-----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, HCuAsRosTE2G/ZNAg1AuS879lEcRw5UefRIOMFkw+8LInGm32Gf1v8m2HjptyyfI Cv6n3gdz0z9F8zDnjCPWQg== 0000950127-03-000321.txt : 20030331 0000950127-03-000321.hdr.sgml : 20030331 20030331172347 ACCESSION NUMBER: 0000950127-03-000321 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APHTON CORP CENTRAL INDEX KEY: 0000840319 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 953640931 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19122 FILM NUMBER: 03632121 BUSINESS ADDRESS: STREET 1: PO BOX 1049 STREET 2: STE 51-507 CITY: WOODLAND STATE: CA ZIP: 95776 BUSINESS PHONE: 5306616077 MAIL ADDRESS: STREET 1: PO BOX 1049 STREET 2: STE 51-507 CITY: WOODLAND STATE: CA ZIP: 95776 10-K 1 a1020966_10k.txt APHTON CORPORATION FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ______________________ FORM 10-K (MARK ONE) ( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 (Fee Required) For the Fiscal Year Ended December 31, 2002 Or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ____________ Commission File No. 000-19122 ___________ APHTON CORPORATION 80 SW Eighth Street, Suite 2160 Miami, Florida 33130 (305) 374-7338 Incorporated in Securities Registered Pursuant to I.R.S. Employer Delaware Section 12(b) of the Act Identification None. Title of Each Class No. 95-3640931 Securities Registered pursuant to Section 12(g) of the Act: Common Stock ($.001 par value) ______________________ Title of Each Class Indicate by check mark whether the registrant (1) has filed all reports required to be c to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) Number of shares of Common Stock ($.001 par value) Outstanding as of March 28, 2003: 24,701,639 Aggregate market value of Common Stock ($.001 par value) held by non-affiliates of the registrant on June 30, 2002 based on the last sale price on June 30, 2002: $136,101,923 Documents Incorporated by Reference Document Part of Form 10-K Proxy Statement for the 2003 Annual Part III Meeting of Stockholders 2 Item 1. Business The Company Our History and Product Development Aphton Corporation ("Aphton" or the "Company") is a biopharmaceutical company. We are engaged in research and development and conduct clinical trials for our products, both independently and with our corporate strategic partners. We apply our innovative active immunization technology-platform to develop products for neutralizing, and removing from circulation, hormones and other molecules that participate in gastrointestinal system and reproductive system cancer and non-cancer diseases.We also are developing a product to neutralize hormones to prevent pregnancy. Since 1997 we have had a strategic alliance with Pasteur Merieux Connaught, now Aventis Pasteur, for products that treat gastrointestinal cancers, in North America and Europe. Since 1998, we have had a strategic alliance with SmithKline Beecham, now GlaxoSmithKline, for products that treat reproductive system cancers and non-cancer diseases, worldwide. During our first five years, we developed the basis of our innovative active immunization (vaccine) technology and our monoclonical antibody technology and have continued developing them to date. In our second five years, Aphton initiated the development of products based on those technology platforms, which we have continued to date. Since our inception, we have developed a patent estate to protect our technology platforms and our products after they are commercialized. During this period and since, together with our collaborating scientists, we have developed the scientific foundations and the scientific literature relating to the central role of gastrin and gastrin receptors in the onset, development, growth and spread of adenocarcinomas of the gastrointestinal system from the esophagus to the stomach, pancreas and liver and through the colon and rectum. After conducting toxicology testings and pre-clinical trials in animals, we initiated phase I safety and phase II dose-ranging/indications of efficacy clinical trials, with G17DT and GnRH pharmaccine. These trials demonstrated for the first time that a patient's immune system can be activated to target, neutralize and inhibit hormonal growth factors that fuel cancers and drive them to metastasize (spread). We recently reported successful results from a randomized, double-blind, phase III trial with G17DT as monotherapy for advanced pancreatic cancer and from a phase II gastric (stomach) cancer trial with G17DT in combination with the chemotherapeutics cisplatin and 5-FU. These trials are described more fully under "Results and Status" in this Section. We achieved our developments, preclinical and clinical results with the expenditure approximately $134 million in the twelve years since our initial public offering in 1991. We believe we can reduce our spending during the next twelve months by more than 60% to less than $16 million from the approximately $40 million during the 12 months of fiscal year 2002. We will pursue our primary objective of filing for approval to market G17DT for monotherapy for advanced pancreatic cancer patients in the European Union, Canada and Australia by September 2003. We currently have a strategic alliance with Aventis Pasteur, whereby Aventis will exclusively promote, advertise, market, distribute and sell our anti-gastrine vaccine (G17DT) in North America and Europe. We intend to license G17DT to third parties to treat human cancers in other markets worldwide, including Japan. We also intend to license worldwide our monoclonal antibody products to target gastrointestinal system cancers. For non-cancer therapies, we intend to license G17DT for the treatment of gastroesophageal reflux disease (GERD). Clinical Trials We are currently completing the following clinical trials: a phase III trial conducted outside of the United States for pancreatic cancer with its anti-gastrin 17 immunogen (G17DT) as a monotherapy; a phase II clinical trial conducted in the United States and foreign countries, with G17DT in combination with the chemotherapeutics cisplatin and 5-FU for gastric cancer patients; and a phase II trial in Europe with GnRH pharmaccine for prostate cancer patients. We are conducting a second phase III trial that has also completed patient recruitment, conducted in the United States and foreign countries for pancreatic cancer with G17DT in combination with the chemotherapeutic gemcitabine. We have initiated but are not currently recruiting patients pending funding for a phase II trial in Europe with G17DT for gastroesophageal reflux disease (GERD), or -3- "severe heart burn" patients. In addition, our Phase II clinical trial with respect to immuno-contraception has been initiated but is "on hold," pending further funding from the WHO. We believe that the results of the randomized, double blind, phase III trial conducted in foreign countries with G17DT as a monotherapy for advanced pancreatic cancer patients, described in more detail under "Status and Results" in this Section, are already sufficient for filing for marketing approval in the European Union, Canada and Australia. Therefore, Aphton has begun the process of gathering and compiling the data and the preparation of the extensive regulatory documentation required for submission for marketing approval. This process can be expected to take approximately five months, but that cannot be stated with certainty. Aphton expects it will receive priority review of the filings. The time for review and the granting of marketing approval in each jurisdiction cannot, however, be predicted by Aphton with certainty. In addition, we believe that the results of our phase II trial for gastric cancer patients treated with G17DT in combination with cisplatin and 5-FU can be described as "impressive." We plan to investigate the possibility of obtaining a conditional marketing approval for this therapy in a foreign jurisdiction based on these results, when the final data is compiled, analyzed and documented. In parallel, we plan to seek corporate partners for G17DT for cancer therapy in countries outside of Europe and North America, where we currently have no licensees, and corporate partners for our monoclonal antibody platform for cancer therapies and G17DT for GERD therapy, worldwide. Financial Strategy We finance our operations through the sale of our equity securities, convertible debentures and licensing fees. These funds provide us with the resources to operate our business, attract and retain key personnel and scientific staff, fund our research and development program, pre-clinical testing and clinical trials, obtain the necessary regulatory approvals and develop our technology and products. Aphton Corporation, a Delaware corporation, was incorporated in 1981. The common stock of Aphton has been trading on Nasdaq's National Market System since June 2, 1994. Aphton had been traded in the Nasdaq Small-Cap Issues (formerly over-the-counter) market since April 1, 1991, the date of Aphton's initial public offering. The Company's common stock is traded under the symbol "APHT." Basis of Approach Aphton's primary approach for the treatment of major diseases such as cancer has been to employ (anti) "hormone therapy." Aphton's hormone therapy involves neutralizing, or blocking, targeted hormones which play a critical role in diseases of the gastrointestinal and reproduction systems. Aphton has selected the strategy of hormone therapy because hormone therapy has proved over decades to be efficacious in the treatment of major diseases, both malignant and non-malignant. Well-documented examples of the efficacy of hormone therapy in humans are blocking gastrin (Proglumide) or blocking another hormone stimulated by gastrin, namely histamine (Zantac, Tagamet), to reduce stomach acid. These hormone therapies treat GERD, ulcerations of the esophagus and peptic ulcers. Additional examples of hormone therapy include blocking estrogen (Tamoxifen), for breast cancer therapy and blocking the production of testosterone (Lupron, Zoladex) for prostate cancer therapy. -4- Results and Status The status of our products under research and development is summarized in the following table.
Strategic Product Indication(s) Product Description Status(1)(2) Alliances ------- ------------- ------------------- ------------ --------- Anti-Gastrin 17 Advanced The vaccine, containing a portion Phase III clinical Aventis (G17DT) for pancreatic cancers of the hormone gastrin 17 (G17), trial: G17DT Pasteur(3) Gastrointestinal and diphtheria toxoid (DT), administered as a Cancers chemically bound together to form monotherapy G17DT, neutralizes both G17 and the hormone Gly-G17 to treat advanced pancreatic cancer. Anti-Gastrin 17 Advanced The vaccine, containing a portion Phase III clinical Aventis (G17DT) for pancreatic cancers of the hormone gastrin 17 (G17), trial: G17DT Pasteur(4) Gastrointestinal and diphtheria toxoid (DT), administered with Cancers chemically bound together to form Gemcitabine, a G17DT, neutralizes both G17 and the chemotherapy hormone Gly-G17 to treat advanced pancreatic cancer. Anti-Gastrin 17 Advanced stomach The vaccine, containing a portion Phase II clinical Aventis (G17DT) for Gastric cancer and/or of the hormone gastrin 17 (G17), trial: G17DT Pasteur(5) and esophagus cancers and diphtheria toxoid (DT), administered with Gastro-Esophageal chemically bound together to form the Cancers G17DT, neutralizes both G17 and the chemotherapeutics hormone Gly-G17 to treat advanced Cisplatin and 5-FU stomach cancer and/or esophagus cancer. GnRH Pharmaccine Reproductive A vaccine that neutralizes the GnRH Phase II clinical GlaxoSmith system cancers hormone for hormone-failed or trial: GnRH Kline(6) (including hormone-resistant patients with pharmaccine prostate cancer) prostate cancer. administered with Taxotere, a chemotherapy Anti-Gastrin 17 Gastro-intestinal An anti-gastrin vaccine, that Phase II clinical None (G17DT) for ulcerations and neutralizes G17 to treat GERD and trial, initiated but Gastro-Esophageal GERD gastro-intestinal ulcerations. not currently Reflux Disease recruiting patients; (GERD) pending funding Immuno- Prevent pregnancy A prophylactic (contraceptive) Phase II clinical World Health Contraception in women vaccine that neutralizes a female trial initiated but Organization hormone known as hCG. awaiting further (WHO) funding by WHO
-5- (1) The first, third and fourth of these trials are fully recruited and nearing completion. (2) Clinical trials of a new drug are typically conducted in three sequential phases. Phase I studies typically test the product for safety tolerance. Phase II studies involve limited trials to determine the optimal dose and frequency of administration and an indication of efficacy for defined indications. When the product has been found safe and shows promise of efficacy, further trials are undertaken in Phase III to fully evaluate clinical efficacy and to further test for safety typically using a large and geographically diverse number of patients. (3),(4),(5) For countries in North America and Europe. (6) For countries worldwide. Anti-Gastrin Immunogen (G17DT) Our current anti-gastrin immunogen, or vaccine, clinical programs treat several human gastrointestinal system adenocarcinomas, including those of the esophagus, stomach and pancreas, metastases to the liver and may treat metastases of the liver, colon and rectum. Our anti-gastrin targeted therapy induces antibodies in patients that bind to both gastrin 17 and gly-gastrin and remove them from circulation before they can bind to the cancer cell and initiate cell growth. Gastrin 17 and gly-gastrin are believed to be central growth factors, or the initiating signals, for cell growth, cell proliferation and metastasis (spread) in gastric, i.e. stomach, pancreatic, esophageal, colorectal, liver and other gastrointestinal (GI) system cancers. This signaling program is accomplished by gastrin binding to the large numbers of gastrin receptors which appear, de novo, in the great majority of cases, on tumor cell surfaces throughout the gastrointestinal system. Interrupting this process by immunizing the patient with Aphton's anti-gastrin immunogen is a precisely "targeted" immunotherapy. This specificity of targeting only cancer cells occurs because gastrin is not normally secreted and gastrin receptors are not normally found on cells in the GI system, unless they are malignant, or on the path to malignancy (except for those cells involved with normal acid secretion). Recent findings have shown that inhibiting gastrin not only inhibits cell growth, proliferation and metastasis directly, but also "unblocks" a central pathway leading to cell-suicide (apoptosis). This tilts the balance, from cell growth, to cell suicide. This effect is amplified synergistically when Aphton's drug is given together with a chemotherapeutic drug, as demonstrated in our phase II trial for gastric cancer patients treated with G17DT in combination with cisplatin and 5-FU, described hereunder. Gastrin also stimulates the secretion and expression of other important growth factors and receptors within and on the surfaces of the cancer cells involved in tumor growth. Hence, inhibiting gastrin inhibits all of the foregoing factors contributing to tumor growth and spread, while simultaneously opening a central pathway to cell suicide. Aphton's anti-gastrin targeted therapy adds a biological dimension to the treatment of gastrointestinal cancers. We know of no other vaccine or drug that selectively blocks or neutralizes both gastrin 17 and glycine-extended gastrin 17. Aphton believes that its anti-gastrin vaccine can extend survival in patients suffering from adenocarcinomas of the gastrointestinal system, without adding systemic toxicity. Phase III clinical trial for patients with advanced pancreatic cancer In March 2003 Aphton announced that it had met with and presented results of its randomized, double blind, controlled, monotherapy, Phase III clinical trial conducted in Europe with G17DT on patients with advanced pancreatic cancer to a foreign regulatory authority. The presentation of the most recent analysis of the data resulting from the Phase III clinical trial, which is not yet completed, as some patients are still alive, demonstrated an overall median survival benefit of 83%, with a statistically significant value of p. The corresponding hazard ratio (HR) was 0.65, which also had a statistically significant value of p. (an HR of 0.65 means that at any point in time, patients on G17DT had a 154% higher likelihood of surviving longer than patients on the control.) Because there are still surviving patients in the trial that are being treated, the results of the final analysis could vary. If further details on the trial were to emerge prior to its completion, there is a possibility that the result of the analysis of the standard of care of the remaining patients could be influenced, thereby jeopardizing both their inclusion in the final statistical analysis and the ultimate breadth of the indication allowed in each jurisdiction. -6- The latest Phase III clinical trial results update the results announced by Aphton on October 28, 2002 which reported on clinical trials on patients with advanced pancreatic cancer who had received no previous therapy and were treated either with Aphton's anti-gastrin immunogen G17DT as a monotherapy, or with the control. The primary efficacy measure was survival time from the date of randomization. A summary of the results reported is as follows: a) patients with stage IV pancreatic cancer treated with G17DT had a median survival time that was 53% longer than the stage IV patients in the control arm; b) 25% of the patients with stage IV pancreatic cancer who were treated with G17DT had a survival time that was 106% longer than the control arm; and c) the overall HR was 0.7; that is to say, at any point in time, patients on G17DT had a 143% higher likelihood of surviving longer than patients on the control. It is estimated that approximately 88,000 new cases of pancreatic cancer will be diagnosed in the United States and Europe this year. The prognosis for most of these patients is very poor. At the time of diagnosis, the great majority of patients have the disease in its advanced stages, which is considered incurable, and the patients have a very short survival time. Surgery, when possible, and chemotherapy are the primary treatment options currently available, but have shown only very limited benefit. Aphton believes that its anti-gastrin targeted immunotherapy approach has the potential to extend patient survival time significantly without adding systemic toxicity. We believe that the results of the trial are already sufficient for filing for marketing approval in the European Union, Canada and Australia. Therefore, Aphton has begun the process of gathering and compiling the data and the preparation of the extensive regulatory documentation required for submission for marketing approval. This process can be expected to take approximately five months, but cannot be stated with certainty. Aphton expects it will receive priority review of the filings. The time for review and the granting of marketing approval in each jurisdiction cannot, however, be predicted by Aphton with certainty. We believe that with these clinical trials and regulatory developments, we have reached the decisive turning point in our corporate development and in the pursuit of our corporate objectives. Fast Track designation for G17DT (anti-gastrin) immunogen in combination with cisplatin and 5-FU for use in stage IV gastric cancer On February 21, 2003, Aphton announced that the U.S. Food and Drug Administration (FDA) granted its request for Fast Track designation for its G17DT (anti-gastrin) immunogen in combination with cisplatin and 5-FU for use in stage IV gastric cancer to improve overall survival. "Fast Track" is a formal mechanism of interacting with the FDA using approaches that are available to all applicants for marketing claims. The benefits of a Fast Track designation includes scheduled meetings with the FDA to seek FDA input into development plans, the option of submitting a New Drug Application in sections rather than a submission of all components simultaneously, and the option of requesting evaluation of studies using surrogate endpoints. The Fast Track designation is intended for the combination of a product and a claim that addresses an unmet medical need, but is independent of the FDA's priority review and accelerated approval mechanisms. It is estimated that there are approximately 570,000 patients with gastric cancer in the United States, Europe and Japan alone. The prognosis for the overwhelming majority of these patients is very poor. Patients diagnosed with metastatic disease have five-year survival rates of only about three percent. Currently, surgery and chemotherapy are the primary treatment options, but these regimens have shown only very limited benefit. Aphton believes that its anti-gastrin targeted immunotherapy approach has the potential to extend patient survival without adding systemic toxicity. Phase II clinical trial with patients with metastatic stomach cancer who were treated with Aphton's G17DT and chemotherapy consisting of cisplatin and 5FU On February 6, 2003 Aphton reported an interim analysis of tumor response results from its phase II clinical trial with patients with metastatic stomach cancer who were treated with Aphton's G17DT and chemotherapy consisting of cisplatin and 5FU. This report follows interim response results reported at the American Society of Clinical Oncology (ASCO) in an interim report dated July 31, 2002, which reported an overall tumor response rate of 51.4%, an interim report at the ASCO annual meeting dated June 12, 2002, which reported an overall tumor. -7- response rate of 48.3% and an initial report dated May 17, 2002 at the ASCO annual meeting, which reported an overall tumor response rate of 53%. A total of 103 patients were enrolled, of which 73 were evaluable. Thirty-seven patients had either a partial or a complete tumor response, for an overall tumor response rate of 51%. Two patients had a complete response (CR - no detectable residual tumor) and 35 had a partial response (PR). An additional 23 patients had stable disease. Throughout the trial, there was no systemic toxicity attributed to G17DT. One patient showed a previously unseen response pattern. He first responded to treatment with the combination of G17DT and cisplatin/5FU with a reduction of the tumor lesions by approximately 70% (a partial response). Subsequently, the disease stabilized (i.e. the size of the lesions did not increase for between 7 to 8 months, in spite of discontinuation of treatment with cisplatin halfway through the study period because of neuropathy). An additional treatment with G17DT in October 2002, the fifth overall treatment, resulted in a reduction of the tumor lesions (PR) by a further 80%. Subsequent to the sixth treatment in January 2003, there was a complete disappearance of all lesions, the second complete response in the study. Sixteen months after his first treatment, the patient was alive and doing well, with no residual tumor detectable. Aphton's anti-gastrin targeted immunotherapy adds a biological, non-toxic dimension to the treatment of gastrointestinal cancers. There is only one large, randomized, phase III clinical trial that has been reported in the medical literature with cisplatin plus 5FU for patients with advanced gastric cancer. Of 399 total patients enrolled in the trial, 245 were evaluable. For the patients treated with cisplatin plus 5FU, the tumor response rate was 20%, as reported by the European Organization for Research and Treatment of Cancer (EORTC) which conducted the trial. The results reported by Aphton today compare favorably with those results. They represent a 155% improvement relative to the 20% results reported in the EORTC clinical trial. Aphton's July 31, 2002 interim results from its phase II clinical trial with patients with metastatic stomach cancer who were treated with Aphton's G17DT and chemotherapy consisting of cisplatin and 5FU updated results reported on June 12, 2002. Of 72 evaluable patients reported upon this time, 37 had either a partial or a complete tumor response for an overall tumor response rate of 51.4%. One patient had a complete response (no detectable residual tumor) and 36 had a partial response (tumor shrinkage by 50% or more). Furthermore, an additional 20 patients had stable disease. Aphton's June 12, 2002 interim results from its phase II clinical trial with patients with metastatic stomach cancer who were treated with Aphton's G17DT and chemotherapy consisting of cisplatin and 5FU updated results reported at the ASCO annual meeting on May 17, 2002. Of 58 evaluable patients reported upon this time, 28 had either a partial or a complete tumor response for an overall tumor response rate of 48.3%. One patient had a complete response (no detectable residual tumor) and 27 had a partial response (tumor shrinkage by 50% or more). Furthermore, an additional 21 patients, or 36.2% of the evaluated patients, had stable disease. Thus, a total of 84.5% of the patients had either tumor shrinkage or stable disease. Aphton's May 17, 2002 report at the ASCO annual meeting presented highlights from several clinical trials and studies with Aphton's anti-gastrin 17 immunogen (G17DT). Audited results from a Phase II clinical trial in the United States and Europe with previously untreated patients with advanced metastatic stomach cancer treated with Aphton's anti-gastrin 17 immunogen (G17DT) were presented by the principal investigator, Dr. Jaffer Ajani, MD. He noted that there was no approved therapy currently available and that chemotherapy is considered only palliative. Dr. Ajani presented additional audited interim results of the clinical trial with patients with metastatic stomach cancer who were treated with Aphton's G17DT and chemotherapy consisting of cisplatin and 5FU. Of the 36 reported and audited evaluable patients, 19 had a partial tumor response (tumor shrinkage by 50% or more) for an overall response rate of 53%. One patient had a complete response (no detectable residual tumor) and 18 had a partial response. These results compared favorably with the reported response rates of chemotherapy with cisplatin plus 5 FU/Leucovorin. Aphton's anti-gastrin targeted therapy added a biological dimension to the treatment of gastrointestinal cancers. -8- On February 8, 2002, Dr. Ajani, announced interim results of the gastric cancer Phase II clinical trial with Aphton's immunogen, G17DT, in a symposium titled "G17DT: A New Approach to Growth Factor Neutralization" at the 12th International Congress on Anti-Cancer Treatment held that week in Paris. The symposium was chaired by Dr. Ajani. Dr. Ajani presented an interim analysis of the first 30 patients on whom results were available. No side effects were attributed to the immunogen. When administered with G17DT the patients completed on average 5.5 cycles of chemotherapy, compared to a normal average of 2.5 cycles completion before side effects force discontinuation. Of the 30 patients, 15 had a partial tumor response (tumor shrinkage by 50% or more) for an overall response rate of 50%. One patient had a complete response (no detectable residual tumor) and 14 had a partial response. These results compare favorably with reported response rates of chemotherapy with cisplatin plus 5 FU/Leucovorin in large, controlled clinical trials for patients with metastatic gastric cancer. The results discussed the two trials conducted in the United Kingdom with respect to Aphton's anti-gastrin immunogen. The results discussed above updated the results presented in May 2001 at the annual meeting of the ASCO in San Francisco with respect to two studies conducted in the United Kingdom on Aphton's anti-gastrin 17 immunogen. In the first trial, conducted at the Royal Free Hospital, University College in London, 30 patients with histologically proven locally advanced or metastatic pancreatic cancer were immunized with Aphton's anti-gastrin 17 immunogen, at different doses. Of the patients immunized with the lower dose, 46% responded with antibodies to gastrin, while 82% responded at the higher dose. Median survival (50%) for all patients, both lower and higher doses, was 187 days and median survival for patients responding with anti-gastrin 17 antibodies was 217 days. For comparison, median survival for patients receiving best supportive care is approximately 130 days. In a larger, second trial conducted at the Queens Medical Center, University of Nottingham, 37 patients immunized with anti-gastrin 17 immunogen were compared with 37 patients receiving best supportive care. In this larger study, the patients received only the higher dose. Median survival was 297 days, or 9.9 months, as compared to the control group, which had a median survival of 109 days, or 3.6 months. This represents a factor of 2.75, or a 175% increase in median survival. Moreover, more than a third of the immunized patients gained weight, which is highly unusual for patients with advanced pancreatic cancer. For further comparison, the patients receiving Aphton's anti-gastrin 17 immunogen had a median survival of 9.9 months, whereas the chemotherapeutic gemcitabine, the only approved drug for pancreatic cancer in the United States, had a median survival of approximately 5.5 months, in the pivotal trial upon which its approval was based. Orphan Drug status for G17DT for both pancreatic cancer and gastric (stomach) cancer indications On January 22, 2003 Aphton announced that it had received official notification that the Committee for Orphan Medicinal Products (COMP) had recommended to the European Commission of the EU that Aphton's anti-gastrin immunogen G17DT be granted Orphan Drug status for both pancreatic cancer and gastric (stomach) cancer indications. On December 19, 2002, Aphton announced that it had received official notice from the Therapeutic Goods Administration (TGA), the regulatory authority in Australia equivalent to the U.S. FDA, granting its anti-gastrin G17DT Immunogen Orphan-Drug status for treatment of both pancreatic cancer and gastric (stomach) cancer. Unlike in the United States, the Australian orphan-drug designation automatically confers priority evaluation for the drug ahead of other evaluations. On July 23, 2002, Aphton announced that it had received official notice from the FDA granting its anti-gastrin G17DT Immunogen Orphan-Drug status for treatment of gastric (stomach) cancer. The indication designated was broader than the indication originally sought by Aphton. On July 17, 2002, Aphton announced that it had received official notice from the FDA granting its anti-gastrin G17DT immunogen Orphan-Drug designation for treatment of adenocarcinoma of the pancreas. The indication designated was broader than the indication originally sought by Aphton. -9- The term "orphan-drug" in the United States refers to a product that treats a rare disease affecting fewer than 200,000 Americans. Orphan-Drug Status confers a 7-year period of exclusive marketing rights for G17DT for this indication, thereby protecting it from similar drugs of the same class. In addition, Aphton is qualified to apply for grant amounts totaling up to $900,000 over a 3-year period, with a maximum of $300,000 per year. Furthermore, the requirement for a $300,000 user fee that is payable with the submission of a New Drug Application is waived for an Orphan Drug. Results of other studies and reviews On May 23, 2002, at the annual meeting of the American Gastroenterological Association (AGA) being held in San Francisco, Aphton collaborators received a Blue Ribbon Award Poster of Distinction for one of the four scientific posters relating to Aphton's anti-gastrin immunogen (G17DT), the gastrin family of growth factors and their receptors, the inhibition of these growth factors and receptors, their role in tumor growth, new blood vasculature (angiogenesis) and apoptosis, or cell suicide. The Blue Ribbon Award was given for Aphton's studies showing that both gastrin 17 (G-17) and the precursor gly-G-17 are able to induce specific growth responses that lead to the branching and tubular networks characteristic of angiogenesis, in a human endothelial cell system (cells responsible for the development of new blood vasculature). Most importantly, the studies showed that the angiogenic stimulus in this cell system was equal in magnitude to that caused by VEGF, which has received much attention in the scientific and drug development literature. Furthermore, the studies showed that neutralization of G-17 and gly-G-17 by Aphton's anti-G17-DT caused a strong and significant reversal of (angiogenic) effects confirming their specificity of action. The studies also demonstrated in these angiogenic cells, at both the molecular and protein level, that gastrin/CCK-2 receptor was expressed, and that gastrin/CCK-2R in these blood vessel forming cells was of the type that had 3 times increased affinity for gly-gastrin than for G-17 (amidated) gastrin, which is characteristic of the receptors found in metastatic tumors. It was concluded that these studies presented evidence for an angiogenic role for gastrin, in addition to its widely acknowledged role as a growth factor for GI-cancer cells and its spread. A second study reported upon at the meeting investigated the mechanism of action by which an Aphton monoclonal antibody (Mab) targeted against the receptor to which G-17 binds, called the CCKB/Gastrin receptor, is taken up by a liver tumor cell, enters the cell nucleus and results in cell death. Five liver cancer (hepatoma) cell lines, both human and animal, were studied. The results showed that in all five cell lines, uptake of the (Aphton) labeled anti-CCK-BR antibody was correlated with apoptosis. The study concluded that a direct relationship between the uptake of the antibody and cell death by apoptosis existed. This observation has important implications in the treatment of CCK-BR positive tumors including hepatomas where there are limited therapeutic options." A third study presented findings on the varying structure of the receptors for gastrin 17 and gly-gastrin 17 during the progression of malignancy; and a fourth study investigated the effect of Aphton's anti-gastrin immunogen (G17DT) on human pancreatic cancer cells, concluding that gastrin inhibition increases the potency of the cytotoxic agent Gemcitabine in pancreatic cancer. In June, 2001, scientists in collaboration with Aphton published a peer-reviewed article with the new findings that the genes for both the gastrointestinal hormone gastrin and its receptor are "switched on" at the earliest stages of pre-malignancy in stomach cells, helping to fuel their progression to cancer. The article entitled: "Expression of Gastrin in Developing gastric Adenocarcinoma" appeared in the issue of British Journal of Surgery, 2001 Volume 88. On May 15, 2002, Dr. Jaffer Ajani, MD presented the first results from a Phase III clinical trial at the MD Anderson Cancer Center in Houston, Texas, in treating patients with advanced, metastatic stomach cancer with Aphton's anti-gastrin 17 immunogen. Dr. Ajani, began the discussion by describing the worldwide incidence, stage of disease and expected (short) survival time at detection, and very high death rate statistics for stomach cancer (the highest annual number of deaths worldwide of all cancers after lung cancer). He noted that there is no approved therapy currently available; chemotherapy is considered palliative, only. Dr. Ajani then proceeded directly to provide the interim results of the trial with patients with metastatic stomach cancer who were treated with Aphton's anti-gastrin 17 immunogen and chemotherapy with cisplatin and 5FU. -10- Of the six reported evaluable patients: 1) The first patient had six large liver metastases. After treatment with Aphton's immunogen and the ehemos, all of the metastases disappeared completely (unexpectedly), as shown by repeated CAT scans. The "before" and "after" photos were dramatic. This is termed a "complete response." 2) Two of the patients had tumor volume shrinkage of greater than 50%. This is termed a "partial response." 3) Three of the patients had tumor volume shrinkage of less than 50%. This is termed a "moderate response." Thus all (100%) of the patients responded. Fifty percent of the patients were partial or greater responses, including a complete response. Since the remaining 50% were moderate responses, none even had to be termed "stable" (as yet), which is the cytostatic state hoped for and to be expected from depriving cells of the growth factor gastrin 17. Anti-Gastrin Immunogen Alliance In 1997 Aphton signed an agreement with Pasteur Merieux Connaught (now called "Aventis Pasteur") ("Aventis Pasteur" or "Aventis") for a strategic alliance for all human cancer applications of its anti-gastrin immunogen product, including stomach/esophageal, colorectal, and pancreatic cancers. Under the terms of the twenty-year agreement, Aphton is responsible for product development, clinical trials and regulatory agency approvals, and Aventis Pasteur is responsible for and will fund the promotion, advertising, marketing, distribution and sale of Aphton's anti-gastrin vaccine in North America, Mexico and Europe. In addition, Apthon and Aventis Pasteur have entered into agreements providing for the supply of certain components of the anti-gastrin immunogen (as well as other Aphton products) from Aventis Pasteur to Aphton. See our full discussion of the Aventis Pasteur agreements under Strategic Alliances in this Section. GnRH pharmaccine Overview Aphton has developed an anti-hormone immunogen, GnRH pharmaccine, for human cancer indications, one that targets the reproductive hormone Gonadotropin Releasing Hormone (GnRH). By neutralizing (blocking) GnRH, the immunogen shuts down the production of estrogen and progesterone (in females) and testosterone (in males), which are normally produced in their respective gonadal organs. Estrogen fuels breast cancer and testosterone fuels prostate cancer. The biological blockage, like physical castration, should be efficacious in the treatment of prostate and breast cancers. Aphton's anti-GnRH immunogen induces biological blockage. In 2001 Aphton successfully completed a pilot Phase I/II safety and dose ranging trial and has reported on the results through a news release and in a publication with collaborating scientists in the United Kingdom, in a peer-reviewed journal. The primary purpose of the safety and dose ranging trial was to demonstrate safety; the secondary purpose was to gather data using various doses of immunogen and to show that a biological castration could be induced with Aphton's immunogen. Aphton's GnRH pharmaccine reduced, in some patients at the lowest dose level, gonadal testosterone to levels achieved by surgical castration. This biological castration demonstrated "proof of concept" in man. In addition, the prostate cancer "progression" marker, Prostate Specific Antigen (PSA), was reduced markedly in these patients to very low levels, in some cases from triple-digit to single-digit. Aphton is completing a Phase II clinical trial in Europe to treat prostate cancer patients who have failed hormone therapy (called hormone refractory patients), with a combination immuno-chemo therapy regimen comprised of GnRH pharmaccine, and the chemotherapeutic taxotere. Such patients will likely have been treated with a GnRH agonist drug (to achieve a chemical castration) or an orchiectomy (a surgical castration), following therapy for the primary tumor, but will have metastases, relapsed and have a rising PSA. Strategic Alliance -11- In June 1998, Aphton and GlaxoSmithKline signed a Collaboration and License agreement, granting GlaxoSmithKline exclusive rights worldwide to Aphton's GnRH related patents and proprietary technology. The agreement covers the diagnosis, treatment and prevention of GnRH product are prostate, breast, ovarian and endometrial cancer. Additional medical indications for the anti-GnRH product are endometriosis, polycystic ovaries, uterine fibroids, contraception, infertility and precocious puberty. Under terms of the agreement, Aphton and GlaxoSmithKline are collaborating in a joint product development program, with GlaxoSmithKline responsible for phase III clinical trials and regulatory approvals, and for worldwide marketing and distribution of approved products. The agreement uses a royalty mechanism based on product sales, in dollars, worldwide to determine Aphton's revenues. See our full discussion of the GlaxoSmithKline license agreement under Strategic Alliances in this Section. GERD Aphton is also developing its anti-Gastrin immunogen approach for the treatment of gastroesophageal reflux disease (GERD), also known as "severe heartburn." GERD affects more than 20% of the adult population. Prescription drugs to treat this problem have annual revenues of over $13 billion. Aphton believes its therapy for GERD, which is not yet partnered with any drug company, will obviate major risks associated with current therapies while still providing their benefits, as well as providing more symptomatic relief, in this symptom-driven disease, for which current therapies are inadequate in approximately 50% of the patients. As a preliminary to conducting a Phase III trial for GERD, Aphton has conducted a limited Phase II trial in Europe to optimize the product, given the different performance-profile desired for this major, non-cancer application and has initiated a comprehensive Phase II trial in Europe, but is not currently recruiting patients pending further funding. Immunocontraceptive Aphton's anti-hCG immunocontraceptive product, which is being developed to prevent pregnancy, has been in a Phase II trial, funded by the World Health Organization (WHO) and is currently awaiting further funding by WHO for further development. See our discussion of the WHO strategic alliance under Strategic Alliances in this Section. Equine Anti-Gastrin Immunogen In 1997, the Company entered into a strategic alliance with Schering-Plough Animal Health covering all animal health applications of our anti-gastrin immunogen. See our discussion of the Schering-Plough Animal Health agreement under Strategic Alliances in this Section. Technology Aphton's approach to the treatment of major diseases is to employ (anti) "hormone therapy." Aphton's hormone therapy involves neutralizing, or blocking, certain hormones that play a critical role in these diseases. This is accomplished by immunizing the patients with a product called, appropriately, an "immunogen," that induces in them a directed antibody response which neutralizes, and removes from circulation, the targeted hormone. Aphton has developed an innovative and proprietary active immunization technology platform to create effective immunogens, which are products administered like vaccines. The immunogens harness and direct the body's immune system to generate antibodies, which bind to specific peptide portions of the administered immunogen. These antibodies cross-react (bind) with targeted "self" molecules, such as hormones, when they encounter that portion of the hormone, which is similar to the peptide portion of the administered immunogen. Because diseases involving hormones are not pathogen (microorganism) driven, they have not been viewed traditionally as being susceptible to treatment with immunogens to activate the body's immune system against targeted hormones. Instead, the traditional pharmaceutical industry approach to controlling these diseases has been to treat them with synthetic drugs. However, these drugs typically must be administered in relatively large quantities and on a daily or more frequent basis, giving rise to patient compliance problems, and often have adverse side effects. -12- Aphton's immunogens create a strong antibody response from the patient's own immune system (which effectively becomes a "drug factory") and have a more potent and longer-lasting therapeutic effect. Aphton's technology enables it to specifically target a small sequence within the hormone to be neutralized, in order to achieve a specific desired biological and physiological response. This approach directs all of the immunogen-induced antibodies to the targeted hormone sequence. At the same time it minimizes the possibility of undesired physiological consequences through cross-reactivity of the immunogen with any self molecule or portion thereof, other than the specifically-targeted hormone sequence. This avoids the possibility of autoimmune disease where the antibody production is not "turned off." This is because the antibody production can only be "turned on and kept on" in the presence of the foreign, "carrier" portion of the immunogen (see below). Indeed, without a "booster shot" of the immunogen, the antibodies wane (diminish) and are cleared by the body, over time. Aphton's products may be administered in much smaller dosages and on a much less frequent basis than pharmaceutical drugs; typically twice a year. This virtually eliminates the problem of patient compliance, which is associated with pharmaceutical drugs. Aphton's anti-gastrin immunogen product, for example, consists of: (a) A synthetic peptide, which is similar to a portion of the hormone gastrin 17 which is targeted to be neutralized (i.e., blocked or prevented from reaching and binding to its receptor). (b) A "carrier," Diphtheria Toxoid (DT), foreign to the body, to which a number of the synthetic peptides in (a) are chemically bound (conjugated). This makes them available to be both bound to and, together with the DT, internalized by "B-cells." DT contains the structures (epitopes) which, when internalized and "presented" on B-cells and Macrophages, are bound to by "T-cells." By binding to these foreign epitopes, these T-cells in turn, proliferate and signal the B-cells, which bind to the peptides in (a) to proliferate and to "mass produce" the desired antibodies (all of which bind to the peptide in (a)). (c) A proprietary, slow-release "suspender" which contains (a) and (b). This "delivery vehicle" is designed to enable the achievement of four objectives, concurrently: i) a high antibody response; ii) a long antibody response; iii) no systemic toxicity; and iv) long-term stability, or "shelf-life." The anti-gastrin product, which is administered by injection, with booster shots at approximately six-month intervals, thus induces antibodies in the patient which bind with the peptide in (a) above and which also bind (cross-react) with and neutralize gastrin 17 (when they encounter that portion on gastrin 17 which is similar to peptide (a)). Gastrin 17 is known to drive (or fuel) colorectal, stomach, liver and pancreatic cancer. Neutralizing gastrin 17 inhibits both the growth and metastasis (spread) of these gastrointestinal cancers. In addition, the anti-gastrin product uniquely neutralizes glycine-extended gastrin 17, which has also been shown recently to be secreted by and to fuel these gastrointestinal system cancers. Gastrin 17 is also responsible for the production of the bulk of stomach acid (approximately 90% in humans), the reduction of which is therapeutic for GERD and for both peptic ulcers and non-steroidal anti-inflammatory drug (NSAID) - - induced ulcers (NSAID examples include aspirin and ibuprofen). Aphton's anti-GnRH product is similarly constructed. In this case, the synthetic peptide sequence in (a) represents the hormone GnRH, which is targeted to be neutralized. Neutralizing GnRH inhibits the production of estrogen, progesterone and testosterone. Inhibiting estrogen (and progesterone) is therapeutic for women with breast cancer, endometrial cancer, ovarian cancer and endometriosis. Inhibiting testosterone is therapeutic for men with prostate cancer. Aphton's immunocontraceptive product, which prevents pregnancy in humans, is also similarly constructed. In this case, the so-called "C-terminal" peptide portion of the hormone hCG (which is targeted to be neutralized) is synthesized. A second, unique epitope (peptide), located on the hormone hCG, is also conjugated to the immunogen, which enhances efficacy. By not using a larger portion of the hCG molecule, Aphton avoids inducing unwanted antibodies against other hormones in the woman (LH and FSH), which share domains with some portions of the hormone hCG. Pregnancy is prevented by immunizing the woman; this induces antibodies which bind to and neutralize hCG. -13- Strategic Alliances Aventis Pasteur In February 1997, Aphton signed an agreement with Pasteur Merieux Connaught (now called Aventis Pasteur), for a strategic alliance for all human cancer applications of its anti-gastrin immunogen product, including stomach/esophageal, colorectal, and pancreatic cancers. Under the terms of the twenty-year agreement, Aphton is responsible for product development, clinical trials and regulatory agency approvals, and Aventis Pasteur is responsible for and will fund the promotion, advertising, marketing, distribution and sales of Aphton's anti-gastrin vaccine in North America and Europe. In addition, Aphton and Aventis Pasteur have entered into agreements providing for the supply of certain components of the anti-gastrin immunogen (as well as other Aphton products) from Aventis Pasteur to Aphton. In addition to the license and co-promotion agreement, we entered into agreements with Aventis Pasteur providing for the supply of the anti-gastrin immunogen product from us to Aventis Pasteur for distribution and sale by Aventis Pasteur pursuant to the license and co-promotion agreement, as well as the supply of Diphtheria Toxoid and/or Tetanus Toxoid from Aventis Pasteur to us for use in the anti-gastrin immunogen product (as well as other Aphton products). Aventis Pasteur will fund the costs associated with product introduction, promotion, advertising and marketing throughout the territory covered by the agreement. Under the terms of the agreement, in addition to upfront consideration aggregating $10 million, including $1 million cash and a supply commitment (of Diphtheria Toxoid and/or Tetanus Toxoid suitable for human use) of $9 million, we will receive the majority of the profits from sales of the anti-gastrin immunogen product. Diphtheria Toxoid and/or Tetanus Toxoid suitable for human use is not readily obtained on the open market in such large quantities as will be supplied to us as part of the upfront consideration. The $10 million upfront consideration has been classified as a license payment and has been deferred and will be recognized for financial statement (accounting) purposes as revenue within the twenty-year period of the agreement. The revenue recognition will begin once regulatory agency approval to market the product has been received and will be recognized ratably over the remaining period of the contract, which ends February 13, 2017. We do not speculate on the timing of regulatory approvals. Either party may terminate the agreement for, among other things, uncured material breach or certain events of bankruptcy or insolvency. Aventis Pasteur has the right to terminate the agreement, following completion of Phase III clinical trials in the event that it determines that for safety and efficacy reasons it does not wish to co-promote, market or sell the product. In the event that the agreement is terminated due to a material breach by Aventis Pasteur, all rights of Aventis Pasteur granted by the agreement will be terminated. However, Aventis Pasteur's obligations with regard to the $10 million upfront consideration, both the cash and our rights to the full $9 million in unconditional supply commitment, survive termination of the agreement. There is no provision under the agreement for the unconditional supply commitment to be satisfied by Aventis Pasteur with a cash payment. In the event that the agreement is terminated due to a material breach by us, we will, among other things, grant Aventis Pasteur a co-exclusive license, under our patents and know-how in North America and Europe and the product trademarks, to make and sell the anti-gastrin immunogen product in exchange for royalty payments to the other party at a royalty rate based on a percentage of net sales. On December 20, 2002, Aphton signed a Letter of Intent to restructure its co-promotion and marketing collaboration with Aventis Pasteur. Consummation of the transactions contemplated by the Letter of Intent was subject to, among other conditions to be determined by the parties, Aventis' completion of due diligence to its satisfaction, approval of the transaction by Aventis' and Aphton's respective Board of Directors, and negotiation and execution of definitive agreements for the transaction that were mutually agreeable to Aventis and Aphton. The transactions contemplated by the Letter of Intent include, in part, the granting of exclusive worldwide rights to Aphton's active immunization targeting gastrin or its receptor(s), including, but not limited to, G17DT, for all oncology indications, and also to monoclonal antibodies under development by Aphton targeting gastrin or its receptor(s), for all oncology indications. Aphton would receive an initial payment under the restructured agreement, and would be entitled to receive milestone payments upon achieving certain goals and royalties on sales. Aventis would be responsible for the cost of all preclinical, clinical development and registration activities. On March 31, 2003, Aphton announced that its Board of Directors determined that it is not in the best interests of Aphton's shareholders to restructure the existing Co-Promotion and Marketing Agreement with Aventis Pasteur to treat human cancers with G17DT and that the -14- Letter of Intent dated December 20, 2002 was allowed to expire. Aphton and Aventis Pasteur will continue operating pursuant to the terms and conditions of their existing Co-Promotion and Marketing Agreement. GlaxoSmithKline In June 1998, Aphton and GlaxoSmithKline signed a Collaboration and License agreement, granting GlaxoSmithKline exclusive rights worldwide to Aphton's GnRH-related patents and proprietary technology. The agreement covers the diagnosis, treatment and prevention of GnRH-related cancers and other diseases in humans. Human cancer indications for the anti-GnRH product are prostate, breast, ovarian and endometrial cancer. Additional medical indications for the anti-GnRH product are endometriosis, polycystic ovaries, uterine fibroids, contraception, infertility and precocious puberty. Under terms of the agreement, Aphton and GlaxoSmithKline are collaborating in a joint product development program, with GlaxoSmithKline responsible for phase III clinical trials and regulatory approvals, and for worldwide marketing and distribution of approved products. The agreement uses a royalty mechanism based on product sales, in dollars, worldwide to determine Aphton's revenues. Under terms of the agreement, we are collaborating with GlaxoSmithKline in a joint product development program, with GlaxoSmithKline responsible for worldwide marketing and distribution of approved products. Under the agreement as amended, we are responsible for the initial cost of product development prior to the acceptance of the anti-GnRH product by both parties. Our product development work is reviewed on an ongoing basis with GlaxoSmithKline and after the acceptance of the product by both parties for development, GlaxoSmithKline is responsible for the funding of the development costs of the accepted product, clinical trials and approvals for worldwide marketing and distribution up to an agreed amount. As part of the agreement, GlaxoSmithKline made an equity investment in 1998 of $5,000,000 for 237,867 shares of newly issued Aphton common stock. Either party may terminate the agreement for, among other things, uncured material breach or certain events of bankruptcy or insolvency. Under the agreement as amended, if the anti-GnRH product has not been formally accepted by both parties, either party may terminate the agreement in 2002. In 2002, both parties agreed to continue this agreement. Once the product has been accepted for further development, GlaxoSmithKline may only terminate the agreement for safety, efficacy or economical reasons and Aphton may terminate for the reasons stated above. During the term of the agreement, GlaxoSmithKline will have full access to all matters encompassed within our patents and know-how relating to the anti-GnRH product. Upon termination or expiration of the agreement, GlaxoSmithKline will cease to have the right to use or sell the anti-GnRH product, and all registrations and intellectual property rights in the anti-GnRH product will be fully transferred to us. Until the agreement is terminated or otherwise expires, any invention or discovery made jointly by GlaxoSmithKline and us during the development program will be jointly owned, and the product trademarks and any intellectual property developed by GlaxoSmithKline will be owned by them. Schering-Plough Animal Health In August 1997, we entered into a strategic alliance with Schering-Plough Animal Health covering all animal health applications of our anti-gastrin immunogen. Schering-Plough, in terms of annual sales, is one of the largest animal healthcare companies in the world. Equine (horse) ulcers was selected as the first indication to be pursued under the alliance. Under the terms of the ten-year agreement, we have granted Schering-Plough an exclusive license in the United States to promote, distribute and sell the anti-gastrin immunogen product under our patents and know-how. World Health Organization In January 1995, we announced a relationship with WHO and another research party, for the development and testing of an immunocontraceptive product (which prevents pregnancy), under which we received exclusive rights for the manufacture, distribution and supply of the immunocontraceptive product worldwide, for the term of the applicable patents on a patent-by-patent basis. In exchange for these rights, we make payments to support certain research by the research party. In the event that a safe and effective product is developed, we have undertaken to WHO to dedicate a portion of our production capacity for the product to produce and supply the product to public sector agencies in developing countries only, according to a cost-related pricing structure. Either party may terminate the agreement for uncured -15- material breach by the other party. In the event that we have ceased and continue to cease to perform our obligations under the contract, WHO may terminate the agreement and we will grant WHO an exclusive, royalty-free license to our technology to develop, manufacture and supply immunocontraceptive products to public sector agencies in developing countries only, as well as a non-exclusive, royalty-bearing license to develop, manufacture and supply immunocontraceptive products in developed countries and to the private sector generally. Once the immunocontraceptive product has reached a certain development stage and subject to certain consequences, WHO may be released from its obligations under the agreement for lack of funds or after an assessment of safety and efficacy of the product and Aphton will be released from its obligations. Manufacturing and Marketing Absent or together with a strategic alliance or corporate partnering relationship (such as those with Aventis Pasteur and GlaxoSmithKline) which may impact on the following, Aphton plans to commercialize its products by executing long-term contracts with third parties, including major pharmaceutical companies, to manufacture its products and by contracting with similar drug companies to market, sell and distribute its products. The contract (outsourcing) manufacturing approach leverages on the large and available manufacturing resources of pharmaceutical industry companies. Aphton has contracted with drug manufacturing sources which are providing Aphton's immunogens for toxicology studies and clinical trials. Aphton's outsourcing of marketing, distribution and sales, as exemplified by the Aventis Pasteur and GlaxoSmithKline agreements, similarly leverages on the large and effective sales forces of the major pharmaceutical companies. Aphton's capital formation, personnel and plant and equipment requirements, together with associated risks, are clearly greatly reduced by such a commercialization strategy, which Aphton pioneered. In fact, the outsourcing of non-core functions has now been adopted by major drug companies. This strategy significantly enhances Aphton's ability to achieve rapid market penetration and growth and to exploit the benefits of the patent life of its products. Strategy Aphton's product development and commercialization strategy differs significantly from the normal "licensing" of products to third parties. By using this strategy, Aphton can retain a significantly larger degree of control of the product development and commercialization, and a larger share of profits and earnings, if any, resulting therefrom. Under typical licensing (with royalty payments which are generally a small percentage of sales), the opposite would be the case. By avoiding the industry norm of "corporate partnering" with drug companies in its earlier development stages, and by both undertaking and overcoming the associated risks during product development, Aphton has earned and retained its options and the ability to optimally carry out its commercialization approach. This strategy was successfully validated with Aphton's agreements with Aventis Pasteur and GlaxoSmithKline. Patents and Trade Secrets Proprietary protection for Aphton's products is central to the Company's business. Aphton's policy is to protect its technology by, among other things, filing patent applications in worldwide markets of interest for products which it considers important and intends to market. In that regard, Aphton has filed patent applications and has continued to receive patents for its products, both domestic and foreign. As of December 31, 2002 we held 31 issued patents. Additional patent applications are in preparation or being filed or are pending in the US and in other countries. Aphton intends to continue filing additional patent applications relating to its products and, when appropriate, improvements in its technology and other specific products that it develops. Competition The biotechnology and pharmaceutical industries are subject to rapid and intense technological change. Our competitors include major pharmaceutical companies and specialized biotechnology firms supported by universities and research institutions. Our current competitive position with respect to each of our products is summarized in the following table. -16-
Product Indication(s) Competition ------- ------------ ----------- Anti-Gastrin 17 (G17DT) Advanced The only FDA-approved treatment currently available for pancreatic for Gastrointestinal pancreatic cancer is Gemcitabine, which is manufactured by Eli Lily. Our Cancers cancers anti-Gastrin 17 (G17DT) product is intended to be used as a non-toxic monotherapy, or as a therapy administered with Gemcitabine. We believe that Pharmacia & Upjohn, AstraZeneca and other pharmaceutical companies are also developing pancreatic cancer therapy. Anti-Gastrin 17 (G17DT) Advanced stomach There is currently no FDA-approved drug available for gastric cancer for Gastric and cancer and/or or gastro-esophageal cancer. FDA-approved chemotherapies used to Gastro-Esophageal esophagus cancers treat cancer in other indications, as well as experimental cancer Cancers drugs in clinical trials, are currently being tried on patients with advanced gastric cancer or gastro-esophageal cancer. Roche Laboratories and Bristol-Myers Squibb, among others, are our competitors in this market. GnRH Pharmaccine Reproductive There is currently no FDA-approved drug for advanced prostate cancer system cancers patients who have failed the GnRH agonists, Leuprolide or Goserelin. We believe several other pharmaceutical companies, including Pharmacia Upjohn, Immunex and AstraZeneca, are conducting clinical trials for this class of patients. Anti-Gastrin 17 (G17DT) Gastro-intestinal Proton Pump Inhibitors are approved for treatment of GERD. Unlike for Gastro-Esophageal ulcerations and G17DT, none of the products currently available a) inhibits the Reflux Disease (GERD) GERD effects of gastrin on the lower esophageal sphincter causing abnormal transient LES relaxations typically associated with GERD, which are believed to contribute heavily to the inadequate symptomatic relief of current drugs, or b) treats hyper-gastrinemia, which results from standard of care therapy using Proton Pump Inhibitors (PPIs). Immuno- Contraception Prevent The use of a contraceptive vaccine eliminates patient compliance pregnancy in problems that are inherent with oral medications and intrusive humans devices made by our competitors in the current birth control market.
Our competitive position depends on the safety and efficacy of products, the timing of regulatory approval and commercial introduction, and the effectiveness of marketing and sales efforts. Our success also depends on our ability to form strategic alliance relationships with other companies with greater marketing resources than ours, attract and retain qualified personnel, and secure sufficient capital resources for the often substantial period between technological conception and commercial sales. Some of our competitors have far greater financial resources, larger research staffs and more extensive physical facilities. These competitors may develop products that are more effective than ours and may be more successful than us at producing and marketing their products. In addition, many specialized biotechnology firms have formed collaborations with large, established companies to support the research, development and commercialization of products that may be competitive with ours. -17- Regulation Government regulation in the United States and foreign countries is a significant factor in the development and marketing of all of Aphton's products and in Aphton's ongoing research and development activities. Clinical trials, manufacture and marketing of Aphton's products are expected to undergo extensive testing and approval processes by the Food and Drug Administration (FDA) and equivalent foreign regulatory authorities, including those of the European Union. Aphton conducts human clinical trials with the objective of obtaining regulatory approvals in the key markets, worldwide. The regulatory requirements and status of each of our products are summarized in the following table.
Product Trial Stage Regulatory Requirements Regulatory Status ------- ----------- ----------------------- ----------------- Anti-Gastrin 17 (G17DT) Clinical Trials- FDA, EU, Australia, Amended Investigational New Drug for Gastrointestinal Phase III Canada, Japan and other application (IND) filed with FDA and Cancers countries' approvals. European countries; received permission to proceed with clinical trials in the US and in Europe. Anti-Gastrin 17 for Clinical Trial- FDA,EU, Japan and other Investigational New Drug application Gastric and Phase II countries' approvals. (IND) filed with FDA and European Gastro-Esophageal countries; received permission to Cancers proceed with clinical trials in the US and in Europe. GnRH Pharmaccine Clinical Trial- FDA, MCA and other Investigational New Drug application Phase II countries' approvals. (IND) filed with FDA; received permission to proceed with clinical trials in the US and Europe. Anti-Gastrin 17 Clinical Trial- FDA, MCA/EU and other Amended Investigational New Drug (G17DT) for Phase II countries' approvals. application (IND) filed in Europe; Gastro-esophageal Reflux received permission to proceed with Disease (GERD) clinical trial. Immuno-Contraception Clinical Trial- FDA, MCA and other Investigational New Drug application Phase II countries' approvals. (IND) filed in Europe; received permission to proceed with clinical trial.
-18- Directors and Executive Officers The directors and executive officers of the Company are set forth below: Name: Position(s): - ----- ------------ Philip C. Gevas Chairman of the Board of Directors, President and Chief Executive Officer William A. Hasler Vice Chairman of the Board, Director and Co-Chief Executive Officer Robert S. Basso Chairman of Compensation and Audit Committees and Director Georges Hibon Director Nicholas John Stathis, Esq. Director Frederick W. Jacobs Vice President, Chief Financial Officer, Treasurer and Chief Accounting Officer Philip C. Gevas - 69, Chairman of the Board of Directors, President and Chief Executive Officer. Mr. Gevas has served as Director, President and Chief Executive Officer since co-founding Aphton in 1981. Mr. Gevas conceived and directed the development of Aphton's inventions which have resulted in numerous patents for Aphton for the treatment of colorectal, pancreatic, liver, esophageal and stomach cancers, and GERD. After serving as an officer in the United States Air Force, Mr. Gevas had experience in the defense industry in management, science and engineering. Mr. Gevas has the degrees of M.E., and M.S. Mathematics (Stevens Institute of Technology) and M.S.E.E. (Ohio State University). William A. Hasler - 61, Vice Chairman of the Board, Director and Co-Chief Executive Officer. Mr. Hasler has served as Director of the Company since 1991. Mr. Hasler's expertise and experience in management are focused both on strategy and in operations, in the execution of plans and programs. Prior to his appointment as Aphton's Co-Chief Executive Officer in July 1998, Mr. Hasler was Dean of both the Graduate School and Undergraduate School of Business at the University of California, Berkeley for more than five years. Earlier, Mr. Hasler was Vice Chairman of KPMG Peat Marwick, responsible for management consulting worldwide. He is currently also the Chairman and director of Solectron Corp., director of Stratex Networks and Ditech Communications, trustee of Schwab Funds, and public governor of the Pacific Exchange. Robert S. Basso - 58, Director. Mr. Basso has served as director since 1984. Mr. Basso has served as Chairman of Correspondent Services Corporation (CSC) and as Managing Director of UBS PaineWebber Inc. for more than ten years. Previously, Mr. Basso was President of Broadcort Capital Corporation and Managing Director of Merrill Lynch, Pierce, Fenner & Smith. Georges Hibon - 65, Director. Mr. Hibon has served as directors since 2001. For the past ten years, Mr. Hibon has served as Chairman and Chief Executive Officer of Pasteur Merieux Connaught, NA and a member of its Board of Directors. Previously, Mr. Hibon was President of Merck France. The French Government awarded Mr. Hibon the honor of "Chevalier de la Legion d'Honor" for outstanding military and civilian accomplishments. Nicholas John Stathis, Esq. - 79, Director. Mr. Stathis has served as director since 1994. Previously, Mr. Stathis served counsel at White & Case LLP, was a partner at Botein, Hays & Sklar; Watson, Leavenworth, Kelton & Taggart; and at Hopgood, Calimafde, Kalil, Blaustein & Judlowe. Mr. Stathis practiced in all phases of patent, trademark, copyright and unfair competition law. -19- Frederick W. Jacobs - 47, Vice President, Chief Financial Officer, Treasurer and Chief Accounting Officer. Mr. Jacobs has been with Aphton since 1989. Previously, Mr. Jacobs, a CPA, was Chief Financial Officer of BestCare, a Health Maintenance Organization from 1986 to 1989 and before that served on the staff of PricewaterhouseCoopers (then Coopers & Lybrand) providing audit and tax services. Aphton's Bylaws authorize the Board of Directors to fix the number of directors from time to time by a vote of the majority of the entire Board of Directors (including any vacancies). All directors currently hold office until their successors have been elected. Officers are elected to serve, subject to the discretion of the Board of Directors, until their successors are appointed. Directors do not receive any fees for service on the Board. Board members are reimbursed for their expenses for each meeting attended. There are no family relationships among executive officers or directors of Aphton. Aphton's Audit Committee is composed of Messrs. Basso, Hibon and Stathis. The Compensation Committee is composed of Messrs. Basso and Stathis. Messrs. Basso, Hibon and Stathis are non-executive Board Members. Principal Scientific Officers In addition to Aphton's executive officers Philip C. Gevas, William A. Hasler, Aphton's principal scientific officers are: Paul Broome, MB., Ch.B., MFPM (University of Sheffield Medical School, UK) - 53, Vice President and Medical Director for Clinical Trials and Regulatory Affairs, Europe - Asia. Dr Broome has been with Aphton since 1994. His years of clinical experience includes the responsibility at Glaxo for clinical trials which provided data for US (FDA) and the United Kingdom Medicines Control Agency (MCA) registration of the indication for ranitidine (Zantac) as maintenance therapy, which became the world's largest-selling drug. Later, Dr. Broome was Medical Director of a leading company in the United kingdom which provides services ranging from consulting and R&D through clinical trials, regulatory affairs and the registration of drugs for marketing approval from government regulatory agencies. William D. Perkins, Ph.D. - 65, Vice President, Director for Clinical Trials and Regulatory Affairs, North America. Prior to joining Aphton Corporation in 2000, Dr. Perkins had years of experience in the medical field. He has been actively involved in oncology/immunology clinical trials, including directing all phases of clinical trial development, from Phase I through post-marketing approval (Phase IV). Dr. Perkins has been a major contributor to the formulation and writing of both investigational new drug (IND) applications and of new drug application (NDA) submissions to the FDA. Previous senior professional responsibilities in clinical trials and medical affairs include affiliations with ILEX Oncology (NASDAQ: ILXO), Elan Corporation PLC (NYSE: ELN) and Novartis (NYSE: NVS). Richard Ascione, Ph.D. (Princeton University) - 65, Vice President, Director of Aphton's Laboratory of Molecular Medicine. Dr. Ascione has been with Aphton since 1994. Dr. Ascione directs R&D in the area of Molecular Biology and works closely with Aphton's Laboratory of Immunobiology in research and product development. Previously, Dr. Ascione was a professor in the Department of Experimental Oncology and Associate Director of the Center for Molecular and Structural Biology at the Hollings Cancer Center and the Medical University of South Carolina, respectively, in Charleston, South Carolina. Earlier, Dr. Ascione was with the National Cancer Institute (NCI) of the National Institutes of Health (NIH), where he served as Deputy Chief of NCI's Laboratory of Molecular Oncology. Dr. Ascione has published over sixty-five peer-reviewed papers, several book chapters and articles related to the molecular biology and gene regulation of cancer, human retroviruses and HIV/AIDS. Theo de Roij, Ph.D., D.V.M. - 53, Vice President, Business and Product Development. Prior to joining Aphton in 1998, Dr. de Roij served for more than one year as Director of Business Development at GlaxoSmithKline Biologicals S.A., responsible for its worldwide business development activities. Previously, Dr. de Roij was employed by the Animal Health Division of Solvay, S.A., where he held several senior positions, including responsibility for worldwide business development and strategic planning. -20- Peter Blackburn, Ph.D. - 53, Vice President, Program Development and Manufacturing. Dr. Blackburn has been with Aphton since 1997. Previously, Dr. Blackburn was Executive Vice President and Chief Operating Officer of Applied Microbiology, Inc. Earlier, he was involved in academic research in protein chemistry at Rockefeller University, New York, working in the laboratory of two recipients of the Nobel Prize for Chemistry. Dr. Blackburn has published numerous papers in peer-reviewed journals and is the inventor on numerous US and foreign patents. Dov Michaeli, M.D. (University of California, San Francisco), Ph.D. (University of California, Berkeley) - 67, Senior Vice President, Director of Medical Science and Chief Medical Officer. Dr. Michaeli has been with Aphton since 1989. Dr. Michaeli is a senior member of Aphton's management team with extensive experience in clinical medicine and scientific research. Previously, Dr. Michaeli was a professor at the University of California, San Francisco (Departments of Biochemistry and Surgery) for twenty years. Dr. Michaeli has numerous patents and over fifty published articles and book chapters. Administrative and Scientific Staff Donald Henderson - Vice President and Managing Director, Finance and Administration, Europe. Previously, Mr. Henderson, a chartered accountant, held financial management positions at a number of pharmaceutical companies. Jeannette L. Whitmore - Vice President, Director, Investor and Media Relations, Corporate Communications. Previously, Ms. Whitmore held positions in business administration in the medical and healthcare fields. Stephen L. Karr, Jr., Ph.D., University of California, Davis, Dr. Karr joined the Company soon after its founding in 1981 and serves as Vice President and General Manager of the Laboratory of Immunobiology. He is responsible for the Laboratory's daily operations, including program planning, budgeting and control. As Project Manager, Dr. Karr is responsible for the experimental design and implementation of special projects. Dr. Karr, who is also an immunoparasitologist, is an inventor of numerous Aphton patents. Dr. Karr has sixteen publications and had presented twenty papers prior to joining the Company. Stephen Grimes, Ph.D., University of California - Vice President of the Laboratory of Immunology. Dr. Grimes joined Aphton immediately after its founding and is responsible for research and development in immunology and for the experimental design and implementation of immunology-based projects. He also serves as the principal scientific deputy for Aphton's clinical trials. Dr. Grimes is a co-inventor of numerous issued patents of the Company and additional patents in preparation and pending. Dr. Grimes joined Aphton upon finishing his doctoral dissertation at the University of California, Davis. None of our directors or officers is involved, or has ever been involved, in any litigation, administrative or governmental proceeding in the past five years that are material to an evaluation of their ability and their integrity. Aphton has 56 employees, of which 48 work primarily in Research and Development. Scientific Advisory Board The members of Aphton's Scientific Advisory Board, which functions primarily as a review board for research projects and for product development programs, in addition to its senior staff members, are: Robert J. Scibienski, Ph.D., University of California, Los Angeles. A co-founder of Aphton, Dr. Scibienski focuses on immunology-related basic technology at Aphton, currently addressing immune system regulation, antigen presentation and gene interactions. Dr. Scibienski is a co-inventor of issued Aphton patents and a number of patent applications of Aphton. Dr. Scibienski is Associate Professor, Department of Medical Microbiology and Immunology and Director of the campus-wide Central Hybridoma Facility at the University of California, Davis. Dr. Scibienski has over thirty publications. Demosthenes Pappagianis, M.D. (Stanford School of Medicine), Ph.D. (University of California, Berkeley). A co-founder of Aphton, Dr. Pappagianis is its principal resource on the mechanisms of infection of pathogens and of host defenses. Professor and Chairman (1967-1985) in the Department of Medical Microbiology and Immunology at the University of California, Davis, Dr. Pappagianis is widely recognized in the field of infectious diseases. He is a Diplomate of the National Board of Medical Examiners and Diplomate of the -21- American Board of Medical Microbiology. In addition, he is a Fellow of the Infectious Diseases Society of America and an Associate Member of the Armed Forces Epidemiological Board. Dr. Pappagianis has over one hundred publications. Vernon C. Stevens, Ph.D. Professor of Reproductive Biology, Ohio State University. Dr. Stevens is recognized worldwide as one of the pre-eminent authorities on vaccines, contraception and synthetic peptide based immunogen formulations. He pioneered the development of synthetic peptide immunogens for human use, particularly for Aphton's immunocontraceptive product, which prevents pregnancy, under development with the World Health Organization (WHO). Richard L. Littenberg, M.D. A co-founder of Aphton, Dr. Littenberg is an emeritus member of Aphton's Scientific Advisory Board and is a co-inventor of three Aphton patent filings. Dr. Littenberg is Board Certified in both Internal Medicine and Nuclear Medicine and a Diplomate of the National Board of Medical Examiners and is President and Chief Executive Officer of HMG. Dr. Littenberg received his M.D. degree from the State University of New York. He has practiced internal and nuclear medicine for over twenty years. He has participated in clinical trials for major pharmaceutical companies and has engaged in gastrointestinal, cancer and cardiovascular research. Eliezer Benjamini, Ph.D., University of California, Berkeley. A co-founder of Aphton, Dr. Benjamini is an emeritus member of the Scientific Advisory Board and is a co-inventor of two Aphton patents. Dr. Benjamini retired as a full Professor in the Department of Medical Microbiology and Immunology at the University of California, Davis, where he holds the title of Professor Emeritus. Dr. Benjamini is widely recognized in the field of immunology. He has received awards from industry and academia, including the Distinguished Scientists Award in Virology and Immunology (1984) which was given for his pioneering work in the development of synthetic peptide vaccines. Dr. Benjamini has over one hundred publications and is co-author, with Dr. Sidney Leskowitz, of Immunology: A Short Course, a textbook for medical students. Other scientists (consultants) participate when their expertise is needed on a specific project. -22- Glossary of Selected Terms Adenocarcinoma: cancer that originates in glandular epithelial cells that line certain internal organs. Adjuvant Treatment: an ancillary treatment that is given to patients in addition to a primary treatment to enhance the effectiveness of the primary treatment. For example, in colon cancer, chemotherapy often is given as an adjuvant treatment following surgery to remove the primary cancer from the colon. Antibody: a protein produced by certain white blood cells as part of an immune response. These proteins, called antibodies, bind in a specific manner to a separate molecule and neutralize or inhibit its biological activity. Antigen: any substance that can induce antibodies (B-cells) or activate T-cells, which bind to it. Cancer Vaccine: technically a misnomer: a large weakly-antigenic molecule derived from the surface of cancer cells, which when combined with a foreign molecule (e.g., virus) induces a stronger immune response against it and, then, where located on the surface of the cancer cells. Control Group: the patient group (or arm) of a clinical trial that receives the placebo or a standard treatment for a disease, against which the experimental drug is compared. Gastrin: a hormone produced in the stomach that regulates stomach acid secretion and stimulates the proliferation of gastrointestinal cells and adenocarcinomas of the gastrointestinal tract. It occurs in the body in several forms, including gastrin 17 (a 17 amino acid peptide) and gastrin 34 (a 34 amino acid peptide). Gonadotropin Releasing Hormone (GnRH): a hormone secreted in the hypothalmus that stimulates the release of other reproductive hormones (including ultimately, testosterone, estrogen and progesterone). Hapten: a small molecule (peptide), not antigenic by itself, that can be bound to by antibodies. It can be made antigenic and elicit such antibodies when joined to a foreign molecule (carrier). Hormone: a chemical substance produced by an organ or cells of an organ in one part of the body, and carried in the blood to another organ or part of the body; and which has a specific regulatory effect on the activity of the body including growth, metabolism and reproduction. human Chorionic Gonadotropin (hCG): a female hormone secreted by a fertilized egg necessary to start pregnancy. Immune System: the complex group of organs and cells which has the ability to fight infection and disease. Immunogen: any molecule capable of inducing the immune system to produce an antibody response against it. Metastasis: a process by which cancer cells spread from the primary tumor to distant sites such as the lung, liver, bone, or brain. A cancer that has spread is said to be metastatic, and the distant tumors are called metastases. Peptide: a molecule composed of amino acids that are linked to each other in a sequence. Placebo: an inert non-drug substance that is given to the control group for comparison to a new experimental drug, usually in a randomized clinical trial. Randomized Clinical Trial: a clinical trial with at least two arms, in which the decision as to which arm a new patient is assigned is, by design, made by chance. Standard Treatment: a currently accepted treatment for a given disease. The drug treatment often given to one group (or arm) of patients in a clinical trial. The standard treatment can serve as the control arm, in place of a placebo, for comparison to a new experimental drug treatment. Treatment Group: the patient group, or arm, of a clinical trial that receives the new experimental drug treatment. Vaccine: an immunogen consisting of an attenuated or killed microorganism, administered to induce the immune system to produce antibodies to fight an infectious disease. Vaccine - Like: an immunogen consisting of a synthetic hapten (peptide) joined together with a foreign molecule, administered to induce the immune system to produce antibodies against the peptide. -23- Item 2. Properties We do not own any real property. We presently lease research and development facilities in Yolo County, California and in Leicestershire County, United Kingdom. We lease our corporate headquarters in Miami, Florida. We believe that these facilities are suitable for our operations for the foreseeable future. These leases expire at various dates through December 31, 2007. Rental expense for these leases for the year ended December 31, 2002 was approximately $151,992, for the eleven month period ended December 31, 2001 was approximately $73,000 and for the year ended January 31, 2001 was approximately $103,000. The minimum rental commitment for the year ending December 31, 2003 is $153,000, for the year ended December 31, 2004, $140,000, for the year ended December 31, 2005, $56,000, for the year ended December 31, 2006, $57,000, for the year ended December 31, 2007, $34,000 and none thereafter. The leases provide various options to renew, but we may or may not choose to renew any of the leases. We may or may not relocate one or more of our facilities based on strategic planning. Item 3. Legal Proceedings We are not involved, and have never been involved, in any litigation, administrative or governmental proceeding and none is believed by our management to be threatened. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. -24- PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The common stock of Aphton has been trading on Nasdaq's National Market System since June 2, 1994. Aphton had been traded in the Nasdaq Small-Cap Issues (formerly over-the-counter) market since April 1, 1991, the date of Aphton's initial public offering. The following table sets forth high and low price information, provided by Nasdaq Historical Research Department, for each full quarter beginning after December 31, 2001. Aphton's common stock is traded under the symbol "APHT." For The Year Ended December 31, 2001: High Low 1st Quarter $25.75 $12.13 2nd Quarter $24.82 $14.40 3rd Quarter $21.98 $ 6.95 4th Quarter $18.60 $ 9.01 For The Year Ended December 31, 2002: 1st Quarter $16.00 $9.60 2nd Quarter $12.00 $6.08 3rd Quarter $7.58 $2.16 4th Quarter $4.34 $1.28 We have never paid any cash dividends on our common stock. Although there are no restrictions that currently limit our ability to pay cash dividends, we intend to retain all future earnings, if any, until we generate sufficient revenues to allow for the payment of dividends. We do not expect to pay any cash dividends in the foreseeable future. In August 2001, we closed a $14,250,036 million financing of unregistered equity securities with several institutional investors. Aphton sold 1,187,503 million shares of common stock at $12.00 per share. These shares were subsequently registered in September 2001. The purchase agreement relating to the August 2001 transaction contained an anti-dilution provision that would be triggered in the event that shares of common stock are issued below $12.00 per share before October 2001. On February 7, 2002, Aphton sold 1,345,000 shares of registered common stock at $12.70 per share and received gross proceeds of $17.1 million. On March 21, 2002, Aphton sold 1,200,000 shares of registered common stock at $10.50 per share and received gross proceeds of $12.6 million. Because the shares of common stock were issued below $12.00 per share, the anti-dilution provision contained in the August 2001 purchase agreement was triggered and as a result, on April 9, 2002, we issued 169,643 unregistered shares of common stock to certain of our investors. On September 26, 2002, Aphton sold 2,500,000 shares of registered common stock at $2.00 per share and received gross proceeds of $5 million. On December 6, 2002, Aphton sold 1,520,000 shares of registered common stock at $2.375 per share and received gross proceeds of approximately $3.6 million. Subsequent to year end, on February 24, 2003, we sold to an institutional investor 500,000 shares of registered common stock at $2.96 per shares receiving gross proceeds of approximately $1.48 million and 150,000 unregistered warrants in a private placement at $0.125 per warrant for gross proceeds of $18,750. Each warrant has registration rights and entitles the holder thereof to purchase a share of our common stock at a price of $2.96 per share for the next five years. As of December 31, 2002, Aphton had approximately 300 shareholders of record and approximately 5,000 beneficial holders of its common stock. -25- Item 6. Selected Financial Data SELECTED FINANCIAL INFORMATION The selected financial data set forth below with respect to Aphton's statements of operations and balance sheets for the year ended December 31, 2002, eleven months ended December 31, 2001, the years ended January 31, 2001, 2000 and 1999 and the nine months ended January 31, 1998 are derived from audited financial statements and should be read together with the financial statements and related notes included in this Annual Report. All selected financial data are not covered by the independent accountants' report. The data presented below should be read together with the financial statements, related notes, and other financial information included herein.
Statement of Operations Data: Eleven Months Nine Months (In thousands, Year Ended Ended Ended except per share data) December 31, December 31, Year Ended January 31, January 31, 2002 2001 2001 2000 1999 1998 ---- ---- ---- ---- ---- ---- Research & development expenditures $ 37,682 $ 28,676 $ 15,302 $ 10,821 $ 9,454 $ 4,963 Net loss $(39,990) $(31,264) $(16,397) $(11,193) $(9,757) $(6,605) Net loss per share $ (1.93) $ (1.87) $ (1.02) $ (0.76) $ (0.68) $ (0.48) Weighted average shares outstanding 20,748 16,739 16,100 14,731 14,431 13,733 Balance Sheet Data: December 31, January 31, 2002 2001 2001 2000 1999 1998 ---- ---- ---- ---- ---- ---- Cash and current investments $ 7,824 $ 6,323 $ 18,664 $ 19,179 $ 10,555 $ 14,226 Total assets $ 15,991 $ 13,983 $ 27,364 $ 28,192 $ 19,891 $ 23,580 Total liabilities $ 27,317 $ 20,715 $ 16,208 $ 16,132 $ 13,339 $ 12,273 Accumulated deficit $(140,605) $(100,615) $(69,351) $(52,954) $(41,760) $(32,004) Total stockholders' (deficit) equity $ (11,326) $ (6,733) $ 11,157 $ 12,060 $ 6,552 $ 11,307
In 1998, we changed our fiscal year-end from April 30 to January 31. In May 2000, we changed accountants from PricewaterhouseCoopers LLP to Ernst & Young LLP. The change is discussed in Item 9 of this Report. In March 2001, we changed our fiscal year-end from January 31 to December 31. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Year Ended December 31, 2002, Eleven Months Ended December 31, 2001 and the Year Ended January 31, 2001 During the year ended December 31, 2002, the we reported a net loss of $39,990,001. During this period we had no contract revenues. The investment earnings on cash and current investments for the year ended December 31, 2002 was $114,539 compared to $393,768 for the eleven months ended December 31, 2001. This significant decrease was due to lower average cash balances and interest rates. Total research and development expenditures increased $9,155,874 in the year ended December 31, 2002 over the eleven months ended December 31, 2001. This 32% increase was a result of an additional month in the year ended December 31, 2002 and the increased clinical trial costs associated with the development of our products. Research and development expenses were reduced by -26- approximately $150,000. This reduction corresponds with an adjustment of the same amount for unrealized loss on investment securities. We allow certain employees to defer a portion of compensation, and we transfer this amount into an investment account that the employee then directs the investment of the funds. The related investment securities are held by us, and are subject to our the general creditors. These employees direct the investment of the funds, and the changes in value in these investments are recognized as unrealized gains and losses in the statement of operations with a corresponding increase or decrease to the carrying value of the investment account. The same amount is used to adjust research and development expense and the corresponding liability for employees' wages and benefits payable. Unrealized holding losses on trading securities and the corresponding decrease in research and development expense totaled approximately $150,000 for the year ended December 31, 2002, approximately $660,000 in the eleven month period ending December 31, 2001 and approximately $990,000 for the year ended January 31, 2001. During the eleven months ended December 31, 2001, we reported a net loss of $31,264,455. During this period we had no contract revenues. The investment earnings on cash and current investments for the eleven months ended December 31, 2001 was $393,768, compared to $1,554,661 for the year ended January 31, 2001. This significant decrease was due to lower average cash balances and interest rates. Total research and development expenditures increased $13,374,272 in the eleven months ended December 31, 2001 over the year ended January 31, 2001. This 87% increase was a result of the increased clinical trial costs associated with the development of our products. We do not accumulate cost information by major development product. Many costs are applicable to more than one product. We receive reimbursements from our strategic partners for some of our research and development expenses and these expenses are not included in our costs. We estimate that 93% of our research and development costs are spent on gastrointestinal and reproductive system cancers. There are no payment or penalty milestones associated with any of the projects, all of which are in Phase II or III clinical trials. We do not speculate on the timing of approvals by regulatory authorities. During the year ended January 31, 2001, we reported a net loss of $16,397,139. During this period we had no contract revenues. The investment earnings on cash and current investments for the year was $1,554,611. This significant increase was due to higher average cash balances. Total research and development expenditures increased by $4,480,822 to $15,302,183. Research and development cash expenditures were approximately $5,468,000 greater in the year ended January 31, 2001 than in the year ended January 31, 2000 but were offset by the approximately $990,000 decrease described above. This increase was a result of the increased clinical trial costs associated with the development of our products. Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for Aphton beginning January 1, 2003. Management does not expect that adoption of this standard will have a material impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the required classification of gain or loss on extinguishment of debt as an extraordinary item of income and states that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations." This statement also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, and makes various other technical corrections to existing pronouncements. Aphton is required to implement SFAS No. 145 on January 1, 2003. Aphton does not expect this statement to have a material impact on Aphton's consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date of an entity's commitment to an exit plan. Aphton is -27- required to implement SFAS No. 146 on January 1, 2003 for transactions that occur after December 31, 2002. Aphton does not expect this statement to have a material impact on the Company's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years and interim periods ending after December 15, 2002. SFAS No. 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method. Aphton adopted the disclosure provisions required under SFAS No. 148 effective December 31, 2002. -28- Liquidity and Capital Resources We finance our operations through the sale of our equity securities, convertible debentures and licensing fees. These funds provide us with the resources to operate our business, attract and retain key personnel and scientific staff, fund our research and development program, pre-clinical testing and clinical trials, obtain the necessary regulatory approvals and develop our technology and products. Liquidity During the year ended January 31, 2001, Aphton received net proceeds of $15.5 million from the closing of a private financing with several international biotechnology/healthcare funds. Aphton issued 491,509 shares of common stock. In August 2001, we sold approximately 1,187,503 shares of unregistered common stock at $12.00 per share and received gross proceeds of approximately $14.25 million. These shares were subsequently registered in September, 2001. The purchase agreement relating to the August 2001 transaction contained an anti-dilution provision that would be triggered in the event that shares of common stock are issued below $12.00 per shares before October 2001. On February 7, 2002, we sold 1,345,000 shares of registered common stock at $12.70 per share and received gross proceeds of $17.1 million. On March 21, 2002, we sold 1,200,000 shares of registered common stock at $10.50 per share for gross proceeds of $12.6 million. Because the shares of common stock were issued below $12.00 per share, the anti-dilution provision contained in the August 2001 purchase agreement was triggered and as a result, on April 9, 2002, we issued 169,643 unregistered shares of common stock to certain of our investors. On September 26, 2002, we sold 2,500,000 shares of registered common stock at $2.00 per shares and received gross proceeds of $5 million. In December 6 2002, we sold 1,520,000 shares of registered common stock at $2.375 per share and received gross proceeds of approximately $3.6 million. Indebtedness On December 20, 2002, we issued and sold a convertible, redeemable, 5-year, interest bearing debenture (note) to Aventis for proceeds of $3 million. The note is convertible at Aventis' option under certain conditions into shares of our common stock at a conversion price substantially equivalent to the market price of the common stock at the time of conversion. We have the right and obligation to redeem the note under certain conditions at any time within the next 5 years. -29- Recent Developments Additional Financing Subsequent to year end, on February 24, 2003, we sold to an institutional investor 500,000 shares of registered common stock at $2.96 per shares receiving gross proceeds of $1.48 million and 150,000 unregistered warrants in a private placement at $0.125 per warrant for gross proceeds of $18,750. Each warrant has registration rights and entitles the holder thereof to purchase a share of our common stock at a price of $2.96 per share for the next five years. Subsequent to year end, on March 31, 2003, we issued and sold in a private placement convertible, redeemable, 5-year, interest-bearing notes and warrants to three institutional investors, including a substantial participation by two existing investors in Aphton, for proceeds of $15 million in the first tranche closing on March 31. The Notes are convertible at a fixed price of $2.50 per share; as part of the transaction we also issued to the investors five year warrants with a fixed exercise price of $2.70 per share (both are at a premium to the market price of the common stock as of the last closing price), unless otherwise adjusted prior to conversion pursuant to the provisions of the notes and warrants. We have the right and obligation to redeem the notes under certain conditions at any time after the third year from the issuance date. The securities have registration rights. In addition, and subject to certain conditions, we are obligated to sell and one of the investors is obligated to purchase an additional $5 million of such notes and warrants convertible into shares of our common stock, also with registration rights, in the second tranche. In compliance with regulatory requirements, we intend to hold a shareholder's meeting to approve certain aspects of the transaction; in connection with the shareholder's meeting, we have already secured irrevocable proxies from certain of our existing shareholders to vote in favor of the transaction and believe that it will have a strong favorable majority vote. The selected pro forma financial information summarized below shows the effect of the net proceeds from the equity financing transaction received on February 21, 2003 and February 24, 2003 and from the convertible debt financing completed on March 31, 2003] as if the closing of that transaction had occurred, and the net proceeds from those transactions had taken place, on December 31, 2002. Balance Sheet Data: Pro Forma December 31 December 31, 2002 2002 ---- ---- Cash and current investments(1) $19,971,277 $ 8,573,277 Total assets(1) $32,388,980 $15,990,980 Convertible Debentures(1) $18,000,000 $ 3,000,000 Total Liabilities(1) $45,316,616 $27,316,616 Total stockholders' equity (deficit) $ 9,927,636 $(11,325,636) Weighted average shares outstanding 20,789,615 20,747,948 - ----------------------- (1) Subject to certain conditions, including, without limitation, (i) our common stock continuing to be listed on the Nasdaq and it not having been suspended from trading or having been threatened with delisting by the Nasdaq, or having fallen below the minimum standards for continued listing, (ii) no event of default having occurred under the convertible debentures then outstanding, (iii) our performance of our obligation to deliver shares of our common stock upon the conversion of the then outstanding notes and warrants, (iv) payment of interest on a timely basis, and (iv) our share price remaining above $3.00 a share, one investor will be obligated to purchase an additional $5 million of convertible debentures. If and when SF Capital Partners Limited purchases the convertible debentures, our pro forma December 31, 2002 (i) cash and current investments total would be $24,971,277, (ii) total assets would be 37,388,980, (iii) Convertible debentures total would be $23,000,000, and (iv) Total liabilities would be $50,316,616. The unaudited pro forma financial information is not necessarily indicative of Aphton's future results of operations. The unaudited pro forma financial information should be read in conjunction with this section captioned "Management's Discussion and Analysis of Financial Conditions and Results of Operations" and with our financial statements and related notes included in this report. Nasdaq Listing On October 15, 2002 and on November 1, 2002, we received notices from the staff of the Nasdaq National Market that our common stock had failed to maintain certain minimum requirements for continued listing on the Nasdaq National Market and both of the notices suggested that we may want to consider applying to transfer our securities to the Nasdaq Smallcap Market. We were subsequently advised by Nasdaq that we had regained compliance with certain minimum requirements for continued listing on the Nasdaq National Market and that our common stock would continue to be listed on the Nasdaq National Market, pending future review. Because our share price is below $3 per share, we are currently not in compliance with the continued listing requirements of the Nasdaq National Market and as a result our common stock may be delisted. In the event that our common stock is delisted from the Nasdaq National Market, we would apply to list our common shares on the -30- Nasdaq Smallcap Market. Even if we had to move our securities from the Nasdaq National Market, we believe that we satisfy all the criteria for listing our common stock on the Nasdaq Smallcap Market which, among others, requires that our share price not fall below $1. There is no assurance, however, that our application for trading our common stock on the Nasdaq Smallcap Market would be accepted or, if accepted, that we would be able to maintain eligibility for continued listing on the Nasdaq Smallcap Market. If our common stock were to be delisted from the Nasdaq National Market and not accepted for listing on the Nasdaq Smallcap Market, it could adversely affect our ability to raise funds through stock and debt issuances. Strategic Outlook We intend to reduce our spending during the next twelve months by more than 60% to less than $16 million from approximately the $40 million during the 12 months of fiscal year 2002. We will pursue our primary objective of filing for approval to market G17DT for monotherapy for advanced pancreatic cancer patients in the European Union, Canada and Australia by September 2003. We currently have a strategic alliance with Aventis Pasteur whereby Aventis Pasteur will exclusively promote, advertise, market, distribute and sell our anti-gastrine vaccine (G17DT) in North America and Europe. We intend to license G17DT to third parties to treat human cancers in other markets worldwide, including Japan. We also intend to license, worldwide, products based on our monoclonal antibody platform targeting gastrin receptors on gastrointestinal system cancers and license, worldwide, G17DT for the treatment of gastroesophageal reflux disease. We believe that our existing and anticipatec capital resources which are comprised primarily of cash and short-term cash investments, including the proceeds of equity or other convertible debt financings or other financings and interest thereon, would enable us to maintain our currently planned operations through the year ending December 31, 2003. Our working capital and capital requirements will depend upon numerous factors, including the following: the progress of our research and development program, pre-clinical testing and clinical trials; the timing and cost of obtaining regulatory approvals; the levels of resources that we devote to product development, manufacturing and marketing capabilities; technological advances; competition; and collaborative arrangements or strategic alliances with other drug companies, including the further development, manufacturing and marketing of certain of our products, our ability to maintain our listing status at the Nasdaq National Market or, if necessary, the Nasdaq Smallcap Market and our ability to obtain funds from such strategic alliances or from other sources. Many of these factors are beyond our control. In the event that we require additional funds, we may be required to sell additional equity securities, convertible debt or otherwise, or obtain funds through arrangements with collaborative partners. If we are unable to complete such transactions, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs. We have incurred recurring operating losses since inception and have a negative working capital at December 31, 2002 of approximately $5.4 million. Our independent auditors added a paragraph to its opinion on the consolidated financial statements for the year ending December 31, 2002 with respect to our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the financings completed subsequent to December 31, 2002. Management believes that the receipt and application of proceeds from these financings, including the $15 million financing completed on March 31, 2003, the second $5 million tranche it expects to complete and our plan to reduce spending to less than $16 million during the next 12 months will allow us to operate into the first quarter of 2004, without any additional funds. Accordingly, management believes that after the receipt of these funds, the substantial doubt about our ability to continue as a going concern will no longer exist. Critical Accounting Policies The SEC has recently issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" (FRR 60), suggesting companies to provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to a company's financial condition and results, and requires significant judgment and estimates on the part of management in its application. Aphton believes the following represent the critical accounting policies of Aphton as contemplated by FRR 60. For a summary of all Aphton's significant accounting policies, including the critical accounting policies discussed below, see Note 2 to the accompanying financial statements. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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, however management believes such differences are unlikely to be significant. Research and Development Expenses Research and development costs are expensed as incurred. These costs include internal research and development costs, the salaries of dedicated personnel, the allocated salaries of personnel who also perform general and administrative tasks, the costs of the dedicated research and development facilities and the costs of contracted researchers. There is no allocation of administrative expense or corporate costs to research and development costs. -31- General and Administrative Expenses General and administrative expenses represent expenses not clearly related to research and development expense. A significant portion of these expenses are related to intellectual property/patent legal costs and salaries, which are typically excluded from research and development according to Statement of Financial Accounting Standards No. 2 "Accounting for Research and Development Costs." Equipment and Improvements Equipment and improvements are depreciated using accelerated methods over the estimated economic lives (5-7 years) of the assets. Improvements are amortized over the term of the lease, or the life of the asset, whichever is shorter, using the straight-line method. Betterments that substantially extend the useful life of equipment and furniture generally reduce the accumulated depreciation of the respective asset. Income Taxes Aphton accounts for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires an asset and liability approach in accounting for income taxes. Under this method, the amount of deferred tax asset or liability is calculated by applying the provisions of enacted tax laws to the differences in the bases of assets and liabilities for financial and income tax purposes. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Aphton regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. As a result of this review, Aphton has established a full valuation allowance against its deferred tax assets. Investment Securities Investment securities consist principally of debt securities issued by the US Treasury and other US Government agencies and corporations and investment in other securities, including mutual funds. Investment securities are classified into three categories and accounted for as follows: (1) Held-to-maturity securities are debt securities that Aphton has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. (2) Trading securities are securities which are bought and held principally for the purpose of selling them in the near term. These securities are reported at fair value, with unrealized gains and losses included in current earnings. (3) Available-for-sale securities are debt and equity securities not classified as either held-to-maturity or trading securities. Aphton does not have available-for-sale securities. Gains and losses realized on the sales of investment securities are determined using the specific identification method. Aphton's trading securities consist of mutual funds and relate to a Company plan whereby certain individuals may forego immediate receipt of wages. In connection therewith, Aphton establishes a liability for accrued wages and records the related compensation expense as services are performed. Further, Aphton segregates an amount of funds in investment accounts equal to the liability for accrued wages. The investment accounts (trading securities) remain assets of Aphton, and are subject to the general creditors of Aphton. Upon transfer of the funds to the investment accounts, the employees direct the specific investment of the funds. The changes in value in the investment accounts (trading securities) are recognized as unrealized gains and losses in the statements of operations, with a corresponding increase or decrease to research and development expense and the liability for employees' wages and benefits. Concentrations of Credit Risk Aphton's short-term cash investments are held in several financial institutions and consist principally of insured money market accounts and cash management accounts that are collateralized by or invested in U.S. Government and U.S. Government agency securities. Aphton's held-to-maturity securities consist of marketable debt securities. These securities are issued by a diversified selection of corporate and U.S. government agencies with strong credit ratings. Aphton's investment policy limits the amount of credit exposure with any one institution. Other than asset-backed securities, these debt securities are generally not collateralized. Aphton has not experienced any material losses due to credit impairment on investments in marketable debt securities in any year. -32- Unconditional Supply Commitment Aphton has the unconditional right to receive supplies originally aggregating $9 million from Aventis Pasteur. Aphton's policy is to review the current market prices of available supplies, if any, to assure that they remain above the stated Aventis Pasteur contract price of the materials and that the right to receive the supplies remains unimpaired. Aventis Pasteur is one of the largest pharmaceutical vaccine manufacturers in the world. Aphton monitors the financial performance of Aventis Pasteur to assure that they will continue to be able to perform under the contract, wherein the special order supplies are to be provided from supplies manufactured by Aventis Pasteur in large quantities and sold to many customers, including the U.S. Government, as part of Aventis Pasteur's basic franchise (business). The contract allows for inflation based increases in the per unit costs of the supplies which Aphton and Aventis Pasteur believe are sufficient to assure that there will be no future financial hardship incurred by Aventis Pasteur in the execution of the agreement. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Aphton's market risks are all immaterial. Investment securities consist principally of debt securities issued by the US Treasury and other US Government agencies and corporations and investment in other securities, including mutual funds. Item 8. Financial Statements and Supplementary Data. Financial Statements are set forth in this report beginning at page 42. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Aphton changed accountants from PricewaterhouseCoopers LLP to Ernst & Young LLP, effective May 19, 2000, for the year ended January 31, 2001. PricewaterhouseCoopers LLP was dismissed effective May 19, 2000. The reports of PricewaterhouseCoopers LLP on the financial statements of the registrant for the past two years contained no adverse opinion or other disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. -33- PART III Item 10. Directors and Executive Officers of the Registrant. The information required for this item is incorporated by reference to the section captioned "Election of Directors" in Aphton's Proxy Statement for the Annual Meeting of Stockholders. The information under the sections captioned "Directors and Executive Officers," "Principal Scientific Officers," "Administrative and Scientific Staff," and "Scientific Advisory Board" in Item 1 of this Form 10-K is also incorporated by reference in this section. Item 11. Executive Compensation The information required for this item is incorporated by reference to the section captioned "Executive Compensation" in Aphton's Proxy Statement for the Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required for this item is incorporated by reference to the section captioned "Election of Directors" of Aphton's Proxy Statement for the Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions. Not applicable. Item 14. Disclosure Controls and Procedures (a) Evaluation of disclosure controls and procedures Based on their evaluations as of a date within 90 days of the filing date of this report, Aphton's principal executive officer and principal financial officer have concluded that Aphton's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act) are effective to ensure that information required to be disclosed by Aphton in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. (b) Changes in internal controls There were no significant changes in Aphton's internal controls or in other factors that could significantly affect these internal controls subsequent to the date of its most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents filed as part of this Form 10-K (i) Financial Statements: Reports of Independent Certified Public Accountants Balance Sheets Statements of Operations Statements of Stockholders' (Deficit) Equity Statements of Cash Flows Notes to the Financial Statements (ii) Financial Statements Schedules: -34- Financial Statement Schedules are omitted because they are either not required, not applicable, or the information is included in the Financial Statements or Notes thereto. (b) Exhibits Exhibit Number Description 3.1 Certificate of Incorporation (Incorporated by reference to Exhibit B of the Registrant's Definitive Proxy Statement filed October 8, 1997) 3.3 By-Laws (Incorporated by reference to Exhibit C of the Registrant's Definitive Proxy Statement filed October 8, 1997) 10.1A Collaboration and License Agreement by and between Aphton Corporation and SmithKline Beecham PLC (now GlaxoSmithKline) dated as of June 12, 1998 (Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A for the year ended January 31, 2001 filed on January 29, 2002). 10.1B Amendment No. 1 dated May 10, 2000 to the Collaboration and License Agreement by and between Aphton Corporation and SmithKline Beecham PLC dated as of June 12, 1998 (Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A for the year ended January 31, 2001 filed on January 29, 2002). 10.1C Amendment No. 2 dated July 2, 2001 to the Collaboration and License Agreement by and between Aphton Corporation and SmithKline Beecham PLC dated as of June 12, 1998, as amended through Amendment No. 1dated May 10, 2000 (Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A for the year ended January 31, 2001 filed on January 29, 2002). 10.2A Co-Promotion Agreement and License by and between Aphton Corporation and Connaught Laboratories Limited dated as of February 14, 1997 (Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A for the year ended January 31, 2001 filed on January 29, 2002). 10.2B Aphton Supply Agreement by and between Aphton Corporation and Connaught Laboratories Limited (a Pasteur Merieux Connaught company, now Aventis Pasteur) dated as of August 1, 1998 (Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A for the year ended January 31, 2001 filed on January 29, 2002). 10.2C PMC Supply Agreement by and between Aphton Corporation and Connaught Laboratories Limited dated as of August 1, 1998 (Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A for the year ended January 31, 2001 filed on January 29, 2002). 10.2D Letter Agreement by and between Aphton Corporation and Connaught Laboratories Limited dated as of August 25, 1998 (Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A for the year ended January 31, 2001 filed on January 29, 2002). 10.3A Debenture Purchase Agreement, dated as of December 20, 2002, between Aphton Corporation and Aventis Pharmeceuticals Inc. 10.3B Series A Convertible Debenture due 2007, dated December 20, 2002, issued by Aphton Corporation to Aventis Pharmeceuticals Inc. -35- 10.4A Engagement Letter, dated February 20, 2003, among Aphton Corporation, Wharton Capital Partners, Ltd. And Wharton Capital Markets, LLC (Incorporated by reference to the Registrant's Current Report on Form 8-K filed on February 24, 2003). 10.4B Stock Purchase Agreement, dated as of February 24, 2003, by and between Aphton Corporation and Mainfield Enterprises Inc. (Incorporated by reference to the Registrant's Current Report on Form 8-K filed on February 24, 2003). 10.4C Registration Rights Agreement, dated as of February 24, 2003, by and between Aphton Corporation and Mainfield Enterprises Inc. 10.4D Warrant to purchase Common Stock, dated February 24, 2003, issued by Aphton Corporation to Mainfield Enterprises Inc. 10.5A Securities Purchase Agreement, dated as of March 31, 2003, by among Aphton Corporation and SF Capital Partners Ltd., Heartland Value Fund and Smith Barney Fundamental Value Fund Inc. (Incorporated by reference to the Registrant's current report on Form 8-K filed on March 31, 2003). 10.5B Registration Rights Agreement, dated as March 31, 2003, by and among Aphton Corporation and SF Capital Partners Ltd., Heartland Value Fund and Smith Barney Fundamental Value Fund Inc. (Incorporated by reference to the Registrant's current report on Form 8-K filed on March 31, 2003). 10.5C Form of Senior Convertible Note due 2008, dated March 31, 2003, issued by Aphton Corporation to SF Capital Partners Ltd., Heartland Value Fund and Smith Barney Fundamental Value Fund Inc. (Incorporated by reference to the Registrant's current report on Form 8-K filed on March 31, 2003). 10.5D Form of Warrant to purchase Common Stock, dated March 31, 2003, issued by Aphton Corporation to SF Capital PartnersLtd., Heartland Value Fund and Smith Barney Fundamental Value Fund Inc. (Incorporated by reference to the Registrant's current report on Form 8-K filed on March 31, 2003). 23.1 Consent of Ernst & Young LLP, Independent Certified Public Accountants. 99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. of Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (c) Reports on Form 8-K Aphton filed the following current reports on Form 8-K for fiscal year ended December 31, 2002: - on January 23, 2002, announcing the completion of patient recruitment for Aphton's gastric cancer clinical trial; - on January 31, 2002, announcing the effectiveness of a registration statement on Form S-3 to sell 1,500,000 shares of Aphton's common stock; - on February 5, 2002, disclosing the existence of an underwriting agreement among Aphton, UBS Warburg LLC and Morgan Keegan & Co., Inc.; - on February 5, 2002, announcing the sale of 1,345,000 shares of Aphton's common stock; - on February 7, 2002, announcing the closing of the offer and sale of 1,345,000 shares of Aphton's common stock; - on February 11, 2002, disclosing that a scientific collaborator of Aphton had announced interim results of a gastric cancer Phase II clinical trial at the 12th International Congress in Paris on anti-cancer treatment; - on March 18, 2002, disclosing certain preliminary unaudited summary financial information of Aphton for the period ended December 31, 2001; - on March 18, 2002, disclosing the existence of an underwriting agreement between Aphton and Morgan -36- Keegan & Co., Inc.; - on March 21, 2002, announcing the closing of the offer and sale of 1,200,000 shares of Aphton's common stock. - On May 20, 2002, announcing the interim gastric cancer impressive results presented at the American Society of Clinical Oncology; - On June 12, 2002, announcing the continued impressive interim results with 61% more cancer patients previously reported; - On June 17, 2002, announcing that the Food and Drug Administration (FDA) granted orphan drug status for anti-gastrin immunogen for pancreatic cancer; - July 23, 2002, announcing that the FDA granted orphan drug status for anti-gastrin immunogen for gastric cancer; - On July 29, 2002, disclosing the preparation to file Investigational New Drug application with the FDA to examine whether G17DT may be efficacious for Gastro-esophageal Reflux Disease (GERD); - On July 31, 2002, disclosing further impressive results with 72 stomach cancer patients; - On September 23, 2002, announcing fast track designation approved by the FDA for anti-gastrin immunogen for pancreatic cancer; - On September 23, 2002, attaching the placement agency agreement with Life Science Group, Inc. to sell 2,500,000 shares of common stock; - On September 26, 2002, disclosing receipt of gross proceeds of $5,000,000 for the sale of 2,500,000 shares of common stock under Form S-3 (File No. 333-92058); - On October 28, 2002, announcing the 53% increased median survival time in European Phase III trial for pancreatic cancer; - On November 6, 2002, announcing the receipt of approval to initiate clinical trial in Europe for GERD; - On December 3, 2002, attaching placement agency agreement with Life Science Group, Inc to sell 1,520,000 shares of common stock for gross proceeds of $3,610,000; - On December 6, 2002, announcing receipt of $3,610,000 gross proceeds under Form S-3 (File No. 333-92058); - On December 19, 2002, announcing that Australia granted orphan drug designation for anti-gastric immunogen for both gastric and pancreatic cancers; - On December 20, 2002, announcing sale of note for$3 million and the signing of the letter of intent to restructure existing co-promotion agreement with Aventis; Subsequent to year-end, Aphton filed the following current reports on Form 8-K. - On February 6, 2003, announcing the reported latest tumor responses from Phase II gastric cancer trial; - On February 21, 2003, announcing the fast track designation approved by the FDA for G17DT combined with Cisplatin and 5-FU; - On February 24, 2003, attaching the stock purchase agreement with Mainfield Enterprises Inc. and engagement letter with Wharton Capital to sell 500,000 shares of common stock for gross proceeds of $1,480,000; - On February 24, 2003,disclosing unaudited year-end financial results for tye year 2002; - On March 6, 2003, announcing the Phase III data with G17DT for pancreatic cancer patients presented to overseas regulatory agency. - On March 31, 2003, announcing sale of senior convertible note for $15 million to SF Capital Partners Ltd., Heartland Value Fund and Smith Barney Fundamental Value Fund Inc. - On March 31, 2003, announcing expiration of letter of intent between Aphton and Aventis. -37- Dated: March 31, 2003 APHTON CORPORATION By: PHILIP C. GEVAS Chairman of the Board, Chief Executive Officer, and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date /s/ Philip C. Gevas ------------------------------------ Chairman of the Board, Chief Executive Officer March 31, 2003 and President PHILIP C. GEVAS /s/ William A. Hasler ------------------------------------ Vice Chairman of the Board, Director and March 31, 2003 Co-Chief Executive Officer WILLIAM A. HASLER /s/ Nicholas John Stathis March 31, 2003 ------------------------------------ Director NICHOLAS JOHN STATHIS /s/ Robert S. Basso Director March 31, 2003 ------------------------------------ ROBERT S. BASSO /s/ Frederick W. Jacobs Vice President, Treasurer, Chief Financial March 31, 2003 ------------------------------------ Officer and Chief Accounting Officer FREDERICK W. JACOBS
-38- CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER (Section 302 Certification of the Sarbanes-Oxley Act of 2002) I, Philip C. Gevas, certify that: 1. I have reviewed this Annual Report on Form 10-K of Aphton Corporation; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /S/ Philip C. Gevas - --------------------------------------- Philip C. Gevas Chief Executive Officer March 31, 2003 -39- CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER (Section 302 Certification of the Sarbanes-Oxley Act of 2002) I, Frederick W. Jacobs, certify that: 1. I have reviewed this Annual Report on Form 10-K of Aphton Corporation; 2. Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this Annual Report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a - 14 and 15d - 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): b) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and c) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /S/ Frederick W. Jacobs - --------------------------------------- Frederick W. Jacobs Chief Financial Officer March 31, 2003 -40- INDEX TO FINANCIAL STATEMENTS FINANCIAL STATEMENTS
Page Reports of Independent Certified Public Accountants Balance Sheets - December 31, 2002 and 2001 Statements of Operations - for the year ended December 31, 2002, eleven months ended December 31, 2001 and the year ended January 31, 2001 Statements of Stockholders' (Deficit) Equity - for the year ended December 31, 2002, eleven months ended December 31, 2001 and the year ended January 31, 2001 Statements of Cash Flows - for the year ended December 31, 2002, eleven months ended December 31, 2001 and the year ended January 31, 2001 Notes to the Financial Statements
-41- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Aphton Corporation We have audited the accompanying balance sheets of Aphton Corporation as of December 31, 2002 and December 31, 2001 and the related statements of operations, stockholders' (deficit) equity and cash flows for the year ended December 31, 2002, the eleven months ended December 31, 2001 and the year ended January 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aphton Corporation as of December 31, 2002 and December 31, 2001, and the results of its operations and its cash flows for the year ended December 31, 2002, for the eleven months ended December 31, 2001 and the year ended January 31, 2001, in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming Aphton Corporation will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring operating losses since inception and has negative working capital at December 31, 2002 of approximately $5.4 million. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Miami, Florida March 26, 2003 -42- APHTON CORPORATION Balance Sheets
Assets December 31, December 31, 2002 2001 Current Assets: Cash and current investments: Cash and short-term cash investments $7,824,182 $3,176,717 Investment securities-trading 749,095 1,147,417 Investment securities-held-to-maturity - 1,999,006 ---------- ---------- Total cash and current investments 8,573,277 6,323,140 Other assets (including current portion of unconditional supply commitment) 374,740 595,390 ---------- ---------- Total current assets 8,948,017 6,918,530 Equipment and improvements, at cost, net of accumulated depreciation and amortization 245,063 188,597 Unconditional supply commitment 6,797,900 6,875,515 ----------- ----------- Total assets $15,990,980 $13,982,642 =========== =========== Liabilities and Stockholders' Deficit Liabilities: Current liabilities: Accounts payable and other $14,316,616 $10,715,430 ----------- ----------- Total current liabilities 14,316,616 10,715,430 Convertible debenture 3,000,000 - Deferred revenue 10,000,000 10,000,000 ------------ ----------- Total liabilities 27,316,616 20,715,430 ------------ ----------- Commitments Stockholders' Deficit: Preferred stock, $0.001 par value - Authorized: 2,000,000 shares Issued and outstanding: none - - Common stock, $0.001 par value - Authorized: 30,000,000 shares Issued and outstanding: 24,201,639 shares at December 31, 2002 and 17,386,996 shares at December 31, 2001 24,202 17,387 Additional paid in capital 128,956,652 93,566,314 Purchase warrants 298,900 298,900 Accumulated deficit (140,605,390) (100,615,389) ------------ ----------- Total stockholders' deficit (11,325,636) (6,732,788) ------------ ----------- Total liabilities and stockholders' deficit $15,990,980 $13,982,642 ============ ===========
The accompanying notes are an integral part of the financial statements. -43- APHTON CORPORATION Statements of Operations for the year ended December 31, 2002, the eleven months ended December 31, 2001 and the year ended January 31, 2001
December 31, December 31, January 31, 2002 2001 2001 Revenue: $ - $ - $ - ------------- ----------- -------------- Costs and Expenses: General and administrative 2,269,652 2,319,539 1,661,910 Research and development 37,682,329 28,676,455 15,302,183 ------------- ----------- -------------- Total costs and expenses 39,951,981 30,995,994 16,964,093 ------------- ----------- -------------- Loss from operations 39,951,981 30,995,994 16,964,093 ------------- ----------- -------------- Other Income (expense): Dividend and interest income 114,539 393,768 1,554,611 Unrealized losses from investments (152,559) (662,229) (987,657) -------------- ------------- -------------- Net loss $(39,990,001) $(31,264,455) $(16,397,139) -------------- ------------- -------------- -------------- ------------- -------------- Per share data Basic and diluted loss per common share $(1.93) $(1.87) $(1.02) -------------- ------------- -------------- -------------- ------------- -------------- Weighted average number of common shares outstanding 20,747,948 16,739,267 16,100,108 -------------- ------------- -------------- -------------- ------------- --------------
The accompanying notes are an integral part of the financial statements. APHTON CORPORATION Statements of Stockholders' (Deficit) Equity for the year ended December 31, 2002, the eleven months ended December 31, 2001 and the year ended January 31, 2001
Additional Common Stock Paid in Purchase Accumulated Shares Amount Capital Warrants Deficit Total Balance, January 31, 2000 15,592,984 $15,593 $64,799,784 $198,900 $ (52,953,795) $12,060,482 - Exercise of purchase Warrants 115,000 115 246,385 - 246,500 Sale of stock, net 491,509 491 15,246,309 - - 15,246,800 Net loss - - - - (16,397,139) (16,397,139) ---------- ------- ---------- ----------- --------------- ------------- Balance, January 31, 2001 16,199,493 16,199 80,292,478 198,900 (69,350,934) 11,156,643 ---------- ------- ---------- ----------- --------------- ------------- Sale of stock, net 1,187,503 1,188 13,273,836 - - 13,275,024 Issuance of warrants - - - 100,000 - 100,000 Net loss - - - - (31,264,455) (31,264,455) ---------- ------- ----------- ----------- -------------- ------------- Balance, December 31, 2001 17,386,996 17,387 93,566,314 298,900 (100,615,389) (6,732,788) Exercise of purchase - Warrants 80,000 80 19,920 - 20,000 Sale of stock, net 6,734,643 6,735 35,370,418 - - 35,377,153 Net loss - - - - (39,990,001) (39,990,001) ----------- ------- ------------ -------- -------------- ------------- Balance, December 31, 2002 24,201,639 $24,202 $128,956,652 $298,900 $(140,605,390) $(11,325,636) =========== ======= ============ ======== ============== ==============
The accompanying notes are an integral part of the financial statements. -44- APHTON CORPORATION Statements of Cash Flows for the year ended December 31, 2002, the eleven months ended December 31, 2001 and the year ended January 31, 2001
December 31, December 31, January 31, 2002 2001 2001 Cash flows from operating activities: Cash paid to suppliers and employees $(35,648,620) $(24,593,507) $(15,467,013) Sale (purchase) of trading securities 245,764 (156,467) (259,957) Losses from trading securities (152,559) (662,229) (987,657) Interest and dividends received 114,539 393,768 1,554,611 ------------- ------------- ------------- Net cash used in operating activities (35,440,876) (25,018,435) (15,160,016) ------------- ------------- ------------- Cash flows from investing activities: Purchase of held to maturity securities - (15,311,311) (59,471,854) Proceeds from maturity of held to maturity securities 1,999,006 26,815,000 52,788,000 Capital expenditures (157,818) (92,138) (61,116) ------------- ------------- ------------- Net cash provided by (used in) 1,841,188 11,411,551 (6,744,970) investing activities ------------- ------------- ------------- Cash flows from financing activities Proceeds from convertible debenture 3,000,000 - - Sales of stock 35,397,153 13,275,024 15,493,300 ------------- ------------- ------------- Cash received from financing activities 38,397,153 13,275,024 15,493,300 ------------- ------------- ------------- Net (decrease) increase in cash and short-term cash investments 4,647,465 (331,860) (6,411,686) Cash and short-term cash investments: Beginning of period 3,176,717 3,508,577 9,920,263 ------------- ------------- ------------- End of period $7,824,182 $3,176,717 $3,508,577 ------------- ------------- ------------- ------------- ------------- ------------- Reconciliation of net loss to net cash used in operating activities Net loss $(39,990,001) $(31,264,455) $(16,397,139) Adjustments to reconcile net loss to net cash used in operating activities: Stock purchase warrants - 100,000 - Depreciation and amortization 101,352 69,978 68,029 Unrealized losses from investments 152,559 662,229 987,657 Non-cash employee research and development credit (152,559) (662,229) (987,657) Changes in - Investment securities-trading 398,322 (156,466) 379,581 Other assets 220,650 188,269 45,311 Unconditional supply commitment 77,615 874,149 820,000 Accounts payable and other 3,751,186 5,170,090 (75,798) ------------- ------------- ------------- Net cash used in operating activities: $(35,440,876) $(25,018,435) $(15,160,016) ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the financial statements. -45- APHTON CORPORATION Notes to the Financial Statements 1. Organization and Operations Aphton Corporation is a biopharmaceutical company in late-stage clinical trials for four cancer indications. Aphton is developing products using its innovative vaccine-like technology for neutralizing hormones that participate in gastrointestinal system and reproductive system cancer and non-cancer diseases; and for the prevention of pregnancy. Aphton has strategic alliances with Aventis Pasteur (NYSE: AVE), GlaxoSmithKline (NYSE: GSK), Schering Plough Animal Health (NYSE: SGP), and the World Health Organization (WHO). Basis of Presentation and Management's Plans regarding Liquidity The financial statements have been prepared in accordance with accounting principles generally accepted in the United States for a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred recurring operating losses since inception. At December 31, 2002, the Company has an accumulated deficit and negative working capital of approximately $141 million and $5.4 million, respectively. The Company has financed its research and development activities through debt and equity financings, licensing fees and contracted research and development fees, and interest thereon, from its inception. The Company intends to reduce its spending during the next twelve months by more than 60% to less than $16 million from the approximately $40 million during the twelve months of fiscal year 2002. The Company will pursue its primary objective of filing for approval to market G17DT for monotherapy for advanced pancreatic cancer patients in the European Union, Canada and Australia by September 2003. The Company currently has a strategic alliance with Aventis Pasteur whereby Aventis Pasteur will exclusively promote, advertise, market, distribute and sell its anti-gastrine vaccine (G17DT) in North America and Europe. The Company intends to license G17DT to third parties to treat human cancers in other markets worldwide, including Japan. The Company also intends to license, worldwide, products based on its monoclonal antibody platform targeting gastrin receptors on gastrointestinal system cancers and license, worldwide, G17DT for the treatment of gastroesophageal reflux disease. As part of its efforts to improve its liquidity and financial condition, the Company is currently pursuing various financing alternatives to address its cash needs for the year ended December 31, 2003. There can be no guarantee that the Company will be successful or that it will obtain sufficient funding to address its cash needs for the year ended December 31, 2003. Management believes that the receipt and application of proceeds from these financings, including the $15 million financing completed on March 31, 2003, the second $5 million tranche it expects to complete and the Company's plan to reduce spending to less than $16 million during the next 12 months will allow the Company to operate into the first quarter of 2004, without any additional funds, which would alleviate the substantial doubt about the Company's ability to continue as a going concern. However, if the Company is unsuccessful in its efforts to obtain additional financing the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs. The Company's working capital and capital requirements will depend upon numerous factors, including the following: the progress of its research and development program, pre-clinical testing and clinical trials; the timing and cost of obtaining regulatory approvals; the levels of resources that it devotes to product development, manufacturing and marketing capabilities; technological advances; competition; and collaborative arrangements or strategic alliances with other drug companies, including the further development, manufacturing and marketing of certain of its products, our ability to maintain its listing status at the Nasdaq National Market or, if necessary, the Nasdaq Smallcap Market and its ability to obtain funds from such strategic alliances or from other sources. Many of these factors are beyond the Company's control. On October 15, 2002 and on November 1, 2002, the Company received notices from the staff of the Nasdaq National Market that its common stock had failed to maintain certain minimum requirements for continued listing on the Nasdaq National Market and both of the notices suggested that the Company may want to consider applying to transfer its securities to the Nasdaq Smallcap Market. The Company was subsequently advised by Nasdaq that it had regained compliance with certain minimum requirements for continued listing on the Nasdaq National Market and that its common stock would continue to be listed on the Nasdaq National Market, pending future review. Because its share price is below $3 per share, the Company is currently not in compliance with the continued listing requirements of the Nasdaq National Market and as a result its common stock may be delisted. In the event that the Company's common stock is delisted from the Nasdaq National Market, it would apply to list its common stock on the Nasdaq Smallcap Market. Even if the Company had to move its securities from the Nasdaq National Market, the Company believes that it satisfies all the criteria for listing its common stock on the Nasdaq Smallcap Market, which includes that its share price not fall below $1.00. There is no assurance, however, that the Company's application for trading its common stock on the Nasdaq Smallcap Market would be accepted or, if accepted, that the Company would be able to maintain eligibility for continued listing on the Nasdaq Smallcap Market. If the Company's common stock were to be delisted from the Nasdaq National Market and not accepted for listing on the Nasdaq Smallcap Market, it could adversely affect the Company's ability to raise funds through stock and debt issuances. Aphton's fiscal year end was changed in March, 2001 from January 31 to December 31, effective for the 11 month period ending December 31, 2001. 2. Summary of Significant Accounting Policies Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S.) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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, however, management believes such differences are unlikely to be significant. Research and Development Expenses Research and development costs are expensed as incurred. These costs include internal research and development costs, the salaries of dedicated personnel, the allocated salaries of personnel who also perform general and administrative tasks, the costs of the dedicated research and development facilities and the costs of contracted researchers. There is no allocation of administrative expense or corporate costs to research and development costs. General and Administrative Expenses General and administrative expenses represent expenses not clearly related to research and development expense. A significant portion of these expenses are related to intellectual property/patent legal costs and salaries, which are typically excluded from research and development according to Statement of Financial Accounting Standards No. 2 "Accounting for Research and Development Costs." Equipment and Improvements Equipment and improvements are depreciated using accelerated methods over the estimated economic lives (five to seven years) of the assets. Improvements are amortized over the term of the lease, or the life of the asset, whichever is shorter, using the straight-line method. Betterments that substantially extend the useful life of equipment and furniture generally reduce the accumulated depreciation of the respective asset. Income Taxes The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which requires an asset and liability approach in accounting for income taxes. Under this method, the amount of deferred tax asset or liability is calculated by applying the provisions of enacted tax laws to the differences in the bases of assets and liabilities for financial and income tax purposes. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. -46- Per Share Data The Company complies with SFAS No. 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share. The Company's basic loss per common share was calculated by dividing net loss by the weighted average number of common shares outstanding. The Company's potential common shares are anti-dilutive, and accordingly, basic and diluted loss per share are the same. Such potential common shares consist of purchase warrants (See Note 7) and could potentially dilute basic earnings per share in the future. Cash Equivalents The Company considers all highly liquid debt instruments, including short-term cash investments with initial or remaining maturity from date of purchase of three months or less, to be cash equivalents. Investment Securities Investment securities consist principally of debt securities issued by the U.S. Treasury and other U.S. Government agencies and corporations and investment in other securities, including mutual funds. Investment securities are classified into three categories and accounted for as follows: (1) Held-to-maturity securities are debt securities that the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. (2) Trading securities are securities which are bought and held principally for the purpose of selling them in the near term. These securities are reported at fair value, with unrealized gains and losses included in current earnings. (3) Available-for-sale securities are debt and equity securities not classified as either held-to-maturity or trading securities. The Company does not have available-for-sale securities. Gains and losses realized on the sales of investment securities are determined using the specific identification method. Concentrations of Credit Risk The Company's short-term cash investments are held in several financial institutions and consist principally of insured money market accounts and cash management accounts that are collateralized by or invested in U.S. Government and U.S. Government agency securities. The Company's held-to-maturity securities consist of marketable debt securities. These securities are issued by a diversified selection of corporate and U.S. government agencies with strong credit ratings. The Company's investment policy limits the amount of credit exposure with any one institution. Other than asset-backed securities, these debt securities are generally not collateralized. The Company has not experienced any material losses due to credit impairment on investments in marketable debt securities in any year. Impairment of the Unconditional Supply Commitment As discussed in Note 3, the Company has the unconditional right to receive supplies originally aggregating $9 million from Aventis Pasteur. The Company's policy is to review the current market prices of available supplies, if any, to assure that they remain above the stated Aventis Pasteur contract price of the materials and that the right to receive the supplies remains unimpaired. Aventis Pasteur is one of the largest pharmaceutical vaccine manufacturers in the world. The Company monitors the financial performance of Aventis Pasteur to assure that they will continue to be able to perform under the contract, wherein the special order supplies are to be provided from supplies manufactured by Aventis Pasteur in large quantities and sold to many customers, including the U.S. Government, as part of Aventis Pasteur's basic franchise (business). The contract allows for inflation based increases in the per unit costs of the supplies which the Company and Aventis Pasteur believe are sufficient to assure that there will be no future financial hardship incurred by Aventis Pasteur in the execution of the agreement. Comprehensive Income The Company complies with SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting comprehensive income (defined to include net income, unrealized gains and losses on available-for-sale investment securities, foreign currency adjustments and certain other items not included in the income statement). The Company does not have elements of other comprehensive income other than net loss. -47- Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement is effective for the Company beginning January 1, 2003. Management does not expect that adoption of this standard will have a material impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement eliminates the required classification of gain or loss on extinguishment of debt as an extraordinary item of income and states that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board Opinion No. 30, "Reporting Results of Operations." This statement also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, and makes various other technical corrections to existing pronouncements. The Company is required to implement SFAS No. 145 on January 1, 2003. The Company does not expect this statement to have a material impact on the Company's consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than the date of an entity's commitment to an exit plan. The Company is required to implement SFAS No. 146 on January 1, 2003 for transactions that occur after December 31, 2002. The Company does not expect this statement to have a material impact on the Company's consolidated financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years and interim periods ending after December 15, 2002. SFAS No. 148 does not amend SFAS 123 to require companies to account for employee stock options using the fair value method. The Company adopted the disclosure provisions required under SFAS No. 148 effective December 31, 2002. The Company accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," as amended and interpreted. Accordingly, no compensation expense is recorded for warrants issued to employees in fixed amounts and with fixed exercise prices at least equal to the fair market value of the Company's common stock at the date of grant. The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," through disclosure only. All stock-based awards to nonemployees are accounted for at their fair value in accordance with EITF 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services". There were 909,180 employee stock purchase warrants granted in the year ended December 31, 2002, which expire October 1, 2021. Based on Black-Scholes values, for the year ended December 31, 2002, the pro forma net loss would be approximately $42 million and the pro forma loss per common share would be approximately $2.04. There were 800,360 employee stock purchase warrants granted in the eleven month period ended December 31, 2001, which expire October 1, 2021. Based on Black-Scholes values, for the eleven month period ended December 31, 2001, the pro forma net loss would be approximately $34 million and the pro forma loss per common share would be approximately $2.05. There were 10,000 stock purchase warrants granted in the eleven month period ended December 31, 2001, which expire October 1, 2021, to a non-employee. Based on Black-Scholes values, for the period ended December 31, 2001, the net loss was increased by approximately $100,000. There were 36,000 employee stock purchase warrants granted in the year ended January 31, 2001. Based on Black-Scholes values, for the year ended January 31, 2001, the pro forma net loss would be $16,908,699 and the pro forma loss per common share would be $1.05. There were 150,000 employee stock purchase warrants granted in 2000. Based on Black-Scholes values, for the year ended January 31, 2000, the pro forma net loss would be $13,231,796 and the pro forma loss per common share would be $.90. The following assumptions were used in the Black-Scholes option pricing model for the 909,180 purchase warrants granted in the year ended December 31, 2002 to employees. The stock price and exercise price of these nineteen-year warrants were set at $1.91 on the date of grant, which was November 5, 2002. The risk-free rate of return used was 6.0%. The expected dividend yield used was 0%. The expected time to exercise used was 18.75 years. The expected volatility used was 100%. The following assumptions were used in the Black-Scholes option pricing model for the 800,360 and 10,000 purchase warrants granted in the eleven month period ended December 31, 2001 to employees and non-employees, respectively. The stock price and exercise price of these twenty-year warrants were set at $14.75 on the date of grant, which was October 1, 2001. The risk-free rate of return used was 7.0%. The expected dividend yield used was 0%. The expected time to exercise used was 19.75 years. The expected volatility used was 100%. The following assumptions were used in the Black-Scholes option pricing model for the 36,000 and 150,000 purchase warrants granted to employees in the years ended January 31, 2001 and 2000, respectively. The stock price and exercise price were set at $14.75 on the date of grant, which was May 2000 and 1999, respectively. The stock price and exercise price were set at $14.75 on the date of grant, which was May 2000 and 1999, respectively. The risk-free rate of return used was 7.0%. The expected dividend yield used was 0%. The expected time to exercise used was 10 years. The expected volatility used was 100%. 3. License and Co-Promotion Agreements In June 1998, Aphton and SmithKline Beecham (now GlaxoSmithKline) signed a Collaboration and License agreement, granting GlaxoSmithKline exclusive rights worldwide to Aphton's GnRH-related patents and proprietary technology. The agreement covers the diagnosis, treatment and prevention of GnRH-related cancers and other diseases in humans. Human cancer indications for the anti-GnRH product are prostate, breast, ovarian and endometrial cancer. Additional medical indications for the anti-GnRH product are endometriosis, polycystic ovaries, uterine fibroids, contraception, infertility and precocious puberty. Under terms of the agreement, Aphton and GlaxoSmithKline are collaborating in a joint product development program, with GlaxoSmithKline responsible for clinical trials and regulatory approvals, and for worldwide marketing and distribution of approved products. The agreement uses a royalty mechanism based on product sales, in dollars, worldwide to determine Aphton's revenues. As part of the Agreement, GlaxoSmithKline made an equity investment of $5,000,000 for 237,867 shares of newly issued Aphton common stock. On February 14, 1997 Aphton signed an agreement with Pasteur Merieux Connaught (Rhone-Poulenc Group) which is now known as Aventis Pasteur, a leader in medical science and research and one of the world's largest vaccine manufacturers and marketers, for a strategic alliance for all human cancer applications of the Company's anti-gastrin immunogen product including stomach, colorectal, liver and pancreatic cancers. Under the terms of the 20-year -48- license and co-promotion agreement, Aphton will be responsible for product development, clinical trials and regulatory agency approvals, and Aventis Pasteur will be responsible for promotion, advertising, marketing, distribution and sales of the anti-gastrin immunogen product in the United States, Canada, Europe (including the C.I.S. countries) and Mexico. In addition, Aphton and Aventis Pasteur entered into agreements providing for: (a) the supply of the anti-gastrin immunogen product from Aphton to Aventis Pasteur; and (b) the supply of certain components of the anti-gastrin immunogen product (as well as other Aphton products) from Aventis Pasteur to Aphton. Aventis Pasteur will fund the costs associated with product introduction, promotion, advertising and marketing throughout the territory covered by the agreement. Under the terms of the agreement, in addition to upfront consideration aggregating $10 million, including $1 million cash and the supply commitment (of material suitable for human use) of $9 million, Aphton will receive the majority of the profits from sales of the anti-gastrin immunogen product with the balance of profits to be retained by Aventis Pasteur. The supply commitment of materials suitable for human use consists of Diphtheria Toxoid and/or Tetanus Toxoid. Aphton may use some or all of the unconditional supply commitment in the product under development with Aventis Pasteur or Aphton may use some or all of the supply commitment on other current product lines or on research and development. The supply commitment of material suitable for human use is not readily obtained on the open market in such large quantities. By comparison to lower quality material available in smaller quantities management estimates that the market value of the supplies is substantially greater than the carrying value of $9 million, if they could be obtained. The carrying value of the supplies is based on the negotiated License Fee. The amount of material to be received is based on negotiated per unit costs, which are well below the per unit costs of lower quality materials available in smaller quantities. The $10 million upfront consideration has been classified as a license payment and has been deferred and will be recognized for financial statement (accounting) purposes as revenue within the twenty-year period of the agreement. The revenue recognition will begin once regulatory agency approval to market the product has been received and will be recognized ratably over the remaining period of the contract, which ends February 13, 2017. The Company does not speculate on the timing of regulatory approvals. Under the agreement, Aventis Pasteur shall have the right to terminate upon one hundred eighty (180) days prior notice to Aphton, in the event that it determines, following completion of Phase III clinical trials of the gastrointestinal cancer product (and receipt by Aventis Pasteur of the results and supporting data obtained in such trials), that for safety and efficacy reasons it does not wish to co-promote, market or sell the Product. In addition, either party may terminate the agreement by (a) mutual agreement, (b) for uncured material breach and (c) due to liquidation, insolvency, etc. Further, under the agreement, none of the aggregate $10 million consideration, either the cash or the Company's rights to the full $9 million in unconditional supply commitment, is refundable to Aventis Pasteur under any conditions. There is no provision under the agreement for the unconditional supply commitment to be satisfied by Aventis Pasteur with a cash payment. (The $10 million license payment was recognized for tax purposes in the year ended April 30, 1997.) 4. Equipment and Improvements At December 31, 2002 and 2001, equipment and improvements consisted of the following: December 31, December 31, 2002 2001 ----- ----- Laboratory equipment $ 681,690 $ 546,158 Leasehold improvements 398,232 398,232 Office and laboratory furniture and fixtures 255,267 232,980 ----------- ---------- 1,335,188 1,177,370 Less accumulated depreciation and amortization (1,090,125) (988,773) ----------- ---------- $245,063 $188,597 =========== ========== 5. Accounts Payable and Other At December 31, 2002 and 2001, accounts payable and other was composed of : -49- December 31, December 31, 2002 2001 ---- ---- Trade accounts payable $13,314,943 $9,316,764 Accrued wages payable (see Note 6) 749,095 1,147,417 Employee benefits payable 252,578 251,249 ----------- ----------- $14,316,616 $10,715,430 =========== =========== -50- 6. Investment Securities Securities classified as trading and held-to-maturity at December 31, 2002 and 2001 are summarized below. Estimated fair value is based on quoted market prices for these or similar investments.
December 31, Unrealized Unrealized 2002 Cost Gains Losses Fair Value ------------ ---- ---------- ---------- ---------- Trading securities (carried at fair value): $901,654 $-- $152,559 $749,095 December 31, Unrealized Unrealized 2002 Cost Gains Losses Fair Value ------------ ---- ---------- ---------- ---------- Trading securities (carried at fair value): $1,809,646 $-- $662,229 $1,147,417 Securities held to maturity (carried at amortized cost): $1,999,006 $-- $-- $1,999,006
The Company held no available-for-sale investment securities at December 31, 2002 or 2001. The carrying values of all investment securities held at December 31, 2002 and 2001 are summarized below: Security December 31, December 31, - -------- 2002 2001 ---- ---- Trading securities $749,095 $1,147,417 Securities held-to-maturity maturing within one year - 1,999,006 --------- ---------- Total short-term investments $749,095 $3,146,423 ========= ========== The Company's trading securities consist of mutual funds and relate to a Company plan whereby certain individuals may forego immediate receipt of wages. In connection therewith, the Company establishes a liability for accrued wages and records the related compensation expense as services are performed. Further, the Company segregates an amount of funds in investment accounts equal to the liability for accrued wages. The investment accounts (trading securities) remain assets of the Company, and are subject to the general creditors of the Company. Upon transfer of the funds to the investment accounts, the employees direct the specific investment of the funds. The changes in value in the investment accounts (trading securities) are recognized as unrealized gains and losses in the statements of operations, with a corresponding increase or decrease to research and development expense and the liability for employees' wages and benefits. Unrealized holding losses on trading securities and the corresponding decrease in research and development expense totaled approximately $150,000 in the year ended December 31, 2002. Unrealized holding losses on trading securities and the corresponding decrease in research and development expense totaled approximately $660,000 in the eleven month period ended December 31, 2001. Unrealized holding losses on trading securities and the corresponding decrease in research and development expense totaled approximately $990,000 in the year ended January 31, 2001. 7. Common Stock, Preferred Stock and Purchase Warrants Common Stock - On February 7, 2002, Aphton sold 1,345,000 shares of registered common stock at $12.70 per share and received gross proceeds of $17.1 million. On March 21, 2002, Aphton sold 1,200,000 shares of registered common stock at $10.50 per share and received gross proceeds of $12.6 million. Because the shares of common stock were issued below $12.00 per share, the anti-dilution provision contained in the August 2001 purchase agreement was triggered and as a result, on April 9, 2002, we issued 169,643 unregistered shares of common stock to certain of our investors. On September 26, 2002, Aphton sold 2,500,000 shares of registered common stock at $2.00 per share and received gross proceeds of $5 million. On December 6, 2002, Aphton sold 1,520,000 shares of registered common stock at $2.375 per share and received gross proceeds of approximately $3.6 million. -51- Preferred Stock - The Company has 2,000,000 shares of authorized preferred stock, none of which has ever been issued. Purchase Warrants - Each purchase warrant ("warrant") described below is exercisable for one share of common stock and is subject to the restrictive holding requirements of SEC Rule 144. The terms of the warrant range from 8 to 23 years. In December, 1999 there were 1,000,000 warrants with an exercise price of $14.75 reserved for future use of which 810,360 were issued in the eleven month period ended December 31, 2001. In November, 2002 there were 1,000,000 warrants with an exercise price of $1.91 reserved for future use of which 909,180 were issued in the year ended December 31, 2002. -52- The following table summarizes purchase warrant activity over Weighted-Average the past three fiscal periods: Number of Shares Exercise Price ---------------- ---------------- Outstanding at January 31, 2000 1,804,400 $13.58 Granted 36,000 $14.75 Exercised (115,000) $2.14 ---------- Outstanding at January 31, 2001 1,725,400 $14.37 Granted 810,360 $14.75 Exercised - N/A Outstanding at December 31, 2001 2,535,760 $14.49 Granted 909,180 $1.91 Exercised (80,000) $0.25 ---------- Outstanding at December 31, 2002 3,364,940 $11.43 ========== Exercisable at January 31, 2001 1,725,400 $14.37 Exercisable at December 31, 2001 2,029,400 $14.43 Exercisable at December 31, 2002 3,055,097 $12.74 For warrants outstanding and exercisable at December 31, 2001, the exercise price ranges and average remaining lives were: Warrants Outstanding and Exercisable ------------------------------------
Range of Exercise Number Average Average Number Average Average Prices Outstanding Period (1) Price (2) Exercisable Period (1) Price (2) $.25 to $14.00 1,361,580 16.8 $5.71 968,900 13.9 $7.25 $14.01 to $14.99 1,580,360 15.9 $14.75 1,663,197 16.0 $14.75 $15.00 to $24.00 423,000 12.9 $17.42 423,000 12.9 $17.42 --------- --------- 3,364,940 15.9 $11.43 3,055,097 14.9 $12.74 ========= ========= (1) Weighted average remaining term in years (2) Weighted average exercise price
8. Income Taxes Gross deferred tax assets result from net operating loss and income tax credit carryforwards. Realization of these assets is dependent on the Company's ability to generate sufficient future taxable income, prior to the expiration of the carryforwards, which is dependent on the completion of research and development activities and successful marketing of the Company's various products. Due to the uncertainties related to the above and in accordance with guidance contained in SFAS No. 109, a valuation allowance has been provided for these deferred tax assets. Accordingly, these assets do not appear in the Company's balance sheet at December 31, 2002 and 2001. The changes in the valuation allowance in the year ended December 31, 2002 and the eleven month period ended December 31, 2001 and the year ended January 31, 2001 were $9,580,000, $13,611,000 and $5,553,000, respectively. Deferred tax assets consisted of: December 31, 2002 December 31, 2001 ----------------- ----------------- Net operating losses $41,207,000 $31,990,000 Deferred license payment revenues 3,800,000 3,800,000 Expenses deductible in future periods 381,000 531,000 Federal and State tax credits 3,637,000 3,124,000 ------------- ------------ Total deferred tax assets 49,025,000 39,445,000 Valuation allowance (49,025,000) (39,445,000) ------------- ------------ Net deferred tax assets $ -- $ -- ============= ============ -53- At December 31, 2002, for Federal income tax purposes, the Company had net operating loss carryforwards of approximately $124,228,000 and various income tax credit carryforwards, primarily research and experimentation, aggregating $3,080,000, which expire at various dates through 2023. At December 31, 2002, for California income tax purposes, the Company had various income tax credit carryforwards, primarily research and experimentation, aggregating $554,000, which expire at various dates through 2014. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to these carryforwards. The reconciliation of income tax computed at the U.S. federal statutory rate applied to the Company's net loss is as follows:
Year ended Eleven months ended Year ended December 31, 2002 December 31, 2001 January 31, 2001 ----------------- ----------------- ---------------- Tax at U.S. statutory rate (34.00)% (34.00)% (34.00)% State taxes, net of federal benefit ( 4.00)% ( 4.00)% ( 4.00)% Non-deductible items and other 0.65% 0.65% 1.09% Change in valuation allowance 37.35% 37.35% 36.91% ------- ------- ------- - % - % - % ======= ======= =======
9. Commitments The Company has noncancelable facilities leases expiring at various dates through December 31, 2007. The leases provide various options to renew. The minimum rental commitment for the year ending December 31, 2003 is $153,000, for the year ended December 31, 2004 is $140,000, for the year ended December 31, 2005 is $56,000, for the year ended December 31, 2006 is $57,000, for the year ended December 31, 2007 is $34,000 and none thereafter. Rental expense for these leases for the year ended December 31, 2002 was approximately $151,992, for the eleven month period ended December 31, 2001 was approximately $73,000 and for the year ended January 31, 2001 was approximately $103,000. Rental expense is allocated between research and development expense and general and administrative expense, based on use, in the accompanying statements of operations. 10. Selected Quarterly Financial Data (unaudited) Selected unaudited quarterly financial data for the year ended December 31, 2002 and the eleven months ended December 31, 2001 are summarized below.
Statement of Operations Data: For the First Second Third Fourth year December 31, 2002 Quarter Quarter Quarter Quarter ------- -------- ------- -------- Research and development expenditures $9,690,247 $9,311,658 $10,180,407 $ 8,650,017 Dividend and interest income $ 22,288 $ 49,325 $ 29,011 $ 13,915 Net loss $(10,087,036) $(9,834,698) $(10,923,844) $(9,294,423) Basic and diluted net loss per share $(0.54) $(0.49) $(0.52) $(0.40) Weighted average shares outstanding 18,740,210 20,101,639 20,966,639 23,188,386
Statement of Operations Data: For the Two Months eleven months ended Ended Second Third Fourth December 31, 2001 March 31, 2001 Quarter Quarter Quarter -------------------------------------- ----------------- -------- -------- -------- Research and development expenditures $3,306,175 $5,648,381 $7,550,430 $12,171,469 Dividend and interest income $ 136,561 $ 123,611 $ 79,620 $ 53,976
-54- Net loss $(3,475,187) $(6,453,059) $(8,139,156) $(13,197,053) Basic and diluted net loss per share $(0.21) $(0.40) $(0.48) $(0.76) Weighted average shares outstanding 16,199,493 16,199,493 16,991,161 17,386,996
The sum of the quarterly basic and diluted net loss per share does not equal the basic and diluted net loss per share for the year ended December 31, 2002 and for the eleven months ended December 31, 2001 as a result of rounding. 11. Subsequent Events Subsequent to year end, on February 24, 2003, the Company sold to an institutional investor 500,000 shares of registered common stock at $2.96 per shares receiving gross proceeds of $1.48 million and 150,000 unregistered warrants in a private placement at $0.125 per warrant for gross proceeds of $18,750. Each warrant has registration rights and entitles the holder thereof to purchase a share of the Company's common stock at a price of $2.96 per share for the next five years. Subsequent to year end, on March 31, 2003, issued and sold in a private placement convertible, redeemable, 5-year, interest-bearing notes and warrants to three institutional investors, including a substantial participation by two existing investors in the Company, for proceeds of $15 million in the first tranche closing; the proceeds will be wired today. The notes are convertible at a fixed price of $2.50 per share; as part of the transaction Aphton also issued to the investors five year warrants with a fixed exercise price of $2.70 per share (both are at a premium to the market price of the common stock as of the last closing price), unless otherwise adjusted prior to conversion pursuant to the provisions of the notes and warrants. The Company has the right and obligation to redeem the notes under certain conditions at any time after the third year from the issuance date. The securities have registration rights. In addition, and subject to certain conditions, the Company is obligated to sell and one of the investors is obligated to purchase an additional $5 million of such notes and warrants convertible into shares of our common stock, also with registration rights, in the second tranche. In compliance with regulatory requirements, Aphton intends to hold a shareholder's meeting to approve certain aspects of the transaction; in connection with the shareholder's meeting, the Company has already secured irrevocable proxies from certain of its existing shareholders to vote in favor of the transaction and believes that it will have a strong favorable majority vote. -55- EX-10.3A 3 adebpurchaseagmt_ex10-3a.txt DEBENTURE PURCHASE AGREEMENT ================================================================================ DEBENTURE PURCHASE AGREEMENT, between Aphton Corporation and Aventis Pharmaceuticals Inc., dated as of December 19, 2002, regarding Series A Convertible Debenture Due December 19, 2007 of Aphton Corporation ================================================================================ DEBENTURE PURCHASE AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Agreement"), dated as of December 19, 2002, by between Aphton Corporation, a Delaware corporation (the "Company"), and Aventis Pharmaceuticals Inc., a Delaware corporation (the "Purchaser"). W I T N E S S E T H: In consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS 1.1 Definitions. As used in this Agreement, the following defined terms shall have the meanings indicated below: "Affiliate" means, as applied to any Person, any other Person directly or indirectly controlling, controlled by or under common control with, that Person. For the purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by", and "under common control with") as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through ownership of voting securities or by contract or otherwise. "Agreement" has the meaning ascribed to it in the forepart of this Agreement. "Balance Sheet" has the meaning ascribed to it in Section 3.9. "Business Day" means a day other than Saturday, Sunday or any day on which banks located in the State of New Jersey, the State of New York or the State of Florida are authorized or obligated to close. "Closing" means the closing of the transactions contemplated by Section 2.2. "Closing Date" means December 19, 2002 or such other date on which the Closing actually occurs. "Common Stock" means Common Stock, par value $.001 per share, of the Company. "Company" has the meaning ascribed to it in the forepart of this Agreement. "Company Securities" means the Debenture and the Common Stock obtained upon conversion of the Debenture. "Confidential Information" shall mean, with respect to a party, any financial, technical, business, marketing and other non-public information concerning such party's business, which information is held by such party in confidence and identified in writing or orally to the receiving party as confidential or is of the type customarily understood to be confidential. "Contract" means any agreement (including licenses with non-governmental Persons), lease, evidence of Indebtedness, mortgage, indenture, security agreement or other instrument or contract. "Debenture" has the meaning ascribed to it in Section 2.1(b). "Disposition" has the meaning ascribed to it in Section 4.5. "Encumbrance" means any security interest, lien, pledge, claim, charge, escrow, encumbrance, option, right of first offer, right of first refusal, preemptive right, mortgage, indenture, security agreement or other similar agreement, arrangement, contract, commitment, understanding or obligation, whether or not relating in any way to credit or the borrowing of money. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC thereunder. "Exchange Reports" has the meaning ascribed to it in Section 3.8(a). "Financial Statements" has the meaning ascribed to it in Section 3.8(b). "GAAP" has the meaning ascribed to it in Section 3.8(b). "Governmental or Regulatory Authority" means any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision. "Indebtedness" means (a) all indebtedness of the Company, including the principal of, and premium, if any, and interest (including interest accruing after the filing of a petition initiating any proceeding under any state, federal or foreign bankruptcy laws, whether or not allowable as a claim in such proceeding) on, all indebtedness, whether outstanding currently or hereafter created (i) for borrowed money, (ii) for money borrowed by others and guaranteed, directly or indirectly, by the Company, (iii) for money borrowed by others for which the Company provides security, (iv) constituting purchase money indebtedness the payment of which the Company is directly or contingently liable, (v) constituting reimbursement obligations under bank letters of credit, (vi) under interest rate and currency swaps, caps, floors, collars or similar agreements or arrangements intended to protect the Company against fluctuations in interest or currency exchange rates, (vii) under any lease of any real or personal property, which obligations are capitalized on the Company's books in accordance with generally accepted accounting principles, or (viii) under any other arrangement under which obligations are recorded as indebtedness on the Company's books in accordance with generally accepted accounting principles, and (b) any modifications, refundings, deferrals, renewals or extensions of any such 2 Indebtedness, or securities, note or other evidences of indebtedness issued in exchange for such Indebtedness. "Law" or "Laws" means all laws, statutes, rules, regulations, ordinances and other pronouncements having the effect of law of the United States, any foreign country or any domestic or foreign state, county, city or other political subdivision or of any Governmental or Regulatory Authority. "Losses" has the meaning ascribed to it in Section 5.5(a). "Material Adverse Effect" means a material adverse effect on the business, results of operations, prospects or financial position of a Person and such Person's Subsidiaries, taken as a whole. "Other Registrable Securities" has the meaning ascribed to it in Section 6.1(d). "Permitted Encumbrances" has the meaning ascribed to it in Section 3.11. "Person" means any natural person, corporation, general partnership, limited partnership, limited liability company or partnership, proprietorship, other business organization, trust, union, association or Governmental or Regulatory Authority. "Purchaser" has the meaning ascribed to it in the forepart of this Agreement. "Purchaser's Affiliates" has the meaning ascribed to it in Section 4.3(h). "Purchaser's Counsel" has the meaning ascribed to it in Section 6.3. "Registrable Securities" means shares of Common Stock issued or issuable to the Purchaser upon conversion of the Debenture. "Registration Demand" has the meaning ascribed to it in Section 6.1(a). "Representatives" has the meaning ascribed to it in Section 5.6(a). "SEC" means the Securities and Exchange Commission. "SEC Reports" has the meaning ascribed to it in Section 3.8(a). "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder. "Subsidiary" means, as applied to any Person, any Person in which such Person, directly or indirectly through Subsidiaries or otherwise, beneficially owns more than 50% of either the equity interest in, or the voting control of, such Person, whether or not existing on the date hereof. 3 "Transfer" means, directly or indirectly, any sale, transfer, assignment, hypothecation, pledge or other disposition of any Company Securities or any interests therein. "Transition Report" has the meaning ascribed to it in Section 3.8(a). ARTICLE II SALE AND PURCHASE OF DEBENTURE; CLOSING 2.1 Sale and Purchase of Debenture. (a) Subject to the terms and conditions hereof and in reliance upon the representations and warranties of the Purchaser and the Company contained herein or made pursuant hereto, the Company agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Company, on the Closing Date, the Debenture in the aggregate principal amount of $3,000,000.00. The aggregate principal purchase price to be paid to the Company by the Purchaser for the Debenture is $3,000,000.00. (b) As used herein, "Debenture" means the Company's Series A Convertible Debenture Due December 19, 2007 issued pursuant to this Agreement, together with all debentures issued in exchange therefor or replacement thereof. The Debenture will be substantially in the form of the Debenture set forth as Exhibit A hereto. The Debenture will be convertible into shares of Common Stock at the conversion price and in the manner determined under the terms of the Debenture. 2.2 The Closing. (a) Subject to the terms and conditions hereof, the closing (the "Closing") of the purchase and sale of the Debenture to be purchased by the Purchaser will take place at the offices of Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York, or at such other place as the Company and the Purchaser shall mutually agree, at 10:00 A.M., New York City time, on the Closing Date. (b) Subject to the terms and conditions hereof, on the Closing Date (i) the Company will deliver to the Purchaser (A) the Debenture payable to the Purchaser, and dated the Closing Date, in the aggregate principal amount of $3,000,000.00, (B) the opinion of White & Case LLP, counsel to the Company, dated the Closing Date, addressed to the Purchaser substantially in the form attached hereto as Exhibit B, and (C) a certificate, dated the Closing Date and executed by the secretary or assistant secretary of the Company, as to the certificate of incorporation and bylaws of the Company, resolutions authorizing the transactions contemplated hereby and the incumbency of any officer executing documents on behalf of the Company; and (ii) the Purchaser will deliver to the Company, by wire transfer to an account designated by the Company, an amount equal to the purchase price for the Debenture in federal or other immediately available funds. 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser as follows: 3.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in each state or jurisdiction where the nature of its business or the ownership of property make such qualification necessary, except where the failure of the Company to be so qualified would not have a Material Adverse Effect on the Company. 3.2 Authority. The Company has full power and authority to execute and deliver this Agreement and the Debenture, to perform its obligations hereunder and under the Debenture and to consummate the transactions contemplated hereby and thereby (including, for the sake of clarity, the issuance of the Common Stock upon conversion of the Debenture) subject to the necessary shareholder approvals as required by the Nasdaq National Market or such other domestic securities exchange or quotation system upon which shares of the Common Stock may be listed. The execution, delivery and performance by the Company of this Agreement and the Debenture and the consummation by it of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action by its Board of Directors, and no other action is necessary to authorize the execution, delivery and performance of this Agreement and the Debenture and the consummation by the Company of the transactions contemplated hereby and thereby. This Agreement and the Debenture have been, duly and validly executed and delivered by the Company and this Agreement and the Debenture constitute the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their respective terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. 3.3 No Conflicts. The execution and delivery by the Company of this Agreement and the Debenture, the performance by the Company of its obligations under this Agreement and the Debenture and the consummation of the transactions contemplated hereby and thereby do not and will not (i) conflict with, or constitute a default under, or result in the acceleration or termination of, any Contract to which the Company or any of its Subsidiaries is a party, the result of which could have a Material Adverse Effect on the Company or impair or restrict its power to perform its obligations hereunder or under the Debenture, (ii) result in a violation of or default under the Company's Certificate of Incorporation or Bylaws, or any order, judgment or decree of any court or Governmental or Regulatory Authority having jurisdiction over the Company or any of its assets or properties, the result of which could have a Material Adverse Effect on the Company or impair or restrict its power to perform its obligations hereunder and under the Debenture, or (iii) result in, or require, the creation or imposition of any Encumbrance upon any of the assets or properties of the Company or any of its Subsidiaries, the result of which could have a Material Adverse Effect on the Company or impair or restrict its power to perform its obligations hereunder and under the Debenture. 5 3.4 Brokers. No agent, broker, finder, investment banker, financial advisor or other similar Person will be entitled to any fee, commission or other compensation in connection with the transactions contemplated by this Agreement on the basis of any act or statement made or alleged to have been made by the Company or any of its Affiliates. 3.5 Exemption from Registration. Assuming the accuracy on the date hereof and on the Closing Date of the representations and warranties of the Purchaser set forth in Section 4.3 below, the issuance and the sale of the Debenture to the Purchaser hereunder are, and the issuance of the Common Stock upon conversion of the Debenture will be, exempt from the registration requirements of the Securities Act. 3.6 Litigation. There are no actions, suits, proceedings or investigations pending, or to the knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries. The Company is not in default with respect to any order, writ, injunction, judgment, decree or rule of any Governmental or Regulatory Authority. 3.7 No Defaults. No event has occurred and no condition exists which would, upon or after the execution and delivery of this Agreement or the Debenture or the performance by the Company of its obligations hereunder or thereunder or the consummation of the transactions contemplated herein or therein, constitute an Event of Default (as such term is defined in the Debenture). Neither the Company nor any of its Subsidiaries is in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any material Indebtedness. 3.8 SEC Reports and Financial Statements. (a) The Company has filed all forms, reports and documents required to be filed by it pursuant to Section 13 or Section 15(d) of the Exchange Act within the last 12 months (the "Exchange Reports") on a timely basis or has received a valid extension of time for filing. The Company has made available to the Purchaser the Company's Report on Form 10-K for the eleven month period ended December 31, 2001, and all amendments thereto (the "Transition Report", and together with the Exchange Reports, the "SEC Reports"). The SEC Reports complied as to form in all material respects with the rules and regulations of the SEC under the Exchange Act on the date of filing and as of such date (or if amended or superseded by a filing prior to the date of this Agreement, on the date of such filing) did not contain any untrue statement of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the financial statements (including, in each case, any related notes thereto) (the "Financial Statements") contained in the SEC Reports (i) was prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved (except as may be expressly described in the notes thereto) and (ii) fairly presents in all material respects the financial position of the Company as at the respective dates thereof and the results of its operations and cash flows for the periods indicated. 6 3.9 Events Subsequent to the Date of the Last Financial Statement. Since the date of the last audited Financial Statements, except as contemplated by this Agreement or as reflected on the balance sheet contained in the Transition Report (the "Balance Sheet"), neither the Company nor any of its Subsidiaries has (i) sold, assigned, transferred or granted any license with respect to any patent, trademark, trade name, service mark, copyright, trade secret or other intangible asset licensed to or owned by the Company or any of its Subsidiaries, (ii) suffered any loss of property that had a Material Adverse Effect on the Company and its Subsidiaries taken as a whole or waived any right of substantial value to the Company or any of its Subsidiaries, or (iii) entered into any commitment, obligation, understanding or other arrangement, contingent or otherwise, to effect, directly or indirectly, any of the foregoing. Except as set forth in the Company's Form 10-Q for the Quarter ended September 30, 2002, since December 31, 2001, no events have occurred which individually or collectively have had or could reasonably be expected to have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole. 3.10 Absence of Undisclosed Liabilities. Since December 31, 2001, neither the Company nor any of its Subsidiaries has had any loss contingency (as defined in Statement of Financial Accounting Standards No. 5), whether matured or unmatured, fixed or contingent, that has had or could reasonably by expected to have a Material Adverse Effect on the Company and its Subsidiaries taken as a whole. 3.11 Title to Assets, Properties and Rights. Each of the Company and its Subsidiaries has good and marketable title (or a valid leasehold interest) to all of the assets (whether real, personal or mixed) necessary for the conduct of its business substantially as now conducted, free and clear of all Encumbrances, except for (i) liens for current taxes, assessments and other governmental charges not yet due and payable for which reserves have been established as required by GAAP; (ii) easements, covenants, conditions and restrictions (whether or not of record) as to which no material violation or encroachment exists or, if such violation or encroachment exists, as to which the cure of such violation or encroachment would not materially interfere with the conduct of the Company's business; (iii) any zoning or other governmentally established restrictions or encumbrances; (iv) workers or unemployment compensation liens arising in the ordinary course of business; or (v) mechanic's, materialman's, supplier's, vendor's or similar liens arising in the ordinary course of business securing amounts which are not delinquent. (The matters set forth in the foregoing clauses (i) through (v) being referred to herein as the "Permitted Encumbrances"). Such assets are in such operating condition and repair as is suitable for the uses for which they are used in the Company's or its Subsidiaries' business, as applicable, are not subject to any condition which materially interferes with the use thereof by the Company or any of its Subsidiaries, as applicable, and constitute all assets, properties, interests in properties and rights necessary to permit the Company and its Subsidiaries to carry on business after the Closing substantially as conducted by them prior thereto. 3.12 Patents, Trademarks, Copyrights and Licenses. Each of the Company and its Subsidiaries owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses therefor necessary for the conduct of its business substantially as now conducted. Neither the Company nor and of its Subsidiaries has interfered with, infringed upon or misappropriated any intellectual property rights of any Person or committed any acts of unfair 7 competition with respect to the operation of its business, and has not received from any Person any notice, charge, complaint, claim or assertion thereof, and no such claim is impliedly threatened by an offer to license from another Person under a claim of use. No activity, service or procedure currently conducted by the Company or any of its Subsidiaries violates in any material respect any Contract of the Company or any of its Subsidiaries, on the one hand, and any third Person, on the other hand, relating to any intellectual property rights. 3.13 Governmental Consents. Each of the Company and its Subsidiaries has, and is in good standing with respect to, all governmental consents, approvals, licenses, authorizations, permits, certificates, inspections and franchises necessary to continue to conduct its business substantially as now conducted and to own or lease and operate the assets and properties necessary for the conduct by the Company of its business substantially as now conducted except for such failures that could not reasonably be expected to have either individually or in the aggregate a Material Adverse Effect on the Company and its Subsidiaries taken as a whole. 3.14 No Consent or Approval Required. No consent, approval or authorization of, or declaration to or filing with, any Person is required by the Company for the valid authorization, execution and delivery by the Company of this Agreement or the Debenture or its consummation of the transactions contemplated hereby and thereby other than filings, if any, pursuant to applicable state securities laws. 3.15 Compliance with Laws. Except as set forth in Section 3.15 of the Disclosure Schedule, each of the Company and its Subsidiaries has duly complied with, and the assets and properties, business operations and leaseholds used in connection with its business are in compliance with, the provisions of all laws applicable to the Company and its Subsidiaries, their respective assets and properties or their respective conduct of businesses and there have been no citations, notices or orders of noncompliance issued to the Company, under any such law, rule or regulation, except for such noncompliance which could not reasonably be expected to have either individually or in the aggregate a Material Adverse Effect on the Company and its Subsidiaries taken as a whole. 3.16 Capitalization. The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, of which 24,201,639 shares are outstanding on the date hereof. All of the outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and non-assessable. The Company is not a party to any agreement granting registration rights to any person with respect to any shares of its capital stock. The Company is not a party to, and it has no knowledge of, any agreement restricting the voting or transfer of any shares of its capital stock. 3.17 Subsidiaries. The Company's only Subsidiary is Aphton (BVI) Corporation. Aphton (BVI) Corporation is a corporation duly organized, validly existing and in good standing under the Laws of the British Virgin Islands. Aphton (BVI) Corporation is duly qualified and is authorized to do business and is in good standing as a foreign corporation in each state or jurisdiction where the nature of its business or the ownership of property make such 8 qualification necessary, except where the failure of Aphton (BVI) Corporation to be so qualified would not have a Material Adverse Effect on Aphton (BVI) Corporation. 3.18 Labor Relations. The employees of the Company are not subject to any collective bargaining agreement. There are no material grievances, disputes or controversies with any union or any other organization of the Company's employees, or threats of strikes, work stoppages or any asserted pending demands for collective bargaining by any union or organization. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Company as follows: 4.1 Organization; Power and Authority. It is duly organized, validly existing and in good standing under the laws of the state of Delaware, and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder and under the Debenture and to consummate the transactions contemplated hereby. The execution and delivery by the Purchaser of this Agreement and the performance by the Purchaser of its obligations hereunder, have been duly and validly authorized by the Purchaser. This Agreement has been duly and validly executed and delivered by the Purchaser and constitutes the legal, valid and binding obligation of the Purchaser enforceable against it in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to the enforcement of creditors' rights generally and by general principles of equity. 4.2 No Conflicts. The execution, delivery and performance of this Agreement and the consummation by the Purchaser of the transactions contemplated hereby will not conflict with, or constitute a default under, or result in the acceleration or termination of, any Contract to which the Purchaser is a party, or result in a violation of or default under the Purchaser's organizational documents or any order, judgment or decree of any court or Governmental or Regulatory Authority having jurisdiction over the Purchaser or any of its properties and, no consent, authorization or order of, or filing or registration with, any Governmental or Regulatory Authority is required by the Purchaser for the execution, delivery and performance of this Agreement. 4.3 Investor Representations. (a) The Purchaser is an "accredited investor" within the meaning of Rule 501(a) (1), (2), (3) or (7) under the Securities Act. (b) The Purchaser understands that the Debenture and the Registrable Securities have not been registered under the Securities Act and are being offered and sold pursuant to an exemption from registration contained in the Securities Act based upon the representations of the Purchaser contained herein. 9 (c) The Purchaser knows of no public solicitation or advertisement of an offer in connection with the proposed issuance and sale of the Debenture or the Registrable Securities. (d) The Purchaser is acquiring the Debenture and the Registrable Securities, if any, for its own account for investment and not as a nominee and not with a view to the distribution thereof. The Purchaser understands that it must bear the economic risk of this investment indefinitely and that the Company has no present intention of registering the Debenture or the Registrable Securities. The Purchaser further understands that there is no assurance that any exemption from the Securities Act will be available or, if available, that such exemption will allow the Purchaser to dispose of or otherwise transfer any or all of the Debenture or the Registrable Securities under the circumstances, in the amounts or at the times the Purchaser might propose. (e) By reason of its business or financial experience, or that of its professional advisor, the Purchaser has the capacity to protect its own interests in connection with the purchase of the Debenture and the Registrable Securities hereunder and has the ability to bear the economic risk (including the risk of total loss) of its investment. (f) The Purchaser acknowledges that it is aware of Rule 144 promulgated under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. The Purchaser understands that under Rule 144, except as otherwise provided by section (k) of that Rule, the conditions include, among other things: the availability of certain current public information about the issuer, the resale occurring not less than one year after the party has purchased and paid for the securities to be sold and limitations on the amount of securities to be sold and the manner of sale. The Purchaser acknowledges and understands that notwithstanding the Company's current reporting obligations under the Exchange Act, the Company may not be satisfying the current public information requirement of Rule 144 at the time it wishes to sell the Debenture or the Registrable Securities received on conversion thereof, and that, in such event, it may be precluded from selling such stock under such Rule, even if the one year minimum holding period of such Rule has been satisfied. (g) The Purchaser acknowledges that in the event all of the requirements of Rule 144 are not met, registration under the Securities Act or an exemption from registration will be required for any disposition of the Debenture or the Registrable Securities. The Purchaser understands that although Rule 144 is not exclusive, the SEC has expressed its opinion that persons proposing to sell restricted securities received in a private offering other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales and that such persons and the brokers who participate in the transactions do so at their own risk. (h) All voting securities of the Company that the Purchaser, together with its ultimate parent entity and all entities controlled by the same ultimate parent as the Purchaser (such entities, including the Purchaser, hereinafter collectively referred to as the "Purchaser's Affiliates") will hold, directly or indirectly, as of the Closing Date, will be held solely for the purpose of investment such that these securities will be held by the Purchaser's Affiliates with no intention on the part of any of them to participate in the formulation, determination or direction of the basic business decisions of the Company. 10 (i) The Purchaser understands and acknowledges that (i) the Registrable Securities if and when issued will be issued to it without registration under the Securities Act and is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and the Purchaser hereby consents to such reliance. (j) The Purchaser has been given access to all information regarding the Company and the business, condition and operations of the Company that the Purchaser has requested in order to evaluate its investment in the Debenture and the Common Stock. The Purchaser has been given the opportunity to ask questions of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Debenture and other matters pertaining to the Purchaser's investment in the Debenture. In evaluating the suitability of the purchase of the Debenture hereunder, the Purchaser has not relied upon any representations or other information (whether oral or written) other than as set forth in the SEC Reports or as contained herein. (k) The Purchaser understands that the Debenture (and any Common Stock into which the Debenture may be converted) will bear the following legend (and a stop-transfer order may be placed against transfer of the certificates for the Registrable Securities): "THIS DEBENTURE AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS DEBENTURE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT AS PERMITTED BY THE PROVISIONS OF REGULATION S UNDER THE ACT OR PURSUANT TO REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. THE TRANSFER OF THIS DEBENTURE AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF ARE RESTRICTED AS DESCRIBED IN SECTION 7 HEREOF AND AS OTHERWISE DESCRIBED HEREIN." 4.4 Brokers. No agent, broker, finder, investment banker, financial advisor or other similar Person will be entitled to any fee, commission or other compensation in connection with any of the transactions contemplated by this Agreement on the basis of any act or statement made by the Purchaser. 4.5 Restrictions on Sale. The Purchaser will not, prior to the date on which a registration statement referred to in Article VI hereof is first declared effective by the SEC, if then prohibited by law or regulation, sell, offer to sell, solicit offers to buy, dispose of, loan, pledge or grant any right with respect to (collectively, a "Disposition"), the Registrable Securities, nor will the Purchaser engage in any hedging or other transaction which is designed or could reasonably be expected to lead to or result in a Disposition of the Registrable Securities by the Purchaser or any person or entity. Such prohibited hedging or other transaction would include, without limitation, effecting any short sale or having in effect a short position (whether such short sale or position is 11 against the box and regardless of when such position was entered into) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to the Registrable Securities or with respect to any security (other than a broad-based market basket or index) that includes or derives any significant part of its value from the Registrable Securities. ARTICLE V CERTAIN COVENANTS The Company covenants and agrees with the Purchaser that, for so long as the Debenture remains outstanding: 5.1 Access to Company Information. The Company will (a) promptly provide, or cause to be promptly provided, all material information with respect to the ongoing viability of the Company (including, but not limited to, financial and business plans) as may be reasonably requested by the Purchaser, but no more than once per calendar quarter; provided, that the Purchaser shall not be entitled to undertake or have undertaken on its behalf a financial audit of the Company and (b) permit representatives of the Purchaser, from time to time, to discuss with the officers of the Company such information contemplated by clause (a) above. 5.2 Maintenance of Books and Records; Financial Statements; Report; Etc. The Company will keep adequate records and books of account with respect to its business activities in which proper entries are made in accordance with GAAP reflecting all of its financial transactions. Furnish to the Purchaser promptly after the sending or filing thereof, as the case may be, copies of any proxy statements, financial statements or reports which the Company has made available to its shareholders and copies of any regular, periodic and special reports or registration statements which the Company files with the SEC or any Governmental or Regulatory Authority which may be substituted therefor, or any national securities exchange. 5.3 Insurance. The Company will at all times maintain with financially sound and reputable insurers insurance with respect to its assets and properties and businesses against loss or damage of the kind customarily insured against by companies engaged in the same or similar businesses and similarly situated, of such types and in such amounts as are customarily carried under similar circumstances by such companies. 5.4 Indemnification. (a) The Company hereby agrees to indemnify and hold harmless the Purchaser and its Affiliates, and their respective directors and officers, and the successors and assigns of all of the foregoing persons, from and against any and all liabilities, judgments, claims, settlements, losses, damages, reasonable fees (including attorneys' and other experts' fees and disbursements), liens, taxes, penalties, obligations and expenses (collectively, "Losses") incurred or suffered by any such Person arising from, by reason of or in connection with any breach of any representation, warranty or covenant of the Company contained in this Agreement; provided, however, that: 12 (i) the Company shall have no obligation to indemnify the Purchaser hereunder with respect to breaches of representations and warranties unless and until the aggregate amount of Losses arising as a result of the breach of representations and warranties shall exceed $100,000 and then the Company shall be liable for the entire amount of Losses; (ii) the Company shall have no obligation to indemnify the Purchaser hereunder for Losses arising as a result of the breach of representations and warranties in excess of $3,000,000; and (iii) the Company's obligation under this Section 5.4 with respect to representations and warranties shall terminate on the third anniversary of the Closing Date (except with respect to claims made prior to such date). (b) The Purchaser hereby agrees to indemnify and hold harmless the Company and its Affiliates, and their respective directors and officers, and the successors and assigns of all of the foregoing persons, from and against any and all Losses incurred or suffered by any such Person arising from, by reason of or in connection with any breach of any representation, warranty or covenant of the Purchaser contained in this Agreement; provided, however, that: (i) the Purchaser shall have no obligation to indemnify the Company hereunder with respect to breaches of representations and warranties unless and until the aggregate amount of Losses arising as a result of the breach of representations and warranties shall exceed $100,000 and then the Purchaser shall be liable for the entire amount of Losses; (ii) the Purchaser shall have no obligation to indemnify the Company hereunder for Losses arising as a result of the breach of representations and warranties in excess of $3,000,000; and (iii) the Purchaser's obligation under this Section 5.4 with respect to representations and warranties shall terminate on the third anniversary of the Closing Date (except with respect to claims made prior to such date). (c) Promptly upon receipt by a party indemnified under this Section 5.4 of notice of the commencement of any action against such indemnified party in respect of which indemnity or reimbursement may be sought against the indemnifying party, such indemnified party shall notify the indemnifying party in writing of the commencement of such action, but the failure so to notify the indemnifying party shall not relieve it of any liability which it may have to any indemnified party under this Section 5.4 unless such failure materially adversely affects the defense of such action. In case notice of commencement of any such action shall be given to the indemnifying party as above provided, the indemnifying party shall be entitled to participate in and to assume the defense of such action at its own expense, with counsel chosen by it, if the indemnifying party acknowledges to the indemnified party in writing its obligation to indemnify the indemnified party with respect to such action. The indemnifying party shall be liable for the fees and expenses of counsel for the indemnified party for any period during which the 13 indemnifying party has not assumed the defense thereof (other than during any period in which the indemnified party shall have failed to give notice of the action as provided above). If the indemnifying party assumes the defense of an action, the indemnified party shall agree to any settlement, compromise or discharge of such action that the indemnifying party may recommend and that by its terms obligates the indemnifying party to pay the full amount of the liability in connection with such action, and which releases the indemnified party completely in connection with such action; provided that, the indemnifying party shall not agree, without the prior written consent of the indemnified party, to the entry of any judgment or settlement, compromise or decree that provides for injunctive or other nonmonetary relief affecting the indemnified party. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be paid by the indemnified party unless (i) the indemnifying party fails to assume the defense of such action in a timely manner and in accordance with the foregoing or (ii) the indemnified party has been advised in writing by counsel that representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party). In the foregoing circumstances, the indemnified parties shall be entitled to engage, and the indemnifying party shall pay the reasonable costs and expenses of, one counsel (plus any necessary local counsel) for all indemnified parties. The indemnifying party shall not be liable for any settlement entered into without its prior written consent (which consent shall not be unreasonably withheld or delayed). 5.5 Shares Issuable Upon Conversion. The Company shall at all times reserve and keep available, out of its authorized and unissued stock, solely for the purpose of effecting the conversion of the Debenture, the full number of shares of Common Stock as shall from time to time be sufficient to effect the conversion of the entire amount of the Debenture from time to time outstanding. The Company shall from time to time, in accordance with the laws of the State of Delaware, increase the authorized number of shares of Common Stock if at any time the number of shares of Common Stock authorized and not then outstanding shall be insufficient to permit the conversion of the entire amount of the Debenture then outstanding. 5.6 Confidentiality. (a) Each of the Company and the Purchaser acknowledges that all of the Confidential Information made available to it by the other party is confidential and proprietary to the disclosing party and, accordingly, agrees to maintain such information in confidence for a period of three (3) years after disclosure thereof. The receiving party further covenants that it shall not disclose any such information to a third party except to its employees, agents, representatives, (including, but not limited to, legal advisors, financial advisors and auditors) or any other person under its authorization ("Representatives"), on a need to know basis, provided such Representatives are made aware of and agree to abide by the foregoing obligations of the receiving party. (b) Notwithstanding anything above to the contrary, the term "Confidential Information" shall not apply to information that is (i) in the public domain, (ii) received by the receiving party on an unrestricted basis where the receiving party has no duty of confidentiality to 14 the party providing such information or (iii) required to be disclosed to a governmental or other regulatory authority or pursuant to legal process, in which case the receiving party shall promptly notify the other party of such disclosure. (c) Each party acknowledges that damages for disclosure of Confidential Information in violation of this Section 5.6 would be an inadequate remedy and that in the event of any such disclosure, the other party shall be entitled to seek injunctive relief or other equitable relief in addition to any and all remedies available at law or in equity. 5.7 Notification. The Purchaser will notify the Company promptly of the sale of any of the Registrable Securities, other than sales pursuant to a registration statement contemplated in ARTICLE VI hereof, and the Purchaser will furnish any information reasonably requested by the Company (including, if so requested, a legal opinion in form and substance reasonably satisfactory to the Company and its counsel) to evidence the exemption from the registration requirements of the Securities Act, and the state securities laws, in reliance upon which such sales have been made. ARTICLE VI REGISTRATION RIGHTS 6.1 Demand Registration. (a) The Company agrees that upon receipt of written notice from the Purchaser, on or after the conversion of the Debenture, requesting registration of Registrable Securities (a "Registration Demand"), the Company shall with reasonable promptness, and in any case not later than one hundred twenty (120) days after receipt by the Company of the Registration Demand, file a registration statement with the SEC relating to the Registrable Securities as to which registration is requested in the Registration Demand. The Company shall use its reasonable best efforts to make such registration statement become effective and to qualify the same under the Blue Sky laws of such states as may be requested; provided, however, that with respect to compliance with Blue Sky laws, the Company shall not be obligated to qualify as a foreign corporation or as a dealer in securities or to execute or file any general consent to service of process under the laws of any such state where it is not so subject and would not otherwise be required to so qualify but for this sentence. The Company shall not be obligated to effect more than two registrations (whether on Form S-3 (or any successor or similar form) if the Company is so eligible to use such form or on Form S-1 (or any successor or similar form) if the Company is not so eligible to use such Form S-3) under this Section 6.1(a). The Company shall not be obligated to effect a registration hereunder at any time when the Purchaser could sell all Registrable Securities within 90 days pursuant to Rule 144 under the Securities Act. The Company shall not be deemed to have complied with its obligations under this Section 6.1(a) to effect a registration of Registrable Securities unless and until the applicable registration statement has been declared effective by the SEC under the Securities Act and, in the event such registration statement is not so declared effective, the Purchaser's right to such demand registration statement pursuant to this Section 6.1(a) shall be reinstated. 15 (b) Notwithstanding the foregoing, the Company shall not be obligated to file a registration statement pursuant to this Section 6.1 if it has filed a registration statement for any purpose within the preceding six month period. The Company shall be entitled to postpone for a reasonable period of time, not to exceed one hundred twenty (120) days (and only once can this right be invoked), the filing of any registration statement otherwise required to be filed by it, if the Board of Directors of the Company determines, in its reasonable good faith judgment, that such registration statement would be detrimental to the Company and its stockholders and the Company gives to the Purchaser written notice of such determination in which event the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of such request by the Purchaser in accordance with Section 6.1(a). In such event, the Purchaser shall have the right to withdraw the request for registration by giving written notice to the Company within sixty (60) days after receipt of the notice of postponement and, in such event, the Purchaser's right to such demand registration statement pursuant to this Section 6.1 shall be reinstated. (c) Any Registration Demand pursuant to this Section 6.1 shall: (i) specify the number of shares of Registrable Securities intended to be offered, state the firm intention of the Purchaser to offer such securities for sale and describe the intended method of distribution; (ii) contain an undertaking on the part of the Purchaser to provide all such information and materials concerning the Purchaser and take all such action as may be required to permit the Company to comply with all applicable requirements of the SEC in connection with such registration statement; and (iii) contain an undertaking on the part of the Purchaser to enter into an underwriting agreement in customary form. (d) Neither the Company nor any other Person (other than the Purchaser and its transferees) shall be entitled to have Common Stock ("Other Registrable Securities") registered in connection with the registration of Registrable Securities pursuant to this Section 6.1 unless the Company or such other Person shall agree for the benefit of the Purchaser that the number of shares of Other Registrable Securities to be included in such registration may be reduced (pro rata among all Persons holding Other Registrable Securities), or that all of such Other Registrable Securities may be excluded from any such registration, if the Company or the Purchaser is advised in writing by the managing underwriter that such reduction or exclusion is necessary to avoid materially adversely affecting the public offering of the securities being offered by the Purchaser. At any time before the registration statement covering Registrable Shares pursuant to this Section 6.1 becomes effective, the Purchaser may request the Company to withdraw or not to file the registration statement. In that event, if such request of withdrawal shall not have been caused by, or made in response to, a Material Adverse Effect on the Company, the Purchaser shall have used one of its Registration Demand rights under this Section 6.1 unless the Purchaser shall pay to the Company the Purchaser's pro rata expenses incurred by the Company (based on the number of shares of the Purchaser being registered to the total number of shares being registered) through the date of such request. 16 6.2 Piggyback Rights. (a) If the Company proposes to file a registration statement under the Securities Act on behalf of the Company or otherwise, the Company shall give written notice of such registration no later than seven (7) business days before its filing with the SEC to the Purchaser regardless of whether the Purchaser is holding the Debenture or Registrable Securities; provided, that registrations relating solely to securities to be issued by the Company in connection with any acquisition, employee stock option or employee stock purchase or savings plan on Form S-4 or S-8 (or successor Forms) under the Securities Act shall not be subject to this Section 6.2. If the Purchaser so request in writing within seven (7) business days after delivery of such notice by the Company, the Company shall include in any such registration statement any Common Stock obtained (or to be obtained) by the Purchaser upon conversion of the Debenture held by the Purchaser and requested to be included in such registration. Any such written request by the Purchaser shall contain an undertaking on the part of the Purchaser to provide all such information and materials concerning the Purchaser and take such action as may be required to permit the Company to comply with all applicable requirements of the SEC in connection with such registration. Notwithstanding Section 7.1, for purposes of this Section 6.2(a), any and all notices by the Company to the Purchaser shall be in writing and will be deemed to have been duly given only if delivered by facsimile transmission against facsimile and telephonic confirmation. (b) The Company may require that the number of shares of Registrable Securities to be included in such registration be reduced (pro rata among the Purchaser and any other Person exercising "piggy-back" registration rights), or that all of such shares be excluded from any such registration, if the Company is advised in writing by the managing underwriter of the offering that such reduction or exclusion is necessary to avoid materially adversely affecting the public offering of the securities being offered by the Company. In the event that (i) the Purchaser converts all or less than all of the remaining principal amount of the Debenture together with all accrued and unpaid interest in order to participate in such registration and (ii) the number of shares of Registrable Securities to be included in such registration are reduced as contemplated above, then an amount equal to the number of shares that the Purchaser is cutback multiplied by the applicable Conversion Price shall be added back to the outstanding principal amount of the Debenture. 6.3 Expenses. In the event that the Purchaser participates in a registration under this Article VI, the Purchaser shall be responsible for the underwriting discounts and selling commissions applicable to the Registrable Securities sold by the Purchaser and any expenses incurred by the Purchaser in connection therewith, in proportion to the number of securities sold by all holders thereunder, except that the Company shall pay the reasonable costs and expenses of the Purchaser's counsel ("Purchaser's Counsel") for each registration in which the Purchaser participates in an amount not to exceed $20,000 (per registration); provided, however, that the Purchaser shall pay the reasonable costs and expenses of the Purchaser's Counsel for each registration after the Purchaser has used one of its Registration Demand rights under Section 6.1. Except as otherwise specifically provided in this Article VI, the costs and expenses of any registration and qualification pursuant to Article VI hereof shall be borne by the Company. Such costs and expenses shall include the fees and expenses of counsel for the 17 Company and of its accountants, all other costs, reasonable fees and expenses of the Company incident to the preparation, printing and filing under the Securities Act of the registration statement and all amendments and supplements thereto, the cost of furnishing copies of each preliminary prospectus, each final prospectus and each amendment or supplement thereto to underwriters, dealers and the Purchaser and the costs and expenses (including fees and disbursements of counsel) incurred in connection with the qualification under the Blue Sky laws of various jurisdictions. 6.4 Procedures. (a) In connection with any registration pursuant to this Article VI, the Company may require that the Purchaser effect the offer and sale of Registrable Securities pursuant to an underwritten offering with underwriters reasonably acceptable to the Company. (b) In the case of each registration or qualification pursuant to Article VI, the Company will keep the Purchaser and Purchaser's Counsel advised as to the initiation of proceedings for such registration and qualification and as to the completion thereof, and will advise the Purchaser and Purchaser's Counsel, upon request, of the progress of such proceeding. The Company will give the Purchaser and Purchaser's Counsel the opportunity to review any registration statement prepared pursuant to this Article VI, each prospectus included therein, and each amendment thereto or supplement thereto, before the same is filed with the SEC, and will give the Purchaser and Purchaser's Counsel such access to its books and records and such opportunities to discuss the business of the Company with its officers, counsel and the independent auditors who have certified its financial statements, as shall be reasonably necessary in order to allow the Purchaser and Purchaser's Counsel to conduct a reasonable and diligent investigation within the meaning of the Securities Act. The Company will notify the Purchaser upon the happening of any event as a result of which any prospectus included in a registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (c) At the Company's expense, the Company will keep each registration and qualification involving an underwritten offering under this Article VI effective (and in compliance with the Securities Act) by such action as may be necessary or appropriate for a period of one-hundred twenty (120) days after the effective date of such registration statement (or until all the securities registered pursuant thereto have been sold), including, without limitation, the filing of post-effective amendments and supplements to any registration statement or prospectus necessary to keep the registration statement current and the further qualification under any applicable Blue Sky or other state securities laws to permit such sale or distribution, all as requested by the Purchaser. (d) In connection with any registration under this Article VI, the Company shall cause the Registrable Securities being registered to be listed on such securities exchange or eligible for trading on such over-the-counter market as other securities of the Company of the same class are traded, in each case not later than the effective date of such registration statement. 18 (e) The Company shall use its reasonable best efforts to obtain from its independent auditors "cold comfort" letters in customary form and at customary times and covering matters of the type customarily covered by cold comfort letters, addressed to the underwriters. (f) The Company shall use its reasonable best efforts to obtain from its counsel an opinion or opinions in customary form, addressed to the underwriters and the Purchaser selling Registrable Securities. 6.5 Provision of Documents. The Company will, at its expense, furnish to the Purchaser and Purchaser's Counsel such number of registration statements, prospectuses, and other documents incident to any registration or qualification referred to in this Article VI as may be reasonably requested. 6.6 Indemnification. (a) The Company will indemnify and hold harmless the Purchaser and any underwriters (as defined in the Securities Act) for the Purchaser and each person, if any, who controls the Purchaser or such underwriters within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any losses, claims, damages or liabilities, joint or several, and expenses (including reasonable attorneys' fees and expenses and reasonable costs of investigation) to which the Purchaser or such underwriters or such controlling person may be subject, under the Securities Act or otherwise, insofar as any thereof arise out of or are based upon (i) any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement under which Registrable Securities were registered under the Securities Act pursuant to this Article VI, any prospectus contained therein, or any amendment or supplement thereto, or (ii) the omission (or alleged omission) to state in any item referred to in the preceding clause (i) a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished to the Company by the Purchaser (or by any underwriter on behalf of and at the specific direction of the Purchaser) in writing specifically for use therein (with respect to which information the Purchaser shall so indemnify and hold harmless the Company, any underwriters for the Company and each person, if any, who controls the Company or such underwriters within the meaning of the Securities Act; provided, however, that the maximum liability of the Purchaser or such underwriter under this indemnity shall be limited to the amount of the net proceeds received by the Purchaser or such underwriter from the sale of such Registrable Securities to which such indemnification relates). The indemnity contained in this Section 6.6(a) shall not inure to the benefit of an indemnified party to the extent that the loss, claim, damage, liability or expense results from an untrue statement in or omission from a preliminary prospectus, a copy of which was made available to the indemnified party, and (i) such untrue statement in or omission from the preliminary prospectus was corrected in the final prospectus, a copy of which was made available to the indemnified party, and (ii) the indemnified party failed to cause a copy of such final prospectus to be delivered to the person 19 asserting such claim at or prior to the written confirmation of the sale of securities to such person. (b) Promptly upon receipt by a party indemnified under this Section 6.6 of notice of the commencement of any action against such indemnified party in respect of which indemnity or reimbursement may be sought against any indemnifying party under this Section 6.6, such indemnified party shall notify the indemnifying party in writing of the commencement of such action, but the failure so to notify the indemnifying party shall not relieve it of any liability which it may have to any indemnified party under this Section 6.6 unless such failure materially adversely affects the defense of such action. In case notice of commencement of any such action shall be given to the indemnifying party as above provided, the indemnifying party shall be entitled to participate in and, to the extent it may wish, jointly with any other indemnifying party similarly notified, to assume the defense of such action at its own expense, with counsel chosen by it, if the indemnifying party acknowledges to the indemnified party in writing its obligation to indemnify the indemnified party with respect to such action. The indemnifying party shall be liable for the fees and expenses of counsel for the indemnified party for any period during which the indemnifying party has not assumed the defense thereof (other than during any period in which the indemnified party shall have failed to give notice of the action as provided above). If the indemnifying party assumes the defense of an action, the indemnified party shall agree to any settlement, compromise or discharge of such action that the indemnifying party may recommend and that by its terms obligates the indemnifying party to pay the full amount of the liability in connection with such action, and which releases the indemnified party completely in connection with such action; provided that, the indemnifying party shall not agree, without the prior written consent of the indemnified party, to the entry of any judgment or settlement, compromise or decree that provides for injunctive or other nonmonetary relief affecting the indemnified party. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be paid by the indemnified party unless (i) the indemnifying party fails to assume the defense of such action in a timely manner and in accordance with the foregoing or (ii) the indemnified party has been advised in writing by counsel that representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party). In the foregoing circumstances, the indemnified party shall be entitled to engage, and the indemnifying party shall pay the reasonable costs and expenses of, one counsel (plus any necessary local counsel) for the indemnified party. No indemnifying party shall be liable for any settlement entered into without its prior written consent, which consent shall not be unreasonably withheld or delayed. (c) If the indemnification provided for in this Section 6.6 is unavailable or insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities, expenses or actions in respect thereof referred to in this Section 6.6, then the indemnifying party shall in lieu of indemnifying such indemnified party contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses or actions in such proportion as is appropriate to reflect the relative fault of the Company, on the one hand, and the Purchaser (and its underwriters) on the other, in connection 20 with the statements or omissions which resulted in such losses, claims, damages, liabilities, expenses or actions as well as any other relevant equitable considerations, including the failure to give the notice required hereunder. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company, on the one hand, or the Purchaser (and its underwriters at the specific direction of the Purchaser), on the other hand, and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Purchaser agree that it would not be just and equitable if contribution pursuant to this Section 6.6 were determined by pro rata allocation or by any other method of allocation which did not take account of the equitable considerations referred to above. The amount paid or payable by the indemnified party as a result of the losses, claims, damages, liabilities or actions in respect thereof referred to above shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim; provided, however, that the maximum liability of the Purchaser or underwriter hereunder shall be limited to the amount of the net proceeds received by the Purchaser or underwriter from the sale of Registrable Securities to which such contribution relates. No person guilty of fraudulent misrepresentations (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. ARTICLE VII MISCELLANEOUS 7.1 Notices. All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally against written receipt or by facsimile transmission against facsimile confirmation or mailed by prepaid first class certified mail, return receipt requested, or mailed by nationally recognized overnight courier prepaid, to the parties at the following addresses or facsimile numbers: (i) If to the Company, to: 21 Aphton Corporation 80 SW 8th Street Miami, FL 33130 Facsimile No.: Attn: [______________] with a copy to: White & Case LLP 1155 Avenue of the Americas New York, NY 10036 Facsimile No.: (212) 354-8113 Attn: Jonathan E. Kahn, Esq. and (ii) If to the Purchaser, to: [Aventis Pharmaceuticals Inc.] 200 Crossing Boulevard P.O. Box 6890 Bridgewater, NJ 08807-0890 Facsimile No.: Attn: [______________] with a copy to: Morgan Lewis & Bockius, LLP 101 Park Avenue New York, NY 10178 Facsimile No.: (212) 309-6273 Attn: Randy Sunberg, Esq. All such notices, requests and other communications will (i) if delivered personally against written receipt to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided for in this Section, be deemed given upon facsimile confirmation, (iii) if delivered by mail in the manner described above to the address as provided for in this Section, be deemed given on the earlier of the third Business Day following mailing or upon receipt and (iv) if delivered by nationally recognized overnight courier to the address as provided in this Section, be deemed given on the earlier of the first Business Day following the date sent by such overnight courier or upon receipt (in each case regardless of whether such notice, request or other communication is received by any other 22 Person to whom a copy of such notice is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving notice specifying such change to the other parties hereto. 7.2 Reserved. 7.3 Entire Agreement. This Agreement and the Debenture supersede all prior discussions and agreements between the parties with respect to the subject matter hereof and thereof and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof and thereof. 7.4 Survival. The representations, warranties, covenants and agreements of the Company and the Purchaser contained in this Agreement will survive the Closing. 7.5 Further Assurances; Post-Closing Cooperation. At any time or from time to time after the Closing, the Company shall at its own cost and expense execute and deliver to the Purchaser such other documents and instruments, provide such materials and information and take such other actions as the Purchaser may reasonably request to consummate the transactions contemplated by this Agreement and otherwise to cause the Company to fulfill its obligations under this Agreement. 7.6 Waiver. Any term or condition of this Agreement may be waived at any time by the party that is entitled to the benefit thereof, but no such waiver shall be effective unless set forth in a written instrument duly executed by or on behalf of the party waiving such term or condition. No waiver by any party of any term or condition of this Agreement, in any one or more instances, shall be deemed to be or construed as a waiver of the same or any other term or condition of this Agreement on any future occasion. All remedies, either under this Agreement or by Law or otherwise afforded, will be cumulative and not alternative. 7.7 Amendment. This Agreement may be amended, supplemented or modified only by a written instrument duly executed by or on behalf of each party hereto. 7.8 Right to Rely. Notwithstanding any right of any party (whether or not exercised) to investigate the affairs of any other party contained in this Agreement, each party has the right to rely fully upon the representations, warranties, covenants and agreements contained in this Agreement. 7.9 Third Party Beneficiaries. The terms and provisions of this Agreement are intended solely for the benefit of each party hereto and their respective successors and assigns, and it is not the intention of the parties to confer third-party beneficiary rights, and this Agreement does not confer any such rights, upon any other Person other than any Person entitled to indemnity under Article V or VI. 7.10 No Assignment; Binding Effect. Neither this Agreement nor any right, interest or obligation hereunder may be assigned (by operation of law or otherwise) by the Company without the prior written consent of the Purchaser, or by the Purchaser without the prior written consent of the Company, and any attempt to do so will be void; provided, however, that the Purchaser shall have the right to assign this Agreement or any such right, interest or obligation to any Person described in subsection (a) of the definition of Affiliate without such consent of the Company. Subject to the preceding sentence, this Agreement is binding upon, inures to the benefit of and is enforceable by the parties hereto and their respective successors and assigns. 23 7.11 Headings. The headings used in this Agreement have been inserted for convenience of reference only and do not define or limit the provisions hereof. 7.12 Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid or unenforceable under any present or future law, and if the rights or obligations of any party hereto under this Agreement will not be materially and adversely affected thereby, (a) such provision will be fully severable, (b) this Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof, (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid or unenforceable provision or by its severance therefrom and (d) in lieu of such illegal, invalid or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible. 7.13 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the rules governing the conflicts of laws. The parties hereby irrevocably consent to the jurisdiction of the courts of the State of New York and of any federal court located in such state in connection with any action or proceeding arising out of or relating to this Agreement. 7.14 Waiver of Jury Trial. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO ENFORCE OR DEFEND ANY RIGHTS OR REMEDIES UNDER THIS AGREEMENT, THE TRANSACTION DOCUMENTS OR ANY DOCUMENTS RELATED HERETO. 7.15 Construction. The parties hereto agree that this Agreement is the product of negotiation between sophisticated parties and individuals, all of whom were represented by counsel, and each of whom had an opportunity to participate in and did participate in, the drafting of each provision hereof. Accordingly, ambiguities in this Agreement, if any, shall not be construed strictly or in favor of or against any party hereto but rather shall be given a fair and reasonable construction without regard to the rule of contra proferentum. 24 7.16 Counterparts. This Agreement may be executed in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. [signature page to follow] 25 IN WITNESS WHEREOF, this Debenture Purchase Agreement has been duly executed and delivered by the duly authorized representative of each party hereto as of the date first above written. Aphton Corporation By: /s/ Philip C. Gevas ------------------------------------- Name: Philip C. Gevas Title: Chief Executive Officer Aventis Pharmaceuticals Inc. By: /s/ Michael A. Yeomans ------------------------------------- Name: Michael Yeomans Title: Vice President, Global Business Development Exhibit A SERIES A CONVERTIBLE DEBENTURE Exhibit B OPINION OF THE COMPANY'S COUNSEL TABLE OF CONTENTS ARTICLE I DEFINITIONS 1 1.1 Definitions 1 ARTICLE II SALE AND PURCHASE OF DEBENTURE; CLOSING 2.1 Sale and Purchase of Debenture 4 2.2 The Closing 4 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY 3.1 Organization and Qualification 5 3.2 Authority 5 3.3 No Conflicts 5 3.4 Brokers 5 3.5 Exemption from Registration 6 3.6 Litigation 6 3.7 No Defaults 6 3.8 SEC Reports and Financial 6 Statements 3.9 Events Subsequent to the 6 Date of the Last Financial Statement 3.10 Absence of Undisclosed 7 Liabilities 3.11 Title to Assets, Properties 7 and Rights 3.12 Patents, Trademarks, 7 Copyrights and Licenses 3.13 Governmental Consents 8 3.14 No Consent or Approval 8 Required 3.15 Compliance with Laws 8 3.16 Capitalization 8 3.17 Subsidiaries 8 3.18 Labor Relations. 8 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 4.1 Organization; Power and 9 Authority 4.2 No Conflicts 9 4.3 Investor Representations 9 4.4 Brokers 11 4.5 Restrictions on Sale. 11 ARTICLE V CERTAIN COVENANTS 5.1 Visits and Inspections. 12 5.2 Maintenance of Books and 12 Records; Financial Statements; Report; Etc. 5.3 Insurance. 12 5.4 Indemnification 12 5.5 Shares Issuable Upon 14 Conversion 5.6 Notification 14 ARTICLE VI REGISTRATION RIGHTS 6.1 Demand Registration 14 6.2 Piggyback Rights 16 6.3 Expenses 17 6.4 Procedures 17 6.5 Provision of Documents 18 6.6 Indemnification 18 ARTICLE VII MISCELLANEOUS 7.1 Notices 20 7.2 Reserved. 22 7.3 Entire Agreement 22 7.4 Survival 22 7.5 Further Assurances; 22 Post-Closing Cooperation 7.6 Waiver 22 7.7 Amendment 22 7.8 Right to Rely 22 7.9 Third Party Beneficiaries 22 7.10 No Assignment; Binding 22 Effect 7.11 Headings 23 7.12 Invalid Provisions 23 7.13 Governing Law. 23 7.14 Waiver of Jury Trial 23 7.15 Construction 23 7.16 Counterparts 24 EX-10.3B 4 adebenture_ex10-3b.txt DEBENTURE DEBENTURE THIS DEBENTURE AND ANY SHARES ISSUABLE UPON THE EXERCISE OF THIS DEBENTURE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), NOR UNDER ANY STATE SECURITIES LAW AND SUCH SECURITIES MAY NOT BE PLEDGED, SOLD, ASSIGNED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT AS PERMITTED BY THE PROVISIONS OF REGULATION S UNDER THE ACT OR PURSUANT TO REGISTRATION UNDER THE ACT OR AN AVAILABLE EXEMPTION FROM REGISTRATION. THE TRANSFER OF THIS DEBENTURE AND THE SHARES ISSUABLE UPON THE EXERCISE HEREOF ARE RESTRICTED AS DESCRIBED IN SECTION 7 HEREOF AND AS OTHERWISE DESCRIBED HEREIN. No. D-01 US$3,000,000 APHTON CORPORATION SERIES A CONVERTIBLE DEBENTURE DUE DECEMBER 19, 2007 THIS DEBENTURE is a duly authorized issue of APHTON CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "Company") designated as its Series A Convertible Debenture due 2007. The date on which this Debenture is issued is referred to herein as the "Issue Date." This Debenture is issued by the Company pursuant to the Debenture Purchase Agreement, dated as of December __, 2002, regarding Series A Convertible Debenture due 2007 of the Company (as such agreement may be amended from time to time, the "Debenture Purchase Agreement"). FOR VALUE RECEIVED, the Company promises to pay to [Aventis Pharmaceuticals Inc.], a [Delaware] corporation, the registered holder hereof (the "Holder"), the principal sum of $3,000,000 (the "Face Amount") plus all accrued and unpaid interest on December 19, 2007 (the "Maturity Date"). Interest shall accrue on this Debenture as set forth herein. This Debenture is subject to the following additional provisions: 1. INTEREST. This Debenture shall bear interest at a rate of 11% per annum on the unpaid Face Amount from the Issue Date until the Maturity Date, payable in cash annually on January 5th of each year. Interest will accrue daily on the unpaid principal amount of this Debenture. Upon the occurrence and during the continuance of an Event of Default, interest will accrue on the unpaid principal amount of this Debenture, all accrued and unpaid interest on this Debenture and any other amounts payable hereunder, to the extent permitted by applicable law, at 13% per annum. In no event shall any interest payable under this Debenture exceed the maximum rate of interest permissible under any applicable usury law. 2. CONVERSION. (a) The Holder is entitled, at its option after the date that is 90 days after the date hereof, subject to the following provisions of this Section 2 and the necessary shareholder approvals as required by the Nasdaq National Market or such other domestic securities exchange or quotation system upon which shares of Common Stock, par value $.001 per share ("Common Stock"), may be listed, to convert all or a portion of this Debenture including the accrued and unpaid interest hereon (the "Conversion") into unregistered shares of Common Stock of the Company, at any time until the Maturity Date, at a conversion price for each share of Common Stock (the "Conversion Price") equal to the average closing price of Common Stock on the Nasdaq National Market, the Nasdaq SmallCap Market or the OTC Bulletin Board, as the case may be, for the five (5) trading days prior to the Conversion Date (as defined below); provided that (i) the principal amount being converted is at least US$100,000.00 (unless if at the time of such election to convert the principal amount of this Debenture is less than US $100,000.00, then the whole amount thereof) and (ii) the number of shares of Common Stock issuable upon such election to convert, together with any Common Stock already owned by the Holder or any affiliate thereof, does not exceed 19.9% of the Common Stock outstanding as of the date of the Conversion Date (the "19.9% Cap"). The number of shares of Common Stock issuable upon exercise of this Debenture (the "Conversion Shares") into which this Debenture are convertible shall be determined by dividing (a) the principal amount of this Debenture to be converted, together with all accrued and unpaid interest hereon, by (b) the Conversion Price then in effect. In the event that the number of Conversion Shares exceeds the 19.9% Cap, the Company will pay the remaining principal balance of this Debenture plus all accrued and unpaid interest hereon on the Maturity Date. (b) In order to convert the principal amount of this Debenture, or any portion thereof (including any accrued and unpaid interest hereon), the Holder shall send by facsimile transmission (and confirm such transmission by telephone or voicemail message) a notice of conversion (the "Notice of Conversion") to the Company and the Company shall notify its transfer agent, U.S. Stock Transfer Corporation, located at 1745 Gardena Avenue, Glendale, California 91204-2991 or any successor thereto (the "Transfer Agent"), stating either (i) the dollar amount or (ii) the remaining principal amount (and any accrued and unpaid interest hereon), to be converted and the applicable Conversion Price, and prior to Conversion, the Holder must physically surrender this Debenture to the Company. In the event that the Holder converts less than the remaining principal amount under this Debenture, the amount to be converted shall first be deducted from the accrued and unpaid interest, and then the balance shall be deducted from the remaining principal amount. (c) No fractional shares of Common Stock or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded down to the nearest whole share. The date on which the Notice of Conversion is given (the "Conversion Date") shall be deemed to be the date on which the Holder faxes or otherwise delivers the Notice of Conversion, substantially in the form annexed hereto as Exhibit A, duly executed, to the Company, provided that the Holder shall deliver to the Company the original Debenture being converted within five (5) business days thereafter (and if not so delivered within such time, the -2- Conversion Date shall be the date on which the later of the Notice of Conversion and the original Debenture being converted is received by the Company). Facsimile delivery of the Notice of Conversion shall be accepted by the Company at facsimile number (305) 374-7615; Attn: Chief Executive Officer, or at such other facsimile number as the Company may provide to the Holder. In the event that (i) the entire remaining principal amount together with all accrued and unpaid interest under this Debenture is being converted in accordance with this Section 2, such fraction shall be paid to the Holder "in cash" on the date of such conversion and (ii) less than the entire remaining principal amount together with all accrued and unpaid interest under this Debenture is being converted in accordance with this Section 2, such fraction shall be added back to the principal amount remaining under this Debenture. 3. REDEMPTION. (a) The Company is entitled, at its option at any time after the date hereof, subject to the following provisions of this Section 3, to redeem by payment to the Holder in cash or Conversion Shares or a combination of both, at the Holder's option, the principal amount and accrued and unpaid interest of this Debenture as of the date of such redemption. (b) If (i) the Company and the Holder fail to execute a collaboration agreement between the Company and the Holder by March 31, 2003 and (ii)(A) the Company sells, licenses, assigns, pledges or otherwise transfers its rights to the Projects (as defined in the Letter of Intent between the Company and the Holder, dated December __, 2002) or any other Company product to an entity that is not the Holder or an affiliate thereof or (B) a Change of Control occurs, then any portion of this Debenture that remains outstanding as of that date shall be, unless otherwise designated by the Holder, redeemed by the Company within thirty (30) days by payment to the Holder in cash or Conversion Shares or a combination of both, at the Holder's option, of the principal amount and accrued and unpaid interest of this Debenture as of the date of such redemption. "Change of Control" means the sale of the Company either by way of (i) a sale or other disposition of all or substantially all of the assets of the Company to another person or entity or (ii) merger, consolidation, issuance of shares, reorganization, share exchange or any other transaction or series of transactions to, with or into another person or persons or entity in which a single person or group of affiliated persons obtains ownership or control of 50% or more of (A) the voting power or (B) any class of equity interests of the Company. (c) If, at any time while any portion of this Debenture remains outstanding, the Company shall sell, license, assign, pledge or otherwise transfer its rights to any of the Projects or any other Company product or any other rights related thereto to any entity other than the Holder or its affiliates or subsidiaries, then any portion of this Debenture that remains outstanding as of the date of such sale, license, assignment, pledge or transfer, shall be, unless otherwise designated by the Holder, redeemed by the Company within thirty (30) days by payment to the Holder in cash or Conversion Shares or a combination of both, at the Holder's option, of the principal amount and accrued and unpaid interest of this Debenture as of the date of such sale, license, assignment, pledge or transfer. (d) Any portion of this Debenture that remains outstanding as of the Maturity Date shall be, unless otherwise designated by the Holder, redeemed by the Company by payment to the -3- Holder in cash or Conversion Shares or a combination of both, at the Holder's option, of the principal amount of this Debenture together with any accrued and unpaid interest hereon on the Maturity Date. 4. ADJUSTMENTS TO CONVERSION PRICE. (a) The number of Conversion Shares and the Conversion Price shall be subject to adjustment from time to time as provided in this Section 4. There shall be no adjustment hereunder with respect to (A) the issuance or sale of shares or options to purchase shares of the Common Stock to employees, officers, directors and consultants of the Company and its subsidiaries (as such number of shares is appropriately adjusted for subsequent stock splits, stock combinations, stock dividends and recapitalizations) pursuant to plans or arrangements approved by the Company's Board of Directors; (B) the issue or sale to other entities or the owners thereof for acquisition purposes; and (C) the issue and sale to banks, savings and loan associations, equipment lessors or other similar lending institutions in connection with such entities providing working capital credit facilities or equipment financing to the Company. (b) The reclassification of Common Stock into securities (other than Common Stock) and/or cash and/or other consideration shall be deemed to involve a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number or amount of securities and/or cash and/or other consideration outstanding immediately thereafter, and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective," as the case may be, within the meaning of Section 4(c). (c) In the event of any capital reorganization of the Company, any reclassification of the stock of the Company (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), any sale or transfer to another person or entity of the property of the Company as an entirety or substantially as an entirety, or any consolidation or merger of the Company with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to the Common Stock), this Debenture shall after such reorganization, reclassification, consolidation, transfer or merger be exercisable for the kind and number of shares of stock or other securities or property of the Company or of the successor corporation resulting from such consolidation, transfer or surviving such merger, if any, to which the holder of the number of shares of Common Stock deliverable (immediately prior to the time of such reorganization, reclassification, consolidation or merger) upon exercise of this Debenture would have been entitled upon such reorganization, reclassification, consolidation, transfer or merger. The provisions of this clause shall similarly apply to successive reorganizations, reclassifications, consolidations, transfers, or mergers. 5. GOVERNING LAW. This Debenture shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the rules governing the conflicts of laws. The parties hereby irrevocably consent to the jurisdiction of the courts of -4- the State of New York and of any federal court located in such state in connection with any action or proceeding arising out of or relating to this Debenture. 6. EVENTS OF DEFAULT. The following shall constitute an "Event of Default": (a) The Company fails to make any payment of principal or interest on this Debenture as required pursuant to this Debenture and same shall continue for a period of five (5) days; or (b) The Company fails to issue shares of Common Stock to the Holder or to cause its Transfer Agent to issue shares of Common Stock upon exercise by the Holder of the conversion rights of the Holder in accordance with the terms of this Debenture, fails to transfer or to cause its Transfer Agent to transfer any certificate for shares of Common Stock issued to the Holder upon conversion of this Debenture and when required by this Debenture, and such transfer is otherwise lawful, or fails to remove any restrictive legend or to cause its Transfer Agent to transfer any certificate or any shares of Common Stock issued to the Holder upon conversion of this Debenture as and when required by this Debenture and such legend removal is otherwise lawful, and any such failure shall continue uncured for thirty (30) business days after written notice from the Holder of such failure; or (c) The Company fails to redeem or cause to be redeemed the outstanding portion of this Debenture as and when required by the provisions set forth in Section 3 and any such failure shall continue uncured for twenty (20) business days after written notice from the Holder of such failure; or (d) The Company shall (1) make an assignment for the benefit of creditors or commence proceedings for its dissolution; or (2) apply for or consent to the appointment of a trustee, liquidator or receiver for its or for a substantial part of its property or business; or (e) A trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within sixty (60) days after such appointment; or (f) Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed within sixty (60) days thereafter; or (g) Bankruptcy, reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company and, if instituted against the Company, shall not be dismissed within sixty (60) days after such institution or the Company shall by any action or answer approve of, consent to, or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding; or -5- (h) The Company is delisted from the Nasdaq National Market or the Nasdaq SmallCap Market and is not quoted on the over-the-counter (OTC) market. Then, or at any time thereafter (i.e. the grace periods set forth above), and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder of this Debenture (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the Holder and in the discretion of the Holder, the Holder may (A) without notice or demand to the Company declare all obligations of the Company to the to be immediately due and payable; (B) perform any warranty, covenant or agreement which the Company has failed to perform under this Agreement; and (C) pursue any available remedy to collect the principal of and interest on this Debenture or to enforce the performance of any provision of this Debenture. 7. RESTRICTIONS ON TRANSFER. This Debenture shall also be subject to the restrictions on transfer set forth in Section 4.3 of the Debenture Purchase Agreement. 8. MISCELLANEOUS. (a) Except as contemplated in the next sentence, nothing contained in this Debenture shall be construed as conferring upon the Holder the right to vote or to receive dividends or to consent or receive notice as a stockholder in respect of any meeting of stockholders or any rights whatsoever as a stockholder of the Company, unless and to the extent converted in accordance with the terms hereof. In the event the Company shall fix a record date for the making of a distribution to holders of its Common Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation), of (i) assets (other than (A) cash dividends or cash distributions or (B) dividends payable in Common Stock), (ii) evidences of indebtedness or other securities (except for Common Stock) of the Company or of any entity other than the Company, or (iii) subscription rights, options or warrants to purchase any of the foregoing assets or securities, whether or not such rights, options or warrants are immediately exercisable (all such distributions referred to in clauses (i), (ii) and (iii) being hereinafter collectively referred to as "Distributions on Common Stock"), then, in any such case, the Company shall set aside, in an escrow reasonably acceptable to the Holder of this Debenture, the Distributions on Common Stock to which the Holder would have been entitled if the Holder had converted this Debenture for Common Stock, immediately prior to the record date for the purpose of determining stockholders entitled to receive such Distributions on Common Stock and any such Distributions on Common Stock (together with any earnings while escrowed) shall thereafter be distributed from time to time out of such escrow to the Holder upon conversion of this Debenture or within five (5) business days thereafter. Upon the payment of this Debenture in cash on the Maturity Date, any such Distributions on Common Stock set aside in escrow pursuant to this Section 8(a) relating to this Debenture or the portion thereof being paid shall be released and returned to the Company. (b) No recourse shall be had for the payment of the principal of this Debenture, or for -6- any claim based hereon, or otherwise in respect hereof, against any incorporator, stockholder or employee, as such, past, present or future, of the Company or any successor Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. (c) All payments contemplated hereby to be made "in cash" shall be made in immediately available good funds in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. All payments of cash and each delivery of shares of Common Stock issuable to the Holder as contemplated hereby shall be made to the Holder at the address last appearing on this Debenture or as otherwise designated in writing by the Holder from time to time; except that the Holder can designate, by notice to the Company, a different delivery address for any one or more specific payments or deliveries. (e) Upon receipt by the Company of evidence of the loss, theft, destruction or mutilation of this Debenture, and (in the case of loss, theft or destruction) of indemnity or security reasonably satisfactory to the Company, and upon surrender and cancellation of this Debenture, if mutilated, the Company shall execute and deliver to the Holder a new debenture identical in all respects to this Debenture. (f) No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. (g) All the covenants, stipulations, promises and agreements by or on behalf of the Company contained in this Debenture shall be binding upon the Company's successors and assigns whether or not so expressed. (h) If any provision of this Debenture is found by a court of competent jurisdiction to be invalid, illegal or unenforceable, all other provisions of this Debenture shall remain in effect, and if any provision is in applicable to any person or circumstances, such provision shall nevertheless remain applicable to all other persons and circumstances. (i) The headings used in this Debenture are for convenience of reference only and do not define or limit the provisions hereof. (j) All notices, requests and other communications hereunder must be in writing and will be deemed to have been duly given only if delivered personally against written receipt or by facsimile transmission or mailed by prepaid first class certified mail, return receipt requested, or mailed by nationally recognized overnight courier prepaid, to the parties at the following addresses or facsimile numbers: -7- If to the Registered Holder, to: [Aventis Pharmaceuticals Inc.] 200 Crossing Boulevard P.O. Box 6890 Bridgewater, NJ 08807-0890 Facsimile No.: Attn: [______________] with a copy to: Morgan, Lewis & Bockius LLP 101 Park Avenue New York, NY 10178 Facsimile No.: (212) 309-6273 Attn: Randy Sunberg, Esq. If to the Company, to: Aphton Corporation 80 SW Eighth Street Miami, FL 33130 Facsimile No.: Attn: with a copy to: White & Case LLP 1155 Avenue of the Americas New York, NY 10036 Facsimile No.: (212) 354-8113 Attn: Jonathan E. Kahn, Esq. All such notices, requests and other communications will (i) if delivered personally to the address as provided in this Section, be deemed given upon delivery, (ii) if delivered by facsimile transmission to the facsimile number as provided in this Section, be deemed given upon receipt, (iii) if delivered by mail in the manner described above to the address as provided in this Section, be deemed given upon the earlier of the third business day following mailing or upon receipt and (iv) if delivered by nationally recognized overnight courier to the address as provided in this Section, be deemed given on the earlier of the first business day following the date sent by such overnight courier or upon receipt (in each case regardless of whether such notice, request or other communication is received by any other person to whom a copy of such notice is to be delivered pursuant to this Section). Any party from time to time may change its address, facsimile number -8- or other information for the purpose of notices to that party by giving notice specifying such change to the other party hereto. (k) All shares of Common Stock which are issuable upon conversion of this Debenture shall, when issued, be duly and validly issued, fully paid and nonassessable. The Company shall take all such actions as may be necessary to ensure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange or quotation system upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). (l) The Company shall within twelve months from the Issue Date hold a meeting of its shareholders at which it shall seek shareholder approval for the issuance of the Common Stock issuable upon conversion of this Debenture. -9- IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed by AN officer thereunto duly authorized. Dated: December ____, 2002 APHTON CORPORATION By: /s/ Philip C. Gevas ------------------------------------- Name: Philip C. Gevas Title: Chief Executive Officer ACKNOWLEDGED AND AGREED By: Aventis Pharmaceuticals Inc. By: /s/ Michael A. Yeomans -------------------------------- Name: Michael Yeomans Title: President, Global Business Development EXHIBIT A NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the Debenture) The undersigned hereby irrevocably elects to convert [$ ________________ of the above Debenture No. ___] [the remaining principal amount, together with all accrued and unpaid interest thereon of the above Debenture No. ___,] into shares of Common Stock of APHTON CORPORATION (the "Company") according to the conditions hereof, as of the date written below. Conversion Date*: _______________________ Applicable Conversion Price: _________________ Signature: _____________________ [Name] Address: _____________________ _____________________ * This original Debenture must be received by the Company or its transfer agent by the fifth business date following the Conversion Date. EX-10.4C 5 aregrightsagmt_ex10-4c.txt REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into as of February 24, 2003, by and among Aphton Corporation, a Delaware corporation (the "Company"), and Mainfield Enterprises Inc. ("Purchaser"). This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof among the Company and the Purchaser (the "Purchase Agreement"). The Company and the Purchaser hereby agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "Common Stock" shall mean the common stock of the Company, par value $0.001 per share. "Effective Date" means the date, if any, that such Registration Statement is first declared effective by the Commission. "Effectiveness Date" means, the earlier of (1) the 90th day following the Closing Date, and (2) the fifth Trading Day following the date on which the Company is notified by the Commission that the Registration Statement will not be reviewed or is no longer subject to further review and comments. "Effectiveness Period" shall have the meaning set forth in Section 2(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Filing Date" means the 30th day following the Closing Date. "Holder" or "Holders" means the holder or holders, as the case may be, from time to time of Registrable Securities. "Indemnified Party" shall have the meaning set forth in Section 5(c). "Indemnifying Party" shall have the meaning set forth in Section 5(c). "Liquidated Damages Product" shall have the meaning set forth in Section 2(b). "Losses" shall have the meaning set forth in Section 5(a). "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "Prospectus" means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "Registrable Securities" means the shares of Common Stock issuable upon exercise of the Warrants. "Registration Statement" means the registration statement required to be filed hereunder including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement. "Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 415" means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Rule 424" means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "Securities Act" means the Securities Act of 1933, as amended. "Special Counsel" means Bryan Cave LLP. "Warrants" means the Warrants issued or issuable to the Purchaser under the Purchase Agreement. 2. Registration. (a) On or prior to the Filing Date, the Company shall prepare and file with the Commission a Registration Statement covering the resale of all Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another -2- appropriate form in accordance herewith) and shall contain (except if otherwise directed by the Holders) the "Plan of Distribution" attached hereto as Annex A. The Company shall cause the Registration Statement to be declared effective under the Securities Act as soon as possible but, in any event, no later than the Effectiveness Date, and shall use its best efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is two years after the date that the Registration Statement is declared effective by the Commission or such earlier date when all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "Effectiveness Period"). (b) If: (i) the Registration Statement is not filed on or prior to the Filing Date (if the Company files such Registration Statement without affording the Holder the opportunity to review and comment on the same as required by Section 3(a) hereof, the Company shall not be deemed to have satisfied this clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that the Registration Statement will not be "reviewed," or not subject to further review, or (iii) the Company fails to respond to any comments made by the Commission within ten days after the receipt of such comments, or (iv) after its Effective Date, the Registration Statement ceases to be effective and available to the Holders thereunder as to all Registrable Securities to which it is required to relate (whether upon the delivery of an Advice pursuant to Section 6(d) or otherwise) at any time prior to the expiration of its Effectiveness Period without being succeeded within fifteen Trading Days by an amendment to such Registration Statement or by a subsequent Registration Statement filed with and declared effective by the Commission, or (v) an amendment to the Registration Statement is not filed by the Company with the Commission within fifteen Trading Days of the Commission's notifying the Company that such amendment is required in order for the Registration Statement to be declared effective, or (vi) the exercise rights of the Holders pursuant to the Warrants are suspended for any reason, or (vii) the Registration Statement shall not be declared effective by the Commission on or prior to the Effectiveness Date (any such failure or breach being referred to as an "Event," and for purposes of clause (i), (vi) or (vii) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five Trading Day period is exceeded, or for purposes of clause (iii) the date which such ten day-period is exceeded, or for purposes of clauses (iv) or (v) the date which such fifteen Trading Day-period is exceeded, being referred to as "Event Date"), then, in addition to any other rights available to the Holders: (x) on each such Event Date the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 1% of the product of the number of Warrant Shares then issuable upon exercise in full of the Warrant and the greater of (1) the closing sales price of the Common Stock on the Original Issue Date and (2) the closing sales price of the Common Stock as of such applicable Event Date ("Liquidated Damages Product"); and (y) on each monthly anniversary of each such Event Date thereof (if the applicable Event shall not have been cured by such date) until the applicable Event is cured, the Company shall pay to each Holder an amount in cash, as liquidated damages and not as a penalty, equal to 2% of the Liquidated Damages Product. If the Company fails to pay any liquidated damages pursuant to this Section in full within seven days after the date payable, the Company will pay interest thereon at a rate of 18% per annum (or such -3- lesser maximum amount that is permitted to be paid by applicable law) to the Holder, accruing daily from the date such liquidated damages are due until such amounts, plus all such interest thereon, are paid in full. 3. Registration Procedures In connection with the Company's registration obligations hereunder, the Company shall: (a) Not less than two Trading Days prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto, the Company shall, (i) furnish to the Holders and their Special Counsel copies of all such documents proposed to be filed (including documents incorporated or deemed incorporated by reference) which documents will be subject to the review of such Holders and their Special Counsel, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities and their Special Counsel shall reasonably object in good faith. (b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event within ten days, to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and, as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold and their Special Counsel as promptly as reasonably possible (and, in the case of (i)(A) below, not less than three Trading Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); and (C) with respect to the Registration -4- Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (v) of the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not 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. (d) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) Furnish to each Holder and their Special Counsel, without charge, at least one conformed copy of each Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (f) Promptly deliver to each Holder and their Special Counsel, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request. The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto. (g) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the selling Holders and their Special Counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder requests in writing, to keep each such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered by a Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is -5- not then so qualified or subject the Company to any material tax in any such jurisdiction where it is not then so subject. (h) Cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request. (i) Upon the occurrence of any event contemplated by Section 3(c)(v), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (j) Comply with all applicable rules and regulations of the Commission. (k) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if requested by the Commission, the controlling person thereof. 4. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with Nasdaq National Market or any other Trading Market, and (B) in compliance with applicable state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. -6- 5. Indemnification (a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable costs of preparation and reasonable attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 5(e). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, arising solely out of or based solely upon: (x) such Holder's failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto, or arising solely out of or based solely upon any omission of a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or to the extent that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to -7- the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the "Indemnifying Party") in writing, and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have proximately and materially adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, -8- as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party (regardless of whether it is ultimately determined that an Indemnified Party is not entitled to indemnification hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to reimburse all such fees and expenses to the extent it is finally judicially determined that such Indemnified Party is not entitled to indemnification hereunder). (d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. Miscellaneous (a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for -9- specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Piggyback on Registrations. Except as and to the extent specified in Schedule 6(b) hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities, and the Company shall not after the date hereof enter into any agreement providing any such right to any of its security holders. Except as and to the extent specified in Schedule 6(b) hereto, the Company has not previously entered into any agreement granting any registration rights with respect to any of its securities to any Person which have not been fully satisfied. (c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. (e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder written notice of such determination and, if within fifteen days after receipt of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of registration rights. (f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and the Holders of all of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of certain Holders and that -10- does not directly or indirectly affect the rights of other Holders may be given by Holders of at least a majority of the Registrable Securities to which such waiver or consent relates, provided, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence. (g) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile telephone number specified in this Agreement later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows: If to the Company: Aphton Corporation [ ] Attn: [ ] Fax No.: [ ] With a copy to: [ ] Attn: [ ] Facsimile No.: [ ] If to a Purchaser: To the address set forth under the Purchaser's name on the signature page hereto. With a copy to: Bryan Cave LLP 1290 Avenue of the Americas New York, NY 10101 Attn.: Eric L. Cohen, Esq. Fax No.: (212) 541-4630 and (212) 541-1432 If to any other Person who is then the registered Holder: To the address of such Holder as it appears in the stock transfer books of the Company or such other address as may be designated in writing hereafter, in the same manner, by such Person. (h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. -11- (i) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of this Agreement), and hereby irrevocably waives, and agrees not to assert in any suit, action or Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or Proceeding is improper. Each party hereto (including its affiliates, agents, officers, directors and employees) hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal Proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If either party shall commence an action or Proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or Proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or Proceeding. (k) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGES TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. APHTON CORPORATION By: /s/ Philip C. Gevas --------------------------------- Name: Philip C. Gevas Title: Chief Executive Officer [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK SIGNATURE PAGE OF PURCHASER TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. MAINFIELD ENTERPRISES INC. By: /s/ Kenneth L. Henderson ------------------------------------- Name: Kenneth L. Henderson Title: Attorney-in-fact Address for Notice: [ ] Facsimile No.: [ ] Attn: [ ] With a copy to: Bryan Cave LLP 1290 Avenue of the Americas New York, NY 10104 Facsimile No.: (212) 541-4630 and (212) 541-1432 Attn: Eric L. Cohen, Esq. Annex A Plan of Distribution The Selling Stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares: $ ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; $ block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; $ purchases by a broker-dealer as principal and resale by the broker-dealer for its account; $ an exchange distribution in accordance with the rules of the applicable exchange; $ privately negotiated transactions; $ short sales $ broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; $ a combination of any such methods of sale; and $ any other method permitted pursuant to applicable law. The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The Selling Stockholder may from time to time pledge or grant a security interest in some or all of the common stock or Warrant owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of selling stockholders to include the pledgee, transferee or other successors in interest as selling stockholders under this prospectus. The Selling Stockholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus. The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Selling Stockholders have informed the Company that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. The Company is required to pay all fees and expenses incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. EX-10.4D 6 awarrant_ex10-4d.txt WARRANT NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. APHTON CORPORATION WARRANT Warrant No. 1 Date of Original Issuance: February 24, 2003 Aphton Corporation, a Delaware corporation (the "Company"), hereby certifies that, for value received, Mainfield Enterprises Inc. or its registered assigns (the "Holder"), is entitled to purchase from the Company up to a total of 150,000 shares of common stock, $0.001 par value (the "Common Stock"), of the Company (each such share, a "Warrant Share" and all such shares, the "Warrant Shares") at an exercise price equal to $2.96 per share (as adjusted from time to time as provided in Section 9, the "Exercise Price"), at any time and from time to time from and after the date hereof and through and including February 24, 2008 (the "Expiration Date"), and subject to the following terms and conditions: 1. Definitions. In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein shall have the meanings given to such terms in the Securities Purchase Agreement of even date herewith to which the Company and the original Holder are parties (the "Purchase Agreement"). 2. Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the "Warrant Register"), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary. 3. Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new Warrant to purchase Common Stock, in substantially the form of this Warrant (any such new Warrant, a "New Warrant"), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant. 4. Exercise and Duration of Warrants. This Warrant shall be exercisable by the registered Holder at any time and from time to time on or after the date hereof to and including the Expiration Date. At 6:30 p.m., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value, provided, that if the closing sales price of the Common Stock on the Expiration Date is greater than 102% of the Exercise Price on the Expiration Date, then this Warrant shall be deemed to have been exercised in full (to the extent not previously exercised) on a "cashless exercise" basis at 6:30 P.M. New York City time on the Expiration Date. 5. Delivery of Warrant Shares. (a) To effect conversions hereunder, the Holder shall not be required to physically surrender this Warrant unless the aggregate Warrant Shares represented by this Warrant is being exercised. Upon delivery of the Exercise Notice to the Company (with the attached Warrant Shares Exercise Log) at its address for notice set forth herein and upon payment of the Exercise Price multiplied by the number of Warrant Shares that the Holder intends to purchase hereunder, the Company shall promptly (but in no event later than three Trading Days after the Date of Exercise (as defined herein)) issue and deliver to the Holder, a certificate for the Warrant Shares issuable upon such exercise, which, unless otherwise required by the Purchase Agreement, shall be free of restrictive legends. The Company shall, upon request of the Holder and subsequent to the date on which a registration statement covering the resale of the Warrant Shares has been declared effective by the Securities and Exchange Commission, use its best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions, if available, provided, that, the Company may, but will not be required to change its transfer agent if its current transfer agent cannot deliver Warrant Shares electronically through the Depository Trust Corporation. A "Date of Exercise" means the date on which the Holder shall have delivered to Company: (i) the Exercise Notice (with the Warrant Exercise Log attached to it), appropriately completed and duly signed and (ii) if such Holder is not utilizing the cashless exercise provisions set forth in this Warrant, payment of the Exercise Price for the number of Warrant Shares so indicated by the Holder to be purchased. (b) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), then the Holder will have the right to rescind such exercise. (c) If by the third Trading Day after a Date of Exercise the Company fails to deliver the required number of Warrant Shares in the manner required pursuant to Section 5(a), and if after such third Trading Day and prior to the receipt of such Warrant Shares, the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue by (B) the closing bid price of the Common Stock at the time of the obligation giving rise to such purchase obligation and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In. (d) The Company's obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. 6. Charges, Taxes and Expenses. Issuance and delivery of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; 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 registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof. 7. Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity (which shall not include a surety bond), if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe. If a New Warrant is requested as a result of a mutilation of this Warrant, then the Holder shall deliver such mutilated Warrant to the Company as a condition precedent to the Company's obligation to issue the New Warrant. 8. Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. 9. Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9. (a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination. If any event requiring an adjustment under this paragraph occurs during the period that an Exercise Price is calculated hereunder, then the calculation of such Exercise Price shall be adjusted appropriately to reflect such event. (b) Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, distributes to all holders of Common Stock (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each case, "Distributed Property"), then, at the request of any Holder delivered before the 90th day after the record date fixed for determination of stockholders entitled to receive such distribution, the Company will deliver to such Holder, within five Trading Days after such request (or, if later, on the effective date of such distribution), the Distributed Property that such Holder would have been entitled to receive in respect of the Warrant Shares for which such Holder's Warrant could have been exercised immediately prior to such record date. If such Distributed Property is not delivered to a Holder pursuant to the preceding sentence, then upon any exercise of the Warrant that occurs after such record date, such Holder shall be entitled to receive, in addition to the Warrant Shares otherwise issuable upon such conversion, the Distributed Property that such Holder would have been entitled to receive in respect of such number of Warrant Shares had the Holder been the record holder of such Warrant Shares immediately prior to such record date. (c) Fundamental Transactions. If, at any time while this Warrant is outstanding, (1) the Company effects any merger or consolidation of the Company with or into another Person, (2) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (3) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a "Fundamental Transaction"), then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the "Alternate Consideration"). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. At the Holder's option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall, either (1) issue to the Holder a new warrant substantially in the form of this Warrant and consistent with the foregoing provisions and evidencing the Holder's right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof, or (2) purchase the Warrant from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black Scholes value of the remaining unexercised portion of this Warrant on the date of such request. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this paragraph (c) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. (d) Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to paragraphs (a) or (b) of this Section, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the adjusted number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment. (e) Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock. (f) Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company's Transfer Agent. (g) Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least 20 calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice. 10. Payment of Exercise Price. The Holder may pay the Exercise Price in one of the following manners: (a) Cash Exercise. The Holder may deliver immediately available funds; or (b) Cashless Exercise. In the event that there is not then an effective registration statement that is then available for the Holder to resell the Warrant Shares subject to the exercise at issue, the Holder may deliver an Exercise Notice of its election to utilize cashless exercise, in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows: X = Y [(A-B)/A] where: X = the number of Warrant Shares to be issued to the Holder. Y = the number of Warrant Shares with respect to which this Warrant is being exercised. A = the average of the closing prices for the five Trading Days immediately prior to (but not including) the Exercise Date. B = the Exercise Price. For purposes of Rule 144 promulgated under the Securities Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued. 11. Limitation on Exercise. Notwithstanding anything to the contrary contained herein, the number of shares of Common Stock that may be acquired by the Holder upon any exercise of this Warrant (or otherwise in respect hereof) shall be limited to the extent necessary to insure that, following such exercise (or other issuance), the total number of shares of Common Stock then beneficially owned by such Holder and its Affiliates and any other Persons whose beneficial ownership of Common Stock would be aggregated with the Holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 9.999% of the total number of issued and outstanding shares of Common Stock (including for such purpose the shares of Common Stock issuable upon such exercise). For such purposes, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. Each delivery of an Exercise Notice hereunder will constitute a representation by the Holder that it has evaluated the limitation set forth in this paragraph and determined that issuance of the full number of Warrant Shares requested in such Exercise Notice is permitted under this paragraph. This provision shall not restrict the number of shares of Common Stock which a Holder may receive or beneficially own in order to determine the amount of securities or other consideration that such Holder may receive in the event of a merger or other business combination or reclassification involving the Company as contemplated in Section 9 of this Warrant. 12. No Fractional Shares. No fractional shares of Warrant Shares will be issued in connection with any exercise of this Warrant. In lieu of any fractional shares which would, otherwise be issuable, the Company shall pay cash equal to the product of such fraction multiplied by the closing price of one Warrant Share as reported on the Nasdaq National Market on the date of exercise. 13. Notices. Any and all notices or other communications or deliveries hereunder (including, without limitation, any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to the Company, to Aphton Corp., Facsimile No. [ ], Attn: Chief Financial Officer, or (ii) if to the Holder, to the address or facsimile number appearing on the Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section. 14. Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 30 days' notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or shareholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder's last address as shown on the Warrant Register. 15. Miscellaneous. (a) This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and assigns. Subject to the preceding sentence, nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy or cause of action under this Warrant. This Warrant may be amended only in writing signed by the Company and the Holder and their successors and assigns. (b) All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan. Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of this Warrant), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper. Each party hereto hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Each party hereto (including its affiliates, agents, officers, directors and employees) hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Warrant or the transactions contemplated hereby. If either party shall commence an action or proceeding to enforce any provisions of this Warrant, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. (c) The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof. (d) In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK, SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above. APHTON CORPORATION By: /s/ Philip C. Gevas -------------------------------------- Name: Philip C. Gevas Title: Chief Executive Officer EXERCISE NOTICE To Aphton Corporation: The undersigned hereby irrevocably elects to purchase _____________ shares of common stock, $0.001 par value per share, of Aphton Corporation ("Common Stock"), pursuant to Warrant No. 1, original issued February [ ], 2003 (the "Warrant"), and, if such Holder is not utilizing the cashless exercise provisions set forth in the Warrant, encloses herewith $________ in cash, certified or official bank check or checks or other immediately available funds, which sum represents the aggregate Exercise Price (as defined in the Warrant) for the number of shares of Common Stock to which this Exercise Notice relates, together with any applicable taxes payable by the undersigned pursuant to the Warrant. By its delivery of this Exercise Notice, the undersigned represents and warrants to the Company that in giving effect to the exercise evidenced hereby the Holder will not beneficially own in excess of the number of shares of Common Stock (determined in accordance with Section 13(d) of the Securities Exchange Act of 1934) permitted to be owned under Section 11 of this Warrant to which this notice relates. The undersigned requests that certificates for the shares of Common Stock issuable upon this exercise be issued in the name of PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER (Please print name and address) Warrant Shares Exercise Log --------------------------- Number of Warrant Date Number of Warrant Shares Number of Warrant Shares Remaining to Available to be Exercised Shares Exercised be Exercised - -------------------------------------------------------------------------------- FORM OF ASSIGNMENT [To be completed and signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Aphton Corporation to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Aphton Corporation with full power of substitution in the premises. Dated: _______________, ____ --------------------------------------- (Signature must conform in all respects to name of holder as specified on the face of the Warrant) --------------------------------------- Address of Transferee --------------------------------------- --------------------------------------- In the presence of: - -------------------------- EX-23.1 7 exh_23-1.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-92058, Form S-3 No. 333-82344, Form S-3 No. 333-69052, Form S-3 No. 333-72964, Form S-3 No. 333-48680, Form S-3 No. 333-31217, and Form S-3 No. 33-77286) of Aphton Corporation and in the related Prospectuses of our report dated March 26, 2003, with respect to the financial statements of Aphton Corporation included in this Annual Report (Form 10-K) as of and for the year ended December 31, 2002. /s/ Ernst & Young LLP Miami, Florida March 31, 2003 EX-99.1 8 exh_99-1.txt SECTION 906 CERTIFICATION EXHIBIT 99.1 CERTIFICATION (Section 906 Certification of the Sarbanes-Oxley Act of 2002) In connection with the Annual Report on Form 10-K of Aphton Corporation (the "Company") for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Annual Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ Philip C. Gevas - --------------------------------------- Philip C. Gevas Chief Executive Officer Dated: March 31, 2003 EX-99.2 9 exh_99-2.txt SECTION 906 CERTIFICATION EXHIBIT 99.2 CERTIFICATION (Section 906 Certification of the Sarbanes-Oxley Act of 2002) In connection with the Annual Report on Form 10-K of Aphton Corporation (the "Company") for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Annual Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ Frederick W. Jacobs - --------------------------------------- Frederick W. Jacobs Chief Financial Officer Dated: March 31, 2003 -----END PRIVACY-ENHANCED MESSAGE-----