-----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, FDdD7la6nwDbKcuok/nF0mSkY36UC2UMMgR5pqr8+PruUfqFUp2P3wL4g2lINlA1 wVsQdIpe5ION5hoIPP11CA== 0000950168-97-002613.txt : 19970912 0000950168-97-002613.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950168-97-002613 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19970908 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRIMERIS INC CENTRAL INDEX KEY: 0000911326 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 561808663 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-31109 FILM NUMBER: 97676381 BUSINESS ADDRESS: STREET 1: 4727 UNIVERSITY DR STE 100 CITY: DURHAM STATE: NC ZIP: 27707 BUSINESS PHONE: 9194196050 MAIL ADDRESS: STREET 1: 4727 UNIVERSITY DRIVE STE 100 CITY: DURHAM STATE: NC ZIP: 27707 S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1997 REGISTRATION NO. 333-31109 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 TRIMERIS, INC. (Exact name of registrant as specified in its charter) DELAWARE 8733 56-1808663 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Organization) Industrial Code Number) Identification No.)
4727 UNIVERSITY DRIVE, SUITE 100 DURHAM, NORTH CAROLINA 27707 (919) 419-6050 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) DR. M. ROSS JOHNSON PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF SCIENTIFIC OFFICER 4727 UNIVERSITY DRIVE, SUITE 100 DURHAM, NORTH CAROLINA 27707 (919) 419-6050 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO:
COUNSEL TO COMPANY COUNSEL TO UNDERWRITERS FRED D. HUTCHISON, ESQUIRE JOHN B. WATKINS, ESQUIRE ALEXANDER D. LYNCH, ESQUIRE HUTCHISON & MASON PLLC WILMER, CUTLER & PICKERING BROBECK, PHLEGER & HARRISON LLP 4011 WESTCHASE BOULEVARD 2445 M ST., N.W. 1633 BROADWAY SUITE 400 WASHINGTON, D.C. 20037 47TH FLOOR RALEIGH, NORTH CAROLINA 27607 (202) 663-6000 NEW YORK, NEW YORK 10019 (919) 829-9600 (212) 581-1600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. (A redherring appears on the left side of page, rotated 90 degrees with the following text:) Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1997 PROSPECTUS 2,500,000 Shares (logo) Trimeris, Inc. Common Stock All of the 2,500,000 shares of Common Stock offered hereby (the "Offering") are being sold by Trimeris, Inc., a development stage company with a limited operating history ("Trimeris" or the "Company"). The Company has incurred losses since its inception, had an accumulated deficit of approximately $21.4 million as of June 30, 1997, and expects to incur substantial losses for the foreseeable future. Prior to this Offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $12.00 and $14.00 per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "TRMS," subject to official notice of issuance. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS," BEGINNING ON PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. [CAPTION] Price to Underwriting Discounts Proceeds to Public and Commissions(1) Company(2) Per Share............................... $ $ $ Total(3)................................ $ $ $
1. For information regarding indemnification of the Underwriters, see "Underwriting." 2. Before deducting expenses of the Offering payable by the Company, estimated at approximately $800,000. 3. The Company has granted the Underwriters an option, exercisable within 30 days from the date hereof, to purchase up to 375,000 additional shares of Common Stock on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, total Price to Public will be $ , Underwriting Discounts and Commissions will be $ and Proceeds to the Company will be $ . See "Underwriting." The shares of Common Stock offered by the Underwriters are subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and to certain other conditions. It is expected that delivery of such shares will be made through the offices of UBS Securities LLC, 299 Park Avenue, New York, New York, on or about , 1997. UBS Securities Montgomery Securities , 1997 [Model for T-20 inhibition of HIV Fusion and infection of a host cell as more fully described on page 25] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE INFORMATION UNDER "RISK FACTORS." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Trimeris is a biopharmaceutical company engaged in the discovery and development of novel therapeutic agents that block viral infection by inhibiting viral fusion with host cells. Viral fusion is a complex process by which viruses attach to and penetrate host cells. The Company's lead product candidate, T-20, inhibits fusion of the Human Immunodeficiency Virus-1 ("HIV") with host cells. T-20 has been tested in a multidose Phase I/II clinical trial as a monotherapy for HIV-infected patients in the United States. The results from this clinical trial indicate that short-term administration of T-20 in an intravenous formulation is safe and well tolerated. Furthermore, all four patients in the clinical trial who received the highest dose of T-20 experienced a reduction in HIV viral load to below detectable levels (less than 500 copies/ml) during the treatment period. T-20 and the Company's other product candidates are designed to inhibit viral fusion, unlike other currently approved therapeutic agents that target replicating viruses inside already infected cells. The Company has developed a proprietary technology platform in the field of fusion inhibition, which is being applied to the discovery and development of novel products for the treatment of a variety of viral diseases. T-20 is a proprietary 36 amino acid synthetic peptide which has demonstrated significant inhibition of HIV in preclinical testing. In the Phase I/II clinical trial, no drug-related adverse events were recorded and no dose-limiting toxicities were observed for any patient during the treatment period. A dose-dependent decrease in HIV viral load and a dose-dependent increase in the patients' CD4+ T-cell count were also observed. All four patients who received the highest dose of T-20 (100 mg every 12 hours for 14 consecutive days) experienced a decrease in HIV viral load to below detectable levels (less than 500 copies/ml) during the treatment period. The Company is preparing to begin a Phase II clinical trial in HIV-infected patients in the United States that will compare delivery of a constant therapeutic dose by a continuous, subcutaneous infusion pump to delivery by intermittent, subcutaneous injections. The Company believes that delivery of a continuous therapeutic dose may inhibit viral fusion more effectively than other delivery mechanisms. After completion of the continuous, subcutaneous infusion Phase II trial, the Company intends to begin a Phase II pivotal trial in a larger population of HIV-infected patients who are either resistant to, or intolerant of, currently approved antiviral therapies. Concurrently with the start of the pivotal Phase II clinical trial, the Company intends to begin a trial of T-20 in HIV-infected pediatric patients. In addition, throughout the T-20 clinical process, the Company intends to work with the United States Food and Drug Administration (the "FDA") to design and implement a clinical trial strategy involving the administration of T-20 to HIV-infected patients in combination with approved HIV antiviral agents. HIV infection causes Acquired Immunodeficiency Syndrome ("AIDS"), which is the leading cause of death in the United States of men and women between the ages of 25 and 44. Currently approved HIV antivirals inhibit reverse transcriptase ("RT") and protease, two viral enzymes which are required for HIV replication. RT and protease inhibitors must penetrate HIV-infected host cells in order to be effective. HIV is prone to mutations that produce resistance to RT and protease inhibitors. In an effort to overcome drug resistance, physicians have begun to use RT and protease inhibitors in various combinations. While combination therapy with RT and protease inhibitors represents an advance in the treatment of HIV infection, it has not yet proven to be a cure. Moreover, although these combinations have slowed the emergence of resistance, new mutant strains have been identified which are resistant to several of the drugs currently used in combination therapy. Due to the complexity of the dosing regimens for many combination therapies, which can include 14-16 pills taken at six to eight specific times during the 3 day, and the toxic side effects that can result from the use of such drugs, many patients are unable to, or fail to, follow the recommended dosing regimens. Such noncompliance leads to a reduction in the effectiveness of such drugs and an increased opportunity for the development of resistance. The Company believes that T-20 may offer a new paradigm for the treatment of HIV. Preclinical testing and early clinical trial results suggest that T-20 is less toxic than currently approved HIV antivirals. The Company believes that T-20's reduced toxicity is due to its unique extracellular mechanism of action and its chemical structure. Furthermore, the Company believes that the delivery of a continuous therapeutic dose of T-20 by subcutaneous infusion will enhance patient compliance, thereby reducing the likelihood of the development of resistance. Through its study of the HIV fusion process, the Company has developed a proprietary technology platform aimed at discovering antiviral compounds to treat other diseases. The cornerstone of this platform is the Company's Computerized Anti-Fusion Searching Technology ("CAST"), a proprietary computer algorithm which identifies target sequences within certain viral proteins that have the potential to interact during the fusion process. CAST has enabled the Company to design product candidates for Respiratory Syncytial Virus ("RSV") and Human Parainfluenza Virus ("HPIV") fusion inhibition. The Company has identified, and filed patent applications disclosing, numerous discrete peptide sequences, which include potential fusion targets in other viruses such as hepatitis B and C, influenza and herpes. T-786 is the Company's lead product candidate for treatment of RSV infection, which is a significant cause of pediatric bronchiolitis and pneumonia. T-786 is a proprietary 36 amino acid synthetic peptide which shows potent, specific and selective inhibition of RSV infection IN VITRO. T-786 significantly reduced the level of viral infection in an animal model. Preclinical testing of T-786 is currently in progress. Upon successful completion of these preclinical tests, the Company anticipates that it will begin clinical trials with T-786 in 1998. The Company was incorporated under Delaware law as SL-1 Pharmaceuticals, Inc. on January 7, 1993 and changed its name to Trimeris, Inc. on February 11, 1993. The Company's principal executive office is located at 4727 University Drive, Durham, North Carolina 27707, and its telephone number is (919) 419-6050. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (II) REFLECTS THE AUTOMATIC CONVERSION UPON THE COMPLETION OF THIS OFFERING OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO 6,261,615 SHARES OF COMMON STOCK (THE "PREFERRED STOCK CONVERSION"), AND (III) REFLECTS THE FILING OF A THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE COMPANY WHICH, AMONG OTHER THINGS, WILL AUTHORIZE 10,000,000 SHARES OF UNDESIGNATED PREFERRED STOCK. SEE "DESCRIPTION OF CAPITAL STOCK," "CAPITALIZATION" AND "UNDERWRITING." THE COMPANY HAS FILED FOR REGISTRATION OF "TRIMERIS" AND THE COMPANY'S LOGO AS TRADEMARKS AND SERVICE MARKS OF THE COMPANY. THIS PROSPECTUS ALSO INCLUDES TRADEMARKS AND TRADE NAMES OF COMPANIES OTHER THAN THE COMPANY. 4 THE OFFERING Common Stock Offered.................................. 2,500,000 shares Common Stock Outstanding after this Offering.......... 9,864,676 shares (1) Use of Proceeds....................................... To fund increased research and development activities, to fund the expansion of facilities, to provide working capital and to fund other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol................ TRMS
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY)
PERIOD FROM INCEPTION FOR THE CUMULATIVE (JANUARY 7, 1993) FOR THE SIX MONTHS ENDED FROM INCEPTION THROUGH YEARS ENDED DECEMBER 31, JUNE 30, (JANUARY 7, 1993) DECEMBER 31, 1993 1994 1995 1996 1996 1997 TO JUNE 30, 1997 (UNAUDITED) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenue....................... $ -- $ -- $ 104 $ 55 $ -- $ 212 $ 371 Research and development expenses.................... 691 2,747 4,012 5,146 2,278 2,859 15,455 Operating loss................ (1,322) (3,694) (5,428) (6,852) (3,080) (3,433) (20,730) Other income (expenses)....... 11 (250) (311) (120) (54) (45) (713) Net loss...................... (1,311) (3,944) (5,739) (6,972) (3,134) (3,478) (21,443) Pro forma net loss per share (2) (3)..................... $ (1.48) $ (.59) Pro forma weighted average shares used in computing pro forma net loss per share (2) (3)......................... 4,705 5,880
AS OF JUNE 30, 1997 (UNAUDITED) PRO PRO FORMA AS ACTUAL FORMA (3) ADJUSTED (4) BALANCE SHEET DATA: Cash and cash equivalents.................................................... $ 8,912 $ 8,912 $ 38,337 Working capital.............................................................. 8,019 8,019 37,444 Total assets................................................................. 10,585 10,585 40,010 Notes payable and capital lease obligations, less current portion............ 488 488 488 Accumulated deficit.......................................................... (21,443) (21,443) (21,443) Total stockholders' equity................................................... 8,847 8,847 38,272
(1) Based on the number of shares outstanding as of June 30, 1997. Excludes (i) 260,361 shares of Common Stock reserved for issuance pursuant to stock options outstanding as of June 30, 1997 and (ii) an aggregate of 56,684 shares of Common Stock issuable upon the exercise of warrants outstanding as of June 30, 1997. Also excludes an aggregate of 254,188 shares of Common Stock reserved for future issuance as of June 30, 1997 under the Company's New Stock Option Plan (the "Stock Option Plan"). See "Management -- Stock Option Plans," "Description of Capital Stock" and Note 5 of Notes to Financial Statements. (2) Computed on the basis described in Note 1 of Notes to Financial Statements. (3) Pro forma to give effect to the automatic conversion upon the completion of this Offering of all outstanding shares of the Company's Series A, B, C and D Preferred Stock, par value $.001 per share (the "Preferred Stock"), into 6,261,615 shares of Common Stock. (4) Adjusted to give effect to the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." 5 RISK FACTORS PROSPECTIVE INVESTORS IN THE SHARES OFFERED HEREBY SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. DEVELOPMENT STAGE COMPANY. The Company commenced operations in January 1993 and is subject to all of the business risks associated with a biopharmaceutical company in the early stage of development, including constraints on the Company's financial, personnel and other resources, and uncertainties regarding the Company's novel product discovery and development programs. Prospective investors, therefore, have limited historical financial information about the Company upon which to base their evaluation of the Company's performance and an investment in the shares offered hereby. Since its inception, substantially all of the Company's resources have been dedicated to the development, patenting, preclinical testing and a Phase I/II clinical trial of T-20, the development of its proprietary technology platform, and research and development and preclinical testing of other potential product candidates and compounds discovered by the Company. The Company has yet to generate any revenues from product sales or royalties, and there can be no assurance that it will be able to generate any such revenues or royalties in the future. Product candidates and compounds discovered by the Company and developed through the Company's product development programs will require significant additional, time-consuming and costly research and development, preclinical testing and extensive clinical trials prior to submission of any regulatory application for commercial use. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY. The Company has incurred losses since its inception. As of June 30, 1997, the Company's accumulated deficit was approximately $21.4 million. Such losses have resulted principally from expenses incurred in the Company's research and development activities associated with the development, patenting, preclinical testing and a Phase I/II clinical trial of T-20, the development of its proprietary technology platform, research and development and preclinical testing of other potential product candidates and compounds discovered by the Company, and from general and administrative expenses. The Company expects to incur substantial losses for the foreseeable future and expects losses to increase as the Company's research and development, preclinical testing and clinical trial efforts expand. The amount and timing of the Company's operating expenses will depend on several factors, including the status of the Company's research and development activities, product candidate and compound discovery and development efforts, including preclinical testing and clinical trials, the timing of regulatory actions, the costs involved in preparing, filing, prosecuting, maintaining, protecting and enforcing patent claims and other proprietary rights, the ability of the Company to establish, internally or through relationships with third parties, manufacturing, sales, marketing and distribution capabilities, technological and other changes in the competitive landscape, changes in the Company's existing research and development relationships and strategic alliances, evaluation of the commercial viability of potential product candidates and other factors, many of which are outside of the Company's control. As a result, the Company believes that period-to-period comparisons of financial results in the future are not necessarily meaningful and results of operations in prior periods should not be relied upon as an indication of future performance. Any deviations in results of operations from levels expected by securities analysts and investors could have a material adverse effect on the market price of the Common Stock. The Company's ability to achieve profitability will depend, in part, upon its or its collaborative partners' ability to successfully develop and obtain regulatory approval for T-20 and other product candidates and compounds discovered by the Company, and to develop the capacity, either internally or through relationships with third parties, to manufacture, sell, market and distribute approved products, if any. There can be no assurance that the Company will ever generate significant revenues or achieve profitable operations. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "Business -- Programs and Product Candidates Under Development." DEPENDENCE ON A SINGLE PRODUCT CANDIDATE. T-20 is the only product candidate developed by the Company which has been tested in humans. The Company's success will depend, in significant part, upon the ability of the Company to establish the safety and effectiveness of T-20 in humans, to obtain the requisite regulatory approvals 6 for the commercialization of T-20, to establish relationships for the commercial-scale production of T-20 at acceptable cost and with appropriate quality, to successfully market T-20, and to achieve market acceptance of T-20 by the medical community, including health care providers and third-party payors. Failure of the Company or its collaborative partners to successfully develop and commercialize T-20 would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Programs and Product Candidates Under Development." TECHNOLOGICAL UNCERTAINTY. The Company's product development programs are based upon a novel technology designed to facilitate the discovery of product candidates and compounds which are designed to treat viral infection through the inhibition of viral fusion. The Company is not aware of any other approved antiviral pharmaceutical products which target the inhibition of viral fusion. Accordingly, product development utilizing the Company's novel mechanism of action involves a high degree of risk, is highly uncertain, and could result in unanticipated developments, clinical or regulatory delays, unexpected adverse side effects or inadequate therapeutic effectiveness, any of which could slow or suspend the Company's product development efforts which could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's technologies will lead to the discovery and development of any commercially viable products, that the Company's research or product development efforts as to any particular product candidate or compound will be successfully completed, that any such product candidates or compounds will be proven to be safe and effective, or that required regulatory approvals will be obtained. The Company's development programs are subject to the risks inherent in the development of new products using new technologies and approaches. There can be no assurance that unforeseen problems will not develop with these technologies or applications, that the Company will be able to address successfully technological challenges it encounters in its research and development programs or that commercially feasible product candidates or compounds will ultimately be developed by the Company. See "Business -- Programs and Product Candidates Under Development" and " -- Clinical Development Programs." UNCERTAINTIES RELATED TO CLINICAL TRIALS AND CLINICAL TRIAL STRATEGY. Before obtaining required regulatory approvals for the commercial sale of any of its product candidates or compounds, the Company must demonstrate through preclinical testing and clinical trials that each product candidate or compound is safe and effective for use in humans for each target indication. To date, the Company has conducted initial preclinical testing of certain of its product candidates and has conducted a Phase I/II clinical trial of T-20. The Company intends to conduct a Phase II clinical trial and a pivotal clinical trial of T-20. These clinical trials will involve a relatively small patient population. No assurance can be given that the results of early clinical trials will support the commencement of further clinical trials of T-20, that the results of the clinical trials will support the Company's applications for regulatory approval, or that regulatory authorities will not require the Company to conduct additional clinical trials either prior to, or after, regulatory approval is obtained. The Company may find, at any stage of this complex process, that potential product candidates or compounds that appeared promising in preclinical testing and early clinical trials do not demonstrate safety or effectiveness on a larger scale in advanced clinical trials or do not receive the requisite regulatory approvals. Accordingly, any product development program undertaken by the Company may be curtailed, redirected or eliminated at any time, which could result in delays in conducting further preclinical testing and clinical trials, in unexpected adverse events in further preclinical testing and clinical trials, and in additional development expenses. Furthermore, administration of the Company's potential product candidates or compounds may prove to have undesirable or unintended side effects in humans. The occurrence of side effects could interrupt, delay or halt clinical trials of each such product candidate or compound and could delay or prevent its approval by the FDA or foreign regulatory authorities for any and all targeted indications. The Company or the FDA may suspend or terminate clinical trials at any time if it is believed that the trial participants are being exposed to unacceptable health risks. In addition, this Prospectus reflects the Company's estimates regarding the timing of future preclinical testing and clinical trials. Such preclinical testing and clinical trials may be delayed or cancelled for a number of reasons, including the receipt of unanticipated, adverse or ambiguous results from preclinical testing or clinical trials, the demonstration of undesirable or unintended side effects, the inability to locate, recruit and qualify sufficient numbers of patients, lack of funding, the inability to locate or recruit scientists to undertake or complete planned preclinical testing or clinical trials, the redesign of the Company's preclinical testing or clinical trial programs, the inability to manufacture or acquire sufficient quantities 7 of the particular product candidate or any other components required for preclinical testing or clinical trials, regulatory delays or other regulatory actions, changes in focus of the Company's or its collaborators' development efforts, and the disclosure of clinical trial results by competitors. Accordingly, no assurance can be given that the Company's preclinical testing or clinical trials will commence on their target dates, or at all. Delays in such testing and trials could delay regulatory approval for the Company's product candidates, delay commercialization of the Company's product candidates, increase operating expenses, result in the expenditure of additional capital, cause the diversion of management time and attention, or create adverse market perception about the Company and its product candidates, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The rate of completion of the Company's clinical trials will depend upon, among other factors, obtaining or manufacturing adequate amounts of the Company's product candidates from third-party manufacturers and sufficient patient enrollment. See "Business -- Lack of Manufacturing Capabilities" for a description of certain risks associated with the manufacturing of the Company's product candidates and compounds. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the clinical trial. Delays in planned patient enrollment may result in increased costs or delays or both, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Programs and Product Candidates Under Development" and " -- Government Regulation." DEPENDENCE ON COLLABORATIONS AND LICENSES WITH OTHERS. The Company intends to consider entering into collaborative and license arrangements with collaborative partners, licensees and third parties to seek regulatory approval of and to manufacture and commercialize certain of its existing and potential product candidates and compounds. Accordingly, the Company's success will depend, in part, upon the subsequent success of such third parties in performing preclinical testing and clinical trials, obtaining the requisite regulatory approvals, scaling up manufacturing, successfully commercializing the licensed product candidates or compounds and otherwise performing their obligations. There can be no assurance that the Company will be able to maintain its existing arrangements or enter into acceptable collaborative and license arrangements in the future on acceptable terms, if at all, that such arrangements will be successful, that the parties with which the Company has or may establish arrangements will perform their obligations under such arrangements, or that potential collaborators will not compete with the Company by seeking alternative means of developing therapeutics for the diseases targeted by the Company. There can also be no assurance that the Company's existing or any future arrangements will lead to the development of product candidates or compounds with commercial potential, that the Company will be able to obtain proprietary rights or licenses for the proprietary rights with respect to any technology or product candidates or compounds developed in connection with these arrangements, or that the Company will be able to ensure the confidentiality of any proprietary rights and information developed in such arrangements or prevent the public disclosure thereof. The Company currently has a license from Duke University, and in the future may require additional licenses from these or other parties, to effectively develop potential product candidates and compounds. Pursuant to a license agreement with Duke University (the "Duke License"), the Company has obtained an exclusive, worldwide license to existing and certain future technologies in the field of antiviral therapeutics developed by several researchers at Duke University for the life of each particular patent filed in connection with such technologies. Unless the Duke License is renewed, the Company will not be entitled to any additional technologies developed after 2000 or after any earlier termination. None of the technologies licensed by the Company from Duke University is the subject of a separate individual license agreement. Rather, the Company's rights to such technologies are licensed solely pursuant to the Duke License. The early termination of the Duke License due to the Company's failure to develop the licensed technologies or the failure of the Company to renew the Duke License on acceptable terms, or at all, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company is currently negotiating a license with a third party to acquire a related technology. Pursuant to a Cooperative and Strategic Alliance Agreement (the "MiniMed Agreement"), the Company and MiniMed Inc. ("MiniMed") have agreed to jointly design, develop and implement a system for the continual delivery of T-20 utilizing the MiniMed continuous infusion pump. The failure of the Company and MiniMed to achieve their collective objectives could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has received two Small 8 Business Innovation Research ("SBIR") grants from the National Institutes of Health and entered into an investigative contract with a third party to identify certain pharmaceutical compounds. There can be no assurance that the funding provided by such SBIR grants will be sufficient to complete the studies contemplated by such programs or that the Company will receive any additional future grants or funding under any of these programs. There can be no assurance that such license or agreements can be maintained or that additional licenses can be obtained on acceptable terms, if at all, or will be renewable if obtained, or that the patents underlying such licenses, if any, will be valid and enforceable, or that the proprietary nature of the patented technology underlying such licenses will remain proprietary. See "Business -- License and Collaborative Agreements." FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company has experienced negative cash flows from operations since its inception and does not anticipate generating sufficient positive cash flows to fund its operations in the foreseeable future. The Company has expended, and expects to continue to expend in the future, substantial funds to pursue its product candidate and compound discovery and development efforts, including expenditures for continued clinical trials of T-20, research and development and preclinical testing of other potential product candidates and compounds discovered by the Company and the development of its proprietary technology platform. The Company expects that its existing capital resources, together with the net proceeds of this Offering and the interest earned thereon, will be adequate to fund its capital requirements through 1998. However, the Company's future capital requirements and the adequacy of available funds will depend on many factors, including the results of the clinical trials relating to T-20, the progress and scope of the Company's product development programs, the magnitude of these programs, the results of preclinical testing and clinical trials, the need for additional facilities based on the results of these clinical trials and other product development programs, changes in the focus and direction of the Company's product development programs, the costs involved in preparing, filing, prosecuting, maintaining, protecting and enforcing patent claims and other intellectual property rights, competitive factors and technological advances, the cost, timing and outcome of regulatory reviews, changes in the requirements of the FDA, administrative and legal expenses, evaluation of the commercial viability of potential product candidates and compounds, the establishment of capacity, either internally or through the establishment of relationships with third parties, for manufacturing, sales, marketing and distribution functions and other factors, many of which are outside of the Company's control. Thus, there can be no assurance that the net proceeds of this Offering, together with the interest earned thereon, will be sufficient to fund the Company's capital requirements during the period discussed above. The Company believes that substantial additional funds will be required to continue to fund its operations and that the Company will be required to obtain additional funds through equity or debt financings or licenses, agreements or other arrangements with partners and others, or from other sources. The terms of any such equity financings may be dilutive to stockholders, and the terms of any debt financings may contain restrictive covenants which limit the Company's ability to pursue certain courses of action. There can be no assurance that such funds will be available to the Company on acceptable terms, if at all, or that any such financings will be adequate to meet the Company's future capital requirements. If adequate funds are not available, the Company may be required to delay, scale-back or eliminate certain aspects of its preclinical testing, clinical trials and research and development programs or attempt to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies or product candidates or compounds, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend, in part, on its ability, and the ability of its collaborators or licensors, to obtain protection for its products and technologies under United States and foreign patent laws, to preserve its trade secrets, and to operate without infringing the proprietary rights of third parties. Because of the substantial length of time and expense associated with bringing new products through development to the marketplace, the pharmaceutical and biotechnology industries place considerable importance on obtaining, and maintaining, patent and trade secret protection for new technologies, products and processes. The Company has obtained rights to certain patents and patent applications and may, in the future, seek rights from third parties to additional patents and patent applications. The Company is currently negotiating a license 9 with a third party to acquire a related technology. There can be no assurance that patent applications relating to the Company's potential products or technologies will result in patents being issued, that any issued patents will afford adequate protection to the Company, or that such patents will not be challenged, invalidated, infringed or circumvented. Furthermore, there can be no assurance that others have not developed, or will not develop, similar products or technologies that will compete with those of the Company without infringing upon the Company's intellectual property rights. Legal standards relating to the scope of claims and the validity of patents in the biopharmaceutical industry are uncertain and still evolving, and no assurance can be given as to the degree of protection that will be afforded any patents issued to, or licensed by, the Company. There can be no assurance that, if challenged by others in litigation, any patents assigned to or licensed by the Company, will not be found invalid. Furthermore, there can be no assurance that the Company's activities would not infringe patents owned by others. Defense and prosecution of patent matters can be expensive and time-consuming and, regardless of whether the outcome is favorable to the Company, can result in the diversion of substantial financial, management and other resources. An adverse outcome could subject the Company to significant liability to third parties, require the Company to obtain licenses from third parties, or require the Company to cease any related research and development activities and product sales. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company, if at all. Moreover, the laws of certain countries may not protect the Company's proprietary rights to the same extent as U.S. law. The Company also relies on trade secrets, know-how and other proprietary information, which it seeks to protect, in part, through the use of confidentiality agreements with employees, consultants, advisors, and others. There can be no assurance that such agreements will provide adequate protection for the Company's trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosure, that employees of the Company, consultants, advisors or others will maintain the confidentiality of such trade secrets or proprietary information, or that the trade secrets or proprietary know-how of the Company will not otherwise become known, or be independently developed, by competitors. In January 1997, the United States Patent and Trademark Office (the "USPTO") instituted an interference proceeding between an issued patent licensed by the Company from Duke University and a pending patent application owned by a third party. An interference proceeding is an action, in the USPTO, to determine which, of several parties, is entitled to a patent. An interference proceeding may be instituted when the USPTO believes that a pending patent application and an issued patent claim the same patentable subject matter. The Company believes that no interference-in-fact exists, i.e., that the parties to the interference are not claiming the same patentable invention, and, through its licensor, the Company is taking all reasonable action to have the interference proceeding dismissed. However, no assurance can be given that the interference proceeding will be dismissed. Furthermore, no assurance can be given that, should the interference proceeding continue, as between the two parties to the interference, the Company's licensor will be found to be the first inventor of the invention which is declared to be the subject matter of the interference proceeding. Failure of the Company's licensor to prevail in the interference proceeding and any loss of the involved patent rights could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Patents, Proprietary Technology and Trade Secrets." EXTENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL. Human pharmaceutical products are subject to lengthy and rigorous preclinical testing and clinical trials and other extensive, costly and time-consuming procedures mandated by the FDA and foreign regulatory authorities. The regulatory approval process, which includes the establishment of the safety and effectiveness of each product candidate and compound for each target indication and confirmation by the FDA that good laboratory, clinical and manufacturing practices were maintained during testing and manufacturing, typically takes a number of years, varying based upon the type, complexity and novelty of the pharmaceutical product. This process requires the expenditure of substantial resources and gives larger companies with greater financial resources a competitive advantage over the Company. To date, no product candidate or compound being evaluated by the Company has been submitted for approval by the FDA or any other regulatory authority for commercialization, and there can be no assurance that any such product candidate or compound will ever be approved for commercialization or that the Company will be able to 10 obtain the labeling claims desired for its product candidates or compounds. There can be no assurance that submission to the FDA of a request for authorization to conduct clinical trials on an investigational drug will be approved on a trial basis, if at all. There can be no assurance that if clinical trials are successfully completed, the Company will be able to submit a New Drug Application ("NDA") in a timely manner or that any such NDA will be approved by the FDA. The approval process is affected by a number of factors, including the severity of the targeted indications, the availability of alternative treatments and the risks and benefits demonstrated in the clinical trials. The FDA may reject an NDA if applicable regulatory criteria are not satisfied, or may require additional clinical trials or information with respect to the product candidate or compound. Even if FDA approval is obtained, further clinical trials, including post-market trials, may be required in order to provide additional data on safety and will be required in order to obtain approval for the use of a product as treatment for clinical indications other than those for which the product was initially approved. The FDA will also require post-market reporting and may require surveillance programs to monitor the side effects of any approved products. Results of post-market programs may limit the further marketing, manufacturing process or labeling, and an NDA supplement may be required to be submitted to the FDA. Any failure of the Company to successfully complete its clinical trials and obtain approvals of corresponding NDAs would have a material adverse effect on the Company's business, financial condition and results of operations. The Company is and will continue to be dependent upon the laboratories conducting its preclinical testing and clinical trials to maintain both good laboratory and good clinical practices, and, if any of the Company's product candidates or compounds obtain the requisite regulatory approvals, the Company will be dependent upon any third-party manufacturers of its products to maintain compliance with the FDA's good manufacturing practice ("GMP") requirements. Various federal and foreign statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record-keeping and marketing of pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate United States and foreign statutes and regulations are time-consuming and will require the expenditure of substantial resources by the Company. In addition, these requirements and processes vary widely from country to country. The time required for completing preclinical testing and clinical trials is uncertain, and the FDA approval process is unpredictable and uncertain, and no assurance can be given that necessary approvals will be granted on a timely basis, or at all. The Company may decide to replace a product candidate or compound in preclinical testing and/or clinical trials with a modified product candidate or compound, thus extending the development period. In addition, the FDA or similar foreign regulatory authorities may require additional clinical trials, which could result in increased costs and significant development delays. Delays or rejections may also be encountered based upon changes in legislation, administrative action or FDA policy during the period of product development and FDA review, including changes in FDA policy relating to clinical testing guidelines for the use of the Company's product candidates or compounds in children. Similar delays or rejections may be encountered in other countries. While certain of the Company's product candidates and compounds, including T-20, have been and will continue to be designed to treat serious or life-threatening illnesses, such product candidates and compounds may not qualify for accelerated development and/or approval under FDA regulations and, even if some of the Company's product candidates or compounds qualify for accelerated development and/or approval, they may not be approved for marketing on an accelerated basis, or at all. There can be no assurance that, even after substantial time and expenditures, any of the Company's product candidates or compounds under development will receive commercialization approval in any country on a timely basis, or at all. If the Company is unable to demonstrate the safety and effectiveness of its product candidates and compounds to the satisfaction of the FDA or foreign regulatory authorities, the Company will be unable to commercialize its product candidates and compounds and the Company's business, financial condition and results of operations would be materially and adversely affected. Furthermore, even if regulatory approval of a product candidate or compound is obtained, the approval may entail limitations on the indicated uses for which the product candidate or compound may be marketed. A marketed product or compound, its manufacturer and the manufacturer's facilities are subject to continual review and periodic inspections, and subsequent discovery of previously unknown problems with a product, compound, manufacturer or facility may result in restrictions on such product, compound, manufacturer or facility, including withdrawal of the product or compound from the market. The failure to comply with applicable regulatory requirements can, among other things, result in fines, injunctions, civil penalties, total or partial suspension of regulatory approvals, refusal 11 to approve pending applications, refusal to permit exports from the United States, recalls or seizures of products or compounds, operating and production restrictions and criminal prosecutions. Further, FDA policy may change and additional government regulations may be established that could prevent or delay regulatory approval of the Company's product candidates or compounds. The effect of governmental regulation may be to delay the marketing of new products or compounds for a considerable period of time, to impose costly requirements on the Company's activities or to provide a competitive advantage to other companies that compete with the Company. Adverse clinical results by others could have a negative impact on the regulatory process and timing with respect to the development and approval of the Company's product candidates or compounds. A delay in obtaining or failure to obtain regulatory approvals could have a material adverse effect on the Company's business, financial condition and results of operations. The extent and character of potentially adverse governmental regulation that may arise from future legislation or administrative action cannot be predicted. In April 1997, the Company and MiniMed entered into the MiniMed Agreement pursuant to which the parties have agreed to jointly design, develop and implement a system for the delivery of T-20 utilizing the MiniMed continuous infusion pump. There can be no assurance that the FDA will approve, on a timely basis, if at all, the delivery of T-20 utilizing the MiniMed continuous infusion pump. The failure of the Company and MiniMed to collectively develop a continual T-20 delivery system which receives FDA approval on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. The Company and its existing and potential future collaborative partners are also subject to various federal, state and local laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's product development programs. Compliance with such laws, regulations and requirements may be costly and time-consuming and the failure to maintain such compliance by the Company or its existing and future collaborative partners could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, this Prospectus reflects the Company's estimates regarding future regulatory submission dates. Regulatory submissions can be delayed, or plans to submit proposed products can be cancelled, for a number of reasons, including the receipt of unanticipated preclinical testing or clinical trial reports, changes in regulations, adoption of new, or unanticipated enforcement of existing, regulations, technological developments and competitive developments. Accordingly, no assurance can be given that the Company's anticipated submissions will be made on their target dates, or at all. Delays in such submissions could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." INTENSE COMPETITION. The Company is engaged in segments of the biopharmaceutical industry, including the treatment of HIV, that are intensely competitive and rapidly changing. If successfully developed and approved, the product candidates and compounds that the Company is currently developing will compete with numerous existing therapies. For example, 11 drugs are currently approved for the treatment of HIV. In addition, a number of companies are pursuing the development of novel pharmaceutical products that target the same diseases that the Company is targeting, and some companies, including several multinational pharmaceutical companies, are simultaneously marketing several different drugs and may therefore be able to market their own combination drug therapies. The Company believes that a significant number of drugs are currently under development and will become available in the future for the treatment of HIV. The Company anticipates that it will face intense and increasing competition in the future as new products enter the market and advanced technologies become available. There can be no assurance that existing products or new products for the treatment of HIV developed by the Company's competitors, including Glaxo Wellcome plc ("Glaxo"), Merck & Co., Inc. ("Merck") and Abbott Laboratories, Inc. ("Abbott"), will not be more effective, or more effectively marketed and sold, than T-20, should it be successfully developed and receive regulatory approval, or any other therapeutic for HIV that may be developed by the Company. Competitive products or the development by others of a cure or new treatment methods may render the Company's technologies and products and compounds obsolete, noncompetitive or uneconomical prior to the 12 Company's recovery of development or commercialization expenses incurred with respect to any such technologies or products or compounds. Many of the Company's competitors have significantly greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture, sell, market and distribute products. In addition, many of these companies have extensive experience in preclinical testing and clinical trials, obtaining FDA and other regulatory approvals and manufacturing and marketing pharmaceutical products. Many of these competitors also have products that have been approved or are in late-stage development and operate large, well-funded research and development programs. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. Furthermore, academic institutions, governmental agencies and other public and private research organizations are becoming increasingly aware of the commercial value of their inventions and are more actively seeking to commercialize the technology they have developed. New developments in areas in which the Company is conducting its research and development are expected to continue at a rapid pace in both industry and academia. If the Company's product candidates and compounds are successfully developed and approved, the Company will face competition based on the safety and effectiveness of its products and compounds, the timing and scope of regulatory approvals, availability of manufacturing, sales, marketing and distribution capabilities, reimbursement coverage, price and patent position. There can be no assurance that the Company's competitors will not develop more effective or more affordable technologies or products, or achieve earlier patent protection, product development or product commercialization than the Company. Accordingly, the Company's competitors may succeed in commercializing products more rapidly or effectively than the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition." LACK OF MANUFACTURING CAPABILITIES. The Company has no experience in manufacturing pharmaceuticals and has no commercial manufacturing capacity. The Company has established relationships and intends to establish additional relationships with third-party manufacturers for the production of quantities of its product candidates or compounds sufficient to conduct its planned preclinical testing and clinical trials and the commercial production of any approved products or compounds. There can be no assurance that the Company will be able to retain or establish relationships with third-party manufacturers on acceptable terms, if at all, or that such third-party manufacturers will be able to manufacture products in commercial quantities under GMP requirements on a cost-effective basis. The Company's anticipated peptide-based therapeutics are difficult and expensive to manufacture using existing technologies. The Company, and its third-party manufacturers, are currently using solid-phase sequential peptide synthesis to manufacture T-20. This chemical methodology is inherently inefficient and complex. Due to technical limitations, solid-phase sequential peptide synthesis is the most expensive way to chemically assemble the Company's current peptide product candidates, including T-20. There can be no assurance that the Company or its third-party manufacturers will be able to manufacture T-20 on a cost-effective basis or that the Company will be successful in its efforts to develop an alternative, more efficient manufacturing method for T-20 or any of its other peptide product candidates. The Company's dependence upon third parties for the manufacture of its products, product candidates and compounds may materially and adversely affect the Company's profit margins and its ability to develop and commercialize product candidates, products and compounds on a timely and competitive basis. Further, there can be no assurance that manufacturing or quality control problems will not arise in connection with the manufacture of the Company's products, product candidates or compounds or that third-party manufacturers will maintain the necessary governmental licenses and approvals to continue manufacturing the Company's products, product candidates or compounds. Any failure to maintain existing or establish new relationships with third parties for the Company's manufacturing requirements on a timely basis and on acceptable terms would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." LACK OF SALES, MARKETING AND DISTRIBUTION CAPABILITIES. The Company has no experience in sales, marketing or distribution of pharmaceuticals and currently has no personnel employed in any such capacities. Some therapeutics for HIV can be marketed to a concentrated group of physicians in a relatively narrow geographic scope. The Company may consider developing internal sales, marketing and distribution capabilities for T-20, should it be successfully developed and receive regulatory approval. For the remainder of the Company's product candidates 13 and compounds, should they be successfully developed and receive regulatory approval, the Company may rely on marketing partners or other arrangements with third parties which have established distribution systems and direct sales forces for the sales, marketing, and distribution of such products and compounds. In the event that the Company is unable to reach agreement with one or more marketing partners to market these other products and compounds, the Company would be required to develop internal sales, marketing and distribution capabilities for such products and compounds. There can be no assurance that the Company will be able to establish sales, marketing or distribution capabilities or make arrangements with third parties to perform such activities on acceptable terms, if at all, or that any internal capabilities or third-party arrangements will be cost-effective. The failure to establish such capabilities would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any third parties with which the Company establishes sales, marketing or distribution arrangements may have significant control over important aspects of the commercialization of the Company's products and compounds, including market identification, marketing methods, pricing, composition of sales force and promotional activities. For example, the MiniMed Agreement contemplates that MiniMed will participate in the sales, marketing and distribution of any products jointly developed by the parties. There can be no assurance that the Company will be able to control the amount and timing of resources that MiniMed or any other third party may devote to the Company's products or compounds or prevent any third party from pursuing alternative technologies or products that could result in the development of products that compete with the Company's products and the withdrawal of support for the Company's products. See "Business -- Sales, Marketing and Distribution." UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success will depend upon the acceptance by the medical community, including health care providers and third-party payors, of the Company's antifusion technology as a safe and effective means of treating viral infection. The Company's success will additionally be dependent upon the acceptance by the medical community, including health care providers and third-party payors, of any products or compounds developed by the Company. The degree of market acceptance will depend upon a number of factors, including the establishment and demonstration in clinical trials of the safety and effectiveness of the Company's products and compounds, the receipt and scope of regulatory approvals, the demonstration of the potential advantages of the Company's products and compounds over existing treatment methods, and the reimbursement policies of government and third-party payors with respect to antiviral therapeutics based upon blocking viral fusion. Moreover, companies that market and sell HIV antivirals and other HIV-related therapeutics have from time to time been subject to protests and boycotts by patient advocacy and activist groups. These protests and boycotts have focused on, among other things, availability of such therapeutics and pricing concerns. Market acceptance of such therapeutics, including any products or compounds that the Company may develop, will be dependent, in part, on the continued support by such groups. There can be no assurance that the Company's products or compounds will achieve significant market acceptance on a timely basis, or at all. Failure of some or all of the Company's products, if successfully developed, to achieve significant market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON THIRD PARTIES FOR CLINICAL TRIALS. The Company has engaged, and intends to continue to engage, third-party contract research organizations ("CROs") to perform certain functions in connection with the development of the Company's product candidates and compounds. The Company intends to design clinical trials, but have CROs conduct the clinical trials, and the Company will rely on the CROs to perform many important aspects of the clinical trials. As a result, these aspects of the Company's product development programs will be outside the direct control of the Company. There can be no assurance that the CROs or other third parties will perform all of their obligations under their arrangements with the Company. In addition, there can be no assurance that any such arrangements will be renewed or any new arrangements will be available on acceptable terms, if at all, or that any such arrangements, if entered into, will be successful. In the event that the CROs do not perform clinical trials in a satisfactory manner or breach their obligations to the Company, the commercialization of any product candidate or compound may be delayed or precluded, which could have a material adverse effect on the Company's business, financial condition and results of operations. UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT AND HEALTH CARE REFORM MEASURES. In the United States and elsewhere, sales of prescription pharmaceuticals are dependent, in part, on the availability of reimbursement to the 14 consumer from third-party payors, such as government agencies and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services in an effort to promote cost containment measures and alternative health care delivery systems and they may mandate predetermined discounts from list prices. If the Company succeeds in bringing one or more products or compounds to the market, there can be no assurance that these products or compounds will be considered cost-effective or that reimbursement to the consumer will be available or will be sufficient to allow the Company or its potential collaborative partners to sell the Company's products or compounds on a competitive basis. The business and financial condition of pharmaceutical companies will continue to be affected by economic, political and regulatory influences, including the efforts of governments and third-party payors to contain or reduce the cost of health care through various means. A number of legislative and regulatory proposals aimed at changing the health care system have been proposed in recent years. Because of the high cost of the treatment of AIDS or HIV using combination therapy, many state legislatures are reassessing reimbursement policies for such therapy. In addition, an increasing emphasis on managed care in the United States to reduce the overall costs of health care has and will continue to increase the pressure on pharmaceutical pricing. While the Company cannot predict whether legislative or regulatory proposals will be adopted or the effect those proposals or managed care efforts may have, the announcement and/or adoption of such proposals or efforts could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Third Party Reimbursement and Health Care Reform Measures." HAZARDOUS MATERIALS. The Company's product development programs involve the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds, including Class IV type hazardous materials. Although the Company believes that its handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages or fines that result and any such liability could exceed the resources of the Company. The Company may incur substantial additional costs to comply with environmental regulations if the Company develops manufacturing capacity. ABSENCE OF PRODUCT LIABILITY INSURANCE; INSURANCE RISKS. The Company's business will expose it to potential product liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. There can be no assurance that product liability claims will not be asserted against the Company. In addition, the use of pharmaceutical products that may be developed by the Company's potential collaborators in clinical trials and the subsequent sale of products by the Company or its potential collaborators may cause the Company to bear a portion of those risks. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not currently have any product liability insurance relating to clinical trials or any products or compounds it may develop and there can be no assurance that the Company will be able to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against potential liabilities. Furthermore, there can be no assurance that any collaborators or licensees of the Company will agree to indemnify the Company, be sufficiently insured, or have a net worth sufficient to satisfy any product liability claims. Claims or losses in excess of any product liability insurance coverage that may be obtained by the Company could have a material adverse effect on the Company's business, financial condition and results of operations. NEED TO ATTRACT AND RETAIN KEY OFFICERS, EMPLOYEES AND CONSULTANTS. The Company is highly dependent upon the efforts of the principal members of its scientific and management staff. The loss of the services of one or more members of the Company's scientific or management staff could significantly delay or prevent the achievement of the Company's research, development or business objectives and could have a material adverse effect on the Company's business, financial condition and results of operations. At present, the Company only has individual employment agreements with Dr. Johnson, the Company's President, Chief Executive Officer and Chief Scientific Officer, and Mr. Megaro, the Company's Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary. In addition, the Company relies on consultants and advisors, including the members of its Scientific Advisory Board, to assist the Company in formulating its research and development strategy. The loss of 15 the services of certain members of the Company's Scientific Advisory Board or certain consultants could materially and adversely affect the Company to the extent that the Company is pursuing research or development in areas of such scientific advisor's or consultant's expertise. Due to the specialized scientific nature of the Company's business, the Company is also highly dependent upon its ability to attract and retain qualified scientific, technical and key management personnel. There is intense competition for qualified personnel in the areas of the Company's activities by academic institutions, biotechnology companies and pharmaceutical companies and there can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its existing business and its expansion into areas and activities requiring additional expertise. The loss of, or failure to recruit, scientific, technical, and managerial personnel could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's scientific advisors and consultants may be employed by or have consulting agreements with entities other than the Company, some of which may compete with the Company. To the extent that members of the Company's Scientific Advisory Board or the consultants have consulting arrangements with or become employed by any competitor of the Company, the Company's business, financial condition or results of operations could be materially and adversely affected. Under certain circumstances, inventions or processes independently discovered by the scientific advisors or the consultants will remain the property of such persons or their employers. In addition, the institutions with which the scientific advisors and the consultants are affiliated may make available the research services of their scientific and other skilled personnel, including the scientific advisors and the consultants, to competitors of the Company pursuant to sponsored research agreements. Under such sponsored research agreements, such institutions may be obligated to assign or license to a competitor of the Company patents and other proprietary information that may result from research sponsored by an entity other than the Company, including research performed by a scientific advisor or a consultant for a competitor of the Company. The Company requires all employees, consultants and certain of its contractors to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside the Company and require disclosure and assignment to the Company of their ideas, developments, discoveries or inventions developed during the course of their service to the Company. However, no assurance can be given that competitors of the Company will not gain access to trade secrets and other proprietary information developed by the Company and disclosed to the scientific advisors and the consultants. See "Business -- Human Resources," " -- Scientific Advisory Board" and "Management." SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common Stock (including shares issued upon the exercise of outstanding options and warrants) in the public market after this Offering or the prospect of such sales could materially and adversely affect the market price of the Common Stock and may have a material adverse effect on the Company's ability to raise any necessary capital to fund its future operations. Upon completion of this Offering, the Company will have 9,880,325 shares of Common Stock outstanding (assuming no exercise of options and warrants outstanding as of August 27, 1997). Of these shares, the 2,500,000 shares offered hereby will be freely tradeable without restrictions or further registration under the Securities Act of 1933, as amended (the "Securities Act"), except that any shares held by "affiliates" of the Company within the meaning of the Securities Act will be subject to the resale limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). The remaining 7,380,325 outstanding shares are "restricted" securities that may be sold only if registered under the Securities Act, or sold in accordance with an applicable exemption from registration, such as Rule 144. Rule 144 imposes a holding period with respect to securities purchased directly from an issuer or an "affiliate" of an issuer. The officers and directors of the Company and other holders of Common Stock who together hold 7,366,303 shares of Common Stock have agreed not to sell, offer, make any short sale or otherwise dispose of or enter into any contract, arrangement or commitment to sell or otherwise dispose of any Common Stock without the prior written consent of UBS Securities LLC for a period of 180 days from the date of this Prospectus (the "Lock-up Agreements"). Approximately 231,117 shares of Common Stock will be eligible for resale in the public market without restriction in reliance on Rule 144(k) immediately following the completion of this Offering, 225,944 shares of which are subject to the Lock-up Agreements. An additional 769,238 (763,331 shares of which are subject to the Lock-up Agreements) will be eligible for resale in the public market pursuant to Rule 701 under the Securities Act beginning approximately 90 days after the effective date of this Prospectus, except to the extent that 16 such shares are subject to vesting restrictions or certain contractual restrictions on sale or transfer pursuant to agreements with the Company. After the expiration of the 180-day lock-up period, an additional 3,739,158 shares of Common Stock will be eligible for resale in the public market pursuant to Rule 144. From time to time thereafter, the remaining shares of Common Stock outstanding will become eligible for resale in the public market pursuant to Rule 144. Approximately 90 days after the completion of this Offering, the Company intends to file a registration statement on Form S-8 under the Securities Act to register the future issuance of shares of Common Stock reserved for issuance under the Company's Stock Option Plan. As of August 27, 1997, 244,006 shares of Common Stock were reserved for issuance pursuant to outstanding options and 254,894 shares of Common Stock were reserved for future issuance under the Company's Stock Option Plan. Such registration statement will automatically become effective upon filing. Accordingly, shares registered thereunder will, subject to Rule 144 limitations applicable to affiliates, be available for sale in the public market, except to the extent that such shares are subject to vesting restrictions with the Company or certain contractual restrictions on sale or transfer (including options covering 242,829 shares which are subject to Lock-up Agreements). After this Offering, the holders of approximately 6,261,615 shares of Common Stock and the holders of warrants to purchase an aggregate of 56,684 shares of Common Stock will be entitled to certain demand and piggyback rights with respect to the registration of such shares under the Securities Act. If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price of the Company's Common Stock. If the Company, either on its own behalf or on behalf of certain stockholders, were to initiate a registration and include shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales could have a material adverse effect on the Company's ability to raise needed capital. See "Certain Transactions," "Shares Eligible for Future Sale," "Description of Capital Stock -- Registration Rights" and "Underwriting." CONTROL BY DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATED ENTITIES. The Company's directors, executive officers and entities affiliated with them will, in the aggregate, beneficially own approximately 35.1% of the Company's outstanding shares of Common Stock following the completion of this Offering (or approximately 33.8% if the Underwriters exercise their over-allotment option in full). As a result, these stockholders, if acting together, would be able to significantly influence all matters requiring approval by the stockholders of the Company, including the election of directors and the approval of mergers and consolidations, sales of all or substantially all of the assets of the Company or other business combination transactions. This may discourage a tender offer for the Company's Common Stock or a change in control of the Company. See "Principal Stockholders" and "Description of Capital Stock." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS. The Company's Board of Directors is authorized to issue up to 10,000,000 shares of Preferred Stock and to determine the price, rights, preferences and limitations of those shares without any further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. While the Company has no present intention to issue shares of Preferred Stock, such issuance could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, the Company is subject to the provisions of Section 203 of the Delaware General Corporation Law (the "DGCL") which, subject to certain exceptions, prohibits the Company from engaging in certain business combinations with certain stockholders (each, an "interested stockholder") for a period of three years after the date of the transaction in which the stockholder became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of the Company. The Company's Third Amended and Restated Certificate of Incorporation provides for staggered terms for the members of the Board of Directors. The staggered Board of Directors, the Company's Third Amended and Certificate of Incorporation and certain provisions of the DGCL may have the effect of delaying, deterring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price and may adversely affect the market price, and the voting and other rights of the holders, of the Common Stock. See "Description of Capital Stock -- Delaware Law and Certain Charter Provisions." 17 NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to this Offering, there has been no public market for the Company's Common Stock and there can be no assurance that an active public market for the Common Stock will develop or be sustained after this Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters and may not be indicative of the market price at which the Common Stock of the Company will trade after this Offering. Among the factors to be considered in such negotiations, in addition to prevailing market conditions, are certain financial information of the Company, market valuations of other companies that the Company and the representatives of the several underwriters believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The initial public offering price set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price is subject to change as a result of market conditions and other factors. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this Offering at or above the initial offering price. The market price of the Common Stock, like that of the securities of many other biotechnology and pharmaceutical companies, is likely to be highly volatile. Factors such as announcements of technological innovations or new products by the Company or its competitors, preclinical testing or clinical trial results relating to or regulatory approvals or disapprovals of the Company's or competitors' product candidates, government regulation, health care legislation, developments or disputes concerning patent or other proprietary rights of the Company or its competitors, including litigation, fluctuations in the Company's operating results, and market prices of the capital stock of biotechnology and pharmaceutical companies in general could have a significant impact on the future market price of the Common Stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that may be unrelated to the operating performance of particular companies. In addition, in the past, following periods of volatility in the market price of the securities of companies in the biotechnology and pharmaceutical industries, securities class action litigation has often been instituted against those companies. Such litigation, if instituted against the Company, could result in substantial costs and a diversion of management attention and resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. The realization of any of the risks described in these "Risk Factors" could have a dramatic and adverse impact on the market price of the Common Stock. See "Underwriting." BROAD DISCRETION IN USE OF PROCEEDS. The net proceeds of the Offering will be added to the Company's working capital and will be available for research and development, capital expenditures, working capital and general corporate purposes. As of the date of this Prospectus, the Company cannot specify with certainty the particular uses for the net proceeds to be received upon completion of this Offering. Accordingly, the Company's management will have broad discretion in the application of the net proceeds. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Common Stock offered hereby will incur an immediate and substantial dilution in the net tangible book value of the Common Stock from the initial public offering price. The current stockholders of the Company, including the Company's directors and officers, acquired their shares of Common Stock for consideration substantially less than the initial public offering price of the shares of Common Stock offered hereby. Additionally, the Company has issued options to acquire shares of the Common Stock at prices significantly below the initial public offering price. To the extent outstanding options to purchase the Common Stock are exercised, there will be further dilution. See "Dilution." NO DIVIDENDS. The Company has not paid cash dividends on its Common Stock since its inception and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share are estimated to be approximately $29.4 million (approximately $34.0 million if the Underwriters' over-allotment option is exercised in full), after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company intends to use the net proceeds of this Offering to fund the continued clinical trials of T-20, increased research and development activities, including ongoing development of the Company's technologies, preclinical testing and clinical trials, and other costs associated with the Company's product discovery and development programs. The Company also intends, depending on the results of ongoing preclinical testing and clinical trials, to use some of the net proceeds for the expansion of its facilities. The remainder of the aggregate net proceeds will be used to provide working capital and to fund other general corporate purposes. The amounts actually expended for each purpose and the timing of such expenditures may vary significantly depending upon a number of factors, including the status of the Company's research, product candidate and compound discovery and development efforts, including preclinical testing and clinical trials, the timing of regulatory actions, the costs involved in preparing, filing, prosecuting, maintaining, protecting and enforcing patent claims and other proprietary rights, the ability of the Company to establish, internally or through relationships with third parties, manufacturing, sales, marketing and distribution capabilities, technological and other changes in the competitive landscape, changes in the Company's existing research and development relationships and strategic alliances, evaluation of the commercial viability of potential product candidates and compounds, needs for additional facilities and other factors, many of which are outside of the Company's control. As of the date of this Prospectus, the Company cannot specify with certainty the particular uses for the net proceeds to be received upon completion of this Offering. Accordingly, the Company's management will have broad discretion in the application of the net proceeds. The Company may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to those of the Company, although the Company currently has no agreements and is not involved in any negotiations with respect to any such transactions. Pending such uses, the Company intends to invest the net proceeds in investment grade, interest-bearing securities, including, without limitation, obligations of the U.S. government or U.S. government agencies and other highly rated liquid debt instruments. DIVIDEND POLICY The Company has not paid any dividends on its Common Stock since its inception. The Company currently intends to retain any future earnings to fund its operations and, therefore, does not anticipate paying any cash dividends in the foreseeable future. 19 CAPITALIZATION The following table sets forth, as of June 30, 1997, (i) the actual capitalization of the Company, (ii) the pro forma capitalization of the Company after giving effect to the Preferred Stock Conversion and the filing of the Company's Third Amended and Restated Certificate of Incorporation upon the completion of the Offering, and (iii) the pro forma capitalization of the Company as adjusted to give effect to the sale of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The table should be read in conjunction with the Financial Statements and the related Notes thereto included elsewhere in this Prospectus.
AS OF JUNE 30, 1997 PRO FORMA ACTUAL PRO FORMA AS ADJUSTED Notes payable and obligations under capital leases, excluding current installments.............................................. $ 488 $ 488 $ 488 Stockholders' equity (deficit): Series A, B, C and D Preferred Stock........................................ 53 -- -- Preferred Stock, $.001 par value per share, 10,000,000 shares authorized and no shares issued and outstanding.............................................................. -- -- -- Common Stock, $.001 par value per share, 80,000,000 shares authorized 1,092,472 shares issued and outstanding, actual; 7,354,087 shares issued and outstanding, pro forma and 9,854,087 shares issued and outstanding, pro forma as adjusted (1)...................................................................... 1 7 10 Additional paid-in capital.................................................. 32,435 32,482 61,904 Deficit accumulated during the development stage............................ (21,443) (21,443 ) (21,443) Deferred compensation....................................................... (1,935) (1,935 ) (1,935) Notes receivable from stockholders............................................ (264) (264 ) (264) Total stockholders' equity............................................... 8,847 8,847 38,272 Total capitalization..................................................... $ 9,335 $ 9,335 $ 38,760
(1) Excludes (i) 10,589 shares of Common Stock issued by the Company after June 30, 1997, (ii) 260,361 shares of Common Stock reserved for issuance pursuant to stock options outstanding as of June 30, 1997 at a weighted average exercise price of $.36 per share, and (iii) 56,684 shares of Common Stock issuable upon exercise of warrants outstanding as of June 30, 1997 at a weighted average exercise price of $4.25 per share. Also excludes an aggregate of 254,188 shares of Common Stock reserved for future issuance under the Company's Stock Option Plan as of June 30, 1997. See "Management -- Stock Option Plans," "Description of Capital Stock" and Note 1 of Notes to Financial Statements. 20 DILUTION The pro forma net tangible book value of the Company's Common Stock as of June 30, 1997 was approximately $8.3 million, or $1.13 per share, after giving effect to the Preferred Stock Conversion. After giving effect to the sale by the Company of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share (after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company), the pro forma net tangible book value of the Company as of June 30, 1997 would have been approximately $37.8 million, or $3.83 per share. This represents an immediate increase in net tangible book value of $2.70 per share to existing stockholders and an immediate dilution in net tangible book value of $9.17 per share to purchasers in this Offering. "Net tangible book value" represents the amount of tangible assets of the Company less total liabilities. Dilution represents the difference between the amount per share paid by purchasers in this Offering and the pro forma net tangible book value per share upon completion of this Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.......................... $13.00 Pro forma net tangible book value per share as of June 30, 1997........ $1.13 Increase in book value per share attributable to new investors......... 2.70 Pro forma net tangible book value per share after this Offering.......... 3.83 Dilution per share to new investors (1).................................. $ 9.17
(1) If the Underwriters' over-allotment is exercised in full, the dilution to new investors will be $8.86 per share. The following table sets forth, on a pro forma basis as of June 30, 1997, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing holders of Common Stock and by the new investors, after giving effect to the Preferred Stock Conversion and before deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, at an assumed initial public offering price of $13.00 per share:
AVERAGE SHARES PURCHASED TOTAL CONSIDERATION PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE Existing stockholders................................. 7,354,087 75% $30,488,588 48% $ 4.15 New investors......................................... 2,500,000 25 32,500,000 52 13.00 Total.......................................... 9,854,087 100% $62,988,588 100% $ 6.39
The foregoing tables assume no exercise of outstanding options or warrants. As of June 30, 1997, (i) 260,361 shares of Common Stock were issuable upon exercise of outstanding stock options at a weighted average exercise price of $.36 per share, and (ii) an aggregate of 56,684 shares of Common Stock were issuable upon the exercise of outstanding warrants at a weighted-average exercise price of $4.25 per share. Also excludes an aggregate of 254,188 shares of Common Stock reserved for future issuance under the Company's Stock Option Plan as of June 30, 1997. To the extent the outstanding options are exercised, there will be further dilution to new investors. See "Capitalization," and "Management -- Stock Option Plans," "Description of Capital Stock" and Note 1 of Notes to Financial Statements. 21 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's Statement of Operations for the years ended December 31, 1994, 1995 and 1996 and with respect to the Company's Balance Sheets as of December 31, 1995 and 1996 are derived from the audited Financial Statements of the Company which are included elsewhere in this Prospectus and are qualified by reference to such Financial Statements and the related Notes thereto. Statements of Operations data for the period from inception (January 7, 1993) through December 31, 1993 and Balance Sheet data at December 31, 1993 and 1994 are derived from audited Financial Statements of the Company not included herein. The selected financial data as of June 30, 1997 and for the six months ended June 30, 1996 and 1997 are derived from unaudited Financial Statements included elsewhere in this Prospectus. The unaudited Financial Statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for the fair presentation of its financial position and the results of its operations for those periods. Operating results for the six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. The selected financial data set forth below is qualified in its entirety by, and should be read in conjunction with, the Financial Statements, the related Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY)
PERIOD FROM INCEPTION FOR THE CUMULATIVE (JANUARY 7, 1993) FOR THE SIX MONTHS ENDED FROM INCEPTION THROUGH DECEMBER 31, YEARS ENDED DECEMBER 31, JUNE 30, (JANUARY 7, 1993) 1993 1994 1995 1996 1996 1997 TO JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED) STATEMENTS OF OPERATIONS DATA: Revenue......................... $ -- $ -- $ 104 $ 55 $ -- $ 212 $ 371 Operating expense: Research and development expenses...................... 691 2,747 4,012 5,146 2,278 2,859 15,455 General and administrative expenses...................... 631 947 1,520 1,761 802 786 5,646 Total operating expenses.... 1,322 3,694 5,532 6,907 3,080 3,645 21,101 Operating loss.................. (1,322) (3,694) (5,428) (6,852) (3,080) (3,433) (20,730) Interest income................. 16 8 49 47 32 33 154 Interest expense................ (5) (258) (360) (167) (86) (78) (867) Total other income (expense)................... 11 (250) (311) (120) (54) (45) (713) Net loss.................... $ (1,311) $(3,944) $(5,739) $(6,972) $(3,134) $(3,478) $ (21,443) Pro forma net loss per share (1)(2)........................ $ (1.48) $ (.59) Pro forma weighted average shares used in computing pro forma net loss per share (1)(2)........................ 4,705 5,880
AS OF AS OF DECEMBER 31, JUNE 30, 1993 1994 1995 1996 1997 (IN THOUSANDS) (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................................ $ 509 $ 277 $ 1,343 $ 132 $ 8,912 Working capital (deficiency)............................................. 183 (4,067) 322 (1,305) 8,019 Total assets............................................................. 1,802 1,873 3,058 1,684 10,585 Long-term notes payable and capital lease obligations, less current portion................................................................ 401 751 703 576 488 Accumulated deficit...................................................... (1,311) (5,254) (10,994) (17,965) (21,443) Total stockholders' equity............................................... 701 (3,236) 1,324 (409) 8,847
(1) Computed on the basis described in Note 1 of Notes to Financial Statements. (2) Pro forma to give effect to the Preferred Stock Conversion. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "BUSINESS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW Trimeris commenced operations in January 1993, has a limited operating history and is a development stage company. Since its inception, substantially all of the Company's resources have been dedicated to the development, patenting, preclinical testing and a Phase I/II clinical trial of T-20, the development of its proprietary technology platform and research and development and preclinical testing of other potential product candidates and compounds discovered by the Company. The Company has incurred losses since its inception and, as of June 30, 1997, had an accumulated deficit of approximately $21.4 million. The Company has received revenue solely from SBIR grants and an investigative contract and has yet to generate any revenue from product sales or royalties, and there can be no assurance that it will be able to generate any such revenues or royalties in the future. Product candidates and compounds discovered by the Company and developed through the Company's product development programs will require significant additional, time-consuming and costly research and development, preclinical testing and extensive clinical trials prior to submission of any regulatory application for commercial use. The Company has incurred losses since its inception. Such losses have resulted principally from expenses incurred in the Company's research and development activities associated with the development, patenting, preclinical testing and a Phase I/II clinical trial of T-20, the development of its proprietary technology platform, research and development and preclinical testing of other potential product candidates and compounds discovered by the Company, and from general and administrative expenses. The Company expects to incur substantial losses for the foreseeable future and expects losses to increase as the Company's research and development, preclinical testing and clinical trial efforts expand. The amount and timing of the Company's operating expenses will depend on several factors, including the status of the Company's research and development activities, product candidate and compound discovery and development efforts, including preclinical testing and clinical trials, the timing of regulatory actions, the costs involved in preparing, filing, prosecuting, maintaining, protecting and enforcing patent claims and other proprietary rights, the ability of the Company to establish, internally or through relationships with third parties, manufacturing, sales, marketing and distribution capabilities, technological and other changes in the competitive landscape, changes in the Company's existing research and development relationships and strategic alliances, evaluation of the commercial viability of potential product candidates and other factors, many of which are outside of the Company's control. As a result, the Company believes that period-to-period comparisons of financial results in the future are not necessarily meaningful and results of operations in prior periods should not be relied upon as an indication of future performance. Any deviations in results from operations from levels expected by securities analysts and investors could have a material adverse effect on the market price of the Common Stock. The Company's ability to achieve profitability will depend, in part, upon its or its collaborated partners' ability to successfully develop and obtain regulatory approval for T-20 and other product candidates and compounds discovered by the Company, and to develop the capacity, either internally or through relationships with third parties, to manufacture, sell, market and distribute approved products, if any. There can be no assurance that the Company will ever generate significant revenues or achieve profitable operations. See "Risk Factors -- Development Stage Company" and " -- History of Operating Losses; Accumulated Deficit; Uncertainty of Future Profitability." 23 RESULTS OF OPERATIONS COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 AND 1997 REVENUE. There was no revenue recognized for the six months ended June 30, 1996. Revenue recognized for the six months ended June 30, 1997 consisted of approximately $112,000 of income from SBIR grants, and $100,000 from an investigative contract. RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses increased from approximately $2.3 million for the six months ended June 30, 1996 to approximately $2.9 million for the six months ended June 30, 1997. The increase is primarily due to increased costs related to additional personnel and related laboratory research supplies to support these personnel and the continuation of a Phase I/II clinical trial for T-20. Total research personnel were 24 and 28 at June 30, 1996 and 1997, respectively. The Company expects its research and development expenses to increase substantially in the future due to continued expansion of product development activities, including preclinical testing and clinical trials. GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative expenses decreased from approximately $802,000 for the six months ended June 30, 1996 to approximately $786,000 for the six months ended June 30, 1997. The Company expects its administrative expenses to increase in the future to support the expansion of its product development activities. OTHER INCOME (EXPENSE). Other income (expense) consists of interest income and expense. Total other expenses decreased from approximately $55,000 for the six months ended June 30, 1996 to $45,000 for the six months ended June 30, 1997. This change was primarily due to fluctuations in cash balances and borrowings. COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 REVENUE. Total revenue was approximately $0, $104,000 and $54,000 for 1994, 1995 and 1996, respectively. An SBIR grant was received in 1995, and revenue was recognized as earned under this grant in 1995 and 1996. RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses increased from $2.7 million in 1994 to approximately $4.0 million in 1995 and increased to approximately $5.1 million in 1996. The increases are primarily due to increased costs related to additional personnel and related laboratory research supplies to support these personnel. During 1996, the Company began a Phase I/II clinical trial for T-20 and incurred costs associated with these clinical trials. Total research personnel were 17, 25 and 25 at December 31, 1994, 1995 and 1996, respectively. GENERAL AND ADMINISTRATIVE EXPENSES. Total general and administrative expenses increased from approximately $948,000 in 1994 to approximately $1.5 million in 1995, and increased to approximately $1.8 million in 1996. These increases are primarily due to increased costs related to additional personnel and professional fees incurred in the patent application process. OTHER INCOME (EXPENSE). Other income (expense) consists of interest income and expense. Total other expense increased from approximately $250,000 in 1994 to approximately $311,000 in 1995 and decreased to approximately $120,000 in 1996. The increase from 1994 to 1995 was primarily due to an increase in interest expense of approximately $102,000 net of an increase in interest income of approximately $41,000. The decrease from 1995 to 1996 was primarily due to a reduction in interest expense of approximately $193,000 as a result of the exchange of notes payable for preferred stock during 1995. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through the private placement of equity securities, the issuance of notes to stockholders and equipment lease financing. Net cash used by operating activities was approximately $3.8 million, approximately $4.8 million and approximately $5.8 million in 1994, 1995 and 1996, respectively, and approximately $2.9 million and approximately $3.5 million for the six months ended June 30, 1996 and June 30, 1997, respectively. The cash used by operating activities was used primarily to fund research and development and general and administrative expenses. Cash provided by financing activities was approximately $3.6 million, approximately $6.1 million, and approximately $4.8 million in 1994, 1995 and 1996, 24 respectively, and approximately $3.3 million and approximately $12.4 million for the six months ended June 30, 1996 and 1997, respectively. The cash provided by financing activities was primarily from the sale of equity securities and notes to stockholders. As of June 30, 1997, the Company had approximately $8.9 million in cash and cash equivalents compared to approximately $132,000 as of December 31, 1996. The increase resulted from the receipt of approximately $12.8 million from the sale of equity securities during 1997, partially offset by approximately $3.5 million used by operations. The Company has experienced negative cash flows from operations since its inception and does not anticipate generating sufficient positive cash flows to fund its operations in the foreseeable future. The Company has expended, and expects to continue to expend in the future, substantial funds to pursue its product candidate and compound discovery and development efforts, including expenditures for continued clinical trials of T-20, research and development and preclinical testing of other product candidates and compounds discovered by the Company and the development of its proprietary technology platform. As of June 30, 1997, the Company had commitments to purchase approximately $2.0 million of product candidate materials and expects to expend approximately $900,000 in capital expenditures through the end of 1997. These expenditures may be financed with capital or operating leases, debt or working capital. The Company expects that its existing capital resources, together with the net proceeds of the Offering and the interest earned thereon, will be adequate to fund its capital requirements through 1998. However, the Company's future capital requirements and the adequacy of available funds will depend on many factors, including the results of the clinical trials relating to T-20, the progress and scope of the Company's product development programs, the magnitude of these programs, the results of preclinical testing and clinical trials, the need for additional facilities based on the results of these clinical trials and other product development programs, changes in the focus and direction of the Company's product development programs, the costs involved in preparing, filing, processing, maintaining, protecting and enforcing patent claims and other intellectual property rights, competitive factors and technological advances, the cost, timing and outcome of regulatory reviews, changes in the requirements of the FDA, administrative and legal expenses, evaluation of the commercial viability of potential product candidates and compounds, the establishment of capacity, either internally or through relationships with third parties, for manufacturing, sales, marketing and distribution functions and other factors, many of which are outside of the Company's control. Thus, there can be no assurance that the net proceeds of this Offering, together with the interest earned thereon, will be sufficient to fund the Company's capital requirements during the period discussed above. The Company believes that substantial additional funds will be required to continue to fund its operations and that the Company will be required to obtain additional funds through equity or debt financing or licenses, agreements or other arrangements with collaborative partners and others, or from other sources. The terms of any such equity financings may be dilutive to stockholders and the terms of any debt financings may contain restrictive covenants which limit the Company's ability to pursue certain courses of action. There can be no assurance that such funds will be available to the Company on acceptable terms, if at all, or that such financings will be adequate to meet the Company's future capital requirements. If adequate funds are not available, the Company may be required to delay, scale-back or eliminate certain aspects of its preclinical testing, clinical trials and research and development programs or attempt to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies or product candidates or compounds, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Future Capital Needs; Uncertainty of Additional Funding" and "Use of Proceeds." NET OPERATING LOSS CARRYFORWARDS As of June 30, 1997, the Company had a net operating loss carryforward of approximately $21 million. The Company has recognized a valuation allowance equal to the deferred asset represented by this net operating loss carryforward and therefore recognized no tax benefit. The Company's ability to utilize its net operating loss carryforwards may be subject to an annual limitation in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). See Note 6 of Notes to Financial Statements. 25 BUSINESS THE COMPANY Trimeris is a biopharmaceutical company engaged in the discovery and development of novel therapeutic agents that block viral infection by inhibiting viral fusion with host cells. Viral fusion is a complex process by which viruses attach to and penetrate host cells. The Company's lead product candidate, T-20, inhibits fusion of HIV with host cells. T-20 has been tested in a multidose Phase I/II clinical trial as a monotherapy for HIV-infected patients in the United States. The results from this clinical trial indicate that short-term administration of T-20 in an intravenous formulation is safe and well tolerated. Furthermore, all four patients in the clinical trial who received the highest dose of T-20 experienced a reduction in HIV viral load to below detectable levels (less than 500 copies/ml) during the treatment period. T-20 and the Company's other product candidates are designed to inhibit viral fusion, unlike other currently approved therapeutic agents that target replicating viruses inside already infected cells. The Company has developed a proprietary technology platform in the field of fusion inhibition, which is being applied to the discovery and development of novel products for the treatment of a variety of viral diseases. The Company is a development stage company. Since its inception, substantially all of the Company's resources have been dedicated to the development, patenting, preclinical testing and a Phase I/II clinical trial of T-20, the development of the Company's proprietary technology platform, and research and development and preclinical testing of other potential product candidates and compounds discovered by the Company. OVERVIEW OF VIRAL DISEASE Viruses are infectious particles which contain either RNA or DNA and rely on host cells to maintain their life cycle. Outside a host cell, a virus particle cannot replicate. However, after infecting a host cell, a virus exploits the metabolic mechanisms of that host cell to reproduce and make new infectious virus particles that can infect other cells. The genetic material of viruses is surrounded by a protein coat, called a nucleocapsid. The nucleocapsid of certain viruses, known as enveloped viruses (HIV, RSV, HPIV, influenza and hepatitis B and C), is surrounded by a bilayer membrane consisting of both lipids and proteins. Certain of these viral proteins facilitate the binding process of the virus to the host cell. These proteins contain peptide domains that associate with one another to form coiled coils during the infection process. These coiled-coil protein domains come together in very specific structural rearrangements that help the viral membrane fuse with the host cell membrane. This coiled-coil interaction permits the viral fusion process to take place, thereby allowing the virus to inject its genetic material into the host cell. Using HIV as an example, the following diagrams illustrate a typical life cycle of a virus and the process by which certain viruses infect a host cell. HIV LIFE CYCLE [Depiction of the HIV Life Cycle as more fully described below] STEP 1: HIV attaches to the surface of a human immune cell when the gp120 protein binds to a particular host cell receptor. After attachment, gp120 is stripped away from the virus and certain peptide domains within the gp41 transmembrane protein 26 rearrange and bind to each other very tightly to form coiled coils which mediate the fusion of the viral and host cell membranes. STEP 2: The virus injects its genetic material (RNA) into the cell. An HIV viral enzyme (reverse transcriptase) then converts this RNA into DNA. STEP 3: The viral DNA is transported to the nucleus and is integrated into the host cell's chromosomes. STEP 4: The infected cell begins to produce new viral RNA, which then uses a portion of the host cell's protein synthesis machinery to make many different viral proteins. STEP 5: The viral enzyme called protease cuts these new proteins into smaller pieces. STEP 6: These protein pieces assemble with the HIV RNA and lipids to make new infectious virus particles. STEP 7: Mature HIV particles are released from the surface of the infected cell to begin a new cycle of infection. MODEL FOR HIV FUSION [Depiction of Model for HIV Fusion as more fully described below] (1) PRE-FUSION: The HIV gp41 protein contains two peptide domains which are predicted to associate with one another to help the virus fuse with the host cell membrane. However, these two peptide domains are presumably kept apart by the gp120 protein in a pre-fusion state until the virus attaches to a host cell. (2) ATTACHMENT: The gp120 protein is stripped away from the virus after gp120 binds to host cell receptors. The two specific peptide domains within the gp41 protein can then rearrange and bind to each other very tightly to form a coiled-coil structure. In doing so, the tip of the gp41 protein is now positioned to penetrate the host cell membrane. (3) FUSION: The virus is now drawn closer to the host cell membrane surface and the viral and host cell membranes fuse together. (4) PENETRATION: Once the membranes fuse together, the virus can inject its genetic material into the host cell and the infection process is completed. NOTE: The gp120 and gp41 protein structures are enlarged in comparison to the size of the virus to show detail. 27 THE COMPANY'S TECHNOLOGY The Company's academic founders, Dr. Dani Bolognesi and Dr. Thomas Matthews, both of the Duke University Center for AIDS Research, have discovered a novel method to block HIV infection by inhibiting viral fusion with host cells. This discovery was licensed to the Company and led to the Company's development of its proprietary technology platform. The Company is using its proprietary techonology platform to support its discovery and development programs. Unlike therapeutic agents targeting viral replication processes inside host cells, the Company's product candidates prevent one of the first steps in the infection process that occurs outside of the host cell. The Company's goal is to use its expertise in the field of fusion inhibition to discover, develop and market novel peptides or small molecules to inhibit viral fusion for the treatment of a variety of diseases. T-20, the Company's lead product candidate, inhibits HIV infection. T-20 is a proprietary 36 amino acid synthetic peptide that binds to a key peptide domain of the HIV gp41 protein and blocks HIV viral fusion by interfering with the interactions between peptide domains within viral proteins that are required for HIV entry into a host cell. In a multidose Phase I/II clinical trial, T-20 exhibited dose-dependent anti-HIV activity while eliciting no drug-related adverse events and no dose-limiting toxicities during the treatment period. The following diagram illustrates the use of T-20 to inhibit viral fusion. MODEL FOR T-20 INHIBITION OF HIV FUSION [Depiction of the use of T-20 to block viral fusion as more fully described below] The gp120 protein is stripped away from the virus after gp120 binds to a particular host cell receptor. Two specific peptide domains in the gp41 protein are thus freed and can bind to one another to form a coiled coil. However, if T-20 is present in the bloodstream, it binds very tightly to one of the two peptide domains within the gp41 protein. Therefore, T-20 blocks the ability of gp41 to form a natural, coiled-coil structure. As a result, the tip of the gp41 protein does not effectively penetrate the host cell membrane. Since the virus cannot penetrate and inject its genetic material into the cell, HIV infection of the host cell is inhibited. NOTE: The gp120 and gp41 protein structures are enlarged in comparison to the size of the virus to show detail. 28 Through its study of the HIV fusion process, the Company has developed a proprietary technology platform aimed at discovering antiviral compounds. The cornerstone of this platform is CAST, a proprietary computer algorithm which identifies target sequences within certain viral proteins that have the potential to interact during the fusion process. Once identified by the CAST algorithm, these target sequences form the basis for designing highly selective and potent peptide inhibitors of viral fusion. CAST has enabled the Company to design product candidates for RSV and HPIV fusion inhibition. The Company has identified, and has filed patent applications disclosing, numerous discrete peptide sequences, which include potential fusion targets in other viruses such as hepatitis B and C, influenza and herpes. In addition to viral targets, CAST has identified protein sequences which may have a role in bacterial pathogenesis, thus providing the Company with the basis for future work aimed at the potential discovery of antibiotic agents. Ultimately, the Company plans to explore CAST-identified sequences across a wide range of targets, including those associated with cancer, immunology and neurology. PROGRAMS AND PRODUCT CANDIDATES UNDER DEVELOPMENT The following table describes the various stages of development of the Company's programs and product candidates.
INDICATION PRODUCT CANDIDATE DEVELOPMENT STATUS(1) HIV T-20 Phase I/II Completed RSV T-786 Preclinical HIV Second generation inhibitors Preclinical RSV Small molecules Preclinical HPIV T-205 Research HPIV Small molecules Research HIV Small molecules Research Influenza Virus Small molecules Discovery Hepatitis B Virus Small molecules Discovery Hepatitis C Virus Small molecules Discovery Epstein-Barr Virus Small molecules Discovery (1) "Phase I/II Completed" indicates that the product candidate has been tested in a Phase I/II clinical trial for safety and preliminary indications of biological activity in a limited patient population. "Preclinical" indicates that the Company is testing a product candidate in animal models. "Research" indicates the Company is pursuing the discovery of prototype compounds and evaluating prototype compounds in IN VITRO testing. "Discovery" indicates that the Company is developing assay systems to screen chemical libraries of small molecules. See "Risk Factors -- Uncertainties Related to Clinical Trials and Clinical Trial Strategy," " -- Extensive Government Regulation; No Assurance of Regulatory Approval" and "Business -- Government Regulation."
CLINICAL DEVELOPMENT PROGRAM T-20 T-20 is a proprietary compound which has demonstrated significant inhibition of HIV in preclinical testing. T-20 has been tested in a Phase I/II clinical trial in which T-20 exhibited dose-dependent anti-HIV activity while eliciting no drug-related adverse events and no dose-limiting toxicities during the treatment period. T-20 inhibits HIV viral fusion with host cells and thus operates by a completely different mechanism of action than any other currently approved HIV antiviral. HIV targets primarily the human immune cells known as CD4+ T-cells and macrophages. HIV-infected cells ultimately lose their immune function, leading to eventual degeneration of the immune system, which results in opportunistic infections, neurological dysfunctions, neoplasms and death. T-20 is a 36 amino acid synthetic peptide whose sequence is derived from the gp41 protein of HIV. In preclinical testing, T-20 displayed potent antiviral activity and reduced HIV viral load significantly in animal 29 models. In those tests, T-20 displayed notable pharmaceutical properties, including long half-life, significant bioavailability, chemical stability and rapid distribution into lymphatic tissue, a major reservoir of HIV. In August 1997, the Company concluded a Phase I/II clinical trial in which an intravenous formulation of T-20 was administered to HIV-infected patients. The clinical trial consisted of four groups of four patients, with each group receiving a different dose of T-20. Patients received doses of T-20 at either 3 mg, 10 mg, 30 mg or 100 mg by bolus intravenous infusion every 12 hours for 14 consecutive days. No drug-related adverse events were recorded and no dose-limiting toxicities were observed for any patient during the treatment period. Furthermore, a dose-dependent decrease in HIV viral load and a dose-dependent increase in CD4+ T-cell count were observed. All four patients who received the 100 mg dose experienced a decrease in HIV viral load to below detectable levels (less than 500 copies/ml) during the treatment period. The lower limit of detection of the assay used for this trial is 500 copies/ml, which is equivalent to 2.70 log10 . The data from the clinical trial thus indicate that the 100 mg dose group of patients experienced a minimum decrease of at least 1.50 log10 in HIV viral load. The following table summarizes the results of this clinical trial. T-20 PHASE I/II CLINICAL TRIAL RESULTS
MEAN HIV VIRAL LOAD (1) CHANGE T-20 DOSE (2) BASELINE DAY 14 LOG(10) PERCENT 3 mg 4.82 4.71 (0.11) (22)% 10 mg 5.12 5.06 (0.06) (13) 30 mg 4.95 4.47 (0.48) (61) 100 mg 4.20 2.70(3) (1.50) (97)
(1) Copies/ml plasma (reported in log10). (2) Administered every 12 hours for 14 consecutive days. (3) 2.70 log10 is the lower limit of detection of the assay used for this trial. The criteria for enrollment set forth in the trial protocol required that participants (1) either have stopped taking antiretroviral drug therapy at least 15 days prior to initiating treatment with T-20 or have never received such drug therapy, (2) have CD4+ T-cell counts above 100 cells/ml and (3) have HIV viral loads of in excess of 10,000 copies/ml. There can be no assurance that the results from the Phase I/II clinical trial will support future clinical trials or will be predictive of results that will be obtained in pivotal clinical trials. T-20 CLINICAL DEVELOPMENT The Company believes that delivery of a continuous therapeutic dose of T-20 using a subcutaneous infusion delivery system may suppress HIV more effectively than other delivery mechanisms. Accordingly, the Company, together with MiniMed, is developing a continuous, subcutaneous infusion delivery system for administering T-20. The Company believes that the ease of use of a continuous, subcutaneous infusion delivery system may increase patient compliance. In addition, the Company believes that such a system may reduce the amount of T-20 necessary to maintain effective HIV suppression. The Company is preparing to begin a Phase II clinical trial that will compare delivery of a constant therapeutic dose of T-20 by a continuous, subcutaneous infusion pump to delivery by intermittent, subcutaneous injections. The Company anticipates that this clinical trial will be conducted at the University of Alabama at Birmingham under the supervision of Dr. Michael Saag and at the UCLA Medical Center under the supervision of Dr. Ron Mitsuyasu. Each site is expected to enroll 16 to 24 HIV-infected patients and measure pharmacokinetics of T-20 drug delivery using the continuous, subcutaneous infusion pump and the effect of this treatment approach on primary surrogate markers. This trial will also analyze the T-20 dosing range 30 when using the MiniMed continuous, subcutaneous infusion pump. The Company anticipates that this Phase II clinical trial will be completed in the first quarter of 1998. After completion of the continuous, subcutaneous infusion Phase II trial, the Company intends to begin a pivotal Phase II trial in a larger population of HIV-infected patients who are either resistant to, or intolerant of, currently approved antiviral therapies (RT and protease inhibitors). Historically, pivotal Phase II trials of this type involving HIV antivirals have included approximately 300-400 patients and have taken approximately 18-24 months to complete. The Company anticipates that this pivotal Phase II trial will begin in the first half of 1998. Concurrently with the start of the pivotal Phase II trial, the Company intends to begin a study of T-20 in HIV-infected pediatric patients. Historically, studies of this type involving HIV antivirals have included approximately 40-60 pediatric patients and have taken approximately 18-30 months to complete. Throughout the T-20 clinical trial process, the Company intends to work with the FDA to design and implement a clinical trial strategy involving the administration of T-20 to HIV-infected patients in combination with approved HIV antiviral agents. The Company also believes that it will be able to conduct its T-20 clinical trial programs pursuant to the accelerated approval procedure authorized by the FDA for drugs intended to treat serious or life-threatening illnesses. However, there can be no assurance that T-20 will be eligible for accelerated development and/or approval under these regulations. Further, there can be no assurance that T-20 (if eligible for accelerated development and/or approval under these regulations) will be approved by the FDA for marketing on an accelerated basis, or at all. The anticipated timing of the Company's T-20 clinical trials may be delayed or cancelled for a number of reasons, including the receipt of unanticipated T-20 clinical trial results, changes in the focus of the Company or its collaborators, financial requirements and resources, manufacturing issues, technological developments and competitive factors. Accordingly, no assurance can be given that the Company's T-20 clinical trials will commence on their target dates, or at all. Delays in such clinical trials could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Extensive Government Regulation; No Assurance of Regulatory Approval," " -- Uncertainties Related to Clinical Trials and Clinical Trial Strategy" and "Business -- Government Regulation." HIV MARKET AND EXISTING THERAPIES HIV infection causes AIDS, which is the leading cause of death in the United States in men and women between the ages of 25 and 44. The World Health Organization estimates that, as of late 1996, approximately 750,000 people were infected with HIV in the United States, and approximately 510,000 people were infected in Western Europe. The first drugs approved in the United States to treat HIV infection inhibit the synthesis of virus DNA from viral RNA in infected cells by targeting RT, the viral enzyme essential for such synthesis. Approved RT inhibitors include AZT, 3TC, ddI, ddC, d4T, nevirapine and delavirdine. Worldwide sales of RT inhibitors were approximately $1.0 billion in 1996. A second class of HIV antivirals inhibits HIV protease, a viral enzyme required to cleave newly synthesized viral proteins into the correct size so the virus can assemble itself into new infectious virus particles. Approved HIV protease inhibitors include indinavir, ritonavir, saquinavir and nelfinavir mesilate. Worldwide sales of protease inhibitors were approximately $400 million in 1996 and are projected to grow significantly over the next several years. HIV is prone to mutations that produce resistance to RT and protease inhibitors. Once resistance emerges to one drug, these strains may also be resistant to most, if not all, of the drugs in the same chemical or functional class (a phenomenon known as cross-resistance). In an effort to overcome such resistance, physicians have begun to use RT and protease inhibitors in various combinations. While combination therapy with RT and protease inhibitors represents an advance in treatment of HIV infection, combination therapy has not yet proven to be a cure. Moreover, although these combination therapies have slowed the emergence of resistance, new mutant strains have been identified which are resistant to several of the drugs currently used in combination therapy. Equally problematic is that even brief instances of non-compliance with the strict drug dosing regimens associated with these combination therapies may reduce the effectiveness of combination therapy and can accelerate the emergence of resistance. For example, in order to maintain a high blood level of the drug and to present a 31 continuous challenge to the targeted virus, many current drugs require complex dosing, with some medications to be taken with meals and some on an empty stomach. A typical combination therapy regimen includes 14 to 16 pills taken at six to eight times during the day. This type of complex dosing regimen can easily lead to noncompliance or only partial compliance. Orally administered, small molecule drugs such as RT and protease inhibitors generally reach peak levels in the bloodstream within a short period of time after being taken by the patient. Drug levels then gradually fall over time as the drug is either absorbed into tissues or is eliminated from the body. At the point in the day when the drug level reaches its lowest concentration in the bloodstream (prior to the patient's taking another dose), the drug level may not be sufficiently high to effectively inhibit the virus. If a patient misses a dose or delays taking the drug for a short period of time, the drug level in the body will fall even lower, thus allowing the virus to replicate and potentially develop resistant strains. The Company believes that one solution to this problem is drug delivery using a continuous, subcutaneous infusion system through which a controlled, programmable amount of the drug could be delivered throughout the day. Toxicity is also an issue associated with the use of RT and protease inhibitors. Accumulating data indicate that certain patients are unable to take RT and protease inhibitors, either alone or in combination, due to toxic side effects, including gastrointestinal disorders, peripheral neuropathy and kidney stones. Furthermore, recent information has suggested that protease inhibitors may cause diabetes-like symptoms in some patients. Clinical studies with some RT and protease inhibitors indicate that a significant number of HIV-positive patients discontinue therapy soon after they begin treatment because (i) they cannot tolerate the toxic side effects, (ii) they rapidly become resistant to these therapies, or (iii) demands of the drug dosing regimen (the number of pills the patients are required to take on a strict schedule) are too great. If the side effects of the drugs prove too severe, or if a patient's virus becomes resistant to available drug combinations, there are no other antiviral treatments currently available. T-20 COMMERCIALIZATION STRATEGY The Company has entered into a strategic alliance with MiniMed under which the parties will collaborate to deliver T-20 using MiniMed's continuous infusion pump. MiniMed pumps, currently used for insulin therapy, are generally attached to a belt, strapped to a leg or draped on a cord around the neck. These pumps weigh approximately 3.5 ounces and are approximately the size of a pager. The Company expects that MiniMed will play an active role in the marketing of its pump for T-20 delivery and will provide patient support and product service for the pump and related disposable products. The Company plans to work directly with MiniMed to pursue necessary regulatory approvals for the delivery of T-20 using the MiniMed pump. See "Risk Factors -- Dependence on Collaborations and Licenses with Others," " -- Extensive Government Regulation; No Assurance of Regulatory Approvals," "Business -- License and Collaborative Agreements" and " -- Government Regulation." The manufacture of peptides requires significant expertise, facilities and equipment. Accordingly, the Company has elected to work with several third-party contract manufacturers to supply quantities of T-20 to be used in the Company's currently planned clinical trials. The Company may continue to rely on third-party manufacturers throughout the clinical and initial commercialization phases of T-20 development. The Company has also established an in-house T-20 manufacturing process development and control team that is attempting to develop an improved process for the synthetic manufacture of T-20, which may result in increased production volume and lower unit costs. See "Business -- Manufacturing" and "Risk Factors -- Lack of Manufacturing Capabilities" for a discussion of manufacturing processes and certain risks associated with manufacturing peptides. The Company does not currently have sales, marketing or distribution capabilities and is evaluating strategies for the sale, marketing and distribution of T-20, including developing internal capabilities and entering into collaborative arrangements. The Company believes that it may be feasible to develop internal sales, marketing and distribution capability for T-20, since the market for HIV therapeutics is comprised of a concentrated group of physicians in medical practices that treat HIV patients. The Company will continue to explore alternative opportunities to market T-20, either internally or in conjunction with appropriate marketing partners. See "Risk Factors -- Lack of Sales, Marketing and Distribution Capabilities" and "Business -- Sales, Marketing and Distribution." 32 PRECLINICAL DEVELOPMENT PROGRAMS The Company is using its proprietary technology platform to discover and develop fusion inhibitors for other viral diseases where there are substantial unmet medical needs. T-786 T-786 is the Company's lead product candidate for the treatment of RSV infection, which is a significant cause of pediatric bronchiolitis and pneumonia. Each year in the United States, 11 out of 100 children younger than one year of age are infected with RSV, more than 90,000 infants are hospitalized with RSV infections, and over 4,500 deaths are attributed to RSV. There is currently only one product approved for the treatment of RSV infection, and the Company believes that this product is used sparingly because its effectiveness is limited and its side effects are significant. T-786 is a proprietary 36 amino acid synthetic peptide derived from a CAST predicted domain of the RSV fusion protein. T-786 shows potent, specific and selective inhibition of RSV infection IN VITRO. In preclinical testing, T-786 significantly reduced the level of viral infection in an animal model. Because RSV infects lung tissue primarily, the Company believes that aerosol delivery of its RSV therapeutic directly to the lung may be the most effective method for administering T-786. The Company is currently developing an aerosol formulation of T-786 for preclinical evaluation. Preclinical testing of T-786 is currently in progress. Upon successful completion of these tests, the Company anticipates that it will begin clinical trials for T-786 in 1998. SECOND-GENERATION HIV FUSION INHIBITORS Using CAST, the Company has designed proprietary second-generation, peptide HIV fusion inhibitors which bind to regions of the HIV fusion protein target that are different from the region bound by T-20. In preclinical testing, these second-generation compounds have been shown to be highly effective against a wide range of HIV strains IN VITRO. In preclinical testing, these compounds have demonstrated pharmaceutical characteristics distinct from T-20. The Company believes that these second-generation compounds could provide a range of future options for the continuing treatment of HIV infection. The Company expects to begin testing its lead second-generation HIV fusion inhibitor in animal models in the fourth quarter of 1997. ANTI-RSV SMALL MOLECULES The Company has identified a series of small-molecule inhibitors of RSV infection using its high-throughput screening assays. These assays were designed based upon the CAST platform. Using its proprietary knowledge of the chemical structure of these compounds, the Company has developed a number of analogs which have demonstrated potency against RSV in preclinical testing. Several of these analogs have also demonstrated low toxicity. The Company is continuing to synthesize analogs of these compounds to evaluate their pharmaceutical properties and will continue preclinical testing to identify lead compounds. RESEARCH AND DISCOVERY PROGRAMS The Company is leveraging its proprietary technology platform and expertise in viral fusion to discover and develop lead compounds and product candidates to treat a variety of diseases caused by other viruses. ANTI-HPIV COMPOUNDS Using CAST, the Company has developed a series of proprietary peptides which inhibit HPIV IN VITRO. T-205, the Company's lead anti-HPIV peptide, was derived from a coiled-coil domain of the HPIV fusion protein. T-205 shows specific, selective and potent inhibition of HPIV infection IN VITRO. HPIV is a cause of respiratory disease in young infants. There are no drugs currently approved for the treatment of HPIV. The Company is conducting a research program to evaluate T-205 and other peptide candidates for possible advancement to preclinical development. The Company has also discovered several small-molecule inhibitors of HPIV using the Company's high-throughput HPIV screening assay. This assay was designed based on the CAST platform. These compounds show 33 potent, dose-response inhibition of HPIV IN VITRO. The Company is currently synthesizing analogs of these compounds to evaluate their pharmaceutical properties. ANTI-HIV SMALL MOLECULES The Company has indentified a series of small-molecule compounds which inhibit HIV infection IN VITRO using the Company's high-throughput HIV screening assays. These assays were designed based on the CAST platform. The Company plans to continue screening its chemical libraries to discover additional anti-HIV small-molecule compounds. INFLUENZA VIRUS The Company has initiated an early-stage discovery program to create a high-throughput screening assay based on CAST to identify potential small-molecule inhibitors of influenza viral fusion. The Company has established a collaboration with Dr. Judith White at the University of Virginia to assist in the discovery and development of fusion inhibitors for influenza virus. HEPATITIS B AND C VIRUS The Company has initiated early-stage discovery programs to create high-throughput screening assays that can identify potential small-molecule inhibitors of the hepatitis B and C viruses. Additionally, in collaboration with Dr. Timothy Block of the Thomas Jefferson Medical School, the Company plans to synthesize and test peptides derived from CAST-identified regions of the hepatitis B virus. The Company has been awarded a Phase I SBIR grant from the Department of Health and Human Services for this program. EPSTEIN-BARR VIRUS The Company has initiated an early-stage discovery program in Epstein-Barr virus ("EBV") through a collaboration with Dr. Joseph Pagano of the University of North Carolina at Chapel Hill. EBV causes infectious mononucleosis and has been linked to a variety of cancers. Dr. Pagano is working with the Company's scientists to develop a strategy for inhibiting a key protein required for EBV replication. Using CAST, the Company has identified key interactive peptide domains within this molecular target and has synthesized peptide inhibitors for the molecular target IN VITRO. BUSINESS STRATEGY The Company's goal is to become a leader in anti-fusion viral therapy. To achieve this objective, the principal elements of the Company's strategy are to: (Bullet) VALIDATE FUSION INHIBITION THERAPY BY OBTAINING REGULATORY APPROVAL FOR T-20. T-20 has been shown in preclinical testing to inhibit HIV fusion. T-20 has been tested in a Phase I/II clinical trial, and the Company anticipates that a Phase II pivotal trial will begin in the first half of 1998. The Company believes that it will be able to conduct its pivotal T-20 clinical trials program pursuant to the accelerated approval procedure authorized by the FDA for drugs intended to treat serious or life-threatening illnesses. The Company believes that regulatory approval of T-20, if obtained, will provide important evidence to support the validity of viral fusion inhibition therapy. (Bullet) LEVERAGE ANTI-FUSION EXPERTISE TO DEVELOP OTHER ANTIVIRAL THERAPIES. The Company believes that its proprietary technology platform, including CAST, is applicable to many other viral targets that may be susceptible to fusion inhibition. For example, using CAST, the Company designed T-786 for treatment of RSV infection. Upon the successful completion of preclinical testing, the Company anticipates that it will begin clinical trials of T-786 in 1998. The Company also has research and discovery programs to identify compounds to inhibit fusion of other viruses, including HPIV, influenza, hepatitis B and C, and EBV. Additionally, as the Company refines and enhances CAST, the Company believes that it will be able to develop new, high-throughput screening assays for multiple targets. 34 (Bullet) TAILOR COMMERCIALIZATION CAPABILITIES TO SPECIFIC PRODUCT MARKETS. The Company intends to evaluate the appropriate commercializaton strategy for each of its product candidates, depending on the size and nature of the market. For example, the Company believes that it may develop its own capability to sell and market T-20 in the United States because a relatively small number of physicians write the majority of prescriptions for HIV drugs in the United States. MANUFACTURING The Company has no experience in manufacturing pharmaceuticals and has no commercial manufacturing capacity. The Company has established relationships and intends to establish additional relationships with third-party manufacturers for the production of quantities of its product candidates or compounds sufficient to conduct its planned preclinical testing and clinical trials and the commercial production of any approved products or compounds. Three different methods are currently available for the synthetic manufacture of peptides such as T-20, namely solid-phase sequential peptide synthesis, peptide synthesis by fragment condensation and solution-phase peptide synthesis. In solid-phase sequential peptide synthesis, peptides are synthetically manufactured by sequentially linking together amino acids to form a peptide chain. The peptide chain is attached to a solid support from which the finished peptide is chemically released after completion of this amino acid assembly process. Because of certain technical limitations inherent in this process that limit its efficiency, solid-phase sequential peptide synthesis is the most expensive way to chemically assemble the Company's current peptide product candidates, including T-20. Peptides may also be manufactured using a process known as peptide synthesis by fragment condensation, in which peptide segments that match sequential regions along the parent peptide sequence are synthesized using solid-phase peptide chemistry techniques. This process is technically more difficult to accomplish than solid-phase sequential peptide synthesis and may not lead to a process that is commercially feasible. However, if successful, this process is generally more economical than solid-phase sequential peptide synthesis for peptides that are longer than approximately 15 amino acids in length. In the third peptide manufacturing method, solution-phase peptide synthesis, peptides are synthetically manufactured by linking all amino acids together in the peptide chain entirely in solution. This chemical assembly process is technically the most difficult to design and implement and may be technically infeasible on a commercial scale for peptides longer than approximately 15 amino acids. However, the Company believes that cost savings may be achieved beyond those possible using fragment condensation peptide synthesis if technical difficulties with the technology are overcome. The Company and its third-party manufacturers have manufactured sufficient quantities of T-20 using solid-phase sequential peptide synthesis to complete preclinical testing and the Phase I/II clinical trial. The Company has entered into agreements with two contract manufacturers for the solid-phase sequential peptide synthetic manufacture of T-20 for use in clinical trials. The Company has also established a manufacturing process development and control team consisting of four individuals with significant pharmaceutical experience in peptide and small organic molecule process development and manufacturing. This team is currently working to implement a strategy to manufacture T-20 using peptide synthesis by fragment condensation. The Company anticipates that such a process may be available to support later-stage T-20 clinical trial needs. This team will also coordinate process implementation with third-party manufacturers and help to ensure regulatory compliance in the manufacturing process. Although the Company has no plans at present to evaluate solution-phase peptide synthesis for T-20, the Company may chose to evaluate the use of this process for T-20 in the future. There can be no assurance that the Company or its third-party manufacturers will be able to manufacture T-20 on a cost-effective basis or that the Company will be successful in its efforts to develop an alternative, more efficient manufacturing method for T-20 or any of its other peptide product candidates. There can be no assurance that the Company will be able to retain or establish relationships with any third-party manufacturers on acceptable terms, if at all, or that such third-party manufacturers will be able to manufacture products in commercial quantities under GMP requirements on a cost-effective basis. The Company's dependence upon third parties for the manufacture of its products, product candidates and compounds may adversely affect the Company's profit margins and its ability to develop and commercialize product candidates, products and compounds on a timely and competitive basis. Further, there can be no assurance that manufacturing or quality 35 control problems will not arise in connection with the manufacture of the Company's products, product candidates or compounds or that third-party manufacturers will maintain the necessary governmental licenses and approvals to continue manufacturing the Company's products, product candidates or compounds. Any failure to maintain existing or establish new relationships with third parties for the Company's manufacturing requirements on a timely basis and on acceptable terms would have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Lack of Manufacturing Capabilities" and " -- Extensive Government Regulation; No Assurance of Regulatory Approval." LICENSING AND COLLABORATIVE AGREEMENTS The Company intends to consider entering into collaborative and licensing arrangements with collaborative partners, licensees and third parties to seek regulatory approval of and to manufacture and commercialize certain of its existing and potential product candidates and compounds. These collaborations could provide the Company with funding, research and development resources, access to libraries of diverse compounds and clinical development, manufacturing, sales, marketing and distribution capabilities. Accordingly, the Company's success will depend, in part, upon the subsequent success of such third parties in performing preclinical testing and clinical trials, obtaining the requisite regulatory approvals, scaling up manufacturing, successfully commercializing the licensed product candidates or compounds and otherwise performing their obligations. There can be no assurance that the Company will be able to maintain its existing arrangements or enter into acceptable collaborative and license arrangements in the future on acceptable terms, if at all, that such arrangements will be successful, that the parties with which the Company has or may establish arrangements will perform their obligations under the arrangements, or that potential collaborators will not compete with the Company by seeking alternative means of developing therapeutics for the diseases targeted by the Company. There can also be no assurance that the Company's existing or any future arrangements will lead to the development of product candidates or compounds with commercial potential, that the Company will be able to obtain proprietary rights or licenses for proprietary rights with respect to any technology developed in connection with these arrangements, or that the Company will be able to ensure the confidentiality of any proprietary rights and information developed in such arrangements or prevent the public disclosure thereof. The Company currently has a license from Duke University (as described below), and in the future may require additional licenses from these or other parties, to effectively develop potential product candidates and compounds. The Company is currently negotiating a license with a third party to acquire a related technology. The Company has received approximately $300,000 from SBIR grants. The first grant, "Screens for Identifying HIV Fusion Inhibitors -- Phase I," was completed during 1995. Phase II of that grant, in the amount of $365,000, is currently in progress with a projected completion date in March 1998. Another grant, "Peptide Therapeutics for the Liver Cancer Pathogen HBV," was begun during 1996 and completed in 1997. There can be no assurance that the funding provided by such grants will be sufficient to complete the studies contemplated by such programs or that the Company will receive any additional future grants under any of these programs. The Company also received approximately $100,000 from a third party under an investigative contract. The purpose of this contract was to identify pharmaceutical compounds in late stage clinical development that may be licensed for sale in the United States and other foreign countries. There can be no assurance that the Company will receive any additional funding under this or any other similar contract. In April 1997, the Company and MiniMed entered into the MiniMed Agreement. Under the agreement, the Company and MiniMed will collaborate in the development and delivery of therapies for the treatment of targeted indications by combining the continuous infusion delivery pump of MiniMed and the antiviral product candidates and compounds being developed by the Company. The first collaborative project under the terms of the agreement will involve the continuous delivery of T-20. The parties intend to initiate clinical trials for the delivery of T-20 with MiniMed's continuous infusion delivery pump in the third quarter of 1997. While MiniMed's continuous infusion pump has been approved for the continuous, subcutaneous infusion of other therapies, there can be no assurance that the FDA will approve on a timely basis, if at all, the use of the delivery of T-20 utilizing the MiniMed continuous infusion pump. The parties are evaluating other product candidates and compounds for inclusion under the agreement. Under the terms of the agreement, a joint management committee will determine an 36 implementation strategy for each collaborative project. The agreement contains certain exclusivity and noncompetition provisions, subject to the Company's right, under certain circumstances, to terminate such obligations with respect to T-20 in exchange for certain royalty payments. The failure of the Company and MiniMed to achieve their collective objectives could have a material adverse effect on the Company's business, financial condition and results of operations. Pursuant to the Duke License, the Company has obtained from Duke University an exclusive, worldwide, royalty-free license to all discoveries and inventions in the field of antiviral therapeutics emanating from the laboratories of Drs. Dani Bolognesi, Thomas J. Matthews, Michael Greenberg and Kent Weinhold of the Duke University Center for AIDS Research for the period from February 3, 1993 until February 2, 2000. The Company's rights to each of these discoveries and inventions expire upon the expiration of the life of the particular patent. Multiple discoveries and inventions have flowed to the Company under the Duke License and include those upon which United States patents have been issued. None of the technologies licensed by the Company from Duke University is the subject of a separate license agreement. Rather, the Company's rights to such technologies are licensed solely pursuant to the Duke License. While the Company believes it will be able to successfully negotiate an extension or renewal of the Duke License, there can be no assurance that the Company will be able to obtain such an extension or renewal or that such an extension or renewal will be on acceptable terms. The early termination of the Duke License or the failure of the Company to renew the Duke License on acceptable terms, if at all, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- License and Collaborative Agreements" and " -- Extensive Government Regulation; No Assurance of Regulatory Approval." SALES, MARKETING AND DISTRIBUTION The Company has no experience in sales, marketing or distribution of pharmaceuticals and currently has no personnel employed in any such capacities. However, the Company intends to develop such capability in certain areas. For example, because a relatively small number of physicians write the majority of prescriptions for HIV drugs in the United States, the Company intends to consider developing in-house sales, marketing and distribution capabilities to address the market. In other areas, however, the Company may rely on marketing partners or other arrangements with third parties which have established distribution systems and direct sales forces for the sales, marketing and distribution of such products and compounds. In the event that the Company is unable to reach agreement with one or more marketing partners to market these other products and compounds, it may be required to develop internal sales, marketing and distribution capabilities for such products and compounds. There can be no assurance that the Company will be able to establish sales, marketing or distribution capabilities or make arrangements with third parties to perform such activities on acceptable terms, if at all, or that any internal capabilities or third-party arrangements will be cost-effective. The failure to establish such capabilities would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any third parties with which the Company establishes sales, marketing or distribution arrangements may have significant control over important aspects of the commercialization of the Company's products, and compounds including market identification, marketing methods, pricing, composition of sales force and promotional activities. For example, the MiniMed Agreement contemplates that MiniMed will participate in the sales, marketing and distribution of any products jointly developed by the parties. There can be no assurance that the Company will be able to control the amount and timing of resources that MiniMed or any other third party may devote to the Company's products or compounds or prevent any third party from pursuing alternative technologies or products that could result in the development of products that compete with the Company's products and compounds and the withdrawal of support for the Company's products and compounds. See "Risk Factors -- Lack of Sales, Marketing and Distribution Capabilities." PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS The Company's success will depend, in part, on its ability, and the ability of its collaborators or licensors, to obtain protection for its products and technologies under United States and foreign patent laws, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Because of the substantial 37 length of time and expense associated with bringing new products through development to the marketplace, the pharmaceutical and biotechnology industries place considerable importance on obtaining, and maintaining, patent and trade secret protection for new technologies, products and processes. As of August 15, 1997, the Company was the sole assignee of one pending United States patent application and one pending patent application under the Patent Cooperation Treaty designating the United States, directed to combinatorial therapy employing its proprietary antifusion peptides and other therapeutic agents, and the owner of one pending provisional application, directed to certain antifusion chemical compounds discovered by the Company's proprietary screening method. In addition, as of August 15, 1997, the Company was the assignee or owner, along with Duke University, of 14 pending United States applications, along with certain corresponding foreign patent applications, directed to numerous antifusion peptides and their therapeutic uses. Under the Duke License, the Company is the exclusive licensee under Duke University's rights in these jointly-owned patent applications, as well as the exclusive licensee under three issued United States patents, six pending United States patent applications, and certain corresponding foreign patent applications directed to antifusion peptides. The Company is currently negotiating a license with a third party to acquire a related technology. Legal standards relating to the scope of claims and the validity of patents in the biotechnology industry are uncertain and still evolving, and no assurance can be given as to the degree of protection that will be afforded any patents issued to, or licensed by, the Company. There can be no assurance that, if challenged by others in litigation, any patents assigned to, or licensed by, the Company, will not be found invalid. Furthermore, there can be no assurance that the Company's activities will not infringe patents owned by others. Defense and prosecution of patent matters can be expensive and time-consuming, and regardless of whether the outcome is favorable to the Company, can result in the diversion of substantial financial, management and other resources. An adverse outcome could subject the Company to significant liability to third parties, require the Company to obtain licenses from third parties, or require the Company to cease any related product sales. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company, if at all. Moreover, the laws of certain countries may not protect the Company's proprietary rights to the same extent as U.S. law. The Company also relies on trade secrets, know-how and other proprietary information, which it seeks to protect, in part, through the use of confidentiality agreements with employees, consultants, advisors and others. There can be no assurance that such agreements will provide adequate protection for the Company's trade secrets, know-how, or other proprietary information in the event of any unauthorized disclosure, that employees of the Company, consultants, advisors, or others, will maintain the confidentiality of such trade secrets or proprietary information, or that the trade secrets or proprietary know-how of the Company will not otherwise become known, or be independently developed by, competitors. In January 1997, the USPTO instituted an interference proceeding between an issued patent licensed by the Company from Duke University and a pending patent application owned by a third party. An interference proceeding is an action, in the USPTO, to determine which, of several parties, is entitled to a patent. An interference proceeding may be instituted when the USPTO believes that a pending patent application and an issued patent claim the same patentable subject matter. The Company believes that no interference-in-fact exists, i.e., that the parties to the interference are not claiming the same patentable invention, and, through its licensor, the Company is taking all reasonable action to have the interference proceeding dismissed. However, no assurance can be given that the interference proceeding will be dismissed. Furthermore, no assurance can be given that, should the interference proceeding continue, as between the two parties to the interference, the Company's licensor will be found to be the first inventor of the invention which is declared to be the subject matter of the interference proceeding. Failure of the Company's licensor to prevail in the interference proceeding and any loss of the involved patent rights could have a material adverse effect on the Company's business, financial results and results of operations. See "Risk Factors -- Patents, Proprietary, Technology and Trade Secrets." COMPETITION The Company is engaged in segments of the biopharmaceutical industry, including the treatment of HIV, that are intensely competitive and rapidly changing. If successfully developed and approved, the product candidates 38 and compounds that the Company is currently developing will compete with numerous existing therapies. For example, 11 drugs are currently approved for the treatment of HIV. In addition, a number of companies are pursuing the development of novel pharmaceutical products that target the same diseases that the Company is targeting, and some companies, including several multinational pharmaceutical companies, are simultaneously marketing several different drugs and may therefore be able to market their own combination drug therapies. The Company believes that a significant number of drugs are currently under development and will become available in the future for the treatment of HIV. Although the Company believes that there is a significant future market for therapeutics that treat HIV and other viral diseases, the Company anticipates that it will face intense and increasing competition in the future as new products enter the market and advanced technologies become available. There can be no assurance that existing products or new products for the treatment of HIV developed by the Company's competitors, including Glaxo, Merck and Abbott, will not be more effective, or more effectively marketed and sold, than T-20, should it be successfully developed and receive regulatory approval, or any other therapeutic for HIV that may be developed by the Company. Competitive products or the development by others of a cure or new treatment methods may render the Company's technologies and products and compounds obsolete, noncompetitive or uneconomical prior to the Company's recovery of development or commercialization expenses incurred with respect to any such technologies or products or compounds. Many of the Company's competitors have significantly greater financial, technical and human resources than the Company and may be better equipped to develop, manufacture, sell, market and distribute products. In addition, many of these companies have extensive experience in preclinical testing and clinical trials, obtaining FDA and other regulatory approvals and manufacturing and marketing pharmaceutical products. For use individually or in combination therapy, many of these competitors also have products that have been approved or are in late-stage development and operate large, well-funded research and development programs. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and biotechnology companies. Furthermore, academic institutions, governmental agencies and other public and private research organizations are becoming increasingly aware of the commercial value of their inventions and are more actively seeking to commercialize the technology they have developed. New developments in areas in which the Company is conducting its research and development are expected to continue at a rapid pace in both industry and academia. If the Company's product candidates and compounds are successfully developed and approved, the Company will face competition based on the safety and effectiveness of its products and compounds, the timing and scope of regulatory approvals, availability of manufacturing, sales, marketing and distribution capabilities, reimbursement coverage, price and patent position. There can be no assurance that the Company's competitors will not develop more effective or more affordable technology or products, or achieve earlier patent protection, product development or product commercialization than the Company. Accordingly, the Company's competitors may succeed in commercializing products more rapidly or effectively than the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Intense Competition." GOVERNMENT REGULATION Human pharmaceutical products are subject to lengthy and rigorous preclinical testing and clinical trials and other extensive, costly and time-consuming procedures mandated by the FDA and foreign regulatory authorities. The regulatory approval process, which includes the establishment of the safety and effectiveness of each product candidate and compound for each target indication and confirmation by the FDA that good laboratory, clinical and manufacturing practices were maintained during testing and manufacturing, typically takes a number of years, varying based upon the type, complexity and novelty of the pharmaceutical product. This process requires the expenditure of substantial resources and gives larger companies with greater financial resources a competitive advantage over the Company. To date, no product candidate or compound being evaluated by the Company has been submitted for approval by the FDA or any other regulatory authority for commercialization, and there can be no assurance that any such product candidate or compound will ever be approved for commercialization or that the Company will be able to obtain the labeling claims desired for its product candidates or compounds. 39 The steps required by the FDA before new drugs may be marketed in the United States include: (i) preclinical studies; (ii) the submission to the FDA of a request for authorization to conduct clinical trials on an investigational drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for its intended use; (iv) submission to the FDA of an NDA; and (v) review and approval of the NDA by the FDA before the drug may be shipped or sold commercially. In the United States, preclinical testing includes both IN VITRO and IN VIVO laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Laboratories involved in preclinical testing must comply with FDA regulations regarding good laboratory practices. Preclinical testing results are submitted to the FDA as part of the IND and, unless there is objection by the FDA, the IND will become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in the commencement of human clinical trials. Clinical trials, which involve the administration of the investigational drug to healthy volunteers or to patients under the supervision of a qualified principal investigator, are typically conducted in three sequential phases, although the phases may overlap with one another. Clinical trials must be conducted in accordance with good clinical procedures under protocols that detail the objectives of the clinical trial, the parameters to be used to monitor safety and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical trial must be conducted under the auspices of an independent Institutional Review Board (an "IRB") at the institution where the clinical trial will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the institution. Compounds must be formulated according to GMP requirements. Phase I clinical trials represent the initial administration of the investigational drug to a small group of healthy human subjects or, more rarely, to a group of selected patients with a targeted disease or disorder. The goal of Phase I clinical trials is typically to test for safety (adverse effects), dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical pharmacokinetics. Phase II clinical trials involve a small sample of the actual intended patient population and seek to assess the effectiveness of the drug for the specific targeted indications, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. Once the investigational drug is found to have some effectiveness and the acceptable safety profile in the targeted patient population, Phase III clinical trials are initiated to establish further clinical safety and effectiveness of the investigational drug in a broader sample of the general patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for all physician labeling. The results of the research and product development, manufacturing, preclinical testing, clinical trials and related information are submitted to the FDA in the form of an NDA for approval of the marketing and shipment of the drug. The approval process is affected by a number of factors, including the severity of the targeted indications, the availability of alternative treatments and the risks and benefits demonstrated in the clinical trials. The FDA may reject an NDA if applicable regulatory criteria are not satisfied, or may require additional testing or information with respect to the product candidate or compound. Even if FDA approval is obtained, further clinical trials, including post-market trials, may be required in order to provide additional data on safety and will be required in order to obtain approval for the use of a product as treatment for clinical indications other than those for which the product was initially approved. The FDA will also require post-market reporting and may require surveillance programs to monitor the side effects of any approved products. Results of post-market programs may limit the further marketing, manufacturing process or labeling, and an NDA supplement may be required to be submitted to the FDA. Any failure of the Company to successfully complete its clinical trials and obtain approvals of corresponding NDAs would have a material adverse effect on the Company's business, financial condition and results of operations. The Company is and will continue to be dependent upon the laboratories conducting its preclinical testing and clinical trials to maintain both good laboratory and good clinical practices, and, if any of the Company's product candidates or compounds obtain the requisite regulatory approvals, the Company will be dependent 40 upon the manufacturers of its products to maintain compliance with GMP requirements. Various federal and foreign statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record-keeping and marketing of pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate United States and foreign statutes and regulations are time-consuming and will require the expenditure of substantial resources by the Company. In addition, these requirements and processes vary widely from country to country. The time required for completing preclinical testing and clinical trials is uncertain, and the FDA approval process is unpredictable and uncertain, and no assurance can be given that necessary approvals will be granted on a timely basis, or at all. The Company may decide to replace a product candidate or compound in preclinical testing and/or clinical trials with a modified product candidate or compound, thus extending the development period. In addition, the FDA or similar foreign regulatory authorities may require additional clinical trials, which could result in increased costs and significant development delays. Delays or rejections may also be encountered based upon changes in legislation, administrative action or FDA policy during the period of product development and FDA review, including changes in FDA policy relating to clinical testing guidelines for the use of the Company's product candidates or compounds in children. Similar delays or rejections may be encountered in other countries. In 1988, the FDA issued regulations to expedite the development, evaluation and marketing of drugs for life-threatening and severely debilitating illnesses, especially where no alternative therapy exists. These procedures encourage early consultation between the IND sponsors and the FDA in the preclinical testing and clinical trial phases to determine what evidence will be necessary for marketing approval and to assist the sponsors in designing clinical trials. Under this program, the FDA works closely with the IND sponsors to accelerate and condense Phase II clinical trials, which may, in some cases, eliminate the need to conduct Phase III trials or limit the scope of Phase III trials. Under these regulations, the FDA may require postmarketing clinical trials ("Phase IV trials") to obtain additional information on the drug's risks, benefits and optimal use. In 1992, the FDA issued regulations establishing an accelerated NDA approval procedure for certain drugs under Subpart H of the agency's NDA approval regulations ("Subpart H Regulations"). The Subpart H Regulations provide for accelerated NDA approval for new drugs intended to treat serious or life-threatening diseases where the drugs provide a meaningful therapeutic advantage over existing treatment. Under this accelerated approval procedure, the FDA may approve a drug based on evidence from adequate and well-controlled studies of the drug's effect on a surrogate endpoint that reasonably suggest clinical benefits, or on evidence of the drug's effect on a clinical endpoint other than survival or irreversible morbidity. This approval is conditional on the favorable completion of trials to establish and define the degree of clinical benefits to the patient. Such post-market clinical trials would usually be underway when the product obtains this accelerated approval. If, after approval, a post-market clinical trial establishes that the drug does not perform as expected, or if post-market restrictions are not adhered to or are not adequate to ensure the safe use of the drug, or other evidence demonstrates that the product is not safe and/or effective under its conditions of use, the FDA may withdraw approval. These two accelerated approval procedures for expediting the clinical evaluation and approval of certain drugs may shorten the drug development process by as much as two to three years. While certain of the Company's product candidates and compounds, including T-20, have been designed to treat serious or life-threatening illnesses, such product candidates and compounds may not qualify for accelerated development and/or approval under FDA regulations and, even if some of the Company's product candidates qualify for accelerated development and/or approval, they may not be approved for marketing on an accelerated basis, or at all. There can be no assurance that, even after substantial time and expenditures, any of the Company's product candidates or compounds under development will receive commercialization approval in any country on a timely basis, or at all. If the Company is unable to demonstrate the safety and effectiveness of its product candidates and compounds to the satisfaction of the FDA or foreign regulatory authorities, the Company will be unable to commercialize its product candidates and compounds; and the Company's business, financial condition and results of operations would be materially and adversely affected. Furthermore, even if regulatory approval of a product candidate or compound is obtained, the approval may entail limitations on the indicated uses for which the product candidate or compound may be marketed. A marketed product or compound, its manufacturer and the manufacturer's facilities are subject to continual review and periodic inspections, and subsequent discovery of previously unknown problems with a product, compound, manufacturer or facility may result in restrictions on 41 such product, compound, manufacturer or facility, including withdrawal of the product or compound from the market. The failure to comply with applicable regulatory requirements can, among other things, result in fines, injunctions, civil penalties, total or partial suspension of regulatory approvals, refusal to approve pending applications, refusal to permit exports from the United States, recalls or seizures of products, operating and production restrictions and criminal prosecutions. Further, FDA policy may change and additional government regulations may be established that could prevent or delay regulatory approval of the Company's product candidates or compounds. The effect of governmental regulation may be to delay the marketing of new products or compounds for a considerable period of time, to impose costly requirements on the Company's activities or to provide a competitive advantage to other companies that compete with the Company. Adverse clinical results by others could have a negative impact on the regulatory process and timing with respect to the development and approval of the Company's product candidates or compounds. A delay in obtaining or failure to obtain regulatory approvals could have a material adverse effect on the Company's business, financial condition and results of operations. The extent and character of potentially adverse governmental regulation that may arise from future legislation or administrative action cannot be predicted. In April 1997, the Company and MiniMed entered into the MiniMed Agreement pursuant to which the parties have agreed to jointly design, develop and implement a system for the continual delivery of T-20 utilizing the MiniMed continuous infusion pump. There can be no assurance that the FDA will approve the delivery of T-20 utilizing the MiniMed continuous infusion pump on a timely basis, if at all. The failure of the Company and MiniMed to collectively develop a continual T-20 delivery system which receives FDA approval on a timely basis could have a material adverse effect on the Company's business, financial condition and results of operations. The Company and its existing and potential future collaborative partners are also subject to various federal, state and local laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's product development programs. Compliance with such laws, regulations and requirements may be costly and time-consuming and the failure to maintain such compliance by the Company or its existing and future collaborative partners could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, this Prospectus reflects the Company's estimates regarding future regulatory submission dates. Regulatory submissions can be delayed, or plans to submit proposed products can be cancelled, for a number of reasons, including the receipt of unanticipated, adverse or ambiguous results from preclinical testing or clinical trials, the demonstration of undesirable or unintended side effects, the inability to locate, recruit and qualify sufficient numbers of patients, lack of funding, the inability to locate or recruit scientists to undertake or complete planned preclinical testing or clinical trials, the redesign of the Company's preclinical testing or clinical trial programs, the inability to manufacture or acquire sufficient quantities of the particular product candidate or any other components required for preclinical testing or clinical trials, regulatory delays or other regulatory actions, changes in focus of the Company's or its collaborators' development efforts, and the disclosure of clinical trial results by competitors. Accordingly, no assurances can be given that the Company's anticipated submissions will be made on their target dates, or at all. Delays in such submissions could delay regulatory approval for the Company's product candidates, delay commercialization of the Company's product candidates, increase operating expenses, result in the expenditure of additional capital, cause the diversion of management time and attention, or create adverse market perception about the Company and its product candidates, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." THIRD PARTY REIMBURSEMENT AND HEALTH CARE REFORM MEASURES In the United States and elsewhere, sales of prescription pharmaceuticals are dependent, in part, on the availability of reimbursement to the consumer from third-party payors, such as government agencies and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and services in an effort to promote cost containment measures and alternative health care delivery systems and they may mandate 42 predetermined discounts from list prices. If the Company succeeds in bringing one or more products or compounds to the market, there can be no assurance that these products or compounds will be considered cost-effective or that reimbursement to the consumer will be available or will be sufficient to allow the Company to sell its products or compounds on a competitive basis. The business and financial condition of pharmaceutical companies will continue to be affected by economic, political and regulatory influences, including the efforts of governments and third-party payors to contain or reduce the cost of health care through various means. A number of legislative and regulatory proposals aimed at changing the health care system have been proposed in recent years. Because of the high cost of the treatment of AIDS or HIV using combination therapy, many state legislatures are reassessing reimbursement policies for such therapy. In addition, an increasing emphasis on managed care in the United States to reduce the overall costs of health care has and will continue to increase the pressure on pharmaceutical pricing. While the Company cannot predict whether legislative or regulatory proposals will be adopted or the effect such proposals or managed care efforts may have on its business, the announcement and/or adoption of such proposals or efforts could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Uncertainty of Third Party Reimbursement and Health Care Reform Measures." FACILITIES The Company currently leases approximately 21,000 square feet of laboratory and office space at 4727 University Drive, Suite 100, Durham, North Carolina. The Company leases this space under a sublease agreement which expires on September 30, 1999. Depending on the results of clinical trials and the progress of the Company's product development programs, the Company may require facilities in addition to those currently under lease. The Company believes that there will be suitable facilities available as needed. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. HUMAN RESOURCES As of June 30, 1997, the Company had 37 full-time employees, including a technical scientific staff of 29. None of the Company's employees are covered by collective bargaining arrangements, and management considers relations with its employees to be good. See "Risk Factors -- Need to Attract and Retain Key Officers, Employees and Consultants." SCIENTIFIC ADVISORY BOARD The Company has assembled a Scientific Advisory Board (the "SAB") comprised of eight individuals (the "Scientific Advisors") who are leaders in the fields of viral disease research and treatment. Members of the SAB review the Company's research, development and operating activities and are available for consultation with the Company's management and staff relating to their respective areas of expertise. The SAB holds regular meetings. Several of the individual Scientific Advisors have separate consulting relationships with the Company and meet more frequently, on an individual basis, with the Company's management and staff to discuss the Company's ongoing research and development projects. Certain of the Scientific Advisors own Common Stock and/or hold options to purchase Common Stock. The Scientific Advisors are expected to devote only a small portion of their time to the business of the Company. The Scientific Advisors are all employed by entities other than the Company. Each Scientific Advisor has entered into a letter agreement with the Company that contains confidentiality and non-disclosure provisions that prohibit the disclosure of confidential information to anyone outside the Company. Such letter agreements also provide that all inventions, discoveries or other intellectual property that come to the attention of or are discovered by the Scientific Advisor while performing services under the letter agreement with the Company will be assigned to the Company. The current members of the SAB are as follows: DANI P. BOLOGNESI, PH.D. James B. Duke Professor of Surgery, Professor of Microbiology/Immunology, Vice Chairman of the Department of Surgery for Research and Development, Director of the Duke University Center for AIDS Research -- Duke University. 43 ROBERT C. GALLO, M.D. Professor and Director, Institute of Human Virology -- University of Maryland Biotechnology Institute. ERIC HUNTER, PH.D. Professor of Microbiology, Director, Center for AIDS Research -- The University of Alabama at Birmingham. THOMAS J. MATTHEWS, PH.D. Associate Professor of Experimental Surgery -- Duke University. JOSEPH S. PAGANO, M.D. Professor of Medicine and Microbiology and Immunology, Director of The Lineberger Comprehensive Cancer Center -- The University of North Carolina at Chapel Hill. JEROME J. SCHENTAG, PHARM.D. Professor of Pharmacy and Pharmaceutics, Director, The Clinical Pharmacokinetics Laboratory, Millard Fillmore Hospital, Director, Center for Clinical Pharmacy Research -- The State University of New York at Buffalo School of Pharmacy. JUDITH M. WHITE, PH.D. Professor of Cell Biology and Microbiology -- University of Virginia. RICHARD J. WHITLEY, M.D. Loeb Eminent Scholar Chair in Pediatrics, Professor of Pediatrics, Microbiology and Medicine -- The University of Alabama at Birmingham. 44 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The following table sets forth certain information with respect to executive officers, directors and certain key employees of the Company:
NAME AGE POSITION M. Ross Johnson, Ph.D............................... 52 President, Chief Executive Officer, Chief Scientific Officer and Director Matthew A. Megaro................................... 39 Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary Samuel Hopkins, Ph.D................................ 38 Vice President of Medical Affairs Dennis M. Lambert, Ph.D............................. 50 Vice President of Biological and Molecular Sciences M.C. Kang, Ph.D..................................... 45 Director of Chemistry Michael A. Recny, Ph.D.............................. 41 Director of Business Development Timothy J. Creech................................... 36 Director of Finance Jesse I. Treu, Ph.D.(1)............................. 50 Chairman of the Board of Directors Dani P. Bolognesi, Ph.D.(2)......................... 56 Director Brian H. Dovey(2)................................... 55 Director Andrew S. McCreath(1)............................... 41 Director Charles A. Sanders, M.D.(1)(2)...................... 65 Director
(1) Member of the Audit Committee. (2) Member of the Compensation Committee. M. ROSS JOHNSON, PH.D. joined the Company as Chief Scientific Officer and a Director in January 1995 and was named President and Chief Executive Officer in March 1996. Prior to joining the Company, Dr. Johnson was President and Chief Executive Officer of Parnassus Pharmaceuticals, Inc. ("Parnassus"), a biopharmaceutical company, from March 1994 to October 1994. In October 1994, Parnassus filed for protection under the United States Bankruptcy Code. From 1987 to March 1994, Dr. Johnson served as Vice President of the Chemical Development Division and Division of Chemistry, respectively, at Glaxo, a multinational pharmaceutical company. Prior to joining Glaxo, Dr. Johnson held a number of scientific management positions at Pfizer Inc., a multinational pharmaceutical company. Dr. Johnson received his Ph.D. degree in Organic Chemistry from the University of California at Santa Barbara. MATTHEW A. MEGARO joined the Company as Chief Financial Officer and Vice President of Business Development in March 1995 and was named Chief Operating Officer, Executive Vice President and Secretary of the Company in June 1997. Prior to joining the Company, Mr. Megaro was Chief Operating Officer of Parnassus from January 1994 to October 1994. In October 1994, Parnassus filed for protection under the United States Bankruptcy Code. Prior to joining Parnassus, Mr. Megaro was Chief Financial Officer and Vice President of Finance and Administration of Athena Neurosciences, Inc., a biopharmaceutical company, from 1988 to January 1994. SAMUEL HOPKINS, PH.D. joined the Company as Director of Drug Development in April 1995 and was named Vice President of Medical Affairs in June 1997. Prior to joining the Company, Dr. Hopkins was Director of Oncology and Antiviral Drug Product Development and Senior Clinical Research Scientist, respectively, at Cato Research, Ltd., a contract research organization from 1991 to April 1995. From 1987 to 1991, Dr. Hopkins was a Senior Research Scientist in the Division of Virology at Burroughs Wellcome Co., a multinational pharmaceutical company. Dr. Hopkins received his Ph.D. degree in Biochemisty and Biophysics from the Medical College of Virginia. DENNIS M. LAMBERT, PH.D. joined the Company as Director of Virology in March 1993, was named Senior Director of Virology and Molecular Biology in September 1995, and was named Vice President of Biological Molecular 45 Sciences in June 1997. Prior to joining the Company, Dr. Lambert was Assistant Director, Department of Molecular Virology and Host Defense, at SmithKline Beecham Corp., a pharmaceutical company, from 1988 to July 1993. Dr. Lambert received his Ph.D. degree in Microbiology/Virology from Indiana State University at Terre Haute. M.C. KANG, PH.D. joined the Company as a consultant in October 1995 and was named Director of Chemistry in August 1996. Prior to joining the Company, Dr. Kang held various positions at Glaxo from 1990 to October 1995, most recently serving as Director of Chemical Development. Prior to joining Glaxo, Dr. Kang was a Development Chemist in the Medical Products Division at E.I. DuPont de Nemours and Company, a chemical company from 1986 to 1990. Dr. Kang received his Ph.D. degree in Synthetic Organic Chemistry from Oregon State University. MICHAEL A. RECNY, PH.D. joined the Company as Director of Biochemical Sciences in March 1995, and was named Director of Business Development in November 1996. Prior to joining the Company, Dr. Recny was Senior Director of Biological Sciences at Parnassus from November 1993 to October 1994. From 1988 to November 1993, Dr. Recny was Director of Protein Biochemistry at Procept, Inc., a biopharmaceutical company. Prior to joining Procept, Inc., Dr. Recny was a Staff Scientist/Laboratory Head at Genetics Institute Inc., a biopharmaceutical company. Dr. Recny received his Ph.D. degree in Biochemistry from the University of Illinois at Urbana-Champaign. TIMOTHY J. CREECH, C.P.A. joined the Company as Director of Finance in July 1997. Prior to joining the Company, Mr. Creech was Corporate Controller at Performance Awareness Corporation, a software company, from July 1996 to June 1997. From December 1993 to July 1996, Mr. Creech was Director of Finance at Avant! Corporation, a software company. From 1990 to December 1993, Mr. Creech was a senior manager at KPMG Peat Marwick LLP, independent auditors for the Company. JESSE I. TREU, PH.D. has been Chairman of the Board of Directors of the Company since its inception. Dr. Treu has been a general partner of Domain Associates, a venture capital firm specializing in investments in life sciences, since 1986. Dr. Treu serves on the Boards of Directors of Biosite Diagnostics, Inc. and GelTex Pharmaceuticals, Inc. Dr. Treu received his Ph.D. in Physics from Princeton University. DANI P. BOLOGNESI, PH.D. was a founder of the Company and has been a Director since its inception. Dr. Bolognesi has held a number of positions at Duke University since 1971, and now serves as James B. Duke Professor of Surgery, Professor of Microbiology/Immunology, Vice Chairman of the Department of Surgery for Research and Development and Director of the Duke University Center for AIDS Research. Dr. Bolognesi is the Co-Chair of the National Institute of Allergy and Infectious Diseases Vaccine Working Group ("NIAID"), Chair of the Office of AIDS Research Coordinating Committee for Vaccines, Chair of the Office of AIDS Research Task Force Vaccine Reasearch and Development Area Review Panel, Chair of the panel to recommend strategies for the long-term care of the United States biomedical chimpanzee population, and is a member of the NIAID Vaccine Selection Committee. Dr. Bolognesi received his Ph.D. in Virology from Duke University. BRIAN H. DOVEY has been a Director of the Company since its inception. Mr. Dovey has been a general partner of Domain Associates, a venture capital firm specializing in investments in life sciences, since 1988. Mr. Dovey is President of the National Venture Capital Association and is a member of the Boards of Trustees of the Coriell Institute and the University of Pennsylvania School of Nursing. Mr. Dovey is Chairman of the Board of Directors of Creative BioMolecules and also serves on the Boards of Directors of Connetics Corporation, Geron Corporation, NABI and Vivus, Inc. ANDREW S. MCCREATH, C.F.A. has been a Director of the Company since October 1996. In January 1996, Mr. McCreath became a founding partner of Lawrence & Company Inc., a private investment firm in Toronto, Canada, which specializes in the technology, health care, and leisure industries. From 1991 to December 1995, Mr. McCreath served as a partner and director of Gordon Capital Corporation, a Canadian investment bank. Mr. McCreath serves on the Board of Directors of Galaxy Brands International. CHARLES A. SANDERS, M.D. has been a Director of the Company since October 1996. From 1989 to May 1995, Dr. Sanders was Chairman of the Board of Directors and Chief Executive Officer of Glaxo and a member of the Board of Directors of Glaxo plc. Prior to joining Glaxo, Dr. Sanders held a number of positions at Squibb Corporation, a multinational pharmaceutical corporation, including Vice Chairman, Chief Executive Officer of the Science 46 and Technology Group and Chairman of the Science and Technology Committee of the Board. Dr. Sanders serves on the Boards of Directors of Magainin Pharmaceuticals, Vertex Pharmaceuticals and Staff Mark, Inc. Dr. Sanders received an M.D. degree from Southwestern Medical College of the University of Texas. BOARD OF DIRECTORS In accordance with the terms of the Company's Third Amended and Restated Certificate of Incorporation to be filed upon the completion of this Offering, the Board of Directors of the Company will be divided into three classes, denominated Class I, Class II and Class III, with members of each class holding office for staggered three-year terms. At each annual stockholder meeting commencing with the 1998 annual meeting, the successors to the Directors whose terms expire will be elected to serve from the time of their election and qualification until the third annual meeting of stockholders following their election or until a successor has been duly elected and qualified. Officers serve at the discretion of the Board. The Compensation Committee of the Board was established in April 1997 to determine the salaries and incentive compensation of the executive officers of the Company and to provide recommendations for the salaries and incentive compensation of the other employees and consultants of the Company. The Compensation Committee also administers the Company's benefit plans, including the Stock Option Plan. Mr. Dovey serves as the Chairman of the Compensation Committee and the other members of the committee are Drs. Bolognesi and Sanders. The Audit Committee of the Board was established in July 1997 to review, act on and report to the Board with respect to various auditing and accounting matters, including the selection of the Company's independent auditors, the scope of the annual audits, the fees to be paid to the independent auditors, the performance of the Company's independent auditors and the accounting practices of the Company. Dr. Treu serves as the Chairman of the Audit Committee and the other members of the committee are Mr. McCreath and Dr. Sanders. 47 EXECUTIVE COMPENSATION The following table sets forth certain information with respect to the annual and long-term compensation paid by the Company during the fiscal year ended December 31, 1996 to the Company's President and Chief Executive Officer and to the Company's two other most highly compensated executive officers who were serving as executive officers and whose 1996 compensation exceeded $100,000 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION SECURITIES ANNUAL COMPENSATION UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION M. Ross Johnson (1) 1996 $ 238,800 $50,000 117,648(2) $ -- President, Chief Executive Officer and Chief Scientific Officer Richard A. Franco (3) 1996 60,000 -- 94,118(2) 244,897(4) Former President and Chief Executive Officer Matthew A. Megaro 1996 160,300 34,000 51,765(2) -- Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary Max N. Wallace (5) 1996 144,900 26,000 52,765(2) -- Former Executive Vice President, General Counsel and Secretary
(1) Dr. Johnson was named President and Chief Executive Officer of the Company in April 1996. (2) For information regarding the vesting and subsequent exercise of these options, see the table entitled Option Grants in the Year Ended December 31, 1996 and the notes thereto and "Certain Transactions." (3) Mr. Franco resigned as President and Chief Executive Officer of the Company in March 1996. (4) Consists of amounts paid to Mr. Franco following the termination of his employment with the Company pursuant to a severance arrangement with the Company. (5) Mr. Wallace resigned as Executive Vice President, General Counsel and Secretary in July 1997. 48 STOCK OPTION INFORMATION The following table sets forth certain information concerning stock options granted to the Named Executive Officers of the Company during the year ended December 31, 1996. No stock appreciation rights were granted to any of the Named Executive Officers during 1996 and no stock appreciation rights were outstanding as of December 31, 1996. OPTIONS GRANTED IN THE YEAR ENDED DECEMBER 31, 1996
POTENTIAL REALIZABLE VALUE AT INDIVIDUAL GRANTS ASSUMED ANNUAL RATES NUMBER OF PERCENT OF OF SECURITIES TOTAL STOCK PRICE UNDERLYING OPTIONS GRANTED EXERCISE APPRECIATION OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION FOR OPTION TERM(3) NAME GRANTED(#)(1) 1996 SHARE(2) DATE 5% 10% M. Ross Johnson 117,648(4) 24% $ .34 05/01/06 $25,156 $63,750 Richard A. Franco 94,118 19 .34 03/25/06 20,125 51,000 Matthew A. Megaro 51,765(5) 11 .34 05/01/06 11,069 28,050 Max N. Wallace 52,765(6) 11 .34 05/01/06 11,282 28,592
(1) These options were granted under the Company's Stock Option Plan. (2) The exercise price per share of the options was equal to the fair market value of the Common Stock on the date of grant as determined by the Board of Directors. (3) The potential realizable value of the options reported above was calculated by assuming that the market price of the Common Stock of the Company appreciates 5% and 10% compounded annually over the term of the options (10 years). These assumed annual rates of appreciation were used in compliance with the rules of the Securities and Exchange Commission and are not intended to forecast future prices appreciation of the Common Stock of the Company. These amounts do not represent the Company's estimate of future stock price performance. The actual value realized from the options could be substantially higher or lower than the values reported above, depending upon the future appreciation or depreciation of the Common Stock during the option period and the timing of exercise of the options. (4) In October 1996, the Board of Directors granted options to purchase 35,295 shares, 35,295 shares and 47,058 shares which were scheduled to vest ratably over a 48-month period which commenced in January 1995, July 1995 and March 1996, respectively. In May 1997, the Board of Directors accelerated the vesting of these options subject to certain restrictions on the underlying shares of Common Stock which lapse over the same period of time over which the options were to vest. See "Certain Transactions." (5) In October 1996, the Board of Directors granted options to purchase 23,530 shares, 23,530 shares and 4,705 shares which were scheduled to vest ratably over a 48-month period which commenced in March 1995, July 1995 and March 1996, respectively. In May 1997, the Board of Directors accelerated the vesting of these options subject to certain restrictions on the underlying shares of Common Stock which lapse over the same period of time over which the options were to vest. See "Certain Transactions." (6) In October 1996, the Board of Directors granted options to purchase 17,648 shares, 27,648 shares and 7,469 shares which were scheduled to vest ratably over a 48-month period which commenced in March 1993, July 1995 and March 1996, respectively. In May 1997, the Board of Directors accelerated the vesting of these options subject to certain restrictions on the underlying shares of Common Stock which lapse over the same period of time over which the options were to vest. On July 10, 1997, Mr. Wallace resigned as an officer and Director of the Company and entered into an agreement with the Company pursuant to which the vesting of 3,971 of such underlying shares was accelerated and the other restrictions applicable to such 3,971 shares terminated. See "Certain Transactions." 49 YEAR-END OPTION TABLE The following table sets forth certain information concerning stock options exercised by the Named Executive Officers during 1996, the number of options held by the Named Executive Officers as of December 31, 1996, and the value of any in-the-money options as of December 31, 1996. AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1996 AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AS OF IN-THE-MONEY OPTIONS AS SHARES ACQUIRED DECEMBER 31, 1996 (1)(#) OF DECEMBER 31, 1996 (2) NAME ON EXERCISE (#) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE M. Ross Johnson -- 39,718 77,930 $ 502,830 $ 986,594 Richard A. Franco 27,452 -- -- -- -- Matthew A. Megaro -- 20,322 31,443 257,281 398,061 Max N. Wallace -- 28,232 24,533 357,419 310,588
(1) In May 1997, the Board of Directors accelerated all options set forth below subject to certain restrictions on the underlying shares of Common Stock which lapse over time. See the table entitled Options Granted in the Year Ended December 31, 1996 and the notes thereto and "Certain Transactions." (2) There was no public trading market for the Common Stock as of December 31, 1996. Accordingly, these values have been calculated on the basis of an assumed initial public offering price of $13.00 per share, less the applicable exercise price per share, multiplied by the number of shares underlying such options. STOCK OPTION PLANS The Company's Stock Option Plan was adopted by the Board of Directors in May 1996 and approved by the stockholders in July 1996. In April 1997, the Stock Option Plan was amended by the Board of Directors to increase the number of shares of Common Stock authorized for issuance thereunder. This amendment to the Stock Option Plan was approved by the stockholders of the Company in June 1997. A total of 852,941 shares of Common Stock have been authorized for issuance under the Stock Option Plan. As of June 30, 1997, options to purchase a total of 348,042 shares of Common Stock had been exercised, options to purchase a total of 260,361 shares at a weighted average exercise price of $.36 per share were outstanding, and 254,188 shares remained available for future option grants. The Stock Option Plan provides for the grant to employees of the Company (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Code and for the grant of nonstatutory stock options to employees, Directors, consultants, advisors or other independent contractors of the Company. To the extent an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value (under all plans of the Company and determined for each share as of the date the option to purchase the share was granted) in excess of $100,000, any such options will be treated as nonstatutory stock options. The Stock Option Plan is administered by the Board of Directors or a committee of the Board of Directors. Subject to the provisions of the Stock Option Plan, the Board determines the terms of options granted under the Stock Option Plan, including the number of shares subject to the option, exercise price, term and exercisability. The exercise price of all incentive stock options granted under the Stock Option Plan must be at least equal to the fair market value of the Common Stock of the Company on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the voting power of the Company's outstanding capital stock (a "10% Stockholder") must equal at least 110% of the fair market value of the Common Stock on the date of grant. The Board determines the term of options. The term of a stock option granted under the Stock Option Plan may not exceed ten years; provided, however, that the term of an incentive stock option may not exceed five years for 10% Stockholders. No option may be transferred or assigned by the optionee other than by will or the laws of descent or distribution. In the event an optionee ceases to be employed by the Company for any reason other than death or disability, each outstanding option held by such optionee will terminate and cease to be exercisable no later than three months after the date of such cessation of employment. Should the optionee's employment terminate by reason of death or 50 disability (within the meaning of Section 22(e)(3) of the Code), each outstanding option held by such optionee will terminate and cease to be exercisable no later than twelve months after the date of held by such optionee such cessation of employment. An optionee's employment shall be deemed to have terminated on account of death if the optionee dies within three months following such cessation of employment. In the event of certain transactions involving changes in control of the Company, the Stock Option Plan provides that the Board may elect, in its sole discretion, to provide that any unexercisable portion of all options will accelerate so that each option will be fully exercisable for all of the shares subject to such option as of a date prior to the effective date of the transaction as the Board so determines, conditioned upon the consummation of such transfer of control. The Board may further elect, in its sole discretion, to provide that any options which become exercisable solely by reason of transfer of control and which are not exercised as of the date such transfer of control will terminate effective as of the date of a transfer of control. The Board may terminate or amend the Stock Option Plan at any time; provided however, that without the approval of the Company's stockholders, there shall be (a) no increase in the total number of shares of stock covered by the Stock Option Plan (except in the case of a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the Common Stock), (b) no change in the class of persons eligible to receive incentive stock options, and (c) no extension of the period during which incentive stock options may be granted beyond the date which is ten years following the date the Stock Option Plan is adopted by the Company or the date the Stock Option Plan is approved by the stockholders of the Company. In any event, no amendment may adversely affect any then outstanding option or any unexercised portion thereof, without the consent of the optionee, unless such amendment is required to enable an option designated as an incentive stock option to qualify as an incentive stock option. If not previously terminated, the Stock Option Plan will terminate in 2006. As of June 30, 1997, the Company had outstanding 9,412 nonqualifed stock options under its previous stock option plan at a weighted average exercise price of $.43 per share. The Board of Directors has determined not to grant additional options under such plan. EMPLOYEE STOCK PURCHASE PLAN In August 1997, the Board of Directors adopted, and the stockholders of the Company approved, the Company's 1997 Employee Stock Purchase Plan (the "ESPP"), contingent upon and subject to the consummation of the Offering. The ESPP is intended to encourage ownership of the Company's Common Stock by employees of the Company. A maximum of 250,000 shares of Common Stock have been reserved for purchase under the ESPP (subject to certain adjustments under the ESPP). No options to purchase shares of Common Stock have been granted and no shares of Common Stock have been purchased under the ESPP. The ESPP is administered by the Compensation Committee of the Board of Directors, or such other committee as the Board designates (the "Committee"). For eligible employees who have become participants in the ESPP, the ESPP provides for the automatic grant of options to purchase shares of Common Stock ("Options"). The Options are granted on the first day of an offering period ("Offering Period"). Offering Periods are successive and overlapping 24 month periods beginning on the first trading day on or after December 1 and June 1 of each year, and each Offering Period contains four exercise periods ("Purchase Period"), each of which is approximately six months. The first Offering Period, however, will run from completion of the Offering through May 31, 1999, and the first Purchase Period will run from completion of the Offering through May 31, 1998. Employees of the Company who have been employed by the Company before the beginning of an Offering Period may participate in the ESPP for that Offering Period. Payroll deductions are accumulated in an account for each participant, based on the amounts the participant requests be withheld. The accumulated amounts are used at the end of each Purchase Period to purchase shares of Common Stock pursuant to the Option. The purchase price of a share of Common Stock under an Option will equal 85% of the lower of the fair market value of a share (a) on the first day of the Offering Period or (b) on the last day of the relevant Exercise Period. Options may not be assigned or transferred. No participant may purchase shares having a fair market value (determined as of the beginning of the Offering Period) exceeding $25,000 in any calendar year, nor may a participant purchase shares if the participant would own shares or hold outstanding options to purchase shares, or both, possessing 5% or more of the total combined voting power or value of all 51 classes of shares of the Company. A participant may withdraw from an Offering Period at any time without affecting his or her eligibility to participate in future Offering Periods. There are no tax consequences to either the participant or the Company when the Option is issued. When shares are issued upon the exercise of the Option, there are no tax consequences to the participant (except to the extent that any excess in the fair market value of the Common Stock over the exercise price constitutes a tax preference item which requires payment of the alternative minimum tax) or to the Company. A participant's Option will terminate and his or her accumulated account balance will be returned if such participant ceases to be employed by the Company. If a participant disposes of shares purchased under the ESPP at least two years after the first day of the applicable Offering Period and at least one year after the date of purchase, the participant will recognize ordinary income in the year of disposition equal to the amount of the discount. The amount of ordinary income recognized by a participant will be added to the participant's basis in the shares. Any additional gain recognized upon the disposition will be long-term capital gain. The Company will not generally be entitled to a deduction if the participant complies with these holding periods. If a participant disposes of shares purchased under the ESPP within two years from the first day of the applicable Offering Period or within one year from the date of purchase (a "disqualifying disposition"), the participant will recognize ordinary income in the year of such disposition equal to the lesser of (i) the amount by which the fair market value of the shares on the date the shares were purchased exceeded the purchase price and (ii) the amount by which the fair market value of the shares on the date of disposition exceeded the purchase price. The amount of ordinary income will be added to the participant's basis in the shares, and any additional gain or resulting loss recognized on the disposition of the shares will be a capital gain or loss. The Company will generally be entitled to a deduction in the year of the disqualifying disposition equal to the amount of ordinary income recognized by the participant as a result of the disposition. The ESPP provides that in the event of a "Substantial Corporate Change" the offering will terminate unless provision is made in writing for (i) the assumption or continuation of outstanding elections or (ii) the substitution for Options or grants of Options covering securities of a successor corporation. For purposes of the ESPP, events constituting a "Substantial Corporate Change" are (i) dissolution or liquidation of the Company, (ii) a merger, consolidation or reorganization of the Company in which the Company is not the surviving corporation, (iii) the sale of substantially all of the Company's assets or (iv) any transaction approved by the Board of Directors that results in any person or entity owning 100% of the combined voting power of all classes of stock of the Company. The Board of Directors may terminate or amend the ESPP at any time. Any amendment to the ESPP that (i) materially increases the benefits to participants, (ii) materially increases the number of securities that may be issued under the ESPP, or (iii) materially modifies the eligibility requirements for participation in the ESPP must be approved by the stockholders of the Company. If any change is made to the stock issuable under the ESPP by reason of any recapitalization, reclassification, stock split, reverse stock split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or some other increase or decrease in such Common Stock occurs without the Company's receiving consideration, appropriate adjustment will be made to the shares subject to the ESPP and the number of shares that a participant may purchase with respect to an Option. EMPLOYMENT AGREEMENTS In December 1994, the Company entered into an employment arrangement with Dr. Johnson, its President, Chief Executive Officer and Chief Scientific Officer. Pursuant to this arrangement, Dr. Johnson is entitled to receive minimum annual compensation of $225,000, an annual bonus based upon the achievement of certain milestones and all health insurance and other benefits generally made available to the Company's employees. In the event that Dr. Johnson's employment is terminated for any reason other than for cause, Dr. Johnson's employment arrangement provides that Dr. Johnson is entitled to his base salary and benefits for one year from the date of such termination. In February 1995, the Company entered into an employment arrangement with Mr. Megaro, its Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary. Pursuant to this arrangement, Mr. 52 Megaro is entitled to receive minimum annual compensation of $130,000, an annual bonus based upon the achievement of certain milestones and all health insurance and other benefits generally made available to the Company's employees. In the event that Mr. Megaro's employment is terminated for any reason other than for cause, Mr. Megaro's employment arrangement provides that Mr. Megaro is entitled to his base salary and benefits for up to six months from the date of such termination, subject to certain limitations. On July 10, 1997, Mr. Wallace resigned as an officer and Director of the Company and entered into an agreement with the Company pursuant to which he will serve as a consultant to the Company until December 31, 1997. Thereafter, Mr. Wallace will receive severance payments until June 30, 1998 based on his annual salary at the time of his resignation. In addition, the Company has agreed to terminate its right of repurchase and other restrictions with respect to approximately 24,015 shares of Common Stock held by Mr. Wallace for which such restrictions would not otherwise have lapsed at the time of his resignation. COMPENSATION OF DIRECTORS The Company does not currently compensate its Directors for attending Board or committee meetings, but reimburses Directors for their reasonable travel expenses incurred in connection with attending meetings of the Board or committees of the Board. Also, non-employee Directors are entitled to be granted options under the Company's Stock Option Plan. The Company intends to reevaluate its policy with respect to compensation of non-employee Directors after completion of this Offering. On October 21, 1996, the Company granted Dr. Sanders options to purchase 5,883 shares of Common Stock at an exercise price of $.34 per share. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Effective April 10, 1997, the Board of Directors established a Compensation Committee which is responsible for determining the salaries and incentive compensation of the executive officers of the Company and to provide recommendations for the salaries and incentive compensation of the other employees and consultants of the Company. The Compensation Committe also administers the Company's benefit plans, including the Stock Option Plan. Mr. Dovey serves as the Chairman of the Compensation Committee and the other members of the committee are Drs. Bolognesi and Sanders. None of Mr. Dovey, Dr. Bolognesi, nor Dr. Sanders was an officer or employee of the Company during 1996 or any prior year. During 1996 and prior to the formation of the Compensation Committee, the Board of Directors as a whole made decisions relating to compensation of the Company's executive officers. Dr. Johnson, the Company's President, Chief Executive Officer and Chief Scientific Officer, Mr. Wallace, the Company's former Executive Vice President, General Counsel and Secretary and Mr. Franco, the Company's former President and Chief Executive Officer, participated in all such discussions and decisions concerning the compensation of executive officers of the Company, except that Dr. Johnson and Messrs. Wallace and Franco were excluded from discussions regarding their own compensation. 53 CERTAIN TRANSACTIONS Since February 1995, the Company has issued an aggregate of 274,511 shares of Common Stock to Dr. Johnson, the Company's President, Chief Executive Officer and Chief Scientific Officer at an aggregate purchase price of $123,300, or a weighted average purchase price of $.45 per share. In June 1997, the Company issued to Dr. Johnson an aggregate of 127,060 shares of Common Stock at an aggregate purchase price of $54,636, or $.43 per share, in consideration for a full recourse secured promissory note payable to the Company, which bears interest at eight percent per annum and is due in June 1999. In May 1997, the Company issued to Dr. Johnson an aggregate of 117,648 shares of Common Stock upon the exercise of certain options granted to Dr. Johnson at an aggregate exercise price of $40,000, or $.34 per share, in consideration for a full recourse secured promissory note payable to the Company, which bears interest at eight percent per annum and is due in May 1999. In April 1997, the Company issued to Dr. Johnson an aggregate of 33,333 shares of Series C Preferred Stock (convertible into 3,922 shares of Common Stock upon the completion of the Offering) at an aggregate purchase price of $20,000, or $.60 per share. Certain shares of Common Stock purchased from the Company by Dr. Johnson are subject to the Company's right of repurchase and certain other restrictions which lapse over a period of time. Since March 1995, the Company has issued an aggregate of 146,079 shares of Common Stock to Mr. Megaro, the Company's Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary at an aggregate purchase price of $80,000, or a weighted average purchase price of $.55 per share. In June 1997, the Company issued Mr. Megaro an aggregate of 76,471 shares of Common Stock at an aggregate purchase price of $32,883, or $.43 per share, in consideration for a full recourse secured promissory note payable to the Company which bears interest at eight percent per annum and is due in June 1999. In May 1997, the Company issued Mr. Megaro an aggregate of 51,765 shares of Common Stock upon the exercise of certain options granted to Mr. Megaro at an aggregate exercise price of $17,600, or $.34 per share, in consideration for a full recourse secured promissory note payable to the Company which bears interest at eight percent per annum and is due in May 1999. In April 1997, the Company issued Mr. Megaro an aggregate of 41,667 shares of Series C Preferred Stock (convertible into 4,902 shares of Common Stock upon the completion of the Offering) at an aggregate purchase price of $25,000, or $.60 per share. Certain shares of Common Stock purchased from the Company by Mr. Megaro are subject to the Company's right of repurchase and certain other restrictions which lapse over a period of time. Since March 1995, the Company has issued an aggregate of 129,705 shares of Common Stock to Mr. Wallace, the Company's former Executive Vice President, General Counsel and Secretary at an aggregate purchase price of $37,790, or a weighted average purchase price of $.29 per share. In June 1997, the Company issued Mr. Wallace an aggregate of 34,589 shares of Common Stock at an aggregate purchase price of $14,874, or $.43 per share, in consideration for a full recourse secured promissory note payable to the Company which bears interest at eight percent per annum and is due in June 1999. In May 1997, the Company issued Mr. Wallace an aggregate of 52,765 shares of Common Stock upon the exercise of certain options granted to Mr. Wallace at an aggregate exercise price of $17,941, or $.34 per share, in consideration for a full recourse secured promissory note payable to the Company which bears interest at eight percent per annum and is due in May 1999. On July 10, 1997, Mr. Wallace resigned as an officer and Director of the Company and entered into an agreement with the Company pursuant to which he will serve as a consultant to the Company until December 31, 1997. Thereafter, Mr. Wallace will receive severance payments until June 30, 1998 based on his annual salary at the time of his resignation. In addition, the Company has agreed to terminate its right of repurchase and other restrictions with respect to approximately 24,015 shares of Common Stock held by Mr. Wallace for which such restrictions would not otherwise have lapsed at the time of his resignation. 54 The following table summarizes the shares of Preferred Stock purchased by affiliates of the Directors and the holders of more than five percent (5%) of the Common Stock. See the table entitled "Principal Stockholders" and the notes thereto for further information relating to the beneficial ownership of such shares.
SERIES A SERIES B SERIES C PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK Domain Partners II, L.P. (1).............. 2,000,000 11,095,920 Domain Partners III, L.P. (2)............. 5,932,528 2,061,997 DP III Associates, L.P. (2)............... 206,466 71,336 Biotechnology Investments Limited (3)..... 1,000,000 6,900,650 2,866,668 Lawrence & Company Inc. (4)............... 2,283,334 Sentron Medical, Inc...................... 2,000,000 1,333,334
(1) Dr. Treu and Mr. Dovey are general partners of One Palmer Square Associates, II, L.P., the general partner of Domain Partners II, L.P. (2) Dr. Treu and Mr. Dovey are general partners of One Palmer Square Associates, III, L.P., the general partner of Domain Partners III, L.P. and DP III Associates, L.P. (3) Pursuant to a contractual agreement, Domain Associates is the U.S. venture capital advisor to Biotechnology Investments Limited. Dr. Treu and Mr. Dovey are general partners of Domain Associates. (4) Mr. McCreath is a founding partner of Lawrence & Company Inc. For information regarding employment agreements with Named Executive Officers, see "Management -- Employment Agreements." For information regarding compensation of Directors, see "Management -- Compensation of Directors." 55 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of August 27, 1997 (after giving effect to the Preferred Stock Conversion) and as adjusted to give effect to the sale of the shares of Common Stock offered hereby, by (i) each person (or group of affiliated persons) who is known by the Company to own beneficially 5% or more of the outstanding shares of Common Stock, (ii) each Named Executive Officer, (iii) each of the Company's Directors, and (iv) all Directors and executive officers of the Company as a group.
NUMBER OF PERCENTAGE SHARES OWNERSHIP(1) BENEFICIALLY BEFORE AFTER BENEFICIAL OWNER OWNED(1) OFFERING OFFERING Domain Partners II, L.P. (2).................................................. 2,570,559 34.8% 26.0% Domain Partners III, L.P. (2)................................................. 2,570,559 34.8 26.0 DP III Associates, L.P. (2)................................................... 2,570,559 34.8 26.0 Biotechnology Investments Limited (3)......................................... 1,295,068 17.5 13.1 Sentron Medical, Inc. (4)..................................................... 392,158 5.3 4.0 M. Ross Johnson (5)........................................................... 188,994 2.6 1.9 Matthew A. Megaro (6)......................................................... 146,079 2.0 1.5 Max N. Wallace (7)............................................................ 132,149 1.8 1.3 Richard A. Franco............................................................. 53,334 * * Jesse I. Treu (2)............................................................. 2,570,559 34.8 26.0 Dani P. Bolognesi (8)......................................................... 98,813 1.3 1.0 Brian H. Dovey (2)............................................................ 2,570,559 34.8 26.0 Charles A. Sanders (9)........................................................ 11,765 * * Andrew A. McCreath (10)....................................................... 268,628 3.7 2.7 All executive officers and directors as a group (eight persons) (11).................................................... 3,464,603 46.9 35.1
* Less than one percent. (1) Applicable percentage ownership is based on 7,380,325 shares of Common Stock outstanding as of August 27, 1997 after giving effect to the Preferred Stock Conversion. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission based on factors including voting or investment power with respect to securities. Shares of Common Stock subject to options, warrants and convertible notes currently exercisable or convertible, or exercisable or convertible within 60 days after August 27, 1997, are deemed outstanding for computing the percentage ownership of the person or entity holding such securities, but are not deemed outstanding for computing the percentage ownership of any other person or entity. Except as indicated, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of Common Stock as beneficially owned by them, and there are no other affiliations among the stockholders listed in the table. (2) Consists of shares held by affiliated entities as follows: (i) 1,597,342 shares beneficially owned by Domain Partners II, L.P., whose general partner is One Palmer Square Associates II, L.P.; (ii) 940,533 shares beneficially owned by Domain Partners III, L.P., whose general partner is One Palmer Square Associates III, L.P.; and (iii) 32,684 shares beneficially owned by DP III Associates, L.P., whose general partner is One Palmer Square Associates III, L.P. Dr. Treu and Mr. Dovey are general partners of One Palmer Square Associates II, L.P. and One Palmer Square Associates III, L.P. In such capacities, Dr. Treu and Mr. Dovey each may be deemed to be the beneficial owner of such shares, although each disclaims such beneficial ownership except to the extent of his pecuniary interest, if any. The address for Domain Partners II, L.P., Domain Partners III, L.P., DP III Associates, L.P., Dr. Treu and Mr. Dovey is One Palmer Square, Princeton, New Jersey 08542. (3) Biotechnology Investments Limited ("BIL") has entered into a contractual arrangement with Domain Associates whereby Domain Associates serves as the United States venture capital advisor to BIL. Domain Associates has neither voting nor investment power over BIL's shares. Dr. Treu and Mr. Dovey are general partners of Domain Associates. The address for BIL is St. Peter Port House, Sausmarez Street, St. Peter Port, Guernsey, GY13PH, Channel Islands. (4) The address for Sentron Medical, Inc. is 4445 Lake Forest Drive, Suite 600, Cincinnati, Ohio 45242. (5) Includes 179,645 shares subject to certain contractual restrictions, which restrictions lapse with respect to 8,037 shares within 60 days after August 27, 1997. Does not include an aggregate of 85,518 shares beneficially owned by Michael Johnson and Greg Johnson, Mr. Johnson's sons, who have sole voting and investment power of such shares and as to which shares Mr. Johnson disclaims beneficial ownership. 56 (6) Includes (i) 91,756 shares subject to certain contractual restrictions, which restrictions lapse with respect to 3,955 shares within 60 days after August 27, 1997, and (ii) an aggregate of 47,076 shares beneficially owned by Matthew A. Megaro as custodian for Anthony Megaro and Arianna Megaro, Mr. Megaro's son and daughter. (7) Includes (i) 29,543 shares subject to certain contractual restrictions, which restrictions lapse with respect to 1,442 shares within 60 days after August 27, 1997 and (ii) 2,443 shares beneficially owned by Diana Parrish, Mr. Wallace's wife. For information concerning the subsequent lapsing of these restrictions, see "Certain Transactions." (8) Includes 13,652 shares that Dr. Bolognesi may acquire pursuant to stock options exercisable within 60 days after August 27, 1997 and the following shares as to which Dr. Bolognesi disclaims beneficial ownership: (i) 11,765 shares beneficially owned by James C. Bolognesi Irrevocable Trust, for which James C. Bolognesi, Dr. Bolognesi's son, is the sole beneficiary and Sarah Bolognesi, Dr. Bolognesi's wife, is the sole trustee; (ii) 11,765 shares beneficially owned by Michael P. Bolognesi Irrevocable Trust, for which Michael P. Bolognesi, Dr. Bolognesi's son, is the sole beneficiary and Sarah Bolognesi is the sole trustee; and (iii) 5,748 shares that Sarah Bolognesi may acquire pursuant to certain stock options exercisable within 60 days after August 27, 1997. (9) Includes 1,961 shares that Dr. Sanders may acquire pursuant to stock options exercisable within 60 days after August 27, 1997. (10) Includes 268,628 shares beneficially owned by Lawrence & Company Inc., of which Mr. McCreath is a partner. In such capacity, Mr. McCreath may be deemed to be the beneficial owner of such shares, although he disclaims such beneficial ownership except to the extent of his pecuniary interest, if any. (11) See notes (2)-(10). 57 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock (after giving effect to the Preferred Stock Conversion and the filing of the Third Amended and Restated Certificate of Incorporation upon the completion of this Offering). The following description of the capital stock of the Company is a summary, does not purport to be complete, is subject to, and qualified in its entirety by, the provisions of the Third Amended and Restated Certificate of Incorporation, which is filed as an exhibit to the Registration Statement of which this Prospectus is a part, and by applicable law. COMMON STOCK As of June 30, 1997, there were 7,354,087 shares of Common Stock outstanding, as adjusted to reflect the Preferred Stock Conversion upon the completion of this Offering, held of record by 70 stockholders. The holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights applicable to any outstanding Preferred Stock that may be issued in the future. The Company has not declared or paid cash dividends on its capital stock. The Company currently intends to retain any future earnings to fund its operations and, therefore, does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy." In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets of the Company remaining after the payment of all debts and other liabilities, subject to the prior distribution rights of shares of Preferred Stock if any, then outstanding. There are no preemptive, subscription or conversion rights applicable to the Common Stock. The outstanding shares of Common Stock are, and the shares offered by the Company in this Offering will be, when issued and paid for, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to the rights of the holders of shares of any class or series of Preferred Stock that the Company may designate and issue in the future. PREFERRED STOCK The Board of Directors has the authority, without action by the stockholders, to designate and issue 10,000,000 shares of Preferred Stock in one or more series and to designate the rights, preferences and limitations of all series, any or all of which may be superior to the rights of the Common Stock. It is not possible to state the actual effect of the issuance of any shares of Preferred Stock upon the rights of the holders of Common Stock until the Board of Directors determines the specific rights of the holders of Preferred Stock. However, the effects might include, among others, restricting dividends on Common Stock, diluting the voting power of the Common Stock, impairing the liquidation rights of the Common Stock, and making it more difficult for a third party to acquire the Company, which could have the effect of discouraging a third party from acquiring, or deterring a third party from paying a premium to acquire, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. See "Risk Factors -- Anti-Takeover Effect of Certain Charter and Bylaw Provisions." WARRANTS As of June 30, 1997, the Company had outstanding warrants entitling the purchasers thereof to purchase a total of 56,684 shares of Common Stock at a weighted-average exercise price of $4.25 per share (the "Warrants"). The Warrants have expiration dates ranging from 2003 to 2005. REGISTRATION RIGHTS The holders, or their permitted transferees, of approximately 6,261,615 shares of Common Stock and 56,684 shares of Common Stock issuable upon exercise of the Warrants (the "Registrable Securities") are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under 58 the terms of certain agreements between the Company and holders of Registrable Securities. Subject to certain limitations set forth in the agreements, certain of the holders may require the Company, at its expense, on not more than two occasions, to file a registration statement under the Securities Act with respect to the public resale of Registrable Securities. If the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to notice of the registration and are entitled to include, at the Company's expense, such shares therein, subject to certain conditions and limitations. Further, the holders of Registrable Securities may require the Company at its expense to register their shares on Form S-3 when the use of such form becomes available to the Company, subject to certain conditions and limitations. All registration expenses must be borne by the Company and all selling expenses relating to Registrable Securities must be borne by the holder of the securities being registered. DELAWARE LAW AND CERTAIN CHARTER PROVISIONS The Company is subject to the provisions of DGCL Section 203 which, subject to certain exceptions, prohibits the Company from engaging in certain business combinations with interested stockholders for a period of three years after the date of the transaction in which the stockholder became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the stockholder. For purposes of Section 203, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. The application of Section 203 could have the effect of delaying or preventing a change of control of the Company. The Company's Third Amended and Restated Certificate of Incorporation provides that effective upon this Offering, each director will serve for a three-year term and that approximately one-third of the directors are to be elected annually. Candidates for directors shall be nominated only by the Board of Directors or by a stockholder who gives written notice to the Company in the manner prescribed by the Bylaws. The number of directors may be fixed by resolution of the Board of Directors. The Board currently consists of six members and the Board may appoint new directors to fill vacancies or newly created directorships between stockholder meetings. The Third Amended and Restated Certificate of Incorporation does not provide for cumulative voting at stockholder meetings for election of directors. A director may be removed from office only for cause by the affirmative vote of a majority of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors or without cause by the affirmative vote of at least two-thirds of the voting power of the outstanding shares of stock entitled to vote in the election of directors. Any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by written consent. The staggered Board of Directors, the Company's Third Amended and Restated Certificate of Incorporation and certain other provisions of the DGCL may have the effect of delaying, deterring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price and may adversely affect the market price, and the voting and other rights of the holders, of the Common Stock. TRANSFER AGENT The transfer agent for the Company's Common Stock is Wachovia Bank of North Carolina, N.A. 59 SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock (including shares issued upon the exercise of outstanding options and warrants) in the public market after this Offering or the prospect of such sales could materially and adversely affect the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock of the Company in the public market after the restrictions described below lapse could also materially and adversely affect the prevailing market price of the Common Stock and the ability of the Company to raise equity capital in the future. Upon the completion of this Offering, the Company will have 9,880,325 shares of Common Stock outstanding (assuming no exercise of options and warrants outstanding as of August 27, 1997). Of these shares, the 2,500,000 shares sold in this Offering will be freely tradeable without restrictions unless held by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 7,380,325 shares were issued and sold in reliance upon certain exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered, or pursuant to an exemption from such registration, such as Rule 144 or Rule 144(k) under the Securities Act. Approximately 231,117 shares of Common Stock will be eligible for resale in the public market without restriction in reliance on Rule 144(k) immediately following the completion of this Offering, 225,944 shares of which are subject to the Lock-up Agreements described below. An additional 769,238 shares (763,331 shares of which are subject to the Lock-up Agreements) will be eligible for resale in the public market pursuant to Rule 701 under the Securities Act beginning approximately 90 days after the effective date of this Prospectus, except to the extent that such shares are subject to vesting restrictions or certain contractual restrictions on sale or transfer pursuant to agreements with the Company. After the expiration of the 180-day lock-up period described below, an additional 3,739,158 shares of Common Stock will be eligible for resale in the public market pursuant to Rule 144. From time to time thereafter, the remaining shares of Common Stock outstanding will become eligible for resale in the public market pursuant to Rule 144. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), who has beneficially owned restricted securities (as that term is defined in Rule 144) for at least one year is entitled to sell, within any three month period, a number of such securities that does not exceed the greater of one percent of the then outstanding class of securities (in the case of the Common Stock, approximately 98,803 shares, based on the number of shares to be outstanding after this Offering) or the average weekly trading volume in such securities in the public market during the four calendar weeks preceding the filing of the seller's Form 144, provided certain requirements concerning availability of public information concerning the issuer of the restricted securities, manner of sale and notice of sale are satisfied. A person who is not an affiliate of the issuer, has not been an affiliate within three months prior to the sale and has beneficially owned the restricted securities for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the limitations described above. Rule 144 also provides that affiliates who are selling shares that are not restricted securities must nonetheless comply with the same restrictions applicable to restricted securities with the exception of the holding period requirement. The one-year and two-year holding periods described above do not begin to run until the full purchase price or other consideration is paid by the person acquiring the restricted securities from the issuer or an affiliate of the issuer and may include the holding period of a prior owner who is not an affiliate of the issuer. Securities issued in reliance on Rule 701 (such as shares of Common Stock issued before the completion of this Offering upon the exercise of options) are also restricted securities and, beginning approximately 90 days after the effective date of this Prospectus, may be resold by persons other than affiliates of the Company subject only to the manner of sale provisions of Rule 144 and may be resold by affiliates under Rule 144 without compliance with the one-year holding period. The executive officers, directors, employees and certain other stockholders of the Company, who together beneficially own or have dispositive power over 7,366,303 shares of Common Stock outstanding prior to this Offering, have agreed that they will not sell, offer, make any short sale or otherwise dispose of or enter into any contract, arrangement or commitment to sell or otherwise dispose of any shares of Common Stock or securities 60 exerciseable into or convertible into shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus without the prior written consent of UBS Securities LLC. Approximately 90 days after the completion of this Offering, the Company intends to file a registration statement on Form S-8 under the Securities Act to register the future issuance of shares of Common Stock reserved for issuance under the Company's stock option plan. As of August 27, 1997, 244,006 shares of Common Stock were reserved for issuance pursuant to outstanding options and 254,894 shares of Common Stock were reserved for future issuance under the Company's stock option plan. Such registration statement will automatically become effective upon filing. Accordingly, shares registered thereunder will, subject to Rule 144 limitations applicable to affiliates, be available for sale in the public market, except to the extent that such shares are subject to vesting restrictions with the Company or certain contractual restrictions on sale or transfer (including options covering 242,829 shares which are subject to Lock-up Agreements). After this Offering, the holders of approximately 6,261,215 shares of Common Stock and the holders of warrants to purchase an aggregate of 56,684 shares of Common Stock will be entitled to certain demand and piggyback rights with respect to the registration of such shares under the Securities Act. If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price of the Company's Common Stock. If the Company, either on its own behalf or on behalf of certain stockholders, were to initiate a registration and include shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales could have a material adverse effect on the Company's ability to raise needed capital. See "Certain Transactions," "Shares Eligible for Future Sale," "Description of Capital Stock -- Registration Rights" and "Underwriting." 61 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below (the "Underwriters"), for whom UBS Securities LLC and Montgomery Securities are acting as representatives (the "Representatives"), have agreed to purchase from the Company the following respective number of shares of Common Stock:
UNDERWRITERS SHARES UBS Securities LLC................................................. Montgomery Securities.............................................. Total....................................................... 2,500,000
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel. The nature of the Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any such shares are purchased. The Underwriting Agreement contains certain provisions whereby if any Underwriter defaults in its obligations to purchase shares, and the aggregate obligations of the Underwriters so defaulting do not exceed ten percent of the shares offered hereby, the remaining Underwriters, or some of them, must assume such obligations. The Underwriters have advised the Company that the Underwriters propose to offer the shares of the Common Stock directly to the public at the offering price set forth on the cover of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per share to certain other dealers. After the public offering of the shares of Common Stock, the Offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock to cover over-allotments, if any, at the public offering price set forth on the cover page of this Prospectus, less the underwriting discounts and commissions. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. In connection with the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may overallot the Offering, creating a syndicate short position. In addition, the Underwriters may bid for and purchase shares of Common Stock in the open market to cover syndicate short positions or to stabilize the price of the Common Stock. Finally, the Underwriters may reclaim selling concessions from syndicate members in the Offering if the syndicate repurchases previously distributed Common Stock in syndicate covering transactions, in stabilizing transactions or otherwise. Any of these activities may stabilize or maintain the market price of the Common Stock above independent market levels. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. 62 The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The executive officers, directors, employees and certain other stockholders of the Company who beneficially own or have dispositive power over substantially all of the shares of Common Stock outstanding prior to this Offering, including Common Stock to be issued upon the completion of this Offering pursuant to the Preferred Stock Conversion, have agreed that they will not, without the prior written consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock owned by them for a period of 180 days after the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus, except that the Company may grant options under the Stock Option Plan and may issue shares pursuant to other currently outstanding options. The Representatives have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority in excess of five percent of the number of shares of Common Stock offered hereby. In June 1997, an entity affiliated with UBS Securities LLC purchased in connection with the Company's Series D Preferred Stock financing an aggregate of 2,000,000 shares of Series D Preferred Stock at a price of $.75 per share. Such Preferred Stock will convert into 235,295 shares of Common Stock upon the completion of this Offering. Prior to this Offering, there has been no public market for the Common Stock of the Company. The initial public offering price will be determined by negotiations between the Company and the Representatives and may not be indicative of the market price at which the Common Stock of the Company will trade after this Offering. Among the factors to be considered in such negotiations, in addition to prevailing market conditions, are certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. The initial public offering price set forth on the cover page of this Prospectus should not, however, be considered an indication of the actual value of the Common Stock. Such price is subject to change as a result of market conditions and other factors. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this Offering at or above the initial offering price. 63 LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Hutchison & Mason PLLC, Raleigh, North Carolina, counsel to the Company. Certain legal matters will be passed upon for the Company by Wilmer, Cutler & Pickering, Washington D.C., special counsel to the Company. As of the date of this Prospectus, two members of Hutchison & Mason PLLC beneficially own an aggregate of 3,530 shares of the Company's Common Stock and a partner of Wilmer, Cutler & Pickering beneficially owns 9,804 shares of the Company's Common Stock. A principal of AspenTree Capital, consultant to the Company and beneficial owner of 26,865 shares of the Company's Common Stock and options to purchase Common Stock, exercisable as to 3,603 shares within 60 days after September 1, 1997, serves as a consultant to Wilmer, Cutler & Pickering on certain matters other than those relating to the Company. Certain legal matters will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York. EXPERTS The financial statements of the Company, as of December 31, 1995 and 1996 and for each of the years in the three-year period ended December 31, 1996, and the period from inception (January 7, 1993) to December 31, 1996 have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The statements in this Prospectus under the captions "Risk Factors -- Uncertainty Regarding Patents and Proprietary Rights" and "Business -- Patents, Proprietary Technology and Trade Secrets", relating to U.S. patent matters, have been reviewed and approved by Pennie & Edmonds LLP, New York, New York, patent counsel to the Company, and are included herein in reliance upon such review and approval by the firm as experts in U.S. patent law. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-l under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules hereto. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and to the exhibits and schedules filed as a part thereof. Statements made in this Prospectus concerning the contents of any contracts or documents are not necessarily complete, and, in each such instance, if such contract or document is filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description, and each such statement is qualified in its entirety by reference to such exhibit. Any interested party may inspect the Registration Statement, without charge, at the public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of all or any portion of the Registration Statement, including exhibits and schedules thereto, may be obtained at prescribed rates from the Public Reference Section of the Commission at its principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's public reference facilities in Chicago, Illinois and New York, New York. The Commission maintains a World Wide Web site that will contain reports, proxy and information statements and other information regarding the Company. The address of such site is http://www.sec.gov. As a result of the filing of this Registration Statement and the completion of the Offering contemplated hereby, the Company will become subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith will be required to file reports and other information with the Commission. Such reports and other information can be inspected and copied at the public reference facilities maintained by the Commission at its principal offices. The Company intends to furnish its stockholders annual reports containing financial statements audited by its independent auditors and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 64 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) INDEX TO FINANCIAL STATEMENTS
PAGE Independent Auditors' Report................................................................................ F-2 Balance Sheets at December 31, 1995 and 1996 and June 30, 1997 (unaudited).................................. F-3 Statements of Operations for the Years Ended December 31, 1994, 1995, and 1996 and for the Six Months Ended June 30, 1996 (unaudited) and 1997 (unaudited) and for the period from Inception to December 31, 1996........................................ F-4 Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1993, 1994, 1995, and 1996 and for the Six Months Ended June 30, 1997 (unaudited)..................................... F-5 Statements of Cash Flows for the Years Ended December 31, 1994, 1995, and 1996 and for the Six Months Ended June 30, 1996 (unaudited) and 1997 (unaudited) and for the period from Inception to December 31, 1996........................................ F-6 Notes to Financial Statements............................................................................... F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Trimeris, Inc.: We have audited the accompanying balance sheets of Trimeris, Inc. (A Development Stage Company) (the "Company") as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1996 and for the cumulative period from the date of inception to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, and for the cumulative period from the date of inception to December 31, 1996, in conformity with generally accepted accounting principles. March 17, 1997 except for Note 11(a) as to which the date is June 30, 1997 Raleigh, North Carolina KPMG PEAT MARWICK LLP F-2 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS
PRO FORMA AS OF JUNE STOCKHOLDERS' AS OF DECEMBER 31, 30, EQUITY AS OF 1995 1996 1997 JUNE 30, 1997 (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.................................... $ 1,343,346 $ 131,540 $ 8,912,343 Accounts receivable.......................................... 793 32,752 44,758 Loans to employees........................................... -- 2,985 -- Prepaid expenses............................................. 9,564 45,470 311,753 Total current assets..................................... 1,353,703 212,747 9,268,854 Property, furniture and equipment, net of accumulated depreciation of $921,135, $1,611,544 and $1,911,663 at December 31, 1995, 1996 and June 30, 1997 (unaudited), respectively................................................. 1,230,394 896,672 698,372 Other assets: Equipment held for resale, less allowance of $60,972, $54,029 and $54,029 at December 31, 1995, 1996 and June 30, 1997 (unaudited), respectively.................................. 60,972 54,029 54,029 Exclusive license agreement, net of accumulated amortizaton of $6,632, $9,044 and $10,250 at December 31, 1995, 1996 and June 30, 1997 (unaudited), respectively................ 34,368 31,956 30,750 Patent costs................................................. 298,154 412,619 444,949 Equipment deposits........................................... 58,830 58,830 58,830 Other assets, net of accumulated amortization of $10,233, $14,531 and $16,518 at December 31, 1995, 1996 and June 30, 1997 (unaudited), respectively.................................. 21,427 16,876 28,967 Total other assets....................................... 473,751 574,310 617,525 Total assets............................................. $ 3,057,848 $ 1,683,729 $ 10,584,751 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable............................................. $ 118,016 $ 254,845 $ 337,173 Current installments of obligations under capital leases..... 527,406 500,248 332,332 Accrued expenses............................................. 385,797 762,548 580,012 Total current liabilities................................ 1,031,219 1,517,641 1,249,517 Notes payable.................................................. 166,718 259,000 260,000 Obligations under capital leases, excluding current installments................................................. 536,184 316,537 228,111 Total liabilities........................................ 1,734,121 2,093,178 1,737,628 Stockholders' equity (deficit): Series A Preferred Stock at $.001 par value per share. 3,000,000 shares authorized, issued and outstanding........ 3,000 3,000 3,000 $ -- Series B Preferred Stock at $.001 par value per share. 29,000,000 shares authorized; issued and outstanding 20,635,564 and 27,135,564 shares at December 31, 1995, 1996 and June 30, 1997 (unaudited), respectively................ 20,636 27,136 27,136 -- Series C Preferred Stock at $.001 per share. 20,000,000 shares authorized; issued and outstanding 3,333,335 and 13,317,740 shares at December 31, 1996 and June 30, 1997 (unaudited), respectively.................................. -- 3,333 13,317 -- Series D Preferred Stock at $.001 par value per share 10,666,667 shares authorized; issued and outstanding 9,047,962 at June 30, 1997 (unaudited).................................. -- -- 9,048 -- Common Stock at $.001 par value per share. Authorized 80,000,000 shares; issued and outstanding 352,412, 436,688 and 1,092,472 shares at December 31, 1995, 1996 and June 30, 1997 (unaudited), respectively......................... 353 437 1,092 7,354 Additional paid-in capital................................... 12,293,582 17,535,897 32,434,995 32,481,234 Deficit accumulated during the development stage............. (10,993,844) (17,965,252) (21,442,925) (21,442,925 ) Deferred compensation........................................ -- -- (1,935,000) (1,935,000 ) Notes receivable from stockholders........................... -- (14,000) (263,540) (263,540 ) Total stockholders' equity (deficit)..................... 1,323,727 (409,449) 8,847,123 $ 8,847,123 Commitments and contingencies (notes 2, 10, and 11) Total liabilities and stockholders' equity (deficit)..... $ 3,057,848 $ 1,683,729 $ 10,584,751
See accompanying notes to financial statements. F-3 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS
CUMULATIVE FROM INCEPTION (JANUARY 7, FOR THE CUMULATIVE 1993) SIX MONTHS ENDED FROM INCEPTION FOR THE YEARS ENDED DECEMBER 31, TO DECEMBER 31, JUNE 30, (JANUARY 7, 1993) 1994 1995 1996 1996 1996 1997 TO JUNE 30, 1997 (UNAUDITED) (UNAUDITED) Revenue............... $ -- $ 104,453 $ 54,465 $ 158,918 $ -- $ 211,875 $ 370,793 Operating expenses: Research and development....... 2,746,867 4,011,875 5,146,072 12,596,163 2,278,084 2,858,785 15,454,948 General and administrative.... 947,518 1,520,974 1,759,965 4,859,704 801,547 786,445 5,646,149 Total operating expenses..... 3,694,385 5,532,849 6,906,037 17,455,867 3,079,631 3,645,230 21,101,097 Operating loss...... (3,694,385) (5,428,396) (6,851,572) (17,296,949) (3,079,631) (3,433,355) (20,730,304) Other income (expense): Interest income..... 8,611 49,176 46,992 121,449 31,672 33,319 154,768 Interest expense.... (258,191) (360,158) (166,828) (789,752) (85,623) (77,637) (867,389) (249,580) (310,982) (119,836) (668,303) (53,951) (44,318) (712,621) Net loss............ $(3,943,965) $(5,739,378) $(6,971,408) $ (17,965,252) $(3,133,582) $(3,477,673) $ (21,442,925) Pro forma net loss per share............ $ (1.48) $ (0.59) Pro forma weighted average shares used in per share computations......... 4,705,000 5,880,000
See accompanying notes to financial statements. F-4 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1993, 1994, 1995 AND 1996, AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
DEFICIT ACCUMULATED NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE RECEIVABLE NUMBER PAR NUMBER PAR PAID-IN DEVELOPMENT DEFERRED FROM OF SHARES VALUE OF SHARES VALUE CAPITAL STAGE COMPENSATION STOCKHOLDERS Balance at January 7, 1993..................... -- $ -- -- $ -- $ -- $ -- -- -- $ -- Issuances of Common Stock.................... -- -- 217,647 218 1,632 -- -- -- Issuances of Series A Preferred Stock.......... 3,000,000 3,000 -- -- 1,997,000 -- -- -- Stock issuance costs...... -- -- -- -- (33,813) -- -- -- Common Stock issued in exchange for exclusive license.................. -- -- 96,471 96 40,904 -- -- -- Common Stock issued in exchange for consulting services................. -- -- 5,882 6 2,494 -- -- -- Loss for the period....... -- -- -- -- -- (1,310,501) -- -- Balance as of December 31, 1993..................... 3,000,000 3,000 320,000 320 2,008,217 (1,310,501) -- -- Issuances of Common Stock.................... -- -- 11,911 12 5,051 -- -- -- Common Stock issued in exchange for consulting services................. -- -- 4,706 5 1,995 -- -- -- Loss for the period....... -- -- -- -- -- (3,943,965) -- -- Balance as of December 31, 1994..................... 3,000,000 3,000 336,617 337 2,015,263 (5,254,466) -- -- Issuances of Common Stock.................... -- -- 15,795 16 7,894 -- -- -- Issuance of Series B Preferred Stock.......... 20,635,564 20,636 -- -- 10,297,146 -- -- -- Stock issuance costs...... -- -- -- -- (26,721) -- -- -- Loss for the period....... -- -- -- -- -- (5,739,378) -- -- Balance as of December 31, 1995..................... 23,635,564 23,636 352,412 353 12,293,582 (10,993,844) -- -- Issuances of Common Stock.................... -- -- 83,688 84 28,370 -- -- -- Common Stock issued in exchange for consulting services................. -- -- 588 -- 200 -- -- -- Issuances of Series B Preferred Stock.......... 6,500,000 6,500 -- -- 3,243,500 -- -- -- Issuances of Series C Preferred Stock.......... 3,333,335 3,333 -- -- 1,996,668 -- -- -- Stock issuance costs...... -- -- -- -- (26,423) -- -- -- Loss for the period....... -- -- -- -- -- (6,971,408) -- -- Notes receivable from stockholders for the purchase of shares....... -- -- -- -- -- -- -- (14,000) Balance as of December 31, 1996..................... 33,468,899 33,469 436,688 437 17,535,897 (17,965,252) -- (14,000) Issuances of Series C Preferred Stock.......... 9,984,405 9,984 -- -- 5,980,658 -- -- -- Issuances of Series D Preferred Stock.......... 9,047,962 9,048 -- -- 6,776,923 -- -- -- Issuances of Common Stock.................... -- -- 656,494 656 251,198 -- -- (249,540) Repurchase of Common Stock.................... -- -- (710) (1) (301) -- -- -- Stock issuance costs...... -- -- -- -- (109,380) -- -- -- Issuance of Common Stock and options at below market value............. -- -- -- -- 2,000,000 -- (2,000,000) -- Amortization of deferred compensation............. -- -- -- -- -- -- 65,000 -- Loss for the period....... -- -- -- -- -- (3,477,673) -- -- Balance as of June 30, 1997 (unaudited)......... 52,501,266 $52,501 1,092,472 $1,092 $32,434,995 $ (21,442,925) $ (1,935,000) $ (263,540) NET STOCKHOLDERS' EQUITY (DEFICIT) Balance at January 7, 1993..................... $ -- Issuances of Common Stock.................... 1,850 Issuances of Series A Preferred Stock.......... 2,000,000 Stock issuance costs...... (33,813) Common Stock issued in exchange for exclusive license.................. 41,000 Common Stock issued in exchange for consulting services................. 2,500 Loss for the period....... (1,310,501) Balance as of December 31, 1993..................... 701,036 Issuances of Common Stock.................... 5,063 Common Stock issued in exchange for consulting services................. 2,000 Loss for the period....... (3,943,965) Balance as of December 31, 1994..................... (3,235,866) Issuances of Common Stock.................... 7,910 Issuance of Series B Preferred Stock.......... 10,317,782 Stock issuance costs...... (26,721) Loss for the period....... (5,739,378) Balance as of December 31, 1995..................... 1,323,727 Issuances of Common Stock.................... 28,454 Common Stock issued in exchange for consulting services................. 200 Issuances of Series B Preferred Stock.......... 3,250,000 Issuances of Series C Preferred Stock.......... 2,000,001 Stock issuance costs...... (26,423) Loss for the period....... (6,971,408) Notes receivable from stockholders for the purchase of shares....... (14,000) Balance as of December 31, 1996..................... (409,449) Issuances of Series C Preferred Stock.......... 5,990,642 Issuances of Series D Preferred Stock.......... 6,785,971 Issuances of Common Stock.................... 2,314 Repurchase of Common Stock.................... (302) Stock issuance costs...... (109,380) Issuance of Common Stock and options at below market value............. -- Amortization of deferred compensation............. 65,000 Loss for the period....... (3,477,673) Balance as of June 30, 1997 (unaudited)......... $ 8,847,123
See accompanying notes to financial statements. F-5 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS
CUMULATIVE FROM INCEPTION (JANUARY 7, FOR THE SIX MONTHS ENDED 1993) FOR THE YEARS ENDED DECEMBER 31, TO DECEMBER 31, JUNE 30, 1994 1995 1996 1996 1996 1997 (UNAUDITED) Cash flows from operating activities: Net Loss............................... $(3,943,965) $(5,739,378) $(6,971,408) $ (17,965,252) $(3,133,582) $(3,477,673) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization of property, furniture and equipment.......................... 356,009 543,796 690,419 1,631,486 324,270 300,109 Other amortization................... 7,055 6,707 8,699 25,565 1,206 66,206 Provision for equipment held for resale............................. 16,821 -- -- 60,972 -- -- Stock issued for consulting services........................... 2,000 -- 200 4,700 -- -- Stock issued to repay interest on notes to stockholders.............. -- 194,521 -- 194,521 -- -- Debt issued for research and development........................ -- -- 193,350 193,350 -- -- Loss on disposal of property and equipment.......................... 16,686 -- -- 16,686 -- -- Decrease (increase) in assets: Accounts receivable and loans to employees.......................... (8,223) 7,430 (34,944) (35,737) (7,449) (9,021) Prepaid expenses..................... 2,680 (3,574) (35,906) (45,470) (112) (266,283) Other assets......................... (719) (16,260) 253 (68,651) 2,401 (12,091) Increase (decrease) in liabilities: Accounts payable..................... (351,554) (20,409) 136,829 254,845 45,605 82,328 Accrued expenses..................... 137,275 270,778 183,401 673,292 (111,906) (182,536) Net cash used by operating activities......................... (3,765,935) (4,756,389) (5,829,107) (15,059,693) (2,879,567) (3,498,961) Cash flows from investing activities: Purchase of property and equipment..... (57,608) (97,467) (26,529) (430,469) (234,032) (101,809) Equipment held for resale.............. 21,475 -- 6,943 (115,001) 6,943 -- Organizational costs................... -- -- -- (8,217) -- -- Patent costs........................... (20,474) (213,454) (116,454) (414,608) (76,418) (32,330) Net cash used in investing activities......................... (56,607) (310,921) (136,040) (968,295) (303,507) (134,139) Cash flows from financing activities: Proceeds from issuance of notes payable.............................. 3,600,000 2,716,718 92,282 6,409,000 71,782 1,000 Lease costs............................ -- -- -- (13,371) -- -- Proceeds from financing................ 265,650 -- -- -- -- -- Principal payments under capital lease obligations.......................... (281,067) (432,958) (576,973) (1,297,589) (62,659) (256,342) Proceeds from issuance of Common Stock................................ 5,063 7,910 14,454 29,277 -- 2,314 Proceeds from issuance of Preferred Stock................................ -- 3,869,167 5,250,001 11,119,168 3,244,664 12,776,613 Repurchase of Common Stock............. -- -- -- -- -- (302) Stock issuance costs................... -- (26,721) (26,423) (86,957) -- (109,380) Net cash provided by financing activities......................... 3,589,646 6,134,116 4,753,341 16,159,528 3,253,787 12,413,903 Net increase (decrease) in cash and cash equivalents................... (232,896) 1,066,806 (1,211,806) 131,540 70,713 8,780,803 Cash and cash equivalents at beginning of period................................. 509,436 276,540 1,343,346 -- 1,343,346 131,540 Cash and cash equivalents at end of period................................. $ 276,540 $ 1,343,346 $ 131,540 $ 131,540 $ 1,414,059 $ 8,912,343 Supplemental disclosure of cash flow information: Cash paid during the period for interest............................. $ 154,097 $ 178,913 $ 154,228 $ 691,728 $ 85,623 $ 56,233
Supplemental disclosures of noncash investing and financing activities are described in Note 8. See accompanying notes to financial statements. F-6 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Trimeris, Inc. was incorporated on January 7, 1993 to discover and develop novel therapeutic agents that block viral infection by inhibiting viral fusion with host cells. The financial statements have been prepared in accordance with Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises," to recognize the fact that the Company is devoting substantially all of its efforts to establishing a new business and planned principal operations have not commenced. CASH EQUIVALENTS The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. PROPERTY, FURNITURE AND EQUIPMENT Property, furniture and equipment are recorded at cost. Property, furniture and equipment under capital leases are initially recorded at the present value of minimum lease payments at the inception of the lease. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Property, furniture and equipment held under capital leases and leasehold improvements are amortized using the straight line method over the lesser of the lease term or estimated useful life of the asset. ORGANIZATION COSTS Organization costs are amortized using the straight-line method over five years. EXCLUSIVE LICENSE The exclusive license is amortized using the straight-line method over seventeen years. PATENTS The costs of patents are capitalized and will be amortized using the straight-line method over the remaining lives of the patents from the date the patents are granted. RESEARCH AND DEVELOPMENT Research and development costs are charged to operations as incurred. DEFERRED FINANCING COSTS Financing costs were incurred as part of the Company's capital lease agreements and are amortized straight-line over the lease term. INCOME TAXES The Company uses the asset and liability method of accounting for income taxes. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- CONTINUED 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED) Upon the completion of the Company's initial public offering (the "Offering") of Common Stock (the "Common Stock"), all of the outstanding shares of Series A, B, C, and D Preferred Stock (the "Preferred Stock") will convert into 6,261,615 shares of Common Stock. The unaudited pro forma presentation of stockholders' equity has been prepared giving effect to the conversion of all the Preferred Stock into Common Stock on June 30, 1997, assuming that the initial public offering price per share in connection with this Offering is $13.00. PRO FORMA NET LOSS PER SHARE (UNAUDITED) The pro forma net loss per share is computed based upon the weighted average number of common shares and common equivalent shares (using the treasury stock method) outstanding after certain adjustments described below. Common equivalent shares are not included in the per share calculations where the effect of their inclusion would be anti-dilutive, except that, in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 83, all common and common equivalent shares issued during the twelve-month period prior to the initial filing of the registration statement relating to the Offering, even when anti-dilutive, have been included in the calculation as if they were outstanding for all periods, using the treasury stock method and an assumed initial public offering price of $13.00 per share. The pro forma net loss per common share gives effect to the mandatory conversion of all outstanding shares of Preferred Stock into 6,261,615 shares of Common Stock upon the completion of this Offering. HISTORICAL NET LOSS PER COMMON SHARE Net loss per common share on a historical basis is computed in the same manner as pro forma net loss per common share, except that Series A, B, C and D Preferred Stock are not assumed to be converted. Net loss per common share on a historical basis is as follows:
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, 1994 1995 1996 1996 1997 (UNAUDITED) Net loss to common stockholders.......... $(3,943,965) $(5,739,378) $(6,971,408) $(3,133,582) $(3,477,673) Net loss per common share................ $ (3.57) $ (5.06) $ (6.04) $ (2.77) $ (2.96) Weighted average number of common and common equivalent shares outstanding... 1,105,000 1,134,000 1,154,000 1,133,000 1,173,000
Fully diluted net loss per common share is the same as primary net loss per common share. STOCK SPLIT Effective July 11, 1997, the Company declared a one for eight and one-half reverse stock split for common shareholders. This stock split has been retroactively applied and all periods presented have been restated. The conversion prices for the Preferred Stock discussed in Note 4 will be adjusted for this reverse stock split. F-8 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- CONTINUED 2. LEASES The Company is obligated under various capital leases for furniture and equipment that expire at various dates during the next four years. The gross amount of furniture and equipment and related accumulated amortization recorded under capital leases and included in property, furniture and equipment were as follows at December 31, 1995, 1996 and June 30, 1997 (unaudited):
JUNE 30, 1995 1996 1997 (UNAUDITED) Furniture and equipment......................... $1,790,110 $ 1,930,423 $ 1,980,665 Less accumulated amortization................... (780,082) (1,084,160) (1,347,996) $1,010,028 $ 846,263 $ 632,669
The Company also has several non-cancelable operating leases, primarily for office space and office equipment, that extend through September 1999. Rental expense, including maintenance charges, for operating leases during 1994, 1995, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) was $454,307, $532,146, $552,001, $254,717 and $300,018 respectively. Future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 1996 are:
CAPITAL OPERATING LEASES LEASES Year ending December 31: 1997........................................................... $552,675 $ 514,774 1998........................................................... 274,991 520,721 1999........................................................... 114,871 419,255 2000........................................................... 7,117 -- Total minimum lease payments................................... 949,654 $1,454,750 Less amount representing interest.............................. 132,869 Present value of net minimum capital lease payments............ 816,785 Less current installments of obligations under capital leases.... 500,248 Obligations under capital leases, excluding current installments................................................ $316,537
Additionally, under a warrant agreement dated August 24, 1993 with a lessor, the Company issued warrants to acquire Series B Preferred Stock at the initial Series B Preferred Stock per share offering price, such that the aggregate purchase price for the shares equals $118,756. The warrants shall be exercisable prior to the earlier of the tenth annual anniversary date of the grant date or fifth anniversary date of Trimeris' Initial Public Offering. The shares have not been issued as of December 31, 1996. During the year ended December 31, 1995, the lease with the aforementioned lessor was amended to increase the credit limit by $750,000 to $2.0 million. As part of this amendment, Trimeris granted the lessor additional warrants to purchase shares valued at $71,250 of Series B Preferred Stock at the initial per share offering price. 3. NOTES PAYABLE In March 1995, the Company entered into a Financial Assistance Agreement with the North Carolina Biotechnology Center (the "Center"). Under this agreement, the Center agreed to extend to the Company a line of credit up F-9 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- CONTINUED 3. NOTES PAYABLE -- Continued to $250,000 for the funding of certain research performed by the Company. This note payable is unsecured and bears interest at 8.5% on the balance of all outstanding principal. The note matures in March 2000, at which time principal and accrued interest is to be repaid. At December 31, 1995, 1996 and June 30, 1997 (unaudited), the total principal and interest due were $162,218, $262,600 and $284,000, respectively. In November 1995, the Company entered into a Collaborative Funding Assistance Agreement with the Center. Under this agreement, the Center agreed to lend the Company up to $10,000 for the funding of certain research performed by the Company. This note payable is unsecured and bears interest at 8.75% on the balance of all outstanding principal. The note matures in December 2000, at which time principal and accrued interest is to be repaid. At December 31, 1995, 1996 and June 30, 1997 (unaudited), the total principal due was $4,500, $9,000 and $10,000, respectively. 4. STOCKHOLDERS' EQUITY (DEFICIT) The Company has the authority to issue 121,750,000 shares of stock consisting of 69,750,000 shares of Common Stock, par value $0.001 per share, and 52,000,000 shares of Preferred Stock, par value $0.001 per share, of which 3,000,000 shares shall be designated Series A Preferred Stock, 29,000,000 shares shall be designated Series B Preferred Stock, and 20,000,000 shares shall be designated Series C Preferred Stock. During 1996 and the six months ended June 30, 1997 (unaudited), loans with an interest rate of 8% totaling $14,000 and $249,540, respectively, were issued to employees of the Company for purchase of shares of the Company's Common Stock. This amount has been presented as contra-equity in the statement of stockholders' equity (deficit). PREFERRED STOCK DIVIDENDS Holders of the Preferred Stock are not entitled to receive dividends, provided however, that in the event the Company shall at any time declare or pay a dividend on the Common Stock, other than a stock dividend, each holder of Preferred Stock shall receive a dividend equal to the dividend that would have been payable to such holder if the Preferred Stock had been converted into Common Stock on the date of record for holders of the Common Stock. In the event of a merger or consolidation, holders of Preferred Stock will have the right to redeem the shares within 15 days of receipt of such notice. Any redeemed shares will be considered permanently retired. LIQUIDATION Upon any liquidation, dissolution, or winding up of the Company, holders of the Preferred Stock shall be entitled, before any distribution is made upon the Common Stock, to be paid for each share in cash an amount equal to (i) $0.67 per share in the case of the Series A Preferred Stock, (ii) $0.50 per share in the case of the Series B Preferred Stock or (iii) $0.60 per share in the case of Series C Preferred Stock in addition to other considerations. If the assets to be distributed are insufficient to permit full payment to the preferred stockholders, then the assets of the Company shall be distributed on a pro rata basis to each class of preferred stockholders. The value of any noncash distribution shall be determined by an independent appraiser or securities exchange if the item is an actively traded security. F-10 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- CONTINUED 4. STOCKHOLDERS' EQUITY (DEFICIT) -- Continued CONVERSION Holders of Preferred Stock have the right, at any time, to convert into such number of shares of common stock as is obtained by multiplying the number of shares to be converted by the preferred stock's "Basic Liquidation Preference" ($0.67 for Series A Preferred Stock, $0.50 for Series B Preferred Stock $0.60 for Series C Preferred Stock and $0.75 for Series D Preferred Stock) and dividing such amount by the Preferred Stock's conversion price in effect at the time of conversion. The respective preferred stock conversion prices are as follows as of December 31:
1994 1995 1996 Series A.............................. $0.670 $0.534 $0.524 Series B.............................. -- 0.500 0.500 Series C.............................. -- -- 0.600
The Preferred Stock conversion price will be reduced in the event of the Company's issuing any shares of its Common Stock without consideration or for a consideration per share of less than the conversion price of any series of Preferred Stock in effect immediately prior to the time of such issue or sale, subject to certain limitations. The Company shall at times reserve and keep available out of its authorized Common Stock or treasury shares, such number of common shares sufficient to cover the conversion of all outstanding Preferred Stock. The Company may at its option, require the conversion of all (but not less than all) the shares at the time outstanding if the Company shall complete a firm commitment underwritten public offering involving the sale of the Company's Common Stock (i) at a price to the public of at least $10 per share appropriately adjusted for stock splits and dividends and stock combinations, and (ii) yielding gross proceeds to the Company of at least $20 million. VOTING Each holder of Preferred Stock shall be entitled to one vote for each share of Common Stock which would be issuable to holder upon conversion. Each holder of Common Stock is entitled to one vote per share. Preferred and common stockholders shall vote together as a class. RESTRICTIONS The Company cannot, without the consent of the preferred stockholders: (i) authorize any new classes of stock unless that class ranks junior to the Preferred Stock, (ii) increase the authorized amount of Preferred Stock, or (iii) authorize any obligation or security which is convertible into Preferred Stock. COMMON STOCK DIVIDENDS The holders of Common Stock shall be entitled to receive dividends as from time to time may be declared by the Board of Directors taking into account the rights of the preferred stockholders. LIQUIDATION After payment to the preferred stockholders as discussed above, holders of Common Stock shall be entitled, together with the holders of Preferred Stock, to share ratably, according to the number of shares held by them in all remaining assets of the Company available for distribution. F-11 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- CONTINUED 5. STOCK OPTION PLAN In 1993, the Company adopted a stock option plan which allows for the issuance of non-qualified and incentive stock options. During 1996, the Trimeris, Inc. New Stock Option Plan (the "Stock Option Plan") was implemented that replaced the 1993 plan. Under this new Stock Option Plan, the Company may grant non-qualified or incentive stock options for up to 852,941 shares of Common Stock. The exercise price of each option shall not be less than the fair market value of the Company's Common Stock on the date of grant and an option's maximum term is ten years. All outstanding incentive stock options have been issued at $.34. The vesting period occurs ratably over four years. All incentive stock options which had been granted under the 1993 plan were cancelled at inception of the new Stock Option Plan while the non-qualified stock options remain outstanding at an exercise price of $.43. No more grants will be made under the 1993 plan. Stock option transactions for the years ended December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997 (unaudited) are as follows:
JUNE 30, 1994 1995 1996 1997 (UNAUDITED) Options outstanding at January 1.............................. 27,276 141,411 166,191 482,804 Granted....................................................... 114,341 37,753 572,206 100,782 Exercised (at $.43/share)..................................... (147) (4,755) (28,394) (319,540) Cancelled..................................................... (59) (8,218) (227,199) (3,685) Options outstanding at end of period.......................... 141,411 166,191 482,804 260,361
The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans. Accordingly, compensation cost related to stock options issued to employees would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. For the period ended June 30, the Company has recorded a deferred charge of $2.0 million, representing the difference between the exercise price and the deemed fair value of the Company's Common Stock for 347,529 shares of Common Stock and 79,959 shares subject to Common Stock Options granted in the second quarter of 1997. The deferred compensation will be amortized to expense over the period the shares and options vest, generally four years. SFAS 123, Accounting for Stock-Based Compensation, permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25. The pro forma disclosures have not been included as the fair value of the options granted in 1996 and 1995 are immaterial. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: Estimated dividend yield......................................... 0.00% Expected stock price volatility.................................. 0.00% Risk-free interest rate.......................................... 5.07-6.00% Expected life of options......................................... 5-7 years
6. INCOME TAXES At December 31, 1996, the Company has net operating loss carryforwards (NOL's) for federal income tax purposes of approximately $17.4 million which expire in varying amounts between 2009 and 2012. The Company F-12 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- CONTINUED 6. INCOME TAXES -- Continued has NOL's for state tax purposes of approximately $17.4 million which expire in varying amounts between 1999 and 2002. Additionally, the Company has research and development credits of $261,000 which expire in varying amounts between 2008 and 2011. The Tax Reform Act of 1986 contains provisions which limit the ability to utilize net operating loss carryforwards in the case of certain events including significant changes in ownership interests. If the Company's NOL's are limited, and the Company has taxable income which exceeds the permissible yearly NOL, the Company would incur a federal income tax liability even though NOL's would be available in future years. The components of deferred tax assets and deferred tax liabilities as of December 31, 1995 and 1996 and June 30, 1997 (unaudited) are as follows:
JUNE 30, 1995 1996 1997 (UNAUDITED) Deferred tax assets: Tax loss carryforwards............................................... $ 4,100,000 $ 6,823,000 $ 8,165,000 Tax credits.......................................................... 158,000 261,000 297,000 Reserves and accruals................................................ 76,000 211,000 56,000 Start-up costs....................................................... 114,000 109,000 57,000 4,448,000 7,404,000 8,575,000 Valuation allowance.................................................... (4,448,000) (7,404,000) (8,575,000) Net deferred asset................................................... -- -- -- Deferred tax liabilities: Deferred tax liability............................................... -- -- -- Net deferred tax assets and (liability)........................... $ -- $ -- $ --
The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets. 7. PROFIT SHARING PLAN The Company has adopted a 401(k) Profit Sharing Plan (the "Plan") covering all qualified employees. The effective date of the Plan is January 1, 1994. Participants may elect a salary reduction from 1% to 10% as a contribution to the Plan. Modifications of the salary reductions may be made annually. The Plan permits the Company to match up to 8% of a participant's salary, but to date, the Company has elected not to match participants' contributions. The normal retirement age shall be the later of a participant's 65th birthday or the fifth anniversary of the first day of the Plan year in which participation commenced. The Plan does not have an early retirement provision. 8. SUPPLEMENTARY CASH FLOW INFORMATION Capital lease obligations of $345,104, $330,168 and $195,179 were incurred in 1995 and 1996 and for the six months ended June 30, 1997 (unaudited), respectively, for leases of new furniture and equipment. During 1995, the Company exchanged notes payable to stockholders, including accrued interest of $6.4 million for Series B Preferred Stock. F-13 TRIMERIS, INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- CONTINUED 8. SUPPLEMENTARY CASH FLOW INFORMATION -- Continued Shares issued under the license and consulting agreements have been valued by the Board of Directors taking into consideration the fair value of the most recently issued preferred stock or the value of the services, whichever is more readily determinable. 9. EQUITY FINANCING An initial investment of $2 million was provided by Domain Partners II, L.P. ("Domain") and Biotechnology Investments Limited ("BIL") to fund the start up phase of the Company. During the year ended December 31, 1995, Domain, BIL and others invested an additional $3.9 million to fund continued operations of the Company through the purchase of shares of Series B Preferred Stock. In addition, the Company exchanged notes payable, including accrued interest, of $6.4 million for shares of Series B Preferred Stock. These notes were payable to Domain and BIL and were entered into during the years ended December 31, 1994 and 1995. A total of 20,635,564 shares were issued for a total consideration of $10.3 million. In March and October 1996, Domain, BIL, and others invested an additional $5.3 million to fund continued operations of the Company through the purchase of 6,500,000 shares of Series B Preferred Stock and 3,333,335 shares of Series C Preferred Stock, respectively. Common stock was issued during 1994, 1995, and 1996 through purchase by Company personnel and also through the exercise of stock options. 10. CONTINGENCIES The Company is involved in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the financial position or results of operations of the Company. 11. SUBSEQUENT EVENTS (a) During the six months ended June 30, 1997 equity financing of approximately $12.8 million has been received from current and new investors. (b) The Company's Certificate of Incorporation was amended on July 11, 1997, giving the Company the authority to issue 142,666,667 shares of stock consisting of 80,000,000 shares of Common Stock, par value $.001 per share, and 62,666,667 shares of Preferred Stock, par value $0.001 per share, of which 3,000,000 shares shall be designated Series A Preferred Stock, 29,000,000 shares shall be designated Series B Preferred Stock, 20,000,000 shares shall be designated Series C Preferred Stock, and 10,666,667 shares shall be designated Series D Preferred Stock. (c) During 1997, the Company entered into agreements for the production of drug material which require maximum payments of approximately $2.3 million, subject to acceptance of the material under the terms of the contracts. (d) On August 26, 1997, the Board of Directors adopted, and the stockholders of the Company approved, the Trimeris, Inc. 1997 Employee Stock Purchase Plan, subject to and contingent upon the consummation of the Offering. F-14 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. TABLE OF CONTENTS
Page Prospectus Summary............................... 3 Risk Factors..................................... 6 Use of Proceeds.................................. 19 Dividend Policy.................................. 19 Capitalization................................... 20 Dilution......................................... 21 Selected Financial Data.......................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations............ 23 Business......................................... 26 Management....................................... 45 Certain Transactions............................. 54 Principal Stockholders........................... 56 Description of Capital Stock..................... 58 Shares Eligible for Future Sale.................. 60 Underwriting..................................... 62 Legal Matters.................................... 64 Experts.......................................... 64 Additional Information........................... 64 Index to Financial Statements.................... F-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2,500,000 Shares Trimeris, Inc. Common Stock PROSPECTUS , 1997 UBS Securities Montgomery Securities PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the expenses to be paid by Trimeris, Inc. (the "Registrant" or the "Company") in connection with the issuance and distribution of the securities being registered hereby other than underwriting discounts and commissions. Registration Fee -- Securities and Exchange Commission.................................................. $ 12,197 Filing Fee -- National Association of Securities Dealers, Inc........................................... 4,525 Filing and Listing Fee -- Nasdaq National Market........................................................ 42,177 Transfer Agent's Fee and Expenses*...................................................................... 5,000 Legal Fees and Expenses*................................................................................ 325,000 Printing and Engraving Expenses*........................................................................ 175,000 Accounting Fees and Expenses*........................................................................... 150,000 Blue Sky Fees and Expenses (including legal fees)*...................................................... 15,000 Miscellaneous*.......................................................................................... 71,101 Total............................................................................................ $800,000
* Estimated ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "DGCL") permits indemnification of officers and directors of the Company under certain conditions and subject to certain limitations. Section 145 of the DGCL also provides that a corporation has the power to purchase and maintain insurance on behalf of its officers and directors against any liability asserted against such person and incurred by him and her in such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of Section 145 of the DGCL. The Company's Third Amended and Restated Certificate of Incorporation to be filed upon the completion of this Offering contains certain provisions permitted under DGCL relating to the liability of directors. These provisions eliminate a director's personal liability for monetary damages resulting from a breach of fiduciary duty, except in certain circumstances involving certain wrongful acts, such as (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL, (iv) for any transaction from which the director derives an improper personal benefit or (v) acts or omissions occurring prior to the date of these provisions. These provisions do not limit or eliminate the rights of the Company or any stockholder to seek equitable relief, such as an injunction or rescission, in the event of a breach of director's fiduciary duty. These provisions will not alter a director's liability under federal securities laws. The Company's Third Amended and Restated Certificate of Incorporation also contains provisions indemnifying the directors and officers of the Company to the fullest extent permitted by DGCL. The Amended and Restated Bylaws of the Company to be effective upon the completion of this Offering provide that the Company shall indemnify its directors and executive officers to the fullest extent permitted by the DGCL. The rights to indemnity thereunder continue as to a person who has ceased to be a director, officer, employee or agent and inure to the benefit of the heirs, executors and administrators of the person. In addition, expenses incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that he or she is or was a director or officer of the Company (or was serving at the Company's request as a director or officer of another corporation) shall be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Company as authorized by the relevant section of the DGCL. II-1 The Company intends to enter into indemnification agreements with each of its directors and executive officers prior to the completion of the Offering. Generally, the indemnification agreements will provide the maximum protection available under the Third Amended and Restated Certificate of Incorporation, the Amended and Restated Bylaws and the DGCL as it may be amended from time to time. Under such indemnification agreements, however, an individual will not receive indemnification for judgments, settlements or expenses if he or she is found liable to the Company (except to the extent the court determines he or she is fairly and reasonably entitled to indemnity for expenses), for settlements not approved by the Company or for settlements and expenses if the settlement is not approved by the court. The indemnification agreements provide for the Company to advance to the individual any and all expenses (including attorneys' fees) incurred in investigating or defending any such action, suit or proceeding. Also, the individual must repay such advances upon a final judicial decision that he or she is not entitled to indemnification. The Underwriting Agreement (to be filed as Exhibit 1.1 to this Registration Statement) contains provisions by which the Underwriters have agreed, severally and not jointly, to indemnify and hold harmless the Company, each person, if any, who controls the Company, within the meaning of Section 15 of the Securities Act, each director of the Company, and each officer of the Company who signs this Registration Statement, from and against any liability caused by any information furnished in writing by the Underwriters for use in the Registration Statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Except as hereinafter set forth, there have been no securities sold by the Registrant within the last three years which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). Amounts in this Item 15 have been adjusted to reflect the 1-for-8.5 reverse stock split of the Registrant effected on July 11, 1997. (a) Issuances of Securities On July 1, 1997, the Registrant issued 10,589 shares of Common Stock to a key employee of the Registrant at a purchase price of $.43 per share. On June 27, 1997, the Registrant issued 9,047,962 shares of Series D Preferred Stock to certain existing stockholders and new investors at a purchase price of $.75 per share. On June 11, 1997, the Registrant issued an aggregate of 117,648 shares of Common Stock to certain executive officers and key employees of the Registrant at a purchase price of $.43 per share payable pursuant to the terms of certain promissory notes. On June 2, 1997, the Registrant issued an aggregate of 219,295 shares of Common Stock to certain executive officers and key employees of the Registrant at a purchase price of $.43 per share payable pursuant to the terms of certain promissory notes. In a series of closings held on October 7, 1996, January 16, 1997, March 27, 1997 and April 29, 1997, the Registrant issued an aggregate of 13,317,739 shares of Series C Preferred Stock to certain existing stockholders and new investors at a purchase price of $.60 per share. On October 31, 1996, the Registrant issued an aggregate of 41,177 shares of Common Stock to certain executive officers and key employees of the Registrant at a purchase price of $.34 per share payable pursuant to the terms of certain promissory notes. On June 25, 1996, the Registrant issued an aggregate of 14,118 shares of Common Stock to a former executive officer of the Registrant at a purchase price of $.34 per share. On January 26, 1996, the Registrant issued an aggregate of 589 shares of Common Stock to consultants of the Registrant at a purchase price of $.43 per share. On July 31, 1995, the Registrant issued a warrant to purchase up to an aggregate of 100,000 shares of Series B Preferred Stock (which warrant has been amended to provide for the purchase shares of Common Stock upon the completion of this Offering) at an exercise price of $0.50 per share to North Carolina Biotechnology Center. II-2 In a series of closings held on July 17, 1995, August 16, 1995, and March 22, 1996, the Registrant issued an aggregate of 27,135,564 shares of Series B Preferred Stock to existing stockholders and new investors at a purchase price of $.50 per share. On March 1, 1995, the Registrant issued an aggregate of 17,648 shares of Common Stock to certain executive officers and key employees of the Registrant at a purchase price of $.43 per share. On February 21, 1995, the Registrant issued 5,883 shares of Common Stock to an executive officer of the Registrant at a purchase price of $.43 per share. On September 16, 1994, the Registrant sold 11,765 shares of Common Stock to a former executive officer at a purchase price of $.43 per share. In a series of transactions on August 24, 1993, October 26, 1994 and February 7, 1995, the Registrant issued warrants to purchase an aggregate of 381,808 shares of Series B Preferred Stock (which warrant has been amended to provide for the purchase of shares of Common Stock upon the completion of this Offering) at an exercise price of $.50 per share to its venture leasing partner in consideration for certain leasing arrangements. Since June 1994, the Registrant has issued options to certain employees, directors, consultants and others to purchase an aggregate of 706,782 shares of Common Stock at a weighted average exercise price of $.44 per share. 356,634 of such options have been exercised, 271,562 of such options remain outstanding at a weighted average exercise price of $.39 per share and 77,586 of such options have been terminated. (b) No underwriters were involved in connection with the sales of securities referred to in paragraph (a) of this Item 15. (c) The shares of Series B, Series C and Series D Preferred Stock described in paragraph (a) of this Item 15 were issued in reliance on the exemption provided by Rule 506 of Regulation D promulgated pursuant to the Securities Act, as well as Section 4(2) of the Securities Act. The issuances of compensatory stock awards, stock options and the shares of Common Stock upon the exercise thereof as described in paragraph (a) of this Item 15 were issued in reliance upon the exemption provided by Section 3(b) of the Securities Act and Rule 701 promulgated thereunder, as well as Section 4(2) of the Securities Act. The warrants described in paragraph (a) of this Item 15 were issued upon reliance on exemption provided by Section 4(2) of the Securities Act. Appropriate legends are affixed to the stock certificates and warrant certificates issued in the aforementioned transactions. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1.1 * Form of Underwriting Agreement. 3.1 ** Second Restated Certificate of Incorporation of the Registrant. 3.2 Form of Third Amended and Restated Certificate of Incorporation of the Registrant (to be filed with the Secretary of State of Delaware upon the completion of the Offering). 3.3 Bylaws of the Registrant. 3.4 Form of Amended and Restated Bylaws of the Registrant (to be adopted upon the completion of the Offering). 4.1 ** Specimen certificate for shares of Common Stock. 4.2 Description of Capital Stock (contained in the Third Amended and Restated Certificate of Incorporation of the Corporation of the Registrant, filed as Exhibit 3.2). 5.1 Opinion of Hutchison & Mason PLLC with respect to the legality of the shares being registered. 10.1 License Agreement dated February 3, 1993, between the Registrant and Duke University. 10.2 Sublease Agreement dated November 19, 1993, by and among the Registrant, Sphinx Pharmaceuticals Corporation and University Place Associates and as amended by the Lease Amendment dated August 15, 1994, and Second Agreement of Sublease dated January 16, 1995. 10.3 Cooperation and Strategic Alliance Agreement dated April 21, 1997, between the Registrant and MiniMed Inc. 10.4 * Trimeris, Inc. New Stock Option Plan. 10.5 ** Trimeris, Inc. Employee Stock Purchase Plan.
II-3 10.6 Form of Promissory Notes executed by certain executive officers in favor of the Registrant, and related collateral documents. 10.7 Form of Stock Restriction Agreements between the Registrant and certain executive officers. 10.8 Form of Stock Pledge Agreement between the Registrant and certain executive officers. 10.9 Employment Offer Letter with M. Ross Johnson dated December 15, 1994. 10.10 Employment Offer Letter with Matthew A. Megaro dated February 23, 1995. 10.11 Sixth Amended and Restated Registration Rights Agreement dated June 27, 1997, by and among the Registrant and certain stockholders of the Registrant. 10.12 Agreement with Max N. Wallace dated July 10, 1997. 10.13** Form of Indemnification Agreements. 11.1 Computation of Net Income (Loss) Per Share. 23.1 Consent of Hutchison & Mason PLLC (included in Exhibit 5.1). 23.2 ** Consent of KPMG Peat Marwick, LLP, Independent Auditors. 23.3 ** Consent of Pennie & Edmonds. 24.1 Power of Attorney (included in signature page to Registration Statement). 27 Financial Data Schedule.
* To be filed by amendment ** Filed herewith. (b) Financial Statement Schedules. All financial statement schedules have been omitted because either they are not required, are not applicable, or the information is otherwise set forth in the Financial Statements and Notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing or closings specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit promt delivery to each purchaser. The undersigned Registrant hereby further undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(b) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Durham, County of Durham, State of North Carolina, on this 5th day of September, 1997. TRIMERIS, INC. By: /s/ M. ROSS JOHNSON M. ROSS JOHNSON, PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF SCIENTIFIC OFFICER WITNESS our hands on this 5th day of September, 1997. /s/ JESSE I. TREU* /s/ ANDREW MCCREATH* Jesse I. Treu, Ph.D. Andrew McCreath Chairman of the Board of Directors Director /s/ DANI P. BOLOGNESI* /s/ MATTHEW A. MEGARO Dani P. Bolognesi, Ph.D. Matthew A. Megaro Director Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary (Principal Accounting and Financial Officer) /s/ BRIAN H. DOVEY* /s/ CHARLES A. SANDERS* Brian H. Dovey Charles A. Sanders, M.D. Director Director /s/ M. ROSS JOHNSON M. Ross Johnson, Ph.D. President, Chief Executive Officer, Chief Scientific Officer and Director (Principal Executive Officer) * Executed on behalf of these persons by Matthew A. Megaro, duly appointed Attorney-in-fact of each such person. /s/ MATTHEW A. MEGARO Matthew A. Megaro Attorney-in-Fact
EX-3.(I) 2 EXHIBIT 3-1 SECOND RESTATED CERTIFICATE OF INCORPORATION OF TRIMERIS, INC. Pursuant to Section 245 of the General Corporation Law of the State of Delaware TRIMERIS, INC., a corporation duly organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), and which was incorporated under the name SL-1 Pharmaceuticals, Inc. on January 7, 1993, does hereby certify as follows: FIRST: that the following resolutions were duly adopted by written consent in lieu of meeting of the Board of Directors of the Corporation pursuant to Section 141(f) of the General Corporation Law of the State of Delaware on May 28, 1997, setting forth proposed amendments to and the restatement of the Certificate of Incorporation of the Corporation, as previously amended and supplemented (the "Certificate of Incorporation"), in accordance with Section 245 of the General Corporation Law of the State of Delaware; determining that the capital of the Corporation will not be decreased on account of such amendments to and restatement of the Certificate of Incorporation; and, declaring such amendments to and restatement of the Certificate of Incorporation to be advisable and directing that such amendments to and restatement of the Certificate of Incorporation be submitted to the stockholders of the Corporation for their approval: "RESOLVED, that the Certificate of Incorporation of the Corporation, as heretofore amended or supplemented, be amended and restated in its entirety to read as follows (the "Second Restated Certificate of Incorporation"): * * * * * * Article 1. The name of the corporation is TRIMERIS, INC. Article 2. The address of the registered office of the corporation in the State of Delaware is 1013 Centre Road, Wilmington, New Castle County, Delaware 19805 and the name of the registered agent is Corporation Service Company. Article 3. The purpose for which the corporation is organized is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. 1 Article 4. The aggregate number of shares of all classes of stock which the Corporation shall have authority to issue is 142,666,667 shares, consisting of 80,000,000 shares of Common Stock, par value $0.001 per share (herein called the "Common Stock"), and 62,666,667 shares of Convertible Preferred Stock, par value $0.001 per share (herein called the "Preferred Stock"), of which 3,000,000 shares shall be designated Series A Convertible Preferred Stock (the "Series A Preferred"), 29,000,000 shares shall be designated Series B Convertible Preferred Stock (the "Series B Preferred"), 20,000,000 shares shall be designated Series C Convertible Preferred Stock (the "Series C Preferred"), and 10,666,667 shares shall be designated Series D Convertible Preferred Stock (the "Series D Preferred"). All cross-references in each subdivision of this Article 4 refer to other paragraphs in such subdivision unless otherwise indicated. The following is a statement of the designations and the preferences, limitations and relative rights in respect of each class of stock of the Corporation: I. PREFERRED STOCK 1. Dividends. The holders of the Preferred Stock shall not be entitled to receive dividends, provided, however, that in the event the Corporation shall at any time declare or pay a dividend on the Common Stock (other than a dividend referred to in subparagraph 4D(4)), it shall, simultaneously therewith and as part of such declaration or payment, declare and pay to each holder of Preferred Stock a dividend equal to the dividend which would have been payable to such holder if the shares of Preferred Stock held by such holder had been converted into Common Stock on the date of determination of holders of Common Stock entitled to receive such dividend. 2. Redemption. The shares of Preferred Stock shall be redeemable as follows: 2A. Mandatory Redemption. In case of the consolidation or merger of the Corporation with or into any other corporation (other than (i) a merger in which the Corporation is the surviving corporation and in which the persons who owned a majority of the outstanding Common Stock of the Corporation (giving effect to conversion of outstanding convertible securities convertible into Common Stock) immediately prior to the effective date of such merger continue to own, in substantially the same proportions, at least a majority of the outstanding Common Stock of the Corporation (giving effect to conversion of outstanding convertible securities convertible into Common Stock) immediately after such effective date or (ii) a consolidation or merger in which 2 each share of Common Stock outstanding immediately before such consolidation or merger (including as outstanding all shares issuable upon conversion of outstanding Preferred Stock) shall, immediately after giving effect to such consolidation or merger, have a value, or represent a right to receive cash or other property having a value, determined in accordance with subparagraph 3B, equal to or greater than the Target Value (as hereinafter defined)), and, in the case of a sale of all or substantially all of the properties and assets of the Corporation as an entirety to any other person, the Corporation shall, not later than 20 days prior to the effective date of any such consolidation, merger or sale of properties and assets, give notice thereof to the holder or holders of shares of Preferred Stock, and in the event that within 15 days after receipt of such notice any holder or holders of shares of Preferred Stock shall elect, by written notice to the Corporation, to have any or all of its or their shares of Preferred Stock redeemed, the Corporation shall redeem the same (in the manner and with the effect provided in subparagraphs 2B through 2D below) not later than the effective date of such consolidation, merger or sale of properties and assets. Any date on which shares of Preferred Stock are to be redeemed by the Corporation shall be referred to as a "Redemption Date." As used in this subparagraph 2A, the term "Target Value" shall mean an amount equal to three (3) times the consideration per share paid for the Preferred Stock, provided that, in case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Target Value shall be proportionally reduced, and conversely, in case the outstanding shares of Common Stock of the Corporation shall be combined into a smaller number of shares, the Target Value shall be proportionally increased. 2B. Redemption Price.The Preferred Stock to be redeemed on a Redemption Date shall be redeemed by paying for each share in cash the sum of (i) its Basic Liquidation Preference (as defined in subparagraph 3A) plus (ii) in each case an amount equal to the amount by which (x) cumulative dividends on such shares from the respective dates of the issue thereof through the Redemption Date, at the rate per annum of 8% of their respective Basic Liquidation Preference, exceed (y) any cash dividends theretofore declared and paid thereon, plus (iii) an amount equal to (a) the net assets of the Corporation which would be available for distribution to holders of Common Stock after payment of the amounts described in the preceding clauses (i) and (ii) to holders of all outstanding shares of Preferred Stock (whether or not such holders shall have elected to have such shares redeemed) divided by (b) the number of shares of Common Stock which would be outstanding if all outstanding shares of Preferred Stock (including any such shares the holder or holders of which shall have elected redemption) had been converted immediately prior to the event giving rise to such redemption, multiplied by (c) the number of shares of Common Stock into which each share of Preferred Stock is then convertible pursuant to paragraph 4 immediately prior to the event giving rise to redemption, and the holders of Preferred Stock shall not be entitled to any 3 further payment, such amount being herein sometimes referred to as the "Redemption Price." If on the Redemption Date the assets of the Corporation available for distribution to stockholders shall be insufficient to permit payment of the full aggregate Redemption Price of all Preferred Stock outstanding at the time (regardless of whether or not the holders thereof shall have elected redemption), then the holder of each share of Preferred Stock to be redeemed shall be entitled to receive such holder's pro rata share of such assets available for distribution, based on the respective Basic Liquidation Preferences of all shares of Preferred Stock outstanding at the time. If notice of any consolidation, merger or sale of all or substantially all of the assets of the Corporation shall have been duly given pursuant to subparagraph 2A, and the holder of any shares of Preferred Stock shall have duly elected to have such shares redeemed, as provided in subparagraph 2A, and if on or before such Redemption Date the funds necessary for redemption shall have been set aside (as set forth below) so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares of Preferred Stock to be redeemed shall not have been surrendered for cancellation, after the close of business on such Redemption Date, the shares to be redeemed shall no longer be deemed outstanding, the dividends thereon shall cease to accrue, and all rights with respect to such shares shall forthwith after the close of business on the Redemption Date, cease, except only the right of the holders thereof to receive, upon presentation of the certificate representing shares so called for redemption, the Redemption Price therefor, without interest thereon. All funds required or permitted to be set aside for redemption of the Preferred Stock as provided in this subparagraph 2B shall be placed in an account maintained by a bank or trust company (i) organized and doing business under the laws of the United States of America or of any state, (ii) authorized under such laws to exercise trust powers, (iii) having a combined capital and undivided surplus of at least $50,000,000 and (iv) subject to supervision or examination by a federal or state authority. 2C. Redeemed or Otherwise Acquired Shares to Be Retired. Any shares of the Preferred Stock redeemed pursuant to this paragraph 2 or otherwise acquired by the Corporation in any manner whatsoever shall be permanently retired and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the number of authorized shares of Preferred Stock accordingly. 3A. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the shares of Preferred Stock shall be entitled, before any distribution or payment is made upon any Common Stock, to be paid for each share in cash an amount equal to (i) $0.67 per share in the case of the Series A Preferred or $0.50 per share in the case of the Series B Preferred or $0.60 per share in the 4 case of Series C Preferred or $0.75 per share in case of the Series D Preferred (such amounts being herein called the "Basic Liquidation Preference" of the shares of such respective series) plus (ii) an amount equal to the amount by which (x) cumulative dividends (whether or not declared by the Board of Directors) on such shares from the respective dates of issue thereof through the date of such liquidation, dissolution or winding up, at the rate per annum of 8% of their respective Basic Liquidation Preference, exceed (y) any cash dividends theretofore declared and paid thereon, plus (iii) an amount equal to (a) the net assets of the Corporation which would be available for distribution to holders of Common Stock after payment of the amounts described in the preceding clauses (i) and (ii) to holders of all outstanding shares of Preferred Stock divided by (b) the number of shares of Common Stock which would be outstanding if all outstanding shares of Preferred Stock had been converted immediately prior to the effective time of such liquidation, dissolution or winding up, multiplied by (c) the number of shares of Common Stock into which each share of Preferred Stock is convertible pursuant to paragraph 4 at the effective time of such liquidation, dissolution or winding up, and the holders of Preferred Stock shall not be entitled to any further payment, such amounts being sometimes referred to as the "Liquidation Payments." If upon such liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of Preferred Stock shall be insufficient to permit payment to such holders of the full proportional amount to which they are respectively entitled then the entire assets of the Corporation to be so distributed shall be distributed among the holders of Preferred Stock pro rata in proportion to the respective numbers of shares of Preferred Stock held by such holders. Upon any such liquidation, dissolution or winding up of the Corporation, after the holders of Preferred Stock shall have been paid in full the amounts to which they shall be entitled, the remaining net assets of the Corporation may be distributed to the holders of Common Stock. Written notice of such liquidation, dissolution or winding up, stating a payment date, the amount of the Liquidation Payments and the place where said Liquidation Payments shall be payable shall be given by certified or registered mail, postage prepaid, not less than 30 days prior to the payment date stated therein, to the holders of record of Preferred Stock, such notice to be addressed to each such holder at his post office address as shown by the records of the Corporation. Subject to all provisions of paragraph 2, neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the sale or transfer by the Corporation of all or substantially all its assets, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of the provisions of this paragraph 3. 3B. Noncash Distributions. If any of the assets of the Corporation are to be distributed other than in cash under paragraph 2 or this paragraph 3 or for any other purpose, then the Board of Directors shall promptly engage independent competent appraisers to determine the value of the 5 assets to be distributed to the holders of Preferred Stock or Common Stock. The Corporation shall, upon receipt of such appraiser's valuation, give prompt written notice to each holder of shares of Preferred Stock and each holder of shares of Common Stock of the appraiser's valuation. Notwithstanding the above, any securities to be distributed to the stockholders shall be valued as follows: (i) If traded on a securities exchange or quotations system, the value shall be deemed to be the average of the closing bid prices of the securities on such exchange over the 30-day period ending three (3) business days prior to the closing; (ii) If actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) business days prior to the closing; and (iii) If there is no active public market, the value shall be the fair market value thereof, as mutually determined by the Corporation and the holders of not less than a majority of the outstanding shares of Preferred Stock, voting as a class, and a majority of the outstanding shares of Common Stock, voting as a class, provided that if the Corporation and the holders of a majority of the outstanding shares of Preferred Stock, voting as a class, and a majority of the outstanding shares of Common Stock, voting as a class, are unable to reach agreement, then by independent competent appraisal by an investment banker hired and paid by the Corporation, but acceptable to the holders of a majority of the outstanding shares of Preferred Stock, voting as a class, and a majority of the outstanding shares of Common Stock, voting as a class. 4A. Right to Convert. Subject to the terms and conditions of this paragraph 4, the holder of any share or shares of Preferred Stock shall have the right, at its option at any time prior to the close of business on the last full business day preceding the Redemption Date for any shares, to convert any such shares of Preferred Stock (except that upon any liquidation of the Corporation the right of conversion shall terminate at the close of business on the last full business day next preceding the date fixed for payment of the amount distributable on the Preferred Stock) into such number of fully paid and nonassessable whole shares of Common Stock as is obtained, in the case of the Series A Preferred, by multiplying the number of shares of Series A Preferred to be so converted by their Basic Liquidation Preference of $0.67 and dividing the result by the initial Series A Preferred conversion price of $0.67 per share or, if applicable, by the Series A Preferred conversion price as last adjusted and in effect at the date any share or shares of Series A preferred are surrendered for conversion (such price, or such price as last adjusted, being referred to herein as 6 the "Series A Conversion Price") and, in the case of the Series B Preferred, by multiplying the number of shares of Series B Preferred to be so converted by their Basic Liquidation Preference of $0.50 and dividing the result by the initial Series B Preferred conversion price of $0.50 per share, if applicable, or by the Series B Preferred conversion price as last adjusted and in effect at the date any share or shares of Series B Preferred are surrendered for conversion (such price or such price as last adjusted, being referred to herein as the "Series B Conversion Price") and, in the case of Series C Preferred, by multiplying the number of shares of Series C Preferred to be so converted by their Basic Liquidation Preference of $0.60 and dividing the result by the initial Series C Preferred conversion price of $0.60 per share, if applicable, or by the Series C Preferred conversion price as last adjusted and in effect at the date any share or shares of Series C Preferred are surrendered for conversion (such price or such price as last adjusted, being referred to herein as the "Series C Conversion Price") and, in the case of the Series D Preferred, by multiplying the number of shares of Series D Preferred to be so converted by their Basic Liquidation Preference of $0.75 and dividing the result by the initial Series D Preferred conversion price of $0.75 per share or, if applicable, by the Series D Preferred conversion price as last adjusted and in effect at the date any share or shares of Series D Preferred are surrendered for conversion (such price or such price as last adjusted, being referred to herein as the "Series D Conversion Price"). Such rights of conversion shall be exercised by the holder thereof by giving written notice that the holder elects to convert a stated number of shares of Preferred Stock into Common Stock and by surrender of a certificate or certificates for the shares so as to be converted to the Corporation at its principal office (or such other office or agency at the Corporation as the Corporation may designate by notice in writing to the holder or holders of the Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address) in which the certificate or certificates for shares of Common Stock shall be issued. 4B. Issuance of Certificates; Time Conversion Effected. Promptly after the receipt of the written notice referred to in subparagraph 4A and surrender of the certificate or certificates for the share or shares of the Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, registered in such name or names as such holder may direct, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been affected, and the Series A, Series B, Series C or Series D Conversion Price, as the case may be, shall be determined, as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Preferred Stock shall cease, and the person 7 or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. 4C. Fractional Shares; Dividends; Partial Conversion. No fractional shares shall be issued upon conversion of the Preferred Stock into Common Stock and no payment or adjustment shall be made upon any conversion on account of any cash dividends on the Common Stock issued upon such conversion. At the time of each conversion, the Corporation shall pay in cash an amount equal to all dividends declared and unpaid on the shares surrendered for conversion to the date upon which such conversion is deemed to take place as provided in subparagraph 4B. In case the number of shares of Preferred Stock represented by the certificate or certificates surrendered pursuant to subparagraph 4A exceeds the number of shares converted, the Corporation shall, upon such conversion, execute and deliver to the holder thereof, at the expense of the Corporation, a new certificate or certificates for the number of shares of Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. If any fractional interest in a share of Common Stock would, except for the provisions of the first sentence of this subparagraph 4C, be deliverable upon any such conversion, the Corporation, in lieu of delivering the fractional share thereof, shall pay to the holder surrendering the Preferred Stock for conversion an amount in cash equal to the current market price of such fractional interest as determined in good faith by the Board of Directors of the Corporation. 4D. Adjustment of Price Upon Issuance of Common Shares. Except as provided in subparagraph 4F hereof, if and whenever the Corporation shall issue or sell, or is in accordance with subparagraphs 4D(1) through 4D(7) deemed to have issued or sold, any shares of its Common Stock without consideration or for a consideration per share less than the Conversion Price of any series of Preferred Stock in effect immediately prior to the time of such issue or sale, then, forthwith upon such issue or sale, the Conversion Price of such series of Preferred Stock shall be reduced concurrently with such issue or sale, to a price (calculated to the nearest cent) determined by dividing (i) an amount equal to the sum of (x) the number of shares of Common Stock outstanding immediately prior to such issue or sale (including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series B Preferred, Series C Preferred and Series D Preferred, in the case of adjustment of the Series A Conversion Price, or including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series A Preferred, Series C Preferred and Series D Preferred, in the case of adjustment of the Series B Conversion Price, or including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series A Preferred, Series B Preferred and Series D 8 Preferred, in the case of adjustment of the Series C Conversion Price, or including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series A Preferred, Series B Preferred and Series C Preferred, in the case of adjustment of the Series D Conversion Price) multiplied by the then existing applicable Conversion Price, and (y) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the total number of shares of Common Stock outstanding immediately after such issue or sale (including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series B Preferred, Series C Preferred and Series D Preferred, in the case of adjustment of the Series A Conversion Price, or including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series A Preferred, Series C Preferred and Series D Preferred, in the case of adjustment of the Series B Conversion Price or including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series A Preferred, Series B Preferred and Series D Preferred in the case of adjustment of the Series C Conversion Price, or including as outstanding all shares of Common Stock issuable immediately prior to the time of such issue or sale upon conversion of outstanding Series A Preferred, Series B Preferred and Series C Preferred, in the case of adjustment of the Series D Conversion Price). In the event that the Corporation shall issue and sell, or is in accordance with subparagraphs 4D(1) through 4D(7) deemed to have issued or sold, Series B Preferred, Series C Preferred or Series D Preferred in separate transactions, the adjustment to the Series A Conversion Price resulting from the issuance of the Series B Preferred, Series C Preferred or Series D Preferred, as the case may be, shall be calculated as if all outstanding shares of Series B Preferred, Series C Preferred, or Series D Preferred (including any shares deemed to be outstanding pursuant to subparagraph 4D(1) to 4D(7)) had been issued and sold in a single transaction at the time of the last issuance and sale of Series B Preferred, Series C Preferred, or Series D Preferred, as the case may be. In the event that the Corporation shall issue and sell, or is in accordance with subparagraphs 4D(1) through 4D(7) deemed to have issued or sold, Series A Preferred, Series C Preferred or Series D Preferred in separate transactions, the adjustment to the Series B Conversion Price resulting from the issuance of the Series A Preferred, Series C Preferred or Series D Preferred, as the case may be, shall be calculated as if all outstanding shares of Series A Preferred, Series C Preferred, or Series D Preferred (including any shares deemed to be outstanding pursuant to subparagraph 4D(1) to 4D(7)) had been issued and sold in a single transaction at the time of the last issuance and sale of Series A Preferred, Series C Preferred, or Series D Preferred, as the case may be. In the event that the Corporation shall issue and sell, or is in accordance with subparagraphs 4D(1) through 4D(7) deemed to have issued or sold, Series A Preferred, Series B Preferred or Series D Preferred in separate transactions, the adjustment to the Series C Conversion 9 Price resulting from the issuance of the Series A Preferred, Series B Preferred or Series D Preferred, as the case may be, shall be calculated as if all outstanding shares of Series A Preferred, Series B Preferred, or Series D Preferred (including any shares deemed to be outstanding pursuant to subparagraph 4D(1) to 4D(7)) had been issued and sold in a single transaction at the time of the last issuance and sale of Series A Preferred, Series B Preferred, or Series D Preferred, as the case may be. In the event that the Corporation shall issue and sell, or is in accordance with subparagraphs 4D(1) through 4D(7) deemed to have issued or sold, Series A Preferred, Series B Preferred or Series C Preferred in separate transactions, the adjustment to the Series D Conversion Price resulting from the issuance of the Series A Preferred, Series B Preferred or Series C Preferred, as the case may be, shall be calculated as if all outstanding shares of Series A Preferred, Series B Preferred, or Series C Preferred (including any shares deemed to be outstanding pursuant to subparagraph 4D(1) to 4D(7)) had been issued and sold in a single transaction at the time of the last issuance and sale of Series A Preferred, Series B Preferred, or Series C Preferred, as the case may be. No adjustment of any Conversion Price, however, shall be made in an amount less than $0.01 per share, and any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall amount to $0.01 per share or more. For purposes of this subparagraph 4D, the following subparagraphs 4D(1) to 4D(7) shall also be applicable. 4D(1). Issuance of Rights or Options. In case at any time the Corporation shall in any manner grant (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (such rights or options being herein called "Options" and such convertible or exchangeable stock or securities being herein called "Convertible Securities") whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such Options or upon conversion or exchange of such Convertible Securities (determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the granting of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon the exercise of all such Options, plus, in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the issue or sale of such convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the 10 exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the applicable Conversion Price in effect immediately prior to the time of the granting of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of the granting of such Options and thereafter shall be deemed to be outstanding. Except as otherwise provided in subparagraph 4D(3), no adjustment of the Series A, Series B, Series C or Series D Conversion Prices shall be made upon the actual issue of such Common Stock or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities. 4D(2). Issuance of Convertible Securities.In case the Corporation shall in any manner issue (whether directly or by assumption, in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange (determined by dividing (i) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the applicable Conversion Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding, provided that (a) except as otherwise provided in subparagraph 4D(3) below, no adjustment of the Series A, Series B, Series C or Series D Conversion Prices shall be made upon the actual issue of such Common Stock upon conversion or exchange of such Convertible Securities, and (b) if any such issue or sale of such Convertible Securities is made upon exercise of any option to purchase any such Convertible Securities for which adjustments of the Conversion Price have been or are to be made pursuant to other provisions of this subparagraph 4D, no further adjustment of the Series A, Series B, Series C or Series D Conversion Prices shall be made by reason of such issue or sale. 4D(3). Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in subparagraph 4D(1), the additional consideration, if any, payable upon the conversion or exchange of any 11 Convertible Securities referred to in subparagraph 4D(1) or 4D(2), or the rate at which any Convertible Securities referred to in subparagraph 4D(1) or 4D(2) are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution), the Series A, Series B, Series C or Series D Conversion Prices in effect at the time of such event shall forthwith be readjusted to the Series A, Series B, Series C or Series D Conversion Prices which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold; and on the expiration of any such Option or the termination of any such right to convert or exchange such Convertible Securities, the Series A, Series B, Series C or Series D Conversion Prices then in effect hereunder shall forthwith be increased to the Conversion Prices which would have been in effect at the time of such expiration or termination had such option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued, and the Common Stock issuable thereunder shall no longer be deemed to be outstanding. If the purchase price provided for in any such Option referred to in subparagraph 4D(1) or the rate at which any Convertible Securities referred to in subparagraph 4D(1) or 4D(2) convertible into or exchangeable for Common Stock shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then, in case of the delivery of the Common Stock upon the exercise of any such Option or upon conversion or exchange of any such Convertible Securities, the Conversion Prices then in effect hereunder shall forthwith be adjusted to such respective amount as would have been obtained had such option or Convertible Securities never been issued as to such Common Stock and had adjustments been made upon the issuance of the shares of Common Stock delivered as aforesaid, but only if as a result of such adjustment the Series A, Series B, Series C or Series D Conversion Prices then in effect hereunder is thereby reduced. 4D(4). Stock Dividends. In case the Corporation shall declare a dividend or make any other distribution upon any stock of the Corporation payable in Common Stock, Options or Convertible Securities, any Common Stock, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. 4D(5). Consideration for Stock. In case any shares of Common Stock, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor, without deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Corporation in connection therewith. The amount of consideration deemed to be received by the Corporation pursuant to the foregoing provisions of this 12 subparagraph 4D(5) upon any issuance and/or sale of shares of Common Stock, Options or Convertible Securities, pursuant to an established compensation plan of the Corporation, to directors, officers or employees of the Corporation in connection with their employment shall be increased by the amount of any tax benefit realized by the Corporation as a result of such issuance and/or sale, the amount of such tax benefit being the amount by which the Federal and/or state income or other tax liability of the Corporation shall be reduced in such year by reason of any deduction or credit in respect of such issuance and/or sale. In case any Options shall be issued in connection with the issue and sale of other securities of the Corporation, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. 4D(6). Record Date. In case the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities, or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 4D(7). Treasury Shares. 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 Corporation, and any disposition of any such shares (other than by cancellation) shall be considered an issue or sale of Common Stock for the purposes of this subparagraph 4D. 4E. Subdivision or Combination of Stock. In case the Corporation shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Series A, Series B, Series C or Series D Conversion Prices in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Corporation shall be combined into a smaller number of Shares, the Series A, Series B, Series C or Series D Conversion Prices in effect immediately prior to such combination shall be proportionately increased. 4F. Certain Issues of Common Shares Excepted. Anything herein to the contrary notwithstanding, the Corporation shall not be required to make any adjustment of the Series A, Series B, Series C or Series D Conversion Prices (i) in the case of the issuance of shares of Common Stock (or stock options to purchase such shares of Common Stock) to employees, officers or directors of or consultants to the Corporation pursuant to arrangements authorized and 13 approved by the Board of Directors of the Corporation, if and to the extent that the aggregate number of such shares so issued or reserved for issuance upon exercise of such options from and after February 6, 1993 does not exceed 9,121,163, or (ii) in the case of the issuance of shares of Common Stock upon the conversion of any issued and outstanding Preferred Stock or upon the exercise of any Options (as defined in subparagraph 4D(1)) or conversion of Convertible Securities (as defined in subparagraph 4D(1)) outstanding as of June 30, 1997. 4G. Reorganization or Reclassification. If any capital reorganization or reclassification of the capital stock of the Corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization or reclassification, lawful and adequate provisions (in form satisfactory to the holders of at least a majority of the outstanding shares of Preferred Stock) shall be made whereby each holder of a share or shares of Preferred Stock shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Corporation immediately theretofore receivable upon the conversion of such share or shares of the Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore so receivable had such reorganization or reclassification not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of such holder to the end that the provisions hereof (including without limitation provisions for adjustment of the Conversion Prices) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of such conversion rights (including an immediate adjustment, by reason of such reorganization or reclassification, of the Conversion Prices to the value for the Common Stock reflected by the terms of such consolidation or merger if the value so reflected is less than the applicable Conversion Price(s) in effect immediately prior to such consolidation or merger). In the event of a merger or consolidation of the Corporation as a result of which a greater or lesser number of shares of common stock of the surviving corporation are issuable to holders of Common Stock of the Corporation outstanding immediately prior to such merger or consolidation, the Conversion Prices in effect immediately prior to such merger or consolidation shall be adjusted in the same manner as though there were a subdivision or combination of the outstanding shares of Common Stock of the Corporation. The Corporation will not effect any such reorganization or reclassification, unless prior to the consummation thereof, the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument (in form reasonably satisfactory to the holders of at least a majority of the shares of Preferred Stock at the time outstanding) executed and mailed or 14 delivered to each holder of shares of Preferred Stock at the last address of such holder appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to receive. 4H. Notice of Adjustment. Upon any adjustment of the Series A, Series B, Series C or Series D Conversion Price, then and in each such case, the Corporation shall give written notice thereof, by first-class mail, postage prepaid, addressed to each holder of shares of Preferred Stock at the address of such holder as shown on the books of the Corporation, which notice shall state the applicable Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 4I. Other Notices. In case at any time: (1) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (2) the Corporation shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (3) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with, or a sale of all or substantially all its assets to, another corporation; or (4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of said cases, the Corporation shall give, by first-class mail, postage prepaid, addressed to each holder of any shares of Preferred Stock at the address of such holder as shown on the books of the Corporation, (a) at least 20 days prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 20 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such 15 notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 4J. Stock to Be Reserved. The Corporation will at all times reserve and keep available out of its authorized Common Stock or its treasury shares, solely for the purpose of issue upon the conversion of the Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Preferred Stock. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective applicable Conversion Prices. The Corporation will take all such action as may be necessary to assure that such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange or quotation system upon which the Common Stock of the Corporation may be listed or quoted. The Corporation will not take any action which results in any adjustment of the applicable Conversion Prices if the total number of shares of Common Stock issued and issuable after such action upon conversion of the Preferred Stock would exceed the total number of shares of Common Stock then authorized by the Corporation's Second Restated Certificate of Incorporation. 4K. No Reissuance of Preferred Stock. Shares of Preferred Stock which are converted into shares of Common Stock as provided herein shall not be reissued. 4L. Issue Tax. The issuance of certificates for shares of Common Stock upon conversion of the Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Preferred Stock which is being converted. 4M. Closing of Books. The Corporation will at no time close its transfer books against the transfer of any Preferred Stock or of any shares of Common Stock issued or issuable upon the conversion of any shares of Preferred Stock in any manner which interferes with the timely conversion of such Preferred Stock. 16 4N. Definition of Common Stock. As used in this paragraph 4, the term "Common Stock" shall mean and include the Corporation's authorized Common Stock, $0.001 par value as constituted on the effective date of this Second Restated Certificate of Incorporation and shall also include any capital stock of any class of the Corporation thereafter authorized which shall not be limited to a fixed sum or percentage of par value in respect of the rights of the holders thereof to participate in dividends or in the distribution of assets upon voluntary or involuntary liquidation, dissolution or winding up of the Corporation; provided that the shares of Common Stock receivable upon conversion of shares of the Preferred Stock of the Corporation, or, in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets provided for in subparagraph 4G, shall include only shares designated as Common Stock of the Corporation on the effective date of this Second Restated Certificate of Incorporation. 4O. No Impairment. The Corporation will not through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observation or performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all of the provisions of this paragraph 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of Preferred Stock against impairment. This provision shall not restrict the Corporation's right to amend its Certificate of Incorporation with the requisite stockholder consent. 5. Voting Rights. Except as otherwise provided by law and this Second Restated Certificate of Incorporation, the holders of Common Stock and Preferred Stock shall vote together as a class on all matters to be voted on by the stockholders of the Corporation on the following bases: (1) each holder of Preferred Stock shall be entitled to one vote for each share of Common Stock which would be issuable to such holder upon the conversion of all the shares of Preferred Stock so held on the record date for the determination of stockholders entitled to vote and (2) each holder of Common Stock shall be entitled to one vote per share. 6. Restrictions. At any time when shares of Preferred Stock are outstanding, except where the vote or written consent of the holders of a greater number of shares of the Corporation is required by law or by this Second Restated Certificate of Incorporation and in addition to any other vote required by law, without the prior consent of the holders of a majority of the outstanding shares of each series of Preferred Stock, given in person or by proxy, either in writing or at a special meeting called for that purpose, at which 17 meeting the holders of the shares of such Preferred Stock shall vote separately as a series. 6A. The Corporation will not create or authorize the creation of any additional class of shares of stock or other equity security, including any other security or debt instrument convertible into or exercisable for any such equity security, or increase the authorized amount of the Preferred Stock or increase the authorized amount of any additional class of shares of stock unless the same ranks junior to the Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation or redemption of shares, or create or authorize any obligation or security convertible into shares of Preferred Stock or into shares of any other class of stock unless the same ranks junior to the Preferred Stock as to the distribution of assets on the liquidation, dissolution or winding up of the Corporation or redemption of shares, whether any such creation or authorization or increase shall be by means of amendment of the Corporation's Second Restated Certificate of Incorporation or by merger, consolidation or otherwise; 6B. The Corporation will not amend, alter or repeal its Second Restated Certificate of Incorporation or Bylaws in any manner so as to adversely affect the respective relative rights and preferences of the Preferred Stock or adversely affect the Preferred Stock or the holders thereof in any manner. 6C. The Corporation will not effect any sale or liquidation of all or substantially all of the Corporation's assets, or affect any merger, consolidation or reorganization other than a merger or consolidation with a wholly-owned subsidiary. 6D. The Corporation will not affect any reclassification, reverse stock split, combination of any class of capital stock or other recapitalization. 6E. The Corporation shall not: (1) engage in any spin-out, distribution or sale of any business unit of the Corporation; (2) enter into any transactions with affiliates of the Corporation except on arms-length terms approved by a majority of the disinterested members of the Corporation's Board of Directors; or (3) redeem or repurchase any outstanding Common Stock of the Corporation except for repurchases of unvested or restricted shares of Common Stock at cost from 18 employees, consultants or members of the Board of Directors pursuant to repurchase options of the Corporation. II. COMMON STOCK 1. Dividends. The holders of shares of Common Stock shall be entitled to receive such dividends as from time to time may be declared by the Board of Directors of the Corporation, subject to the provisions of subdivision I of this Article 4 with respect to the rights of holders of the Preferred Stock. 2. Liquidation. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made to holders of Preferred Stock of the full amounts to which they shall respectively be entitled prior to the making of any distribution to the holders of Common Stock as stated and expressed herein or as may be stated and expressed pursuant hereto, the holders of Common Stock shall be entitled, together with the holders of the Preferred Stock as provided in paragraph 3 of subdivision I of this Article 4, to share ratably according to the number of shares of Common Stock held by them in all remaining assets of the Corporation available for distribution to its stockholders. 3. Voting. Except as otherwise provided by law, voting rights shall be governed by paragraph 5 of subdivision I of this Article 4. Article 5. The number of Directors of the corporation may be fixed by the Bylaws. Article 6. The Board of Directors of the corporation shall have the power to adopt, amend or repeal the Bylaws of the corporation. Article 7. Elections of directors may be, but shall not be required to be, by written ballot. Article 8. No director of the corporation shall have personal liability arising out of an action whether by or in the right of the Corporation or otherwise for monetary damages for breach of fiduciary duty as a director; provided, however, that the foregoing shall not limit or eliminate the liability of a director (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware or any successor provision, 19 (iv) for any transaction from which such director derived an improper personal benefit, or (v) acts or omissions occurring prior to the date of the effectiveness of this provision. Furthermore, notwithstanding the foregoing provision, in the event that the General Corporation Law of the State of Delaware is amended or enacted to permit further limitation of elimination of the personal liability of the director, the personal liability for the corporation's directors shall be limited or eliminated to the fullest extent permitted by the applicable law. This provision shall not affect any provision permitted under the General Corporation Law of the State of Delaware in the Second Restated Certificate of Incorporation, Bylaws or contract or resolution of the corporation indemnifying or agreeing to indemnify a director against personal liability. Any repeal or modification of this provision shall not adversely affect any limitation hereunder on the personal liability of the director with respect to acts or omissions occurring prior to such repeal or modification. RESOLVED FURTHER, that the Board of Directors determines that the capital of the Corporation will not be decreased on account of the foregoing Second Restated Certificate of Incorporation, declares the foregoing Second Restated Certificate of Incorporation to be advisable and directs that such Second Restated Certificate of Incorporation be submitted to the stockholders of the Corporation for their approval pursuant to Section 242 of the General Corporation Law of the State of Delaware." SECOND: that the Second Restated Certificate of Incorporation effected by this certificate was duly authorized by written consent of the holders of a majority of the issued and outstanding shares of each class and series of the capital stock of the Corporation on June 9, 1997, after first having been declared advisable by the Board of Directors of the Corporation, all in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. THIRD: that the capital of the Corporation will not be reduced under, or by reason of, the foregoing Second Restated Certificate of Incorporation of the Corporation. 20 IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by M. Ross Johnson, its President, who hereby acknowledges under penalties of perjury that the facts herein stated are true and that this certificate is his act and deed, and attested by Max N. Wallace, its Secretary, this 25th day of June, 1997. TRIMERIS, INC. [CORPORATE SEAL] By: /s/ Matthew A. Megaro Matthew A. Megaro Vice President of Business Development, Chief Operating Officer, and Chief Financial Officer ATTEST: By: /s/ Gloria E. Ivey Gloria E. Ivey, Secretary 21 CERTIFICATE OF AMENDMENT OF SECOND RESTATED CERTIFICATE OF INCORPORATION OF TRIMERIS, INC. PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE TRIMERIS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies as follows: FIRST: That Article 4 of the Second Restated Certificate of Incorporation of the Corporation is amended by deleting the first paragraph thereof in its entirety and inserting the following in lieu thereof: "Article 4. The aggregate number of shares of all classes of stock which the Corporation shall have authority to issue is 142,666,667 shares, consisting of 80,000,000 shares of Common Stock, par value $0.001 per share (herein called the "Common Stock"), and 62,666,667 shares of Convertible Preferred Stock, par value $0.001 per share (herein called the "Preferred Stock"), of which 3,000,000 shares shall be designated Series A Convertible Preferred Stock (the "Series A Preferred"), 29,000,000 shares shall be designated Series B Convertible Preferred Stock (the "Series B Preferred"), 20,000,000 shares shall be designated Series C Convertible Preferred Stock (the "Series C Preferred"), and 10,666,667 shares shall be designated Series D Convertible Preferred Stock (the "Series D Preferred"). All cross-references in each subdivision of this Article 4 refer to other paragraphs in such subdivision unless otherwise indicated Each eight and one-half (8.5) shares of the Corporation's Common Stock, par value $.0001 per share issued and outstanding as of the date this Certificate of Amendment is filed shall be converted and reclassified into one (1) share of the Corporation's Common Stock, par value $.0001 per share, so that each share of the Corporation's Common Stock issued and outstanding is hereby converted and reclassified. No fractional interests resulting from such conversion shall be issued, but in lieu thereof, the Corporation will round the number of shares of Common Stock issuable to each holder of Common Stock up to the nearest whole share of Common Stock." SECOND: that the foregoing amendment of the Second Restated Certificate of Incorporation of the Corporation was duly authorized by written consent of the stockholders of the Corporation on July 10, 1997, after first having been declared advisable by the Board of Directors of the Corporation, all in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this Certificate to be signed by M. Ross Johnson, its President, and attested by Gloria E. Ivey, its Assistant Secretary, this 11th day of July, 1997. TRIMERIS, INC. [CORPORATE SEAL] By /s/ M. Ross Johnson ATTEST: M. Ross Johnson, President By /s/ Gloria E. Ivey Gloria E. Ivey, Assistant Secretary CERTIFICATE OF CORRECTION FILED TO CORRECT A CERTAIN ERROR IN THE CERTIFICATE OF AMENDMENT OF SECOND RESTATED CERTIFICATE OF INCORPORATION OF TRIMERIS, INC. FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE ON JULY 11, 1997 Trimeris, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: 1. The name of the corporation is Trimeris, Inc. 2. The Certificate of Amendment of Second Restated Certificate of Incorporation filed by the Secretary of State of Delaware on July 11, 1997 (the "Certificate of Amendment"), requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracy or defect of the Certificate of Amendment to be corrected is the par value per share as stated in the first sentence of the second paragraph of Article 4 of the Certificate of Amendment, which amount was incorrectly stated as $.0001. 4. The first sentence of the second paragraph of Article 4 of the Certificate of Amendment is hereby corrected to read as follows: "Each eight and one-half (8.5) shares of the Corporation's Common Stock, par value $0.001 per share issued and outstanding as of the date this Certificate of Amendment is filed shall be converted and reclassified into one (1) share of the Corporation's Common Stock, par value $0.001 per share, so that each share of the Corporation's Common Stock issued and outstanding is hereby converted and reclassified." IN WITNESS WHEREOF, this Certificate of Correction of the Certificate of Amendment of Second Restated Certificate of Incorporation as filed on July 11, 1997 has been signed by the President and the Assistant Secretary of the Corporation this 22nd day of August, 1997. /s/ M. Ross Johnson M. Ross Johnson President /s/ Gloria Ivey Gloria Ivey [CORPORATE SEAL] Assistant Secretary CERTIFICATE OF CORRECTION FILED TO CORRECT CERTAIN ERRORS IN THE SECOND RESTATED CERTIFICATE OF INCORPORATION OF TRIMERIS, INC. FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE ON JUNE 25, 1997 Trimeris, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: 1. The name of the corporation is Trimeris, Inc. 2. The Second Restated Certificate of Incorporation filed by the Secretary of State of Delaware on June 25, 1997 (the "Certificate of Incorporation"), requires correction as permitted by Section 103 of the General Corporation Law of the State of Delaware. 3. The inaccuracies or defects of the Certificate of Incorporation to be corrected pertain to the names and titles of the signatories in the closing paragraph and the title of the signatory in the attestation, which names and titles were incorrectly stated. 4. The closing paragraph of the Certificate of Incorporation is hereby corrected to read as follows: "IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereunto affixed and this certificate to be signed by Matthew A. Megaro, its Vice President of Business Development, Chief Operating Officer, and Chief Financial Officer who hereby acknowledges under penalties of perjury that the facts herein stated are true and that this certificate is his act and deed, and attested by Gloria E. Ivey, its Assistant Secretary, this 25th day of June, 1997." 5. The title of the signatory in the attestation should be changed from "Secretary" to "Assistant Secretary". IN WITNESS WHEREOF, this Certificate of Correction of the Second Restated Certificate of Incorporation as filed on June 25, 1997 has been signed by the President and the Assistant Secretary of the Corporation this 22nd day of August, 1997. /s/ M. Ross Johnson M. Ross Johnson President /s/ Gloria Ivey Gloria Ivey [CORPORATE SEAL] Assistant Secretary EX-4 3 EXHIBIT 4.1 (logo) NUMBER TRIMERIS, INC. SHARES T INCORPORATED UNDER THE LAWS SEE REVERSE FOR OF THE STATE OF DELAWARE CERTAIN DEFINITIONS CUSIP 896263 10 0 THIS IS TO CERTIFY THAT IS THE OWNER OF FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF ONE-TENTH OF ONE CENT ($0.001) EACH OF TRIMERIS, INC. (the following text is overprinted on the paragraph below) CERTIFICATE OF STOCK (hereinafter called the "Corporation") transferable on the books of the Corporation by said owner in person or by duly authorized attorney; upon surrender of this certificate properly endorsed. This certificate is not valid unless countersigned by the Transfer Agent. Witness, the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: /s/ Matthew A. Megaro Trimeris, Inc. /s/ M. Ross Johnson Corporate SEAL CHIEF FINANCIAL OFFICER 1993 PRESIDENT AND CHIEF AND SECRETARY DELAWARE EXECUTIVE OFFICER (c) SECURITY COLUMBIAN UNITED STATES BANKNOTE COMPANY 1980 (the following text appears rotated 90 degrees on the right side of page) COUNTERSIGNED: WACHOVIA BANK, N.A. (WINSTON-SALEM, NC) BY: TRANSFER AGENT AUTHORIZED SIGNATURE TRIMERIS, INC. The Corporation shall furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT-______ CUSTODIAN_______ TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act________________________ in common (State) Additional abbreviations may also be used though not in the above list. For value received, ______________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - ---------------------------------------------------------------------- shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - ------------------------------------------------------------------- Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated ------------------------- Signature(s) Guaranteed: ---------------------------- Signature(s) - ------------------------------------- --------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED NOTICE: THE SIGNATURE(S) ON THIS BY AN ELIGIBLE GUARANTOR INSTITUTION, ASSIGNMENT MUST CORRESPOND WITH AS DEFINED IN RULE 17 Ad-15 UNDER THE THE NAME(S) AS WRITTEN UPON THE SECURITIES AND EXCHANGE ACT OF 1934, FACE OF THE CERTIFICATE, IN EVERY AND AMENDED. PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER. EX-10 4 EXHIBIT 10.5 TRIMERIS, INC. 1997 EMPLOYEE STOCK PURCHASE PLAN PURPOSE The Trimeris, Inc. Employee Stock Purchase Plan (the "ESPP" or the "Plan") provides employees of Trimeris, Inc. (the "Company") and selected Company Subsidiaries with an opportunity to become owners of the Company through the purchase of shares of the Company's common stock (the "Common Stock"). The Company intends this Plan to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"), and its terms should be construed accordingly. ELIGIBILITY An Employee whom the Company or an Eligible Subsidiary has employed continuously for one year as of the first day of an Offering Period is eligible to participate in the ESPP for that Offering Period; provided, however, that an Employee may not make a purchase under the ESPP if such purchase would result in the Employee's owning Common Stock possessing 5% or more of the total combined voting power or value of the Company's outstanding stock. For purposes of determining an individual's amount of stock ownership, any options to acquire shares of Company Common Stock are counted as shares of stock, and the attribution rules of Section 424(d) of the Code apply. Employee means any person employed as a common law employee of the Company or an Eligible Subsidiary. Employee excludes anyone who, with respect to any particular period of time, was not treated initially on the payroll records as a common law employee. ADMINISTRATOR The Compensation Committee of the Board of Directors of the Company, or such other committee as the Board designates (the "Committee"), will administer the ESPP. The Committee is vested with full authority and discretion to make, administer, and interpret such rules and regulations as it deems necessary to administer the ESPP (including rules and regulations deemed necessary in order to comply with the requirements of Section 423 of the Code). Any determination or action of the Committee in connection with the administration or interpretation of the ESPP shall be final and binding upon each Employee, Participant and all persons claiming under or through any Employee or Participant. - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 1 of 11 Without shareholder consent and without regard to whether the actions might adversely affect Participants, the Compensation Committee (or the Board) may change the Offering Periods, limit or increase the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount the Participant designated to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant's Compensation, and establish such other limitations or procedures as it determines in its sole discretion advisable and consistent with the Plan. OFFERING Offering Periods are successive and overlapping 24 PERIOD month periods beginning on the first Trading Day on or after December 1 and June 1 of each year and ending on the last Trading Day in the 24 month period, but the first period will run from [the effective date of the initial public offering for the Common Stock] through May 31, 1999. The Board may change the duration of Offering Periods (including their beginning dates) with respect to future offerings without shareholder approval if the change is announced at least five days before the scheduled beginning of the first Offering Period for which the change is effective. PARTICIPATION An eligible Employee may become a "Participant" for an Offering Period by completing an authorization notice and delivering it to the Committee through the Company's Human Resources Department within a reasonable period of time before the first day of such Offering Period. The Committee will send to each new Employee who satisfies the rules in Eligibility above a notice advising the Employee of his right to participate in the ESPP for the following Offering Period. All Participants receiving options under the ESPP will have the same rights and privileges. METHOD A Participant may contribute to the ESPP through OF PAYMENT payroll deductions, as follows: The Participant must elect on an authorization notice to have deductions made from his Compensation for each payroll period during the Offering Period at a rate of at least 1% but not more than 10% of his Compensation. Compensation under the Plan means an Employee's - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 2 of 11 regular compensation, including overtime, bonuses, and commissions, from the Company or an Eligible Subsidiary paid during an Offering Period. All payroll deductions will be credited to the Participant's account under the ESPP. No interest or earnings will accrue on any payroll deductions credited to such accounts. Payroll deductions will begin on the first payday coinciding with or following the first day of each Offering Period and will end with the last payday preceding or coinciding with the end of that Offering Period, unless the Participant sooner withdraws as authorized under Withdrawals below. A Participant may not alter the rate of payroll deductions during the Offering Period. The Company may use the consideration it receives for general corporate purposes. GRANTING OF On the first day of each Offering Period, a Participant OPTIONS will receive options to purchase on each Exercise Date during the Offering Period a number of shares of Common Stock with funds withheld from his Compensation. Such number of shares will be determined at the end of the Purchase Period according to the following procedure: Step 1--Determine the amount the Company withheld from Compensation since the later of the beginning of the Offering Period or the preceding Exercise Date; Step 2--Determine the amount that represents 85% of the lower of Fair Market Value of a share of Common Stock on the (I) first day of the Offering Period, or (II) the Exercise Date; and Step 3--Divide the amount determined in Step 1 by the amount determined in Step 2 and round down the quotient to the nearest whole number. FAIR MARKET The Fair Market Value of a share of Common Stock for VALUE purposes of the Plan as of each date described in Step 2 will be determined as follows: - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 3 of 11 if the Common Stock is traded on a national securities exchange, the closing sale price on that date; if the Common Stock is not traded on any such exchange, the closing sale price as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("Nasdaq") for such date; if no such closing sale price information is available, the average of the closing bid and asked prices as reported by Nasdaq for such date; if there are no such closing bid and asked prices, the average of the closing bid and asked prices as reported by any other commercial service for such date; or if there is no established market for the Common Stock, the value as determined in good faith by the Board. A Trading Day is a day on which the national stock exchanges and Nasdaq are open for trading. No Participant shall receive options: if, immediately after the grant, that Participant would own shares, or hold outstanding options to purchase shares, or both, possessing 5% or more of the total combined voting power or value of all classes of shares of the Company or any Subsidiaries; or that permit the Participant to purchase shares under all employee stock purchase plans of the Company and any Subsidiary with a Fair Market Value (determined at the time the options are granted) that exceeds $25,000 in any calendar year. EXERCISE Unless a Participant effects a timely withdrawal OF OPTION pursuant to the Withdrawal paragraph below, his option AND PURCHASE for the purchase of shares of Common Stock during PERIODS an Offering Period will be automatically exercised as of each Exercise Date for the purchase of the maximum number of full shares that the sum of the payroll deductions credited to the Participant's account during the Purchase Period ending on that Exercise Date can purchase pursuant to the formula specified in Granting of - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 4 of 11 Options. Exercise Date The Exercise Date is the last Trading Day of a given Purchase Period. Purchase The Purchase Period is the approximately six-month Period period beginning after an Exercise Date and ending with the next Exercise Date, except that the first Purchase Period of any Offering Period will begin on the first day of the Offering Period and end with the next Exercise Date and that the initial Purchase Period will run from [the effective date of the initial public offering for the Common Stock] through May 31, 1999 Any payroll deductions credited to a Participant's account during the Offering Period that are not used for the purchase of shares will be treated as follows: If the Participant has elected to withdraw from the ESPP as of the end of the Offering Period, the Company will deliver the amount of the payroll deductions to the Participant. The amount of any other excess payroll deductions will be applied to the purchase of shares in the immediately succeeding Offering Period. DELIVERY OF As soon as administratively feasible after the options COMMON are used to purchase Common Stock, the Company will STOCK deliver to each Participant or, in the alternative, to a custodian that the Committee designates, the shares of Common Stock the Participant purchased upon the exercise of the option. If shares are delivered to a custodian, the Participant may elect at any time thereafter to take possession of the shares or to have the Committee deliver the shares to any brokerage firm. The Committee may, in its discretion, establish a program for cashless sales of Common Stock received under the ESPP. SUBSEQUENT A Participant will be deemed to have elected to OFFERINGS participate in each subsequent Offering Period following his initial election to participate in the ESPP, unless the Participant files a written withdrawal notice with the Human Resources Department at least ten days before the beginning of the Offering Period as of which the Participant desires to withdraw from the ESPP. WITHDRAWAL A Participant may withdraw all, but not less than all, FROM THE payroll deductions PLAN - ------------------------------------------------------------------------------ Trimeris 1997 Employee Stock Purchase Plan Page 5 of 11 credited to his account for an Offering Period before the end of such Offering Period by delivering a written notice to the Human Resources Department on behalf of the Committee at least thirty days before the end of such Offering Period. A Participant who for any reason, including retirement, termination of employment, or death, ceases to be an Employee before the last day of any Offering Period will be deemed to have withdrawn from the ESPP as of the date of such cessation. Upon the withdrawal of a Participant from the ESPP under the terms of Subparagraph (b) above, his outstanding options under the ESPP will immediately terminate. If a Participant withdraws from the ESPP for any reason, the Company will pay to the Participant all payroll deductions credited to his account or, in the event of death, to the persons designated as provided in Designation of Beneficiary, as soon as administratively feasible after the date of such withdrawal and no further deductions will be made from the Participant's Compensation. A Participant who has elected to withdraw from the ESPP may resume participation in the same manner and pursuant to the same rules as any Employee making an initial election to participate in the ESPP, i.e., he may elect to participate in the next following Offering Period so long as he files the authorization form by the deadline for that Offering Period. Any Participant who is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and who withdraws from the ESPP for any reason will only be permitted to resume participation in a manner that will permit transactions under the ESPP to continue to be exempt within the meaning of Rule 16b-3, as issued under the Exchange Act. STOCK SUBJECT The shares of Common Stock that the Company will sell TO PLAN to Participants under the ESPP will be shares of authorized but unissued Common Stock. The maximum number of shares made available for sale under the ESPP will be _____ (subject to the provisions in Adjustments upon Changes in Capital Stock). If the total number of shares for which options are to be exercised in a Purchase Period exceeds the number of shares then available under the ESPP, the Company will make, so far as is practicable, a pro rata allocation of the shares available. - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 6 of 11 A Participant will have no interest in shares covered by his option until the Participant exercises the option. Shares that a Participant purchases under the ESPP will be registered in the name of the Participant or, at the Participant's election, in street name. The Company will not issue fractional shares pursuant to the ESPP, but the Administrator may, in its discretion, direct the Company to make a cash payment in lieu of fractional shares. [REPORTS Individual accounts will be maintained for each Participant. Statements of account will be given to Participants at least annually, and those statements will set forth the amount of payroll deductions, the exercise price, the number of shares purchased, and the remaining cash balance, if any.] ADJUSTMENTS Subject to any required action by the Company (which it UPON CHANGES shall promptly take) or its stockholders, and subject to IN CAPITAL STOCK the provisions of applicable corporate law, if, during an Offering Period, the outstanding shares of Common Stock increase or decrease or change into or are exchanged for a different number or kind of security by reason of any recapitalization, reclassification, stock split, reverse stock split, combination of shares, exchange of shares, stock dividend, or other distribution payable in capital stock, or some other increase or decrease in such Common Stock occurs without the Company's receiving consideration, the Administrator will make a proportionate and appropriate adjustment in the number of shares of Common Stock underlying the options, so that the proportionate interest of the Participant immediately following such event will, to the extent practicable, be the same as immediately before such event. Any such adjustment to the options will not change the total price with respect to shares of Common Stock underlying the Participant's election but will include a corresponding proportionate adjustment in the price of the Common Stock, to the extent consistent with Section 424 of the Code. The Administrator will make a commensurate change to the maximum - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 7 of 11 number and kind of shares provided in the Stock Subject to Plan section. Any issue by the Company of any class of preferred stock, or securities convertible into shares of common or preferred stock of any class, will not affect, and no adjustment by reason thereof will be made with respect to, the number of shares of Common Stock subject to any options or the price to be paid for stock except as this Adjustments section specifically provides. The grant of an option under the Plan will not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, or to merge or to consolidate, or to dissolve, liquidate, sell, or transfer all or any part of its business or assets. Substantial Upon a Substantial Corporate Change, the Plan and the Corporate offering will terminate unless provision is made in Change writing in connection with such transaction for the assumption or continuation of outstanding elections, or the substitution for such options or grants of any options or grants covering the stock or securities of a successor employer corporation, or a parent or subsidiary of such successor, with appropriate adjustments as to the number and kind of shares of stock and prices, in which event the options will continue in the manner and under the terms so provided. If an option would otherwise terminate pursuant to the preceding sentence, the optionee will have the right, at such time before the consummation of the transaction causing such termination as the Board reasonably designates, to exercise any unexercised portions of the option. [However, the Board may determine that allowing such exercise before the end of the Offering Period will not occur if the election would render unavailable "pooling of interest" accounting for any reorganization, merger, or consolidation of the Company.] A Substantial Corporate Change means the dissolution or liquidation of the Company, merger, consolidation, or reorganization of the Company with one or more corporations in which the Company is not the surviving - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 8 of 11 corporation, the sale of substantially all of the assets of the Company to another corporation, or any transaction (including a merger or reorganization in which the Company survives) approved by the Board that results in any person or entity (other than any affiliate of the Company as defined in Rule 144(a)(l) under the Securities Act) owning 100% of the combined voting power of all classes of stock of the Company. DESIGNATION OF A Participant may file with the Committee a written BENEFICIARY designation of a beneficiary who is to receive any payroll deductions credited to the Participant's account under the ESPP or any shares of Common Stock owed to the Participant under the ESPP if the Participant dies. A Participant may change a beneficiary at any time by filing a notice in writing with the Human Resources Department on behalf of the Committee. Upon the death of a Participant and upon receipt by the Committee of proof of the identity and existence of the Participant's designated beneficiary, the Company shall deliver such cash or shares, or both, to the beneficiary. If a Participant dies and is not survived by a beneficiary that the Participant designated in accordance with the immediate preceding paragraph, the Company will deliver such cash or shares, or both, to the personal representative of the estate of the deceased Participant. If, to the knowledge of the Committee, no personal representative has been appointed within 90 days following the date of the Participant's death, the Committee, in its discretion, may direct the Company to deliver such cash or shares, or both, to the surviving spouse of the deceased Participant, or to any one or more dependents or relatives of the deceased Participant, or if no spouse, dependent or relative is known to the Committee, then to such other person as the Committee may designate. No designated beneficiary may acquire any interest in such cash or shares before the death of the Participant. SUBSIDIARY Employees of Company Subsidiaries will be entitled to EMPLOYEES participate in the ESPP, except as otherwise designated by the Board of Directors or the Committee. - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 9 of 11 Eligible Subsidiary means each of the Company's Subsidiaries (if any), except as the Board otherwise specifies. Subsidiary means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time an option is granted to a Participant under the ESPP, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. TRANSFERS, A participant may not assign, pledge, or otherwise ASSIGNMENTS dispose of payroll deductions credited to the AND PLEDGES Participant's account or any rights to exercise an option or to receive shares of Common Stock under the ESPP other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order, as defined in the Employee Retirement Income Security Act. Any other attempted assignment, pledge, or other disposition will be without effect, except that the Company may treat such act as an election to withdraw under the Withdrawal section. AMENDMENT OR The Board of Directors of the Company may at any time TERMINATION terminate or amend the ESPP. Any amendment of the ESPP OF PLAN that (i) materially increases the benefits to Participants, (ii) materially increases the number of securities that may be issued under the ESPP, or (iii) materially modifies the eligibility requirements for participation in the ESPP must be approved by the shareholders of the Company to take effect. The Company shall refund to each Participant the amount of payroll deductions credited to his account as of the date of termination as soon as administratively feasible following the effective date of the termination. NOTICES All notices or other communications by a Participant to the Committee or the Company shall be deemed to have been duly given when the Human Resources Department or the Secretary of the Company receives them or when any other person the Company designates receives the notice or other communication in the form the Company specifies. GENERAL ASSETS Any amounts the Company invests or otherwise sets aside or segregates to satisfy its obligations under this ESPP will be solely the Company's property (except as otherwise required by Federal or state wage laws), and the optionee's claim against the Company under the ESPP, if any, will be only as a general creditor. The optionee will have no right, title, or interest whatever in or to any investments that the Company may make to aid it in meeting its obligations under the ESPP. Nothing - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 10 of 11 contained in the ESPP, and no action taken pursuant to its provisions, will create or be construed to create an implied or constructive trust of any kind or a fiduciary relationship between the Company and any Employee, Participant, former Employee, former Participant, or any beneficiary. PRIVILEGES OF No Participant and no beneficiary or other person STOCK OWNERSHIP claiming under or through such Participant will have any right, title, or interest in or to any shares of Common Stock allocated or reserved under the Plan execpt as to such shares of Common Stock, if any, that have been issued to such Participant. LIMITATIONS ON Notwithstanding any other provisions of the ESPP, no LIABILITY individual acting as a director, employee, or agent of the Company shall be liable to any Employee, Participant, former Employee, former Participant, or any spouse or beneficiary for any claim, loss, liability, or expense incurred in connection with the ESPP, nor shall such individual be personally liable because of any contract or other instrument he executes in such other capacity. The Company will indemnify and hold harmless each director, employee, or agent of the Company to whom any duty or power relating to the administration or interpretation of the ESPP has been or will be delegated, against any cost or expense (including attorneys' fees) or liability (including any sum paid in settlement of a claim with the Trimeris Board's approval) arising out of any act or omission to act concerning this ESPP unless arising out of such person's own fraud or bad faith. NO EMPLOYMENT Nothing contained in this Plan constitutes an employment CONTRACT contract between the Company or an Eligible Subsidiary and any Employee. The ESPP does not give an Employee any right to be retained in the Company's employ, nor does it enlarge or diminish the Company's right to terminate the Employee's employment. DURATION OF ESPP Unless the Board extends the Plan's term, no Offering Period will begin after the tenth anniversary of its initial approval by the Board. APPLICABLE LAW The laws of the State of North Carolina (other than its choice of law provisions) govern the ESPP and its interpretation. APPROVAL OF The ESPP must be submitted to the shareholders of the SHAREHOLDERS Company for their approval within 12 months after the Board of Directors of the Company adopts the ESPP. The adoption of the ESPP is conditioned upon the approval of the shareholders of the Company, and failure to receive their approval will render the ESPP and any outstanding options thereunder void and of no effect. - ------------------------------------------------------------------------------- Trimeris 1997 Employee Stock Purchase Plan Page 11 of 11 EX-10 5 EXHIBIT 10.13 INDEMNITY AGREEMENT THIS AGREEMENT is made and entered into as of July 2, 1997 by and between Trimeris, Inc., a Delaware corporation (the "Corporation"), and ____________________ ("Indemnitee"). RECITALS WHEREAS, Indemnitee, a member of the Board of Directors and/or an officer of the Corporation, performs a valuable service in such capacity for the Corporation; and WHEREAS, in order to induce Indemnitee to continue to serve as a Director and/or an officer of the Corporation, the Corporation has determined and agreed to enter into this Agreement with Indemnitee. NOW, THEREFORE, in consideration of Indemnitee's continued service as a Director/and or an officer after the date hereof, the parties hereto agree as follows: 1. SERVICES TO THE CORPORATION. Indemnitee will serve, at the will of the Corporation under separate contract, if any such contract exists, as an officer and/or Director of the Corporation, or as a director, officer or other fiduciary of an affiliate of the Corporation (including any employee benefit plan of the Corporation) faithfully and to the best of his ability so long as he is duly elected and qualified in accordance with the Certificate of Incorporation and the Bylaws, as amended or amended and restated from time to time, of the Corporation or of such affiliate (the "Organizational Documents"); provided, however, that Indemnitee may at any time and for any reason resign from such position or any other position (subject to any contractual obligation that Indemnitee may have assumed apart from this Agreement) and that the Corporation or any affiliate shall have no obligation under this Agreement to continue Indemnitee in such position or any other position. 2. INDEMNITY OF INDEMNITEE. The Corporation hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent authorized or permitted by the Organizational Documents and the Delaware General Corporation Law, as amended (the "Code"), as the same may be amended from time to time (but only to the extent that any such amendment permits the Corporation to provide broader indemnification rights than the Organizational Documents or the Code permitted prior to adoption of such amendment). 3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the indemnification otherwise provided for herein, and subject only to the Organizational Documents, the Code, any other applicable law and the exclusions set forth in Section 4 hereof, the Corporation hereby further agrees to hold harmless and indemnify Indemnitee: 1 (a) against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines and amounts paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay because of any claim or claims made against or by him in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitral, administrative or investigative (including an action by or in the right of the Corporation), to which Indemnitee is, was or at any time becomes a party, or is threatened to be made a party, by the reason of the fact that Indemnitee is, was or at any time becomes a director, officer, employee or other agent of the Corporation or is or was serving or at any time serves at the written request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and (b) otherwise to the fullest extent as may be provided to Indemnitee by the Corporation under the Code and the Organizational Documents. 4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section 3 hereof shall be paid by the Corporation: (a) on account of any claim against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation, pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (b) for which payment has actually been made to Indemnitee under a valid and collectible insurance policy or under a valid and enforceable indemnity clause, bylaw or agreement, except in respect of any excess beyond payment under such insurance, clause, bylaw or agreement; or (c) in connection with any proceeding (or part thereof) brought or made by Indemnitee against the Corporation, unless (i) such indemnification is expressly required to be made by law, or (ii) the proceeding is initiated pursuant to Section 9 hereof; or (d) on account of Indemnitee's conduct which is finally adjudged to have been knowingly fraudulent or deliberately dishonest, or to constitute willful misconduct. 5. CONTINUATION OF INDEMNITY. All agreements and obligations of the Corporation contained herein shall continue during the period Indemnitee is a director, officer, employee or other agent of the Corporation (or is or was serving at the written request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or complete action, suit or proceeding, whether civil, criminal, arbitral, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. 2 6. PARTIAL INDEMNIFICATION. Indemnitee shall be entitled under this Agreement to indemnification by the Corporation for a portion of the expenses (including attorneys' fees), witness fees, damages, judgments, fines and amount paid in settlement and any other amounts that Indemnitee becomes legally obligated to pay in connection with any action, suit or proceeding referred to in Section 4 hereof even if not entitled hereunder to indemnification for the total amount thereof, and the Corporation shall indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. 7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days after receipt by Indemnitee of notice of the commencement of any action, suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof; but the omission so to notify the Corporation will not relieve it from any liability except to the extent that the failure to notify shall prejudice the Corporation and will not relieve it from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any such action, suit or proceeding as to which Indemnitee notifies the Corporation of the commencement thereof: (a) The Corporation will be entitled to participate therein at its own expense; (b) Except as otherwise provided below, the Corporation may, at its option and jointly with any other indemnifying party similarly notified and electing to assume such defense, assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. After notice from the Corporation to Indemnitee of its election to assume the defense thereof, the Corporation will not be liable to Indemnitee under this Agreement for any legal or other expenses subsequently incurred by Indemnitee in connection with the defense thereof except for reasonable costs of investigation or otherwise as provided below. Indemnitee shall have the right to employ separate counsel in such action, suit or proceeding but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (i) the employment of counsel by Indemnitee has been authorized by the Corporation, (ii) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of Indemnitee's separate counsel shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit or proceeding brought by or on behalf of the Corporation or as to which Indemnitee shall have made the conclusion provided for in clause (ii) above; (c) The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent, which shall not be unreasonably withheld. The Corporation shall be permitted to settle any action except that it shall not settle any action or claim in any manner which would impose any penalty or limitation on Indemnitee without 3 Indemnitee's written consent, which may be given or withheld in Indemnitee's sole discretion; (d) If there is a Change in Control (defined below) of the Corporation, then with respect to all matters thereafter arising concerning the rights of Indemnitee to indemnity, expense payments and/or advances under this Agreement or any other agreement or the Organizational Documents now or hereafter in effect, the Corporation shall seek and follow legal advice only from Independent Legal Counsel (defined below) selected by Indemnitee and approved by the Corporation (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Corporation and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Corporation shall pay the reasonable fees of such Independent Legal Counsel. (e) For the purpose of this Section, a "Change in Control" shall be deemed to have occurred if (i) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation and any new director whose election by the Board of Directors or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds (2/3) of the directors still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, (ii) the stockholders of the Corporation approve a merger or consolidation of the Corporation with any other corporation, other than a merger or consolidation that would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the total voting power represented by the voting securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation, or (iii) the stockholders or the Corporation approve a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of (in one transaction or a series of transactions) all or substantially all of the Corporation's assets; and (f) For purposes of this Section, "Independent Legal Counsel" shall be defined as an attorney or firm of attorneys, selected in accordance with this Section, who have not otherwise performed services for the Corporation or Indemnitee within the last five years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other directors, officers, employees or other agents under similar indemnity agreements). 8. EXPENSES. The Corporation shall advance, prior to the final disposition of any proceeding, promptly following request thereof, all expenses incurred by Indemnitee in connection with such proceeding upon receipt of an undertaking by or on behalf of Indemnitee to repay said amounts if it shall be determined ultimately that 4 Indemnitee is not entitled to be indemnified under the provisions of this Agreement, the Organizational Documents, the Code or otherwise. 9. ENFORCEMENT. Any right to indemnification or advances granted by this Agreement to Indemnitee shall be enforceable by or on behalf of Indemnitee in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. Indemnitee in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expenses of prosecuting his claim. It shall be a defense to any action for which a claim for indemnification is made under Section 3 hereof (other than an action brought to enforce a claim for expenses pursuant to Section 8 hereof, provided that the required undertaking has been tendered to the Corporation) that Indemnitee is not entitled to indemnification because of the limitations set forth in Section 4 hereof. 10. SUBROGATION. In the event of payment under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 11. NON-EXCLUSIVITY OF RIGHTS. The right conferred on Indemnitee by this Agreement shall not be exclusive of any other right which Indemnitee may have or hereafter acquire under any statute, provision of the Organizational Documents, agreement, vote of stockholders or directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. 12. SURVIVAL RIGHTS. (a) The rights conferred on Indemnitee by this Agreement shall continue after Indemnitee has ceased to be a director, officer, employee or other agent of the Corporation or to serve at the request of the Corporation as a director, officer, employee or other agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise and shall inure to the benefit of Indemnitee's heirs, executors and administrators. (b) The Corporation shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Corporation, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform if no such succession has taken place. 13. SEPARABILITY. Each of the provisions of this Agreement is a separate and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid for any reason, such invalidity or unenforceablility shall 5 not affect the validity or enforceability of the other provisions hereof. Furthermore, if this Agreement shall be invalidated in its entirety on any ground, then the Corporation shall nevertheless indemnify Indemnitee to the fullest extent provided by the Organizational Documents, the Code or any other applicable law. 14. GOVERNING LAW. This Agreement shall be interpreted and enforced in accordance with the laws of the State of Delaware. 15. AMENDMENT AND TERMINATION. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be original but all of which together shall constitute but one and the same Agreement. 17. HEADINGS. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 18. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given (i) upon delivery if delivered by hand to the party to whom such communication was directed or (ii) upon the third business day after the date on which such communication was mailed if mailed by certified mail with postage prepaid addressed as follows or to such other address as a party may hereafter designate by notice given pursuant hereto: (a) If to Indemnitee, at the address indicated on the signature page hereof. (b) If the Corporation, to: Trimeris, Inc. 4727 University Drive Durham, North Carolina 27707 IN WITNESS WHEROF, the parties hereto have executed this Agreement as of the date first above written. TRIMERIS, INC. By: __________________________ Name: Title: 6 INDEMNITEE ------------------------------ Print Indemnitee's name and address: ------------------------------ ------------------------------ ------------------------------ 7 EX-23 6 EXHIBIT 23.2 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Trimeris, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP Raleigh, North Carolina September 5, 1997 EX-23 7 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF COUNSEL The undersigned hereby consents to the use of our name and the statement with respect to us appearing under the heading "Experts" in Amendment No. 2 to the Registration Statement on Form S-1 of of Trimeris, Inc. /s/ PENNIE & EDMONDS LLP PENNIE & EDMONDS LLP New York, New York September 5, 1997 -----END PRIVACY-ENHANCED MESSAGE-----