Roche, Inc. ("Roche") has asserted to both HBL and ISI that the manufacture, sale and use of their respective forms of IFN|ga infringe United States Patent 4,503,035 and foreign counterparts thereof owned by Roche relating to IFN|ga (collectively, the "Roche Patent"). The Roche Patent expires in March 2002 in the United States and at various times in other jurisdictions. HBL has informed the Company that it believes that the claims of the Roche Patent are not applicable to the manufacture and sale of HBL IFN|ga . HBL has prevailed at the trial level in litigation initiated by Roche in Japan concerning the dispute and Roche has appealed the decision. The Company is not a party to the litigation between Roche and HBL in Japan. The Company believes that it is likely that Roche would commence suit against the Company if the Company were to sell or attempt to sell HBL IFN|ga for commercial use in the United States or any other country where the Roche Patent has issued with IFN|ga composition claims and is still in effect. However, under applicable United States patent law, the use of a patented product solely for uses reasonably related to the development and submission of information for seeking FDA approval of a biologic for indicated uses in humans is not an act of infringement. Thus, the Company believes that it is unlikely that it would be sued by Roche prior to commercialization of the Company's IFN|ga products. Roche would also not assert infringement claims with respect to the Company's sale of ISI IFN|ga , because in March 1995 ISI entered into a license agreement with Roche pursuant to which ISI was granted a license to use the Roche Patent in exchange for specified royalties. The Company believes that its oral IFN|ga dosage forms do not infringe any claims of the Roche Patent. However, there can be no assurance that, if the Company sells or attempts to sell HBL IFN|ga for commercial use in one or more countries in which the Roche Patent has issued, such sale or attempted sale would not be determined to be an infringement of the Roche Patent under applicable law. HBL has agreed to indemnify the Company for litigation expenses incurred in defending suits brought by Roche against the Company for infringement of the Roche Patent and for any damages the Company may be required to pay to Roche in the event that Roche is successful in any such suit. Nevertheless, a determination of infringement could have a material adverse effect on the business and operations of the Company. See "Business-Patents and Proprietary Rights" and Certain Transactions." 7 Government Regulation. The development, manufacture, testing and marketing of all of the Company's products are subject to extensive regulation by numerous authorities in the United States and other countries. In the United States, before new pharmaceutical products (including biologics) are permitted to be marketed commercially, they must undergo extensive preclinical and clinical testing to satisfy the FDA that they are safe and efficacious in each clinical indication (the specific condition intended to be treated) for which approval is sought. Additionally, approval by analogous regulatory authorities in other countries must be obtained prior to commencing marketing of pharmaceutical products in those countries. The approval process varies from country to country and approval of a drug for sale in one country does not ensure approval in other countries. Delays in obtaining regulatory approvals may adversely affect the development, testing or marketing of the Company's products and the ability of the Company to generate revenues from the sale or licensing of such products. There can be no assurance that the Company will obtain regulatory approvals for its products in a timely manner, or at all. Since 1992 the Company has filed and there are now in effect, seven INDs covering indicated uses for low dose oral IFN|ga. The Company intends to use a portion of the proceeds of this offering to do clinical testing of the use of low dose oral IFN|ga in treating Sjogren's syndrome and oral mucositis, two of the indications covered by the INDs granted to the Company. There can be no assurance that regulatory approvals will be obtained by the Company in the United States or any other country to sell IFN|ga for such purposes. In addition, INADs have been filed and are now in effect for testing of low dose oral IFN|ga in cats, dogs, swine, horses and cattle. Manufacturers of therapeutic products sold in the United States are required to satisfy the FDA that their manufacturing facilities and processes adhere to the agency's good manufacturing practices ("GMP") regulations and to engage in extensive record keeping and reporting. Even if regulatory approval for a product is granted, the facilities in which the product is manufactured will be subject to periodic review and inspections by the FDA or the analogous regulatory authorities of other countries for compliance with GMP or similar foreign regulatory standards. Compliance with such regulations requires substantial time and attention, and is costly. In addition, each domestic manufacturing establishment must be registered with and approved by the FDA. For biologics, except certain well-characterized ones, this requires the filing of an establishment license application for the facilities at which the product will be produced. Failure to comply with the applicable regulatory requirements by either the Company or its strategic partners could, among other things, result in criminal prosecution and fines, product recalls, product seizures and operating restrictions. The Company has not yet sought FDA approval for the commercial sale of any of its products or for the manufacturing processes or facilities of any of its strategic partners. The Company has obtained approval in Kenya for the use of oral IFN|ga for the treatment of certain symptoms of AIDS and has made application in Poland for the use of oral IFN|ga as a treatment for hepatitis B and AIDS, but has not yet received approval for commercial sales in Poland. The approval process applicable to products of the type being developed by the Company usually takes many years and typically requires substantial expenditures. Moreover, even if approval is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. Inasmuch as the Company may manufacture products in the United States and seek to market or license other domestic manufacturers to market products throughout the world, the Company may become subject to United States laws and regulations applicable to exporting drugs, including biologics. The Federal Food, Drug, and Cosmetic Act stipulates that, prior to FDA approval for commercial sale, a drug manufactured in the United States may be exported, without prior FDA authorization, only to certain countries listed in Section 802 of that act. This list contains 25 countries to which such a drug may be exported, provided certain requirements are met, including that: (i) at least one of the 25 countries has granted approval for such drug for commercial sale, (ii) the product is manufactured in substantial compliance with the FDA's GMP regulations, (iii) the FDA is notified of the exportation, and (iv) the FDA has not determined that the probability of reimportation presents an imminent hazard to the public health and safety of the United States. Drugs for investigational use in any of the 25 countries may be exported without notification to the FDA. Thus, the ability of the Company or its licensees to export products manufactured in the United States prior to receiving commercial approval in the United States will be subject to certain restrictions. Therefore, there can be no assurance that the Company or its licensees would be able to export for investigational use or commercial sale in any countries products manufactured in the United States which have not received FDA approval. 8 The Company is also subject to the regulations of the United States Environmental Protection Agency as well as other federal, state and local laws and regulations governing the use and disposal of hazardous materials. Compliance with these laws and regulations is time-consuming and expensive and failure to comply could have a material adverse effect on the Company. The adoption by federal, state or local governments of significant new laws or regulations or a change in the interpretation of existing laws or regulations relating to environmental or other regulatory matters could increase the cost of producing the products manufactured by the Company or its strategic partners or otherwise adversely affect the demand for the Company's products. Adverse governmental regulation which might arise from future legislative or administrative action cannot be predicted. See "Business-Government Regulation." Dependence on HBL; Possible Conflict of Interest. The success of the Company's business will depend upon many factors beyond the Company's control, including its contractual and working relationship with HBL. The Company relies and will rely on HBL to supply HBL IFN|ga to the Company in sufficient quantities to support development and regulatory approval of products for oral and topical use in humans and animals. The ability of the Company to commercialize its oral IFN|ga products in Japan will be dependent upon the efforts of HBL, to which it has granted exclusive marketing rights in such country. To date HBL has provided to the Company an aggregate of $9,000,000 of funding pursuant to the Development Agreement. HBL has also purchased from the Company an aggregate of 461,520 shares of Common Stock for a total purchase price of $1,443,800 and has made loans to the Company aggregating $3,000,000. Of such loans, $1,000,000 principal amount bearing interest at 6% per annum is due in September 1996 and $1,000,000 principal amount bearing interest at 6% per annum is due in September 1997, provided in each case that principal and accrued interest thereon are required to be paid only out of 10% of the Company's gross revenues from its sale of IFN. The remaining $1,000,000 principal amount of the loans bears interest at the rate of 4% per annum and is required to be, and will be, repaid with a portion of the proceeds of this offering. Of the shares of Common Stock to be sold in this offering, 600,000 shares have been reserved for sale to HBL or its designees. Giving effect to the sale of 2,000,000 shares of the Company's Common Stock pursuant to this offering, including 600,000 shares to HBL, and the issuance of 79,000 shares to three officers of the Company simultaneously with the sale of the Common Stock offered hereby, HBL will own approximately 31.9% of the Company's Common Stock. Despite its substantial investment in the Company, HBL is not obligated to provide any additional funding to the Company. The initial term of the Development Agreement expires in March 1999, but the agreement is automatically renewable for successive three year terms, subject to the prior written agreement of the parties. Commencing in March 2002, HBL may also terminate the Development Agreement if sales by the Company or its sublicensees of oral products containing HBL IFN|ga shall not have exceeded $100,000 during the calendar year prior to the termination. If such agreement is terminated, the Company would lose its only current source of supply of IFN|ga for use in humans and there can be no assurance that alternate sources of supply would be available on satisfactory terms, or at all. Such loss could severely limit the Company's ability to conduct clinical trials for the development of applications for its products or to sell its products. The termination of the Company's relationship with HBL could also adversely affect the Company's ability to develop and maintain business relationships with other companies. HBL is a principal shareholder of the Company and one of the directors of the Company is an employee of HBL. The Development Agreement and other agreements and arrangements with HBL may from time to time require further negotiation with the Company and there can be no assurance that conflicts of interest will not arise with respect to the foregoing agreements or arrangements or that conflicts will be resolved in a manner favorable to the Company. See "Business -- Strategic Alliance with HBL" and "Certain Transactions." Limited Manufacturing Capability and Experience. To be successfully commercialized, the Company's products must be manufactured in large quantities in compliance with regulatory requirements and at an acceptable cost. The Company does not intend to build manufacturing facilities for such purpose. Rather, it currently intends to obtain all of its requirements of bulk IFN|ga for oral use in humans from HBL and all of its requirements of bulk IFN|ga for animal use from either ISI or HBL. HBL manufactures IFN|ga at its plant in Okayama, Japan, which the Company believes will have sufficient capacity to produce all of the Company's requirements of the product for the foreseeable future. HBL will be required to obtain FDA approval for commercial-scale manufacturing of products sold in the United States which contain HBL IFN|ga , which approval has not yet been sought or obtained. ISI manufactures IFN|ga at its plant in New Brunswick, New Jersey. The FDA has approved an establishment license application for such facility. The Company has entered into a supply agreement with ISI pursuant to which ISI is obligated to use its best efforts to supply the Company's requirements of IFN|ga for 9 animal use. However, such agreement may be terminated by ISI under certain circumstances. If for any reason HBL and ISI were unwilling or unable to supply to the Company IFN|ga, the Company would be required to seek alternate sources of such product. The availability of such alternate sources of supply, on terms satisfactory to the Company, or at all, is not assured. The Company's failure to obtain adequate supplies of IFN|ga at a competitive cost or in a timely manner could have a material adverse effect on the Company. See "Business." Risks Related to Obtaining, Maintaining and Defending Patents and Proprietary Technology. The Company's success will depend in part on its ability to obtain or license patents, protect trade secrets for its technology and operate without infringing on the proprietary rights of others. The Company owns two United States patents which expire in 2008 and 2010 and licenses from HBL and two universities or their affiliates a total of nine United States patents which expire on various dates between 2001 and 2014. The Company also owns or licenses numerous foreign counterparts of such patents. The Company's licensors also have eight United States patent applications pending. While all claims in seven of such pending applications have been initially rejected by the patent examiner, the Company's licensors are continuing prosecution of all of such applications to counter the rejections with the goal of patent grants. The issued patents are primarily "use" patents (which cover the use of IFN|ga for particular purposes). However, the patents licensed by the Company from HBL cover certain forms of maltose and their use in the manufacture of pharmaceutical dosage forms. The Company and its licensors have filed patent applications in certain other areas of the world and expect to make additional patent applications in the United States and other countries with respect to the use of low doses of IFN|ga for oral mucosal administration. There can be no assurance, however, that either the Company's or its licensors' existing patent applications will mature into issued patents or, if issued, that such patents will be adequate to protect the Company's products or processes. In addition, there can be no assurance that the Company will be able to obtain any necessary or desired additional licenses to patents or technologies of others or that the Company will be able to develop its own additional patentable technologies. The Company believes that the patent position of pharmaceutical companies generally involves complex legal and factual questions. There can be no assurance that any future patent applications or any patents issued to the Company will provide it with competitive advantages or that the Company's use of its technology will not be challenged as infringing upon the patents or proprietary rights of others, or that the patents or proprietary rights of others will not have an adverse effect on the ability of the Company to do business. Furthermore, there can be no assurance that others will not independently develop similar technology or that others will not design technology to circumvent the Company's existing or future patents or proprietary rights. In the event that the Company's technology were deemed to be infringing upon the rights of others, the Company could be subject to damages or enjoined from using such technology or the Company could be required to obtain licenses to utilize such technology. No assurance can be given that any such licenses would be made available on terms acceptable to the Company, or at all. If the Company were unable to obtain such licenses, it could encounter significant delays in introducing products to the market while it attempts to design around the patents or rights infringed upon, or the Company's development, manufacture and sale of products requiring such licenses could be foreclosed. In addition, the Company could experience a loss of revenues and may incur substantial costs in defending itself and indemnifying its strategic partners in patent infringement or other actions based on proprietary rights violations brought against it or its strategic partners. The Company could also incur substantial costs in the event it finds it necessary to assert claims against third parties to prevent the infringement of its patents and proprietary rights by others. The Company relies on proprietary know-how and confidential information and employs various methods, such as entering into confidentiality and noncompete agreements with its current employees and with third parties to whom it has divulged proprietary information, to protect the processes, concepts, ideas and documentation associated with its technologies. Such methods may afford incomplete protection and there can be no assurance that the Company will be able to protect adequately its trade secrets or that other companies will not acquire information which the Company considers to be proprietary. The Company will be materially adversely affected if it cannot maintain its proprietary technologies. See "Business--Patents and Proprietary Rights." Competition. The pharmaceutical industry is an expanding and rapidly changing industry characterized by intense competition. The Company believes that its ability to compete will be dependent in large part upon its ability to continually enhance and improve its products and technologies. In order to do so, the Company must effectively utilize and expand its research and development capabilities and, once developed, expeditiously convert new technology into products and processes which can be commercialized. Competition is based primarily 10 on scientific and technological superiority, technical support, availability of patent protection, access to adequate capital, the ability to develop, acquire and market products and processes successfully, the ability to obtain governmental approvals and the ability to serve the particular needs of commercial customers. Corporations and institutions with greater resources than the Company may, therefore, have a significant competitive advantage. The Company's potential competitors include entities that develop and produce therapeutic agents for treatment of human and animal diseases. These include numerous public and private academic and research organizations and pharmaceutical and biotechnology companies pursuing production of, among other things, biologics from cell cultures, genetically engineered drugs and natural and chemically synthesized drugs. Almost all of these potential competitors have substantially greater capital resources, research and development capabilities, manufacturing and marketing resources and experience than the Company. The Company's competitors may succeed in developing products or processes that are more effective or less costly than any that may be developed by the Company, or that gain regulatory approval prior to the Company's products. The Company also expects that the number of its competitors and potential competitors will increase as more IFN|ga products receive commercial marketing approvals from the FDA or analogous foreign regulatory agencies. Any of these competitors may be more successful than the Company in manufacturing, marketing and distributing its products. There can be no assurance that the Company will be able to compete successfully. See "Business-Competition." Technological Change. The pharmaceutical industry is subject to rapid and significant technological change, and the ability of the Company to compete is dependent in large part on its ability continually to enhance and improve its products and technologies. In order to do so, the Company must effectively utilize and expand its research and development capabilities, and, once developed, expeditiously convert new technology into products and processes which can be commercialized. The Company's competitors may succeed in developing technologies, products and processes that render the Company's processes and products obsolete. Certain companies, such as Roche, have filed applications for or have been issued patents and may obtain additional patents and proprietary rights relating to products or processes competitive with or otherwise related to those of the Company. The scope and viability of these patents, the extent to which the Company may be required to obtain licenses under these patents or under other proprietary rights and the cost and availability of licenses are unknown, but these factors may limit the Company's ability to market its products. See "Business-- Competition." Product Liability Exposure; Uncertainty of Availability of Insurance. The Company's business exposes it to potential product liability risks which are inherent in the testing, manufacturing, marketing and sale of therapeutic products. While the Company will take precautions it deems appropriate, there can be no assurance that it will be able to avoid significant product liability exposure. Product liability insurance for the pharmaceutical industry generally is expensive, to the extent it is available at all. Although the Company is currently making limited sales of IFN|ga in Kenya and is using IFN|ga in clinical trials, it has not yet sought to obtain product liability coverage. The Company intends to obtain product liability insurance coverage at such time, if any, that the volume of sales of its products in its opinion warrants such coverage. There can be no assurance that it will be able to obtain coverage on acceptable terms or that any insurance policy will provide adequate protection against potential claims. A successful claim brought against the Company in excess of any insurance coverage could have a material adverse effect upon the Company. Uncertainty of Healthcare Reimbursement and Reform. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare industry participants. During the past several years, state and federal government regulation of reimbursement rates and capital expenditures in the United States has increased. Lawmakers continue to propose programs to reform the United States healthcare system, which may contain programs to increase governmental involvement in healthcare, lower Medicare and Medicaid reimbursement rates or otherwise change the operating environment in the healthcare industry. Healthcare industry participants may react to these proposals by curtailing or deferring use of new treatments for disease, including treatments utilizing the biologics that the Company is developing. Dependence on Management. The success of the Company will be largely dependent on the abilities and continued personal efforts of Dr. Joseph Cummins, the Company's founder, Chairman of the Board, President and Chief Executive Officer, as well as, to a lesser extent, Dr. Alan Richards, its Director of Clinical and Regu 11 latory Affairs, and Charles Hughes, its Vice President-Finance and Administration and Chief Financial Officer. Dr. Cummins is employed by the Company under an employment agreement expiring December 31, 1999. Dr. Richards and Mr. Hughes each have an employment agreement with the Company which is terminable by either the individual or the Company on six months prior written notice to the other. The loss of the services of Dr. Cummins would have a material adverse effect on the Company. The Company is the beneficiary of a key man life insurance policy on Dr. Cummins in the amount of $2,000,000. It does not own policies covering any other officer or employee. The Company is seeking the services of an additional experienced senior executive. There can be no assurance that the Company will be able to attract such a person. See "Management." Continuing Control by Existing Shareholders. Upon the consummation of this offering, HBL and Dr. Joseph Cummins, the Chairman of the Board, President and Chief Executive Officer of the Company, will beneficially own approximately 31.9% and 13.6%, respectively, of the shares of Common Stock outstanding. Katsuaki Hayashibara, the Director of the Research and Development Center of HBL, is a director of the Company. In the event that HBL and Dr. Cummins were to act in concert, they would be in a position generally to control the affairs of the Company. These two shareholders may be able to control the outcome of shareholder votes, including votes concerning the election of directors, the adoption of amendments to the Company's Restated Certificate of Incorporation or By-laws and the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of the Company's assets. Such control by existing shareholders could also have the effect of delaying, deferring or preventing a change in control of the Company. Moreover, purchasers of the shares offered hereby (other than HBL) will be minority shareholders and, although entitled to vote on matters submitted to a vote of shareholders, they will not control the outcome of such a vote. See "Principal Shareholders" and "Description of Common Stock." Indemnification of Directors and Officers. The Company's By-laws provide for the Company to indemnify each director and officer of the Company against liabilities imposed upon him (including reasonable amounts paid in settlement) and expenses incurred by him in connection with any claim made against him or any action, suit or proceeding to which he may be a party by reason of his being or having been a director or officer of the Company. The Company has also entered into Indemnification Agreements with each officer and director pursuant to which the Company will, in general, indemnify such persons to the maximum extent permitted by the Company's By-laws and the laws of the State of Texas against any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any actual or threatened action or proceeding to which such director or officer is made or threatened to be made a party by reason of the fact that such person is or was a director or officer of the Company. The foregoing provisions may reduce the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from suing directors for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its shareholders. See "Management -- Indemnification of Directors and Officers." Broad Discretion by Management in Application of Proceeds. Although the Company currently intends to use approximately $6,350,000 (77.7%) of the net proceeds of this offering to fund the Primary Development Projects, it will have broad discretion in the use of such funds as circumstances warrant. In addition, approximately $825,000 (10.1%) of the estimated net proceeds from this offering has been allocated to working capital and general corporate purposes. Accordingly, the Company's management will have broad discretion as to the application of such proceeds. See "Use of Proceeds." No Assurance of Public Market; Arbitrary Determination of Offering Price; Possible Volatility of Market Price of Common Stock. Prior to this offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price has been determined by negotiation between the Company and the Underwriter and is not necessarily related to the Company's asset value, net worth or other criteria of value. Among the factors considered in determining the offering price were the Company's financial condition and prospects, management, market prices of similar securities of comparable publicly-traded companies, certain financial and operating information of companies engaged in activities similar to those of the Company and the general condition of the securities market. There can be no assurance that a regular trading market will develop after this offering or that, if developed, it will be sustained. The market prices for securities of biotechnology companies have been volatile. Announcements of technological innovations or new products by the Company or 12 its competitors, developments concerning proprietary rights (including patents and litigation matters), publicity regarding actual or potential clinical testing relating to products under development by the Company or others, regulatory developments in both the United States and foreign countries, public concern as to the safety of biotechnology products and economic and other external factors, as well as period-to-period fluctuations in financial results, may have a significant impact on the market price of the Common Stock. Additionally, in recent years, the stock market has experienced a high level of price and volume volatility and market prices for the stock of many companies, particularly the common stock of small and emerging growth companies that trade in the over-the-counter market, have experienced wide price fluctuations not necessarily related to the operating performance of such companies. See "Underwriting." Benefits of Offering to Existing Shareholders. Upon the consummation of this offering, the existing shareholders of the Company will receive substantial benefits, including the creation of a public trading market for their securities and the corresponding facilitation of sales by such shareholders of their shares of Common Stock in the secondary market, as well as an immediate increase in net tangible book value of $1.77 per share to such shareholders based upon the pro forma net tangible book value per share after this offering and the initial public offering price per share of the Common Stock offered hereby. The existing shareholders of the Company have acquired their respective equity interests at costs substantially below the offering price. Accordingly, to the extent that the Company incurs losses, the investors purchasing shares in this offering will bear a disproportionate risk of such losses. If, at the time the existing shareholders are able to sell their shares of Common Stock in the public market, the market price per share remains at the $5.00 initial public offering price (of which there can be no assurance) such shareholders would realize an aggregate gain of $11,951,082 ($3.84 per share) on the sale of all of their existing shares. Additionally, $1,000,000 of the proceeds of this offering will be used to repay indebtedness owing by the Company to HBL, which is an existing shareholder. See "Use of Proceeds," "Dilution" and "Shares Eligible for Future Sale." Shares Eligible for Future Sale. Upon the consummation of this offering, the Company will have 5,114,232 shares of Common Stock outstanding. Up to 600,000 of the 2,000,000 shares offered hereby may be purchased by HBL and, if purchased, will be subject to certain restrictions on sale imposed under the federal securities laws. The remaining shares of Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"). All of the 3,035,232 shares of Common Stock outstanding as of the date of this Prospectus are, and all of the 79,000 shares to be issued to three officers of the Company simultaneously with the consummation of the sale of the Common Stock offered hereby, including 30,000 shares to each of Dr. Cummins and Dr. Richards and 19,000 shares to Mr. Hughes, will be, "restricted securities" as that term is defined under Rule 144 promulgated under the Securities Act. Such shares may only be sold pursuant to a registration statement under the Securities Act, in compliance with the exemptive provisions of Rule 144 or pursuant to another exemption under the Securities Act. Of such 3,114,232 restricted shares of Common Stock, an aggregate of 1,040,976 shares are immediately eligible for sale, without registration, under Rule 144 (subject to the contractual restrictions described below). An additional 1,964,616 shares will become eligible for sale (subject to the volume limitations prescribed in Rule 144 and such contractural restrictions) commencing 90 days after the date of this Prospectus. The balance of such shares will become eligible for sale at various times commencing in January 1997. In general, under Rule 144 as currently in effect, subject to the satisfaction of certain other conditions, a person (or persons whose shares are aggregated for this purpose), including an affiliate of the Company, who has owned restricted shares of Common Stock beneficially for at least two years is permitted to sell in the open market within any three- month period a number of shares that does not exceed the greater of 1% of the outstanding shares of the same class or, if the Common Stock is quoted on NASDAQ, the average weekly trading volume during the four calendar weeks preceding the filing of the required notice of sale. A person who has not been an affiliate of the Company for at least the three months immediately preceding the sale and who has beneficially owned shares of Common Stock as described above for at least three years is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. The Company and its officers and directors and shareholders owning of record more than 99% of the Common Stock outstanding as of the date of this Prospectus, have agreed with the Underwriter not to sell or otherwise dispose of any shares of Common Stock for a period of 12 months after the date of this Prospectus, without the Underwriter's prior written consent. No predictions can be made of the effect, if any, that sales of Common Stock in the market or the availability of shares of Common Stock for sale under Rule 144 will have on the market price of Common Stock prevailing from time to time. 13 Nevertheless, the possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. See "Shares Eligible for Future Sale" and "Underwriting." Outstanding Options. Upon the consummation of this offering, there will be 40,500 shares of Common Stock reserved for issuance upon the exercise of stock options outstanding under the Company's 1996 Employee Stock Option Plan (the "Employee Plan") and 75,000 shares of Common Stock reserved for issuance upon exercise of stock options outstanding under the Company's Outside Director and Advisor Stock Option Plan (the "Director Plan" and together with the Employee Plan, the "Plans"). None of the foregoing options is currently exercisable. An additional 134,500 shares are reserved for issuance upon exercise of options available for future grant under the Plans. All of the options outstanding upon consummation of this offering will be exercisable at a price of $5.00 per share. To the extent the market price of Common Stock at the time of exercise exceeds the exercise price, the exercise of the foregoing options will have a dilutive effect on the Company's shareholders. Moreover, the terms upon which the Company may be able to obtain additional equity may be adversely affected, since the holders of the options can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the options. See "Management - Stock Option Plans" and "Shares Eligible for Future Sale." Immediate and Substantial Dilution. This offering involves an immediate and substantial dilution of $3.69 (73.8%) between the pro forma net tangible book value per share of Common Stock after the offering and the initial public offering price of $5.00 per share. See "Dilution." No Dividends. To date, the Company has not paid any cash dividends on its Common Stock and it does not expect to declare or pay dividends on the Common Stock in the foreseeable future. In addition, future agreements or credit facilities may restrict dividend payments. See "Dividend Policy" and "Description of Common Stock." Possible Delisting of Securities from NASDAQ System; Risks of Low-Priced Stocks. It is anticipated that the Company's Common Stock will be quoted on NASDAQ on the date of this Prospectus. However, in order to continue to be listed on NASDAQ, a company must maintain $2,000,000 in total assets, a $200,000 market value of the public float and $1,000,000 in total capital and surplus. In addition, continued inclusion requires two market makers and a minimum bid price of $1.00 per share; provided, however, that if a company falls below such minimum bid price, it will remain eligible for continued inclusion on NASDAQ if the market value of the public float is at least $1,000,000 and the company has $2,000,000 in capital and surplus. The failure to meet these maintenance criteria in the future may result in the delisting of the Company's Common Stock from NASDAQ and trading, if any, in the Company's Common Stock would thereafter be conducted in the non- NASDAQ over-the-counter market. As a result of such delisting, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, the Company's Common Stock. In addition, if the Common Stock were to become delisted from trading on NASDAQ and the trading price of the Common Stock were to fall below $5.00 per share, trading in the Common Stock would also be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a "penny stock" (generally, any non-NASDAQ equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally defined as an investor with a net worth in excess of $1,000,000 or annual income exceeding $200,000, $300,000 together with a spouse). For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Such information must be provided to the customer orally or in writing prior to effecting the transaction and in writing before or with the customer confirmation. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements may discourage them from effecting transactions in the Common Stock, which could severely limit the liquidity of the Common Stock and the ability of purchasers in this offering to sell the Common Stock in the secondary market. 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered hereby, after deducting underwriting discounts and commissions and other expenses of the offering are estimated to be approximately $8,175,000 ($9,480,000 if the Underwriter's over-allotment option is exercised in full). The Company expects to use such net proceeds approximately as follows:
Approximate Approximate Dollar Percentage of Application of Proceeds Amount Net Proceeds ------------------------------------------------- ------------- --------------- Research and development(1) ..................... $6,350,000 77.7% Repayment of indebtedness to HBL (2) ............ 1,000,000 12.2 Working capital and general corporate purposes(3) . 825,000 10.1 ------------- --------------- Total ....................................... $8,175,000 100.0% ============= ===============
- ------ (1) Represents a portion of the costs associated with the Primary Development Projects, including the cost of conducting clinical trials to determine the safety, efficacy and optimal dosages of low dose oral IFN|ga for indicated uses as well as other direct and indirect costs. The Company estimates that the amounts required to complete the Primary Development Projects will be substantially in excess of the portion of the proceeds allocated to research and development. See "Business--Research and Development." (2) The Company has borrowed $3,000,000 from HBL, of which $1,000,000 borrowed after March 31, 1996, bearing interest at the rate of 4% per annum, is required to be repaid upon the consummation of the sale of Common Stock offered hereby. The Company has used the proceeds of loans made to it by HBL for research and development and general corporate purposes. (3) Pursuant to agreements between the Company and three of its officers, simultaneously with the consummation of this offering the Company was to have issued an aggregate of 126,000 shares to such officers. In satisfaction of such obligation, the Company will issue 79,000 shares and use $235,000 of the proceeds of this offering to satisfy required tax withholding relating to such transaction. In addition, a portion of the proceeds allocated to working capital is expected to be utilized to pay the salaries of the Company's three executive officers, which salaries are anticipated to aggregate approximately $281,500 for the 12 months following the consummation of this offering. See "Management" and "Certain Transactions." If the Underwriter exercises its over-allotment option in full, the Company will receive additional net proceeds of approximately $1,305,000, which amount will be utilized for research and development. The allocation of the net proceeds of this offering set forth above represents the Company's best estimates based upon its current plans and certain assumptions regarding the Company's future revenues and expenditures. If any of these factors change, the Company may find it necessary or advisable to reallocate some of the proceeds within the above-described categories or to use portions thereof for other purposes. The Company estimates that, over approximately the next three years, approximately $4,500,000 and $3,800,000 will be needed for regulatory compliance and clinical trials with respect to low dose oral IFN|ga therapy for the treatment of Sjogren's syndrome and oral mucositis, respectively, approximately $2,000,000 will be needed for HCV testing in Mexico and Canada and approximately $800,000 will be needed for HBV testing in Mexico, subject to obtaining regulatory approvals in such countries. The amounts actually expended by the Company for these activities may vary significantly from the foregoing estimates as a result of a variety of factors, including the timing of regulatory approvals (if such approvals are given at all), the status of competitive products, technological advances made by the Company or others, the progress of the Company's research and development efforts, the availability of funding from institutions or corporate sponsors and determinations regarding the commercial potential of the Company's products, including other products the Company is currently developing and new products the Company may identify. The Company may abandon, deemphasize or expand its activities with respect to one or more of the Primary Development Projects and may use a portion of the proceeds of this offering for other projects as circumstances warrant. 15 The Company anticipates, based on its currently proposed plans and assumptions relating to its operations (including assumptions regarding the progress of its research and development and the timing and costs associated with the Primary Development Projects), that the net proceeds of this offering, together with the Company's existing capital resources, will be sufficient to satisfy the Company's estimated cash requirements for at least 12 months following the consummation of this offering. As set forth above, the Company estimates that an aggregate of $11,100,000 will be needed over approximately the next three years to complete the Primary Development Projects. Such amount is in excess of the net proceeds of this offering and the existing capital of the Company. Therefore, unless the Company generates significant revenues during such period, which the Company believes is unlikely, the Company will need additional financing to fully fund such development. The Company has no current arrangements with respect to, or sources of, additional financing and it is not anticipated that any of the officers, directors or shareholders of the Company (including HBL) will provide any portion of the Company's financing requirements. There can be no assurance that, when needed, any additional financing will be available to the Company on commercially reasonable terms, or at all. In the event the Company's plans change, its assumptions change or prove to be inaccurate, or if the net proceeds of this offering, together with other capital resources, otherwise prove to be insufficient to fund operations, the Company could be required to seek additional financing sooner than currently anticipated. Proceeds not immediately required for the purposes described above will be invested principally in United States Government securities, bank certificates of deposit, money market funds or other short-term interest- bearing investments. DIVIDEND POLICY To date, the Company has not declared or paid any cash dividends on its Common Stock and does not expect to declare or pay any dividends in the foreseeable future. Instead, the Company intends to retain all earnings, if any, for use in the Company's business operations. 16 DILUTION The difference between the public offering price per share of the Common Stock and the pro forma net tangible book value per share of the Common Stock after completion of this offering constitutes the dilution to investors in this offering. Net tangible book value per share on any given date is determined by dividing the Company's net tangible book value (total tangible assets less total liabilities) on such date by the number of outstanding shares of Common Stock. At March 31, 1996, the negative net tangible book value of the Company was $(1,383,475) or approximately $(.46) per share of Common Stock. After giving effect to the sale by the Company of 2,000,000 shares of Common Stock offered hereby (less underwriting discounts and commissions and estimated expenses of this offering and assuming no exercise of the Underwriter's over-allotment option or the Underwriter's Warrants) and the issuance of 79,000 shares and the use of $235,000 of the proceeds of this offering simultaneously with such sale to satisfy withholding tax obligations relating to such transaction, the pro forma net tangible book value of the Company at March 31, 1996 would have been $6,681,212, or approximately $1.31 per share of Common Stock. This represents an immediate increase in net tangible book value of $1.77 per share to the existing shareholders and an immediate dilution of $3.69 per share (73.8%) to new investors. The following table illustrates this dilution to new investors on a per share basis:
Public offering price .......................... $5.00 Negative net tangible book value before offering $(.46) Increase attributable to new investors .... 1.77 -------- Pro forma net tangible book value after offering . 1.31 ------- Dilution to new investors ...................... $3.69
The following table sets forth, with respect to the Company's existing shareholders (including three employees of the Company who will be issued an aggregate of 79,000 shares simultaneously with the consummation of the sale of the Common Stock offered hereby) and new investors in this offering a comparison of the number of shares of Common Stock purchased from the Company, the percentage ownership of such shares, the total consideration paid, the percentage of total consideration paid and the average price per share:
Average Price Per Shares Purchased Total Consideration Share ------------------------ -------------------------- ----------- Number Percent Amount Percent ----------- --------- ------------- --------- Existing shareholders . 3,114,232 60.9% $ 3,620,078 26.6% $1.16 New investors ....... 2,000,000 39.1 10,000,000 73.4 5.00 ----------- --------- ------------- --------- ----------- Total ............. 5,114,232 100.0% $13,620,078 100.0% =========== ========= ============= =========
The above table assumes no exercise of the Underwriter's over-allotment option. If the Underwriter's over- allotment option is exercised in full, the new investors will have paid $11,500,000 or 76.1% of the total consideration, for 2,300,000 shares, or approximately 42.5% of the total number of shares of Common Stock outstanding. See "Underwriting." 17 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 on a historical basis and as adjusted to give effect to the Company's sale of 2,000,000 shares of Common Stock offered hereby and the application of the estimated net proceeds therefrom.
March 31, 1996 ------------------------------- Actual As Adjusted(1) ------------- -------------- Notes payable to related party(2) ................. $ 2,000,000 $ 2,000,000 ------------- -------------- Shareholders' equity (deficit) Common Stock, $.01 par value, 10,000,000 shares authorized, 3,048,672 shares issued, 5,114,232 shares as adjusted(3) ......... 30,487 51,142 Additional paid-in capital ................. 3,589,591 12,112,936 Deficit accumulated during the development stage. .................................. (4,943,168) (5,448,481) Unrealized gain on marketable securities ... 30,000 30,000 Treasury stock -- 13,440 shares(4) ......... (26,000) -- ------------- -------------- Total shareholders' equity (deficit) ..... (1,319,090) 6,745,597 ------------- -------------- Total capitalization ................... $ 680,910 $ 8,745,597 ============= ==============
- ------ (1) Gives effect to the issuance of 79,000 shares of Common Stock to three officers of the Company and the use of $235,000 of the proceeds of this offering simultaneously with the sale of the Common Stock offered hereby to satisfy withholding tax obligations relating to such transaction. See "Management-Employment Agreements." (2) Represents the outstanding principal amounts of two $1,000,000 promissory notes issued to HBL in September 1991 and September 1992, respectively. Accrued interest on such notes was $483,699 as of March 31, 1996. The notes are due on September 16, 1996 and September 25, 1997, respectively, provided that principal and accrued interest thereon are required to be paid only out of 10% of the Company's gross revenues from its sales of IFN. The notes bear interest at the rate of 6% per annum. Since repayment of the notes is dependent on future sales of IFN by the Company, material amounts of which are not expected within the next year, they are classified as non-current liabilities. (3) Does not include (i) 200,000 shares of Common Stock reserved for issuance upon exercise of the Underwriter's Warrants; (ii) an aggregate of 115,500 shares of Common Stock reserved for issuance upon the exercise of stock options to be outstanding under the Plans, none of which options are currently exercisable; or (iii) an aggregate of 134,500 shares of Common Stock reserved for issuance upon exercise of stock options which are available for future grant under the Plans. See "Management-Stock Option Plans," "Principal Shareholders," "Certain Transactions" and "Underwriting." (4) On May 14, 1996, the Board of Directors of the Company approved the cancellation of all treasury shares. 18 SELECTED FINANCIAL DATA The selected financial data presented below under the captions "Consolidated Statement of Operations Data" and "Consolidated Balance Sheet Data" for the two years ended December 31, 1995 and as of December 31, 1995 are derived from the consolidated financial statements of the Company and its subsidiaries (companies in the development stage) included elsewhere in this Prospectus, which financial statements have been audited by Ernst & Young LLP, independent auditors. Financial data for the three months ended March 31, 1995 and March 31, 1996 and the period from June 25, 1984 (inception) through March 31, 1996 and as of March 31, 1996 are unaudited and, in the opinion of the Company's management, contain all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation thereof. Results for the three months ended March 31, 1996 are not indicative of the results that may be expected for the full 1996 fiscal year. The selected financial data should be read in conjunction with the consolidated financial statements, the related notes and the independent auditors' report, appearing elsewhere in this Prospectus. CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Cumulative From June 25, 1984 Three Months Ended March (Inception) Year Ended December 31, 31, Through ---------------------------- -------------------------- March 31, 1994 1995 1995 1996 1996 ------------ ------------ ----------- ----------- --------------- Total revenues ................ $2,653,331 $2,006,262 $ 647,069 $ 415,728 $10,570,886 Total expenses ................ 2,782,570 2,317,841 722,003 402,921 15,514,054 Net income (loss) ............. (129,239) (311,579) (74,934) 12,807 (4,943,168) Net loss per share ............ (.04) (.10) (.02) -- Weighted average shares outstanding .................. 3,005,592 3,034,339 3,031,609 3,035,232
CONSOLIDATED BALANCE SHEET DATA:
March 31, 1996 ------------------------------- December 31, 1995 Actual As Adjusted(1) ----------------- ------------- -------------- Cash and cash equivalents ....................... $ 1,108,527 $ 724,280 $ 8,664,280 Working capital (deficiency) .................... (18,035) (2,585) 8,062,102 Total assets .................................... 1,791,060 1,424,004 9,364,004 Total liabilities ............................... 3,152,957 2,743,094 2,618,407 Deficit accumulated during the development stage . (4,955,975) (4,943,168) (5,448,481) Shareholders' equity (deficit) .................. (1,361,897) (1,319,090) 6,745,597
- ------ (1) Gives effect to the sale of 2,000,000 shares of Common Stock offered hereby and the anticipated application of the estimated net proceeds therefrom, including the payment of $235,000 to satisfy withholding tax obligations of the Company arising in a transaction required under the employment agreements of three officers in which the Company shall also issue 79,000 shares of Common Stock to such officers. Subsequent to March 31, 1996, the Company borrowed $1,000,000 from HBL, which amount will be repaid from the proceeds of this offering. See "Use of Proceeds" and "Certain Transactions." 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Since June 1984, the Company, a development stage company, has been engaged almost exclusively in research and development activities focused on developing biologics for the treatment of human and animal diseases. Other than limited sales of natural IFN|ga in Kenya, the Company has not yet commenced any significant product commercialization and, until such time as it does, will not generate significant product revenues. The Company has incurred significant operating losses since its inception resulting in an accumulated deficit of $4,943,168 at March 31, 1996. Beginning in April 1996, the rate of loss increased and such losses are expected to continue for the foreseeable future and until such time, if ever, as the Company is able to attain sales levels sufficient to support its operations. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995 During the three months ended March 31, 1996 (the "1996 Quarter") and the three months ended March 31, 1995 (the "1995 Quarter") the Company recorded total revenues of $415,728 and $647,069, respectively. $402,574 of the 1996 revenues and $618,266 of the 1995 revenues were contract revenues recognized during the respective periods. Other revenues consisted primarily of interest income of $11,154 and $28,803 for the 1996 and 1995 quarters, respectively. Of the $9 million contract revenues received from HBL from 1992 through 1994, all but $14,566 has been recognized as income as of the end of the 1996 Quarter. Beginning in April 1996, the Company will no longer have contract revenues to offset expenditures as they are incurred. Accordingly, the Company anticipates a significant increase in net losses. During the 1996 Quarter, research and development expenses were $134,209 as compared to $247,978 for the 1995 Quarter. The decrease of $113,769 was the result of fewer clinical studies conducted and completed in the 1996 Quarter. General and administrative expenses were $238,712 during the 1996 Quarter as compared to $444,025 during the 1995 Quarter. The primary reason for the decrease was fewer employees in the 1996 Quarter (eight compared to eleven) and litigation expense in the 1995 Quarter of $103,737 compared to none in the 1996 Quarter. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 During the year ended December 31, 1995, the Company had total revenues of $2,006,262 compared to total revenues of $2,653,331 during the year ended December 31, 1994. $550,000 of the revenues for 1995 were received in connection with the settlement of a patent infringement action brought by the Company in New Zealand. Of the total settlement amount, $50,000 was in exchange for the grant by the Company of a sublicense of the technology that was the subject of the lawsuit and $500,000 was a reimbursement of research and development cost incurred by the Company. Other revenues for 1995 consisted of interest income of $94,867 and deferred contract revenues recognized in the amount of $1,361,395. Had the Company not received the $500,000 payment toward research and development costs from the settlement, the remaining balance of deferred contract revenue ($417,140) would have been recognized as contract revenue in 1995. During 1994, deferred contract revenues of $2,480,093 were recorded as earned based on research and development and administrative costs incurred. Other 1994 revenues consisted of interest income of $132,713 and interferon sales of $40,525. During 1995, research and development expenses were $875,093 as compared to $1,364,042 during 1994. The decrease of $488,949 in 1995 was the result of certain clinical studies being completed in 1994 and the continuation of certain other studies into 1996. It is anticipated that approximately $76,000 will be paid by the Company in 1996 for 1995 studies which will be completed in 1996. During 1995 and 1994, the Company incurred general and administrative expenses of $1,322,748 and $1,298,528, respectively. Over all, general and administrative expenses for 1995 were lower than 1994. However, the Company recorded a $150,000 discount on its investment in ISI common stock due to certain restric- 20 tions placed on the sale of such stock. The Company acquired 312,500 shares of ISI common stock for $625,000, or $2.00 per share, representing the quoted market price of ISI stock at that time. The stock was acquired as a result of an agreement with ISI to allow the sublicense by the Company to others of certain products previously exclusively licensed to ISI. LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, the Company had cash of $724,280 with accounts payable of $100,175 and other funding commitments for clinical studies of approximately $36,000. Deferred contract revenues of $14,566 at March 31, 1996 represents contract revenues received from HBL in advance of services to be performed for research and development activities. The Company has borrowed $2 million from HBL and the notes accrue interest at the rate of 6% per annum with accrued interest of $483,699 at March 31, 1996. The accrued interest and principal are to be paid only from 10% of the Company's gross revenues from sales of IFN. The Company has borrowed from HBL an additional $500,000 in May 1996 and $500,000 in June 1996. Such additional loans bear interest at the rate of 4% per annum and will be paid in full simultaneously with the consummation of this offering. At the present time, the Company's only sales of IFN|ga are to Kenya and such sales are insignificant. Accordingly, the Company believes that losses from operations will continue until such time, if ever, as the Company receives approval from the FDA, so that commercial marketing of the Company's products can begin in the United States. Also, approval is being sought in certain foreign countries for product sales. However, there can be no assurance that such approvals will occur. The Company anticipates, based on its currently proposed plans and assumptions relating to its operations (including assumptions regarding the progress of its research and development and the timing and costs associated with the Primary Development Projects), that the net proceeds of this offering, together with the Company's existing capital resources, will be sufficient to satisfy the Company's estimated cash requirements for at least 12 months following the consummation of this offering. The Company estimates that an aggregate of $11,100,000 will be needed over approximately the next three years to complete its Primary Development Projects. Such amount is in excess of the net proceeds of this offering and the existing capital of the Company. Therefore, unless the Company generates significant revenues during such period, which the Company believes is unlikely, the Company will need additional financing to fully fund such development. The Company has no current arrangements with respect to, or sources of, additional financing and it is not anticipated that any of the officers, directors or shareholders of the Company (including HBL) will provide any portion of the Company's future financing requirements. There can be no assurance that, when needed, additional financing will be available to the Company on commercially reasonable terms, or at all. In the event that the Company's plans change, its assumptions change or prove inaccurate, or if the net proceeds of this offering, together with other capital resources, otherwise prove to be insufficient to fund operations, the Company could be required to seek additional financing sooner than currently anticipated. Any inability to obtain additional financing when needed would have a material adverse effect on the Company, including requiring the Company to significantly curtail or possibly cease its operations. 21 BUSINESS GENERAL The Company, a development-stage company, is engaged in developing biologics for the treatment of human and animal diseases. The Company is currently focusing its research on human health indications for the use of low dose oral natural IFN|ga, particularly for the treatment of Sjogren's syndrome, oral mucositis in cancer patients and hepatitis B and C. The Company believes that significant worldwide opportunities exist for the development of low dose oral natural IFN|ga as an inexpensive, non-toxic, efficacious alternative to the treatment of disease by injection of high doses of IFN|ga. In addition, the Company believes that low dose oral natural IFN|ga can be an effective treatment for diseases or conditions for which current therapies are inadequate. The Company owns or licenses eleven United States patents relating to low dose oral natural IFN|ga. Since 1992, the Company has filed, and there now are in effect, seven Investigational New Drug Applications covering indicated uses for low dose oral IFN|ga, including treatment of Sjogren's syndrome and oral mucositis. The Company is seeking regulatory approvals in certain foreign countries to test and/or market low dose oral IFN|ga for the treatment of hepatitis B and C. The Company is also testing oral IFN|ga in cats with herpesvirus-1 infection, dogs with keratoconjunctivitis sicca and cattle with shipping fever or mastitis and has filed and there are now in effect Investigational New Animal Drug Applications for these and other indications for the product in animals. The Company is also testing a topical IFN|ga as a treatment for genital warts in humans. The Company's objective is to exploit its proprietary technology to become a leader in the field of low dose oral IFN|ga applications. The Company's business strategy is to pursue those indications for low dose oral IFN|ga treatment for which initial clinical research has indicated the treatment is efficacious and which in the opinion of the Company have the greatest commercial potential and are most likely to be approved by the FDA. To the extent possible, the Company will attempt to minimize the cost to the Company of obtaining FDA approval by utilizing forms of IFN|ga already approved (in other dosage forms and for different indications) by the Japanese Ministry of Health and Welfare for human use or by the FDA for animal use. The Company believes such minimized costs will be the result of more information available for use in preparing applications for such approvals. The Company will attempt to gain market share for approved products by forming alliances with strong marketing partners. IFN|ga The bodies of humans and animals maintain delicately balanced immune systems that fight disease and injury. Substances such as IFN|ga, which are produced by the body in small quantities, play important roles in the maintenance of these systems. The Company believes that IFN|ga and other biologics show great promise as weapons against disease and for use in therapy. IFN|ga has antiviral, antiproliferative and immunomodulatory properties and is used therapeutically in humans with various chronic disorders. IFN|ga may reduce inflammation by eliminating persistent viral infection, modulating the allergic response or attenuating factors which cause inflammation. In recent years IFN|ga has been used as a biologic and various techniques have been discovered for the mass production of IFN|ga and other biologics. The prevailing view is that for IFN|ga to be effective, sufficient concentrations of the substance must reach the disease site, by means of either local or distal administration of the IFN|ga. If IFN|ga is disseminated in the bloodstream, high doses of IFN|ga would be required to assure that sufficient amounts of IFN|ga reach the diseased tissue. Such approaches have proven effective in many instances, but high-dose systemic IFN|ga therapy has the disadvantage of significant side effects in many cases as well as expense. The Company has focused its efforts on the use of IFN|ga in low doses since such use mimics the way the body naturally produces and utilizes the substance. It has accumulated data that indicate that oral administration 22 of IFN|ga , at very low doses, can trigger systemic alterations which augment the body's disease-fighting mechanisms. Such oral application of low dose IFN|ga is without the adverse side effects of high-dose IFN|ga administration. Moreover, low dose treatment which is administered orally or topically is more economical than treatment by injection of high dose IFN|ga. The Company has conducted preliminary research on various human and animal indications for the use of low dose oral IFN|ga therapy and, based upon initial results, intends to focus its development activities on the applications discussed below. HUMAN HEALTH APPLICATIONS Sjogren's Syndrome. Sjogren's syndrome is a chronic autoimmune disorder characterized by severe dryness of the eyes and mouth. It can exist as a primary disorder or in association with other autoimmune diseases such as rheumatoid arthritis, systemic lupus erythematosus and progressive systemic sclerosis. Patients with primary Sjogren's syndrome may have clinical signs such as rash, arthritis, pneumonitis and nephritis. Typical symptoms include burning eyes, dry mouth, stinging tongue, painful throat, swollen glands and dry vagina. Oral candidiasis (a fungus infection of the mouth) may also arise as a result of the absence of naturally occurring anti-yeast substances which are contained in saliva. Although Sjogren's syndrome is not life threatening, it can cause extreme discomfort. The National Institutes of Health ("NIH") estimates that there are approximately two to four million people in the United States who suffer from Sjogren's syndrome. The Company believes that the incidence of Sjogren's syndrome worldwide is similar to its incidence in the United States. Topical use of artificial tears is the prevailing treatment for the dry eye symptom of the disease. Artificial tears must be used on a regular basis. Intensive oral hygiene is prescribed to prevent progressive periodontal problems that may develop as a result of the disease. The Company believes that oral IFN|ga therapy helps to relieve the dryness associated with Sjogren's syndrome and may effectively supplement or be used in lieu of existing treatments. In a study conducted by the Company from October 1994 to January 1996 at two universities, the Company found that oral IFN|ga therapy administered to Sjogren's syndrome patients led to increased saliva production in six of 14 patients. The Company has filed and there is now in effect an IND for the use of oral IFN|ga to treat Sjogren's syndrome. The Company intends to spend approximately $4.5 million to conduct and evaluate additional clinical trials of the treatment during the next three years. Oral Mucositis. Oral mucositis is a condition characterized by inflammation and sometimes ulcerations of the mucosal lining of the mouth. It is often associated with the use of chemotherapy or radiation therapy on cancer patients, and in many cases is a dose limiting factor for the chemotherapy treatment cancer patients receive. Current treatments for oral mucositis, including oral hygiene, topical agents and oral rinses, are generally ineffective. The Company has filed and there is now in effect an IND for the use of oral IFN|ga to treat oral mucositis. The Company sponsored a Phase 1/Phase 2 clinical trial at three oncology research centers. Seven out of ten patients experienced a clinically significant reduction in their oral mucositis when IFN|ga was given with particular chemotherapy compared to a previous cycle of chemotherapy without IFN|ga given to the same patients. The Company believes that in the United States approximately 400,000 patients per year will suffer from oral mucositis. The Company intends to spend approximately $3.8 million to conduct and evaluate additional clinical trials during the next three years. Hepatitis. Hepatitis is a family of diseases in which inflammation of the liver occurs. The most common cause of hepatitis is viral infection by one of six distinct viruses. Two of the most common of such viruses are HBV and HCV. Symptoms of acute hepatitis, regardless of which viral agent causes the illness, are similar and include fever, nausea, vomiting and jaundice. While acute viral hepatitis can be debilitating, it is seldom fatal or permanently disabling. However, HBV and HCV can result in a lifelong chronic state. This chronic condition is usu- 23 ally found in two forms. One form is a "chronic carrier" state in which the individual does not have the clinical signs of the disease but is infectious. A chronic carrier can spread the disease for years without being aware of it. The second chronic state is termed "chronic active hepatitis." In this condition, the person is both infectious and has mild to severe hepatitis symptoms. According to the World Health Organization ("WHO"), HBV chronically infects (including both carrier and active states) 300-400 million people worldwide. WHO lists HBV as the ninth leading cause of death, responsible for up to 2 million deaths each year. Hepatitis B HBV is transmitted through blood, blood products and sexual contact. About 6-10% of patients infected with HBV become carriers and 5-8% of all HBV patients develop chronic disease. Currently, the only effective and widely approved treatment for chronic HBV is IFN|ga administered parenterally in high doses three times per week for 16 to 24 weeks. However, new parenteral IFN|ga treatment regimens last for up to 48 weeks. Fewer than 40% of HBV patients respond favorably to parenteral IFN|ga treatment. The therapy has been shown to be almost totally ineffective in carrier cases. High dose parenteral IFN|ga therapy often results in adverse reactions, including fever, headache, muscular pain, anorexia, fatigue, chills, weakness, nausea, hair loss, depression and personality changes. Parenteral high- dose IFN|ga treatment is also costly. Moreover, its use requires the additional expense of syringes and needles, and necessitates close medical supervision. Some of the additional required medical expense is in the form of doctor visits and treatment for the adverse effects associated with the parenteral IFN|ga. While no specific cost estimates are available, the costs are substantial, especially in countries where the health system is already overburdened. The Company believes that low dose oral IFN|ga therapy for chronic HBV might be as beneficial a treatment for the disease as, and will be more economical than, parenteral IFN. Up to 105 million chronic HBV patients may qualify for low dose oral IFN|ga therapy worldwide. Since 1990, the Company has been involved in an open-labelled (non-placebo controlled) safety and efficacy study of oral IFN|ga therapy for chronic HBV patients conducted at two clinical centers in Poland. The therapy appears to have had as beneficial an effect in this patient population as parenteral IFN|ga and to have produced fewer adverse side effects. Care needs to be taken in the interpretation of the results of the study since it was not placebo-controlled. However, the data generated to date indicate that the low dose oral IFN|ga therapy would represent significant improvement over parenteral therapy because it is less toxic and less expensive. The Company intends to spend approximately $800,000 to conduct and evaluate clinical trials of oral IFN|ga treatment in Mexico with the goal of obtaining regulatory approval for marketing in Mexico. The Company has designed a study to be conducted at a hepatitis treatment center in Mexico City, which the Company believes will require approximately two years to complete. The Company is seeking temporary approval to market IFN|ga for treatment of HBV in China while clinical testing is being conducted. The Company intends to seek permanent marketing approval in China for such treatment after clinical testing has been completed. Hepatitis C HCV is transmitted primarily through blood and blood products and, to a lesser extent, by sexual contact. However, in up to 40% of HCV cases, no source of infection can be identified. Symptoms of the acute phase of the disease are similar to HBV, though usually less severe, with fatigue being the most common complaint. Of individuals infected with HCV, 20-30% will resolve their infection, 20-30% will become chronic carriers and the remaining 40-60% will develop chronic active hepatitis. The latter group is at great risk of developing cirrhosis and/or liver cancer. It is estimated that the number of chronic infections (including carriers) is 60 million worldwide, and the number is increasing rapidly. While infection via blood, blood products and sexual contact can be controlled to a certain extent, the 20 to 40% of cases with an unknown method of transmission have resulted in great concern in the international health care community. Because HCV was not identified until 1989, the full extent of the epidemic is still unknown. As with HBV, parenterally administered IFN|ga is the only widely approved therapy for HCV infection. Current therapy consists of high dosages of IFN|ga that are administered by injection three times per week for 24 24 weeks. Relapse after parenteral IFN|ga administration is common in HCV patients. Of the 30-50% of patients who initially respond to treatment, about half will revert to active disease, leaving only 15-25% of treated patients who experience a lasting benefit from therapy. Parenteral IFN|ga treatment of HCV is associated with the same high cost and adverse side effects attendant to such therapy for HBV. Costs can be even greater in treating HCV since patients who fail to respond to parenteral IFN|ga therapy or who relapse after therapy often receive multiple treatment courses, sometimes consisting of even greater doses and/or duration, in an attempt to forestall the frequently life-threatening consequences of long-term chronic HCV. Recent clinical pilot work completed by the Company in association with a university in Canada indicates that chronic HCV patients treated with low-dose oral IFN|ga followed by a standard course of parenteral IFN|ga had an initial response rate twice that recorded in patients given parenteral IFN|ga alone. HBL has provided the Company with data that demonstrates that HCV patients in Japan who were treated with injectable IFN|ga preceded by low-dose oral IFN|ga experienced a greater than expected sustained rate of response. It should be noted that these data were generated from open-label treatment and should be interpreted accordingly. The Company has licensed such technology from the Canadian university and intends to use approximately $2,000,000, to prepare an Investigational New Drug submission in Canada and a similar application in Mexico, and, if such applications are approved, to conduct clinical trials in such countries to evaluate, and thereafter develop, oral IFN|ga pre-treatment as a means of increasing the effectiveness of parenteral IFN|ga therapy. An estimated 40 million worldwide chronic cases of HCV are believed to be candidates for this treatment. Other Applications and Products. The Company has also filed and there are currently in effect INDs for the use of oral IFN|ga to treat aphthous stomatitis, fibromyalgia, the common cold and chronic fatigue syndrome in humans. However, the Company does not currently have, nor does it believe that in the foreseeable future it will have, the financial or human resources to actively pursue research and development activities with respect to these or other diseases or conditions. Any such additional activities would require arrangements to be made with strategic partners. There can be no assurance that any such development would occur. In April 1996, the NIH announced that it will be conducting a clinical trial of the use of low dose oral IFN|ga therapy for the treatment of AIDS-related symptoms. The study will enroll 560 AIDS patients and test three different forms of IFN|ga , including the form produced by HBL as well as forms produced by two licensees of the Company. While the Company has filed an IND for the use of oral IFN|ga to treat AIDS, and assisted the NIH in the finalization of the study protocol as well as the coordination of the packaging of clinical supplies for the study, the Company currently plans only limited further development work for this indication until the NIH study has been completed. The extent of further development work undertaken by the Company may depend upon the results of the NIH study. The Company is currently testing IFN|ga in ointment form for the treatment of genital warts. A pilot study has been conducted in Mexico on eight volunteers. The Company is also conducting laboratory tests on the product at an American university. ANIMAL HEALTH The 1996 American Veterinary Medical Association Membership Directory and Resource Manual reports that there are approximately 52 million dogs in 34 million households and 57 million cats in 29 million households in the United States. The United States Department of Agriculture estimates that the total number of cattle in the United States at the end of last year was 103 million. While the Company does not currently intend to devote significant financial or human resources to animal health, it is testing oral IFN|ga as a treatment for keratoconjunctivitis sicca ("KCS") in dogs, feline herpesvirus-1 infection ("FVR") in cats and shipping fever and mastitis in cattle. KCS. KCS occurs whenever there is decreased production of tears or increased evaporation or break-up of the tear film. The disease is most common in dogs but occasionally occurs in cats and horses. Current treatment for the condition involves stimulation of tear production by a topical administration of cyclosporine formulation, topical applications or oral administration of antibiotics and use of artificial tear solutions. The Company has conducted a pilot study in which low dose oral IFN|ga resulted in significantly increased tear production in dogs. 25 FVR. Veterinarians can trace 80 to 90% of all feline upper-respiratory tract infections to two known viruses. Although both viruses cause similar clinical effects, FVR (also known as feline viral rhinotracheitis) usually causes a more severe illness. A cat suffering from infection by the virus may sneeze frequently, become lethargic, salivate excessively and lose its appetite. Some cats also develop conjunctivitis and in some cases, pneumonia. In a pilot study on the use of oral IFN|ga in the treatment of FVR conducted by the Company at an American university in 1995, cats given IFN|ga for only two days had a significant benefit over cats given a placebo in terms of reduced nasal discharges, reduced fever and other clinical variables. Shipping Fever. The term "shipping fever" is used to describe the bovine respiratory disease complex observed in cattle after shipment either into feedlots or onto pasture. Affected cattle experience fever, loss of appetite, cough, nasal discharge and irregular breathing. In studies conducted by Dr. Cummins at an American university from 1982 to 1988, human IFN|ga given orally to calves was found to provide significant reduction in fever, improvement in feed intake, and a decrease in mortality. The Company has filed an INAD and intends to conduct clinical trials with respect to use of oral IFN|ga as a treatment for shipping fever when a development partner is found. Mastitis. The inflammation of the mammary gland in dairy cows is the most important and costly disease in the dairy industry. Ajinomoto Co., Inc. of Tokyo, Japan has agreed to conduct a pilot study, at its sole expense, on the use of low dose oral IFN|ga as a treatment for mastitis. Development Agreement for Animal Health Products. In May 1996, the Company entered into an agreement with Virbac S.A., a manufacturer and distributor of pharmaceuticals and biologics for animals ("Virbac"), pursuant to which it granted to Virbac an exclusive worldwide license, except in Japan, to use the Company's patents and technology for development and sale of oral IFN|ga for dog and cat applications. Under the agreement the Company will work with Virbac, at Virbac's expense, to achieve regulatory approvals for such applications. The Company will also supply bulk IFN|ga to Virbac for the manufacture, formulation, testing and marketing of oral dosage forms of licensed products by Virbac and Virbac will pay the Company for such IFN|ga at specified rates. Virbac will also pay to the Company certain additional fees and reimbursements. STRATEGIC ALLIANCE WITH HBL HBL was established in 1970 to engage in biotechnical research and development. It is a subsidiary of Hayashibara Company Ltd., a privately-owned Japanese holding corporation with diversified subsidiaries. For more than 100 years the Hayashibara Company, Ltd. and its predecessors have been applying microbiological technology in the starch industry for the production of maltose and other sugars. In 1981, HBL established the Fujisaki Institute to accelerate development of industrial methods for the production of biologics and to sponsor clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center to support basic research. In 1987, HBL successfully accomplished the mass production of human cells in an animal host by producing human cells in hamsters. This made it possible to economically produce a natural form of human IFN|ga and other biologics. HBL also has developed and obtained patents for technology relating to the production of IFN|ga - containing lozenges by which the stability of the IFN|ga activity can be maintained for up to 18 months at room temperature and up to three years if the product is refrigerated. The Company believes that the use of such lozenges gives it advantages over competitive technologies in terms of cost, taste and ease of handling. In 1989, the Company and HBL entered into a manufacturing and supply agreement pursuant to which HBL granted the Company a license to use and distribute HBL IFN|ga and committed to supply to the Company its requirements of HBL IFN|ga and the Company agreed to pay HBL perpetual royalties on net sales of products containing IFN|ga (whether supplied by HBL or others) along with certain fees for the sublicensing of the Company's rights. In March 1992, HBL and the Company terminated the 1989 agreement and entered into a Joint Development and Manufacturing/Supply Agreement (the "Development Agreement") pursuant to which HBL agreed to supply to the Company HBL IFN|ga and granted to the Company an exclusive license to market (with the right to sublicense such rights to others, subject to HBL's approval of the sublicensees) HBL IFN|ga for low dosage oral use in humans worldwide, except in Japan (where HBL has retained exclusive marketing rights), and 26 for low dosage oral use in animals worldwide. Subject to certain conditions, HBL also agreed to provide to the Company $9,000,000 in research funding. All of such funding was provided to the Company during the three years ended December 31, 1994 and has been expended. The Company also increased HBL's perpetual royalties on net sales by the Company of IFN|ga- containing products for oral use. Under the Development Agreement, the Company has granted to HBL an exclusive license to use the Company's technology and certain of its patents for the marketing of HBL IFN|ga for oral use in humans in Japan and HBL agreed to pay to the Company perpetual royalties on net sales of HBL IFN|ga for oral use by humans in Japan by HBL, its affiliates and licensees. The initial term of the Development Agreement expires in March 1999, but the agreement is automatically renewable for successive three year terms subject to the prior written agreement of the parties. In January 1993, the Company entered into a license agreement with HBL pursuant to which it granted a license to HBL for the marketing by HBL of HBL IFN|ga for oral use in animals in Japan in exchange for HBL's agreement to pay royalties on net sales of the product for such use in Japan by HBL, its affiliates and licensees. Such agreement terminates in January 2000 but is automatically renewable for successive three year terms subject to the prior written agreement of the parties. In June 1994, the Company and HBL entered into a Manufacturing/Supply Agreement under which HBL granted to the Company an exclusive license to use, formulate, test and market HBL IFN|ga for non-oral (topical or parenteral) use in both humans and animals in North America and HBL agreed to supply to the Company its IFN|ga for such purposes. Under the agreement the Company agreed to pay to HBL a specified price for the HBL IFN|ga it purchases for non-oral use. AGREEMENTS WITH ISI AND OTHERS In October 1989, the Company entered into a Manufacturing and Supply Agreement with ISI, under which ISI granted to the Company an exclusive worldwide license to market ISI IFN|ga for oral use in animals and agreed to supply ISI IFN|ga for such use exclusively to the Company. Pursuant to the agreement, ISI receives a specified price for ISI IFN|ga sold to the Company. ISI is also entitled to receive royalties on net sales as well as a percentage of any license fee, option fee or other payment, except royalty or specific research or patent expense reimbursements, which the Company receives for the assignment or sublicense of the Company's rights under the license agreement. Since 1994, the Company has been required to expend a minimum of $50,000 per year toward development of products under the Manufacturing and Supply Agreement in order to keep it in force. The Company has done so, and currently intends to continue to make such expenditures. The Manufacturing and Supply Agreement will continue for seven years after the Company's first purchase order for Manufactured Products under the Agreement, and will be automatically renewed for successive three-year terms thereafter, subject to termination by the Company, with or without cause, and subject to termination by ISI at any time after the first renewal term, if net sales for a calendar year do not exceed $100,000. The seven-year term has not yet commenced, since the Company has not yet placed an order with ISI for Manufactured Products. "Manufactured Products" is defined in the agreement as ISI IFN|ga, packaged in accordance with FDA approved dosage forms. The FDA has not yet approved any dosage form within the meaning of the agreement. In October 1989, the Company and ISI entered into a license agreement pursuant to which the Company granted to ISI a license (co-exclusive with the Company) of the Company's patented technology for the use and sale of IFN|ga - containing products for use in humans worldwide, except for Japan (where the Company has granted to HBL an exclusive license), for a royalty on net sales of licensed products made during the term of the agreement. The original term of the license agreement was to expire on October 20, 1994, but ISI extended its term as therein permitted. As amended in April 1995, the agreement will continue in force for the life of the licensed patents, subject only to ISI's right to terminate the agreement with or without cause (in which case ISI must cease any use or sale of the licensed products), and the Company's right to terminate for breach of the agreement by ISI, or upon certain other events. 27 In April 1995, in connection with the settlement of certain patent and infringement litigation brought by the Company in New Zealand against Fernz Corporation Limited, Pharma Pacific Management Pty. Ltd. ("PPM") and certain other companies and certain opposition proceedings brought by PPM against the Company and certain of the Company's licensors in Australia and Europe, the Company entered into a non-exclusive license agreement with PPM. Pursuant to such agreement, the Company licenses to PPM worldwide, except in Japan, the right to use the Company's patented technology for the use and sale of IFN|ga - containing products in humans and PPM is obligated to pay the Company a royalty based on sales of the product in countries where any of the licensed patents has issued. To the Company's knowledge, PPM is not selling products covered by the license in any such country. PPM also paid to the Company $500,000 as a reimbursement of a portion of the Company's research and expenses related to the licensed technology and a $50,000 license fee to be credited against future royalties. In connection with the settlement, ISI and the Company agreed to an amendment of ISI's license from the Company to prohibit any sublicensing by ISI of the licensed technology (except that ISI retained the right to sublicense such technology in connection with the use and sale of ISI IFN|ga products) and the Company purchased, for $625,000, 312,500 shares of the Common Stock of ISI, a public company. MANUFACTURING The Company depends on HBL and ISI for the production and purification of IFN|ga for use in clinical trials and intends to rely on them to supply it with IFN|ga in bulk for formulation in products commercially sold by the Company. HBL produces all of its IFN|ga (including injectable IFN|ga and IFN|ga formulated in lozenges) at its Kibi Pharmaceutical Plant outside Okayama, Japan. The plant has not yet been approved by the FDA for production of IFN|ga . ISI produces all of its IFN|ga at an FDA-approved plant in New Brunswick, New Jersey. The Company uses ISI IFN|ga for oral administration in animal testing. MARKETING AND SALES The Company anticipates that its products eventually will be marketed in all countries where approval to sell such products is obtained. The Company expects to sell products for human use to pharmaceutical distributors who will undertake the marketing of human products. It hopes to sell the products for animal use to animal health distributors who will undertake the marketing of the products. However, the Company does not expect that it will have significant sales for at least three years. In November 1990, the Company entered into an agreement (the "Marketing Agreement") with Mitsubishi Corporation ("Mitsubishi") under which it has appointed Mitsubishi its marketing representative for the Company's low-dose oral IFN|ga products for human use. The agreement is exclusive worldwide, except for the United States, Japan, Thailand and certain countries in Africa. Pursuant to the Marketing Agreement, Mitsubishi is assisting the Company in developing a global marketing strategy. Mitsubishi will also identify and negotiate with potential licensees where the Company determines that licensing is the most effective method of commercializing a product; establish distribution channels for such products, if any, that may be produced under the Company's own auspices; arrange for shipment and delivery of products to licensees, distributors and customers; and assist the Company in obtaining regulatory approval for the Company's products. For its services, Mitsubishi will receive stated percentages of all license or option fees and stated percentages of any royalties paid to the Company under any license agreements entered into by the Company in Mitsubishi's exclusive market area during the term of the Marketing Agreement or any license agreement entered into within two years after the term with licensees contacted by Mitsubishi or introduced to the Company by Mitsubishi prior to the expiration of the Marketing Agreement. In addition, Mitsubishi is entitled to a percentage commission on the net sales value (as defined in the agreement) of products shipped to any person in Mitsubishi's exclusive marketing area during the same periods discussed above with respect to licenses. The initial term of the Marketing Agreement expires in November 2000, but the term shall automatically be extended for successive three year periods unless either party elects not to extend the agreement by written notice to the other not less than 12 months prior to the end of the term or renewal term. 28 PATENTS AND PROPRIETARY RIGHTS The Company seeks patent protection for its technology and products. It typically files United States patent applications and related foreign patent applications as soon as such technology and products are developed. The Company files foreign patent applications on some of its technology and products in countries where, in the Company's opinion, business considerations warrant such filings. The foreign countries in which the Company files patent applications usually include Japan, Canada, Australia, and countries of the European Economic Community. The Company owns two United States patents which expire in 2008 and 2010 and licenses from HBL and two universities or their affiliates, a total of nine United States patents which expire on various dates between 2001 and 2014. The Company's licensors have eight United States patent applications pending relating to oral IFN|ga. Numerous foreign patent applications which correspond to certain of these United States patent applications have also been filed and are pending. Although the patent examiner has initially rejected all claims in seven of the pending United States patent applications, the Company's licensors are prosecuting the applications to counter the rejections, with the goal of patent grants. There can be no assurance, however, that the Company's licensors' existing patent applications will mature into issued patents, or, if issued, that such patents will be adequate to protect the Company's products or processes. In addition, there can be no assurance that the Company will be able to obtain any necessary or desired additional licenses to patents or technologies of others or that the Company will be able to develop its own additional patentable technologies. The Company's license agreements with its licensors provide for the payment to licensors of various license issue fees, percentage royalties on net sales of licensed products by the Company (including certain minimum annual royalties) and stated percentages of license, option or other front- end payments and royalty payments received by the Company from sublicensees. The Company's licenses extend for the life of the licensed patents, subject to earlier termination without cause by the Company or with cause by licensors. The Company believes that the patent position of pharmaceutical companies involves complex legal and factual questions. There can be no assurance that any future patent applications or any patents issued to the Company will provide it with competitive advantages or that the Company's use of its technology will not be challenged as infringing upon the patents or proprietary rights of others, or that the patents or proprietary rights of others will not have an adverse effect on the ability of the Company to do business. Furthermore, there can be no assurance that others will not independently develop similar technology or that others will not design technology to circumvent the Company's existing or future patents or proprietary rights. In the event that the Company's technology were deemed to be infringing upon the rights of others, the Company could be subject to damages or enjoined from using such technology or the Company could be required to obtain licenses to utilize such technology. No assurance can be given that any such licenses would be made available on terms acceptable to the Company, or at all. If the Company were to be unable to obtain such licenses, it could encounter significant delays in introducing products to the market while it attempts to design around the patents or rights infringed upon, or the Company's development, manufacture and sale of products requiring such licenses could be foreclosed. In addition, the Company could experience a loss of revenues and may incur substantial costs in defending itself and indemnifying its strategic partners in patent infringement or other actions based on proprietary rights violations brought against it or its strategic partners. The Company could also incur substantial costs in the event it finds it necessary to assert claims against third parties to prevent the infringement of its patents and proprietary rights by others. Roche has asserted to both HBL and ISI that the manufacture, sale and use of their respective forms of IFN|ga infringe United States Patent 4,503,035 and foreign counterparts thereof owned by Roche relating to IFN|ga (collectively, the "Roche Patent"). The Roche Patent expires in March 2002 in the United States and at various times in other jurisdictions. HBL has informed the Company that it believes that the claims of the Roche Patent are not applicable to the manufacture and sale of HBL IFN|ga. HBL has prevailed at the trial level in litigation initiated by Roche in Japan concerning the dispute and Roche has appealed the decision. The Company is not a party to the litigation between Roche and HBL in Japan. 29 The Company believes that it is likely that Roche would commence suit against the Company if the Company were to sell or attempt to sell HBL IFN|ga for commercial use in the United States or any other country where the Roche Patent has issued with IFN|ga composition claims and is still in effect. However, under applicable United States patent law, the use of a patented product solely for uses reasonably related to the development and submission of information for seeking FDA approval of a biologic for indicated uses in humans is not an act of infringement. Thus, the Company believes that it is unlikely that it would be sued by Roche prior to commercialization of the Company's IFN|ga products. Roche would also not assert infringement claims with respect to the Company's sale of ISI IFN|ga, because in March 1995 ISI entered into a license agreement with Roche pursuant to which ISI was granted a license to use the Roche Patent in exchange for specified royalties. The Company believes that its oral IFN|ga dosage forms do not infringe any claims of the Roche Patent. However, there can be no assurance that, if the Company sells or attempts to sell HBL IFN|ga for commercial use in one or more countries in which the Roche Patent has issued, such sale or attempted sale would not be determined to be an infringement of the Roche Patent under applicable law. HBL has agreed to indemnify the Company for litigation expenses incurred in defending suits brought by Roche against the Company for infringement of the Roche Patent and for any damages the Company may be required to pay to Roche in the event that Roche is successful in any such suit. Nevertheless, a determination of infringement could have a material adverse effect on the business and operations of the Company. See "Certain Transactions." In response to patent infringement claims made by the Company against PPM and certain other persons, PPM contested the validity of granted claims of certain Company-licensed patents in Australia, New Zealand and Europe. In addition, a former employee of the Company contested the validity of one of the United States patents licensed by the Company. All of the disputes were settled or dismissed without final resolution of the patent validity issues. However, in connection with the settlement of the litigation with PPM, the Company granted to PPM a non-exclusive royalty-bearing license to use the patented technology worldwide, except in Japan. See "-- Agreements with ISI and Others." The Company relies on proprietary know-how and confidential information and employs various methods, such as entering into confidentiality and noncompete agreements with its current employees and with third parties to whom it has divulged proprietary information, to protect the processes, concepts, ideas and documentation associated with its technologies. Such methods may afford incomplete protection and there can be no assurance that the Company will be able to protect adequately its trade secrets or that other companies will not acquire information which the Company considers to be proprietary. The Company will be materially adversely affected if it cannot maintain its proprietary technologies. COMPETITION The pharmaceutical industry is an expanding and rapidly changing industry characterized by intense competition. The Company believes that its ability to compete will be dependent in large part upon its ability to continually enhance and improve its products and technologies. In order to do so, the Company must effectively utilize and expand its research and development capabilities and, once developed, expeditiously convert new technology into products and processes which can be commercialized. Competition is based primarily on scientific and technological superiority, technical support, availability of patent protection, access to adequate capital, the ability to develop, acquire and market products and processes successfully, the ability to obtain governmental approvals and the ability to serve the particular needs of commercial customers. Corporations and institutions with greater resources than the Company may, therefore, have a significant competitive advantage. The Company's potential competitors include entities that develop and produce therapeutic agents for treatment of human and animal disease. These include numerous public and private academic and research organizations and pharmaceutical and biotechnology companies pursuing production of, among other things, biologics from cell cultures, genetically engineered drugs and natural and chemically synthesized drugs. Almost all of these potential competitors have substantially greater capital resources, research and development capabilities, manufacturing and marketing resources and experience than the Company. The Company's competitors may succeed in developing products or processes that are more effective or less costly than any that may be developed by the Company, or that gain regulatory approval prior to the Company's products. The Company also expects that the number of its competitors and potential competitors will increase as more IFN|ga products receive commercial 30 marketing approvals from the FDA or analogous foreign regulatory agencies. Any of these competitors may be more successful than the Company in manufacturing, marketing and distributing its products. There can be no assurance that the Company will be able to compete successfully. GOVERNMENT REGULATION The Company's research and development activities are subject to comprehensive regulation by numerous governmental authorities in the United States and other countries. If the Company is able to produce and market products, such production and marketing will place the Company under continued regulation. Among the applicable regulations in the United States, pharmaceutical products are subject to the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, other federal statutes and regulations, and certain state and local regulations. These statutes and regulations govern the development, testing, formulation, manufacture, labeling, storage, record keeping, quality control, advertising, promotion, sale, distribution and approval of pharmaceutical products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, refusal by the government to approve marketing of the product and criminal prosecution. A new drug may not be legally marketed for commercial use in the United States without FDA approval. In addition, upon approval, a drug may only be marketed for the indications, in the formulations and at the dosage levels approved by the FDA. The FDA also has the authority to withdraw approval of drugs in accordance with applicable statutes and regulations. Analogous foreign regulators impose similar approval requirements relating to commercial marketing of a drug in their respective countries and may impose similar restrictions and limitations after approval. In order to obtain FDA approval of a new product, the Company and its strategic partners, if any, must submit proof of safety, efficacy, purity, and stability, and the Company must demonstrate validation of its manufacturing process. The testing and application process is expensive and time consuming, often taking years to complete. There is no assurance that the FDA will act favorably or quickly in reviewing applications. With respect to patented products, processes or technologies, delays imposed or caused by the governmental approval process may materially reduce the period during which the Company will have the exclusive right to exploit them. Delays could also affect the commercial advantages derived from proprietary processes. There is no assurance that the regulatory agencies will find present or future submissions of the Company to be adequate. The FDA approval process for a pharmaceutical product such as oral IFN|ga includes review of (i) preclinical laboratory and animal studies to enable FDA review of an Investigational New Drug Application ("IND") or Investigational New Animal Drug Notice ("INAD"), (ii) initial clinical studies to define safety and dose parameters and (iii) well-controlled clinical trials to demonstrate product efficacy and safety, followed by submission and FDA approval of a Product License Application ("PLA") concerning biologics and a New Drug Application ("NDA") with respect to drugs. FDA approval of the NDA and/or PLA is required prior to any commercial sale or shipment of the product, except as to certain exports. Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the safety of the product. The results of the preclinical tests are submitted to the FDA as part of the IND or INAD application and are reviewed by the FDA. Unless the FDA objects to an IND, the application will become effective 30 days following its receipt by the FDA. INADs need only be filed prior to the shipment of the drug or biologic for testing. There can be no certainty that the FDA will not object to the commencement of clinical studies concerning any drug or biologic. Human clinical trials are typically conducted in three sequential phases with some amount of overlap allowed. Phase 1 trials normally consist of testing the product in a small number of patient volunteers for establishing safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. In Phase 2, the continued safety and initial efficacy of the product are evaluated in a somewhat larger patient population, and appropriate dosage amounts and treatment intervals are determined. Phase 3 trials typically involve more definitive testing of the appropriate dose for safety and clinical efficacy in an expanded patient population at multiple clinical testing centers. A clinical plan, or "protocol," accompanied by the approval of the institution participating in the trials, must be submitted to the FDA prior to commencement of each clinical trial. 31 Each clinical study must be conducted under the auspices of an Institutional Review Board ("IRB") at the institution performing the clinical study. An IRB may require changes in a protocol, and there can be no assurance that an IRB will permit any given study to be initiated or completed. In addition, the FDA may order the temporary or permanent discontinuation of clinical trials at any time. In light of this process, the Company must necessarily rely on other persons and institutions to conduct studies. The Company cannot guarantee that such persons and institutions will conduct studies properly. There also can be no assurance that Phase 1, Phase 2 and Phase 3 testing of the Company's products will be completed successfully within any specified time period, if at all. All the results of the preclinical and clinical studies on a pharmaceutical product are submitted to the FDA in the form of a PLA or NDA, for approval to commence commercial distribution. Submission of a PLA or NDA does not assure FDA approval for marketing. The application review process takes more than two years on average to complete. However, the process may take substantially longer if the FDA has questions or concerns about a product or studies regarding the product. In general, the FDA requires at least two adequate and well-controlled clinical studies demonstrating efficacy with sufficient levels of statistical assurance. However, additional support may be required. The FDA also may request additional information relating to safety or efficacy, such as long- term toxicity studies. In responding to a PLA or NDA, the FDA may grant marketing approval, require additional testing and/or information or deny the application. Accordingly, there can be no assurance about any specific time frame for approval, if any, of products by the FDA. The FDA also may require post-marketing testing and surveillance to monitor the safety record of a product and its continued compliance with regulatory requirements. The facilities of each pharmaceutical manufacturer must be registered with and approved by the FDA as compliant with the agency's good manufacturing practice regulations ("GMP"). For biologics, except certain well-characterized ones, this requires the filing of an establishment license application ("ELA") that must be approved by the FDA for the facility in which the product is maintained. While the ELA and PLA are separate documents, they must be submitted at the same time and both documents must be approved before the sale of the biologic. Continued registration also requires compliance with the FDA's GMP regulations. Products must be formulated in accordance with the FDA's GMP requirements and preclinical tests must be conducted by laboratories that comply with FDA regulations governing the testing of drugs in humans and animals. In order to comply with GMP, manufacturers must continue to expend time, money and effort in production, record keeping and quality control. In addition, manufacturers must comply with regulations promulgated by the United States Drug Enforcement Administration and similar state and local regulatory authorities if they handle controlled substances, and they must be registered with the United States Environmental Protection Agency and similar state and local regulatory authorities if they generate toxic or dangerous waste streams. Other regulatory agencies, such as the Occupational Safety and Health Administration, also monitor manufacturing facilities for compliance with workplace safety regulations. Each of these organizations conducts periodic establishment inspections to confirm continued compliance with its regulations. Failure to comply with any of these regulations could mean fines, interruption of production and even criminal prosecution. For foreign markets, a pharmaceutical company is subject to regulatory requirements, review procedures and product approvals which, generally, may be as extensive, if not more extensive, as those in the United States. Although the technical descriptions of the clinical trials are different, the trials themselves are often substantially the same as those in the United States. Approval of a product by regulatory authorities of foreign countries must be obtained prior to commencing commercial product marketing in those countries, regardless of whether FDA approval has been obtained. The time and cost required to obtain market approvals in foreign countries may be greater than required for FDA approval and may be subject to delay. There can be no assurance that regulatory authorities of foreign countries will grant approval. RESEARCH AND DEVELOPMENT During the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996, the Company incurred expenses of $1,364,042, $875,093 and $134,209, respectively, resulting from Company- sponsored research and development activities. Research and development is expected to remain a significant component of the Company's business. In the short term, the Company expects to concentrate on the Primary 32 Development Projects and intends to use approximately $6,350,000 of the estimated net proceeds of this offering and other funds, to the extent they are, or may become, available, for such projects. However, the Company may abandon or deemphasize its research and development activities with respect to the Primary Development Projects and expand research and development of other products as circumstances warrant. The Company has contracted out substantially all of its clinical research and intends to continue to do so while utilizing its staff for monitoring such research. PROPERTY The Company's executive and administrative offices are located at 800 West 9th Avenue, Amarillo, Texas in a 5,200 square foot facility owned by the Company. The building contains offices, meeting rooms and a biologic storage area. The Company believes that the facility is adequate for its present and anticipated uses. EMPLOYEES The Company currently has eight full-time employees, three of whom are executive officers, three of whom assist in the design and monitoring of clinical trials and the conduct of regulatory affairs for such trials, and two of whom are clerical staff. The Company believes that its relations with its employees are good. None are covered by a collective bargaining agreement with the Company. 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The current directors and executive officers of the Company are as follows:
Name Age Position ----------------------------- ----- ------------------------------------------- Joseph Cummins, DVM, PhD (1) . 53 Chairman of the Board, President, Chief Executive Officer and Director Vice President--Finance and Charles Hughes .............. 56 Administration, Chief Financial Officer Alan Richards, PhD .......... 46 and Treasurer Edward L. Morris ............ 51 Director of Clinical and Regulatory Affairs Stephen Chen, PhD (2) ....... 47 Secretary James Cook (1)(3) ........... 61 Director Katsuaki Hayashibara (2) .... 52 Director Dennis Moore, DVM (1)(3) .... 49 Director James Page, MD (2) .......... 69 Director Director
- ------ (1) Member of the Executive Committee. (2) Member of the Compensation Committee. (3) Member of the Audit Committee. Joseph Cummins has been the Chairman of the Board of the Company since he founded it in June 1984. Dr. Cummins has also served as President of the Company since December 1994 and from June 1984 to September 1992. He received a PhD degree in veterinary microbiology from the University of Missouri in 1978 and a doctor of veterinary medicine degree from Ohio State University in 1966. Dr. Cummins has been conducting research concerning IFN since 1969. Charles Hughes has been Vice President -- Finance and Administration, Chief Financial Officer and Treasurer of the Company since April 1993. From August 1991 to March 1993 he was a Vice President of First National Bank of Amarillo, and from July 1989 to July 1991 he was Vice President of Finance and Administration of the Cattlemen's Beef Promotion and Research Board, an industry organization. From September 1985 to July 1989, he was a financial consultant and from May 1979 to September 1985 he was the Chief Financial Officer of Friona Industries, Inc., a public company engaged in agribusiness. Mr. Hughes is a certified public accountant. Alan Richards has served the Company in various capacities since June 1990, most recently as Director of Clinical and Regulatory Affairs. From 1986 to 1990, Dr. Richards was a member of the faculty of Campbell University teaching microbiology, immunology, genetics and biotechnology. He received a PhD degree in veterinary microbiology and immunology from Texas A&M University in 1984. Edward Morris has served as Secretary of the Company since 1986. Since 1983, Mr. Morris has been a partner in the law firm of Morris, Moore, Moss & Douglass, P.C., which firm provides legal services to the Company. Stephen Chen has been a director of the Company since February 1996. He has been President and Chief Executive Officer of STC International, Inc., a healthcare investment firm, since May 1992. From August 1989 to May 1992 he was Director of Pharmaceutical Research and Development for the Ciba Consumer Pharmaceuticals Division of Ciba-Geigy. James Cook has been a director of the Company since 1988. He has been the President and Chief Executive Officer of the First National Bank of Arvada since January 1992 and from April 1987 to December 1991 he was Executive Vice President of First National Bank of Amarillo. Katsuaki Hayashibara has been a director of the Company since 1994. Since 1988, Mr. Hayashibara has been the Director of Research and Development for HBL. 34 Dennis Moore has been a director of the Company since 1986. Dr. Moore has been a doctor of veterinary medicine since 1972 and was in private practice from 1972 to 1995. James Page has been a director of the Company since February 1996. Prior to retiring in 1991 as a Vice President with Adria Laboratories, Inc., a pharmaceutical company specializing in therapy given to cancer and AIDS patients, Dr. Page held various upper management level positions with Carter Wallace, Inc., Merck Sharpe & Dohme Research Laboratories and Wyeth Laboratories. The Company's directors are elected at the annual meeting of shareholders to hold office until the annual meeting of shareholders for the ensuing year or until their successors have been duly elected and qualified. The Company pays directors who are not employees of the Company a fee of $1,000 per regularly scheduled Board meeting attended (or $250 for participation in a regularly scheduled Board meeting by conference telephone). The Company reimburses all directors for their expenses in connection with their attendance at such meetings. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. The Company has agreed, for a period of five years from the date of this Prospectus, if so requested by the Underwriter, to nominate and use its best efforts to elect a designee of the Underwriter as a director of the Company or, at the Underwriter's option, as a non-voting advisor to the Company's Board of Directors. The Company's officers and directors and substantially all of its existing shareholders have agreed to vote their shares of Common Stock in favor of such designee. The Underwriter has not yet exercised its right to designate such a person. The Company is the owner and beneficiary of a $2,000,000 insurance policy on the life of Dr. Joseph Cummins. EXECUTIVE COMPENSATION The following table sets forth for the three years ended December 31, 1995 compensation paid by the Company to its Chairman of the Board, President and Chief Executive Officer. None of the Company's other executive officers had annual compensation in excess of $100,000 for services rendered during any of the three years ended December 31, 1995. SUMMARY COMPENSATION TABLE
Annual Compensation --------------------------------------- Other Annual Compensation Name and Principal Position Year Salary($) Bonus($) ($) ---------------------------- ------ ---------- -------- -------------- Dr. Joseph Cummins, Chairman of the Board, President and Chief Executive Officer ... 1995 $120,000 $ 500 $ -- 1994 120,000 -- -- 1993 120,000 27,308 30,000(1)
- ------ (1) Represents the amount allocated to Mr. Cummins of contributions made by the Company to employees under the Company's Profit Sharing Plan which was discontinued in 1995. EMPLOYMENT AGREEMENTS Joseph Cummins, the Chairman of the Board, President and Chief Executive Officer of the Company, is employed under an employment agreement entered into by the parties in March 1994, as amended in May 1996. As amended, the agreement provides for a term expiring on December 31, 1999. Pursuant to the agreement Dr. Cummins is required to devote his full time to the affairs of the Company and receives an annual salary of $120,000. The agreement also contains provisions (i) prohibiting disclosure of confidential information, (ii) granting to the Company rights to intellectual property developed by Dr. Cummins that relate to the Company's business and are developed in the course of his employment by the Company, and (iii) prohibiting competition with the Company during, and for a period of three years after, Dr. Cummins' employment by the Company. The employment agreement also sets forth the amended terms of a restricted stock grant awarded to Dr. Cum- 35 mins by the Company. In accordance with and in full satisfaction of such terms, simultaneously with the sale of the Common Stock offered hereby, the Company will issue to Dr. Cummins 30,000 shares of Common Stock and use $90,000 to satisfy withholding tax obligations arising as a result of such issuance. See "Certain Transactions." Alan Richards, the Company's Director of Clinical and Regulatory Affairs, and Charles Hughes, its Vice President - Finance and Administration and Chief Financial Officer, respectively, are employed pursuant to employment agreements entered into in March 1994 and June 1994, respectively. Pursuant to the agreements, Dr. Richards and Mr. Hughes each is required to devote his full time to the affairs of the Company and receive annual salaries of $87,500 and $74,000, respectively. The employment agreements contain the same provisions regarding confidentiality, non-competition and ownership of intellectual property rights as contained in Dr. Cummins' employment agreement. The employment agreements were amended in May 1996 to modify the terms of certain restricted stock grants previously awarded to the employees. In accordance with and in full satisfaction of the amended terms of the restricted stock grants, simultaneously with the sale of the Common Stock offered hereby, the Company will issue 30,000 and 19,000 shares of Common Stock, respectively, to Dr. Richards and Mr. Hughes and use an aggregate of $145,000 to satisfy withholding tax obligations relating to such issuances. Each employment agreement is for an indefinite term, but is terminable by either party upon six months prior written notice to the other. See "Certain Transactions." For a period of three years after the date of this Prospectus, the Company may not, without the prior written consent of the Underwriter, increase the compensation of Messrs. Cummins, Richards or Hughes. Such approval shall be predicated upon, among other things, the performance of the Company, the performance of the employee, inflationary trends and other economic conditions. SCIENTIFIC ADVISORY BOARD The Company's Scientific Advisory Board (the "Advisory Board") was organized to review and evaluate the Company's research and development programs and to advise the Company generally in addressing various scientific issues. The Company generally selects for membership persons who are experts in infectious diseases. Members of the Advisory Board ("Advisors") may meet as a group or individually with management of the Company. They are not employed by the Company and may have commitments to, or consulting or advisory agreements with, other entities that may limit their availability to the Company. These entities may also be competitors of the Company. The Company is not aware of any conflict of interest between work performed by Advisors on behalf of the Company and work performed by them on behalf of other parties. The Company requires each Advisor to execute a confidentiality agreement upon the commencement of his or her relationship with the Company. The agreements generally provide that all confidential information made known to the individual during the term of the relationship is the exclusive property of the Company and shall be kept confidential and not disclosed to third parties. The current members of the Advisory Board are as follows: Steven L. Berk, M.D. Michael Lange, M.D. Chairman of the Scientific Advisory Board Associate Chief of Infectious Diseases Professor and Chairman of Medicine St. Luke's-Roosevelt Hospital Center East Tennessee State University New York, New York Masashi Kurimoto Jun Minowada, M.D., DMS Member of Executive Retired Board of HBL, Director of Former Executive Director of HBL and Director of Fujisaki Institute Fujisaki Cell Center Wayne A. Tompkins, Ph.D. James Page, M.D. Professor of Immunology and Director Director of the Company of Graduate Programs, North Carolina State University
The Company has entered into consulting agreements with each Advisor. Each agreement is for a one year term. Under each agreement the Company is required to pay the Advisor $1,200 per day for consultation services requested by the Company and performed by such person. Advisors also receive reimbursement of travel 36 expenses connected with Company business and stock options and related stock appreciation rights under the Director Plan. Consultation services include assisting the Company in the development of a research plan to elucidate the biological effects, safety and efficacy of the Company's products and assisting the Company in analyzing data from research trials and other studies concerning the Company's products. The Company anticipates that each Advisor will devote approximately six days per year to the affairs of the Company in his capacity as an Advisor, consisting of three one-day meetings of the Scientific Advisory Board to be held each year and preparation for such meetings. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's By-laws provide for the Company to indemnify each director and officer of the Company against liabilities imposed upon him (including reasonable amounts paid in settlement) and expenses incurred by him in connection with any claim made against him or any action, suit or proceeding to which he may be a party by reason of his being or having been a director or officer of the Company. The Company has also entered into Indemnification Agreements with each officer and director pursuant to which the Company will, in general, indemnify such persons to the maximum extent permitted by the Company's By-Laws and the laws of the State of Texas against any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any actual or threatened action or proceeding to which such director or officer is made or threatened to be made a party by reason of the fact that such person is or was a director or officer of the Company. The foregoing provisions may reduce the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from suing directors for breaches of their duty of care, even though such an action, if successful, might otherwise benefit the Company and its shareholders. STOCK OPTION PLANS In May 1996, the Board of Directors adopted and the shareholders of the Company approved both the 1996 Employee Stock Option Plan (the "Employee Plan") and the Outside Director and Advisor Stock Option Plan (the "Director Plan" and together with the Employee Plan, the "Plans"). EMPLOYEE PLAN The purpose of the Employee Plan is to serve as an incentive to employees for continuous employment with the Company, to maintain competitive compensation levels for employees and to more closely align the interests of shareholders and employees of the Company. Awards under the Employee Plan shall be in the form of incentive stock options ("ISOs"), as defined in Section 422 of the Internal Revenue Code of 1986, as amended. Limited stock appreciation rights ("Limited Rights") relating to such ISOs may also be granted. An aggregate of 150,000 shares of Common Stock are reserved for issuance upon the exercise of ISOs granted under the Employee Plan. The Employee Plan is administered by a committee of at least two directors of the Company (the "Committee") which has the authority, in its sole discretion, to grant ISOs and Limited Rights to eligible employees, to determine the timing and amount of such awards, to impose limitations, restrictions and conditions upon such awards and to interpret the Employee Plan and related rules and agreements. All ISOs granted to employees who do not possess more than 10% of the total combined voting power of all classes of stock of the Company will be exercisable at a price equal to 100% of the fair market value of a share of Common Stock on the date of grant and will vest at the rate of 20% per year, commencing on the first anniversary of the date of grant. All ISOs granted to 10% shareholders will be exercisable at a price equal to 110% of the fair market value of a share of Common Stock on the date of grant and will vest at the rate 25% per year, commencing on the first anniversary of the date of grant. The aggregate fair market value of the shares covered by ISOs granted under the Employee Plan that become exercisable by a holder for the first time in any calendar year is subject to a $100,000 limit. The maximum number of shares of Common Stock with respect to which ISOs may be granted in any one year to any employee shall not exceed 50,000. ISOs granted to employees who are not 10% shareholders must be exercised prior to the expiration of ten years from the date of grant and ISOs granted to 10% shareholders must be exercised prior to the expiration of 37 five years from the date of grant. ISOs are exercisable only during the holder's employment, and, in the case of an involuntary termination of the employee, for a period of up to 90 days after the termination of such holder's employment to the extent the ISOs were exercisable at the date of termination or become exercisable within the 90 days after termination of employment. However, in the case of the termination of an optionee's employment by reason of his disability or retirement, the ISOs held by him may be exercised for a period of 36 months after such termination to the extent the ISOs were exercisable at the date of termination. In the case of the death of an optionee, any ISO exercisable on the date of the employee's death may be exercised by the employee's estate or beneficiaries if such exercise occurs within the remaining term of the option but in no event after one year after the employee's death. ISOs may not be transferred other than by will or the laws of descent and distribution, or pursuant to certain qualified domestic relations orders. Concurrently with or subsequent to the award of any ISO, the Committee may award a Limited Right with respect to each ISO permitting the optionee to be paid the appreciation on the Common Stock in lieu of (but not in addition to) exercising the ISO. A Limited Right is fully exercisable and must be exercised immediately preceding or simultaneously with a Change in Control (as defined in the Employee Plan), except that if a Change of Control occurs without notice to the holder of the Limited Right or an opportunity by the holder of the Limited Right to exercise it, the Limited Right must be exercised as soon as practicable after the Change of Control occurs. Any shares of Common Stock subject to an option which has been terminated unexercised or expires shall again be available for issuance under the Employee Plan, except that shares subject to an option which are not issued because the optionee has elected to be paid upon the exercise of a related Limited Right shall not again be available for issuance under the Employee Plan. In May 1996, the Company granted ISOs to purchase 7,500 shares of Common Stock at an exercise price of $5.00 per share to each of Joseph Cummins, Charles Hughes and Alan Richards. DIRECTOR PLAN The purpose of the Director Plan is to provide an incentive to outside directors and members of the Company's Scientific Advisory Board ("Advisors") for continuous association with the Company and to reinforce the relationship between participants' rewards and shareholder gains. Awards under the Director Plan are in the form of so-called non-qualified stock options and Limited Rights relating to such options. An aggregate of 100,000 shares of Common Stock are reserved for issuance upon exercise of options granted under the Director Plan. Options under the Director Plan may be granted only to directors or Advisors who are not officers or employees of the Company. The Director Plan is administered by a committee of at least two directors of the Company which has the authority, in its sole discretion, to interpret the Plan, to adopt, amend and rescind rules and regulations relating to the Plan and to otherwise administer the Plan. However, all options and Limited Rights granted under the Plan are automatic and non-discretionary. The Director Plan provides that on the day following the date of this Prospectus or, if later, the date a person first becomes an outside director of or Advisor to the Company, each outside director or Advisor shall be awarded options to purchase an aggregate of 10,000 and 5,000 shares, respectively, of Common Stock, except any outside director who is an Advisor shall be granted options to purchase 10,000 shares of Common Stock as a director and shall not be granted any options as an Advisor. Concurrently with the award of options, each director and Advisor shall also be awarded an equal number of Limited Rights. All options granted under the Director Plan will be exercisable at a price equal to 100% of the fair market value of a share of Common Stock on the date of grant and will vest at the rate of 20% per year, commencing on the first anniversary of the date of grant. Options must be exercised prior to the expiration of ten years from the date of grant. The provisions of the Director Plan relating to exercisability of outstanding options after the optionee's termination of association with the Company by virtue of his death, disability or the involuntary termination of the optionee's employment and the exercise of Limited Rights are the same as the provisions of the Employee Plan relating thereto. Options under the Director Plan may not be transferred other than by will or the laws of descent and distribution. 38 On the day after the date of this Prospectus, options to purchase an aggregate of 10,000 shares of Common Stock at an exercise price of $5.00 per share will be granted to each of Stephen Chen, James Cook, Katsuaki Hayashibara, Dennis Moore and James Page, each of whom is a director of the Company, and options to purchase an aggregate of 5,000 shares of Common Stock at an exercise price of $5.00 per share will be granted to each of Steven Berk, Masashi Kurimoto, Wayne Tompkins, Michael Lange and Jun Minowada, each of whom is an Advisor. 39 PRINCIPAL SHAREHOLDERS The following table sets forth information as of the date of this Prospectus and as adjusted to reflect the sale of 2,000,000 shares offered hereby, based upon information obtained from the persons named below, relating to the beneficial ownership of shares of Common Stock by (i) each person known to the Company to own five percent or more of the outstanding Common Stock, (ii) each director of the Company and (iii) all officers and directors of the Company as a group.
Amount and Nature of Beneficial Percentage of Shares Owned Ownership ------------------------- Name and Address Before Offering Before After of Beneficial Owner (1) Offering Offering (2) - --------------------------------------------------- ----------------- ---------- ------------ Hayashibara Biochemical Laboratories, Inc. 2-3, Shimoishii 1-chome Okayama 700, Japan ................................ 1,032,756 34.0% 31.9%(3) Dr. Joseph Cummins 800 West 9th Avenue Amarillo, Texas 79101 ............................. 666,804(4) 22.0% 13.6% Mesa, Inc. P.O. Box 2009 Amarillo, Texas 79189-2009 ........................ 315,120 10.4% 6.2% Dr. Dennis Moore P.O. Box 1553 Hamilton, Montana 59840 ........................... 149,616 4.9% 2.9% Katsuaki Hayashibara Hayashibara Biochemical Laboratories, Inc. 1-2-3, Shimoishii Okayama 700, Japan ................................ 48,240(5) 1.6% * Dr. Stephen Chen 6 Persimmon Court East Brunswick, New Jersey 08816 .................. -- -- -- James Cook 13711 Basalt Court Broomfield, Colorado 80020 ........................ 66,600(6) 2.2% 1.3% Dr. James Page 103 Clubhouse Lane Naples, Florida 33942 ............................. -- -- -- All officers and directors as a group (nine persons) 1,033,824(7) 34.1% 21.8%
- ------ * Less than 1% (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options or warrants. Each beneficial owner's percentage ownership is determined by assuming that options that are held by such person (but not those held by any other person) and that are exercisable within 60 days from the date of this Prospectus have been exercised. Except as otherwise indicated, the Company believes that each of the persons named has sole voting and investment power with respect to the shares shown as beneficially owned by him. (2) Gives effect to the issuance of 30,000 shares of Common Stock to Joseph Cummins and an aggregate of 49,000 shares of Common Stock to two officers simultaneously with the consummation of the sale of the Common Stock offered hereby - See "Management-Employment Agreements" and "Certain Transactions." (3) Gives effect to the purchase by HBL of 600,000 of the 2,000,000 shares offered hereby. (4) Includes an aggregate of 337,666 shares of Common Stock held by Joseph Cummins as trustee under certain trusts for the benefit of his children and 360 shares owned by Dr. Cummins wife. (5) Does not include 1,032,756 shares owned by HBL. (6) All of such shares are owned jointly with Mr. Cook's wife. (7) Includes an aggregate of 22,344 shares of Common Stock held by one officer as trustee of a trust, an aggregate of 33,044 shares of Common Stock held by such officer as the executor of an estate, an aggregate of 960 shares of Common Stock held by such officer as the trustee of a profit sharing plan and an aggregate of 17,616 shares of Common Stock owned by a law firm of which such officer is a member. Joseph Cummins and HBL may be deemed "parents" of the Company and Joseph Cummins may be deemed a "promoter" of the Company, as such terms are defined under the federal securities laws. 40 CERTAIN TRANSACTIONS The Company has relied significantly on HBL, the principal shareholder of the Company, for a substantial portion of its capital requirements. From 1989 to the date of this Prospectus, HBL has provided an aggregate of $9,000,000 of funding pursuant to the Development Agreement, purchased from the Company an aggregate of 461,520 shares of Common Stock for a total purchase price of $1,443,800 and made loans to the Company aggregating $3,000,000, of which $1,000,000 loaned after March 31, 1996 will be repayable simultaneously with the consummation of this offering. As of March 31, 1996, the outstanding amount of the Company's indebtedness to HBL (including accrued interest) was $2,483,699. Of the shares of Common Stock being sold in this offering, 600,000 shares of Common Stock have been reserved for sale, at the initial public offering price, to HBL or its designees. Giving effect to the sale of 2,000,000 shares of the Company's Common Stock pursuant to this offering, including 600,000 shares to HBL, HBL will own approximately 31.9% of the Company's Common Stock. In addition to the Development Agreement, HBL and the Company are parties to various license and manufacturing and supply agreements pursuant to which the Company licenses certain technology to or from HBL and HBL supplies formulations of its IFN|ga to the Company. In May 1996, the Company amended the employment agreements of three officers to provide that in lieu of issuing an aggregate of 126,000 shares of Common Stock that were originally to be issued to such persons as a result of their satisfying certain criteria under which the Common Stock becomes issuable, the Company will issue an aggregate of 79,000 shares and use $235,000 of the proceeds of this offering to satisfy withholding tax obligations relating to such issuances. The amended employment agreement between the Company and Dr. Cummins provides for the term of Dr. Cummins' employment agreement to be extended to December 31, 1999. See "Management -- Employment Agreements." Pursuant to a Contract Termination and Severance Agreement with Edward Sherwood, a former President of the Company, in January 1995 the Company issued to Mr. Sherwood an aggregate of 29,640 shares of Common Stock and satisfied the withholding tax obligations relating to such issuance. Pursuant to a Stock Purchase Agreement entered into in September 1987 between the Company and Mesa, Inc. ("Mesa"), which owns 315,120 shares of Common Stock as of the date of this Prospectus, the Company has agreed that for as long as Mesa is a shareholder of the Company, the Company shall not without the prior written approval of Mesa engage in any repurchase or redemption of its issued and outstanding shares of Common Stock, unless such repurchase or redemption is offered, pro rata, to all then existing shareholders. During the year ended December 31, 1995, the Company accrued an aggregate of $68,700 for legal services rendered by Morris, Moore, Moss and Douglas, P.C. Edward Morris, the Secretary of the Company, is a member of such firm. Effective upon the consummation of the sale of Common Stock offered hereby, HBL has agreed to indemnify the Company and its officers, directors, employees and agents for litigation expenses, losses, damages and amounts paid in settlement arising out of litigation which may be brought by Roche or its affiliates relating to the Roche Patent. Although the Company believes that the foregoing transactions were on terms no less favorable to the Company than would have been available from unaffiliated third parties in arm's length transactions, there can be no assurance that this is the case. All future transactions and loans between the Company and its officers, directors and 5% shareholders will be on terms no less favorable to the Company than could be obtained from independent, third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will be advantageous, that conflicts of interest will not arise with respect thereto or that if conflicts do arise, that they will be resolved in favor of the Company. 41 DESCRIPTION OF COMMON STOCK The Company is authorized to issue 10,000,000 shares of Common Stock, par value $.01 per share. As of the date of this Prospectus, there are 3,035,232 shares outstanding (not including an aggregate of 79,000 shares to be issued to three officers simultaneously with the sale of the Common Stock offered hereby) which are held by 135 holders of record. The holders of Common Stock are entitled to one vote for each share held of record on all matters to be voted on by shareholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voting for the election of directors can elect all of the directors. The holders of Common Stock are entitled to receive dividends when, as and if declared by the Board of Directors in its discretion, out of funds legally available therefor. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in the assets of the Company, if any, legally available for distribution to them after payment of debts and liabilities of the Company and after provision has been made for each class of stock, if any, having liquidation preference over the Common Stock. Holders of shares of Common Stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. The Company has agreed that for so long as Mesa is a shareholder of the Company, the Company shall not without the prior written approval of Mesa engage in any repurchase or redemption of its issued and outstanding shares of Common Stock, unless such repurchase or redemption is offered, pro rata, to all the existing shareholders. All of the outstanding shares of Common Stock are, and the shares of Common Stock offered hereby will be, when issued upon payment of the consideration set forth in this Prospectus, fully paid and non-assessable. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. REPORTS TO SHAREHOLDERS The Company intends to furnish its shareholders annual reports containing audited financial statements and such other periodic reports as the Company may determine to be appropriate or as may be required by law. The Company has agreed, subject to the sale of the shares offered hereby, that on or before the date of this Prospectus, it will register its Common Stock under the provisions of Section 12(g) of the Exchange Act and has agreed with the Underwriter that it will use its best efforts to maintain such registration for five years. Such registration will require the Company to comply with periodic reporting, proxy solicitation and certain other requirements of the Exchange Act. SHARES ELIGIBLE FOR FUTURE SALE Upon the consummation of this offering, the Company will have 5,114,232 shares of Common Stock outstanding (assuming no exercise of the Underwriter's over-allotment option or other outstanding options). Up to 600,000 of the 2,000,000 shares offered hereby may be purchased by HBL and, if purchased, will be subject to certain restrictions on sale imposed under the federal securities laws. The remaining shares of Common Stock being offered hereby will be immediately tradeable without restriction or further registration under the Securities Act. All of the 3,035,232 shares of Common Stock outstanding as of the date of this Prospectus are, and all of the 79,000 shares to be issued to three officers of the Company simultaneously with the consummation of the sale of the Common Stock offered hereby will be, deemed to be "restricted securities," as that term is defined under Rule 144 promulgated under the Securities Act, in that such shares were acquired by the shareholders of the Company in transactions not involving a public offering, and, as such, may only be sold pursuant to a registration statement under the Securities Act, in compliance with the exemption provisions of Rule 144, or pursuant to another exemption under the Securities Act. Of such 3,114,232 restricted shares of Common Stock, an aggregate of 1,040,976 shares are immediately eligible for sale, without registration, under Rule 144 (subject to 42 the contractual restrictions described below). An additional 1,964,616 shares will become eligible for sale (subject to the volume limitations prescribed in Rule 144 and such contractual restrictions) commencing 90 days after the date of this Prospectus. The balance of such shares will become so eligible at various times commencing in January 1997. Notwithstanding the foregoing, stockholders of the Company owning of record more than 99% of the Common Stock outstanding as of the date of this Prospectus, have agreed not to sell or otherwise dispose of any shares of Common Stock beneficially owned by them for a period of 12 months from the date of this Prospectus without the Underwriter's prior written consent. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of the issuer's common stock or the average weekly trading volume during the four calendar weeks preceding such sale, provided that certain public information about the issuer as required by Rule 144 is then available and the seller complies with certain other requirements. Affiliates will be subject to the provisions of Rule 144, except that the holding period requirement does not apply to sales by affiliates of shares which are not restricted securities. A person who is not an affiliate, has not been an affiliate within three months prior to sale, and has beneficially owned the restricted shares for at least three years is entitled to sell such shares under Rule 144 without regard to any of the limitations described above. Prior to this offering, there has been no market for the Common Stock and no prediction can be made as to the effect, if any, that market sales of Common Stock or the availability of such shares for sale will have on the market price prevailing from time to time. Nevertheless, the possibility that substantial amounts of Common Stock may be sold in the public market may adversely affect prevailing market prices for the Common Stock and could impair the Company's ability to raise capital through the sale of its equity securities. UNDERWRITING Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to purchase 2,000,000 shares of Common Stock from the Company. The Underwriter is committed to purchase and pay for all of the Common Stock offered hereby if any of such securities are purchased. The shares of Common Stock are being offered by the Underwriter, subject to prior sale, when, as and if delivered to and accepted by the Underwriter and subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriter has advised the Company that it proposes to offer the Common Stock to the public at the public offering price set forth on the cover page of this Prospectus. The Underwriter may allow to certain dealers who are members of the National Association of Securities Dealers, Inc. (the "NASD") concessions, not in excess of $ per share of Common Stock, of which not in excess of $ per share of Common Stock may be reallowed to other dealers who are members of the NASD. The Company has granted to the Underwriter an option, exercisable for 45 days from the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. The Underwriter may exercise this option in whole or, from time to time, in part, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the shares of Common Stock offered hereby. The Company has agreed to pay to the Underwriter a non-accountable expense allowance of 3% of the gross proceeds of this offering (including gross proceeds received as a result of the exercise of the Underwriter's over-allotment option), of which $50,000 has been paid as of the date of this Prospectus. The Company has also agreed to pay all expenses in connection with qualifying the shares of Common Stock offered hereby for sale under the laws of such states as the Underwriter may designate, including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to sell to the Underwriter and its designees for an aggregate of $200, warrants (the "Underwriter's Warrants") to purchase up to 200,000 shares of Common Stock at a purchase price of $8.10 per share. The Underwriter's Warrants may not be sold, transferred, assigned or hypothecated for one year from the date of this Prospectus, except to the officers and partners of the Underwriter and members of the selling 43 group, and are exercisable during the four-year period commencing one year after the date of this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at nominal cost, the opportunity to profit from a rise in the market price of the Company's Common Stock. To the extent that the Underwriter's Warrants are exercised, dilution to the interests of the Company's stockholders will occur. Further, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the sale of the Underwriter's Warrants or the underlying shares of Common Stock may be deemed additional underwriting compensation. Subject to certain limitations and exclusions, the Company has agreed, at the request of the holders of a majority of the Underwriter's Warrants, at the Company's expense, to register the Underwriter's Warrants and the shares of Common Stock issuable upon exercise of the Underwriter's Warrants under the Securities Act on one occasion during the Warrant Exercise Term and to include the Underwriter's Warrants and all such underlying securities in any appropriate Registration Statement which is filed by the Company during the seven years following the date of this Prospectus. The Company has agreed for a period of five years from the date of this Prospectus, if so requested by the Underwriter, to nominate and use its best efforts to elect a designee of the Underwriter as a director of the Company, or, at the Underwriter's option, as a non-voting advisor to the Company's Board of Directors. The Underwriter has not yet exercised its right to designate such a person. In addition, the Company has agreed to retain the Underwriter as a financial consultant for a period of two years from the consummation of this offering at an annual fee of $30,000, the entire $60,000 payable in full, in advance, upon the consummation of this offering. The consulting agreement will not require the consultant to devote a specific amount of time to the performance of its duties thereunder. It is anticipated that these consulting services will be provided by principals of the Underwriter and/or members of the Underwriter's corporate finance department who, however, have not been designated as of the date hereof. In the event that the Underwriter originates a financing or a merger, acquisition, joint venture or other transaction to which the Company is a party, the Underwriter will be entitled to receive a finder's fee in consideration for origination of such transaction. The Underwriter has informed the Company that it does not expect sales made to discretionary accounts to exceed 1% of the securities offered hereby. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act. All of the officers and directors and shareholders of the Company owning of record more than 99% of the Common Stock outstanding as of the date of this Prospectus, have agreed that they will not sell any shares of Common Stock of the Company for a period of 12 months after the date of this Prospectus without the prior written consent of the Underwriter. Prior to this offering, there has been no public trading market for the Common Stock. Consequently, the initial public offering price of the Common Stock has been determined by negotiation between the Company and the Underwriter and is not necessarily related to the Company's asset value, net worth or other established criteria of value. Among the factors considered in determining the offering price were the Company's financial condition and prospects, management, market prices of similar securities of comparable publicly-traded companies, certain financial and operating information of companies engaged in activities similar to those of the Company and the general condition of the securities market. LEGAL MATTERS The legality of the Common Stock offered hereby will be passed upon for the Company by Lowenthal, Landau, Fischer & Bring, P.C., New York, New York. Certain legal matters have been passed upon for the Underwriter by Tenzer Greenblatt LLP, New York, New York. 44 EXPERTS The consolidated financial statements of the Company and its subsidiaries (companies in the development stage) at December 31, 1995 and for each of the two years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement under the Securities Act with respect to the Common Stock offered by this Prospectus. This Prospectus, filed as a part of such Registration Statement, does not contain all of the information set forth in, or annexed as exhibits to, the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and this offering, reference is made to the Registration Statement, including the exhibits filed therewith, which may be inspected without charge at the Commission's principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, at the Chicago Regional Office, 500 West Madison Street, Chicago, Illinois 60601-2511, and at the New York Regional Office, 7 World Trade Center, New York, New York 10048. Copies of the Registration Statement may be obtained from the Commission's Public Reference Section upon payment of prescribed fees. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, where the contract or other document has been filed as an exhibit to the Registration Statement, each statement is qualified in all respects by reference to the applicable document filed with the Commission. 45 GLOSSARY
AIDS ............................. Acquired Immunodeficiency Syndrome ANTIPROLIFERATIVE ................ Slowing or stopping the multiplication of cells. APHTHOUS STOMATITIS .............. Painful ulcers occurring in the mucosal lining of the mouth. BIOLOGIC ......................... A product derived from living cells which is used to treat or diagnose disease. CIRRHOSIS ........................ Fibrosis of the liver with hardening caused by excessive formation of connective tissue followed by contraction. CLINICAL TRIALS .................. The investigational use of a product in humans or animals. Phase I trials test the product for general safety and metabolism. Phase II trials test various dosages for efficacy and Phase III trials test the chosen dosage in many patients. DISTAL ........................... Far from the point of origin. FELINE HERPESVIRUS-1 INFECTION ... Feline viral rhinotracheitis - a viral disease of the upper respiratory tract of cats. FIBROMYALGIA ..................... A debilitating disease characterized by pain at specific "trigger points", fatigue, sleeplessness, headaches and stiffness. HEPATITIS B (HBV) ................ Disease of the liver caused by a DNA virus. HEPATITIS C (HCV) ................ Disease of the liver caused by an RNA virus. IMMUNOMODULATORY ................. That which modulates (augments or diminishes) immune responses. INDICATION ....................... A specific condition intended to be treated by a drug or biologic. INTERFERON (IFN) ................. A natural protein produced by all species of animals in response to infection by viruses and other intracellular microorganisms. IFN|ga ........................... Interferon alpha, a distinct class of IFN. INTERNATIONAL UNIT (IU) .......... An internationally accepted measure of IFN|ga anti- viral activity. INAD ............................. Notice of Claimed Investigational Exemption for a New Animal Drug. A document that must be submitted to the FDA before animal clinical trials can be conducted using a new drug or biologic. IND .............................. Investigational New Drug Application. A document that must be submitted to the FDA before human clinical trials can be conducted using a new drug or biologic. KERATOCONJUNCTIVITIS SICCA ....... Inflammation of the cornea and conjunctiva of the eye resulting in a decrease in tear production. LOZENGE .......................... A solid dosage formulation designed to dissolve in the mouth and deliver a drug, biologic or active ingredient to the oral cavity. MASTITIS ......................... Inflammation of the mammary gland. ORAL MUCOSITIS ................... Inflammation and ulcers of the mucosal lining of the mouth, often associated with the use of chemotherapy and/or radiation therapy in cancer patients. PARENTERAL ....................... By injection, not by the digestive tract. 46 SHIPPING FEVER ................... A bovine respiratory disease complex observed in cattle after shipment. Usually shipping fever is a combination of viral and bacterial infections. SJOGREN'S SYNDROME ............... A symptom complex of unknown cause marked by keratoconjunctivitis sicca (dry eye) and xerostomia (dry mouth).
47 AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES (COMPANIES IN THE DEVELOPMENT STAGE) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page -------- Report of Independent Auditors ...................................................................... F-2 Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996 (Unaudited) .................. F-3 Consolidated Statements of Operations for the years ended December 31, 1994 and 1995 and the unaudited three months ended March 31, 1995 and 1996 and cumulative from June 25, 1984 (inception) through March 31, 1996 (unaudited) ......................................................................... F-4 Consolidated Statements of Shareholders' Deficit for the years ended December 31, 1994 and 1995 and the three months ended March 31, 1996 (unaudited) and cumulative from June 25, 1984 (inception) through March 31, 1996 (unaudited) ................................................................. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the unaudited three months ended March 31, 1995 and 1996 and cumulative from June 25, 1984 (inception) through March 31, 1996 (unaudited) .......................................................................... F-6 Notes to Consolidated Financial Statements .......................................................... F-7
F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Amarillo Biosciences, Inc. We have audited the accompanying consolidated balance sheet of Amarillo Biosciences, Inc. and subsidiaries (companies in the development stage) as of December 31, 1995, and the related consolidated statements of operations, shareholders' deficit and cash flows for each of the two years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amarillo Biosciences, Inc. and subsidiaries at December 31, 1995, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas February 1, 1996, except for Note 13, as to which the date is May 14, 1996 F-2 AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES (COMPANIES IN THE DEVELOPMENT STAGE) CONSOLIDATED BALANCE SHEETS
December 31, March 31, 1995 1996 -------------- ------------- (Unaudited) Assets Current assets: Cash and cash equivalents ......................................... $ 1,108,527 $ 724,280 Prepaid expenses .................................................. 26,395 16,229 -------------- ------------- Total current assets ...................................... 1,134,922 740,509 Property and equipment, net (Note 2) ................................ 114,593 114,110 Patent license, net of accumulated amortization of $59,118 and $60,946 at December 31, 1995 and March 31, 1996 (unaudited), respectively (Note 5) ................................................................ 65,882 64,054 Organizational costs, net of accumulated amortization of $6,335 and $6,667 at December 31, 1995 and March 31, 1996 (unaudited), respectively . 663 331 Investment in ISI common stock (Note 12) ............................ 475,000 505,000 -------------- ------------- Total assets ........................................................ $ 1,791,060 $ 1,424,004 ============== ============= Liabilities and Shareholders' Deficit Current liabilities: Deferred contract revenues (Note 4) ............................... $ 417,140 $ 14,566 Accounts payable .................................................. 148,274 100,175 Accrued interest expense .......................................... 453,699 483,699 Accrued restricted stock grants ................................... 114,844 124,687 Other accrued expenses ............................................ 19,000 19,967 -------------- ------------- Total current liabilities ................................. 1,152,957 743,094 Notes payable to related party (Note 3) ............................. 2,000,000 2,000,000 -------------- ------------- Total liabilities ................................................... 3,152,957 2,743,094 -------------- ------------- Commitments and contingencies (Notes 4, 5, 6, and 10) Shareholders' deficit (Notes 7 and 13): Common stock, $.01 par value: Authorized shares - 10,000,000 Issued shares - 3,048,672 ......................................... 30,487 30,487 Additional paid-in capital ........................................ 3,589,591 3,589,591 Deficit accumulated during the development stage .................. (4,955,975) (4,943,168) Unrealized gain on marketable securities .......................... -- 30,000 Treasury stock - 13,440 shares, at cost ........................... (26,000) (26,000) -------------- ------------- Total shareholders' deficit ......................................... (1,361,897) (1,319,090) -------------- ------------- Total liabilities and shareholders' deficit ......................... $ 1,791,060 $ 1,424,004 ============== =============
See accompanying notes. F-3 AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES (COMPANIES IN THE DEVELOPMENT STAGE) CONSOLIDATED STATEMENTS OF OPERATIONS
Cumulative from June 25, 1984 (Inception) Year ended Three months ended through December 31, December 31, March 31, March 31, March 31, 1994 1995 1995 1996 1996 -------------- -------------- ------------ ----------- --------------- (Unaudited) (Unaudited) (Unaudited) Revenues: Contract revenues (Note 4) ....... $2,480,093 $1,361,395 $ 618,266 $ 402,574 $ 8,985,434 Interferon sales ................. 40,525 -- -- 2,000 415,773 Interest income .................. 132,713 94,867 28,803 11,154 520,430 Sublicense fees (Note 12) ........ -- 50,000 -- -- 108,334 Royalty income ................... -- -- -- -- 31,544 Other (Note 12) .................. -- 500,000 -- -- 509,371 -------------- -------------- ------------ ----------- --------------- 2,653,331 2,006,262 647,069 415,728 10,570,886 Expenses: Research and development expenses. . 1,364,042 875,093 247,978 134,209 6,585,071 Selling, general, and administrative expenses ...................... 1,298,528 1,322,748 444,025 238,712 8,408,162 Interest expense ................. 120,000 120,000 30,000 30,000 485,821 -------------- -------------- ------------ ----------- --------------- 2,782,570 2,317,841 722,003 402,921 15,479,054 -------------- -------------- ------------ ----------- --------------- Income (loss) before income taxes .. (129,239 ) (311,579 ) (74,934 ) 12,807 (4,908,168) Income tax expense (Note 9) ........ -- -- -- -- 35,000 -------------- -------------- ------------ ----------- --------------- Net income (loss) .................. $ (129,239 ) $ (311,579 ) $ (74,934 ) $ 12,807 $ (4,943,168) ============== ============== ============ =========== =============== Income (loss) per share ............ $ (.04) $ (.10) $ (.02) $ -- ============== ============== ============ =========== Weighted average shares outstanding . 3,005,592 3,034,339 3,031,609 3,035,232 ============== ============== ============ ===========
See accompanying notes. F-4 AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES (COMPANIES IN THE DEVELOPMENT STAGE) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT CUMULATIVE FROM JUNE 25, 1984 (INCEPTION) THROUGH DECEMBER 31, 1996
Issuance Common Stock ------------------------- Price Shares Issued Amount ----------- ------------- -------- 1984: Initial issuance for cash .................... $.29 84,000 $ 840 Initial issuance in exchange for legal fees .. .29 30,000 300 Initial issuance in exchange for services and research and development costs .............. .01 1,086,000 10,860 1985: Issuance for cash ............................ .83 102,000 1,020 Issuance in exchange for professional fees, salaries, and research services ............. .83 10,800 108 1986: Issuance in exchange for professional fees, salaries, and services ...................... .83 22,800 228 Treasury stock purchase, 11,040 shares at cost -- -- Issuance for cash ............................ .83 -1.25 182,352 1,824 Issuance in exchange for professional fees, salaries, and research services ............. .83 19,020 190 1987: Issuance for cash ............................ 1.25 - 2.08 309,648 3,096 Treasury stock purchase, 2,400 shares at cost -- -- 1988: Issuance for cash ............................ 1.88 120,972 1,210 1989: Issuance for cash ............................ 2.08 2,568 26 Issuance for cash ............................ 2.50 227,748 2,277 1990: Issuance for cash ............................ 1.72 - 2.50 592,584 5,926 Issuance for cash ............................ 4.17 174,000 1,740 Issuance in exchange for note receivable from shareholder ................................. 2.50 54,540 545 1991: Repayment of note receivable from shareholder -- -- Net loss cumulative from June 25, 1984 (inception) through December 31, 1991 ....... -- -- 1992: Net loss for year ended December 31, 1992 .... -- -- ----------- ------------- -------- Balance at December 31, 1992 ................. 3,019,032 30,190 1993: Net loss for year ended December 31, 1993 .... -- -- ----------- ------------- -------- Balance at December 31, 1993 ................. 3,019,032 30,190 1994: Net loss for year ended December 31, 1994 .... -- -- Adjustment to unrealized losses on marketable securities .................................. -- -- ----------- ------------- -------- Balance at December 31, 1994 ................. 3,019,032 30,190 1995: Issuance for stock grant ..................... 2.50 29,640 297 Net loss for year ended December 31, 1995 .... -- -- Adjustment to unrealized losses on marketable securities .................................. -- -- ----------- ------------- -------- Balance at December 31, 1995 ................. 3,048,672 30,487 1996: Net income for three months ended March 31, 1996 (unaudited) ............................ -- -- Adjustment to unrealized gain on marketable securities (unaudited) ...................... -- -- ----------- ------------- -------- Balance at March 31, 1996 (unaudited) ........ 3,048,672 $30,487 =========== ============= ========
Deficit Accumulated Unrealized Note During the Gain (Loss) on Receivable Total Additional Development Marketable From Treasury Shareholders' Paid-in Capital Stage Securities Shareholder Stock Deficit --------------- ------------ ------------ ----------- --------- ----------- 1984: Initial issuance for cash .................... $ 23,660 $ -- $ -- $ -- $ -- $ 24,500 Initial issuance in exchange for legal fees .. 8,450 -- -- -- -- 8,750 Initial issuance in exchange for services and research and development costs .............. (9,955) -- -- -- -- 905 1985: Issuance for cash ............................ 83,980 -- -- -- -- 85,000 Issuance in exchange for professional fees, salaries, and research services ............. 8,892 -- -- -- -- 9,000 1986: Issuance in exchange for professional fees, salaries, and services ...................... 18,772 -- -- -- -- 19,000 Treasury stock purchase, 11,040 shares at cost -- -- -- -- (22,500) (22,500) Issuance for cash ............................ 154,626 -- -- -- -- 156,450 Issuance in exchange for professional fees, salaries, and research services ............. 15,660 -- -- -- -- 15,850 1987: Issuance for cash ............................ 445,974 -- -- -- -- 449,070 Treasury stock purchase, 2,400 shares at cost -- -- -- -- (3,500) (3,500) 1988: Issuance for cash ............................ 225,613 -- -- -- -- 226,823 1989: Issuance for cash ............................ 5,324 -- -- -- -- 5,350 Issuance for cash ............................ 567,093 -- -- -- -- 569,370 1990: Issuance for cash ............................ 1,108,634 -- -- -- -- 1,114,560 Issuance for cash ............................ 723,260 -- -- -- -- 725,000 Issuance in exchange for note receivable from shareholder ................................. 135,805 -- -- (136,350) -- -- 1991: Repayment of note receivable from shareholder -- -- -- 136,350 -- 136,350 Net loss cumulative from June 25, 1984 (inception) through December 31, 1991 ....... -- (3,901,236) -- -- -- (3,901,236) 1992: Net loss for year ended December 31, 1992 .... -- (505,558) -- -- -- (505,558) -------------- ------------ ----------- ----------- --------- ----------- Balance at December 31, 1992 ................. 3,515,788 (4,406,794) -- -- (26,000) (886,816) 1993: Net loss for year ended December 31, 1993 .... -- (108,363) -- -- -- (108,363) -------------- ------------ ----------- ----------- --------- ----------- Balance at December 31, 1993 ................. 3,515,788 (4,515,157) -- -- (26,000) (995,179) 1994: Net loss for year ended December 31, 1994 .... -- (129,239) -- -- -- (129,239) Adjustment to unrealized losses on marketable securities .................................. -- -- (57,316) -- -- (57,316) -------------- ------------ ----------- ----------- --------- ------------ Balance at December 31, 1994 ................. 3,515,788 (4,644,396) (57,316) -- (26,000) (1,181,734) 1995: Issuance for stock grant ..................... 73,803 -- -- -- -- 74,100 Net loss for year ended December 31, 1995 .... -- (311,579) -- -- -- (311,579) Adjustment to unrealized losses on marketable securities .................................. -- -- 57,316 -- -- 57,316 -------------- ------------ ----------- ----------- --------- ------------ Balance at December 31, 1995 ................. 3,589,591 (4,955,975) -- -- (26,000) (1,361,897) 1996: Net income for three months ended March 31, 1996 (unaudited) ............................ -- 12,807 -- -- -- 12,807 Adjustment to unrealized gain on marketable securities (unaudited) ...................... -- -- 30,000 -- -- 30,000 -------------- ------------ ----------- ----------- --------- ------------ Balance at March 31, 1996 (unaudited) ........ $3,589,591 $(4,943,168) $ 30,000 $ -- $(26,000) $(1,319,090) ============== ============ =========== =========== ========= ============
See accompanying notes. F-5 AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES (COMPANIES IN THE DEVELOPMENT STAGE) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cumulative from June 25, 1984 (Inception) Year ended Three months ended through December 31, December 31, March 31, March 31, March 31, 1994 1995 1995 1996 1996 -------------- -------------- ------------ ----------- ------------- (Unaudited) (Unaudited) (Unaudited) Operating Activities Net income (loss) ............................... $ (129,239) $ (311,579) $ (74,934) $ 12,807 $(4,943,168) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization .............. 29,282 23,652 6,387 5,110 204,830 Discount on investment in ISI .............. -- 150,000 -- -- 150,000 Recognition of deferred sublicense fees .... -- -- -- -- (32,844) Organization costs ......................... -- -- -- -- (9,953) Gain on sale of equipment, net ............. -- -- -- -- (8,375) Common stock issued for stock grant ........ -- 74,100 74,100 -- 74,100 Common stock issued for services ........... -- -- -- -- 53,505 Changes in operating assets and liabilities: Other current assets .................. (26,323) 5,000 (12,983) 10,166 (16,229) Accounts payable ...................... 25,692 7,282 (82,643) (48,099) 100,175 Accrued expenses ...................... 246,926 98,126 (20,634) 40,810 628,353 Deferred contract revenue ............. (980,092) (1,361,395) (618,266) (402,574) 14,566 -------------- -------------- ------------ ----------- -------------- Net cash used in operating activities ........... (833,754) (1,314,814) (728,973) (381,780) (3,785,040) Investing Activities Sale (purchase) of marketable securities ........ (1,999,336) 1,999,336 -- -- -- Capital expenditures ............................ (2,468) -- -- (2,467) (253,442) Proceeds from the sale of equipment ............. -- -- -- -- 13,445 Purchase of patent license ...................... -- -- -- -- (125,000) Investment in ISI ............................... -- (625,000) -- -- (625,000) Deposits ........................................ (85,000) 85,000 -- -- -- -------------- -------------- ------------ ----------- -------------- Net cash provided by (used in) investing activities .................................... (2,086,804) 1,459,336 -- (2,467) (989,997) Financing Activities Receipt of sublicense fees ...................... $ -- $ -- $ -- $ -- $ 32,844 Proceeds from notes payable ..................... -- -- -- -- 2,000,000 Repayment of note receivable from shareholder for purchase of common stock ...................... -- -- -- -- 136,350 Issuance of common stock ........................ -- -- -- -- 3,356,123 Acquisition of treasury stock ................... -- -- -- -- (26,000) -------------- -------------- ------------ ----------- ------------- Net cash provided by financing activities ....... -- -- -- -- 5,499,317 -------------- -------------- ------------ ----------- -------------- Net increase (decrease) in cash and cash equivalents ................................... (2,920,558) 144,522 (728,973) (384,247) 724,280 Cash and cash equivalents at beginning of period . 3,884,563 964,005 964,005 1,108,527 -- -------------- -------------- ------------ ----------- ------------- Cash and cash equivalents at end of period ...... $ 964,005 $ 1,108,527 $ 235,032 $ 724,280 $ 724,280 ============== ============== ============ =========== ============== Supplemental Disclosure of Cash Flow Information Cash paid for income taxes ...................... $ 7,084 $ -- $ -- $ -- $ 37,084 ============== ============== ============ =========== ==============
See accompanying notes. F-6 AMARILLO BIOSCIENCES, INC. AND SUBSIDIARIES (COMPANIES IN THE DEVELOPMENT STAGE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Amarillo Biosciences, Inc. (the Company), formerly Amarillo Cell Culture Company, Inc. (Note 13), is a development stage company incorporated on June 25, 1984, for the purpose of developing and marketing, within the United States and internationally, eleven patents and eight pending applications relating to low dosage oral and non-oral natural interferon alpha used in the treatment of human and animal diseases. The Company has obtained certain patent rights through licensing agreements (see Note 5) and is currently conducting clinical studies as part of the process of obtaining regulatory approval from the United States Food and Drug Administration (FDA), so that commercial marketing can begin in the United States. The Company's viability is dependent upon successful commercialization of products resulting from its research and product development activities. All of the Company's products will require significant additional development, laboratory and clinical testing and investment prior to obtaining regulatory approval to commercially market its product(s). Accordingly, for at least the next few years, the Company will continue to incur research and development and general and administrative expenses and likely will not generate sufficient revenues from product sales to support its operations. The Company has been dependent upon financing from its shareholders. The Company's development- stage-through-1991 activities were financed primarily through the issuance of common stock. Since 1991, such activities have been financed under agreements (described in Note 4) with a major shareholder. The Company anticipates, based on its currently proposed plans and expectations relating to its operations (including expectations regarding the progress of its research and development and the timing and costs associated therewith), that its existing capital resources together with the proceeds from a $1,000,000 loan expected from a major shareholder, will be sufficient to satisfy the Company's estimated cash requirements through December 31, 1996. However, the Company estimates that an aggregate of $11,100,000 will be needed over the next three years to complete its primary research and development projects. The Company has no current arrangements with respect to further sources of financing and there can be no assurance that any of its officers, directors or shareholders (including the major shareholder) will provide any portion of the Company's future financing requirements. The possible inability to obtain further financing would have a material adverse effect on the Company, including possibly requiring the Company to cease operations. Principles of Consolidation The accompanying consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries, Amarillo Cell of Canada, Inc. (a Texas corporation), Veldona Africa, Inc. (a Texas corporation), Veldona, Inc. (A Canada corporation), Veldona Poland, Inc., Veldona USA, Inc. and Vanguard Biosciences, Inc. (Texas corporations). All significant intercompany balances and transactions have been eliminated in consolidation. The effect of translation of foreign currencies is not material. Marketable Securities Marketable securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with any unrealized gain or loss reported as a separate component of shareholders' equity. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. F-7 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements - (Continued) 1. Organization and Summary of Significant Accounting Policies - (Continued) Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using methods that approximate the declining balance method over the estimated useful lives of the assets. Patent License The patent license represents payments made under one of the license agreements described in Note 5. The agreement remains in effect over the life of the underlying patents. Accordingly, the patent license fee is being amortized over 17 years using the straight-line method. Organizational Costs Organizational costs are amortized using the straight-line method over five years. Income Taxes The Company files a consolidated income tax return with its domestic subsidiaries, Amarillo Cell of Canada, Inc., Veldona Africa, Inc., Veldona Poland, Inc., Veldona USA, Inc., and Vanguard Biosciences, Inc. Veldona, Inc. files a separate income tax return in Canada. On January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement No. 109). As permitted by the new rules, prior years' financial statements have not been restated. The effect of adopting Statement No. 109 was not material. Revenue Recognition Contract revenue for research and development performed under the manufacturing and supply agreement with Hayashibara Biochemical Laboratories, Inc. (HBL) (see Note 4) is recorded as earned based on research and administrative costs incurred. Amounts received in advance of services to be performed are recorded as deferred revenue until expenses are incurred. Research and Development Research and development costs are expensed as incurred. 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Split In May 1993, the Company approved a ten-for-one stock split for all issued and outstanding shares. As described in Note 13, during 1996 a six-for-five stock split was effected. All references to common stock and per share data have been restated to give effect to these splits. F-8 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements -- (Continued) 2. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist of the following:
December 31, 1995 -------------- Land .................................................... $ 8,000 Building ................................................ 94,532 Furniture and equipment ................................. 114,354 -------------- 216,886 Less accumulated depreciation ............................ 102,293 -------------- $114,593 ==============
3. NOTES PAYABLE In September 1991, the Company borrowed $1,000,000 under a note payable agreement with HBL. In September 1992, the Company borrowed an additional $1,000,000 under a similar note agreement with HBL. The unsecured notes accrue interest at a rate of 6%, and the entire principal and interest is due on September 16, 1996 and September 25, 1997, respectively, provided that the principal and accrued interest be paid only from 10% of the Company's gross revenues from sales of interferon. All payments are to be applied first to accrued interest. As repayment of the notes is dependent on future sales, management is unable to estimate the fair value of the notes at December 31, 1995. Because material amounts of sales are not expected in the next twelve months, the notes continue to be classified as non-current liabilities. 4. MANUFACTURING AND SUPPLY AGREEMENTS The Company was a party to the following manufacturing and supply agreements at December 31, 1995: On March 13, 1992, the Company entered into a Joint Development and Manufacturing/ Supply Agreement with HBL (the "Development Agreement"), a major shareholder (see Note 7), under which HBL will formulate, manufacture, and supply HBL interferon for the Company or any sublicensee. In exchange, HBL is entitled to receive a transfer fee, specified royalties and a portion of any payment received by the Company for sublicense of rights under this agreement. The agreement further provides that the Company sublicense to HBL the right to market HBL interferon for oral use in humans and in nonhuman, warm-blooded species in Japan, in exchange for the Company receiving a royalty fee based on net sales. On June 1, 1994, HBL entered into an additional agreement with HBL to make the Company HBL's exclusive agent for the development of HBL interferon for non-oral use in humans and in nonhuman, warm-blooded species in North America. In exchange, HBL is entitled to receive a transfer fee based on units of interferon supplied. Under the Development Agreement, HBL has provided $9,000,000 in research funding to the Company as follows: $3,500,000 in 1992, $4,000,000 in 1993, and $1,500,000 in 1994. Costs incurred under the Development Agreement amounted to $2,480,093 and $1,361,395 in the years ended December 31, 1994 and 1995, respectively, $618,266 and $402,574 in the three months ended March 31, 1995 and 1996 (unaudited), respectively, and $8,985,434 cumulative from June 25, 1984 (inception) through March 31, 1996 (unaudited). The agreement also provides that a royalty fee be paid to HBL. The initial term of the agreement is for seven years, but will be renewed automatically for successive three-year terms subject to prior written agreement. HBL can terminate the agreement at any time after the end of the first renewal term if certain conditions are not met. On October 20, 1989, the Company entered into a manufacturing and supply agreement with Interferon Sciences, Inc. (ISI), a 2% shareholder of the Company, under which ISI will manufacture and utilize ISI interferon to formulate and supply interferon-containing compositions to the Company for use in nonhuman species. Under the Agreement, ISI is entitled to receive certain transfer fees, manufacturing and supply fees, and a portion of any payments received by the Company related to the use of ISI interferon. The initial five-year term of the agreement has been extended to October 20, 1996, and may be terminated or further extended if certain conditions are met. F-9 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements - (Continued) 4. Manufacturing and Supply Agreements - (Continued) On October 1, 1991, Veldona, Inc. entered into an agreement with a Canadian pharmaceutical firm which is to manufacture interferon tablets. As of December 31, 1995, minimum purchase requirements have not been established pending completion of validation trials. If the agreement is terminated, Veldona, Inc. is required to purchase any finished product, raw materials, or packaging components in possession of the manufacturer. The agreement is effective until December 31, 1996, with one year renewal options beyond that date. 5. LICENSE AND SUBLICENSE AGREEMENTS The Company holds patent rights for which the Company has paid certain license fees under three license agreements. Under these agreements, the Company will pay the licensor a portion of any sublicense fee received by the Company with respect to the manufacturing, use or sale of a licensed product, as well as a royalty fee based on the net selling price of licensed products, subject to a minimum annual royalty. The Company has also entered into various sublicense agreements under which the Company is entitled to receive royalties based on the net sales value of licensed products. 6. RESEARCH AGREEMENTS The Company contracts with third parties throughout the world to conduct research, including studies and clinical trials. These agreements are generally less than one year in duration. At December 31, 1995, the Company had commitments to provide additional funding of approximately $76,000 under these agreements. 7. COMMON STOCK In May 1993, the shareholders of the Company approved an amendment to the Articles of Incorporation to increase the total number of authorized shares of common stock of the Company from one million shares to ten million shares. The shareholders also approved a ten-for-one stock split for the currently issued and outstanding shares of the Company. Since 1984, the Company has issued common stock in exchange for various professional, research, and consulting services. The stock issued for noncash consideration was assigned a value based on the fair value of the services received. In December 1989, the Company issued 218,400 shares of stock to HBL for $2.50 per share. In February 1990, an additional 174,000 shares were issued to HBL for $4.17 per share, and in November 1990, an additional 69,120 shares were issued to HBL for $2.50 per share. These shares, combined with purchases from various other shareholders, give HBL control of 34% of the outstanding common stock, or 1,032,756 shares at December 31, 1995. In July 1992, the Board of Directors approved restricted stock grants to three employees which would allow the Company to issue, under certain conditions, up to 180,000 shares of its authorized but unissued shares of common stock. In May 1994, the Board of Directors approved restricted stock grants to an additional employee which would allow the Company to issue, under certain conditions, up to 30,000 shares of its authorized but unissued shares of common stock. In January 1995, 29,640 shares of common stock (net of required federal withholdings of 12,360 shares) were issued to a former employee under a Contract Termination and Severance Agreement. The issuance and withholding were in full satisfaction of the employee's original 84,000 shares in stock grants. Under a stock purchase agreement with a shareholder, Mesa, Inc. (Mesa), the Company is prohibited from repurchasing or redeeming any of its issued and outstanding shares without the prior written approval of Mesa unless such redemption or repurchase is offered pro rata to all shareholders. F-10 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements - (Continued) 8. EMPLOYEE BENEFIT PLAN The Company discontinued a defined contribution retirement plan for eligible employees in August 1995. Profit sharing expense for the years ended December 31, 1994 and 1995, and cumulative from June 25, 1984 (inception) through March 31, 1996 was approximately $0, $0, and $154,500, respectively. 9. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. Significant components of the Company's deferred tax liabilities and assets are as follows at December 31, 1995:
Deferred tax liabilities: Prepaid expenses ................................... $ 8,975 ------------- Total deferred tax liabilities ....................... 8,975 Deferred tax assets: Net operating loss and AMT carryforwards ........ 1,277,286 Accrued interest ................................ 154,258 Depreciation and amortization ................... 59,192 Deferred revenue ................................ 141,828 Accrued stock grants ............................ 39,047 Other ........................................... 56,873 ------------- 1,728,484 Valuation allowance for deferred tax assets .......... (1,719,509) ------------- Total deferred tax assets, net of valuation allowance . 8,975 ------------- Net deferred taxes ................................... $ -- =============
At December 31, 1995, the Company has net operating loss carryforwards of approximately $3,292,000 for federal income tax purposes expiring in 2006 through 2010. The ability of the Company to utilize these carryforwards may be limited should changes in shareholder ownership occur in the future. At December 31, 1995, the Company had approximately $36,000 of alternative minimum tax credits which may be carried forward indefinitely. The difference between the reported income tax provision and the benefit normally expected by applying the statutory rate to the loss before income taxes results primarily from the inability of the Company to recognize its tax losses. 10. CONTINGENCIES Hoffmann La-Roche, Inc. ("Roche") has asserted to HBL that the manufacture, sale and use of its form of IFN|ga infringes United States Patent 4,503,035 and foreign counterparts thereof owned by Roche relating to IFN|ga (collectively, the "Roche Patent"). The Roche Patent expires in March 2002 in the United States and at various times in other jurisdictions. HBL has informed the Company that it believes that the claims of the Roche Patent are not applicable to the manufacture and sale of HBL IFN|ga . HBL has prevailed at the trial level in litigation initiated by Roche in Japan concerning the dispute and Roche has appealed the decision. The Company is not a party to the litigation between Roche and HBL in Japan. The Company is not a party to any litigation related to these issues; however, there is a possibility of litigation against the Company regarding these matters at some point in the future. Management of the Company believes that litigation which might result from these disputes will not have an adverse effect on current opera F-11 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements - (Continued) 10. Contingencies - (Continued) tions, as the Company is not currently selling or attempting to sell HBL interferon in any country where Roche has a patent. However, since the Company currently has no interferons under license except ISI interferon and HBL interferon, an ultimate determination adverse to the Company could impact future expansion of the Company's sales. 11. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has and expects to have transactions with related parties, including shareholders. In addition to the transactions disclosed elsewhere in these financial statements, such related party transactions included legal fees of approximately $50,400 and $68,700 paid to Morris, Moore, Moss and Douglass, P.C., a member of which is an officer and shareholder of the Company, in 1994 and 1995, respectively. The Company also employs various shareholders as researchers and consultants and pays fees based on contractual agreements. 12. SETTLEMENT OF LITIGATION Commencing in 1993, the Company was the plaintiff in litigation involving a patent infringement action in New Zealand. In May 1995, a settlement was reached whereby the Company: (1) amended its manufacturing and supply agreement with ISI to allow the sublicense of certain products previously exclusively licensed to ISI and purchased 312,500 shares of ISI common stock for $625,000, or $2 per share, representing the quoted market price of ISI stock at that time; and (2) received $550,000 cash from the defendant in the lawsuit, comprising $50,000 in exchange for a sublicense of the technology that was the subject of the lawsuit and $500,000 as a payment toward research and development costs incurred by the Company. As a result of restrictions on the sale by the Company of its ISI stock until May 1997, the Company has discounted the ISI stock (quoted price of $1.875 per share at December 31, 1995) to a carrying value of $475,000 at December 31, 1995, and as a result charged $150,000 to selling, general, and administrative expenses. The ISI stock is classified as available-for-sale. The $500,000 contribution toward research and development costs has been recorded as other revenue in 1995. 13. SUBSEQUENT EVENTS On May 14, 1996, the shareholders of the Company approved a name change from Amarillo Cell Culture Company, Inc. to Amarillo Biosciences, Inc. and approved a six-for-five stock split to be effected through a 20% stock dividend on the issued and outstanding shares of the Company at the record date of April 16, 1996. All references to common stock and per share data have been restated to give effect to the split. During May 1996, the Company executed two notes with HBL under which it expects to borrow $500,000 on May 31, 1996 and $500,000 on June 28, 1996. The notes bear interest at 4% per annum and mature one year after the borrowing date. If the Company successfully consummates an initial public offering, the notes are payable in full from the proceeds of such offering. 14. UNAUDITED INFORMATION The unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. The unaudited interim financial statements reflect, in the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to fairly present the financial position, results of operations, and cash flows as of and for the periods presented. The unaudited interim financial information should be read in conjunction with the audited financial statements and related notes thereto. The results for the interim periods presented are not necessarily indicative of results to be expected for the full year. F-12 ============================================================================== No dealer, salesperson or any other individual has been authorized to give any information or to make any representation not contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representation must not be relied upon as having been authorized by the Company or the Underwriter. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities other than the securities offered by this Prospectus, or an offer to sell or a solicitation of an offer to buy any security by any person in any jurisdiction in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, imply that the information in this Prospectus is correct as of any time subsequent to the date of this Prospectus. ------ TABLE OF CONTENTS Page -------- Prospectus Summary ........................ 3 Risk Factors .............................. 6 Use of Proceeds ........................... 15 Dividend Policy ........................... 16 Dilution .................................. 17 Capitalization ............................ 18 Selected Financial Data ................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations 20 Business .................................. 22 Management ................................ 34 Principal Shareholders .................... 40 Certain Transactions ...................... 41 Description of Common Stock ................ 42 Shares Eligible for Future Sale ........... 42 Underwriting .............................. 43 Legal Matters ............................. 44 Experts ................................... 45 Additional Information .................... 45 Glossary .................................. 46 Index to Financial Statements ............. F-1 Until , 1996 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ============================================================================== ============================================================================== 2,000,000 SHARES AMARILLO BIOSCIENCES, INC [LOGO] COMMON STOCK ------------ PROSPECTUS ------------ WHALE SECURITIES CO., L.P. , 1996 ============================================================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article 2.02-1 of the Texas Business Corporation Act (the "Texas Corporation Law") empowers a Texas corporation to indemnify any person who was, is or is threatened to be made a named defendant or respondent in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, any appeal in any such action, suit or proceeding and any inquiry or investigation that could lead to such an action, suit or proceeding (individually, a "Proceeding") by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust or other enterprise, against reasonable expenses (including court costs and attorneys' fees), judgments, penalties (including excise and similar taxes), fines and amounts paid in settlement actually incurred by him in connection with such Proceeding if he conducted himself in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon plea of nolo contendere, or its equivalent, is not, of itself, determinative that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was lawful. A person may be indemnified in respect of a Proceeding (a) in which the person is found liable on the basis that personal benefit was improperly received by him whether or not the benefit resulted from an action taken in the person's official capacity or (b) in which the person is found liable to the corporation. However, indemnification in the foregoing circumstances is limited to reasonable expenses actually incurred by the person in connection with the Proceeding. In no event shall any indemnification be made in respect of a Proceeding in which the person shall have been liable for willful or intentional misconduct in the performance of his duty to the corporation. A person shall be deemed to have been found liable in respect of any claim, issue or matter only after the person shall have been so adjudged by a court of competent jurisdiction after exhaustion of all appeals therefrom. Reasonable expenses incurred by a director, officer, employee or agent of a Texas corporation who was, is, or is threatened to be made a named defendant or respondent in a Proceeding may be paid or reimbursed by the corporation, in advance of the final disposition of the Proceeding, after the corporation receives a written affirmation by the director of his good faith belief that he has met the standard of conduct necessary for indemnification under the Texas Corporation Law and a written undertaking by or on behalf of the person to repay the amount paid or reimbursed if it is ultimately determined that he has not met that standard or if it is ultimately determined that indemnification of the person against expenses incurred by him in connection with that Proceeding is prohibited by the Texas Corporation Law. If, upon application of a person, a court of competent jurisdiction determines, after giving any notice the court considers necessary, that the person is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, the court may order the indemnification that the court determines is proper and equitable. Article 2.02-1 of the Texas Corporation Law further provides that, subject to restrictions on the circumstances in which indemnification is required which may be set forth in the corporation's articles of incorporation, a Texas corporation is required to indemnify a director or officer against reasonable expenses incurred by him in connection with any Proceeding in which he is a named defendant or respondent because he is or was a director or officer, if he has been successful on the merits or otherwise in the defense of the Proceeding; that a corporation may also, consistent with law, indemnify and advance expenses to persons as may be provided in the corporation's articles of incorporation, bylaws or by general or specific action of the corporation's board of directors, or contract or as permitted or required under common law; and empowers the corporation to purchase and maintain insurance or another arrangement on behalf of any person who is or was a director, officer, II-1 employee or agent of the corporation or who is or was serving at the request of the corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another domestic or foreign corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or any other enterprise against any such liability asserted against him and incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against liability under Article 2.02-1. A Texas corporation may provide indemnification only as authorized in the specific case upon a determination that person has met the applicable standard of conduct. Such determination is to be made (i) by the members of the board of directors by a majority vote of a quorum consisting of directors who were not named defendants or respondents in the Proceeding, or (ii) if such a quorum is not obtainable, by a majority vote of a committee of the board of directors designated to act in the matter by a majority vote of all directors, consisting solely of two or more directors who are not named defendants or respondents in the Proceeding or (iii) by special legal counsel selected by the board of directors or a committee thereof. Article IV of the By-Laws of the Company also provides for indemnification of current or former directors and officers of the Company and any person who has served at the request of the Company as a director or officer of another corporation in which the Company owns shares of capital stock or of which it is a creditor against liabilities imposed upon him and expenses reasonably incurred by him in connection with any claim made against him, or any action, suit or proceeding to which he may be a party by reason of his being or having been such director or officer; provided that no director or officer shall be indemnified with respect to matters as to which he shall be adjudged liable for negligence or misconduct in performance of his duty or with respect to matters for which such indemnification could be against public policy. Indemnification of such a person is also authorized against such sums as independent legal counsel selected by the board of directors shall deem reasonable payment in settlement of claims primarily with a view of avoiding expenses of litigation. The Company has entered into indemnification agreements with each of its directors and executive officers whereby the Company will, in general, indemnify such directors and executive officers, to the extent permitted by the Company's Certificate of Incorporation or the laws of the State of Texas, against any expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any actual or threatened action or proceeding to which such director or officer is made or threatened to be made a party by reason of the fact that such person is or was a director or officer of the Company. The Company has obtained liability insurance for each director and officer for certain losses arising from claims or charges made against them while acting in their capacities as directors or officers of the Company. The Underwriting Agreement, which is filed as Exhibit 1.1, provides for indemnification of the directors and certain officers of the Company by the Underwriter against certain civil liabilities, including liabilities under the Securities Act of 1933. Effective upon the consummation of the offering made pursuant to this Registration Statement, HBL has agreed to indemnify the Company and its officers and directors for litigation expenses, losses, damages and amounts paid in settlement arising out of litigation which may be brought by Roche or its affiliates relating to the Roche Patent. II-2 ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an itemized statement of all expenses in connection with the issuance and distribution of the securities being registered (all of which are estimated other than the filing fees of the Securities and Exchange Commission, NASDAQ and the National Association of Securities Dealers, Inc. and the consulting fee to the Underwriter), other than underwriting discounts and commissions and the Underwriter's non-accountable expense allowance:
Securities and Exchange Commission filing fee ............ $ 4,524 NASDAQ fee ............................................... $ 10,415 National Association of Securities Dealers, Inc. filing fee $ 1,813 Printing and engraving expenses .......................... $ 100,000 Legal Fees and expenses .................................. $ 210,000 Registrar and transfer agent fees ........................ $ 5,000 Accounting fees and expenses ............................. $ 75,000 Blue sky fees and expenses ............................... $ 45,000 Consulting fee to Underwriter ............................ $ 60,000 Miscellaneous ............................................ $ 13,248 ---------- Total ............................................... $525,000 ==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. On May 24, 1993 the Company issued 2,264,274 shares of Common Stock to effect a 10 for 1 stock split. The shares issued in the stock split did not require registration under the Securities Act in that the stock split was not a "sale," "offer for sale" or "offer" as such terms are defined in the Securities Act. On January 12, 1995 the Company issued to a former employee 29,640 shares of Common Stock pursuant a Contract Termination and Severance Agreement between the Company and such person. The issuance was in consideration of the settlement of certain obligations of the Company to the employee. The employee did not pay any cash to the Company for the shares. All of the shares were issued pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(2) of the Securities Act. On May 6, 1996 the Company made a 20% stock dividend to all holders of record of its Common Stock as of April 16, 1996. The Company issued 505,872 shares in connection with the stock dividend. The shares issued in the stock dividend did not require registration under the Securities Act in that the stock dividend was not a "sale," "offer for sale" or "offer" as such terms are defined in the Securities Act. On the date this Registration Statement is declared effective by the Securities Exchange Commission the Company shall issue to Joseph Cummins, Alan Richards and Charles Hughes 30,000, 30,000 and 19,000 shares, respectively, of the Company's Common Stock in accordance with the terms of conditional stock grants awarded by the Company to Messrs. Cummins and Richards in July 1992 and Mr. Hughes in June 1994. All of the shares were issued pursuant to an exemption from the registration requirements of the Securities Act afforded by Section 4(2) of the Securities Act. II-3 ITEM 27. EXHIBITS
Number Description ------- ----------------------------------------------------------------------------------------------- **1.1 Form of Underwriting Agreement. *3.1 Restated Articles of Incorporation of the Company. *3.2 Articles of Amendment of Restated Articles of Incorporation of the Company. *3.3 Bylaws of the Company. **4.1 Specimen Common Stock Certificate. **4.2 Form of Underwriter's Warrant. **5.1 Opinion of Lowenthal, Landau, Fischer & Bring, P.C. *10.1 Agreement dated as of April 1, 1984 between University Patents, Inc. and the Company. *10.2 License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System. *10.3 License Agreement dated October 20, 1989 between the Company and ISI.*** *10.4 Manufacturing and Supply Agreement dated October 20, 1989 between the Company and ISI.*** *10.5 Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and HBL, as amended.*** *10.6 Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi and the Company. *10.7 Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL.*** *10.8 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Alan B. Richards, as amended. *10.9 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Joseph M. Cummins, as amended. *10.10 Employment Agreement dated as of June 1, 1994 between the Company and Charles Hughes, as amended. *10.11 Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL. *10.12 Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited. *10.13 Amendment of ACC/ISI License Agreement dated April 27, 1995 between the Company and ISI. *10.14 PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the Company.*** *10.15 License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc. ("VAF") and Innovative Therapeutics, Ltd. ("ITL").*** *10.16 Pricing Amendment, dated December 5, 1995 between VAF and ITL.*** *10.17 License Agreement dated September 25, 1995 between McGill University and the Company. *10.18 Form of Consulting Agreement between the Company and the Underwriter. *10.19 Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co., Inc. *10.20 1996 Employee Stock Option Plan *10.21 1996 Outside Director and Advisor Stock Option Plan *10.22 Form of Indemnification Agreement between the Company and officers and directors of the Company. **10.23 Indemnification Agreement between HBL and the Company.
II-4
Number Description - ------- ------------ **10.24 Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating Limited Partnership and the Company. **10.25 Research License and Supply Agreement dated May 20, 1996 between the Company and Virbac S.A. **23.1 Consent of Lowenthal, Landau, Fischer & Bring, P.C. (included in Exhibit 5.1). **23.2 Consent of Ernst & Young LLP *24.1 Powers of Attorney (contained on signature page of Registration Statement).
- ------ * Previously filed. ** Filed herewith. *** Confidential treatment has been requested with respect to portions of this document. Omitted portions have been filed separately with the Securities and Exchange Commisssion. ITEM 28. UNDERTAKINGS. The Company hereby undertakes that: it will file, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (a) Include any prospectus required under Section 10(a) of the Securities Act; (b) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and (c) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described under Item 24 above, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted against the Company by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that (i) for purposes of determining liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be a part of this Registration Statement as of the time it was II-5 declared effective; and (ii) for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The Company will provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. II-6 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this amendment to the registration statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Amarillo, State of Texas, on July 2, 1996. AMARILLO BIOSCIENCES, INC. By: /s/ Joseph M. Cummins ------------------------------- Joseph M. Cummins, Chairman of the Board In accordance with the requirements of the Securities Act of 1933, this amendment to the registration statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date ------------------------- ---------------------------------------------- -------------- /s/ Joseph M. Cummins Chairman of the Board and President July 2, 1996 ------------------------ (Chief Executive Officer) and Director Joseph M. Cummins * Vice President-Finance and Administration July 2, 1996 ------------------------ and Treasurer (Chief Financial Officer and Charles H. Hughes Chief Accounting Officer) * Secretary July 2, 1996 ------------------------ Edward L. Morris * Director July 2, 1996 ------------------------ Stephen Chen * Director July 2, 1996 ------------------------ Katsuaki Hayashibara * Director July 2, 1996 ------------------------ Dennis Moore * Director July 2, 1996 ------------------------ James Page * Director July 2, 1996 ------------------------ James Cook /s/ Joseph M. Cummins ------------------------ *Joseph M. Cummins Attorney-in-fact
II-7 EXHIBIT INDEX
Number Description ------- ------------ **1.1 Form of Underwriting Agreement. *3.1 Restated Articles of Incorporation of the Company. *3.2 Articles of Amendment of Restated Articles of Incorporation of the Company. *3.3 Bylaws of the Company. **4.1 Specimen Common Stock Certificate. **4.2 Form of Underwriter's Warrant. **5.1 Opinion of Lowenthal, Landau, Fischer & Bring, P.C. *10.1 Agreement dated as of April 1, 1984 between University Patents, Inc. and the Company. *10.2 License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System. *10.3 License Agreement dated October 20, 1989 between the Company and ISI.*** *10.4 Manufacturing and Supply Agreement dated October 20, 1989 between the Company and ISI.*** *10.5 Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and HBL, as amended.*** *10.6 Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi and the Company. *10.7 Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL.*** *10.8 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Alan B. Richards, as amended. *10.9 Employment Agreement dated as of March 4, 1994 between the Company and Dr. Joseph M. Cummins, as amended. *10.10 Employment Agreement dated as of June 1, 1994 between the Company and Charles Hughes, as amended. *10.11 Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL. *10.12 Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited. *10.13 Amendment of ACC/ISI License Agreement dated April 27, 1995 between the Company and ISI. *10.14 PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the Company.*** *10.15 License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc. ("VAF") and Innovative Therapeutics, Ltd. ("ITL").*** *10.16 Pricing Amendment, dated December 5, 1995 between VAF and ITL.*** *10.17 License Agreement dated September 25, 1995 between McGill University and the Company. *10.18 Form of Consulting Agreement between the Company and the Underwriter. *10.19 Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co., Inc. *10.20 1996 Employee Stock Option Plan *10.21 1996 Outside Director and Advisor Stock Option Plan *10.22 Form of Indemnification Agreement between the Company and officers and directors of the Company.
Number Description ----------- ----------------------------------------------------------------------------------------------- **10.23 Indemnification Agreement between HBL and the Company. **10.24 Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating Limited Partnership and the Company. **10.25 Research License and Supply Agreement dated May 20, 1996 between the Company and Virbac S.A. **23.1 Consent of Lowenthal, Landau, Fischer & Bring, P.C. (included in Exhibit 5.1). **23.2 Consent of Ernst & Young LLP *24.1 Powers of Attorney (contained on signature page of Registration Statement).
- ------ * Previously filed. ** Filed herewith. *** Confidential treatment has been requested with respect to portions of this document. Omitted portions have been filed separately with the Securities and Exchange Commisssion. EX-1 2 EXHIBIT 1.1 AMARILLO BIOSCIENCES, INC. 2,000,000 Shares of Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT Whale Securities Co., L.P. New York, New York 650 Fifth Avenue ___________, 1996 New York, New York 10019 Dear Sirs: Amarillo Biosciences, Inc., a Texas corporation (the "Company"), proposes to issue and sell to Whale Securities Co., L.P. (the "Underwriter") 2,000,000 shares of common stock, par value $.01 per share (the "Offered Shares"), which Offered Shares are presently authorized but unissued shares of the common stock, par value $.01 per share (individually a "Common Share" and collectively the "Common Shares"), of the Company. In addition, the Underwriter, in order to cover over-allotments in the sale of the Offered Shares, may purchase for its own account an aggregate of not more than 300,000 Common Shares (the "Optional Shares"; the Offered Shares and the Optional Shares are hereinafter sometimes collectively referred to as the "Shares"). The Shares are described in the Registration Statement, as defined below. The Company also proposes to issue and sell to the Underwriter for its own account and the accounts of its designees, warrants to purchase an aggregate of 200,000 Common Shares at an exercise price of $8.10 per share (the "Underwriter's Warrants"), which sale will be consummated in accordance with the terms and conditions of the form of Underwriter's Warrant filed as an exhibit to the Registration Statement. The Company hereby confirms its agreement with the Underwriter as follows: 1. Purchase and Sale of Offered Shares. On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby agrees to sell the Offered Shares to the Underwriter, and the Underwriter agrees to purchase the Offered Shares from the Company, at a purchase price of $4.50 per Offered Share. The Underwriter plans to offer the Shares to the public at a public offering price of $5.00 per Offered Share. 2. Payment and Delivery. (a) Payment for the Offered Shares will be made to the Company by same day funds or wire transfer payable to its order in New York Clearing House funds, at the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, against delivery of the Offered Shares to the Underwriter. Such payment and delivery will be made at _________, New York City time, on the third business day following the Effective Date as defined below, the date and time of such payment and delivery being herein called the "Closing Date." The certificates representing the Offered Shares to be delivered will be in such denominations and registered in such names as the Underwriter may request not less than one full business day prior to the Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the office of the Company's transfer agent or correspondent in New York City, American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005 not less than one full business day prior to the Closing Date. (b) On the Closing Date, the Company will sell the Underwriter's Warrants to the Underwriter or to its designees (limited to officers of the Underwriter). The Underwriter's Warrants will be in the form of, and in accordance with, the provisions of the Underwriter's Warrant attached as an exhibit to the Registration Statement. The aggregate purchase price for the Underwriter's Warrants is $200. The Underwriter's Warrants will be restricted from sale, transfer, assignment or hypothecation for a period of one year from the Effective Date, except to officers and partners of the Underwriter and members of the selling group and/or their officers or partners. Payment for the Underwriter's Warrants will be made to the Company by check or checks payable to its order on the Closing Date against delivery of the certificates representing the Underwriter's Warrants. The certificates representing the Underwriter's Warrants will be in such denominations and such names as the Underwriter may request prior to the Closing Date. 3. Option to Purchase Optional Shares. (a) For the purposes of covering any overallotments in connection with the distribution and sale of the Offered Shares as contemplated by the Prospectus as defined below, the Underwriter is hereby granted an option to purchase all or any part of the Optional Shares from the Company. The purchase price to be paid for the Optional Shares will be the same price per Optional Share as the price per Offered Share set forth in Section 1 hereof. The option granted hereby may be exercised by the Underwriter as to all or any part of the Optional Shares at any time within 45 days after the Effective Date. The Underwriter will not be under any 2 obligation to purchase any Optional Shares prior to the exercise of such option. (b) The option granted hereby may be exercised by the Underwriter by giving oral notice to the Company, which must be confirmed by a letter, telex or telegraph setting forth the number of Optional Shares to be purchased, the date and time for delivery of and payment for the Optional Shares and stating that the Optional Shares referred to therein are to be used for the purpose of covering over-allotments in connection with the distribution and sale of the Offered Shares. If such notice is given prior to the Closing Date, the date set forth therein for such delivery and payment will not be earlier than either two full business days thereafter or the Closing Date, whichever occurs later. If such notice is given on or after the Closing Date, the date set forth therein for such delivery and payment will not be earlier than five full business days thereafter. In either event, the date so set forth will not be more than 15 full business days after the date of such notice. The date and time set forth in such notice is herein called the "Option Closing Date." Upon exercise of such option, the Company will become obligated to convey to the Underwriter, and, subject to the terms and conditions set forth in Section 3(d) hereof, the Underwriter will become obligated to purchase, the number of Optional Shares specified in such notice. (c) Payment for the Optional Shares purchased will be made to the Company by same day funds or wire transfer payable to its order in New York Clearing House funds, at the office of the Underwriter, against delivery of the Optional Shares purchased to the Underwriter. The certificates representing the Optional Shares to be delivered will be in such denominations and registered in such names as the Underwriter requests not less than two full business days prior to the Option Closing Date, and will be made available to the Underwriter for inspection, checking and packaging at the aforesaid office of the Company's transfer agent or correspondent not less than one full business day prior to the Option Closing Date. (d) The obligation of the Underwriter to purchase and pay for any of the Optional Shares is subject to the accuracy and completeness (as of the date hereof and as of the Option Closing Date) of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy and completeness of the statements of the Company or its officers made in any certificate or other document to be delivered by the Company pursuant to this Agreement, to the performance in all material respects by the Company of its obligations hereunder, to the satisfaction by the Company of the conditions, as of the date hereof and as of the Option Closing Date, set forth in Section 3 3(b) hereof, and to the delivery to the Underwriter of opinions, certificates and letters dated the Option Closing Date substantially similar in scope to those specified in Section 5, 6(b), (c), (d) and (e) hereof, but with each reference to "Offered Shares" and "Closing Date" to be, respectively, to the Optional Shares and the Option Closing Date. 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriter that: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, with full power and authority, corporate and other, to own or lease and operate its properties and to conduct its business as described in the Registration Statement and to execute, deliver and perform this Agreement and the Underwriter's Warrants and to consummate the transactions contemplated hereby and thereby. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company. Other than the companies listed on Schedule A to this Agreement (the "Subsidiaries"), the Company has no subsidiaries. Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction in which it was incorporated, with full power and authority, corporate and other, to own or lease and operate its properties and to conduct its business as described in the Registration Statement. Each Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of such Subsidiary. The Company owns all of the issued and outstanding shares of capital stock of each Subsidiary, free and clear of any security interests, liens, encumbrances, claims and charges, and all of such shares have been duly authorized and validly issued and are fully paid and nonassessable. There are no options or warrants for the purchase of, or other rights to purchase, or outstanding securities convertible into or exchangeable for, any capital stock or other securities of any Subsidiary. (b) Each of this Agreement and the Consulting Agreement described in Section 5(r) hereof (the "Consulting Agreement") has been duly executed and delivered by the Company and 4 upon the due execution and delivery thereof by the other parties thereto will constitute the valid and binding obligation of the Company, and the Underwriter's Warrants, when executed and delivered by the Company and paid for by the Underwriter in accordance with the terms of the Underwriter's Warrant Agreement on the Closing Date, will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms. The execution, delivery and performance of this Agreement, the Consulting Agreement and the Underwriter's Warrants by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, the Consulting Agreement and the Underwriter's Warrants have been duly authorized by all necessary corporate action and do not and will not, with or without the giving of notice or the lapse of time, or both, (i) result in any violation of the articles of incorporation or by-laws of the Company; (ii) result in a breach of or conflict with any of the terms or provisions of, or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any Subsidiary pursuant to any indenture, mortgage, note, contract, commitment or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of their respective properties or assets is or may be bound or affected; (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of their respective properties or business; or (iv) have any effect on any permit, certification, registration, approval, consent, license or franchise necessary for the Company or any Subsidiary to own or lease and operate its properties and to conduct its business or the ability of the Company to make use thereof. (c) No authorization, approval, consent, order, registration, license or permit of any court or governmental agency or body, other than under the Securities Act of 1933, as amended (the "Act"), the Regulations (as hereinafter defined) and applicable state securities or Blue Sky laws, is required for the valid authorization, issuance, sale and delivery of the Shares to the Underwriter, and the consummation by the Company of the transactions contemplated by this Agreement, the Consulting Agreement or the Underwriter's Warrants and if so required, all such authorizations, approvals, consents, orders, registrations, licenses or permits have been duly obtained and are in full force and effect. (d) The conditions for use of a registration statement on Form SB-2 set forth in the General Instructions to 5 Form SB-2 have been satisfied with respect to the Company, the transactions contemplated herein and in the Registration Statement. The Company has prepared in conformity with the requirements of the Act and the rules and regulations (the "Regulations") of the Securities and Exchange Commission (the "Commission") and filed with the Commission a registration statement (File No. 333-04413) on Form SB-2 and has filed one or more amendments thereto, covering the registration of the securities under the Act, including the related preliminary prospectus or preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was endorsed with the legend required by Item 501(a)(5) of Regulation S-B of the Regulations and, if applicable, Rule 430A of the Regulations. Such registration statement including any documents incorporated by reference therein and all financial schedules and exhibits thereto, as amended at the time it becomes effective, and the final prospectus included therein are herein, respectively, called the "Registration Statement" and the "Prospectus," except that, (i) if the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations differs from the Prospectus, the term "Prospectus" will also include the prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement is amended or such Prospectus is supplemented after the effective date of the Registration Statement (the "Effective Date") and prior to the Option Closing Date, the terms "Registration Statement" and "Prospectus" shall include the Registration Statement as amended or supplemented. (e) Neither the Commission nor, to the best of the Company's knowledge, any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus or has instituted or, to the best of the Company's knowledge, threatened to institute any proceedings with respect to such an order. (f) The Registration Statement when it becomes effective, the Prospectus (and any amendment or supplement thereto) when it is filed with the Commission pursuant to Rule 424(b), if applicable, and both documents as of the Closing Date or the Option Closing Date referred to below, will contain all statements which are required to be stated therein in accordance with the Act and the Regulations and will in all material respects conform to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, on such dates, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements or omissions made in reliance upon and in 6 conformity with information furnished in writing to the Company in connection with the Registration Statement or Prospectus or any amendment or supplement thereto by the Underwriter expressly for use therein. (g) The Company had at the date or dates indicated in the Prospectus a duly authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. Based on the assumptions stated in the Registration Statement and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in the Registration Statement or the Prospectus, on the Effective Date and on the Closing Date, there will be no options to purchase, warrants or other rights to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of the Company's capital stock or any such warrants, convertible securities or obligations. Except as set forth in the Prospectus, no holders of any of the Company's securities has any rights, "demand," "piggyback" or otherwise, to have such securities registered under the Act. (h) The descriptions in the Registration Statement and the Prospectus of contracts and other documents are accurate and present fairly the information required to be disclosed, and there are no contracts or other documents required to be described in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement under the Act or the Regulations which have not been so described or filed as required. (i) Ernst & Young LLP, the accountants who have certified certain of the consolidated financial statements filed and to be filed with the Commission as part of the Registration Statement and the Prospectus, are independent public accountants within the meaning of the Act and Regulations. The consolidated financial statements and schedules and the notes thereto filed as part of the Registration Statement and included in the Prospectus are complete, correct and present fairly the financial position of the Company as of the dates thereof, and the results of operations and changes in financial position of the Company for the periods indicated therein, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved except as otherwise stated in the Registration Statement and the Prospectus. The selected financial data set forth in the Registration Statement and the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited and unaudited financial statements included in the Registration Statement and the Prospectus. (j) The Company and each Subsidiary has filed with 7 the appropriate federal, state and local governmental agencies, and all foreign countries and political subdivisions thereof, all tax returns, including franchise tax returns, which are required to be filed or has duly obtained extensions of time for the filing thereof and has paid all taxes shown on such returns and all assessments received by it to the extent that the same have become due; and the provisions for income taxes payable, if any, shown on the consolidated financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid foreign and domestic taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriter, neither the Company nor any Subsidiary has executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income taxes and is not a party to any pending action or proceeding by any foreign or domestic governmental agency for assessment or collection of taxes; and no claims for assessment or collection of taxes have been asserted against the Company or any Subsidiary. (k) The outstanding Common Shares and outstanding options to purchase Common Shares have been duly authorized and validly issued. The outstanding Common Shares are fully paid and nonassessable. The outstanding options and warrants to purchase Common Shares constitute the valid and binding obligations of the Company, enforceable in accordance with their terms. None of the outstanding Common Shares and options to purchase Common Shares has been issued in violation of the preemptive rights of any shareholder of the Company. None of the holders of the outstanding Common Shares is subject to personal liability solely by reason of being such a holder. The offers and sales of the outstanding Common Shares and outstanding options to purchase Common Shares were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or exempt from such registration requirements. The authorized Common Shares and outstanding options to purchase Common Shares conform to the descriptions thereof contained in the Registration Statement and Prospectus. Except as set forth in the Registration Statement and the Prospectus, on the Effective Date and the Closing Date, there will be no outstanding options or warrants for the purchase of, or other outstanding rights to purchase, Common Shares or securities convertible into Common Shares. (l) No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company within the three years prior to the date hereof, except as disclosed in the Registration Statement. 8 (m) The issuance and sale of the Shares have been duly authorized and, when the Shares have been issued and duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The Shares will not be subject to preemptive rights of any shareholder of the Company. (n) The issuance and sale of the Common Shares issuable upon exercise of the Underwriter's Warrants have been duly authorized and, when such Common Shares have been duly delivered against payment therefor, as contemplated by the Underwriter's Warrants, such Common Shares will be validly issued, fully paid and nonassessable. Holders of Common Shares issuable upon the exercise of the Underwriter's Warrants will not be subject to personal liability solely by reason of being such holders. Neither the Underwriter's Warrants nor the Common Shares issuable upon exercise thereof will be subject to preemptive rights of any shareholder of the Company. The Common Shares issuable upon exercise of the Underwriter's Warrants have been duly reserved for issuance upon exercise of the Underwriter's Warrants in accordance with the provisions of the Underwriter's Warrants. The Underwriter's Warrants conform to the descriptions thereof contained in the Registration Statement and Prospectus. (o) Neither the Company nor any Subsidiary is in violation of, or in default under, (i) any term or provision of its Articles of Incorporation, as amended, or By-Laws; (ii) any material term or provision or any financial covenants of any indenture, mortgage, contract, commitment or other agreement or instrument to which it is a party or by which it or any of its property or business is or may be bound or affected; or (iii) any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of the Company's or any Subsidiary's properties or business. The Company and each Subsidiary owns, possesses or has obtained all governmental and other (including those obtainable from third parties) licenses, permits, certifications, registrations, approvals or consents and other authorizations necessary to own or lease, as the case may be, and to operate its properties, whether tangible or intangible, and to conduct any of the business or operations of the Company as presently conducted and all such licenses, permits, certifications, registrations, approvals, consents and other authorizations are outstanding and in good standing, and there are no proceedings pending or, to the best of the Company's knowledge, threatened, or any basis therefor, seeking to cancel, terminate or limit such licenses, permits, certifications, registrations, approvals or consents or other 9 authorizations. (p) Except as set forth in the Prospectus, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, domestic or foreign, or before any private arbitration tribunal, pending, or, to the best of the Company's knowledge, threatened against the Company or any Subsidiary or involving its or any Subsidiary's properties or business which, if determined adversely to the Company or any Subsidiary, would, individually or in the aggregate, result in any material adverse change in the financial position, shareholders' equity, results of operations, properties, business, management or affairs or business prospects of the Company or any Subsidiary or which question the validity of the capital stock of the Company or this Agreement or of any action taken or to be taken by the Company pursuant to, or in connection with, this Agreement; nor, to the best of the Company's knowledge, is there any basis for any such claim, action, suit, proceeding, arbitration, investigation or inquiry (except as may arise from the Hoffmann LaRoche patent described in the Registration Statement, the description thereof being accurate and complete in all material respects). There are no outstanding orders, judgments or decrees of any court, governmental agency or other tribunal naming the Company or any Subsidiary and enjoining the Company or any Subsidiary from taking, or requiring the Company or any Subsidiary to take, any action, or to which the Company or any Subsidiary or the Company's or any Subsidiary's properties or businesses is bound or subject. (q) Neither the Company nor any of its affiliates has incurred any liability for any finder's fees or similar payments in connection with the transactions herein contemplated. (r) The Company and each of the Subsidiaries owns or possesses adequate and enforceable rights to use all patents, patent applications, trademarks, service marks, copyrights, rights, trade secrets, confidential information, processes and formulations used or proposed to be used in the conduct of their businesses as described in the Prospectus (collectively the "Intangibles"); to the best of the Company's knowledge, neither the Company nor any Subsidiary has infringed or is infringing with the rights of others with respect to Intangibles; and except as set forth in the Registration Statement, the description thereof being accurate and complete in all material respects, neither the Company nor any Subsidiary has received any notice of conflict with the asserted rights of others with respect to Intangibles which could, singly or in the aggregate, materially adversely affect its business as presently conducted or prospects, financial condition or results of operations of the Company or any Subsidiary, and the Company knows of no basis therefor; and, to the best of the Company's knowledge, 10 no others have infringed upon the Intangibles of the Company or any Subsidiary. (s) Since the respective dates as of which information is given in the Registration Statement and the Prospectus and the Company's latest consolidated financial statements, neither the Company nor any Subsidiary has incurred any material liability or obligation, direct or contingent, or entered into any material transaction, whether or not in the ordinary course of business, and has not sustained any material loss or interference with its business from fire, storm, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree; and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there have not been, and prior to the Closing Date referred to below there will not be, any changes in the capital stock or any material increases in the long-term debt of the Company or any material adverse change in or affecting the general affairs, management, financial condition, shareholders' equity, results of operations or prospects of the Company or any Subsidiary, otherwise than as set forth or contemplated in the Prospectus. (t) The Company and each Subsidiary has good and marketable title in fee simple to all real property and good title to all personal property (tangible and intangible) owned by it, free and clear of all security interests, charges, mortgages, liens, encumbrances and defects, except such as are described in the Registration Statement and Prospectus or such as do not materially affect the value or transferability of such property and do not interfere with the use of such property made, or proposed to be made, by the Company or any Subsidiary. The leases, licenses or other contracts or instruments under which the Company and each Subsidiary leases, holds or is entitled to use any property, real or personal, are valid, subsisting and enforceable only with such exceptions as are not material and do not interfere with the use of such property made, or proposed to be made, by the Company or any Subsidiary, and all rentals, royalties or other payments accruing thereunder which became due prior to the date of this Agreement have been duly paid, and neither the Company nor any Subsidiary, nor, to the best of the Company's knowledge, any other party, is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the passage of time or the giving of notice, or both, would constitute a default thereunder. Neither the Company nor any Subsidiary has received notice of any violation of any applicable law, ordinance, regulation, order or requirement relating to its owned or leased properties. The Company and each Subsidiary has adequately insured its properties against loss or damage by fire or other casualty and maintains, in adequate amounts, such other insurance as is usually maintained by companies 11 engaged in the same or similar businesses located in its geographical area. (u) Each contract or other instrument (however characterized or described) to which the Company or any Subsidiary is a party or by which its property or business is or may be bound or affected and to which reference is made in the Prospectus has been duly and validly executed, is in full force and effect in all material respects and is enforceable against the parties thereto in accordance with its terms, and none of such contracts or instruments has been assigned by the Company or any Subsidiary, and neither the Company nor any Subsidiary, nor, to the best of the Company's knowledge, any other party is in default thereunder and, to the best of the Company's knowledge, no event has occurred which, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. None of the material provisions of such contracts or instruments violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any of its Subsidiaries or any of their respective assets or businesses, including, without limitation, those relating to the production, development, research, marketing or commercialization of biologics. (v) The employment, consulting, confidentiality and non-competition agreements between the Company and between each Subsidiary and their respective officers, employees and consultants, described in the Registration Statement, are binding and enforceable obligations upon the respective parties thereto in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity. (w) Except as set forth in the Prospectus, the Company has no employee benefit plans (including, without limitation, profit sharing and welfare benefit plans) or deferred compensation arrangements that are subject to the provisions of the Employee Retirement Income Security Act of 1974. (x) Except as set forth in the Prospectus, neither the Company nor any Subsidiary manufactures, fabricates or markets any product or performs any service which is subject to regulation by the federal Food and Drug Administration (the "FDA"), or to any provision of the Food, Drug and Cosmetic Act, as amended (the "FDA Act"), or any rule or regulation promulgated thereunder. To the best of the Company's knowledge, with respect to the products manufactured, fabricated or marketed by the Company 12 and/or any Subsidiary and the services performed by them which are subject to such regulation, the Company and each Subsidiary are in compliance with the provisions of the FDA Act and the rules and regulations promulgated thereunder. (y) To the best of the Company's knowledge, no labor problem exists with any of the Company's or any Subsidiary's employees or is imminent which could adversely affect the Company or any Subsidiary. (z) The Company has not, directly or indirectly, at any time (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution in violation of law or (ii) made any payment to any state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments or contributions required or allowed by applicable law. The Company's internal accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended. (aa) The Shares have been approved for listing on the National Association of Securities Dealers, Inc. ("NASDAQ") Small Cap Market. (ab) The Company's response to the Corporate Review Memorandum of Tenzer Greenblatt LLP, counsel to the Underwriter ("Underwriter's Counsel"), dated March 13, 1996, is true, accurate and complete. (ac) Veldona, Inc., a subsidiary of Amarillo Cell of Canada, Inc., a subsidiary of the Company, is inactive and conducts no business. Any certificate signed by an officer of the Company or of any subsidiary and delivered to the Underwriter or to counsel for the Underwriter shall be deemed to be a representation and warranty by the Company to the Underwriter as to the matters covered thereby. 5. Certain Covenants of the Company. The Company covenants with the Underwriter as follows: (a) The Company will not at any time, whether before the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with the sales of the Shares by the Underwriter or a dealer, file or publish any amendment or supplement to the Registration Statement or Prospectus of which the Underwriter has not been previously 13 advised and furnished a copy, or to which the Underwriter shall object in writing. (b) The Company will use its best efforts to cause the Registration Statement to become effective and will advise the Underwriter immediately, and, if requested by the Underwriter, confirm such advice in writing, (i) when the Registration Statement, or any post-effective amendment to the Registration Statement or any supplemented Prospectus is filed with the Commission; (ii) of the receipt of any comments from the Commission; (iii) of any request of the Commission for amendment or supplementation of the Registration Statement or Prospectus or for additional information; and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus, or of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, or of the initiation of any proceedings for any of such purposes. The Company will use its best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use and to obtain as soon as possible the lifting thereof, if any such order is issued. (c) The Company will deliver to the Underwriter, without charge, from time to time until the Effective Date, as many copies of each Preliminary Prospectus as the Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the Act. The Company will deliver to the Underwriter, without charge, as soon as the Registration Statement becomes effective, and thereafter from time to time as requested, such number of copies of the Prospectus (as supplemented, if the Company makes any supplements to the Prospectus) as the Underwriter may reasonably request. The Company has furnished or will furnish to the Underwriter two signed copies of the Registration Statement as originally filed and of all amendments thereto, whether filed before or after the Registration Statement becomes effective, two copies of all exhibits filed therewith and two signed copies of all consents and certificates of experts. (d) The Company will comply with the Act, the Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Offered Shares and in any Optional Shares which may be issued and sold. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Registration Statement and Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which 14 they were made, not misleading, or if it shall be necessary to amend or supplement the Registration Statement and Prospectus to comply with the Act or the regulations thereunder, the Company will promptly file with the Commission, subject to Section 5(a) hereof, an amendment or supplement which will correct such statement or omission or which will effect such compliance. (e) The Company will furnish such proper information as may be required and otherwise cooperate in qualifying the Shares for offering and sale under the securities or Blue Sky laws relating to the offering or for sale in such jurisdictions as the Underwriter may reasonably designate, provided that no such qualification will be required in any jurisdiction where, solely as a result thereof, the Company would be subject to service of general process or to taxation or qualification as a foreign corporation doing business in such jurisdiction. (f) The Company will make generally available to its security holders, in the manner specified in Rule 158(b) under the Act, and deliver to the Underwriter as soon as practicable and in any event not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earning statement meeting the requirements of Rule 158(a) under the Act covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement. (g) For a period of five years from the Effective Date, the Company will deliver to the Underwriter and to Underwriter's Counsel on a timely basis (i) a copy of each report or document, including, without limitation, reports on Forms 8-K, 10-C, 10-K, 10- KSB and 10-Q, 10- QSB and exhibits thereto, filed or furnished to the Commission, any securities exchange or the National Association of Securities Dealers, Inc. (the "NASD") on the date each such report or document is so filed or furnished; (ii) as soon as practicable, copies of any reports or communications (financial or other) of the Company mailed to its security holders; (iii) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1 or 13E-3 received or prepared by the Company from time to time; (iv) monthly statements setting forth such information regarding the Company's results of operations and financial position (including balance sheet, profit and loss statements and data regarding outstanding purchase orders) as is regularly prepared by management of the Company; and (v) such additional information concerning the business and financial condition of the Company as the Underwriter may from time to time reasonably request and which can be prepared or obtained by the Company without unreasonable effort or expense. The Company will furnish to its shareholders annual reports containing audited financial statements and such other periodic reports as it may 15 determine to be appropriate or as may be required by law. Any such information 7 of a non-public nature shall be kept confidential by the Underwriter to the extent required by applicable securities laws. (h) Neither the Company nor any person that controls, is controlled by or is under common control with the Company will take any action designed to or which might be reasonably expected to cause or result in the stabilization or manipulation of the price of the Common Stock. (i) If the transactions contemplated by this Agreement are consummated, the Underwriter shall retain the $50,000 previously paid to it, and the Company will pay or cause to be paid the following: all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to, the fees and expenses of accountants and counsel for the Company, the preparation, printing, mailing and filing of the Registration Statement (including financial statements and exhibits), Preliminary Prospectuses and the Prospectus, and any amendments or supplements thereto, the printing and mailing of the Selected Dealer Agreement, the issuance and delivery of the Shares to the Underwriter; all taxes, if any, on the issuance of the Shares; the fees, expenses and other costs of qualifying the Shares for sale under the Blue Sky or securities laws of those states in which the Shares are to be offered or sold, the cost of printing and mailing the "Blue Sky Survey" and fees and disbursements of counsel in connection therewith, including those of such local counsel as may have been retained for such purpose; the filing fees incident to securing any required review by the NASD; the cost of furnishing to the Underwriter copies of the Registration Statement, Preliminary Prospectuses and the Prospectus as herein provided; the costs of placing "tombstone advertisements" in any publications which may be selected by the Underwriter, and all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 5(i). In addition, at the Closing Date or the Option Closing Date, as the case may be, the Underwriter will deduct from the payment for the Offered Shares or the Optional Shares three percent (3%) of the gross proceeds of the offering (less the sum of $50,000 previously paid to the Underwriter), as payment for the Underwriter's non-accountable expense allowance relating to the transactions contemplated hereby, which amount will include the fees and expenses of counsel for the Underwriter. (j) If the transactions contemplated by this Agreement or related hereto are not consummated for any reason, then the Underwriter may retain only an amount equal to its 16 accountable out-of-pocket expenses up to the sum of $50,000 previously paid to it; provided, however, that if the Company shall terminate this Agreement pursuant to Section 10(a) hereof or if the Underwriter shall terminate this Agreement pursuant to Sections 6 (except Section 6(g) and except if the failure to satisfy the conditions set forth in Section 6 results from the failure of the underwriting arrangements to satisfy the requirements of the NASD or from objection thereto by the Commission or the NASD), 10(b)(i) or 10(b)(ii) hereof, then the Company will reimburse the Underwriter only for its accountable out-of-pocket expenses up to a maximum of $75,000, less such $50,000. In no event, however, will the Underwriter, in the event the offering is terminated, be entitled to retain or receive more than an amount equal to its actual accountable out-of-pocket expenses. (k) The Company intends to apply the net proceeds from the sale of the Shares for the purposes set forth in the Prospectus. No portion of the net proceeds from the sale of the Shares will be used to repay any indebtedness other than the repayment of $1,000,000 plus interest accrued thereon from May 19, 1996 to Hayashibara Biochemical Laboratories, Inc. The Company will file with the Commission all required reports on Form SR in accordance with the provisions of Rule 463 promulgated under the Act and will provide a copy of each such report to the Underwriter and its counsel. (l) During the twelve (12) months following the Effective Date, without the consent of the Underwriter, (i) the Company will not file any registration statement relating to the offer or sale of any of the Company's securities, including any registration statement on Form S-8; (ii) neither the Company nor any of its officers, directors and securityholders will sell or otherwise dispose of any securities of the Company; provided that, notwithstanding the foregoing, a group of securityholders beneficially owning less than [three thousand (3,000)] shares of Common Stock, individually, and less than thirty thousand (30,000) shares of Common Stock, in the aggregate (such securityholders being referred to herein as the "Minority Shareholders") may be excluded from the provisions of this clause (ii); and (iii) no holders of registration rights relating to securities of the Company will exercise any such registration rights. The Company will deliver to the Underwriter the agreements of its officers, directors , securityholders (other than the Minority Shareholders) and registration rights holders to such effect prior to the Closing Date. 17 (m) The Company will not file any registration statement relating to the offer or sale of any of the Company's securities, including any registration statement on Form S-8, during the twelve (12) months following the date hereof without the Underwriter's prior written consent. (n) The Company maintains and will continue to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (o) The Company will use its best efforts to maintain the listing of the Shares on NASDAQ and, if so qualified, on the National Market System of NASDAQ for so long as the Shares are qualified for such listing. (p) The Company will, concurrently with the Effective Date, register the class of equity securities of which the Shares are a part under Section 12(g) of the Exchange Act and the Company will maintain the registration for a minimum of five years after the Effective Date. (q) Subject to the sale of the Offered Shares, the Underwriter and its successors will have the right to designate a nominee for election, at its or their option, either as a member of or a non-voting advisor to the Board of Directors of the Company, and the Company will use its best efforts to cause such nominee to be elected and continued in office as a director of the Company or as such advisor until the expiration of five years from the Effective Date. Each of the Company's current officers, directors and security holders other than the Minority Shareholders agrees to vote all of the Common Shares owned by such person so as to elect and continue in office such nominee of the Underwriter. Following the election of such nominee as a director or advisor, such person shall receive no more or less compensation than is paid to other non-officer directors of the Company for attendance at meetings of the Board of Directors of the Company and shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings including, but not limited to, food, lodging and transportation. The Company agrees to indemnify and hold such director or advisor harmless, to the maximum extent permitted by law, against any and all claims, 18 actions, awards and judgments arising out of his service as a director or advisor and, in the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, to include such director or advisor as an insured under such policy. The rights and benefits of such indemnification and the benefits of such insurance shall, to the extent possible, extend to the Underwriter insofar as it may be or may be alleged to be responsible for such director or advisor. The Company will deliver to the Underwriter the undertakings as of the date hereof of its current officers, directors and security holders to vote their shares of Common Stock in accordance with the provisions of this Section 5(q). If the Underwriter does not exercise its option to designate a member of or advisor to the Company's Board of Directors, the Underwriter shall nonetheless have the right to send a representative (who need not be the same individual from meeting to meeting) to observe each meeting of the Board of Directors. The Company agrees to give the Underwriter notice of each such meeting and to provide the Underwriter with an agenda and minutes of the meeting no later than it gives such notice and provides such items to the directors. (r) The Company agrees to employ the Underwriter or a designee of the Underwriter as a financial consultant on a non-exclusive basis for a period of two years from the Closing Date, pursuant to a separate written consulting agreement between the Company and the Underwriter and/or such designee, at an annual rate of Thirty Thousand Dollars ($30,000) (exclusive of any accountable out-of-pocket expenses) payable in full in advance, with the first payment to be made on the Closing Date. In addition, the consulting agreement shall provide that the Company will pay the Underwriter a finder's fee in the event that the Underwriter originates a merger, acquisition, joint venture or other transaction to which the Company is a party. The Company further agrees to deliver a duly and validly executed copy of said consulting agreement, in form and substance acceptable to the Underwriter, on the Closing Date. (s) The Company shall retain a transfer agent for the Common Shares, reasonably acceptable to the Underwriter, for a period of five years following the Effective Date. In addition, for a period of five years from the Effective Date, the Company, at its own expense, shall cause such transfer agent to provide the Underwriter, if so requested in writing, with copies of the Company's daily transfer sheets and when requested by the Underwriter, a current list of the Company's security holders, including a list of the beneficial owners of securities held by a depository trust company and other nominees. 19 (t) The Company hereby agrees, at its sole cost and expense, to supply and deliver to the Underwriter, within a reasonable period from the date hereof, four bound volumes, including the Registration Statement, as amended or supplemented, all exhibits to the Registration Statement, the Prospectus and all other underwriting documents. (u) The Company shall, as of the date hereof, have applied for listing in Standard & Poor's Corporation Records Service (including annual report information) or Moody's Industrial Manual (Moody's OTC Industrial Manual not being sufficient for these purposes) and shall use its best efforts to have the Company listed in such manual at or prior to the Effective Date and shall maintain such listing for a period of five years from the Effective Date. (v) For a period of five years from the Effective Date, the Company shall provide the Underwriter, on a not less than annual basis, with internal forecasts setting forth projected results of operations for each quarterly and annual period in the two fiscal years following the respective dates of such forecasts. Such forecasts shall be provided to the Underwriter more frequently than annually if prepared more frequently by management, and revised forecasts shall be prepared and provided to the Underwriter when required to reflect more current information, revised assumptions or actual results that differ materially from those set forth in the forecasts. (w) For a period of five (5) years from the Effective Date, or until such earlier time as the Common Shares are listed on the New York Stock Exchange or the American Stock Exchange, the Company shall cause its legal counsel to provide the Underwriter with a list, to be updated at least annually, of those states in which the Common Shares may be traded in non-issuer transactions under the Blue Sky laws of the 50 states. (x) For a period of five years from the Effective Date, the Company shall continue to retain Ernst & Young LLP (or such other nationally recognized accounting firm acceptable to the Underwriter) as the Company's independent public accountants. (y) For a period of five years from the Effective Date, the Company, at its expense, shall cause its independent certified public accountants, as described in Section 5(x) above, to review (but not audit) the Company's financial statements for each of the first three fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-QSB quarterly report and the mailing of quarterly financial information to shareholders. 20 (z) For a period of three (3) years following the Effective Date, the Company will not, without the Underwriter's prior written consent, increase or authorize an increase in the compensation of Joseph Cummins, Charles Hughes or Alan Richards without the prior written approval of the Underwriter, which such approval shall be predicated upon, among other things (i) the performance of the Company, (ii) the performance of the employee, and (iii) inflationary trends and other economic conditions; further, the Company and Joseph Cummins shall have entered into an amendment to his employment agreement extending its term to a date which is at least three (3) years after the Effective Date; (aa) For a period of twenty-five days from the Effective Date, the Company will not issue press releases or engage in any other publicity without the Underwriter's prior written consent, other than normal and customary releases issued in the ordinary course of the Company's business or those releases required by law. (ab) The Company will retain a financial public relations firm reasonably acceptable to the Underwriter; (ac) For a period of three (3) years following the Effective Date, the Company will promptly submit to the Underwriter copies of all accountants' management reports and similar correspondence between the Company's accountants and the Company; (ad) For a period of three (3) years following the Effective Date, the Company will not offer or sell any of its securities pursuant to Regulation S without the prior written consent of the Underwriter; and (ae) For a period of four (4) years following the Effective Date, the Company will provide to the Underwriter ten (10) days written notice prior to any issuance by the Company of any equity securities or securities exchangeable for or convertible into equity securities of the Company, except for (i) shares of Common Stock issuable upon exercise of currently outstanding options and warrants or conversion of currently outstanding convertible securities and (ii) options available for future grant pursuant to any stock option plan in effect on the Effective Date. 6. Conditions of the Underwriter's Obligation to Purchase Shares from the Company. The obligation of the Underwriter to purchase and pay for the Offered Shares which it has agreed to purchase from the Company is subject (as of the date hereof and the Closing Date) to the accuracy of and compliance in all material respects with the representations and warranties of the Company herein, to the accuracy of the statements of the 21 Company or its officers made pursuant hereto, to the performance in all material respects by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement will have become effective not later than ______.M., New York City time, on the day following the date of this Agreement, or at such later time or on such later date as the Underwriter may agree to in writing; prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement will have been issued and no proceedings for that purpose will have been initiated or will be pending or, to the best of the Underwriter's or the Company's knowledge, will be contemplated by the Commission; and any request on the part of the Commission for additional information will have been complied with to the satisfaction of Underwriter's Counsel. (b) At the time that this Agreement is executed and at the Closing Date, there will have been delivered to the Underwriter a signed opinion of Lowenthal, Landau, Fischer & Bring, P.C., special counsel for the Company ("Company Counsel"), dated as of the date hereof or the Closing Date, as the case may be (and any other opinions of counsel referred to in such opinion of Company Counsel or relied upon by Company Counsel in rendering their opinion), reasonably satisfactory to Underwriter's Counsel, to the effect that: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, with full corporate power and authority, and all licenses, permits, certifications, registrations, approvals, consents and franchises to own or lease and operate its properties and to conduct its business as described in the Registration Statement. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company. To the best of Company Counsel's knowledge, other than the Subsidiaries the Company has no subsidiaries. Each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, with full corporate power and authority, and all licenses, permits, certifications, registrations, approvals, consents and franchises to own or lease and operate its properties and to conduct its business as described in the Registration Statement. Each Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify 22 could have a material adverse effect on the financial condition, results of operations, business or properties of the Company and its Subsidiaries taken as a whole. The Company owns all of the issued and outstanding shares of capital stock of each Subsidiary, free and clear of any security interests, liens, encumbrances, claims and charges, and all of such shares have been duly authorized and validly issued and are fully paid and nonassessable. (ii) The Company has full power and authority, corporate and other, to execute, deliver and perform this Agreement, the Consulting Agreement and the Underwriter's Warrants and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement, the Consulting Agreement and the Underwriter's Warrants by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, the Consulting Agreement and the Underwriter's Warrants have been duly authorized by all necessary corporate action, and each of this Agreement and the Consulting Agreement has been duly executed and delivered by the Company. This Agreement is (assuming for the purposes of this opinion that it is valid and binding upon the other party thereto) and the Consulting Agreement and, when executed and delivered by the Company on the Closing Date and assuming that the exercise price of the Underwriter's Warrants is paid in full in accordance with its term, the Underwriter's Warrants will be, valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally and the discretion of courts in granting equitable remedies and except that enforceability of the indemnification provisions set forth in Section 7 hereof and the contribution provisions set forth in Section 8 hereof may be limited by the federal securities laws or public policy underlying such laws. (iii) The execution, delivery and performance of this Agreement, the Consulting Agreement and the Underwriter's Warrants by the Company, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms of this Agreement, the Consulting Agreement and the Underwriter's Warrants do not, and will not, with or without the giving of notice or the lapse of time, or both, (A) result in a violation of the articles of incorporation or by-laws of the Company, (B) result in a breach of or conflict with any terms or provisions of, or constitute a default under, or result in the modification or 23 termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any Subsidiary pursuant to any indenture, mortgage, note, contract, commitment or other material agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of the Company's or any Subsidiary's properties or assets are or may be bound or affected; (C) violate any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of the Company's or any Subsidiary's properties or business; or (D) have any effect on any permit, certification, registration, approval, consent, license or franchise necessary for the Company or any Subsidiary to own or lease and operate its properties and to conduct its business or the ability of the Company to make use thereof. The opinions described in clauses (B) and (D) of this Section 6(b)(iii) may be given to the best of Company Counsel's knowledge. (iv) To the best of Company Counsel's knowledge, no authorization, approval, consent, order, registration, license or permit of any court or governmental agency or body (other than under the Act, the Regulations and applicable state securities or Blue Sky laws) is required for the valid authorization, issuance, sale and delivery of the Shares or the Underwriter's Warrants to the Underwriter, and the consummation by the Company of the transactions contemplated by this Agreement, the Consulting Agreement or the Underwriter's Warrants. (v) The Registration Statement has become effective under the Act; to the best of Company Counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending, threatened or contemplated under the Act or applicable state securities laws. (vi) The Registration Statement and the Prospectus, as of the Effective Date, and each amendment or supplement thereto as of its effective or issue date (except for the financial statements and other financial data included therein or omitted therefrom, as to which Company Counsel need not express an opinion) comply as to form in all material respects with the requirements of the Act and Regulations; and the conditions for use of a registration statement on Form SB-2 have been satisfied by the Company. (vii) The descriptions in the Registration Statement and the Prospectus of statutes, regulations, government classifications, contracts and other documents (including opinions of such counsel); and the response to Item 13 of Form SB-2 have 24 been reviewed by Company Counsel, and, based upon such review, are accurate in all material respects and present fairly the information required to be disclosed, and there are no material statutes, regulations or government classifications, or, to the best of Company Counsel's knowledge, material contracts or documents, of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not so described or filed as required. None of the material provisions of the contracts or instruments described above violates any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court having jurisdiction over the Company or any Subsidiary or any of their assets or businesses, including, without limitation, those relating to the production, development, research, marketing or commercialization of biologics. (viii) The outstanding Common Shares and outstanding options to purchase Common Shares have been duly authorized and validly issued. The outstanding Common Shares are fully paid and nonassessable. The outstanding options and warrants to purchase Common Shares constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium or other similar laws or arrangements affecting creditors' rights generally and subject to principles of equity. None of the outstanding Common Shares or options to purchase Common Shares has been issued in violation of the preemptive rights of any shareholder of the Company. None of the holders of the outstanding Common Shares is subject to personal liability solely by reason of being such a holder. The offers and sales of the outstanding Common Shares and outstanding options to purchase Common Shares were at all relevant times either registered under the Act and the applicable state securities or Blue Sky laws or exempt from such registration requirements. The authorized Common Shares and outstanding options to purchase Common Shares conform to the description thereof contained in the Registration Statement and Prospectus. To the best of Company Counsel's knowledge, except as set forth in the Prospectus, no holder of any of the Company's securities has any rights, "demand", "piggyback" or otherwise, to have such securities registered under the Act. (ix) The issuance and sale of the Shares have been duly authorized and, when the Shares have been issued and duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The 25 Shares are not subject to preemptive rights of any shareholder of the Company. The certificates representing the Shares are in proper legal form. (x) The issuance and sale of the Common Shares issuable upon exercise of the Underwriter's Warrants have been duly authorized and, when such Common Shares have been duly delivered against payment therefor, as contemplated by the Underwriter's Warrants, such Common Shares will be validly issued, fully paid and nonassessable. Holders of Common Shares issuable upon exercise of the Underwriter's Warrants will not be subject to personal liability solely by reason of being such holders. Neither the Underwriter's Warrants nor the Common Shares issuable upon exercise thereof will be subject to preemptive rights of any shareholder of the Company. The Common Shares issuable upon exercise of the Underwriter's Warrants have been duly reserved for issuance upon exercise of the Underwriter's Warrants in accordance with the provisions of the Underwriter's Warrants. (xi) Upon delivery of the Offered Shares to the Underwriter against payment therefor as provided in this Agreement, the Underwriter (assuming it is a bona fide purchaser within the meaning of the Uniform Commercial Code) will acquire good title to the Offered Shares, free and clear of all liens, encumbrances, equities, security interests and claims. (xii) Assuming that the Underwriter exercises the over-allotment option to purchase the Optional Shares and makes payment therefor in accordance with the terms of this Agreement, upon delivery of the Optional Shares to the Underwriter hereunder, the Underwriter (assuming it is a bona fide purchaser within the meaning of the Uniform Commercial Code) will acquire good title to the Optional Shares, free and clear of any liens, encumbrances, equities, security interests and claims. (xiii) To the best of Company Counsel's knowledge, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, foreign or domestic, or before any private arbitration tribunal, pending or threatened against the Company or any Subsidiary, or involving the Company's or any Subsidiary's properties or business, other than as described in the Prospectus, such description being accurate, and other than litigation incident to the kind of business conducted by the Company which, individually and in the aggregate, is not material. (xiv) 26 Company Counsel has participated in reviews and discussions in connection with the preparation of the Registration Statement and the Prospectus, and in the course of such reviews and discussions and such other investigation as Company Counsel deemed necessary, no facts came to its attention which lead it to believe that (A) the Registration Statement (except as to the financial statements and other financial data contained therein, and as to patent issues [Patent counsel will have to give a 10b-5 opinion for any issues excepted out of Lowenthal's opinion] as to which Company Counsel need not express an opinion), on the Effective Date, contained any untrue statement of a material fact required to be stated therein or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that (B) the Prospectus (except as to the financial statements and other financial data contained therein, and as to patent issues as to which Company Counsel need not express an opinion) contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering its opinion, Company Counsel may rely upon (A) opinions of Morris, Moore, Moss & Douglass, P.C. with respect to matters relating to the laws of the State of Texas; and (B) the certificates of government officials and officers of the Company as to matters of fact, provided that Company Counsel shall state that they have no reason to believe, and do not believe, that they are not justified in relying upon such opinions or such 27 certificates of government officials and officers of the Company as to matters of fact, as the case may be. The opinion letter delivered pursuant to this Section 6(b) shall state that any opinion given therein qualified by the phrase "to the best of our knowledge" is being given by Company Counsel after due investigation of the matters therein discussed. (c) At the time that this Agreement is executed and at the Closing Date, there will have been delivered to the Underwriter a signed joint opinion of Browdy and Neimark, P.L.L.C. and Barnes & Thornburg, P.C., intellectual property counsel for the Company ("Patent Counsel"), dated as of the date hereof or the Closing Date, as the case may be, reasonably satisfactory to Underwriter's Counsel, in the form of Exhibit A attached hereto. The opinion letter delivered pursuant to this Section 6(c) shall state that any opinion given therein qualified by the phrase "to the best of our knowledge" is being given by Patent Counsel after due investigation of the matters therein discussed. (d) At the Closing Date, there will have been delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as of the Closing Date, to the effect that the opinions delivered pursuant to Section 6(b) and 6(c) hereof appear on their face to be appropriately responsive to the requirements of this Agreement, except to the extent waived by the Underwriter, specifying the same, and with respect to such other matters as the Underwriter may require. (e) At the Closing Date (i) the Registration Statement and the Prospectus and any amendments or supplements thereto will contain all material statements which are required to be stated therein in accordance with the Act and the Regulations and will conform in all material respects to the requirements of the Act and the Regulations, and neither the Registration Statement 28 nor the Prospectus nor any amendment or supplement thereto will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there will not have been any material adverse change in the financial condition, results of operations or general affairs of the Company from that set forth or contemplated in the Registra-tion Statement and the Prospectus, except changes which the Registration Statement and the Prospectus indicates might occur after the Effective Date; (iii) since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no material transaction, contract or agreement entered into by the Company, other than in the ordinary course of business, which would be required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein; and (iv) no action, suit or proceeding at law or in equity will be pending or, to the best of the Company's knowledge, threatened against the Company which is required to be set forth in the Registration Statement and the Prospectus, other than as set forth therein, and no proceedings will be pending or, to the best of the Company's knowledge, threatened against the Company before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding would materially adversely affect the business, property, financial condition or results of operations of the Company, other than as set forth in the Registration Statement and the Prospectus. At the Closing Date, there will be delivered to the Underwriter a certificate signed by the Chairman of the Board or the President or a Vice President of the Company, dated the Closing Date, evidencing compliance with the provisions of this Section 6(e) and stating that the representations and warranties of the Company set forth in Section 4 hereof were accurate and complete in all material respects when made on the date hereof and are accurate and complete in all material respects on the Closing Date as if then made; that the Company has performed all covenants and complied with all conditions required by this Agreement to be performed or complied with by the Company prior to or as of the Closing Date; and that, as of the Closing Date, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or, to the best of his knowledge, are contemplated or threatened. In addition, the Underwriter will have received such other and further certificates of officers of the Company as the Underwriter or Underwriter's Counsel may reasonably request. (f) At the time that this Agreement is executed and at the Closing Date, the Underwriter will have received a signed letter from Ernst & Young LLP, dated the date 29 such letter is to be received by the Underwriter and addressed to it, confirming that it is a firm of independent public accountants within the meaning of the Act and Regulations and stating that: (i) insofar as reported on by them, in their opinion, the financial statements of the Company included in the Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable Regulations; (ii) on the basis of procedures and inquiries (not constituting an examination in accordance with generally accepted auditing standards) consisting of a reading of the unaudited interim financial statements of the Company, if any, appearing in the Registration Statement and the Prospectus and the latest available unaudited interim financial statements of the Company, if more recent than that appearing in the Registration Statement and Prospectus, inquiries of officers of the Company responsible for financial and accounting matters as to the transactions and events subsequent to the date of the latest audited financial statements of the Company, and a reading of the minutes of meetings of the shareholders, the Board of Directors of the Company and any committees of the Board of Directors, as set forth in the minute books of the Company, nothing has come to their attention which, in their judgment, would indicate that during the period from the date of the latest financial statements of the Company appearing in the Registration Statement and Prospectus to a specified date not more than three business days prior to the date of such letter, there have been any decreases in net current assets or net assets as compared with amounts shown in such financial statements or decreases in net sales or increases in total or per share net loss compared with the corresponding period in the preceding year or any change in the capitalization or long-term debt of the Company, except in all cases as set forth in or contemplated by the Registration Statement and the Prospectus, and (iii) [on the basis of reviews of interim financial information performed in accordance with SAS 71, "Interim Financial Information," nothing has come to their attention which would indicate that] the unaudited interim financial statements of the Company appearing in the Registration Statement and the Prospectus, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles and practices on a basis substantially consistent with the audited financial statements included in the Registration Statement or the Prospectus; and (iv) they have compared specific dollar amounts, numbers of shares, numerical data, percentages of revenues and earnings, and other financial information pertaining to the Company set forth in the Prospectus (with respect to all dollar amounts, numbers of shares, percentages and other financial information contained in the Prospectus, to the extent that such amounts, numbers, percentages and information may be derived from the general accounting records of the Company, and 30 excluding any questions requiring an interpretation by legal counsel) with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement. (g) There shall have been duly tendered to the Underwriter certificates representing the Offered Shares to be sold on the Closing Date. (h) The NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of the Shares by the Underwriter. (i) No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date or the Option Closing Date, as the case may be, for any member firm of the NASD to execute transactions (as principal or as agent) in the Shares, and no proceedings for the purpose of taking such action shall have been instituted or shall be pending, or, to the best of the Underwriter's or the Company's knowledge, shall be contemplated by the Commission or the NASD. The Company represents at the date hereof, and shall represent as of the Closing Date or Option Closing Date, as the case may be, that it has no knowledge that any such action is in fact contemplated by the Commission or the NASD. (j) The Company meets the current and any existing proposed criteria for inclusion of the Shares in NASDAQ Small Cap Market. (k) All proceedings taken at or prior to the Closing Date or the Option Closing Date, as the case may be, in connection with the authorization, issuance and sale of the Shares shall be reasonably satisfactory in form and substance to the Underwriter and to Underwriter's Counsel, and such counsel shall have been furnished with all such documents, certificates and opinions as they may request for the purpose of enabling them to pass upon the matters referred to in Section 6(d) hereof and in order to evidence the accuracy and completeness of any of the representations, warranties or statements of the Company, the performance of any covenants of the Company, or the compliance by the Company with any of the conditions herein contained. If any of the conditions specified in this Section 6 have not been fulfilled, this Agreement may be terminated by the Underwriter on notice to the Company. 31 7. Indemnification. (a) The Company agrees to indemnify and hold harmless the Underwriter, each officer, director, partner, employee and agent of the Underwriter, and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Underwriter and each such person, if any, for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application or other document executed by the Company, or based upon written information furnished by or on behalf of the Company, filed in any jurisdiction in order to qualify the Shares under the securities laws thereof (hereinafter "application"), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, unless such untrue statement or omission was made in such Registration Statement, Preliminary Prospectus, Prospectus or application in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter or any such person through the Underwriter expressly for use therein; provided, however, that the indemnity agreement contained in this Section 7(a) with respect to any Preliminary Prospectus will not inure to the benefit of the Underwriter (or to the benefit of any other person that may be indemnified pursuant to this Section 7(a)) if (A) the person asserting any such losses, claims, damages, expenses or liabilities purchased the Shares which are the subject thereof from the Underwriter or other indemnified person; (B) the Underwriter or other indemnified person failed to send or give a copy of the Prospectus to such person at or prior to the written confirmation of the sale of such Shares to such person; and (C) the Prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, expense or liability. (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement and each person, if any, 33 who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all losses, claims, damages, expenses or liabilities, joint or several (and actions in respect thereof), to which they or any of them may become subject under the Act or under any other statute or at common law or otherwise, and, except as hereinafter provided, will reimburse the Company and each such director, officer or controlling person for any legal or other expenses reasonably incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained (i) in the Registration Statement, in any Preliminary Prospectus or in the Prospectus (or the Registration Statement or Prospectus as from time to time amended or supplemented) or (ii) in any application (including any application for registration of the Shares under state securities or Blue Sky laws), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein not misleading, in light of the circumstances under which they were made, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company in connection therewith by the Underwriter expressly for use therein. (c) Promptly after receipt of notice of the commencement of any action in respect of which indemnity may be sought against any indemnifying party under this Section 7, the indemnified party will notify the indemnifying party in writing of the commencement thereof, and the indemnifying party will, subject to the provisions hereinafter stated, assume the defense of such action (including the employment of counsel satisfactory to the indemnified party and the payment of expenses) insofar as such action relates to an alleged liability in respect of which indemnity may be sought against the indemnifying party. After notice from the indemnifying party of its election to assume the defense of such claim or action, the indemnifying party shall no longer be liable to the indemnified party under this Section 7 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if (whether because of actual or possible conflict of interest or other bona fide reason) in the reasonable judgment of the indemnified party or parties, it is advisable for the indemnified party or parties to be represented by separate counsel, the indemnified party or parties shall have the right to employ a single counsel to represent the indemnified parties who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the indemnified parties thereof against the indemnifying party, in which event the fees and 33 expenses of such separate counsel shall be borne by the indemnifying party. Any party against whom indemnification may be sought under this Section 7 shall not be liable to indemnify any person that might otherwise be indemnified pursuant hereto for any settlement of any action effected without such indemnifying party's consent, which consent shall not be unreasonably withheld. 8. Contribution. To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 7 hereof (subject to the limitations thereof) and it is finally determined, by a judgment, order or decree not subject to further appeal, that such claim for indemnification may not be enforced, even though this Agreement expressly provides for indemnification in such case; or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act, or otherwise, then the Company (including, for this purpose, any contribution made by or on behalf of any director of the Company, any officer of the Company who signed the Registration Statement and any controlling person of the Company) as one entity and the Underwriter (including, for this purpose, any contribution by or on behalf of each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee and agent of the Underwriter) as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, so that the Underwriter is responsible for the proportion thereof equal to the percentage which the underwriting discount per Share set forth on the cover page of the Prospectus represents of the initial public offering price per Share set forth on the cover page of the Prospectus and the Company is responsible for the remaining portion; provided, however, that if applicable law does not permit such allocation, then, if applicable law permits, other relevant equitable considerations such as the relative fault of the Company and the Underwriter in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses shall also be considered. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission, shall be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by the Company or by the Underwriter, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Underwriter agree that it would be unjust and inequitable if the respective obligations of the Company and the Underwriter for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses or by any other method of allocation that does not reflect the equitable considerations referred to in this Section 8. No person 34 guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee and agent of the Underwriter will have the same rights to contribution as the Underwriter, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who has signed the Registration Statement and each director of the Company will have the same rights to contribution as the Company, subject in each case to the provisions of this Section 8. Anything in this Section 8 to the contrary notwithstanding, no party will be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8 is intended to supersede, to the extent permitted by law, any right to contribution under the Act or the Exchange Act or otherwise available. 9. Survival of Indemnities, Contribution, Warranties and Representations. The respective indemnity and contribution agreements of the Company and the Underwriter contained in Sections 7 and 8 hereof, and the representations and warranties of the Company contained herein shall remain operative and in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation made by or on behalf of the Underwriter, the Company or any of its directors and officers, or any controlling person referred to in said Sections, and shall survive the delivery of, and payment for, the Shares. 10. Termination of Agreement. (a) The Company, by written or telegraphic notice to the Underwriter, or the Underwriter, by written or telegraphic notice to the Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M., New York City time, on the first full business day after the Effective Date; or (ii) the time when the Underwriter, after the Registration Statement becomes effective, releases the Offered Shares for public offering. The time when the Underwriter "releases the Offered Shares for public offering" for the purposes of this Section 10 means the time when the Underwriter releases for publication the first newspaper advertisement, which is subsequently published, relating to the Offered Shares, or the time when the Underwriter releases for delivery to members of a selling group copies of the Prospectus and an offering letter or an offering telegram relating to the Offered Shares, whichever will first occur. (b) This Agreement, including without limitation, 35 the obligation to purchase the Shares and the obligation to purchase the Optional Shares after exercise of the option referred to in Section 3 hereof, are subject to termination in the absolute discretion of the Underwriter, by notice given to the Company prior to delivery of and payment for all the Offered Shares or the Optional Shares, as the case may be, if, prior to such time, any of the following shall have occurred: (i) the Company withdraws the Registration Statement from the Commission or the Company does not or cannot expeditiously proceed with the public offering; (ii) the representations and warranties in Section 4 hereof are not materially correct or cannot be complied with; (iii) trading in securities generally on the New York Stock Exchange or the American Stock Exchange will have been suspended; (iv) limited or minimum prices will have been established on either such Exchange; (v) a banking moratorium will have been declared either by federal or New York State authorities; (vi) any other restrictions on transactions in securities materially affecting the free market for securities or the payment for such securities, including the Offered Shares or the Optional Shares, will be established by either of such Exchanges, by the Commission, by any other federal or state agency, by action of the Congress or by Executive Order; (vii) trading in any securities of the Company shall have been suspended or halted by any national securities exchange, the NASD or the Commission; (viii) there has been a materially adverse change in the condition (financial or otherwise), prospects or obligations of the Company; (ix) the Company will have sustained a material loss, whether or not insured, by reason of fire, flood, accident or other calamity; (x) any action has been taken by the government of the United States or any department or agency thereof which, in the judgment of the Underwriter, has had a material adverse effect upon the market or potential market for securities in general; or (xi) the market for securities in general or political, financial or economic conditions will have so materially adversely changed that, in the judgment of the Underwriter, it will be impracticable to offer for sale, or to enforce contracts made by the Underwriter for the resale of, the Offered Shares or the Optional Shares, as the case may be. (c) If this Agreement is terminated pursuant to Section 6 hereof or this Section 10 or if the purchases provided for herein are not consummated because any condition of the Underwriter's obligations hereunder is not satisfied or because of any refusal, inability or failure on the part of the Company to comply with any of the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company shall be unable to or does not perform all of its obligations under this Agreement, the Company will not be liable to the Underwriter for damages on account of loss of anticipated profits arising out of the transactions covered by this Agreement, but the Company will remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this 36 Agreement. 11. Information Furnished by the Underwriter to the Company. It is hereby acknowledged and agreed by the parties hereto that for the purposes of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and 8 hereof, the only information given by the Underwriter to the Company for use in the Prospectus are the statements set forth in the last sentence of the last paragraph on the cover page, the statement appearing in the last paragraph on page __ with respect to stabilizing the market price of Shares, the information in the __ paragraph on page __ with respect to concessions and reallowances, and the information in the ___ paragraph on page ___ with respect to the determination of the public offering price, as such information appears in any Preliminary Prospectus and in the Prospectus. 12. Notices and Governing Law. All communications hereunder will be in writing and, except as otherwise provided, will be delivered at, or mailed by certified mail, return receipt requested, or telegraphed to, the following addresses: if to the Underwriter, to 650 Fifth Avenue, New York, New York 10019, Attention: William G. Walters, with a copy to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405 Lexington Avenue, New York, New York 10174; if to the Company, addressed to it at 800 West 9th Avenue, Amarillo, Texas 79101, Attention: Dr. Joseph Cummins, with a copy to Lowenthal, Landau, Fischer & Bring, P.C., 250 Park Avenue, New York, New York 10177, Attention: Robert E. Fischer, Esq. This Agreement shall be deemed to have been made and delivered in New York City and shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal laws of the State of New York. The Company (1) agrees that any legal suit, action or proceeding arising out of or relating to this Agreement shall be instituted exclusively in New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, (2) waives any objection which the Company may have now or hereafter to the venue of any such suit, action or proceeding, and (3) irrevocably consents to the jurisdiction of the New York State Supreme Court, County of New York, and the United States District Court for the Southern District of New York in any such suit, action or proceeding. The Company further agrees to accept and acknowledge service of any and all process which may be served in any such suit, action or proceeding in the New York State Supreme Court, County of New York, or in the United States District Court for the Southern District of New York and agrees that service of process upon the Company mailed by certified mail to the Company's address, with copy to its counsel as set forth in this Section 12, shall be deemed in every respect effective service of process upon 37 the Company, in any such suit, action or proceeding. 13. Parties in Interest. This Agreement is made solely for the benefit of the Underwriter, the Company and, to the extent expressed, any person controlling the Company or the Underwriter, each officer, director, partner, employee and agent of the Underwriter, the directors of the Company, its officers who have signed the Registration Statement, and their respective executors, administrators, successors and assigns, and, no other person will acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" will not include any purchaser of the Shares from the Underwriter, as such purchaser. 38 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement between the Company and the Underwriter in accordance with its terms. Very truly yours, AMARILLO BIOSCIENCES, INC. By: ------------------------- Name: Dr. Joseph M. Cummins Title: Chairman of the Board Confirmed and accepted in New York, N.Y., as of the date first above written: WHALE SECURITIES CO., L.P. By: Whale Securities Corp., General Partner By: --------------------------- Name: William G. Walters Title: Chairman 39 EX-4.1 3 EXHIBIT 4.1 EXHIBIT 4.1 AMARILLO BIOSCIENCES, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS CUSIP SEE REVERSE FOR CERTAIN DEFINITIONS AND RESTRICTIONS THIS CERTIFIES that is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, OF AMARILLO BIOSCIENCES, INC. transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NEW YORK) TRANSFER AGENT BY AND REGISTRAR AUTHORIZED SIGNATURE SECRETARY PRESIDENT A FULL STATEMENT OF THE DENIAL OF PREEMPTIVE RIGHTS IS SET FORTH IN THE ARTICLES OF INCORPORATION OF THE CORPORATION ON FILE IN THE OFFICE OF THE SECRETARY OF STATE, THE CORPORATION WILL FURNISH A COPY OF SUCH STATEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE ON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR REGISTERED OFFICE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM- as tenants in common UNIF GIFT MIN ACT- _____Custodian________ TEN ENT- as tenants by the entireties (Cust) (Minor) JT TEN- as joint tenants with under Uniform Gifts to Minors right of survivorship and Act__________________________ not as tenants in common (State) Additional abbreviations may also be used though not in the above list. For value received,___________________ hereby sell, assign and tranfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------- - --------------------------------- _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _________________________________________________________________________shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint______________________________________Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ________________________________ _______________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED: By______________________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-4 4 EXHIBIT 4.2 EXHIBIT 4.2 WARRANT AGREEMENT dated as of ______, 1996 between Amarillo Biosciences, Inc., a Texas corporation (the "Company"), and Whale Securities Co., L.P. (hereinafter referred to as the "Underwriter"). W I T N E S S E T H: WHEREAS, the Company proposes to issue to the Underwriter warrants ("Warrants") to purchase up to 200,000 shares (the "Shares") of common stock of the Company, $.01 par value (the "Common Stock"); and WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement (the "Underwriting Agreement") dated ____________, 1996 between the Underwriter and the Company, to act as the underwriter in connection with the Company's proposed public offering (the "Public Offering") of 2,000,000 shares of Common Stock at an initial public offering price of $5.00 per share of Common Stock; and WHEREAS, the Warrants issued pursuant to this Agreement are being issued by the Company to the Underwriter or officers and partners of the Underwriter and members of the selling group and/or their officers or partners, in consideration for, and as part of the Underwriter's compensation in connection with, the Underwriter acting as the underwriter pursuant to the Underwriting Agreement; NOW, THEREFORE, in consideration of the premises, the payment by the Underwriter to the Company of TWO HUNDRED DOLLARS ($200), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Underwriter, and/or its designees who are officers or partners of the Underwriter or members of the Selling Group in connection with the Public Offering, are hereby granted the right to purchase, at any time from __________, 1996 [Effective Date] until 5:00 P.M., New York City time, on _______, 2001 (the "Warrant Exercise Term"), up to 200,000 Shares at an initial exercise price (subject to adjustment as provided in Article 8 hereof) of $8.10 per Share. 2. Warrant Certificates. The warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth as Exhibit A, attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions and other variations as required or permitted by this Agreement. 3. Exercise of Warrants. 3.1 Cash Exercise. The Warrants initially are exercisable at a price of $8.10 per Share, payable in cash or by check to the order of the Company, or any combination of cash or check, subject to adjustment as provided in Article 8 hereof. Upon surrender of the Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price (as hereinafter defined) for the Shares purchased, at the Company's principal offices in Texas -2- (presently located at 800 West 9th Avenue, Amarillo, Texas 79101) the registered holder of a Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the Shares so purchased. The purchase rights represented by each Warrant Certificate are exercisable at the option of the Holder hereof, in whole or in part (but not as to fractional shares of the Common Stock). In the case of the purchase of less than all the Shares purchasable under any Warrant Certificate, the Company shall cancel said Warrant Certificate upon the surrender thereof and shall execute and deliver a new Warrant Certificate of like tenor for the balance of the Shares purchasable thereunder. 3.2 Cashless Exercise. At any time during the Warrant Exercise Term, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Shares determined in accordance with this Section 3.2, by surrendering this Warrant at the principal office of the Company or at the office of its transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company (the "Exchange Date"). Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the Shares remaining subject to this -3- Warrant, shall be issued as of the Exchange Date and delivered to the Holder within three (3) days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Shares (rounded to the next highest integer) equal to (i) the number of Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price (as hereinafter defined) by (B) the current market value of a share of Common Stock. 4. Issuance of Certificates. Upon the exercise of the Warrants, the issuance of certificates for the Shares shall be made forthwith (and in any event within three business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Article 5 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of -4- such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Warrant Certificates and the certificates representing the Shares shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. The Warrant Certificates and, upon exercise of the Warrants, in part or in whole, certificates representing the Shares shall bear a legend substantially similar to the following: "The securities represented by this certificate and the other securities issuable upon exercise thereof have not been registered under the Securities Act of 1933, as amended (the "Act"), and may not be offered or sold except (i) pursuant to an effective registration statement under the Act, (ii) to the extent applicable, pursuant to Rule 144 under the Act (or any similar rule under such Act relating to the disposition of securities), or (iii) upon the delivery by the holder to the Company of an opinion of counsel, reasonably satisfactory to counsel to the Company, stating that an exemption from registration under such Act is available." -5- 5. Restriction on Transfer of Warrants. The Holder of a Warrant Certificate, by its acceptance thereof, covenants and agrees that the Warrants are being acquired as an investment and not with a view to the distribution thereof, and that the Warrants may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for a period of [one (1) year] from the date hereof, except to officers or partners of the Underwriter or to any member of the selling group participating in the distribution to the public of the Common Stock and/or their respective officers or partners. 6. Price. 6.1 Initial and Adjusted Exercise Price. The initial exercise price of each Warrant shall be $8.10 per Share. The adjusted exercise price shall be the price which shall result from time to time from any and all adjustments of the initial exercise price in accordance with the provisions of Article 8 hereof. 6.2 Exercise Price. The term "Exercise Price" herein shall mean the initial exercise price or the adjusted exercise price, depending upon the context. 7. Registration Rights. 7.1 Registration Under the Securities Act of 1933. The Warrants and the Shares have not been registered for purposes of public distribution under the Securities Act of 1933, as amended (the "Act"). -6- 7.2 Registrable Securities. As used herein the term "Registrable Security" means each of the Warrants, the Shares and any shares of Common Stock issued upon any stock split or stock dividend in respect of such Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Act and disposed of pursuant thereto, (ii) registration under the Act is no longer required for the immediate public distribution of such security or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Article 7. 7.3 Piggyback Registration. If, at any time during the seven years following the date of this Agreement, the Company proposes to prepare and file one or more post-effective amendments to the registration statement filed in connection with the Public Offering or any new registration statement or post-effective amendments thereto covering equity or debt securities of the Company, or any such securities of the Company held by its shareholders (in any such case, other than in connection with a merger, acquisition or pursuant to Form S-8 or successor form), -7- (for purposes of this Article 7, collectively, a "Registration Statement"), it will give written notice of its intention to do so by registered mail ("Notice"), at least thirty (30) business days prior to the filing of each such Registration Statement, to all holders of the Registrable Securities. Upon the written request of such a holder (a "Requesting Holder"), made within twenty (20) business days after receipt of the Notice, that the Company include any of the Requesting Holder's Registrable Securities in the proposed Registration Statement, the Company shall, as to each such Requesting Holder, use its best efforts to effect the registration under the Act of the Registrable Securities which it has been so requested to register ("Piggyback Registration"), at the Company's sole cost and expense and at no cost or expense to the Requesting Holders. Notwithstanding the provisions of this Section 7.3, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 7.3 (irrespective of whether any written request for inclusion of such securities shall have already been made) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof. 7.4 Demand Registration. (a) At any time during the Warrant Exercise Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of the Registrable Securities shall have the right (which right is in addition to the piggyback registration rights provided for under Section 7.3 hereof), exercisable by written -8- notice to the Company (the "Demand Registration Request"), to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, at the sole expense of the Company, a Registration Statement and such other documents, including a prospectus, as may be necessary (in the opinion of both counsel for the Company and counsel for such Majority Holder), in order to comply with the provisions of the Act, so as to permit a public offering and sale of the Registrable Securities by the holders thereof . Once effective, the Company will use its best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold, or (ii) the date that the holders thereof receive an opinion of counsel to the Company that all of the Registrable Securities may be freely traded without registration under the Act, under Rule 144(k) of the Act or otherwise. (b) The Company covenants and agrees to give written notice of any Demand Registration Request to all holders of the Registrable Securities within ten (10) days from the date of the Company's receipt of any such Demand Registration Request. After receiving notice from the Company as provided in this Section 7.4(b), holders of Registrable Securities may request the Company to include their Registrable Securities in the Registration Statement to be filed pursuant to Section 7.4(a) hereof by notifying the Company of their decision to include such securities within ten (10) days of their receipt of the Company's notice. -9- (c) In addition to the registration rights provided for under Section 7.3 and subsection (a) of this Section 7.4, at any time during the Warrant Exercise Term, any Majority Holder (as defined below in Section 7.4(d)) of Registrable Securities shall have the right, exercisable by written request to the Company, to have the Company prepare and file with the Commission, on one occasion in respect of all holders of Registrable Securities, a Registration Statement so as to permit a public offering and sale of such Registrable Securities for nine (9) consecutive months, provided, however, that all costs incident thereto shall be at the expense of the holders of the Registrable Securities included in such Registration Statement. Once effective, the Company will use its best efforts to maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have been sold, or (ii) the date that the holders thereof receive an opinion of counsel to the Company that all of the Registrable Securities may be freely traded without registration under the Act, under Rule 144(k) of the Act or otherwise.If a Majority Holder shall give notice to the Company at any time of its or their desire to exercise the registration right granted pursuant to this Section 7.4(c), then within ten (10) days after the Company's receipt of such notice, the Company shall give notice to the other holders of Registrable Securities, advising them that the Company is proceeding with such -10- registration and offering to include therein the Registrable Securities of such holders, provided they furnish the Company with such appropriate information in connection therewith as the Company shall reasonably request in writing. (d) The term "Majority Holder" as used in this Section 7.4 shall mean any holder or any combination of holders of Registrable Securities, if included in such holders' Registrable Securities are that aggregate number of Shares (including Shares already issued and Shares issuable pursuant to the exercise of outstanding Warrants) as would constitute a majority of the aggregate number of Shares (including Shares already issued and Shares issuable pursuant to the exercise of outstanding Warrants) included in all of the Registrable Securities. 7.5 Covenants of the Company With Respect to Registration. The Company covenants and agrees as follows: (a) In connection with any registration under Section 7.4 hereof, the Company shall file the Registration Statement as expeditiously as possible, but in no event later than twenty (20) business days following receipt of any demand therefor, shall use its best efforts to have any such Registration Statements declared effective at the earliest possible time, and shall furnish each holder of Registrable Securities such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs, fees and expenses in connection with all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof including, without -11- limitation, the Company's legal and accounting fees, printing expenses, and blue sky fees and expenses. The holders of Registrable Securities included in any Registration Statement filed pursuant to Section 7.4(c) hereof will pay all costs, fees and expenses in connection with such registration. (c) The Company will take all necessary action which may be required in qualifying or registering the Registrable Securities included in a Registration Statement for offering and sale under the securities or blue sky laws of such states as are requested by the holders of such securities, [provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction]. (d) The Company shall indemnify any holder of the Registrable Securities to be sold pursuant to any Registration Statement and any underwriter or person deemed to be an underwriter under the Act and each person, if any, who controls such holder or underwriter or person deemed to be an underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from such registration statement to the same extent and with the same effect as the provisions pursuant to which the -12- Company has agreed to indemnify the Underwriters contained in Section 7 of the Underwriting Agreement and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. (e) Any holder of Registrable Securities to be sold pursuant to a Registration Statement, and its successors and assigns, shall severally, and not jointly, indemnify, the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished in writing by or on behalf of such holder, or its successors or assigns, for specific inclusion in such Registration Statement to the same extent and with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company and to provide for just and equitable contribution as set forth in Section 8 of the Underwriting Agreement. (f) Nothing contained in this Agreement shall be construed as requiring any Holder to exercise his Warrants prior to the initial filing of any Registration Statement or the effectiveness thereof. (g) If the Company shall fail to comply with the provisions of this Article 7, the Company shall, in -13- addition to any other equitable or other relief available to the holders of Registrable Securities, be liable for any or all incidental, special and consequential damages sustained by the holders of Registrable Securities, requesting registration of their Registrable Securities. (h) Except as set forth in Section 7.5(j) hereof, the Company shall not permit the inclusion of any securities other than the Registrable Securities to be included in any Registration Statement filed pursuant to Section 7.4 hereof, or permit any other registration statement to be or remain effective during the effectiveness of a Registration Statement filed pursuant to Section 7.4 hereof, without the prior written consent of the Majority Holders, which consent shall not be unreasonably withheld. (i) The Company shall deliver promptly to each holder of Registrable Securities participating in the offering in which such Holder's shares are being registered pursuant to Section 7.3 hereof and requesting the correspondence and memoranda described in this Section 7.5(i) and to the managing underwriter, if any, copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the Registration Statement and permit each holder of Registrable Securities and underwriters to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the Registration Statement as it deems reasonably necessary to comply with -14- applicable securities laws or rules of the National Association of Securities Dealers, Inc. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as any such holder of Registrable Securities or underwriter shall reasonably request. (j) Upon the written request therefor by any holders of Registrable Securities, the Company shall include in the Registration Statement covering any of the Registrable Securities any other securities of the Company held by such holders of Registrable Securities as of the date of filing of such Registration Statement, including, without limitation, restricted shares of Common Stock, options, warrants or any other securities convertible into shares of Common Stock. 8. Adjustments of Exercise Price and Number of Shares. 8.1 Computation of Adjusted Price. In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution the Exercise Price in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing: (a) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Exercise Price in effect immediately prior to such dividend or distribution, by -15- (b) the total number of shares of Common Stock outstanding immediately after such issuance or sale. For the purposes of any computation to be made in accordance with the provisions of this Section 8.1, the Common Stock issuable by way of dividend or other distribution on any stock of the Company shall be deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution. 8.2 Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Exercise Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. 8.3 Adjustment in Number of Shares. Upon each adjustment of the Exercise Price pursuant to the provisions of this Article 8, the number of Shares issuable upon the exercise of each Warrant shall be adjusted to the nearest full Share by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Shares issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. 8.4 Reclassification, Consolidation, Merger, etc. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a -16- subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Holders shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, merger, sale or conveyance as if the Holders were the owners of the shares of Common Stock underlying the Warrants immediately prior to any such events at a price equal to the product of (x) the number of shares issuable upon exercise of the Warrants and (y) the Exercise Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance as if such Holders had exercised the Warrants. 8.5 Determination of Outstanding Shares of Common Stock. The number of shares of Common Stock at any one time outstanding shall include the aggregate number of shares issued or issuable upon the exercise of options, rights, warrants and upon the conversion or exchange of convertible or exchangeable securities. 8.6 Dividends and Other Distributions with Respect to Outstanding Securities. In the event that the Company -17- shall at any time prior to the exercise of all Warrants declare a dividend (other than a dividend consisting solely of shares of Common Stock or a cash dividend or distribution or otherwise distribute to its shareholders any monies, assets, property, rights, evidences of indebtedness, securities (other than shares of Common Stock), whether issued by the Company or by another person or entity, or any other thing of value, the Holder or Holders of the unexercised Warrants shall thereafter be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise thereof, to receive, upon the exercise of such Warrants, the same monies, property, assets, rights, evidences of indebtedness, securities or any other thing of value that they would have been entitled to receive at the time of such dividend or distribution. At the time of any such dividend or distribution, the Company shall make appropriate reserves to ensure the timely performance of the provisions of this Subsection 8.6. 8.7 Subscription Rights for Shares of Common Stock or Other Securities. In the case the Company or an affiliate of the Company shall at any time after the date hereof and prior to the exercise of all the Warrants issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company, the Holders of the unexercised Warrants shall be entitled, in addition to the shares of Common Stock or other securities receivable upon the exercise of the Warrants, to -18- receive such rights at the time such rights are distributed to the other shareholders of the Company. 9. Exchange and Replacement of Warrant Certificates. Each Warrant Certificate is exchangeable without expense, upon the surrender hereof by the registered Holder at the principal executive office of the Company, for a new Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of Shares in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Warrants, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 10. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock and shall not be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock. -19- 11. Reservation and Listing of Securities. The Company shall at all times reserve and keep avail able out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Warrants, such number of shares of Common Stock as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Warrants and payment of the Exercise Price therefor, all shares of Common Stock issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any shareholder. As long as the Warrants shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Warrants to be listed on or quoted by NASDAQ or listed on such national securities exchanges as requested by the Underwriter. 12. Notices to Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holder or Holders the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution -20- payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; or (d) reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par -21- value, as aforesaid), or a sale or conveyance to another corporation of the property of the Company as an entirety is proposed; or (e) The Company or an affiliate of the Company shall propose to issue any rights to subscribe for shares of Common Stock or any other securities of the Company or of such affiliate to all the shareholders of the Company; then, in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, options or warrants, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend or distribution, or the issuance of any convertible or exchangeable securities or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 13. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have -22- been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (a) If to a registered Holder of the Warrants, to the address of such Holder as shown on the books of the Company; or (b) If to the Company, to the address set forth in Section 3 of this Agreement or to such other address as the Company may designate by notice to the Holders. 14. Supplements and Amendments. The Company and the Underwriter may from time to time supplement or amend this Agreement without the approval of any Holders of Warrant Certificates in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem not to adversely affect the interests of the Holders of Warrant Certificates. 15. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder. 16. Termination. This Agreement shall terminate at the close of business on __________, 2004. Notwithstanding the foregoing, this Agree- -23- ment will terminate on any earlier date when all Warrants have been exercised and all the Shares issuable upon exercise of the Warrants have been resold to the public; provided, however, that the provisions of Section 7 shall survive such termination until the close of business on _________, 2007. 17. Governing Law. This Agreement and each Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State. 18. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered holder or holders of the Warrant Certificates, Warrants or the Shares any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriter and any other holder or holders of the Warrant Certificates, Warrants or the Shares. 19. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. -24- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. [SEAL] AMARILLO BIOSCIENCES, INC. By:__________________________________ Name: Title: Attest: - ----------------------- WHALE SECURITIES, CO., L.P. By: Whale Securities Corp., General Partner By:__________________________________ Name: William G. Walters Title: Chairman -25- EXHIBIT A THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, _________, 199_ No. W- _______ Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that _______________ ____________ or registered assigns, is the registered holder of _______ Warrants to purchase, at any time from _______, 1996 until 5:00 P.M. New York City time on ________, 2001 ("Expiration Date"), up to 200,000 shares ("Shares") of fully-paid and non-assessable common stock, $.01 par value ("Common Stock"), of Amarillo Biosciences, Inc., a Texas corporation (the "Company"), at the initial exercise price, subject to adjustment in certain events (the "Exercise Price"), of $8.10 per Share upon surrender of this Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the warrant agreement dated as of ____________, 1996 between the Company and Whale Securities Co., L.P. (the "Warrant Agreement"). Payment of the Exercise Price may be made in cash, or by certified or official bank check in New York Clearing House funds payable to the order of the Company, or any combination of cash or check. No Warrant may be exercised after 5:00 P.M., New York City time, on the Expiration Date, at which time all Warrants evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to in a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Warrants. The Warrant Agreement provides that upon the occurrence of certain events, the Exercise Price and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax, or other governmental charge imposed in connection therewith. Upon the exercise of less than all of the Warrants evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such number of unexercised Warrants. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated: ___________, 1996 AMARILLO BIOSCIENCES, INC. [SEAL] By:__________________________ Name: Title: Attest: - ---------------------- [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase _________ Shares and herewith tenders in payment for such Shares cash or a certified or official bank check payable in New York Clearing House Funds to the order of __________________ in the amount of $ , all in accordance with the terms hereof. The undersigned requests that a certificate for such Shares be registered in the name of , whose address is __________________, and that such Certificate be delivered to __________________, whose address is _____________. Dated: Signature:____________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) -------------------------------- -------------------------------- (Insert Social Security or Other Identifying Number of Holder) [FORM OF ASSIGNMENT] (To be executed by the registered holder if such holder desires to transfer the Warrant Certificate.) FOR VALUE RECEIVED __________________________________________ hereby sells, assigns and transfers unto _______________________________________________________________________________ (Please print name and address of transferee) this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________, Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: Signature:____________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate) - ------------------------------- - ------------------------------- (Insert Social Security or Other Identifying Number of Assignee) EX-5.1 5 EXHIBIT 5.1 Exhibit 5.1 July 1, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Gentlemen: We have acted as counsel to Amarillo Biosciences, Inc., a Texas corporation (the "Company"), in connection with the Registration Statement on Form SB-2 ("Registration No. 333-04413) (the "Registration Statement") under the Securities Act of 1933, as amended, relating to (a) 2,300,000 shares of the Company's common stock, par value $.01 per share (the "Shares"), including 300,000 Shares to cover the Underwriter's over-allotment option, (b) the Underwriter's Warrant to Purchase up to 200,000 Shares ("Warrants") and (c) 200,000 Shares which may be issued and sold upon exercise of the Warrants. In connection with this opinion, we have examined the originals, or copies, certified or otherwise identified to our satisfaction, of all such records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In making such examinations, we have assumed the authenticity of all documents submitted to us as originals, the conformity to authentic originals of all documents submitted to us as copies, the completeness of all documents furnished to us and the genuineness of all signatures of the respective parties to such documents. As to various questions of fact relevant to our opinion, we have relied where appropriate and without further investigation on our part upon certificates of public officials and statements or certificates of officers or representatives of the Company and others. Insofar as this opinion relates to securities to be issued in the future, we have assumed that all applicable laws, regulations and rules in effect at the time of such issuance are the same as those in effect on the date hereof. Based upon and subject to the foregoing, we are of the opinion that the Shares (including the Shares issuable upon exercise of the Warrants), when issued and delivered against payment therefor in accordance with the terms of the Registration Statement, will be legally -1- Securities and Exchange Commission July 1, 1996 Page 2 issued, fully paid and nonassessable and the Warrants, when issued in accordance with the terms of the Registration Statement, will be legally issued. In rendering the foregoing opinion we have relied upon the opinion of Morris, Moore, Moss & Douglass, P.C., a copy of which is attached hereto. We consent to the filing of this opinion as Exhibit 5 to the Registration Statement and we further consent to the reference made to us under the caption "Legal Matters" in the Registration Statement. Very truly yours, LOWENTHAL, LANDAU, FISCHER & BRING, P.C. By:/s/ Jay Weil ----------------------------- -2- June 28, 1996 Amarillo Biosciences, Inc. 800 West 9th Avenue Amarillo, Texas 79101 Lowenthal Landau Fischer & Bring, P.C. 250 Park Avenue New York, New York 10177 Gentlemen: We have acted as counsel to Amarillo Biosciences, Inc., a Texas corporation (the "Company"), in connection with the Registration Statement on Form SB-2 (the "Registration Statement") under the Securities Act of 1933, as amended, relating to an aggregate of 2,500,000 shares of Common Stock, $.01 par value per share, of the Company (the "Shares") including an aggregate of 200,000 Shares that are issuable upon exercise of certain warrants to purchase Shares. In connection with this opinion, we have examined the originals, or copies, certified or otherwise identified to our satisfaction, of all such records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In making such examinations, we have assumed the authenticity of all documents submitted to us as originals, the conformity to authentic originals of all documents submitted to us as copies, the completeness of all documents furnished to us and the genuineness of all signatures of the respective parties to such documents. As to various questions of fact relevant to our opinion, we have relied where appropriate and without further investigation on our part upon certificates of public officials and statements or certificates of officers or representatives of the Company and others. Insofar as this opinion relates to securities to be issued in the future, we have assumed that all applicable laws, regulations and rules in effect at the time of such issuance are the same as those in effect on the date hereof. -3- Securities and Exchange Commission June 28, 1996 Page 2 Based upon and subject to the foregoing, we are of the opinion that the Shares (including the Shares issuable upon exercise of warrants), when issued and delivered against payment therefor in accordance with the terms of the warrants under which they are issued and in accordance with the terms of the Registration Statement, will be legally issued, fully paid and nonassessable. Lowenthal, Landau, Fischer & Bring, P.C. may rely upon this opinion in giving its opinion to the Securities and Exchange Commission concerning the subject matter contained herein and we consent to the filing of this opinion as an exhibit to the Registration Statement. The law covered by the opinion expressed herein is limited to the corporate laws of the State of Texas. Very truly yours, Morris, Moore, Moss & Douglass, P.C. -4- EX-10.23 6 INDEMNIFICATION AGREEMENT Exhibit 10.23 INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT dated as of ________ ___, 1996 by and among Amarillo Biosciences, Inc., a Texas corporation (the "Company"), and Hayashibara Biochemical Laboratories, Inc. ("HBL"). W I T N E S S E T H: WHEREAS: A. HBL manufactures and makes available to the Company, pursuant to certain license agreements, a certain form of alpha interferon (the "Product") which the Company currently is using for research and development in the United States and elsewhere and for marketing in certain foreign countries; and B. The product is patent protected in Japan and elsewhere; and C. Hoffman La Roche, Inc. ("Roche") is the owner of United States Patent No. 4,503,035 (the "035 Patent") pertaining to homogeneous human alpha interferon; and D. It is to the mutual benefit of the parties hereto that the Company continue its research and development and marketing efforts, the success of which would benefit both the Company and HBL; and E. The Company and HBL believe, and have received opinions of counsel, that the Product, as utilized by the Company, does not infringe upon the 035 Patent, but the Company is concerned that Roche might initiate one or more legal proceedings against the Company, claiming patent infringement or otherwise; and F. In order to induce the Company to continue its research and development and marketing efforts, HBL has agreed to indemnify, hold harmless and reimburse the Company against any amounts the Company may be required to pay as a result of any Roche Claim (as hereinafter defined); and G. HBL wishes to have the Company consummate a proposed public offering of its securities (the "Offering") by Whale Securities Co., L.P. ("Whale"); and H. In order to facilitate the Offering, HBL has further agreed to indemnify, hold harmless and reimburse the Company against any amounts the Company may be required to pay as a result of a Whale Claim (as hereinafter defined). NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. (a) HBL agrees to indemnify and hold harmless the Company and each officer, director, employee and agent of the Company (each an "Indemnified Party") from and against any and all losses, claims, damages, expenses or liabilities (including, without limitation, by way of settlement) and actions in respect thereof, to which they or any of them may become subject arising out of or based upon or related to (i) any litigation proceeding commenced or threatened to be commenced by Roche or any affiliate of Roche against any Indemnified Party or any affiliate of any Indemnified Party relating to the 035 Patent (a "Roche Claim") and (ii) any indemnification claim against any Indemnified Party made by Whale pursuant to the underwriting agreement to be entered into between the Company and Whale in connection with the Offering, but only to the extent that such indemnification claim results from the assertion of a Roche Claim (a "Whale Claim"), and will reimburse each of the Indemnified Parties, if any, for any legal fees or other expenses incurred by them or any of them in connection with investigating or defending any actions, whether or not resulting in any liability, insofar as such losses, claims, damages, expenses, liabilities or actions arise out of or are based upon or related to a Roche Claim or Whale Claim. HBL agrees to reimburse each Indemnified Party under this Section 1 for the amount of any loss, claim, damage, expense or liability for which any such Indemnified Party may be entitled, from time to time, promptly upon written notice that such loss, claim, damage, expense or liability has been incurred. Notwithstanding anything to the contrary contained herein, HBL shall not be liable to reimburse the Company for any loss of revenue or profits resulting from the issuance by a court of competent jurisdiction of any injunction against the Company concerning the use, sale and/or marketing of the Product. (b) HBL shall assume the defense of any action against any Indemnified Parties (including the employment of counsel reasonably satisfactory to the Indemnified Parties, whose fees and expenses shall be the obligation of HBL, as set forth above) insofar as such action relates to an alleged liability in respect of which indemnity may be sought against HBL. After notice from HBL of its election to assume the defense of such action, HBL shall no longer be liable to the Indemnified Parties hereunder for any legal or other expenses subsequently incurred by them in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the reasonable judgment of any Indemnified Party, it is advisable for such Indemnified Party to be represented by separate counsel because of an existing or potential conflict of interest which cannot be resolved, the Indemnified Party shall have the right to employ a separate counsel to represent such Indemnified Party, in which event the fees and expenses of such separate counsel shall be borne by HBL. (c) HBL shall also assume the defense of any action brought by a third party against Whale to the extent that such action is the basis of a Whale Claim (an action against Whale resulting from the assertion of a Roche Claim). In such event HBL shall employ counsel reasonably satisfactory to Whale, which counsel's fees and expenses shall be the obligation of HBL. After notice from HBL of its election to assume the defense of such action HBL shall no longer be liable hereunder for any legal or other expenses subsequently incurred by Whale in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if Whale and one or more Indemnified Parties are parties to such action and in the reasonable opinion of Whale it is advisable for Whale to be represented by separate counsel because of an existing or potential conflict of interest which cannot be resolved, Whale shall have the right to employ a separate counsel to represent Whale in such action, in which event the fees and expenses of such separate counsel shall be borne by HBL. 2 2. This Agreement may not be amended, terminated or otherwise modified or rescinded without the written consent of the parties hereto. 3. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas. It constitutes the entire understanding between the parties hereto with respect to the subject matter hereof. 4. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in Dallas, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 5. This Agreement shall bind HBL and its successors and assigns and shall be for the benefit of the Company and its successors, including, but not limited to, Whale. IN WITNESS WHEREOF, the parties have executed this Indemnification Agreement as of the date first above written. AMARILLO BIOSCIENCES, INC. By: /s/ Joseph Cummins ------------------------------------- HAYASHIBARA BIOCHEMICAL LABORATORIES, INC. By: /s/ Ken Hayashibara ------------------------------------- 3 EX-10.24 7 STOCK PURCHASE AGREEMENT Exhibit 10.24 STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of this the 21st day of September, 1987, by and between AMARILLO CELL CULTURE COMPANY, INCORPORATED, a Texas corporation ("ACC"), JOSEPH M. CUMMINS ("CUMMINS") and MESA LIMITED PARTNERSHIP, a Delaware limited partnership ("MESA"). WHEREAS, ACC desires to issue to MESA and MESA desires to purchase from ACC shares of ACC's voting common stock, $0.01 par value ("Stock") upon the terms and conditions hereinafter set forth; and further WHEREAS, the parties hereto desire to evidence their understandings and obligations by this Agreement; THEREFORE, in consideration of these presents and for other good and valuable consideration the receipt and sufficiency of which are evidenced by the execution hereof, the parties hereto agree as follows: 1. Initial Stock Purchase. MESA shall within twenty (20) days of the execution of this Agreement purchase 18,000 shares of Stock at $17.50 per share, for a total cash consideration of $315,000.00. The full purchase price shall be payable in cash, upon the purchase date. 2. Options to Purchase. MESA shall have the option to purchase additional stock from time to time in the future, as follows: 22,500 shares of Stock may be purchased by MESA at any time within 18 months from the date of this Agreement, at the price of $25.00 per share (the "18-month option"). In addition, MESA shall have the option to purchase 27,000 shares of Stock from the Company at any time within 36 months from the date of this Agreement, at a price of $30.00 per share (the "36-month option"). Both the 18-month option and the 36-month option may be exercised in part. In addition, any of the options provided for in Paragraphs 3 and 4 below, which shall not have been exercised within the time period therein specified, by the parties entitled thereunder to exercise such options, may be exercised by MESA, upon the terms and conditions therein set forth, and MESA shall have an additional 30 days past the option termination dates therein set forth, within which to exercise such options. Prior to the exercise of any 18-month option or 36-month option, MESA shall give at least thirty (30) days' prior written notice to ACC, and upon receipt of such notice, ACC shall immediately forward a copy thereof to CUMMINS, and to the Other Shareholders, as hereinafter defined. No such notice by MESA shall be required in connection with its exercise of lapsed options of CUMMINS or Other Shareholders. -1- 3. Options Exercisable by Cummins. CUMMINS shall have the option to purchase (i) 3,030 shares of Stock, at $17.50 per share, within 20 days of the date of this Agreement; (ii) an additional 3,788 shares of Stock at $25.00 per share, exercisable at any time up to eighteen months after the date of this Agreement, subject, however, to lapse, as follows: for each share purchased by MESA under its "18-month options," CUMMINS shall be required, on or before MESA's option exercise date, to purchase .168 shares of Stock. If CUMMINS does not purchase such shares on or before said date, then CUMMINS' right to purchase Stock under this option shall expire, as to said number of shares; (iii) an additional 4,545 shares of Stock at $30.00 per share, exercisable at any time up to thirty-six months after the date of this Agreement, subject, however, to lapse, as follows: for each share purchased by MESA under its "36-month options," CUMMINS shall be required, on or before MESA's option exercise date, to purchase .168 shares of Stock. If CUMMINS does not purchase such shares on or before said date, then CUMMINS' right to purchase Stock under this option shall expire, as to said number of shares of Stock. Any options timely exercised hereunder, which exceed the number of options required to be exercised pursuant to the foregoing provisions, may be charged against options required to be exercised from time to time, so as to prevent, to the extent thereof, the further lapse of options. In order to enable CUMMINS to exercise such options, and as part of the consideration for this Agreement, ACC shall loan the purchase price of such shares to CUMMINS, with funds to be advanced at the time of each respective option exercise, such loans to be evidenced by promissory notes executed by CUMMINS, bearing interest at the then applicable federal rate, determined in accordance with Section 1274(d) of the Internal Revenue Code of 1986, and any successor provisions, and regulations promulgated thereunder, and providing for quarterly compounding of interest, amortization over a period of five (5) years, equal quarterly installments of combined principal and interest, and prepayment without penalty. Said notes shall be secured by security agreements, and pledges of all the Stock owned by CUMMINS upon the date of said loan. 4. Options to Other Shareholders. Within 60 days of the date of this Agreement, ACC shall offer to its current shareholders other than MESA and CUMMINS (herein referred to as the "Other Shareholders") an aggregate of 2,970 shares of Stock at a price of $17.50 per share ("Initial Purchase Rights"); and those Other Shareholders purchasing thereunder shall also have a right to purchase (i) an additional 3,712 shares of Stock at $25.00 per share, exercisable at any time up to eighteen months after the date of this Agreement, -2- subject, however, to lapse, as follows: for each share purchased by MESA under its "18-month options," Other Shareholders shall be required, on or before MESA's option exercise date, to purchase .165 shares of Stock. If said Other Shareholders do not purchase such shares on or before said date, then said Other Shareholders' rights to purchase Stock under this option shall expire, as to said number of shares of Stock; (ii) an additional 4,455 shares of Stock at $30.00 per share, exercisable at any time up to thirty-six months after the date of this Agreement, subject, however, to lapse, as follows: for each share purchased by MESA under its "36-month options," Other Shareholders shall be required, on or before MESA's option exercise date, to purchase .165 shares of Stock. If Other Shareholders do not purchase such shares on or before said date, then their right to purchase Stock under this option shall expire, as to said number of shares of Stock. Any options timely exercised hereunder, which exceed the number of options required to be exercised pursuant to the foregoing provisions, may be charged against options required to be exercised from time to time, so as to prevent, to the extent thereof, the further lapse of options. The 18 and 36 months rights of the Other Shareholders shall be hereinafter referred to as the "Subsequent Purchase Rights." The Initial Purchase Rights shall be exercisable by the Other Shareholders in proportion to their ownership of Stock in ACC, computed prior to the exercise of the Initial Purchase Rights, and any of such rights not exercised may be exercised within thirty (30) days of the termination of the sixty (60) day purchase period by Other Shareholders who did exercise their Initial Purchase Rights. The Subsequent Purchase Rights shall be exercisable by the Other Shareholders in proportion to the number of shares they purchased pursuant to the Initial Purchase Rights. 5. Anti-Dilution. In the event the number of issued and outstanding shares of Stock of ACC should increase, within 36 months from the date of this Agreement, for any reason (excluding, however, an increase resulting from the issuance of Shares purchased by MESA, CUMMINS or Other Shareholders pursuant to the foregoing provisions of this Agreement), including, without limitation, increases in the number of outstanding Shares due to additional sales of stock by ACC, stock splits, stock dividends, merger, consolidation, or any similar event, then all of the options provided to MESA in this Agreement shall be proportionately increased, and the exercise price thereof shall be proportionately decreased, so that MESA shall be entitled to achieve and maintain the same percentage ownership in ACC (or other surviving company) that it could have achieved and maintained, at the same cost to MESA, had said event not taken place. -3- If, within 36 months from the date of this Agreement, ACC should effect or undergo a stock split, stock dividend, merger, consolidation or any similar event, the shares of Stock of ACC, or other surviving company, held by MESA prior to such event, shall be adjusted in such a manner that MESA's percentage ownership in ACC, or other surviving company, is not decreased by virtue of such event. 6. Additional Consideration. As additional consideration for the execution of this Agreement, the parties hereto agree that they will execute the following instruments, if they are indicated therein as parties, simultaneous with the execution hereof: Employment Contract, a copy of which is attached hereto as Exhibit "A," and hereby incorporated by reference; and Voting Agreement, a copy of which is attached hereto as Exhibit "B," and hereby incorporated by reference. 7. Preconditions. The parties recognize and understand that certain parties to the Voting Agreement are not parties to this Agreement; accordingly, this Agreement shall not become binding, and shall be of no force or effect, until the Voting Agreement shall have been executed by all of the parties therein named. In addition, if the Articles of Incorporation are not amended as contemplated in the Voting Agreement, then this Agreement shall terminate, and shall be of no force or effect. 8. Non-Transferability. All options provided for herein shall be non-transferrable. 9. Financial Condition; Use of Proceeds. Exhibit "C" to this Agreement sets forth income statements and balance sheets as of March 31, 1987, and June 30, 1987, and a schedule of obligations of ACC as of September 11, 1987 (the "Financials"). The Financials are unaudited. The Financials are true and correct based on the cash basis of accounting, and fairly present the financial position of ACC as of the dates aforesaid. ACC has no debt, liability or obligation of any nature, whether accrued, absolute, contingent or otherwise, and whether due or to become due, that is not reflected or reserved against in the Financials, excepting only the following: (i) debts, obligations and liabilities which shall have been disclosed in an Exhibit to this Agreement; (ii) debts, liabilities or obligations not exceeding $5,000.00 in the aggregate. Exhibit "D" to this Agreement sets forth a one year budget, being the use ACC proposes to make of the proceeds from the initial stock purchase provided for in Paragraph 1, above. No expenditure of such funds shall be made for any purpose not set forth at said Exhibit "D", or for any purpose set forth at Exhibit "D" in an amount which exceeds the amount set forth therein by more than five percent (5%), without the prior written consent of either -4- MESA, or that director on the Board of ACC who has been nominated by MESA. In addition, said $315,000.00, along with any additional amounts received from MESA pursuant to the exercise of its options as provided for in this Agreement, shall be placed in a separate bank account of ACC, and not commingled with other funds of ACC. Checks may be written and draws may be made on said account only upon signature of two (2) persons, at least one of whom will be nominated by MESA. MESA shall have the right, during business hours, to audit the books and records of ACC, or to employ independent auditors for such purpose. ACC shall provide quarterly financial statements to MESA. 10. Redemptions and Repurchases. As long as MESA shall be and remain a shareholder of ACC, ACC shall engage in no repurchase or redemption of its issued and outstanding shares of Stock, unless such repurchase and/or redemption is offered, pro rata, to all then existing shareholders, without the prior written approval of MESA. 11. Debt Limit. At no time within 36 months of the date of this Agreement will ACC borrow funds from any persons or entities, which borrowing would cause the aggregate, outstanding debt of ACC to exceed $100,000.00, without the prior written approval of MESA. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of this the 21st day of September, 1987. AMARILLO CELL CULTURE COMPANY, INCORPORATED By: s/ ----------------------------------------- President s/ Joseph M. Cummins ----------------------------------------- JOSEPH M. CUMMINS MESA LIMITED PARTNERSHIP By: PICKENS OPERATING CO. By: s/ ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- -5- EX-10.25 8 RESEARCH LICENSE AND SUPPLY AGREEMENT BETWEEN AMARILLO BIOSCIENCES, INC. (ABI) a Texas corporation with its principal place of business at 800 W. 9th, Amarillo, Texas 79101 USA Represented by: Dr. Joseph M. CUMMINS, President AND VIRBAC S.A. (VIRBAC) a French corporation with its principal place of business at 1 ere Avenue 2065 m - L.I.D. - 06516 Carros - FRANCE Represented by: Mr. Pascal BOISSY, President WHEREAS ABI has substantial expertise in the use of the natural human Interferon-alpha ("IFNa") manufactured and used by INTERFERON SCIENCES, INC. for the formulation of natural IFNa-containing formulation(s) for use in the treatment by injection of human genital warts in the United States; ABI has proprietary rights and know-how in the field of formulation and use of the INTERFERON SCIENCES, INC. Interferon; ABI has obtained the rightful access to certain patents through the grant of Exclusive Licenses from University Patents, Inc., a Delaware corporation, on April 1st, 1984, from the Texas A&M University System (TAMUS) on March 22, 1988 and then as the direct owner of several patents filed or issued in the name of ABI. ABI warrants that these patents are genuine, that it has sole title to them, either as exclusive licensee or as direct owner (except for US Patent No. 5,215,741, of which ABI is a co-owner along with the Estate of Dr. Alan Young, Deceased; each co-owner has a co-extensive right to license said patent), and that it has full right, authority and power to enter into this Agreement and that it is legally as well as contractually authorized to dispose of these rights. ABI believes the patents to be valid, and has no reason to believe that they are not. -1- ABI and INTERFERON SCIENCES, INC., of New Brunswick, New Jersey, USA (hereinafter "ISI") have heretofore entered into that certain Exclusive Manufacturing and Supply Agreement dated October 20, 1989 regarding the supply by ISI of ISI Interferon for the manufacture of PRODUCTS for oral use in non-human species; ABI and VIRBAC now desire to promote applications of technology relating to the oral administration of ISI Interferon in the feline and canine species. VIRBAC desires to obtain the exclusive right to use, formulate, test and market ISI Interferon in oral dosage forms for use in both the feline and canine species, and the exclusive right to sell or otherwise distribute ISI Interferon to other persons or entities for use in formulation, testing, or marketing of oral forms labelled for use in feline and/or canine species worldwide on the basis of the grant of a Research License and Supply Agreement. ABI and VIRBAC agree that the present Agreement shall be effective on the date of signature. THEREFORE IT HAS BEEN FURTHER AGREED AS FOLLOWS: Article 1: DEFINITION. As used hereafter, following terms will have the following meaning: TERRITORY means all countries of the world, except Japan. LICENSOR means AMARILLO BIOSCIENCES, INC. AFFILIATE means a corporation, company, partnership, or other business entity which controls or is controlled by, or is under common control with, the designated party. In the case of a corporation, "control" means ownership either directly or indirectly of at least fifty percent (50%) of the shares of stock entitled to vote for the election of directors. LICENSEE means VIRBAC SA. PARTY means LICENSOR or LICENSEE. PARTIES means LICENSOR and LICENSEE jointly. ISI means INTERFERON SCIENCES, INC. COMPOUND means the ISI natural human Interferon-alpha ("IFNa") used by ISI for the formulation of natural IFNa-containing formulation(s) for use in the treatment by injection of human genital warts in the United States, presently under the manufacturing and commercializing approval of the US FDA, and which is produced by ISI. -2- RESEARCH PROGRAM means any research or application executed by LICENSEE designed to determine the target indication in the target animal species, the level of dosage for the PRODUCT to be efficient and safe, as well as the assessment of the value of the PRODUCT, the definition of the domain. DEVELOPMENT PROGRAM means any study and development performed by LICENSEE alone or with the assistance of LICENSOR, when necessary, for the filing and obtainment of registration in each considered country of the TERRITORY. LICENSOR TECHNICAL INFORMATION means all information, reports, results, inventions, licenses, know-how, improvements, materials, and any other technical and scientific data, specifications and formulae directly related to the development, regulatory approval, manufacture, testing, use, marketing and/or sale of COMPOUND, and any non-public information relevant to the business of the PARTIES which is necessarily disclosed by LICENSOR to LICENSEE during the LICENSEE'S performance under this Agreement. LICENSOR TECHNICAL INFORMATION shall include any information belonging to or originating with ISI, and disclosed by LICENSOR to LICENSEE to enable performance under this Agreement. LICENSEE TECHNICAL INFORMATION means all information, reports, results, inventions, licenses, know-how, improvements, materials, and any other technical and scientific data, specifications and formulae directly related to development, regulatory approval, manufacture, testing, use, marketing and/or sale of COMPOUND, and any non-public information relevant to the business of the PARTIES which is necessarily disclosed by LICENSEE to LICENSOR during the LICENSOR's performance under this Agreement. TECHNICAL INFORMATION shall mean both LICENSOR and LICENSEE TECHNICAL INFORMATION. LICENSED PATENTS means US Patent no. 4,462,985 "Delivery of Biologically Active Components" filed by University Patents, Inc. and issued on July 31, 1984 and subject to an Exclusive License Agreement granted to LICENSOR on April 1st, 1984; US Patent no. 4,820,514 "Low Dosage Interferon to Enhance Vaccine Efficiency" filed by the Texas A&M University System on December 30, 1985 and issued on April 11, 1989; -3- US Patent no. 5,019,382 "Treatment of Immuno-Resistant Disease" filed by the Texas A&M University System on January 1st, 1990 and issued on May 28, 1991; US Patent no. 5,215,741, "Method for Prevention of Parasite Infections" filed by ABI on October 30, 1990, and issued on June 1, 1993; European Patent no. 03431258, "Pharmaceutical Composition Containing Interferon for Buccal Administration" filed by ABI on November 6, 1987, and issued on March 2, 1994. All pending patents, applied for but not yet issued, described at Annex 1 to this Agreement; And all continuations, divisionals, continuations-in-part, reissues or extensions of the above-described patents, and all foreign counterparts thereof, with claims dominant of the manufacture, use, or sale of Dog Dose(s) or Cat Dose(s) of the COMPOUND. BULK ISI INTERFERON means COMPOUND provided in a concentrated form for use in the manufacture of oral dosage formulations labelled for use in canine and feline species. DOG DOSE(S) means any approved dosage of COMPOUND to be used orally in the canine species which dosage shall be determined during the research program performed by LICENSEE. CAT DOSE(S) means any approved dosage of COMPOUND to be used orally in the feline species which dosage shall be determined during the research program performed by LICENSEE. PRODUCT(S) means a performant DOSE combined with biologically compatible excipients designed to treat or prevent by oral dosage forms the target indications for dog and cat. PATENT(S) OF THE AGREEMENT means patents which shall be filed and/or issued based on the results of the research/development program performed by LICENSEE. Article 2: RESEARCH PROGRAM. Based on a certain quantity of the COMPOUND to be supplied by LICENSOR to LICENSEE free of charge, LICENSEE will undertake to engage in a RESEARCH PROGRAM in order to determine the CAT DOSE and DOG DOSE required to treat or prevent, once formulated, the target indications. -4- Considering the lack of knowledge and uncertainty of the performance of the interferon as prevention or treatment of the target indications, it is agreed by the PARTIES that there is no possibility to determine in advance the time and funds to be allocated to such RESEARCH PROGRAM. The research work will be performed and funded by LICENSEE which will have to demonstrate that the research work is performed in due diligence by showing that minimum expenditures (not including general administrative overhead) of Fifty Thousand Dollars ($50,000) per year have been made on the RESEARCH PROGRAM by LICENSEE, until the DEVELOPMENT PROGRAM shall have been commenced by the filing of an application for regulatory approval of one or more PRODUCTS in the US. LICENSEE agrees that the research work will include (but will not necessarily be limited to) the indication Keratoconjunctivitis Sicca ("KCS"), in the canine species, and Feline Herpes Virus-1, in the feline species. Article 3: DEVELOPMENT PROGRAM In the event that LICENSEE would succeed in elaborating the PRODUCT, then, LICENSEE shall perform studies, testing, reports and any kind of formalities necessary to the obtainment of registrations and authorizations to permit the sale of the PRODUCT in the TERRITORY. It is agreed that LICENSEE shall emphasize its efforts in order to obtain registrations in priority in major countries such as the United States, France, United Kingdom, and Germany. LICENSEE will work on its own in all the countries of the TERRITORY except in the United States where LICENSOR shall assist LICENSEE, at LICENSEE's expense, in obtaining, among others, local authorizations, FDA approvals, and/or USDA approvals. LICENSEE will use its best endeavor to file the applications for registration within the best delay, but shall in no event be considered as responsible for the administrative delays following the filing of registration applications. Article 4: CONFIDENTIALITY LICENSOR owns or has accesses to LICENSOR TECHNICAL INFORMATION, and it is the intention of LICENSOR to maintain the confidentiality thereof. LICENSEE owns LICENSEE TECHNICAL INFORMATION, and it is its intention to maintain the confidentiality thereof. -5- Each PARTY agrees to maintain confidential and secret all LICENSOR or LICENSEE TECHNICAL INFORMATION which may be disclosed or provided to it by the other PARTY and that the PARTIES may together subsequently acquire in relation to PRODUCTS containing the COMPOUND and which is designated in writing by clearly identifiable legend as being confidential or secret in character. Each PARTY's obligation to the other (to maintain confidentiality) hereunder shall terminate with respect to any particular item and only said item of the disclosing PARTY's TECHNICAL INFORMATION when the recipient PARTY can demonstrate that such item of information: is publicly known and available through some means other than by the recipient PARTY's act or omission; or was in the recipient PARTY's possession prior to its disclosure by the other PARTY, provided that the written evidence of such possession is established; or has come into the recipient PARTY's possession through a third party free of any obligation of confidentiality to the disclosing PARTY, where said third PARTY has acquired said information lawfully and not under circumstances forbidding its disclosure. Neither PARTY will permit TECHNICAL INFORMATION or any part thereof to be disclosed to third PARTIES or to employees except on a "need-to-know" basis and each will maintain TECHNICAL INFORMATION and/or documents with the same precautions it uses to safeguard its own TECHNICAL INFORMATION. Each PARTY will notify the other promptly if it has knowledge that a third party possesses TECHNICAL INFORMATION of the other PARTY related to PRODUCT based on COMPOUND. LICENSEE shall have the right to use LICENSOR's TECHNICAL INFORMATION to the extent reasonably necessary to accomplish the objectives of this Agreement, including specifically the right to disclose such information to its AFFILIATES, actual and potential purchasers or transferees, third-party contract consultants and scientific investigators (from whom LICENSEE shall secure Confidential Disclosure Agreements) and to regulatory agencies in support of applications for regulatory agency approval to make, test and/or sell PRODUCTS based on COMPOUND. Article 5: LICENSE GRANT LICENSOR hereby grants to LICENSEE an exclusive License to the LICENSED PATENTS, and the right to use and sell PRODUCTS as contemplated by this Agreement, and the right to use LICENSOR TECHNICAL INFORMATION in the manufacture, use and sale of oral dosage forms labelled or otherwise detailed for use in canine and/or feline species in the TERRITORY. -6- LICENSOR agrees to allow right of reference to ISI's FDA Biologics Master File(s) for the COMPOUND and to do such other acts as are reasonably necessary, and within LICENSOR's control, to facilitate US FDA (or US USDA) approval of PRODUCTS containing the COMPOUND for oral use in the feline and/or canine species. The term "exclusive" shall mean that LICENSOR shall not itself use any kind of natural human Interferon-alpha "IFNa" for oral applications in the canine and feline field, neither have the right to grant any license rights and/or distribution rights to use, formulate, sell or have sold any kind of natural human Interferon-alpha "IFNa" for oral applications in the canine and feline field in the TERRITORY. Neither LICENSEE nor any of its Affiliates shall use, test, formulate, market or otherwise employ COMPOUND for any use or purpose whatsoever, except for the use of COMPOUND as contemplated by this Agreement, and the marketing of PRODUCT hereunder, nor shall LICENSEE sell, transfer, or distribute COMPOUND, or COMPOUND- containing PRODUCTS, to any persons or entities if LICENSEE has any reason to believe that such persons or entities will use such COMPOUND or PRODUCTS for purposes not contemplated by this Agreement, or for any species other than canine or feline. Article 6: CONSIDERATION 1. In consideration of such license grant, LICENSEE shall pay to LICENSOR: (a) a transfer fee calculated per DOG DOSE and per CAT DOSE as determined in Annex 2. (b) a license payment of $5,000 for consideration for use of the University Patents, Inc. (University of Illinois) US Patent No. 4,462,985 licensed to LICENSOR. (c) a license payment of $5,000 for consideration for use of the various Texas A&M University Patents licensed to LICENSOR. (d) a payment of $5,000 for consideration for use of the COMPOUND and LICENSOR TECHNICAL INFORMATION communicated by ISI to LICENSOR under the Manufacturing and Supply Agreement. -7- (e) a research reimbursement payment in the amount of $30,000. (f) a patent expense reimbursement payment in the amount of $99,000. Each of the payments described in Paragraphs 1 (b) through (f), above, shall be made in three (3) equal installments, to be paid according to the following time schedule: (a) the first on June 1, 1996; (b) the second within thirty (30) days of application for approval by the US FDA (or US USDA) for a PRODUCT based on COMPOUND for use in the feline or canine species; and (c) the third within thirty (30) days of obtaining approval in one of the major (U.S. or European Union) countries of the TERRITORY. 2. Seventy-two thousand dollars ($72,000) of the payments described above shall constitute prepayment by LICENSEE of amounts payable by LICENSEE under Article 11 of this Agreement; accordingly, after the first launch of PRODUCT by LICENSEE, LICENSEE would receive the COMPOUND free of charge up to $72,000. Article 7: PATENTS OF THE AGREEMENT Any result, improvement, patentable or not, concerning applications, directly issued from the research and development programs, shall be the exclusive property of LICENSEE, with the exception of any patentable invention relating to the use of interferon alpha to treat Keratoconjunctivitis sicca ("KCS"). If such a patent should issue to ABI at any time during the term of this Agreement, such patent shall be licensed to VIRBAC under all of the terms and conditions of this Agreement, and for the duration of the term of this Agreement, for no additional consideration. Article 8: PATENT INFRINGEMENT LICENSOR shall defend at its own expense all infringement suits that may be brought against LICENSOR on account of the manufacture, use, or sale of the COMPOUND and/or against LICENSEE in countries where one or more LICENSED PATENTS have issued, on account of the use of COMPOUND in the manufacture and sale of PRODUCTS covered by the present Agreement; provided, however, that LICENSOR is not hereby obligated to defend LICENSEE against any suit against LICENSEE, other than those arising from LICENSEE's practice of the invention(s) described in one or more of the LICENSED PATENTS. -8- In the event LICENSEE reasonably believes that one or more of the LICENSED PATENTS are being infringed by a third party, and in the event that LICENSOR fails to prosecute an action for infringement, LICENSEE shall have the right but not the obligation to institute or bring any action or proceeding against any person other than LICENSOR or its assigns that LICENSEE may be advised to institute or begin for, or by reasons of, any infringement by other manufacturers of the COMPOUND and/or raw material similar to the COMPOUND, or letters-Patent or for unfair trade practices by other manufacturers pertaining to the patent, and, for that purpose, LICENSEE shall have the right to use the name of LICENSOR as a party plaintiff either solely or jointly with LICENSEE's name; provided that, in such case, the suit(s) shall be instituted, maintained and prosecuted at the cost of LICENSEE, and all sums that may be recovered in any suit(s), whether by decree, judgment, settlement, or otherwise, shall be the sole and exclusive property of LICENSEE. In the event that LICENSOR would accept to participate with LICENSEE in the prosecution and filing of a case action then, all sums that would be recovered, shall be shared between the PARTIES according to their respective financial participation. Article 9: SUPPLY OF THE COMPOUND Subject to the terms and conditions of this Agreement, LICENSOR shall supply BULK ISI INTERFERON for the manufacture, use, formulation, testing and/or marketing of oral dosage forms for use in feline and canine species in the TERRITORY, exclusively to LICENSEE for such use. In addition, LICENSOR shall provide to LICENSEE such LICENSOR TECHNICAL INFORMATION as shall be required by LICENSEE for the formulation, testing and/or marketing of PRODUCT hereunder, including without limitation, the filing of applications for regulatory approval in countries in the TERRITORY. Such canine/feline dosage forms shall be subject to resale or other distribution by LICENSEE to other persons or entities for use, formulation, testing, and/or marketing, provided, however, that LICENSEE shall not resell the COMPOUND to other persons or entities for formulation or testing by such other persons or entities without first obtaining LICENSOR's written approval, which approval shall not be unreasonably withheld. Article 10: SALE/PURCHASE - ORDERING LICENSOR agrees to supply LICENSEE during the term of this Agreement such quantities of the COMPOUND needed by LICENSEE for research, development, manufacturing and distribution of the PRODUCTS in the TERRITORY, subject only to availability of COMPOUND from ISI. -9- In order to enable the LICENSOR to duly plan its production and delivery program for the COMPOUND, the LICENSEE will place with the LICENSOR firm orders for its requirements of the COMPOUND at least three (3) months before the intended delivery date of the relevant quantity. Before November 1st of each calendar year, LICENSEE will provide LICENSOR with a non-committal order forecast for the COMPOUND for delivery in the subsequent calendar year. LICENSOR shall execute firm orders of LICENSEE, in accordance with the delivery scheme indicated by LICENSEE within a maximum period of three months and a half, as of the date of the LICENSEE's order, and may invoice LICENSEE for payment at any time after shipment of COMPOUND. LICENSEE undertakes to hold for the COMPOUND reasonable stock to assure smooth and regular sales in the TERRITORY. Article 11: PRICES AND PAYMENT Prices and invoices for the COMPOUND to be supplied by the LICENSOR to the LICENSEE will be FOB New Brunswick, New Jersey, USA, established in US Dollars or other currency as indicated and agreed by the PARTIES, and any customs fees or duties will be the responsibility of LICENSEE. Prices ruling at the commencement of this Agreement for the COMPOUND will be as set forth in Annex 2 to this Agreement. At the end of the RESEARCH PROGRAM the PARTIES agree to revise the above mentioned price if they need to be readjusted based on the results of the research work. Before November 1st of each calendar year, during the term of this Agreement, the prices for the COMPOUND to be delivered in the subsequent calendar year, will be fixed in good faith negotiations between the PARTIES, having due regard to all relevant factors in both sides. Payment by LICENSEE of the quantities of the COMPOUND supplied by LICENSOR pursuant to this Agreement will be made by the LICENSEE within sixty (60) days after the end of the month during which the relevant invoice was presented. The amount invoiced for COMPOUND shall be $.03 (US) per International Unit based on the amount of BULK ISI INTERFERON shipped under that invoice. After LICENSEE has allocated the COMPOUND from such shipment to the respective DOG DOSES and/or CAT DOSES, LICENSEE will provide to LICENSOR a written record of said dose allocation, and will pay LICENSOR the amount set forth at Annex 2, less the amount originally paid upon invoicing ($.03 per IU). -10- Article 12: BOOKS AND RECORDS LICENSEE shall keep proper books and accounts which clearly indicate the volume and price of sales and all other financial data and documentation necessary for calculation of the number of DOG DOSE(S) and CAT DOSE(S) sold by LICENSEE as may be necessary to determine the amounts due from LICENSEE TO LICENSOR, and from LICENSOR to the University of ILLINOIS and Texas A&M University. LICENSEE shall also require its AFFILIATES and its agents to keep books of accounts, manufacturing and shipping records and to make periodic reports of same to LICENSEE as necessary and appropriate to enable LICENSEE to calculate the amounts due in respect to the number of DOG DOSE(S) and CAT DOSE(S). LICENSOR may nominate an independent public accountant, acceptable to and approved by LICENSEE which approval shall not be unreasonably withheld, once in each calendar year, to inspect the books of account of LICENSEE and other records and reports deemed reasonably necessary for inspection by said accountant during reasonable business hours for the purpose of verifying the accuracy of the reports and payments made by LICENSEE. Such accountant shall not disclose any information related to LICENSEE's financial matters but shall certify to LICENSOR the accuracy of the reports and payments made by LICENSEE in accordance with this Agreement. ALL fees charged by such accountant shall be paid by LICENSOR. LICENSOR shall not make any public disclosure of the LICENSEE reports or payments referred to in this Agreement. To the extent disclosure of such information to a third party is required in the ordinary course of LICENSOR's business, such disclosure shall be made subject to the recipient's agreement to hold such information in confidence. Article 13: SALES PROMOTION LICENSEE shall be fully responsible for the promotion of the PRODUCTS. Article 14: WARRANTY LICENSOR warrants that the COMPOUND supplied by LICENSOR hereunder is in conformity with LICENSOR's standard specifications and that it is suitable for the applications indicated in writing by LICENSOR. -11- LICENSOR agrees to hold LICENSEE harmless from any claim or suit, for any loss or damage resulting from manufacturing quality of the COMPOUND supplied by LICENSOR, the non-conformity of the COMPOUND with LICENSOR's manufacturing or handling specifications or as a result of adverse reactions or effects in connection with the COMPOUND due to incorrect information or instructions given by LICENSOR with respect to the COMPOUND or due to the fact that the COMPOUND appears to be unfit for their specific purpose as indicated and recommended by LICENSOR. LICENSEE shall hold LICENSOR harmless from any claim or suit for loss or damage which may result from handling, storage, use, application, development, or administration of the COMPOUND due to negligence or default of LICENSEE and/or non respect of LICENSOR's relevant instructions and specifications, and/or due to LICENSEE's misrepresentation concerning the COMPOUND and/or PRODUCTS's characteristics not in accordance with LICENSOR's specifications. LICENSEE shall promptly notify LICENSOR of any loss or damage suffered by third parties and allegedly attributed to the COMPOUND. LICENSOR undertakes to assist LICENSEE in dealing with the relative claim to such extent as may be appropriate under the circumstances. Neither LICENSOR nor LICENSEE will settle any claim without the other PARTY's prior consent, which shall not be withheld unless that PARTY can show to the other PARTY's reasonable satisfaction that the conclusion of such settlement would greatly affect its interests. Each PARTY will expend its best efforts to procure and maintain adequate product liability insurance with a reputable insurance company, subject to the following: Such coverage shall only be required and mandatory for ABI in the territory on the date of the first launching of PRODUCT in the market or such contemplated territory. Article 15: PRODUCTS REGISTRATION LICENSEE shall obtain Health Registrations, and any amendments thereof, as may be required for the sale of the PRODUCTS in the TERRITORY, in LICENSEE's name, such registrations being LICENSEE's property. Article 16: TRADEMARKS LICENSEE shall commercialize the PRODUCT(S) in the TERRITORY under LICENSEE's own trademarks and LICENSOR hereby acknowledges that the said trademarks are the sole property of LICENSEE. Article 17: TERM-DURATION Unless sooner terminated as hereinafter provided, this Agreement shall remain in effect for a period of fifteen (15) years from the date of signature of the present Agreement. After said initial term, the Agreement may be followed by an Exclusive Supply Agreement, subject to the prior written consent of both PARTIES. -12- Article 18: TERMINATION 1. In the event that LICENSEE defaults in any obligation hereunder or fails to pay any payment due, and such default shall not be cured within sixty (60) days after written notice from LICENSOR to LICENSEE specifying the nature of the default, LICENSOR may terminate this Agreement or demand specific performance in term of payment. 2. In the event that LICENSOR defaults in any obligation hereunder and such default is not be cured within sixty (60) days after written notice from LICENSEE to LICENSOR specifying the nature of the default, LICENSEE may terminate this Agreement, or may demand specific performance. 3. Any termination pursuant to this Article shall not relieve LICENSOR of any obligation to fill purchase orders placed with LICENSOR prior to termination. The exercise by either PARTY of any right of termination shall not constitute a waiver of any other rights or remedies available to such PARTY for violation of the terms of this Agreement or under applicable Law. Article 19: MISCELLANEOUS Survival: Articles 4, 11 and 18.3 shall survive any termination of this Agreement. Force Majeure: The failure of LICENSEE, LICENSOR, or any of their AFFILIATES to take any act required by the present Agreement, if occasioned by an Act of God or the public enemy, fire, explosion, earthquake, perils of the sea, floods, drought, war, sabotage, accident, embargo or any circumstance of like or different character beyond the reasonable control of the PARTY so failing or by the interruption or delay in transportation, inadequacy, or sabotage or failure of the supply of materials and/or equipment, equipment breakdown, labor trouble or compliance with order, direction, action or request of any governmental officer, department or agency and hereafter arises, shall not subject either PARTY to any liability to the other. Dispute: Any dispute shall be submitted to mediation and in the event that no settlement would be reached, then, each PARTY will have the possibility to bring the case either before the French jurisdiction when LICENSOR is acting as the plaintiff or before the US jurisdiction located in the State of TEXAS when LICENSEE is acting as the plaintiff. -13- Communication: Any payment, notice or other communication required or permitted to be made or given to either PARTY hereto pursuant to this Agreement shall be sufficiently made or given on the date of sending if sent to such PARTY by certified or registered mail or by an overnight courier service, postage or delivery charge prepaid, or by telex or telefax addressed to it at its address set forth, or to such other address(es) as it may designate by written notice given to the other PARTY as follows: In case of VIRBAC: Dr. Christian Karst, Director Corporate VIRBAC - 13 eme rue - L.I.D. - 06517 Carros, France In case of ABI: Dr. Joseph M. Cummins, President Amarillo Biosciences, Inc. 800 W. 9th Amarillo, Texas 79101 USA Amendment to Agreement: This Agreement constitutes the entire Agreement between the PARTIES hereto with respect to all matters herein addressed, and supersedes all previous arrangements whether written or oral, covering the same subject matter. Any amendment or modification of this Agreement shall be effective only if made in writing, and executed by both PARTIES. Assignment: This Agreement shall not be assignable or subject to sublicense by LICENSEE to any person or entity other than a LICENSEE AFFILIATE without the prior written consent of LICENSOR, which consent shall not be unreasonably withheld. This Agreement shall not be assignable by LICENSOR to any person or entity without the prior written consent of LICENSEE, which consent shall not be unreasonably withheld. Enforceability: If one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity legality or enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. To the extent permitted by law, each PARTY waives any provision of law which renders any provision herein invalid, illegal or unenforceable in any respect. Nature of the Relationship: Nothing herein shall be construed to place the PARTIES in a relationship of partners or joint venturers, nor does this Agreement make either PARTY the agent or legal representative of the other for any purposes whatsoever. The PARTIES further agree that no representation shall be made by either PARTY that would create an apparent agency, employment, partnership or joint venture. Neither PARTY shall have the power express or implied, to obligate or bind the other in any manner whatsoever. -14- Headings: The headings of the several sections of this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. Waiver: No provision of this Agreement shall be deemed waived, unless such waiver is in writing and signed by the PARTY against which the waiver is sought to be enforced. The waiver by either of the PARTIES hereto of any breach of any provision hereof by the other PARTY shall not be construed to be either a waiver of any succeeding breach of any such provision or a waiver of the provision itself. No third party beneficiary: This Agreement contemplates no third-party beneficiaries, and no person or entity, other than the PARTIES or their permitted assignees, shall have any rights whatsoever under this Agreement. IN WITNESS WHEREOF, the PARTIES hereunto have caused these Heads of Research License Supply Agreement to be executed in duplicate by their duly authorized representatives as of the date first above written. MADE this 20th day of May, 1996, at Carros. AMARILLO BIOSCIENCES, INC. VIRBAC S.A. /s/ Joseph M. Cummins /s/ Pascal Boissy - ------------------------------- ------------------------------------- Dr. Joseph M. Cummins Mr. Pascal Boissy President President -15- ANNEX 1 PENDING PATENTS Serial No. Filing Date Title - ---------- ----------- ----- 07/875,630 4/28/92 Method of Administering Interferon 08/305,418 9/13/94 Treatment of Immuno-Resistant Disease DIV of 08/305,418 6/7/95 Treatment of Bacterial Infection Disease 08/476,621 6/7/95 Treatment of Autoimmune Disorders Disease 08/475,753 6/7/95 Treatment of Hyperallergenic Response 08/479,958 6/7/95 Treatment of Neoplastic Disease Made this 20th day of May, 1996, at Carros. AMARILLO BIOSCIENCES, INC. VIRBAC S.A. /s/ Joseph M. Cummins /s/ Pascal Boissy - ------------------------------- ------------------------------------------- Dr. Joseph M. Cummins Mr. Pascal Boissy President President -16- ANNEX 2 TRANSFER FEES/PRICE PER DOSE LICENSEE shall pay to LICENSOR the amount of $.42 per oral DOG DOSE and $.42 per oral CAT DOSE plus a royalty in the following amount, payable with respect to all amounts received by LICENSEE (or its Affiliate or Assignee) for sale of PRODUCT: For sales outside the United States: 12.4% until expiration of the last to expire of the Licensed Patents. For sales within (or for shipment into) the United States: 15.2% until expiration of U.S. Patent no. 4,462,985; and then 12.4% until expiration of the last to expire the Licensed Patents. Made this 20th day of May, 1996, at Carros. AMARILLO BIOSCIENCES, INC. VIRBAC S.A. /s/ Joseph M. Cummins /s/ Pascal Boissy - ------------------------------- ----------------------------------------- Dr. Joseph M. Cummins Mr. Pascal Boissy President President -17- EX-23.2 9 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our report dated February 1, 1996, except for Note 13, as to which the date is May 14, 1996, in Amendment No. 1 to the Registration Statement (Form SB-2) and related Prospectus of Amarillo Biosciences, Inc. for the registration of 2,000,000 shares of its common stock. ERNST & YOUNG LLP Dallas, Texas June 26, 1996 -----END PRIVACY-ENHANCED MESSAGE-----