-----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, LSNa8TNFwQPS32fIoc0PiojxD9fbN1++jA0lKII0de+qfuCcQAbUJw41XnurDc+S rWLssoY1sot/oUlEKeDIwA== 0000936392-96-000429.txt : 19960711 0000936392-96-000429.hdr.sgml : 19960711 ACCESSION NUMBER: 0000936392-96-000429 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19960710 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEPOTECH CORP CENTRAL INDEX KEY: 0000931686 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 330387911 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-07907 FILM NUMBER: 96593178 BUSINESS ADDRESS: STREET 1: 10450 SCIENCE CENTER DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92037 BUSINESS PHONE: 6196252424 MAIL ADDRESS: STREET 1: 10450 SCIENCE CENTER DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1 1 DEPOTECH CORPORATION -- FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 10, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ DEPOTECH CORPORATION (Exact name of registrant as specified in its charter) CALIFORNIA 2834 33-0387911 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification incorporation or organization) Classification Code Number) Number)
10450 SCIENCE CENTER DRIVE, SAN DIEGO, CALIFORNIA 92121 (619) 625-2424 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) EDWARD L. ERICKSON PRESIDENT AND CHIEF EXECUTIVE OFFICER DEPOTECH CORPORATION 10450 SCIENCE CENTER DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 625-2424 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------ WITH COPIES TO: CRAIG S. ANDREWS, ESQ. M. WAINWRIGHT FISHBURN, JR., ESQ. FAYE H. RUSSELL, ESQ. NANCY E. DENYES, ESQ. BROBECK, PHLEGER & HARRISON LLP COOLEY GODWARD CASTRO 550 WEST "C" STREET, SUITE 1300 HUDDLESON & TATUM SAN DIEGO, CALIFORNIA 92101 4365 EXECUTIVE DRIVE, SUITE 1100 SAN DIEGO, CALIFORNIA 92121
------------------------ Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / - ------------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / - ------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE - ---------------------------------------------------------------------------------------------------------- Common Stock, no par value........ 2,300,000 shares $22.625 $52,037,500 $17,944 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
(1) Includes 300,000 shares of Common Stock that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee. ------------------------ 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 THE REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 DEPOTECH CORPORATION ------------------------ CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
ITEM NUMBER AND HEADING IN FORM S-1 REGISTRATION STATEMENT CAPTION IN PROSPECTUS 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..... Cover Page of Registration Statement; Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.............................. Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Cover Page of Registration Statement 6. Dilution................................... Dilution 7. Selling Security Holders................... Inapplicable 8. Plan of Distribution....................... Outside Front Cover Page; Underwriting 9. Description of Securities to be Registered................................. Outside Front Cover Page; Description of Capital Stock 10. Interests of Named Experts and Counsel..... Legal Matters; Experts 11. Information with Respect to the Registrant................................. Outside Front Cover Page; Prospectus Summary; The Company; Risk Factors; Dividend Policy; Capitalization; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Transactions; Principal Shareholders; Description of Capital Stock; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Inapplicable
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 10, 1996 2,000,000 SHARES [DEPOTECH CORPORATION LOGO] COMMON STOCK THE 2,000,000 SHARES OF COMMON STOCK (THE "COMMON STOCK") OFFERED HEREBY (THIS "OFFERING") ARE BEING OFFERED BY DEPOTECH CORPORATION ("DEPOTECH" OR THE "COMPANY"). THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET ("NASDAQ") UNDER THE SYMBOL "DEPO." ON JULY 9, 1996, THE LAST REPORTED SALES PRICE OF THE COMMON STOCK ON NASDAQ WAS $22.00 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK." FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 6 TO 14. --------------------- 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. ---------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS* COMPANY+ PER SHARE.................. $ $ $ TOTAL++.................... $ $ $
- --------------- * THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING." + BEFORE DEDUCTING EXPENSES OF THIS OFFERING PAYABLE BY THE COMPANY ESTIMATED TO BE $325,000. ++ THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 300,000 ADDITIONAL SHARES OF COMMON STOCK ON THE SAME TERMS PER SHARE SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC WILL BE $ , THE TOTAL UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $ AND THE TOTAL PROCEEDS TO THE COMPANY WILL BE $ . SEE "UNDERWRITING." --------------------- THE COMMON STOCK IS BEING OFFERED BY THE UNDERWRITERS AS SET FORTH UNDER "UNDERWRITING" HEREIN. IT IS EXPECTED THAT THE DELIVERY OF THE CERTIFICATES THEREFOR WILL BE MADE AT THE OFFICES OF DILLON, READ & CO. INC., NEW YORK, NEW YORK, ON OR ABOUT , 1996. THE UNDERWRITERS INCLUDE: DILLON, READ & CO. INC. UBS SECURITIES VECTOR SECURITIES INTERNATIONAL, INC. THE DATE OF THIS PROSPECTUS IS , 1996 4 [DRAWING DEPICTING THE INJECTION OF DEPOCYT INTO AND ITS MODE OF ACTIVITY IN THE CEREBROSPINAL FLUID] [CHART DEPICTING PATIENTS' RESPONSE RATES IN THE COMPANY'S PHASE III CLINICAL TRIAL OF DEPOCYT AS COMPARED TO STANDARD THERAPY (METHOTREXATE)] [CHART DEPICTING PHASE OF DEVELOPMENT OF THE COMPANY'S PRODUCT PROGRAMS AND FEASIBILITY PROGRAMS] AVAILABLE INFORMATION The Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files annual and quarterly reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information may be inspected at the Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at the Commission's regional offices at 7 World Trade Center, 13th Floor, New York, New York 10048; and at Northwest Atrium Center, 500 West Madison Street, Room 1400, Chicago, Illinois 60661-2511. Copies of such material can also be obtained at prescribed rates at the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The Common Stock of the Company is traded on the Nasdaq National Market. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." All of the Company's product names, except DepoCyt(TM) (which is a joint trademark with Chiron Corporation), are trademarks of the Company. This Prospectus also includes names and trademarks of companies other than the Company. 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed under "Risk Factors," as well as those discussed elsewhere in this Prospectus. THE COMPANY DepoTech is a drug delivery company engaged in the development and manufacture of sustained-release therapeutic products based on DepoFoam, an injectable, depot drug delivery technology. DepoFoam consists of microscopic, spherical particles composed of hundreds to thousands of nonconcentric chambers each separated from adjacent chambers by a bilayer lipid membrane. The Company has developed DepoFoam formulations which release drugs over an extended period of time, such as several weeks, or over a shorter period, such as a few days. DepoTech has demonstrated that its proprietary DepoFoam technology can be used to encapsulate a wide spectrum of generic and proprietary water-stable drugs, including proteins, peptides, antisense oligonucleotides and DNA, for a range of therapeutic indications. DepoTech believes that its technology enables the development of highly-differentiated, proprietary products with enhanced safety and efficacy, improved profit margins, broadened labeling, extended or renewed patent life and significantly reduced administration schedules. The Company's lead product, DepoCyt, is a proprietary DepoFoam formulation of cytarabine, a generic anti-cancer drug, also known as ara-C. DepoCyt is being developed in collaboration with Chiron Corporation ("Chiron") in the United States, Canada and Europe for the treatment of three subtypes of neoplastic meningitis arising from solid tumors, leukemia and lymphoma. In June 1996, the Company announced response rate data, a primary endpoint of the solid tumor arm of a pivotal Phase III clinical trial which compared DepoCyt to standard therapy (methotrexate) in patients with neoplastic meningitis. Response was defined as the absence of malignant cells in two consecutive samples of patients' cerebrospinal fluid ("CSF") and lack of disease progression as assessed through neurological evaluation. Of 54 evaluable patients, 36% of the 25 patients treated with DepoCyt showed a response versus 17% of the 29 patients treated with methotrexate. Based on these data and other study endpoints still to be completed, the Company plans to file a new drug application ("NDA") for the treatment of neoplastic meningitis arising from solid tumors in the fourth quarter of 1996. In addition to DepoCyt, DepoTech has a diversified development pipeline that demonstrates the breadth of the Company's technology. The Company is: (i) developing DepoAmikacin, a DepoFoam formulation of amikacin, a potent, broad-spectrum antibiotic for the treatment and prophylaxis of bacterial infections; (ii) developing DepoMorphine, a DepoFoam formulation of morphine sulfate, for post-surgical acute pain management; and (iii) evaluating D0601, a DepoFoam formulation of insulin-like growth factor 1 ("IGF-1"), a Chiron proprietary protein, for a rheumatologic indication. The Company completed a Phase I clinical trial for DepoAmikacin in April 1996 in which the drug was found to be well-tolerated for all dosage levels studied. DepoTech has also completed formulation and initial manufacturing scale-up of DepoMorphine, is currently conducting preclinical studies and intends to file an investigational new drug application ("IND") in 1996. In addition, D0601 scale-up and preclinical development are currently underway. DepoTech is also evaluating DepoFoam formulations of several additional compounds which may offer significant medical benefits and substantial market potential, including antisense oligonucleotides, local anesthetics and anti- thrombotics. Since March 1994, DepoTech and Chiron have collaborated in the development of DepoCyt and DepoFoam formulations of certain of Chiron's proprietary products, including IGF-1. The collaborative agreement provides for the future development of additional DepoFoam formulations of other Chiron 2 6 proprietary products, including certain cytokines, vaccines, growth factors and gene therapy products. Under the terms of the agreement, DepoTech retains manufacturing rights to DepoCyt and the DepoFoam formulations of Chiron's proprietary products. Chiron will market and distribute DepoCyt in the United States, Canada and Europe and will have worldwide marketing rights to DepoFoam formulations of its own proprietary products. The Company's strategy is focused on the development and commercialization of proprietary DepoFoam formulations of generic drugs or, in collaboration with corporate partners, the development of DepoFoam formulations of compounds proprietary to the corporate partners. The Company is implementing this strategy by: (i) developing high value-added DepoFoam formulations of approved or late-stage drugs; (ii) expanding the product pipeline by identifying new product opportunities according to stringent criteria and by conducting feasibility studies; (iii) establishing collaborative and funding arrangements for development and commercialization of new DepoFoam products; and (iv) retaining certain manufacturing rights to DepoFoam formulations. The Company believes this strategy minimizes certain risks associated with traditional pharmaceutical discovery and development. 3 7 THE OFFERING Common Stock offered by the Company.......... 2,000,000 shares Common Stock to be outstanding after this Offering(1)................................ 13,364,978 shares Use of proceeds.............................. For research, clinical and process development expenses for ongoing and future programs, further clinical development and initial commercialization of DepotCyt and general corporate purposes, including research and development, clinical testing and capital expenditures in support of manufacturing, scientific and administrative equipment. See "Use of Proceeds." Nasdaq National Market symbol................ DEPO
- ------------ (1) Does not include: (i) 1,122,373 shares of Common Stock issuable upon exercise of options outstanding at a weighted average exercise price of $3.93 per share pursuant to the Company's stock option plans at March 31, 1996; (ii) 568,041 shares of Common Stock reserved for issuance upon exercise of outstanding warrants at a weighted average exercise price of $6.65 per share at March 31, 1996; and (iii) subsequent to March 31, 1996, 17,300 shares of Common Stock issuable upon the exercise of options granted, 114,890 shares of Common Stock issued upon exercise of options, 6,502 options terminated and 24,730 shares of Common Stock issued under the Company's Employee Stock Purchase Plan. See "Capitalization," "Management -- Benefit Plans," "Description of Capital Stock -- Warrants to Purchase Common Stock." SUMMARY FINANCIAL INFORMATION
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ----------- STATEMENT OF OPERATIONS DATA: Contract revenue................. $ 69,500 $ 582,120 $ 5,825,784 $3,154,540 $ 1,200,654 Marketing rights fee............. -- -- 1,000,000 1,000,000 -- Costs and expenses: Research and development....... 3,231,169 7,426,815 12,699,247 2,411,589 3,271,404 General and administrative..... 827,250 1,880,861 2,826,538 463,431 786,261 ----------- ----------- ----------- ---------- ----------- Total costs and expenses................ 4,058,419 9,307,676 15,525,785 2,875,020 4,057,665 ----------- ----------- ----------- ---------- ----------- Income (loss) from operations.... (3,988,919) (8,725,556) (8,700,001) 1,279,520 (2,857,011) Interest income.................. 128,652 286,984 1,084,244 207,375 511,359 Interest expense................. (36,639) (122,915) (404,790) (52,417) (144,583) ----------- ----------- ----------- ---------- ----------- Net income (loss)................ $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235) =========== =========== =========== ========== =========== Net income (loss) per share(1)... $(0.78) $(1.26) $(0.92) $0.17 $(0.22) ------ ------ ------ ----- ------ ------ ------ ------ ----- ------ Shares used in computing net income (loss) per share(1)..... 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501
MARCH 31, 1996 ------------------------------- ACTUAL AS ADJUSTED(2) ------------ -------------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments.................... $ 30,545,566 $ 71,580,566 Working capital...................................................... 29,813,463 70,848,463 Total assets......................................................... 45,812,895 86,847,895 Obligations under capital leases, less current portion............... 3,592,219 3,592,219 Accumulated deficit.................................................. (28,110,167) (28,110,167) Total shareholders' equity........................................... 38,885,713 79,920,713
- ------------ (1) See Note 1 of Notes to Financial Statements for information concerning the computation of net income (loss) per share and shares used in computing net income (loss) per share. (2) As adjusted to reflect the sale of the Common Stock offered hereby and the application of the estimated net proceeds of this Offering based upon an assumed public offering price of $22.00 per share. See "Use of Proceeds." 4 8 RISK FACTORS In addition to the other information contained in this Prospectus, the discussion of risk factors on pages 6 through 14 of this Prospectus should be considered carefully in evaluating an investment in the Common Stock. The risks of investing in the Common Stock include the following factors: "Early Stage Company;" "Government Regulation; Uncertainty of Obtaining Regulatory Approval;" "Limited Manufacturing Experience; Risk of Scale-Up;" "History of Operating Losses; Uncertainty of Future Profitability;" "Dependence Upon Partners for Development and Commercialization;" "Limited Sales and Marketing Capability;" "Dependence on Suppliers;" "Reliance on Manufacturing Process;" "Reliance on Technology Rights from Research Development Foundation;" "Patents and Proprietary Technology;" "Access to Drugs;" "Future Capital Needs;" "Uncertainty of Additional Funding;" "Dependence on Key Personnel;" "Highly Competitive Industry;" "Product Liability; Availability of Insurance;" "Hazardous Materials;" "Possible Volatility of Stock Price;" "No Dividends;" "Registration Rights; Lockup;" "Dilution;" "Uncertainty of Health Care Reform Measures and Third-Party Reimbursement;" and "Possible Anti-Takeover Effect of Certain Charter Provisions." THE COMPANY The Company was incorporated in the State of California in October 1989. Unless the context indicates otherwise, the "Company" or "DepoTech" refers to DepoTech Corporation. The Company's principal executive offices are located at 10450 Science Center Drive, San Diego, California 92121, and its telephone number is (619) 625-2424. 5 9 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Company. Prospective investors are cautioned that the statements in this Prospectus that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth in the following "Risk Factors" and elsewhere in this Prospectus. EARLY STAGE COMPANY DepoTech's products are at an early stage of development, and, to date, only two of the Company's DepoFoam formulations, DepoCyt and DepoAmikacin, have been subject to any human clinical testing. Although many of the drug compounds which the Company has encapsulated in DepoFoam have been tested in humans by others using alternate delivery routes, the Company's potential products will require extensive research, formulation, development, preclinical and clinical testing, and may involve a lengthy regulatory approval process prior to commercialization. There can be no assurance that DepoCyt, DepoAmikacin or any of the Company's other products or potential products will prove safe and effective in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at acceptable cost or be successfully commercialized. In addition, there can be no assurance that preclinical or clinical testing will accurately predict safety or efficacy in broader human use, or that delays in the regulatory approval process will not result in longer clinical trial schedules than those currently expected by the Company. Even if all of the Company's products prove to be safe and effective and are approved for marketing by the United States Food and Drug Administration ("FDA") and other regulatory authorities, there can be no assurance that health care providers, payors and patients will accept the Company's products. Any failure of the Company to achieve technical feasibility, demonstrate safety, achieve clinical efficacy, obtain regulatory approval or, together with its partners, successfully market products would have a material adverse effect on the Company. DepoCyt is the Company's only product currently in pivotal phase III trials. Data from the solid tumor arm of the trial was reported in June 1996 and the two other arms of the trial, for neoplastic meningitis arising from leukemia and lymphoma, are expected to be completed by the end of 1996. The Company expects to file an NDA under the FDA's expedited approval process for the treatment of neoplastic meningitis arising from solid tumors in the fourth quarter of 1996. In the case of DepoCyt, as with all drugs subject to accelerated approval, the FDA has requested that the Company submit a Phase IV protocol prior to the submission of an NDA. There can be no assurance that the data reported to date regarding DepoCyt will be sufficient to gain FDA approval, that additional results from the pivotal Phase III trial will confirm earlier results or that the Phase IV and other clinical trials of DepoCyt will generate positive results. Any of these occurrences could have a material adverse effect on the Company and its ability to fund the further development and commercialization of DepoCyt and its other products. See "-- Government Regulation; Uncertainty of Obtaining Regulatory Approval." GOVERNMENT REGULATION; UNCERTAINTY OF OBTAINING REGULATORY APPROVAL DepoTech's research and development activities are, and its future business will be, subject to significant regulation by governmental authorities in the United States, primarily by the FDA. Pharmaceutical products intended for therapeutic use in humans are governed principally by the Federal Food, Drug, and Cosmetic Act, as amended, and by the FDA regulations in the United States and by comparable laws and regulations in foreign countries. DepoTech is also subject to regulation under the food and drug statutes and regulations of the State of California. DepoTech recently announced certain results of the solid tumor arm of the Phase III clinical trial for DepoCyt which showed an increased response rate for DepoCyt versus standard therapy. There can be no assurance that these results will meet the requirements for regulatory approvals necessary to commercialize DepoCyt in the United States or otherwise. 6 10 The clinical testing and FDA review process for new drugs or biologics requires substantial time, effort and expense. There can be no assurance that any approval will be granted to the Company on a timely basis, if at all. The FDA may refuse to approve a product for commercial sale or shipment if applicable statutory and/or regulatory criteria are not satisfied, or may require additional testing or information. There can be no assurance that such additional testing or the provision of such information, if required, will not have a material adverse effect on the Company. Also, the regulatory process can be modified by Congress or the FDA in a manner that could materially affect the Company. In 1988, the FDA issued regulations intended to expedite the development, evaluation and marketing of new therapeutic products to treat life-threatening and severely debilitating illnesses for which no satisfactory alternative therapies exist. These regulations provide for early consultation between the sponsor and the FDA in the design of both preclinical studies and clinical trials. At the present time, DepoCyt is being developed under such an accelerated program. There can be no assurance, however, that any future products the Company may develop will be eligible for evaluation by the FDA under the 1988 regulations. In addition, there can be no assurance that DepoCyt or any future products (if eligible) will be approved for marketing at all or, if approved for marketing, will be approved for marketing sooner than would be traditionally expected. Regulatory approval granted under these regulations may be restricted by the FDA as necessary to ensure the safe use of the drug. In addition, post-marketing clinical studies, sometimes called Phase IV studies, may be required. Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a "rare disease or condition," which generally is a disease or condition that affects populations of fewer than 200,000 individuals in the United States. Under current law, orphan drug designation confers United States marketing exclusivity upon the first company to receive FDA approval to market such designated drug for the designated indication for a period of seven years following approval of the NDA, subject to certain limitations. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory approval process. In June 1993, the Company obtained an orphan drug designation for DepoCyt from the FDA to treat neoplastic meningitis. There can be no assurance that the Company will receive the first FDA approval to market sustained-release cytarabine to treat neoplastic meningitis and thus receive market exclusivity for DepoCyt to treat neoplastic meningitis arising from leukemia, lymphoma or solid tumor metastases. Although obtaining FDA approval to market a product with an orphan drug designation can be advantageous, there can be no assurance that the scope of protection or the level of marketing exclusivity that is currently afforded by orphan drug designation and marketing approval will remain in effect in the future. For marketing outside the United States, the Company will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and biologics in such foreign jurisdictions. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country and there can be no assurance that the Company or any of its partners will meet and sustain any such requirements. See "Business -- Government Regulation." LIMITED MANUFACTURING EXPERIENCE; RISK OF SCALE-UP Although DepoTech is currently manufacturing materials for human clinical trials, the Company has no experience manufacturing products for commercial purposes. The Company will need to significantly scale-up its current manufacturing operations and comply with current Good Manufacturing Practices ("cGMPs") and other regulations prescribed by various regulatory agencies in the United States and other countries to achieve the prescribed quality and required levels of production of such products and to obtain marketing approval. Failure by the Company to successfully scale-up its manufacturing operations or to comply with cGMPs and other regulations would have a material adverse impact on the Company, including the loss of manufacturing rights under the Chiron agreement. See "Business -- Manufacturing." 7 11 HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has incurred an accumulated deficit of $28.1 million through March 31, 1996. The Company expects to continue to incur substantial losses over at least the next two years as the Company's research and development efforts, preclinical and clinical testing activities and manufacturing scale-up and sales and marketing arrangement efforts expand. All of the Company's revenues to date have consisted of contract revenues, milestone payments and interest income. No revenues have been generated from product sales. There can be no assurance that the Company can generate sufficient product or contract revenue to become profitable or sustain profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE UPON PARTNERS FOR DEVELOPMENT AND COMMERCIALIZATION The Company does not currently possess all the resources necessary to develop, complete the FDA approval process for and commercialize any of its potential therapeutic products. The Company intends to enter into collaborative arrangements with other companies to fund research, development and clinical trials, to assist in obtaining regulatory approvals in the United States and internationally and to commercialize its products. In addition, the Company's ability to apply its drug delivery technology to a broad range of pharmaceuticals will depend upon its ability to establish and maintain collaborative arrangements because the rights to many of the pharmaceuticals most suited to the Company's drug delivery technology are currently owned by third parties. While the Company has entered into preliminary collaborations to test feasibility of its delivery technology with certain compounds and has entered into a collaboration with Chiron, there can be no assurance that the Company will be able to enter into additional collaborations to develop commercial applications of its drug delivery technology. In addition, there can be no assurance that the Company will be able to enter into or maintain existing or future collaborations or that such collaborations will be successful. The failure of the Company to enter into a collaboration with the owner of rights to a particular formulation or pharmaceutical would preclude the Company from developing its drug delivery technology with respect to such formulation or pharmaceutical. The failure to enter into or maintain existing or future collaborations would have a material adverse effect on the Company. The Company's partners may pursue parallel development of other drug delivery technologies that may compete with the Company's drug delivery technology. In addition, definitive agreements negotiated with such partners may provide that these partners may terminate the collaboration at any time without significant penalty. Both the Company and Chiron have the ability to terminate a portion or all of the collaboration at certain intervals and with advance notice. In addition, Chiron has the ability to terminate the development of a proprietary Chiron compound with a limited amount of advance notice. Termination of a portion or all of the collaboration with Chiron would have a material adverse effect on the Company. Although the Company intends generally to formulate and manufacture pharmaceuticals for partners, certain partners may choose to formulate or manufacture their own formulations, thereby limiting one or more potential sources of revenue for DepoTech. In addition, the Company believes that it may be precluded from entering into arrangements with companies whose products compete with products sold by its partners. The Company also will have limited or no control over the resources that any partner may devote to the Company's products, over partners' development efforts, including the design and conduct of clinical trials, or over the pricing of products. There can be no assurance that any of the Company's present or future collaborative partners will perform their obligations as expected or will devote sufficient resources to the development, clinical testing or marketing of the Company's potential products. Any parallel development by a partner of alternate drug delivery technologies, preclusion from entering into competitive arrangements, failure to obtain timely regulatory approvals, premature termination of a collaborative agreement or failure by a partner to devote sufficient resources to the development and commercialization of the Company's products would have a material adverse effect on the Company. See "Business -- DepoTech's Strategy" and "Business -- Strategic Alliances." 8 12 LIMITED SALES AND MARKETING CAPABILITY Commercialization of the Company's products is expected to be expensive and time-consuming. In the event that the Company elects to participate directly in sales and marketing efforts for the Company's products, the Company will need to build such capability in the targeted markets. The Company currently has a limited marketing staff. There can be no assurance that the Company will be able to establish an adequate sales and marketing capability in any or all targeted markets or that it will be successful in gaining market acceptance for its products. To the extent the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties and there can be no assurance that such efforts will be successful. To the extent the Company relies on its collaborators, there can be no assurance that any of these collaborators or their sublicensees will successfully market or distribute the Company's products or that the Company will be able to establish a successful direct sales organization, co-promotion or distribution arrangements. See "Business -- Sales and Marketing." DEPENDENCE ON SUPPLIERS The Company currently relies on a limited number of suppliers to provide the materials used to manufacture its DepoFoam formulations. Certain of these materials are purchased only from one supplier. In the event the Company could not obtain adequate quantities of necessary materials from its existing suppliers, there can be no assurance that the Company would be able to access alternative sources of supply within a reasonable period of time or at commercially reasonable rates. Regulatory requirements applicable to pharmaceutical products tend to make the substitution of suppliers costly and time-consuming. The unavailability of adequate commercial quantities, the inability to develop alternative sources, a reduction or interruption in supply or a significant increase in the price of materials could have a material adverse effect on the Company's ability to manufacture and market its products. See "Business -- Manufacturing." RELIANCE ON MANUFACTURING PROCESS To date, the Company has relied on a particular proprietary method of manufacture. There can be no assurance that this method will be applicable to all pharmaceuticals or biologics the Company desires to commercialize. Further, the yield of product incorporated into the delivery system may be highly variable for different therapeutic agents. Finally, the Company will need to successfully meet any manufacturing challenges associated with the characteristics of the drug to be encapsulated. The physical and chemical stability of the DepoFoam formulation may vary with each therapeutic agent over time and under various storage conditions. There can be no assurance that the manufacturing process will result in economically viable yields of product or that it will produce formulations of therapeutic products sufficiently stable under suitable storage conditions to be commercially useful. In the event that the Company decides to pursue alternative manufacturing methods for some or all of its drugs, there can be no assurance that these methods will prove to be commercially practical or that the Company will have or be able to acquire rights to use such alternative methods. See "Business -- Manufacturing." RELIANCE ON TECHNOLOGY RIGHTS FROM RESEARCH DEVELOPMENT FOUNDATION In February 1994, the Company entered into an Assignment Agreement with Research Development Foundation ("RDF"), pursuant to which RDF assigned to DepoTech exclusive rights to certain intellectual property relating to the DepoFoam technology, including the corresponding patents and patent applications for such property (the "RDF Technology"). As consideration for the assignment of the RDF Technology, DepoTech will pay RDF an earned royalty on gross revenues from the sale by DepoTech or its collaborators of products incorporating the RDF Technology. The Company's products, including DepoCyt, incorporate the RDF Technology. In certain other circumstances, DepoTech will pay RDF a percentage of the royalties or other consideration received by DepoTech from licensees (or, if greater, the amount of royalty DepoTech would have owed had it engaged in the 9 13 same conduct as the licensees). In addition, RDF retains the right to terminate the agreement or to convert the exclusive nature of the rights granted under the agreement into a nonexclusive license in the event that the Company does not satisfy its contractual obligations, including making certain minimum annual payments. Additional termination events include bankruptcy, a material uncured breach of the agreement by DepoTech or a contest by DepoTech of the patents included in the RDF Technology. The termination of the Assignment Agreement or the conversion of its exclusive nature to a nonexclusive agreement would have a material adverse effect on the Company. See "Business -- Patents and Proprietary Rights." PATENTS AND PROPRIETARY TECHNOLOGY DepoTech relies on a combination of technical leadership, patent, trade secret, copyright and trademark protection and nondisclosure agreements to protect its proprietary rights. As of June 1, 1996, the Company had exclusive rights under its agreement with RDF discussed above to three issued United States patents, six pending United States patent applications, 46 issued foreign patents and 18 pending foreign applications. As of the same date and in its own name, the Company has one issued United States patent, one allowed United States patent application, four pending United States patent applications, one issued foreign patent and 20 pending foreign patent applications on file covering various aspects of its drug delivery technology. The Company intends to file additional patent applications in the future. There can be no assurance that the Company will be issued any additional patents or that, if any patents are issued, they will provide the Company with significant protection or will not be challenged. Even if such patents are enforceable, the Company anticipates that any attempt to enforce its patents would be time consuming and costly. Moreover, the laws of some foreign countries do not protect the Company's proprietary rights in the products to the same extent as do the laws of the United States. The patent positions of pharmaceutical, biotechnology and drug delivery companies, including DepoTech, are uncertain and involve complex legal and factual issues. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued. As a consequence, there can be no assurance that any of the Company's patent applications will result in the issuance of patents or, if any patents issue, that they will provide significant proprietary protection or will not be circumvented or invalidated. Because patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in the scientific or patent literature often lag behind actual discoveries, the Company cannot be certain that it was the first inventor of inventions covered by its pending patent applications or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the United States Patent and Trademark Office ("PTO") to determine priority of invention that could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that the Company's patents, if issued, would be held valid by a court of competent jurisdiction. An adverse outcome of any patent litigation could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from or to third parties or require the Company to cease using the technology in dispute. There can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertions will not result in costly litigation or require the Company to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to the Company, if at all. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief that could effectively block the Company's ability to further develop or commercialize its products in the United States and abroad and could result in the award of substantial damages. Defense of any lawsuit or failure to obtain any such license could have a material adverse affect on the Company. Finally, litigation, regardless of outcome, could result in substantial cost to and a diversion of efforts by the Company. See "Business -- Patents and Proprietary Rights." 10 14 ACCESS TO DRUGS The Company's ability to develop and commercialize its technology will be affected by the Company's or its partners' access to the drugs that are to be formulated. The Company intends in certain circumstances to rely on the ability of its partners to provide access to the drugs that are to be formulated for use with DepoFoam. There can be no assurance that the Company's partners will be able to provide access to drug candidates for formulation in DepoFoam, or that, if such access is provided, the Company or its partner will not be alleged or determined to be infringing on third parties' rights and will not be prohibited from using the drug or be found liable for damages that may not be subject to indemnification. Any restriction on access or liability for damages would have a material adverse effect on the Company. See "-- Dependence Upon Partners for Development and Commercialization" and "Business -- Patents and Proprietary Rights." FUTURE CAPITAL NEEDS The development and commercialization of the Company's products will require substantial funds to conduct research and development and preclinical and clinical testing of products and to manufacture and commercialize any products that are approved for commercial sale. The Company has a contractual commitment arising from the Chiron collaboration to fund 50% of the sales and marketing expenses incurred for DepoCyt in the United States, Canada and Europe. In addition, in December 1994, the Company entered into an agreement to lease an 82,000 square foot facility for a 20-year term with a future minimum rental commitment ranging from approximately $2.1 million to $4.5 million per year, based upon pre-established annual rent increases. Finally, the Company has a right of first refusal and right of first offer to purchase land located adjacent to its headquarters which must be exercised on or before October 15, 1997. The Company may elect to exercise such option in 1997 in order to build a facility to house packaging, labeling and warehousing and administrative offices. The estimated capital expenses associated with this facility would be approximately $8.5 million. The Company's future capital requirements will depend on many factors, including continued scientific progress in its products and process development programs, progress with preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost of manufacturing scale-up, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, competing technological and market developments, changes in existing collaborative relationships, the ability of the Company to establish collaborative arrangements and the cost of establishing effective sales and marketing arrangements. To date, the Company has not received any revenues from product sales. The Company anticipates that its existing, available cash, cash equivalents and short-term investments, combined with the proceeds of this Offering, its committed future contract revenue, projected funding from equipment leases and interest income, will be adequate to satisfy its capital requirements and fund operations at least through 1998. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." UNCERTAINTY OF ADDITIONAL FUNDING The Company intends to seek additional funding through collaborative arrangements, contract research or through public or private financings. There can be no assurance that additional financing will be available on acceptable terms or at all. If additional funds are raised by issuing equity securities, further dilution to then existing shareholders may result. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its research and development programs or seek to obtain funds through arrangements with collaborative partners or others even if the arrangements would require the Company to relinquish certain rights to certain of its technologies, product candidates or products that the Company would not otherwise relinquish. DEPENDENCE ON KEY PERSONNEL The success of the Company is highly dependent, in part, on its ability to retain highly qualified personnel, including senior management and scientific personnel. Competition for such personnel is 11 15 intense and the inability to retain additional key employees or the loss of one or more current key employees could adversely affect the Company. Although the Company has been successful in retaining required personnel to date, there can be no assurance that the Company will be successful in the future. The Company has not entered into employment agreements with any personnel. See "Management." HIGHLY COMPETITIVE INDUSTRY The drug delivery, pharmaceutical and biotechnology industries are highly competitive and rapidly evolving, with significant developments expected to continue at a rapid pace. The Company's success will depend upon maintaining a competitive position and developing products and technologies for efficient and cost-effective drug delivery. The Company's products will compete with other formulations of drugs and with other drug delivery systems. There can be no assurance that any of the Company's products will have advantages that will be significant enough to cause medical professionals to use them. DepoTech believes that its products will compete on the basis of quality, efficacy, cost, convenience, safety and patient compliance. New drugs or further development in alternative drug delivery methods may provide greater therapeutic benefits for a specific drug or indication, or may offer comparable performance at lower cost than those offered by the Company's DepoFoam drug delivery system. The Company is aware of many other competitors in the field of drug delivery, including competitors developing injectable or implantable drug delivery systems, oral drug delivery technologies, passive transdermal systems, electrotransport systems, oral transmucosal systems and inhalation systems. There can be no assurance that developments by others will not render the Company's products or technologies uncompetitive or obsolete. Many of the Company's existing or potential competitors have substantially greater research and development capabilities, experience, manufacturing, marketing, financial and managerial resources than the Company. Furthermore, acquisitions of competing drug delivery companies by large pharmaceutical companies could enhance competitors' financial, marketing and other resources. Accordingly, the Company's competitors may succeed in developing competing technologies, obtaining FDA approval or gaining market share for products more rapidly than the Company. See "Business -- Competition." PRODUCT LIABILITY; AVAILABILITY OF INSURANCE The design, development and manufacture of the Company's products involve an inherent risk of product liability claims and associated adverse publicity. The Company obtained clinical trial product liability insurance for its human clinical trials and intends to obtain insurance for future clinical trials of other products under development and for potential product liability associated with the commercial sale of the Company's products. There can be no assurance, however, that the Company will be able to obtain or maintain insurance for any of its clinical trials or commercial products. Although the Company currently maintains general liability insurance, there can be no assurance that the coverage limits of the Company's insurance policies will be adequate. Product liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. A successful claim brought against the Company in excess of the Company's insurance coverage would have a material adverse effect upon the Company. HAZARDOUS MATERIALS The Company's research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by local, 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 that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations. 12 16 POSSIBLE VOLATILITY OF STOCK PRICE Factors such as the announcements of technological innovations or new products by the Company, its competitors and other third parties, as well as variations in the Company's results of operations, market conditions, analysts' estimates and the stock market generally (and stock market perceptions of the pharmaceutical, biotechnology and/or drug delivery industries specifically) may cause the market price of the Company's common stock to fluctuate significantly. Companies such as DepoTech have, in recent years, experienced dramatic stock price volatility. Also, future sales of shares by existing shareholders pursuant to Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), or through the exercise of outstanding registration rights, could have an adverse effect on the price of the Company's common stock. NO DIVIDENDS The Company currently intends to retain any future earnings for use in its business and does not anticipate paying any cash dividends in the future. Under the terms of an equipment financing facility, the Company may not pay or declare any dividends without the lender's prior written consent. See "Dividend Policy." REGISTRATION RIGHTS; LOCKUP Holders of 3,671,051 shares of Common Stock are entitled to certain rights with respect to registration of such shares of Common Stock for offer or sale to the public (taking into account the exercise of outstanding options and warrants). Such sales may have an adverse effect on the Company's ability to raise needed capital and may adversely affect the market price of the Common Stock. Shareholders owning an aggregate of approximately 4,214,469 shares of Common Stock, representing approximately 37% of the total shares outstanding (and 820,171 shares issuable upon exercise of outstanding warrants and options), including shares held by all executive officers and directors and certain shareholders of the Company, have agreed not to offer, sell, contract to sell, grant any option to purchase, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable for Common Stock, or warrants or other rights to purchase Common Stock for a period of 90 days from the date of this Prospectus without the prior written consent of Dillon, Read & Co. Inc. See "Description of Capital Stock -- Registration Rights" and "Underwriting." DILUTION The public offering price of the Common Stock is substantially higher than the net tangible book value per share of the Common Stock. Investors participating in this Offering will therefore incur an immediate, substantial dilution in net tangible book value of approximately $16.04 per share and may incur additional dilution upon exercise of outstanding stock options and warrants. See "Dilution." UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD-PARTY REIMBURSEMENT The uncertainty created by a series of legislative and regulatory proposals announced in recent years could have a materially adverse effect on the Company's ability to raise capital and to identify and reach agreements with potential partners. In the event such proposals are eventually adopted, they could have a material adverse effect on the Company. Furthermore, the Company's ability to commercialize its potential product portfolio may be adversely affected to the extent that such proposals have a material adverse effect on the business, financial condition and profitability of other companies that are current or prospective collaborators for certain of the Company's proposed products. In both domestic and foreign markets, sales of the Company's potential products, if any, will depend in part on the availability of reimbursement of third-party payors such as government health 13 17 administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's proposed products will be considered cost effective or that adequate third-party reimbursement will be available to enable the Company to maintain price levels sufficient to realize an appropriate return on its investment in product development. Legislation and regulations affecting the pricing of pharmaceuticals may change before the Company's proposed products are approved for marketing and any such changes could further limit reimbursement for medical products and services. See "Business -- Health Care Reform Measures and Third-Party Reimbursement." POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS The Company's Articles of Incorporation include, among other things, a provision (the "Fair Price Provision") that requires the approval of the holders of two-thirds of the Company's voting stock as a condition to a merger or certain other business transactions with, or proposed by, a holder of 15% or more of the Company's voting stock, except in cases where certain directors approve the transaction or certain minimum price criteria and other procedural requirements are met. The Fair Price Provision and other charter provisions may discourage certain types of transactions involving an actual or potential change in control of the Company, including transactions in which the shareholders might otherwise receive a premium for their shares over then current market prices, and may limit the ability of the shareholders to approve transactions that they may deem to be in their best interests. The Board of Directors (the "Board") also has the authority to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the rights, priorities, preferences, qualifications, limitations and restrictions, including the dividend rates, conversion rights, voting rights, terms of redemption, terms of sinking funds, liquidation preferences and the number of shares constituting any series, without any further vote or action by the shareholders, which could decrease the amount of earnings and assets available for distribution to holders of Common Stock or adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company and may adversely affect the rights of the holders of Common Stock. See "Description of Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Possible Anti-Takeover Effect of Certain Charter Provisions." 14 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered hereby are estimated to be approximately $41,035,000 ($47,239,000 if the Underwriters' over-allotment option is exercised in full), assuming a public offering price of $22.00 per share and after deducting the estimated underwriting discounts and commissions and other estimated offering expenses. The Company expects to use the net proceeds, including the interest thereon, (i) to fund research, clinical and process development expenses for ongoing and future programs (approximately 70%), (ii) to fund further clinical development and initial commercialization of DepoCyt (approximately 10%) and (iii) for general corporate purposes, including research and development, clinical testing and capital expenditures in support of manufacturing, scientific and administrative equipment (approximately 20%). The amounts actually expended for each purpose may vary significantly depending upon numerous factors, including the progress of the Company's research and development programs, the results of preclinical and clinical studies, the timing of regulatory approvals, technological advances, the commercial potential of proposed compounds and the status of competitive products. In addition, expenditures will also depend upon the establishment of collaborative research agreements with other companies, the availability of additional financing and other factors. The Company believes that its existing, available cash, cash equivalents and short-term investments, combined with the net proceeds of this Offering, its committed future contract revenue, projected funding from equipment leases and interest income, will be adequate to satisfy its capital requirements and fund operations at least through 1998. Pending application of the net proceeds as described above, the Company intends to invest the net proceeds of this Offering in investment-grade securities. PRICE RANGE OF COMMON STOCK The Common Stock is traded on the over-the-counter market and prices are quoted on the Nasdaq under the symbol "DEPO." The following table sets forth the intraday high and low prices for the Common Stock for the periods indicated, as reported on the Nasdaq.
HIGH LOW ------ ------ YEAR ENDED DECEMBER 31, 1995: 3rd Quarter (Sept. 29 and Sept. 30)............................... $14.00 $12.75 4th Quarter....................................................... 21.75 12.50 YEAR ENDING DECEMBER 31, 1996: 1st Quarter....................................................... $25.50 $18.00 2nd Quarter....................................................... 29.50 22.50 3rd Quarter (through July 9, 1996)................................ 25.50 22.00
On July 9, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $22.00 per share. As of June 1, 1996, there were approximately 310 holders of record of the Common Stock. DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock. The Company does not anticipate paying any cash dividends within the foreseeable future. Under the terms of an equipment financing facility, the Company may not pay or declare any dividends without the lender's prior written consent. 15 19 CAPITALIZATION The following table sets forth (i) the capitalization of the Company as of March 31, 1996 and (ii) as adjusted to give effect to the sale by the Company of 2,000,000 shares of Common Stock offered hereby, assuming a public offering price of $22.00 per share less estimated underwriting discounts and commissions and other expenses of this Offering.
MARCH 31, 1996 ----------------------------- ACTUAL AS ADJUSTED ------------ ------------ Obligations under capital leases, less current portion........ $ 3,592,219 $ 3,592,219 Shareholders' equity: Convertible Preferred Stock, no par value, 5,000,000 shares authorized and none issued and outstanding actual and as adjusted................................................. -- -- Common Stock, no par value, 30,000,000 shares authorized, 11,364,978 and 13,364,978 shares issued and outstanding actual and as adjusted................................... 67,190,282 108,225,282 Deferred compensation related to stock options, net........... (201,326) (201,326) Unrealized gain on investments................................ 6,924 6,924 Accumulated deficit........................................... (28,110,167) (28,110,167) ------------ ------------ Total shareholders' equity(1)............................ 38,885,713 79,920,713 ------------ ------------ Total capitalization................................ $ 42,477,932 $ 83,512,932 ============ ============
- ------------ (1) Does not include: (i) 1,122,373 shares of Common Stock issuable upon exercise of options outstanding at a weighted average exercise price of $3.93 per share pursuant to the Company's stock option plans at March 31, 1996; (ii) 568,041 shares of Common Stock reserved for issuance upon exercise of outstanding warrants at a weighted average exercise price of $6.65 per share at March 31, 1996; and (iii) subsequent to March 31, 1996, 17,300 shares of Common Stock issuable upon the exercise of options granted, 114,890 shares of Common Stock issued upon exercise of options, 6,502 options terminated and 24,730 shares of Common Stock issued under the Company's Employee Stock Purchase Plan. See "Management -- Benefit Plans" and "Description of Capital Stock -- Warrants to Purchase Common Stock." 16 20 DILUTION The net tangible book value of the Company at March 31, 1996 was $38,569,713, or $3.39 per share. Net tangible book value per share of Common Stock represents the amount of total tangible assets of the Company less total liabilities divided by the number of shares of the Common Stock outstanding. After giving effect to the sale of the 2,000,000 shares of Common Stock offered hereby at an assumed public offering price of $22.00 per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, the Company's net tangible book value as of March 31, 1996 would have been $79,604,713 or $5.96 per share of Common Stock. This represents an immediate increase in net tangible book value per share of Common Stock of $2.57 to existing holders and immediate dilution in net tangible book value of $16.04 per share to new investors purchasing Common Stock in this Offering. The following table illustrates the per share dilution: Assumed public offering price per share............................ $22.00 Net tangible book value per share of Common Stock before this Offering................................................. $3.39 Increase per share attributable to new investors................. 2.57 Net tangible book value per share of Common Stock after this Offering.................................................... 5.96 ----- Dilution per share to new investors(1)............................. $16.04 =====
- ------------ (1) If the Underwriters' over-allotment option is exercised in full, dilution per share to new investors would be $15.72. 17 21 SELECTED FINANCIAL DATA The selected financial data set forth below with respect to the Company's statements of operations for each of the three years in the period ended December 31, 1995, and with respect to the Company's balance sheets at December 31, 1994 and 1995, are derived from the audited financial statements of the Company that have been audited by Ernst & Young LLP, independent auditors, which are included elsewhere herein and are qualified by reference to such Financial Statements and Notes related thereto. The statement of operations data for the years ended December 31, 1991 and 1992, and the balance sheet data at December 31, 1991, 1992 and 1993 have been derived from financial statements audited by Ernst & Young LLP which are not included herein. The statement of operations data for the three months ended March 31, 1995 and 1996 and the balance sheet data at March 31, 1996 have been derived from unaudited financial statements; however, management believes such financial statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and results of operations for these periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1996. The selected financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------------------------------------- ------------------------- 1991 1992 1993 1994 1995 1995 1996 --------- ----------- ----------- ----------- ----------- ---------- ----------- STATEMENT OF OPERATIONS DATA: Contract revenue........... $ -- $ 15,000 $ 69,500 $ 582,120 $ 5,825,784 $3,154,540 $ 1,200,654 Marketing rights fee....... -- -- -- -- 1,000,000 1,000,000 -- Costs and expenses: Research and development............ 62,440 741,733 3,231,169 7,426,815 12,699,247 2,411,589 3,271,404 General and administrative......... 82,467 433,929 827,250 1,880,861 2,826,538 463,431 786,261 --------- ----------- ----------- ----------- ----------- ---------- ----------- Total costs and expenses........... 144,907 1,175,662 4,058,419 9,307,676 15,525,785 2,875,020 4,057,665 --------- ----------- ----------- ----------- ----------- ---------- ----------- Income (loss) from operations............... (144,907) (1,160,662) (3,988,919) (8,725,556) (8,700,001) 1,279,520 (2,857,011) Interest income............ 2,455 2,205 128,652 286,984 1,084,244 207,375 511,359 Interest expense........... -- (51,049) (36,639) (122,915) (404,790) (52,417) (144,583) --------- ----------- ----------- ----------- ----------- ---------- ----------- Net income (loss).......... $(142,452) $(1,209,506) $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235) ========= =========== =========== =========== =========== ========== =========== Net income (loss) per share(1)................. $(0.07) $(0.52) $(0.78) $(1.26) $(0.92) $0.17 $(0.22) ----- ----- ----- ----- ----- ---- ----- ----- ----- ----- ----- ----- ---- ----- Shares used in computing net income (loss) per share(1)................. 1,986,950 2,326,059 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501 ========= =========== =========== =========== =========== ========== ===========
DECEMBER 31, --------------------------------------------------------------------------- MARCH 31, 1991 1992 1993 1994 1995 1996 --------- ----------- ----------- ------------ ------------ ------------ BALANCE SHEET DATA: Cash, cash equivalents and short- term investments................ $ 116,287 $ 6,095,987 $ 7,519,096 $ 9,983,046 $ 38,661,534 $ 30,545,566 Working capital................... 79,878 6,066,903 6,674,114 8,530,570 35,375,372 29,813,463 Total assets...................... 145,592 6,333,479 10,107,087 15,346,654 48,977,573 45,812,895 Obligations under capital leases, less current portion............ -- -- 303,366 1,274,381 2,831,010 3,592,219 Note payable...................... -- -- -- 231,938 -- -- Accumulated deficit............... (203,063) (1,412,569) (5,309,475) (15,766,991) (25,619,932) (28,110,167) Total shareholders' equity........ 104,242 6,170,556 8,702,521 10,903,253 41,505,530 38,885,713
- ------------ (1) See Note 1 of Notes to Financial Statements for information concerning the computation of net income (loss) per share and shares used in computing net income (loss) per share. 18 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with "Selected Financial Data" and the Company's Financial Statements and Notes thereto appearing elsewhere in this Prospectus. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Prospectus contain 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 such a difference include, but are not limited to, those discussed in "Risk Factors." OVERVIEW Since its inception in October 1989, the Company has devoted substantially all of its resources to the development of its potential products. To date, the Company has not received any revenues from the sale of products. The Company has funded its development programs primarily from equity-derived working capital and through strategic alliances with other companies. DepoTech expects to incur substantial losses over at least the next two years as the Company's research and development efforts, preclinical and clinical testing activities and manufacturing scale-up and sales and marketing activities expand. The amount of net losses and the time required for the Company to achieve profitability are highly uncertain. Operating losses may also fluctuate from quarter to quarter as a result of differences in timing of expenses incurred. There can be no assurance that the Company will be able to achieve profitability at all or on a sustained basis. As of March 31, 1996, the Company's accumulated deficit was approximately $28.1 million. RESULTS OF OPERATIONS Three Months Ended March 31, 1996 and 1995 The Company had total revenues of $1.2 million for the three months ended March 31, 1996 compared to $4.2 million for the same period in 1995. Total revenues were primarily derived from reimbursement of 50% of the clinical trial and manufacturing scale-up expenses for the Company's lead product, DepoCyt, under a collaborative agreement with Chiron. In addition, Chiron reimbursed DepoTech for 100% of feasibility studies performed on their behalf. 1995 total revenues included a one-time marketing rights fee and reimbursement of prior year clinical trial expenses for DepoCyt totaling $3.5 million earned by the Company in January 1995 upon achievement of a development milestone under the Chiron collaboration. Revenues derived from this milestone will not re-occur in future periods. Revenues may fluctuate from period to period depending on the level of clinical and process development activities for projects covered under the collaboration agreement and the achievement of milestones. Research and development expenses for the first quarter ended March 31, 1996 increased to $3.3 million compared to $2.4 million for the same period in 1995. Factors contributing to this increase include expanded efforts in Phase III clinical trials and manufacturing scale-up for DepoCyt, and clinical and preclinical development of other potential DepoFoam products. The Company completed a Phase I clinical trial for DepoAmikacin in April 1996. Under the collaborative agreement with Chiron, the Company is obligated to fund 50% of the sales and marketing expenses incurred for DepoCyt. DepoTech is recognizing such pre-launch expenses incurred in 1996 prior to the onset of any product revenue. General and administrative expenses for the first quarter of 1996 increased to $0.8 million from $0.5 million in the same period in 1995. The increase was primarily due to expansion in administrative staffing, higher occupancy expenses and costs associated with being a public company. 19 23 Interest income increased to $0.5 million for the three months ended March 31, 1996 from $0.2 million for the same period in 1995. The increase was principally due to higher average cash investment balances following the Company's initial public offering in October 1995 and increases in available market interest rates. Interest expense increased to $145,000 for the three months ended March 31, 1996 from $52,000 for the same period in 1995. The increase in interest expense was due to higher balances outstanding for obligations under capital leases and loans. Years Ended December 31, 1995, 1994 and 1993 The Company had contract revenues of $5.8 million for the year ended December 31, 1995 compared to $0.6 million for 1994 and $0.1 million for 1993. The 1995 and 1994 contract revenues were primarily derived from the Company's collaborative agreement with Chiron. The increase in contract revenues from 1993 to 1994 was due principally to agreements for feasibility studies with corporate partners. In January 1995, the Company achieved a development milestone under the Chiron agreement which resulted in revenues of approximately $2.5 million from Chiron for reimbursement of 50% of clinical trial expenses for DepoCyt incurred from July 1993 to December 1994. The remaining $3.3 million in contract revenues represents Chiron's reimbursement of 50% of clinical trial expenses for DepoCyt incurred during 1995 and Chiron's reimbursement of 100% of costs associated with feasibility studies performed on Chiron's behalf. In addition, during 1995, the Company recorded revenues totaling $1.0 million for a marketing rights fee for DepoCyt in the United States, Canada and Europe. Clinical trial expenses for DepoCyt in the United States and Canada are funded equally by DepoTech and Chiron. Revenues from the reimbursement of clinical trial expenses from prior years and the marketing rights fee are one time payments which will not re-occur in future periods. In 1996, the Company anticipates that contract revenue from Chiron will continue at approximately the same level as that recognized in 1995. Research and development expenses increased to $12.7 million for the year ended December 31, 1995, from $7.4 million in 1994 and $3.2 million in 1993. Factors contributing to these increases include substantial expansion in staff, the purchase of laboratory and manufacturing supplies, the expansion of pilot manufacturing and laboratory facilities and increases in equipment depreciation. Research and development expenses are expected to continue to increase in 1996 due to the ongoing clinical trials for DepoCyt, the continuation of clinical trials for DepoAmikacin, the expansion of preclinical and clinical testing of DepoMorphine and other new product development programs, and higher occupancy expense. General and administrative expenses increased to $2.8 million during 1995 from $1.9 million in 1994 and $0.8 million in 1993. The increases were primarily due to expansion in staffing and higher business development and occupancy expenses. General and administrative expenses are expected to continue to increase in 1996 due to increases in staffing and costs associated with being a public company. Interest income was $1.1 million for the year ended December 31, 1995 compared to $0.3 million in 1994 and $0.1 million in 1993. The increases were principally due to higher average cash investment balances and increases in available market interest rates. Interest expense was $0.4 million for the year ended December 31, 1995 compared to $0.1 million in 1994 and $37,000 in 1993. The increases in interest expense were due to higher balances outstanding for obligations under capital leases and costs associated with a $4.0 million bank credit line. LIQUIDITY AND CAPITAL RESOURCES Since its inception, DepoTech has financed its operations primarily through public and private placements of equity securities, which provided aggregate net proceeds of approximately $67.2 million through March 31, 1996, and through capital equipment leases. In October 1995, the Company completed its initial public offering of common stock with net proceeds of $38.1 million. 20 24 As of March 31, 1996, the Company had cash, cash equivalents and short-term investments of $30.5 million as compared to $38.7 million at December 31, 1995. The decrease of $8.2 million in cash, cash equivalents and short-term investments was due primarily to net cash used to fund operations of $4.2 million and payments totaling $3.4 million for capital expenditures. Working capital decreased to $29.8 million as of March 31, 1996 compared to $35.4 million as of December 31, 1995. Through March 31, 1996, the Company has invested an aggregate of $14.3 million for property and equipment of which $6.6 million has been funded through capital equipment leases. In April 1996, the Company obtained a $2.5 million equipment lease which was used to finance certain tenant improvement costs incurred in the first quarter for the build-out of the Company's main manufacturing space and equipment purchases. In June 1996, the Company signed a bank credit facility for $9.0 million to finance future equipment purchases. DepoTech intends to continue to finance through third parties a substantial portion of future capital expenditures supplemented by internal cash resources, where appropriate. In September 1995, the Company occupied the initial phase (50,000 square feet) of a build-to-suit facility housing its administrative, research, development and clinical activities. DepoTech began paying rent in mid-March 1996 for the remaining space (32,000 square feet) which is intended to provide future multi-line manufacturing capability. This will result in increased facility expenses in future periods. The future minimum rental commitment for this facility will range from $2.1 million to $4.5 million per year over 20 years, based upon pre-established annual rent increases. In addition, the Company has a right of first refusal and right of first offer to purchase land located adjacent to its headquarters which must be exercised on or before October 15, 1997. The Company may elect to exercise such option in 1997 in order to build a facility to house packaging, labeling and warehousing and administrative offices. The estimated capital expenses associated with this facility would be approximately $8.5 million. The Company's operations to date have consumed substantial amounts of cash, which is expected to continue over the foreseeable future. The amount of net losses and the time required for the Company to achieve profitability are highly uncertain. There can be no assurance that the Company will be able to achieve profitability at all or on a sustained basis. It is the Company's intention to fund certain product research and development costs through additional collaborative relationships with suitable corporate partners. There can be no assurance that any future collaborative agreements will successfully reduce the Company's funding requirements. Additional equity or debt financing will be required, and there can be no assurance that these funds will be available on favorable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its product development programs or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would not otherwise relinquish. DepoTech anticipates that its existing, available cash, cash equivalents and short-term investments, combined with the proceeds of this Offering, its committed future contract revenue, projected funding from equipment leases and interest income will be adequate to satisfy its capital requirements and fund operations at least through 1998. The Company's future capital requirements will depend on many factors, including continued scientific progress in its products and process development programs, progress with preclinical testing and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost of manufacturing scale-up, the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, competing technological and market developments, changes in existing collaborative relationships, the ability of the Company to establish collaborative arrangements and the cost of establishing effective sales and marketing arrangements. 21 25 BUSINESS OVERVIEW DepoTech is a drug delivery company engaged in the development and manufacture of sustained-release therapeutic products based on DepoFoam, an injectable, depot drug delivery technology. DepoFoam consists of microscopic, spherical particles composed of hundreds to thousands of nonconcentric chambers each separated from adjacent chambers by a bilayer lipid membrane. The Company has developed DepoFoam formulations which release drugs over an extended period of time, such as several weeks, or over a shorter period, such as a few days. DepoTech has demonstrated that its proprietary DepoFoam technology can be used to encapsulate a wide spectrum of generic and proprietary water-stable drugs, including proteins, peptides, antisense oligonucleotides and DNA, for a range of therapeutic indications. DepoTech believes that its technology enables the development of highly-differentiated, proprietary products with enhanced safety and efficacy, improved profit margins, broadened labeling, extended or renewed patent life and significantly reduced administration schedules. The Company's lead product, DepoCyt, is a proprietary DepoFoam formulation of cytarabine, a generic anti-cancer drug, also known as ara-C. DepoCyt is being developed in collaboration with Chiron in the United States, Canada and Europe for the treatment of three subtypes of neoplastic meningitis arising from solid tumors, leukemia and lymphoma. In June 1996, the Company announced response rate data, a primary endpoint of the solid tumor arm of a pivotal Phase III clinical trial which compared DepoCyt to standard therapy (methotrexate) in patients with neoplastic meningitis. Response was defined as the absence of malignant cells in two consecutive samples of patients' CSF and lack of disease progression as assessed through neurological evaluation. Of 54 evaluable patients, 36% of the 25 patients treated with DepoCyt showed a response versus 17% of the 29 patients treated with methotrexate. Based on these data and other study endpoints still to be completed, the Company plans to file an NDA for the treatment of neoplastic meningitis arising from solid tumors in the fourth quarter of 1996. In addition to DepoCyt, DepoTech has a diversified development pipeline that demonstrates the breadth of the Company's technology. The Company is: (i) developing DepoAmikacin, a DepoFoam formulation of amikacin, a potent, broad-spectrum antibiotic for the treatment and prophylaxis of bacterial infections; (ii) developing DepoMorphine, a DepoFoam formulation of morphine sulfate, for post-surgical acute pain management; and (iii) evaluating D0601, a DepoFoam formulation of IGF-1, a Chiron proprietary protein, for a rheumatologic indication. The Company completed a Phase I clinical trial for DepoAmikacin in April 1996 in which the drug was found to be well-tolerated for all dosage levels studied. DepoTech has also completed formulation and initial manufacturing scale-up of DepoMorphine, is currently conducting preclinical studies and intends to file an IND in 1996. In addition, D0601 scale-up and preclinical development are currently underway. DepoTech is also evaluating DepoFoam formulations of several additional compounds which may offer significant medical benefits and substantial market potential, including antisense oligonucleotides, local anesthetics and antithrombotics. Since March 1994, DepoTech and Chiron have collaborated in the development of DepoCyt and DepoFoam formulations of certain of Chiron's proprietary products, including IGF-1. The collaborative agreement provides for the future development of additional DepoFoam formulations of other Chiron proprietary products, including certain cytokines, vaccines, growth factors and gene therapy products. Under the terms of the agreement, DepoTech retains manufacturing rights to DepoCyt and the DepoFoam formulations of Chiron's proprietary products. Chiron will market and distribute DepoCyt in the United States, Canada and Europe and will have worldwide marketing rights to DepoFoam formulations of its own proprietary products. The Company's strategy is focused on the development and commercialization of proprietary DepoFoam formulations of generic drugs or, in collaboration with corporate partners, the development of DepoFoam formulations of compounds proprietary to the corporate partners. The Company is 22 26 implementing this strategy by: (i) developing high value-added DepoFoam formulations of approved or late-stage drugs; (ii) expanding the product pipeline by identifying new product opportunities according to stringent criteria and by conducting feasibility studies; (iii) establishing collaborative and funding arrangements for development and commercialization of new DepoFoam products; and (iv) retaining certain manufacturing rights to DepoFoam formulations. The Company believes this strategy minimizes certain risks associated with traditional pharmaceutical discovery and development. DEPOFOAM TECHNOLOGY DepoFoam is a proprietary enabling drug delivery technology that permits the formulation of sustained release therapeutic compounds. DepoFoam consists of microscopic, spherical particles composed of hundreds to thousands of nonconcentric internal aqueous chambers containing the encapsulated drug, with each chamber separated from adjacent chambers by a bilayer lipid membrane. DepoFoam can be administered by a number of routes, including subcutaneous, intramuscular, intra-articular, epidural and intrathecal. Because the components of DepoFoam are synthetic duplicates of lipids normally present in the body, the material is biodegradable and biocompatible. Typically, a DepoFoam particle consists of less than 10% lipid, with the remaining 90% consisting of drug in aqueous solution. The resulting DepoFoam formulation is stored under refrigeration in ready-to-use form. The Company has tested DepoFoam formulations that release drugs over a period of days to weeks with the period of release defined by the lipid composition, chemistry of the encapsulated drug and manufacturing parameters of the DepoFoam particles. The Company believes drugs may be released from DepoFoam particles as the drugs diffuse and/or leach through the walls and by gradual erosion of the outside surface. The nature of drug release may also be determined by the specific chemistry and size of each drug molecule. As a result, the Company has demonstrated the ability to develop DepoFoam formulations which release drugs over an extended period of time, such as several weeks, or over a shorter period, such as one to two days. DepoTech has demonstrated that its proprietary DepoFoam technology can be used to encapsulate a wide spectrum of generic and proprietary water-stable drugs, including proteins, peptides, antisense oligonucleotides and DNA, for a range of therapeutic indications. ADVANTAGES OF DEPOFOAM The Company believes DepoFoam addresses many of the limitations associated with traditional drug delivery technologies. Most drugs are administered orally, by injection in intermittent and frequent doses or by continuous infusion. These routes of administration are not optimal for several reasons, including difficulty in achieving therapeutic drug levels over time, problems with toxicity, high costs due to frequent or continuous administration and poor patient compliance. Furthermore, innovations in biotechnology have led to an increase in the number of large-molecule protein and peptide drugs under development. These therapeutics, because of their large molecular size and susceptibility to degradation in the gastrointestinal tract, must usually be administered by multiple injections often in a hospital or other clinical setting. The Company believes that DepoFoam's key advantage over traditional methods of drug delivery, including bolus injections and oral administration, is that DepoFoam's sustained-release characteristics allow drugs to perform more safely and effectively. To attain the desired therapeutic effect, conventional drug delivery requires a dosage that delivers an initially high level of the drug followed by a sharp decline over time, whereas DepoFoam can provide a more consistent drug level over an extended period. For example, DepoCyt clinical trials to date have shown that DepoCyt has a therapeutic life of up to two weeks after a single intrathecal injection, compared to one day with unencapsulated cytarabine. 23 27 The Company believes that DepoFoam's key features, including lower initial drug levels and delivery of therapeutic drug levels over an extended period of time, make it superior to traditional drug delivery techniques, as well as other sustained-release delivery formulations. DepoFoam may: - Enhance safety and efficacy. The Company believes DepoFoam may improve the ratio of therapeutic effect to toxicity by decreasing the initial peak concentrations of drug associated with toxicity, while maintaining levels of drug at therapeutic, sub-toxic concentrations for an extended period of time. Many drugs demonstrate optimal efficacy when concentrations are maintained at therapeutic levels over an extended period of time. When a drug is administered intermittently, the therapeutic concentration is often exceeded for some period of time, and then the concentration rapidly drops below effective levels. Excessively high concentrations are a major cause of side effects, and sub-therapeutic concentrations are ineffective. - Lower overall treatment costs. To be commercially viable in today's health care market, drugs must show cost effectiveness, as well as therapeutic effectiveness. The Company believes that DepoFoam formulations of drugs may offer substantial cost savings by reducing the need for continuous infusion, the frequency of administration and the number of visits a patient must make to the doctor. These formulations may furthermore enable some patients that are typically treated in a hospital to be treated as out-patients, reduce the need for diagnostic monitoring of some products, reduce complications of therapy caused by poor compliance and eliminate the need for additional procedures or equipment. - Expand types of drugs capable of delivery over an extended period of time. Proteins and peptides, because of their large molecular size and susceptibility to degradation in the gastrointestinal tract, must currently be administered frequently by injection or by continuous infusion, typically in a hospital or other clinical setting. The Company believes DepoFoam may be able to deliver these drugs more effectively, including proteins, peptides, antisense oligonucleotides and DNA. - Expand indications of currently-marketed drugs. The Company believes that the therapeutically useful release of drugs from a DepoFoam formulation may allow such drugs to be marketed for indications where the Company believes they cannot currently be used because of the limitations of current delivery methods. For example, the Company believes DepoCyt will be indicated for treating solid tumor and lymphoma metastases in neoplastic meningitis even though the active ingredient of DepoCyt, cytarabine, is currently not labeled for these indications. - Improve profit margins through proprietary reformulation. The Company believes DepoFoam offers the potential to produce new proprietary formulations of generic products that may be differentiated from the nonsustained-release versions by virtue of reduced dosing requirements, improved efficacy, additional applications or decreased toxicity. The Company believes the proprietary position of such DepoFoam formulations will be based on the proprietary nature of DepoFoam, and may offer more attractive margins and increased sales relative to the generic competition. DEPOTECH'S STRATEGY DepoTech's strategy is focused on the development and commercialization of proprietary DepoFoam formulations of generic drugs or, in collaboration with corporate partners, the development of DepoFoam formulations of compounds proprietary to its corporate partners. The Company is implementing this strategy by: - Developing high value-added DepoFoam formulations of approved or late-stage drugs. The Company's product development efforts are focused primarily on drugs that either have proven safety and efficacy and are approved for marketing or are in late-stage clinical trials. The Company does not engage in basic research to discover new molecular entities. - Expanding the product pipeline by identifying new product opportunities according to stringent criteria and by conducting feasibility studies. The Company focuses its efforts on selecting new drug 24 28 candidates based on stringent criteria and developing DepoFoam formulations of drugs where sustained-release formulations offer a clear medical or cost benefit. Once a candidate compound passes these screening criteria, DepoTech performs a limited set of tests to establish technical feasibility for the product before undergoing expensive clinical development. The Company believes that proprietary DepoFoam formulations will add additional value to such drugs by potentially increasing their level of efficacy, reducing their toxicity and side effects, lowering overall treatment costs and expanding the indications they address. - Establishing collaborative and funding arrangements for development and commercialization of new DepoFoam products. As part of its commercialization strategy, the Company intends to focus its efforts on establishing collaborative arrangements with corporate partners to obtain access to specific compounds, obtain marketing and distribution capabilities and fund product development. With respect to products that are proprietary to the partner, DepoTech will seek to have the partner fund the feasibility, formulation, development, clinical testing and regulatory costs of the DepoFoam formulations of the product and will generally grant worldwide distribution rights to the DepoFoam formulation to the partner. In March 1994, the Company entered into a collaboration with Chiron that contained these strategic elements. In addition, in selected instances, DepoTech may retain certain marketing or co-promotion rights. - Retaining certain manufacturing rights to DepoFoam formulations. A key strategy of the Company is to seek to maintain exclusive formulation and manufacturing rights to DepoFoam encapsulated drugs, including proprietary products of corporate partners. The Company believes it has developed significant proprietary expertise in the formulation and manufacture of DepoFoam and expects to receive compensation for its expertise and effort in manufacturing DepoFoam formulations of drugs. 25 29 PRODUCT RESEARCH AND DEVELOPMENT PROGRAMS The table below summarizes DepoTech's portfolio of products currently under development and formulations undergoing feasibility testing. - ------------------------------------------------------------------------------------------------------- CORPORATE PRODUCT (ACTIVE COMPOUND) INTENDED USE STATUS(1) PARTNER/TERRITORY(2) - ------------------------------------------------------------------------------------------------------- PRODUCT PROGRAMS - ------------------------------------------------------------------------------------------------------- DepoCyt (cytarabine) Neoplastic meningitis solid tumors Phase IV Chiron/North America leukemia/lymphoma Phase III Chiron/North America pediatric Phase I/II Chiron/North America Neoplastic meningitis Pharmacokinetics Chiron/Europe study Neoplastic meningitis Dose confirmation None/Japan study DepoAmikacin (amikacin) Bacterial infections Phase I None DepoMorphine (morphine) Acute post-operative Preclinical None pain management D0601 (IGF-1) Rheumatologic diseases Preclinical Chiron/worldwide - ------------------------------------------------------------------------------------------------------- FEASIBILITY PROGRAMS - ------------------------------------------------------------------------------------------------------- Antisense oligonucleotides CMV retinitis Feasibility ISIS/worldwide (ISIS 2922) Local anesthetics Acute post-operative Feasibility None (bupivacaine) pain management Antithrombotics Arterial and venous Feasibility None (heparin) thrombosis - -------------------------------------------------------------------------------------------------------
- ------------ (1) "Feasibility" means initial laboratory testing to determine the ability to encapsulate the drug efficiently in DepoFoam, establish preliminary stability, engineer appropriate in vitro release rates and conduct limited animal studies. "Preclinical" means formulation optimization, scale-up experiments, additional stability testing following initial feasibility studies and other studies, including additional animal studies focused on toxicology and efficacy, necessary to prepare and file an IND. "Dose confirmation study" means a study to confirm the appropriateness of a dose established in one patient population in a different patient population. "Phase I" means initial human studies designed to establish the safety, dose tolerance and sometimes pharmacokinetics of a compound. "Phase I/II" means studies specific to cancer trials where safety, pharmacokinetics and dose finding are established in patients. "Phase III" means human studies designed to lead to accumulation of data sufficient to support an NDA. "Phase IV" means human studies that are generally performed after approval of a new drug. In the case of DepoCyt, as with all drugs subject to accelerated approval, the FDA has requested that the Company submit a Phase IV protocol prior to submission of an NDA. Completion of a Phase IV study is not a prerequisite for review of an NDA by the FDA. "Pharmacokinetics study" means human studies to confirm that therapeutic levels of drug in the CSF can be achieved by the lumbar route of administration. (2) The Company will seek to maintain manufacturing rights to DepoFoam formulations of compounds and will generally grant worldwide distribution rights to the DepoFoam formulation to the partner. For instance, in its collaboration with Chiron, DepoTech will manufacture DepoCyt and will encapsulate Chiron's proprietary compounds in DepoFoam. 26 30 DepoCyt The Company's lead product, DepoCyt, is a proprietary DepoFoam formulation of cytarabine, a generic anti-cancer drug, also known as ara-C. DepoCyt is being developed in collaboration with Chiron in the United States, Canada and Europe for the treatment of three subtypes of neoplastic meningitis arising from solid tumors, leukemia and lymphoma. In June 1996, the Company announced response rate data, a primary endpoint of the solid tumor arm of a pivotal Phase III clinical trial which compared DepoCyt to standard therapy (methotrexate) in patients with neoplastic meningitis. Based on these data and other study endpoints still to be completed, the Company plans to file an NDA initially for the treatment of neoplastic meningitis arising from solid tumors in the fourth quarter of 1996. Background. Neoplastic meningitis is a form of metastatic cancer arising from the spread of leukemia, lymphoma or solid tumors to the tissue, known as the meninges, which surrounds the brain and spinal cord and encloses the CSF. Because of the blood-brain barrier, drugs in the bloodstream do not penetrate well into the CSF. Thus, when cancer cells metastasize to the meninges, the most effective therapy is to inject anti-cancer drugs directly into the CSF. Cytarabine is one of the two drugs most commonly used for this therapy. Cytarabine acts by inhibiting a vital enzyme in DNA synthesis, DNA polymerase, causing a halt to the synthesis of DNA and resulting in death of the cell. Therefore, the best results are obtained when the drug is localized in the vicinity of dividing cancer cells for an extended period. Because the therapeutic half-life of cytarabine in the CSF is relatively short, frequent and repeated injections are necessary for effective treatment. For safety reasons, continuous intrathecal infusion of cytarabine is not a viable option. The result is that neoplastic meningitis cannot be treated effectively without the use of repeated, intrathecal injections that are inconvenient and uncomfortable for patients, require physician supervision and increase the risk of infection. Because of these and other factors, the disease is often under-diagnosed and frequently left untreated. Without effective treatment, life expectancy for patients diagnosed with this disease is between two and four months. Clinical trials to date have shown that DepoCyt maintained therapeutically useful concentrations of cytarabine in the CSF for two weeks after a single intrathecal injection as compared to less than one day with traditional intrathecal injections of cytarabine. As a consequence, the use of DepoCyt results in less frequent injections and extended therapeutic levels of the drug in the CSF. Markets. The Company estimates that the current treated market for neoplastic meningitis is approximately 20,000 patients per year in the United States. However, the Company expects the treatment market to grow and estimates that approximately 65,000 patients per year in the United States develop this disease. In June 1993, the Company obtained orphan drug designation for DepoCyt from the FDA to treat neoplastic meningitis. Clinical Development. In the Phase III clinical trial as originally designed and initiated in April 1994, patients with one of the three subtypes of neoplastic meningitis selected from multiple centers were randomized to receive either DepoCyt or standard therapy. Standard therapy for metastases of solid tumors is methotrexate and the standard therapy for metastases of leukemia and lymphoma is unencapsulated cytarabine. Within each subtype, at least 20 patients are to receive DepoCyt and at least 20 patients are to receive standard therapy. A total of 40 patients are to be treated for each subtype of the disease and a total of only 120 patients are required to complete all three arms of the study. Analysis of patients' response to treatment in the solid tumor arm has been completed and the leukemia and lymphoma arms are ongoing. In June 1996, the Company announced response rate data, a primary endpoint of the solid tumor arm of a pivotal Phase III clinical trial which compared DepoCyt to standard therapy (methotrexate) in patients with neoplastic meningitis. In this multicenter, controlled, non-blinded trial of DepoCyt, 61 patients were randomized to treatment either with DepoCyt or methotrexate. Fifty-four of these patients were evaluable for the analysis of response to therapy. Response was defined as the absence of malignant cells in two consecutive patients' samples of CSF and lack of disease progression as assessed through neurological evaluation. Of 54 evaluable patients, 36% of the 25 patients treated with DepoCyt 27 31 showed a response versus 17% of the 29 patients treated with methotrexate. The study design did not include an evaluation of partial response. Additionally, because previous studies have shown that methotrexate has a better response rate in neoplastic meningitis arising from breast and small cell lung cancers compared to other types of solid tumor metastases, patients entering the study were stratified into two subgroups and randomized to treatment either with DepoCyt or methotrexate. In the breast and small cell lung cancer subgroup, of eight evaluable patients treated with DepoCyt, 38% showed complete response versus 25% of 12 evaluable patients treated with methotrexate. In the subgroup comprised of all other solid tumor cancers, of 17 evaluable patients receiving DepoCyt, 35% responded versus 12% of 17 evaluable patients treated with methotrexate. DepoTech plans to continue to follow patients still on study and release additional trial results prior to submission of the NDA related to other defined endpoints, such as quality of life, duration of response and mortality. Furthermore, the pivotal study of DepoCyt in neoplastic meningitis arising from lymphomas and leukemias are continuing. The Phase III trial is being performed under the expedited development process of the FDA regulations, which is available for therapeutic products to treat life-threatening illnesses for which no satisfactory alternative therapies exist. The FDA has advised the Company that DepoTech may file an NDA with data collected from any one individual subtype in advance of accruing patients and completing the analyses on the other two subtypes. The Company plans to file an NDA for the treatment of neoplastic meningitis arising from solid tumors in the fourth quarter of 1996. In the case of DepoCyt, as with all drugs subject to accelerated approval, the FDA has requested that the Company submit a Phase IV protocol prior to submission of an NDA. Completion of a Phase IV study is not a prerequisite for review of an NDA by the FDA. The Company has initiated a multicenter Phase IV study of DepoCyt for the treatment of neoplastic meningitis arising from solid tumors in the United States and Canada. This study is a non-randomized trial intended to collect further data relating to safety and efficacy. The study also permits additional injections of DepoCyt for patients who fail to respond completely during the initial induction period of the study or who relapse 30 days following completion of the treatment protocol. See "-- Government Regulation." Additional Territories and Indications. Chiron is currently carrying out pharmacokinetic studies of DepoCyt for the treatment of neoplastic meningitis in the European Union. In addition, DepoTech is starting a trial of DepoCyt in Japan. This trial is designed to confirm the applicability of the dosing regimen used in the North American and European trials to the Japanese population. In parallel, the Company intends to submit an orphan drug application for the accelerated marketing approval of DepoCyt in Japan. To establish the appropriate use of DepoCyt in children afflicted with neoplastic meningitis, DepoTech, in conjunction with Chiron, is initiating a multi-center pediatric dose finding trial. This study will evaluate the safety and pharmacokinetics of DepoCyt in children of various ages. In addition, the study is expected to provide information regarding the efficacy of DepoCyt and to collect data on the long-term use of the drug. The Company is also exploring additional indications for DepoCyt, including its use in the treatment of other cancers and viral diseases. DepoAmikacin DepoTech is developing DepoAmikacin, a DepoFoam formulation of amikacin, a potent, broad-spectrum antibiotic. The Company believes that DepoFoam offers the opportunity to reformulate amikacin, which became a generic antibiotic in 1990, into a proprietary new product and to improve its therapeutic profile. The Company has successfully encapsulated amikacin in DepoFoam and has tested various formulations in animals. DepoTech completed a Phase I clinical trial for DepoAmikacin in April 1996 in which the drug was found to be well-tolerated for all dosage levels studied. 28 32 Background. Bacteria cause a wide range of illnesses in people, ranging from clinically unimportant infections to fatal diseases. Injectable forms of antibiotics are important tools of the physician, especially for more acutely ill patients. However, most antibiotics that are administered orally, by bolus injection or by continuous infusion achieve high systemic concentrations but lesser concentrations in infected tissue, and are generally eliminated from the body within several hours of administration. Furthermore, the concentration of certain antibiotics, including amikacin, that can be achieved in the infected tissue using current formulations is limited by the amount of drug that the body can tolerate in the bloodstream without causing damage to the kidneys and auditory nerves. DepoAmikacin can be administered directly into the site of infection and may deliver therapeutic levels of amikacin while reducing certain systemic toxicities associated with this drug. Consequently, DepoAmikacin may be able to expand the indications for amikacin and result in more attractive prices and margins. The Company believes DepoAmikacin may be used in many applications, including treatment and prophylaxis of bacterial infections associated with open fractures, indwelling vascular catheters, orthopedic implants, peritonitis and vascular grafts. Markets. In 1995, there were reported to be a total of over 7.0 million procedures occurring in the United States in which site-specific antibiotic treatment may have been appropriate. DepoTech estimates the target United States market for DepoAmikacin to be approximately 5.6 million procedures. Worldwide 1995 sales of the general class of antibiotics known as aminoglycosides, which includes amikacin, were approximately $477.0 million. In 1995, amikacin worldwide unit sales were approximately 8.4 million units, including 631,000 units in the United States, 5.7 million units in Japan and 2.0 million units in Europe. Clinical Development. In animal studies performed by the Company, a single injection of DepoAmikacin administered locally at the site of an intentionally infected implanted foreign body significantly reduced the number of bacteria present versus the use of either systemic or local injection of free amikacin. This animal model is analogous to many surgical situations, from complicated hip replacement surgery to insertion of catheters. Additional animal models of infection, including models for peritonitis and infected vascular grafts, are currently underway. Information from these studies will be used to support the selection and design of a Phase II clinical study. DepoMorphine DepoTech is developing DepoMorphine, a DepoFoam formulation of the opiate analgesic morphine sulfate, for use in moderating acute pain following surgery. This product is intended for epidural administration and may replace repeated epidural or intravenous administration of opiates or patient controlled analgesia for two to four days following surgery. The Company believes that DepoMorphine could be used in management of pain associated with many types of surgery, including Cesarean sections (epidural morphine is currently used in most Cesarean sections in the United States), hysterectomies, deep abdominal surgeries, hip and knee replacements and other surgical procedures. In 1995, the Company identified a total of approximately 5.6 million procedures occurring in the United States that may have been candidates for DepoMorphine. The Company estimates the target market to be approximately 3.8 million procedures. Worldwide 1995 sales of morphine were $110.3 million. In 1995, morphine worldwide unit sales were approximately 64.0 million units, including 41.6 million units in the United States, 9.8 million units in Japan and 12.6 million units in Europe. The Company believes that DepoFoam offers the opportunity to reformulate morphine sulfate, which has been a generic product for many years, into a proprietary new product with traditional pharmaceutical margins. DepoTech has completed formulation and initial manufacturing scale-up of DepoMorphine, is currently conducting preclinical studies and intends to file an IND in 1996. Preclinical studies in animals showed that DepoMorphine provided a minimum of two to three days of pain control following a single epidural injection. One characteristic of certain DepoFoam formulations of drugs is that an enhanced local effect may occur with limited systemic toxicity. A number of pharmacokinetic studies in 29 33 animals have confirmed that there are high levels of morphine at the injection site and in the local cerebral spinal fluid with very low levels in the blood. These data also show a sustained effect of the morphine and reproducibility from multiple batches of DepoMorphine. Chiron Proprietary Products Under its agreement with Chiron, two Chiron proprietary proteins, IGF-1 and IL-2, were chosen as the first two proprietary compounds to be developed into DepoFoam formulations. Feasibility studies including formulation development and in vivo animal studies on IGF-1 and IL-2 were completed and D0601 (DepoFoam encapsulated IGF-1) was chosen for further clinical development. D0601 scale-up and preclinical development are currently underway. In addition, Chiron and the Company have agreed to initiate another feasibility study on an additional Chiron proprietary compound or an additional indication for IGF-1 to begin in the second half of 1996. New Product Feasibility Programs DepoTech is also evaluating DepoFoam formulations of several additional compounds which may offer significant medical benefits and substantial market potential, including antisense oligonucleotides, local anesthetics and antithrombotics. The objectives of the feasibility programs are to: (i) determine the ease and efficiency of encapsulation of candidate drugs; (ii) evaluate in vitro and in vivo drug release characteristics; and (iii) conduct initial efficacy and/or safety studies in animal models to demonstrate potential clinical utility and advantages of the DepoFoam formulations. Antisense Oligonucleotides. In August 1995, DepoTech signed a research agreement with ISIS Pharmaceuticals, Inc. ("ISIS"). Under the terms of the agreement, DepoTech has successfully encapsulated two ISIS compounds and completed in vitro release and characterization studies of DepoFoam formulations of proprietary ISIS antisense oligonucleotides. ISIS has performed pharmacokinetic studies in animal models demonstrating prolonged release of DepoFoam encapsulated antisense oligonucleotides. Based on these preliminary studies, ISIS and DepoTech elected to extend the research agreement and to conduct additional feasibility studies with ISIS 2922 for use in CMV-induced retinitis. CMV retinitis is a localized, infectious disease that progressively destroys the retina and eventually results in blindness in AIDS patients. A different formulation of ISIS 2922 is currently being tested by ISIS in Phase III clinical trials. Local Anesthetics. DepoTech is conducting feasibility studies on DepoFoam formulations of local anesthetics, such as bupivacaine, for use in alleviating local pain following surgery or injury. The Company has successfully encapsulated bupivacaine into DepoFoam. Pharmacokinetic studies have shown that DepoFoam encapsulated bupivacaine is released slowly from the site of injection, resulting in prolonged duration (more than 24 hours) of analgesia following a single-dose administration. The Company is now optimizing the DepoFoam bupivacaine formulation. DepoTech believes that a DepoFoam formulation of a local anesthetic may complement its current DepoMorphine program and that the DepoMorphine and local anesthetic formulations may give physicians significantly improved drugs to manage postoperative pain. Pain associated with surgery or injury is often treated with local anesthetics. However, the usefulness of local anesthetics is frequently limited by their short half-lives which results in recurrence of pain and the need for repeated drug administration by a medical professional. A DepoFoam formulation of a local anesthetic may be useful either locally or regionally (e.g., epidurally) to provide long-lasting pain relief (more than 24 hours) and to reduce systemic central nervous system and cardiovascular toxicity associated with currently-used drugs. There are more than 5 million surgical procedures and serious trauma injuries per year that may benefit from longer lasting analgesia. The current pain relief drugs are short-acting and frequently do not provide adequate duration of pain relief. The Company believes that a long-lasting, safe DepoFoam formulation of a local anesthetic, such as bupivacaine, could become the drug of choice for controlling post-operative and post-injury pain. 30 34 Antithrombotics. The Company is investigating DepoFoam formulations of both unfractionated heparin ("UFH") and low molecular weight heparins ("LMWH") to deliver long-lasting antithrombotic activity. The Company believes that a DepoFoam heparin formulation may be useful to control both venous and arterial thromboses. The Company has successfully encapsulated UFH and LMWH in initial feasibility studies. In vitro release studies have shown appropriate slow release of LMWH from DepoFoam formulations. Thrombosis, manifested as heart attack and stroke, is a bigger cause of death than cancer, accidents and infections. Heparin, an anti-coagulant, is one of the most frequently prescribed injectable drugs in hospitals. The major disadvantages of heparins are: (i) a short half-life with the associated need for frequent injections or continuous infusions to achieve adequate antithrombotic coverage; and (ii) serious bleeding that can result from the high peak blood levels (supra-therapeutic levels) of heparin that accompany the large doses given to achieve lasting antithrombotic effects. DepoFoam formulations of UFH and LMWH have the potential to provide long-lasting (one to four days' duration) antithrombotic activity from a single dose while limiting supra-therapeutic blood levels and associated bleeding. The total market for antithrombotic agents, including generic heparin, is more than $1 billion, and heparin is the most frequently prescribed agent in this market. In 1995, the total number of UFH and LMWH doses combined was more than 120 million in the United States and more than 290 million in Europe. The Company believes that a long-lasting dosage form of heparin possessing an acceptable safety profile may increase the usage of this drug to prevent and treat thrombotic disorders, such as deep vein thrombosis, unstable angina and arterial restenosis following angioplasty. STRATEGIC ALLIANCES As part of its commercialization strategy, the Company intends to focus its efforts on establishing collaborative arrangements with corporate partners to obtain access to specific compounds, obtain access to distribution organizations and fund development work. The Company intends to seek to collaborate with major pharmaceutical or fully-integrated biotechnology companies that have significant clinical development, financial and marketing resources. With respect to products that are proprietary to its partners, DepoTech will seek to have its partners fund the feasibility, formulation, development, clinical testing and regulatory costs associated with the product and will generally grant worldwide distribution rights to the DepoFoam formulation to the partner. A key strategy of the Company is to retain exclusive formulation and manufacturing rights to any DepoFoam encapsulated drugs, including proprietary products of corporate partners. Under these collaborative arrangements, DepoTech expects to receive compensation based on both the partner's sales of the product and manufacturing costs of the product. The Company will have limited or no control over the resources that any partner may devote to the Company's products, over partners' development efforts, including the design and conduct of clinical trials, or over the pricing of products. There can be no assurance that any of the Company's present or future collaborative partners will perform their obligations as expected or will devote sufficient resources to the development, clinical testing or marketing of the Company's potential products. Any parallel development by a partner of alternate drug delivery technologies, preclusion from entering into competitive arrangements, failure to obtain timely regulatory approvals, premature termination of a collaborative agreement or failure by a partner to devote sufficient resources to the development and commercialization of the Company's products would have a material adverse effect on the Company. Chiron In March 1994, the Company entered into a Collaboration Agreement with Chiron. The objective of the collaboration is to develop and commercialize DepoCyt for use in the treatment of cancer, and to explore the use of the Company's DepoFoam technology for certain compounds proprietary to Chiron. DepoTech believes that Chiron's pharmacological, clinical development and marketing resources in 31 35 these areas complement DepoTech's resources. See "-- Product Research and Development Programs." The Collaboration Agreement grants Chiron rights to market and sell DepoCyt in the United States, Canada and Europe. Chiron has funded and will continue to fund 50% of the clinical development expenses in the United States. Canadian registration expenses will be funded by Chiron. Any additional clinical trials required in Europe will be funded by Chiron. DepoTech will manufacture DepoCyt, Chiron will market, sell, and distribute DepoCyt, and the parties will share all profits equally. Chiron will make payments to DepoTech upon filing of an NDA and upon achievement of certain milestones in the European development of DepoCyt. Chiron also has a right of first refusal to obtain a license to alternate DepoFoam formulations of cytarabine under terms and conditions to be negotiated in the future. Following an evaluation of the markets and certain other factors, the Company and Chiron mutually agreed not to further develop certain additional generic cancer compounds. The Collaboration Agreement also provides for the joint development of DepoFoam formulations of certain compounds proprietary to Chiron ("Chiron Products"). Feasibility studies, including formulation development and in vivo animal studies on IGF-1 and IL-2, have been completed and D0601 scale-up and preclinical development are currently underway. In addition, Chiron and the Company have agreed to initiate another feasibility study on an additional Chiron proprietary compound or an additional indication for IGF-1 to begin in the second half of 1996. In 1997 and thereafter, Chiron must fund one feasibility program for a Chiron Product per year or lose its option to develop DepoFoam formulations of additional Chiron proprietary compounds. The agreement provides that Chiron will pay DepoTech for the Company's feasibility efforts, and that Chiron will be responsible for all development costs thereafter. The agreement also provides for payments by Chiron to DepoTech upon achievement of certain development milestones with regard to the Chiron Products. Chiron will have exclusive, worldwide distribution rights to all Chiron Products and will manufacture the bulk unencapsulated drug. DepoTech will then encapsulate the bulk drug in DepoFoam creating the Chiron Product, and Chiron will market, sell and distribute the Chiron Products. Chiron will compensate DepoTech based on both manufacturing costs, including a manufacturing profit, and a percentage of Chiron's sales of the Chiron Products. Both DepoTech and Chiron have the ability to terminate a portion or all of the collaboration at certain intervals and with advance notice. In addition, Chiron has the ability to terminate the development of a Chiron Product with a limited amount of advance notice. In connection with the Collaboration Agreement, Chiron made a $2.5 million equity investment in the Company. In addition, Chiron paid $1.0 million in March 1994 for a warrant which was converted in January 1995 to a DepoCyt marketing rights fee. Finally, in January 1995, upon achievement of a development milestone, Chiron reimbursed DepoTech approximately $2.5 million for Chiron's share of DepoCyt's clinical trial and development costs from July 1993 through December 1994 and will continue to share equally in DepoCyt's United States clinical trials and development costs. The Company will fund 50% of the sales and marketing expenses incurred for DepoCyt. DepoTech may receive additional payments upon achievement of certain other developmental milestones. MANUFACTURING In connection with its collaborative arrangements, DepoTech intends to maintain exclusive formulation and manufacturing rights to any DepoFoam encapsulated drugs, including proprietary products of corporate partners, and expects to receive compensation based on both manufacturing costs of the product and the partner's net sales of the product. To date, the Company has manufactured its drug delivery formulations only for clinical trials and testing formulations of certain potential therapeutic products and has no experience manufacturing products for commercial purposes. Since 1995, the Company has manufactured clinical materials in a 10,000 square foot manufacturing plant built for this purpose. This manufacturing plant has completed validation to comply with cGMP regulations for the manufacture of pharmaceuticals. This plant was also inspected by the California 32 36 Department of Health Services Food and Drug Branch and received a license from the State to manufacture drugs. In August 1995, the Company completed construction of a 4,400 square foot addition to the manufacturing plant which allows the manufacturing scale to increase by a factor of 10 and which is currently expected to support clinical trial and commercial shipments of DepoCyt in addition to other clinical trial materials. The Company recently completed the construction of an 82,000 square foot facility to house its administrative, research and development and manufacturing activities. See "-- Facilities." The Company will need to complete validation of the scale-up of its current manufacturing processes to comply with cGMPs and other regulations prescribed by various regulatory agencies in the United States and other countries to achieve the prescribed quality and required levels of production of such products and to obtain marketing approval. The Company currently relies on a limited number of suppliers to provide the materials used to manufacture its DepoFoam formulations. Certain of these materials are purchased only from one supplier. In the event the Company could not obtain adequate quantities of necessary materials from its existing suppliers, there can be no assurance that the Company would be able to access alternative sources of supply within a reasonable period of time or at commercially reasonable rates. Regulatory requirements applicable to pharmaceutical products tend to make the substitution of suppliers costly and time-consuming. The unavailability of adequate commercial quantities, the inability to develop alternative sources, a reduction or interruption in supply or a significant increase in the price of materials could have a material adverse effect on the Company's ability to manufacture and market its products. To date, the Company has relied on a particular proprietary method of manufacture. There can be no assurance that this method will be applicable to all pharmaceuticals the Company desires to commercialize. Further, the yield of product incorporated into the delivery system may be highly variable for different therapeutic agents. Finally, the Company will need to successfully meet any manufacturing challenges associated with the characteristics of the drug to be encapsulated. The physical and chemical stability of the DepoFoam formulation may vary with each therapeutic agent over time and under various storage conditions. There can be no assurance that the manufacturing process will result in economically viable yields of product or that it will produce formulations of therapeutic products sufficiently stable under suitable storage conditions to be commercially useful. In the event that the Company decides to pursue alternative manufacturing methods for some or all of its drugs, there can be no assurance that these methods will prove to be commercially practical or that the Company will have or be able to acquire rights to use such alternative methods. GOVERNMENT REGULATION DepoTech's research and development activities are, and its future business will be, subject to significant regulation by governmental authorities in the United States, primarily the FDA. Pharmaceutical products intended for therapeutic use in humans are governed principally by the Federal Food, Drug, and Cosmetic Act, as amended, and by FDA regulations in the United States and by comparable laws and regulations in foreign countries. The process of completing clinical testing and obtaining FDA approval for new drugs or biological products requires a number of years and the expenditure of substantial resources. DepoTech will also be subject to regulation under the food and drug statutes and regulations of the State of California. Pharmaceutical products developed by DepoTech likely will be classified by the FDA as "new drugs" even though the active ingredient in the product was previously approved. This is because the Company's products will be intended for new indications or routes of administration, will provide significantly different pharmacokinetics or will claim to provide significantly increased safety or efficacy, requiring approval under an NDA. In some cases, the Company's products may be marketed as "new drugs" under abbreviated provisions for generic drugs (e.g., "paper NDA") where there are substantial similarities with a currently marketed product that is not protected by patents. It is also 33 37 likely that some of the drugs developed by the Company will be classed as "biologics" under the Public Health Service Act and relevant portions of the Federal Food, Drug, and Cosmetic Act. In this case, the products will be subject to somewhat different regulations. Prior to marketing a new drug product in the United States, other than a generic drug, it is necessary to complete the following: (i) preclinical laboratory and animal tests; (ii) submission to the FDA of an application for an IND, allowing clinical and other studies to assess safety and parameters of use; (iii) adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug; (iv) submission of an NDA to the FDA; and (v) FDA approval of the NDA. For biological products, the process is similar, but not identical to that described above for drugs, with the NDA being replaced with a Product License Application ("PLA"). For marketing of a product under the generic drug provisions, an Abbreviated New Drug Application ("ANDA") must be submitted to the FDA and approved prior to commercial sale or shipment of the drug. Typically, for nongeneric new drugs and therapeutic biological products, preclinical studies are conducted in the laboratory and in animal model systems to gain preliminary information about the drug's pharmacology and toxicology and to identify any potential safety problems. The results of these studies are submitted to the FDA as part of the IND application. Testing in humans may commence after clearance of the IND by the FDA. A three-phase clinical trial program is usually required for FDA approval of a pharmaceutical product. Phase I clinical trials are designed to determine the metabolism and pharmacological effects of the drug in humans and the side effects associated with increasing doses. Phase II studies are conducted to evaluate the effectiveness of the drug for a particular indication and provide evidence of the short-term side effects and risks associated with the drug or biologic and are generally designed to provide the substantial evidence of safety and effectiveness of a drug or biologic required to obtain FDA approval. Phase III clinical trials often involve a substantial number of patients in multiple study centers and may include chronic administration of the agent in order to assess the overall risk/benefit relationship of the drug or biologic. A clinical trial may combine the elements of more than one phase and typically two or more Phase III studies are required. Generally, as the Company intends to utilize active ingredients in its products that have previously been approved or are in a late stage of development, these requirements may be somewhat abbreviated. Upon completion of clinical testing that the Company believes demonstrates that the product is safe and effective for a specific indication, an NDA or PLA may be submitted to the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend or terminate the testing based on the data that have been accumulated to that point and its assessment of the risk to the patient. The clinical testing and FDA review process for new drugs or biologics will require substantial time, effort and expense. There can be no assurance that any approval will be granted to the Company on a timely basis, if at all. The FDA may refuse to approve an NDA or PLA and may require additional testing or information. There can be no assurance that such additional testing or the provision of such information, if required, will not have a material adverse effect on the Company. Also, the regulatory process can be modified by Congress or the FDA in a manner that could materially affect the Company. In 1988, the FDA issued regulations intended to expedite the development, evaluation and marketing of new therapeutic products to treat life-threatening and severely debilitating illnesses for which no satisfactory alternative therapies exist. These regulations provide for early consultation between the sponsor and the FDA in the design of both preclinical studies and clinical trials. In some cases, the objectives of the Phase I and Phase II studies are combined as a single Phase I/II study. If the results of Phase I and Phase II trials support the safety and effectiveness of the therapeutic agent, and their design and execution are deemed satisfactory upon review by the FDA, marketing approval may be sought at the end of Phase II trials or only limited Phase III trials may be required. NDA or PLA approval granted under these regulations may be restricted by the FDA as necessary to ensure the safe use of the drug. In addition, post-marketing clinical studies, sometimes called Phase IV studies, may be required. If, after approval, a post-marketing clinical study establishes that the drug does not perform as expected, or if post-marketing restrictions are not adhered to or are not adequate to ensure 34 38 the safe use of the drug, FDA approval may be withdrawn. The expedited approval may shorten the traditional drug development process by as much as two to three years. At the present time, DepoCyt is being developed under such an accelerated program. There can be no assurance, however, that any future products the Company may develop will be eligible for evaluation by the FDA under the 1988 regulations. In addition, there can be no assurance that DepoCyt or any future products (if eligible) will be approved for marketing at all or, if approved for marketing, will be approved for marketing sooner than would be traditionally expected. Once the sale of a product is approved, the FDA regulates production, marketing and other activities under the Federal Food, Drug, and Cosmetic Act and the FDA's implementing regulations. Post-marketing reports are required to monitor the product's usage and effects. Product approvals may be withdrawn, or other actions may be ordered, or sanctions imposed, including criminal prosecution, if compliance with regulatory requirements is not maintained. Other countries in which any products developed by the Company or its licensees may be marketed impose a similar regulatory process. Under the Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a "rare disease or condition," which generally is a disease or condition that affects populations of fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA or PLA, and after the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are publicly disclosed by the FDA. Under current law, approval of the first NDA for a drug with orphan drug designation confers United States marketing exclusivity to market such designated drug for the designated indication for a period of seven years following approval of the NDA, subject to certain limitations. Orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory approval process. In June 1993, the Company obtained orphan drug designation for DepoCyt from the FDA to treat neoplastic meningitis. There can be no assurance that the Company will receive the first FDA approval to market sustained-release cytarabine to treat neoplastic meningitis and thus receive orphan drug exclusivity for DepoCyt to treat neoplastic meningitis arising from leukemia, lymphoma or solid tumor metastases. Although obtaining FDA approval to market a product with an orphan drug exclusivity can be advantageous, there can be no assurance that the scope of protection or the level of marketing exclusivity that is currently afforded by orphan drug designation will remain in effect in the future. In addition to regulations enforced by the FDA and the State of California, the Company also is subject to regulation under the Occupational Safety and Health Act, the Controlled Substances Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other similar federal, state and local regulations governing permissible laboratory activities, waste disposal handling of toxic, dangerous or radioactive materials and other matters. The Company believes that it is in compliance with such regulations. These regulations are subject to change, however, and may, in the future, require substantial effort and cost to the Company to comply with each of the regulations, and may possibly restrict the Company's business activities. For marketing outside the United States, the Company will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and biologics. The requirements relating to the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. For DepoMorphine, there may be additional regulatory requirements relating to controlled substances for sale in foreign countries. PATENTS AND PROPRIETARY RIGHTS DepoTech relies on a combination of technical leadership, patent, trade secret, copyright and trademark protection and nondisclosure agreements to protect its proprietary rights. As of June 1, 1996, the Company has exclusive rights under its agreement with RDF discussed below to three issued United States patents, six pending United States patent applications, 46 issued foreign patents and 18 pending foreign applications. As of the same date and in its own name, the Company has one issued 35 39 United States patent, one allowed United States patent application, four pending United States patent applications, one issued foreign patent and 20 pending foreign patent applications on file covering various aspects of its drug delivery technology. The Company intends to file additional patent applications in the future. There can be no assurance that the Company will be issued any additional patents or that, if any patents are issued, they will provide the Company with significant protection or will not be challenged. Even if such patents are enforceable, the Company anticipates that any attempt to enforce its patents would be time consuming and costly. Moreover, the laws of some foreign countries do not protect the Company's proprietary rights in the products to the same extent as do the laws of the United States. The PTO has instituted changes to the United States patent law including changing the term to 20 years from the date of filing for applications filed after June 8, 1995. While one of the above applications was filed after June 8, 1995, the Company cannot predict the effect that such changes on the patent laws may have on its business, or on the Company's ability to protect its proprietary information and sustain the commercial viability of its products. In February 1994, the Company entered into an Assignment Agreement with the RDF, pursuant to which RDF assigned to DepoTech exclusive rights to the RDF Technology. The Company is obligated under the Assignment Agreement to prosecute certain patent applications and maintain issued patents relating to the RDF Technology. The term of the Assignment Agreement extends through the life of the last to expire of the patents or patent applications included in the RDF Technology. RDF retains the right to terminate the agreement or to convert the exclusive nature of the rights granted under the agreement into a nonexclusive license in the event that the Company does not satisfy its contractual obligations, including making certain minimum annual payments. Additional termination events include bankruptcy, an uncured material breach of the agreement or a contest by DepoTech of the patents included in the RDF Technology. The termination of the Assignment Agreement or the conversion of its exclusive nature to a nonexclusive agreement would have a material adverse effect on the Company. The patent positions of pharmaceutical, biotechnology and drug delivery companies, including DepoTech, are uncertain and involve complex legal and factual issues. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued. As a consequence, there can be no assurance that any of the Company's patent applications will result in the issuance of patents or, if any patents issue, that they will provide significant proprietary protection or will not be circumvented or invalidated. Because patent applications in the United States are maintained in secrecy until patents issue and publication of discoveries in the scientific or patent literature often lag behind actual discoveries, the Company cannot be certain that it was the first inventor of inventions covered by its pending patent applications or that it was the first to file patent applications for such inventions. Moreover, the Company may have to participate in interference proceedings declared by the PTO to determine priority of invention that could result in substantial cost to the Company, even if the eventual outcome is favorable to the Company. There can be no assurance that the Company's patents, if issued, would be held valid by a court of competent jurisdiction. An adverse outcome of any patent litigation could subject the Company to significant liabilities to third parties, require disputed rights to be licensed from or to third parties or require the Company to cease using the technology in dispute. There can be no assurance that third parties will not assert infringement claims against the Company in the future or that any such assertions will not result in costly litigation or require the Company to obtain a license to intellectual property rights of such parties. There can be no assurance that any such licenses would be available on terms acceptable to the Company, if at all. Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief that could effectively block the Company's ability to further develop or commercialize its products in the United States and abroad and could result in the award of substantial damages. Defense of any lawsuit or failure to obtain any such license could have a material adverse affect on the Company. Finally, litigation, regardless of outcome, could result in substantial cost to and a diversion of efforts by the Company. 36 40 As part of its confidentiality procedures, the Company generally enters into nondisclosure agreements with its employees and suppliers, and limits access to and distribution of its proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's technology without authorization. Accordingly, there can be no assurance that the Company will be successful in protecting its proprietary technology or that DepoTech's proprietary rights will preclude competitors from developing products or technology equivalent or superior to that of the Company. The Company may require additional technology in the formulation and manufacture of Depo-Foam formulations to which the Company currently does not have rights. If the Company determines that this additional technology is relevant to the development of future products and further determines that a license to this additional technology is needed, there can be no assurance that the Company can obtain a license from the relevant party or parties on commercially reasonable terms, if at all. There can be no assurance that the Company can obtain any license to any technology that the Company determines it needs, on reasonable terms, if at all, or that DepoTech could develop or otherwise obtain alternate technology. The failure of the Company to obtain licenses, if needed, would have a material adverse affect on the Company. The Company's ability to develop and commercialize its technology will be affected by the Company's or its partners' access to the drugs that are to be formulated. The Company intends in certain circumstances to rely on the ability of its partners to provide access to the drugs that are to be formulated for use with DepoFoam. There can be no assurance that the Company's partners will be able to provide access to drug candidates for formulation in DepoFoam, or that, if such access is provided, the Company or its partner will not be alleged or determined to be infringing on third parties' rights and will not be prohibited from using the drug or be found liable for damages that may not be subject to indemnification. Any restriction on access or liability for damages would have a material adverse effect on the Company. COMPETITION The drug delivery, pharmaceutical and biotechnology industries are highly competitive and rapidly evolving, with significant developments expected to continue at a rapid pace. The Company's success will depend upon maintaining a competitive position and developing products and technologies for efficient and cost-effective drug delivery. The Company's products will compete with other formulations of drugs and with other drug delivery systems. There can be no assurance that any of the Company's products will have advantages that will be significant enough to cause medical professionals to adopt their use. DepoTech believes that its products will compete on the basis of quality, efficacy, cost, convenience, safety and patient compliance. New drugs or further development in alternative drug delivery methods may provide greater therapeutic benefits for a specific drug or indication, or may offer comparable performance at lower cost than those offered by the Company's DepoFoam drug delivery system. The Company is aware of many other competitors in the field of drug delivery, including competitors developing injectable or implantable drug delivery systems, oral drug delivery technologies, passive transdermal systems, electrotransport systems, oral transmucosal systems and inhalation systems. There can be no assurance that developments by others will not render the Company's products or technologies uncompetitive or obsolete. Many of the Company's existing or potential competitors have substantially greater research and development capabilities, experience, manufacturing, marketing, financial, and managerial resources than the Company. Furthermore, acquisitions of competing drug delivery companies by large pharmaceutical companies could enhance competitors' financial, marketing and other resources. Accordingly, the Company's competitors may succeed in developing competing technologies, obtaining FDA approval or gaining market share for products more rapidly than the Company. 37 41 SALES AND MARKETING Commercialization of the Company's products is expected to be expensive and time-consuming. In the event that the Company elects to participate directly in sales and marketing efforts for the Company's products, the Company will need to build such capability in the targeted markets. The Company currently has a limited marketing staff. There can be no assurance that the Company will be able to establish an adequate sales and marketing capability in any or all targeted markets or that it will be successful in gaining market acceptance for its products. To the extent the Company enters into co-promotion or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties and there can be no assurance that such efforts will be successful. To the extent the Company relies on its collaborators, there can be no assurance that any of these collaborators or their sublicensees will successfully market or distribute the Company's products or that the Company will be able to establish a successful direct sales organization, co-promotion or distribution arrangements. HEALTH CARE REFORM MEASURES AND THIRD-PARTY REIMBURSEMENT A series of legislative and regulatory proposals have been announced aimed at reforming the United States health care system. While the adoption of such legislative or regulatory proposals has been delayed, the uncertainty created by such proposals could have a material adverse effect on the Company's ability to raise capital and to identify and reach agreements with potential partners. In the event such proposals are eventually adopted, they could have a material adverse effect on the Company. Furthermore, the Company's ability to commercialize its potential product portfolio may be adversely affected to the extent that such proposals have a material adverse effect on the business, financial condition and profitability of other companies that are current or prospective collaborators for certain of the Company's proposed products. In both domestic and foreign markets, sales of the Company's potential products, if any, will depend in part on the availability of reimbursement of third-party payors such as government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. There can be no assurance that the Company's proposed products will be considered cost effective or that adequate third-party reimbursement will be available to enable the Company to maintain price levels sufficient to realize an appropriate return on its investment in product development. Legislation and regulations affecting the pricing of pharmaceuticals may change before the Company's proposed products are approved for marketing and any such changes could further limit reimbursement for medical products and services. HUMAN RESOURCES As of June 1, 1996, DepoTech had approximately 123 full-time employees, including 110 in research, development and operations, and 13 in finance and administration. Of these employees, 42 hold advanced degrees, of which 21 are M.D.s or Ph.D.s. The Company's future success will depend in large part upon its ability to attract and retain highly qualified personnel. The Company's employees are not represented by any collective bargaining agreements, and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. FACILITIES The Company currently maintains its headquarters in leased facilities in San Diego, California, that contain all administrative, research and development and manufacturing activities in 82,000 square feet of space. The future minimum rental commitment for this facility will range from approximately $2.1 million to $4.2 million per year over 20 years, based upon pre-established annual rent increases. The Company also maintains a 14,400 square foot manufacturing plant for its 38 42 production needs. The Company has subleased certain of its existing facilities with annual rental income ranging from $223,000 to $290,000. The Company believes its existing facilities will be adequate to meet its needs through mid-1997. In addition, the Company has a right of first refusal and right of first offer to purchase land located adjacent to its headquarters which must be exercised on or before October 15, 1997. The Company may elect to exercise such option in 1997 in order to build a facility to house packaging, labeling and warehouse capabilities and administrative offices. The estimated capital expenses associated with this facility would be approximately $8.5 million. LEGAL PROCEEDINGS As of the date of this Prospectus, the Company is not a party to any legal proceedings. From time to time, DepoTech may be involved in litigation relating to claims arising out of its operations in the normal course of business. 39 43 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The executive officers, directors and key employees of the Company as of June 30, 1996, are as follows:
NAME AGE POSITION Fred A. Middleton(1)(2)............. 47 Chairman of the Board and Director Edward L. Erickson(2)............... 49 President, Chief Executive Officer and Director John P. Longenecker, Ph.D. ......... 48 Senior Vice President, Research, Development and Operations Sinil Kim, M.D. .................... 40 Co-founder, Vice President, Advanced Technology, Chief Scientific Officer and Director Emeritus David B. Thomas..................... 56 Vice President, Quality Assurance and Regulatory Affairs Williams S. Ettouati, D. Pharm. .... 36 Executive Director, Strategic Marketing Dana S. McGowan..................... 37 Director of Finance and Administration, Chief Financial Officer and Treasurer Jeffery S. Vick..................... 34 Director of Corporate Development and Assistant Secretary Roger C. Davisson(1)(3)............. 52 Director Jean Deleage(1)(2)(3)............... 55 Director George W. Dunbar, Jr. .............. 49 Director Stephen B. Howell, M.D. ............ 50 Co-founder and Director Peter Preuss(1)(3).................. 52 Director Pieter Strijkert, Ph.D. ............ 60 Director
- ------------ (1) Member of Compensation Committee. (2) Member of Nominating Committee (3) Member of Audit Committee. FRED A. MIDDLETON is a founder of DepoTech and has served as Chairman of the Board and a director of the Company since August 1990. In addition, Mr. Middleton served as Chief Executive Officer of the Company from August 1990 through June 1993. Mr. Middleton has been active in developing biomedical companies since 1978 and has been general partner of Sanderling Ventures, a venture capital firm specializing in the development of early stage biomedical companies, since 1987. Sanderling Ventures is a principal shareholder of the Company. From May 1984 through July 1986, he served as Managing General Partner of Morgan Stanley Ventures, L.P., a venture capital firm which funded research and development programs at leading technology companies. Prior to that, Mr. Middleton served as Chief Financial Officer, Vice President of Finance and Corporate Development, and President of Genentech Development Corporation, for Genentech, Inc. Mr. Middleton received his B.S. in chemistry from Massachusetts Institute of Technology and an M.B.A. from the Harvard Graduate School of Business Administration. Currently, he is a director of two other publicly-held biomedical companies, Regeneron Pharmaceuticals, Inc. and Vical, Inc., as well as several privately-held biomedical companies. EDWARD L. ERICKSON has served as President, Chief Executive Officer and a director of the Company since June 1993. Prior to joining the Company, Mr. Erickson served as President, Chief Executive Officer and a director of Cholestech Corporation, a publicly-traded medical products company, from October 1991 through June 1993. Prior to that, Mr. Erickson served as President of Serono-Baker Diagnostics, Inc., a medical products company and a subsidiary of The Ares-Serono Group ("Ares-Serono"), an international pharmaceutical company, from June 1990 to September 1991 and as Vice President, Financial Operations of Ares-Serono from August 1988 through June 1990. 40 44 Mr. Erickson previously held senior staff and general management positions with Amersham International, a medical and life-science research products company based in the United Kingdom. Mr. Erickson received a B.S. in mathematics with distinction and an M.S. in mathematics from the Illinois Institute of Technology and an M.B.A. with high distinction from the Harvard Graduate School of Business Administration, where he was elected a George F. Baker Scholar and received the John L. Loeb Fellowship in Finance. Mr. Erickson currently serves as a director of a privately-held biomedical company. JOHN P. LONGENECKER, PH.D. has served as Senior Vice President, Research, Development and Operations, of the Company since November 1992. Prior to joining the Company, Dr. Longenecker served in a number of management and technical positions with Scios Nova, Inc. (formerly California Biotechnology, Inc.), a biotechnology company, from 1982 through 1992, including Vice President and Director of Development from August 1987 through October 1992. In this position Dr. Longenecker was responsible for pharmaceutical research and development, including a novel drug delivery group, preclinical studies, process development, manufacturing and quality control. Dr. Longenecker received a B.S. in chemistry from Purdue University and a Ph.D. in biochemistry from the Australian National University and served as a postdoctoral fellow at Stanford University. SINIL KIM, M.D. is a co-founder of the Company, has served as Vice President, Advanced Technology, and Chief Scientific Officer, since December 1993 and served as a director of the Company from October 1989 to May 1995, at which time he was appointed as a director emeritus in recognition of his many contributions to the founding and development of the Company. Dr. Kim previously served as a consultant to the Company in the capacity of Vice President of Technology of the Company from October 1992 through December 1993. Prior to joining the Company, Dr. Kim served as an assistant professor of medicine in residence at the University of California, San Diego Cancer Center ("UCSD Cancer Center") in its division of Hematology/Oncology from February 1988 through July 1992, an assistant adjunct professor of medicine at UCSD Cancer Center in its division of Hematology/Oncology from July 1992 through May 1994 and an associate clinical professor at UCSD Cancer Center from May 1994 through the present. Dr. Kim received a B.S. in chemistry, summa cum laude, and an M.D. with Alpha Omega Alpha election from University of Washington, Seattle. Dr. Kim served his internship and residency at University of California, Irvine and a postdoctoral fellowship at University of California, San Diego in hematology and oncology. DAVID B. THOMAS has served as Vice President, Quality Assurance and Regulatory Affairs, of the Company since June 1993. Prior to joining the Company, Mr. Thomas served as Vice President of Gen-Probe Corporation, a diagnostics company, from February 1993 to June 1993. Prior to that, Mr. Thomas served as Vice President, Regulatory Affairs and Quality Assurance of Ares-Serono from October 1990 through March 1993. Prior to that, Mr. Thomas served as Vice President, Regulatory Affairs, for C.R. Bard, Inc., a medical device company, from April 1987 through February 1990. Mr. Thomas also served as Vice President, Regulatory Affairs/Product Assurance of the Hospital Products Group of Pfizer, Inc., a pharmaceutical company, from April 1985 through March 1987 and held senior scientific positions at the Biometric Research Institute, Inc. and at the National Institutes of Health. He has been responsible for the clinical development and regulatory approvals of a number of new pharmaceuticals including LAAM and has obtained approvals for new delivery modes and controlled release formulations for more than 15 drugs. Mr. Thomas received a B.A. in anthropology (with a minor in mathematics) from San Francisco State University and an M.A. in anthropology as part of an interdisciplinary program in human biology from University of California, Los Angeles where he was a National Science Foundation Fellow at the Brain Research Institute. Mr. Thomas currently serves as chairman and a director of a privately-held company. WILLIAMS S. ETTOUATI, D.PHARM. has served as Executive Director of Strategic Marketing of the Company since July 1995. Prior to joining the Company, Dr. Ettouati served as Director, New Product Planning at Dura Pharmaceuticals, Inc. from November 1993 to April 1995. From January 1990 to July 1993, Dr. Ettouati served as Senior Product Manager and Product Manager for Syntex International. Dr. Ettouati served as a post doctoral fellow at University of California, Santa Barbara ("UCSB"). 41 45 Dr. Ettouati received a Diplome de Bachelier in mathematics and biology from Academie de Paris, an M.A. in biology from UCSB and a Diplome d'Etat de Docteur en pharmacie from Universite Rene Descartes, Paris V. DANA S. MCGOWAN has served as Director of Finance and Administration of the Company from January 1994 through May 1994 and as Chief Financial Officer and Treasurer since June 1994. Prior to joining the Company, Ms. McGowan served as Director, Accounting and Finance at Alliance Pharmaceutical Corp., a biotechnology company, from May 1993 to December 1993. Previously, Ms. McGowan held various financial positions, including Associate Director and Controller at Cytel Corporation, a biotechnology company, from June 1988 to May 1993. Ms. McGowan received a B.S. in Business Administration from San Diego State University and is a Certified Public Accountant. JEFFERY S. VICK has served as Director of Corporate Development of the Company since July 1993 and Manager, Planning and Corporate Development since May 1992. Prior to joining the Company, Mr. Vick served as a business analyst at Advanced Cardiovascular Systems, a medical device company and subsidiary of Eli Lilly & Co., from July 1990 to May 1992. Mr. Vick attended graduate school from September 1988 to June 1990 at Stanford University. He has performed research into autoimmune diseases and cancer, respectively, at Scripps Clinic & Research Foundation and the UCSD Cancer Center. Mr. Vick received a B.S. in chemistry from the University of Virginia, an M.S. in chemistry from the University of California, San Diego, and an M.B.A. from Stanford Graduate School of Business. ROGER C. DAVISSON has served as a director of the Company since January 1993. Since September 1980, Mr. Davisson has been a general partner of Brentwood Associates, a venture capital firm that manages private investment funds. One of those funds, Brentwood Associates V, L.P., is a principal shareholder of the Company. Mr. Davisson received a B.S. in engineering and an M.S. in engineering science from the California Institute of Technology and an M.B.A. from Stanford Graduate School of Business. JEAN DELEAGE has served as a director of the Company since November 1992. He has been a managing partner of Burr, Egan, Deleage & Co., a venture capital firm, since its formation in 1979. He was the founder of Sofinnova, a venture capital organization in Paris, and in 1976 formed Sofinnova, Inc. (the United States subsidiary of Sofinnova). He holds a master's degree in electrical engineering from Ecole Superieure d'Electricite and a doctorate in economics from the Sorbonne. In 1993, he was awarded the Legion of Honor from the French government in recognition of his career accomplishments. Mr. Deleage is currently a director of Abaxis, Inc. and OraVax, Inc. and of several private companies. GEORGE W. DUNBAR, JR. has served as a director of the Company since May 1996. He has served as President, Chief Executive Officer and a director of Metra Biosystem, Inc. ("Metra") from July 1991 through the present. Prior to joining Metra, he was the Vice President of Licensing and Business Development of Ares-Serono, from 1988 until 1991, where he established a licensing and acquisition group for its health care divisions. From 1974 until 1987, he held various senior management positions with Amersham International ("Amersham"), a health care and life sciences company, where he most recently served as Vice President for its Life Sciences business in North America. Mr. Dunbar also served as Amersham's General Manager of Pacific Rim markets and Eastern Regional operations and, prior to that, he managed the international marketing of Amersham's medical and industrial radioisotopes. Mr. Dunbar holds a B.S. in electrical engineering and an M.B.A. from Auburn University and sits on the Auburn School of Business M.B.A. Advisory Committee. STEPHEN B. HOWELL, M.D. is a co-founder of the Company and has served as a director of the Company since October 1989. Dr. Howell also served as Vice President, Medical Affairs, from October 1989 to May 1995, and currently serves in a consultant capacity as Senior Medical Advisor. Dr. Howell is a Professor of Medicine in the Department of Medicine and the Cancer Center at the University of California, San Diego where he has been since 1977. Dr. Howell is Associate Director for Translational Research of the UCSD Cancer Center, and Director of the Center's Pharmacology Program. 42 46 Dr. Howell is a member of the National Research Council of the American Cancer Society. Dr. Howell received an A.B. degree in biology from the University of Chicago, and an M.D. magna cum laude from Harvard University. Dr. Howell also holds an honorary M.D. from the University of Goteborg, Sweden. He completed his residency at the Massachusetts General Hospital and the University of California, San Francisco, research training at the National Institutes of Health, and medical oncology specialty training at the Dana Farber Cancer Institute. PETER PREUSS has served as a director of the Company since December 1992. Since 1985, Mr. Preuss has acted as a private investor. He was founder and Chief Executive Officer of Integrated Software Systems Corporation (ISSCO), a leading computer graphic software developer, from 1970 to its sale in 1986. Mr. Preuss received a B.S. equivalent from the Technical University of Hanover, Germany and an M.S. in Mathematics from University of California, San Diego. Mr. Preuss is a Regent of the University of California and has served a term on the advisory committee to the director of the National Institutes of Health. He is president of The Preuss Foundation for Brain Tumor Research and is a recipient of the Distinguished Service Award from the American Association of Neurosurgeons. Mr. Preuss currently serves on a number of boards of not-for-profit institutions as well as Network Computing Devices, a publicly-held company, and several privately-held companies. PIETER STRIJKERT, PH.D. has served as a director of the Company since June 1996. He has served as a member of the Board of Management for Royal Gist-Brocades NV, a biomedical products company ("Royal Gist-Brocades"), since June 1995. From July 1993 until June 1995, Dr. Strijkert served as an advisor to that same group. Prior to that, Dr. Strijkert served as a member of the Board of Management of Royal Gist-Brocades from May 1985 through June 1993 and served in other capacities with Royal Gist-Brocades from 1979 through 1985, including Head of the Biotechnology Group and Associate Director of Research and Development and Manager of the Microbiology Group Research and Development. Dr. Strijkert received a Ph.D. in microbiology and a bachelor's degree in biology from the State University of Utrecht. Dr. Strijkert is a member of the board of directors of Chiron and other advisory or technical groups. Members of the Board hold office and serve until the next annual meeting of the shareholders of the Company or until their respective successors have been elected and qualified. The Company has a range of directors authorized of not less than five nor more than nine. The number of directors is currently fixed at eight. Executive officers are appointed by and serve at the discretion of the Board. COMMITTEES OF THE BOARD OF DIRECTORS The Company has a standing Compensation Committee currently composed of Roger C. Davisson, Jean Deleage, Fred A. Middleton and Peter Preuss. The Compensation Committee reviews and acts on matters relating to compensation levels and benefit plans for executive officers and key employees of the Company, including salary and stock options. The Committee is also responsible for granting stock awards, stock options and stock appreciation rights and other awards to be made under the Company's existing incentive compensation plans. The Company also has a standing Audit Committee composed of Roger C. Davisson, Jean Deleage and Peter Preuss. The Audit Committee assists in selecting the independent auditors, designating services they are to perform and in maintaining effective communication with those auditors. The Company also has a standing Nominating Committee composed of Jean Deleage, Edward L. Erickson and Fred A. Middleton. The Nominating Committee recommends director nominees to the Company's Board. EXECUTIVE COMPENSATION Summary of Cash and Certain Other Compensation The following table sets forth the aggregate compensation paid by the Company to the President and Chief Executive Officer and to each of the most highly compensated executive officers who in 1995 43 47 earned over $100,000 (the "Named Executive Officers") for services rendered in all capacities to the Company for the years ended December 31, 1995, 1994 and 1993: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ----------------------------------- --------------- OTHER SECURITIES NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS(#) COMPENSATION(1) - ------------------------- ---- -------- ------- ------------ --------------- --------------- Edward L. Erickson(2).... 1995 $194,250 $49,138(3) $ 27,000(4) 11,450(5) $51 President and Chief 1994 185,000 -0- 29,000(4) 50,000 2 Executive Officer and 1993 101,631 -0- -0- 250,000 3 Director John P. Longenecker...... 1995 178,500 24,098(3) 14,667(4) 16,950(5) 46 Senior Vice President, 1994 167,769 -0- 14,667(4) -0- 2 Research, Development 1993 151,006 -0- 14,667(4) 125,000 3 and Operations Sinil Kim(2)............. 1995 141,750 21,971(3) -0- 17,950(5) 37 Vice President, Advanced 1994 135,000 -0- 5,093(6) 50,000 2 Technology David B. Thomas(2)....... 1995 136,500 18,428(3) 10,800(4) 6,950(5) 35 Vice President, Quality 1994 130,000 -0- 11,600(4) 20,000 2 Assurance and Regulatory Affairs
- ------------ (1) Consists of the dollar value of insurance premiums paid by the Company with respect to term life insurance for the benefit of the Named Executive Officers. (2) Mr. Erickson and Mr. Thomas were hired in June 1993. Dr. Kim was hired in December 1993. (3) Consists of amounts earned in 1995 and paid in 1996. (4) Consists of forgiveness of a portion of a loan made to cover relocation expenses. (5) Includes options granted in 1996 for performance during 1995. (6) Consists of forgiveness of a loan used to purchase 400,000 shares of the Common Stock. 44 48 Stock Options The following table sets forth information concerning stock option grants made to each of the Named Executive Officers for the year ended December 31, 1995. The Company granted no stock appreciation rights ("SARs") to Named Executive Officers during 1995. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED -------------------------------------------------------- ANNUAL RATES OF NUMBER OF STOCK PRICE SECURITIES % OF TOTAL APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM(3) OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ------------------- NAME GRANTED(1) FISCAL YEAR ($/SH)(2) DATE 5%($) 10%($) - --------------------------- ----------- --------------- ----------- ---------- ------- ------- Edward L. Erickson......... 200 0.1% $ 12.00 9/27/05 $ 1,509 $ 3,825 John P. Longenecker........ 10,000 4.0% $ 3.50 3/8/05 22,011 55,781 200 0.1% $ 12.00 9/27/05 1,509 3,825 Sinil Kim.................. 10,000 4.0% $ 3.00 1/17/05 18,867 47,812 200 0.1% $ 12.00 9/27/05 1,509 3,825 David B. Thomas............ 200 0.1% $ 12.00 9/27/05 1,509 3,825
- ------------ (1) The shares subject to each option will immediately vest in the event the Company is acquired by a merger or asset sale, unless the Company's repurchase rights with respect to those shares are transferred to the acquiring entity. The grant dates for the above options are as follows:
OPTIONS GRANT NAME GRANTED (#) DATE ----------------------------------------------------- ----------- ------- Edward L. Erickson................................... 200 9/28/95 John P. Longenecker.................................. 10,000 3/9/95 200 9/28/95 Sinil Kim............................................ 10,000 1/17/95 200 9/28/95 David B. Thomas...................................... 200 9/28/95
(2) The exercise price per share of options granted represented the fair market value of the underlying shares of Common Stock on the dates the respective options were granted as determined by the Board. The exercise price may be paid in cash or in shares of Common Stock valued at fair market value on the exercise date or a combination of cash or shares or any other form of consideration approved by the Board. The fair market value of shares of Common Stock will be determined in accordance with certain provisions of the Plan based on the closing selling price per share of a share of Common Stock on the date in question on the primary exchange on which the Company's common stock is listed or reported. If shares of the Common Stock are not listed or admitted to trading on any stock exchange nor traded on the Nasdaq National Market, then the fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. (3) There is no assurance provided to any executive officer or any other holder of the Company's securities that the actual stock price appreciation over the 10-year option term will be at the assumed 5% or 10% levels or at any other defined level. Unless the market price of the Common Stock does in fact appreciate over the option term, no value will be realized from the option grants made to the executive officers. 45 49 Option Exercises and Holdings The following table provides information concerning option exercises during 1995 by the Named Executive Officers and the value of unexercised options held by each of the Named Executive Officers as of December 31, 1995. No SARs were exercised during 1995 or outstanding as of December 31, 1995. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS SHARES DECEMBER 31, 1995 (#) AT DECEMBER 31, 1995(2) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ----------------------- ------------ ----------- ----------- ------------- ----------- ------------- Edward L. Erickson..... 1,000 $19,000 115,275 93,925 $ 2,189,931 $ 1,782,519 John P. Longenecker.... 0 0 51,380 44,542 977,261 824,285 Sinil Kim.............. 0 0 39,192 21,008 696,306 385,644 David B. Thomas........ 12,000 43,000 6,775 31,425 126,681 578,769
- ------------ (1) "Value realized" is calculated on the basis of the fair market value of the Common Stock on the date of exercise minus the exercise price and does not necessarily indicate that the optionee sold such stock. (2) "Value" is defined as fair market price of the Common Stock at fiscal year-end ($19.25) less exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the year ended December 31, 1995, the Compensation Committee of the Company's Board established the levels of compensation for the Company's executive officers. The members of the Company's Compensation Committee are Messrs. Davisson, Deleage, Middleton and Preuss. Mr. Erickson, the Company's President and Chief Executive Officer, participated in the deliberations of the Compensation Committee regarding executive compensation that occurred during 1995, but did not take part in the deliberations regarding his own compensation. EMPLOYMENT ARRANGEMENTS Mr. Erickson, the Company's President and Chief Executive Officer and a director of the Company, entered into an employment arrangement with the Company in May 1993. In connection therewith, the Company issued 25,000 shares of Common Stock to Mr. Erickson for an aggregate purchase price of $68,750. $50,000 of the purchase price was paid for by a promissory note payable to the Company, which was paid in full prior to its due date of October 31, 1993. Interest accrued at the lesser of 3.62% per annum or the minimum interest rate required to avoid imputation of interest under the Internal Revenue Code. Mr. Erickson was granted an option to purchase 250,000 shares of Common Stock at an exercise price of $0.25 per share, vesting over four years. In June 1993, Mr. Erickson borrowed $50,000 from the Company to cover his family's relocation expenses, evidenced by a promissory note. Interest accrued at 8% per annum. One-half of the outstanding principal and all then-accrued interest under such note was forgiven by the Company in June 1994, and the remaining principal and all then-accrued interest was forgiven in June 1995. Dr. Longenecker, Senior Vice President of the Company, entered into an employment arrangement with the Company in September 1992. In connection therewith, the Company issued stock options for 125,000 shares of Common Stock to Dr. Longenecker at an exercise price of $0.10. Dr. Longenecker also borrowed $44,000 from the Company to cover his family's relocation expenses, evidenced by a promissory note. One-third of the outstanding principal under such note was forgiven by the Company in January 1994, an additional one-third of the outstanding principal was forgiven in 46 50 November 1994, and the remaining principal was forgiven in November 1995. No interest accrued under the note. Mr. Thomas, Vice President, Quality Assurance and Regulatory Affairs, entered into an employment arrangement with the Company in June 1993. In connection therewith, the Company issued stock options for 40,000 shares of Common stock to Mr. Thomas at an exercise price of $0.25 per share, vesting over four years. In June 1993, Mr. Thomas borrowed $20,000 from the Company to cover his family's relocation expenses, evidenced by a promissory note. Interest accrued at 8% per annum. One-half of the outstanding principal and all then-accrued interest under such note was forgiven by the Company in June 1994, and the remaining principal and all then-accrued interest was forgiven in June 1995. DIRECTOR COMPENSATION The Company pays its outside Directors $1,500 per Board meeting attended and reimburses its directors for out-of-pocket expenses incurred in attending each meeting and performing other duties as a director. No additional payments are made with respect to attendance at committee meetings. Non-employee directors also are eligible to initially participate in the discretionary option grant program and subsequently in the automatic option grant program under the Plan. Dr. Howell is a party to a consulting agreement with the Company. See "Certain Transactions." BENEFIT PLANS 1995 Stock Option/Stock Issuance Plan The Plan serves as the successor equity incentive program to the Company's 1991 Stock Option Plan, the 1994 Stock Option Plan and the 1995 Stock Option Plan (collectively, the "Prior Plans"). The Plan was adopted by the Board and the shareholders as of June 1995, and amended during 1996. All outstanding stock options and unvested share issuances under the Prior Plans have been incorporated into the Plan but will continue to be governed by the terms and conditions of the specific instruments evidencing those options and issuances. A total of 2,000,000 shares of Common Stock are authorized for issuance under the Plan, of which, as of June 1, 1996, 1,022,745 shares of Common Stock are subject to outstanding options and 515,339 additional shares are reserved for issuance under the Plan. The total number of shares authorized, as well as shares subject to outstanding options, will be appropriately adjusted in the event of certain changes to the Company's capital structure, such as stock dividends, stock splits or other recapitalizations. The Plan is divided into three separate programs: the discretionary option grant program, the automatic option grant program and the stock issuance program. The Plan will be administered by a committee of two or more non-employee Board members appointed by the Board (the "Plan Administrator"). The Plan Administrator will have complete discretion under the discretionary option grant program and the stock issuance program to determine which eligible individuals are to receive option grants or stock issuances, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive option (which potentially qualify for certain favorable treatment under federal tax law) or a nonstatutory option, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. Participation in such programs is limited to employees (including officers and directors), non-employee directors (until the last day of the first full calendar month following a non-employee Board member's election to the Board) and consultants of the Company or its subsidiary corporations, provided that no non-employee director may participate in the discretionary option grant program or the stock issuance program unless the Plan is being administered by two or more non-employee Board members who have not been granted discretionary options or received any share issuances within the last year other than pursuant to the automatic grant program. The Plan also includes an automatic option grant program under which option grants will be made to non-employee directors. Under the automatic option grant program, effective at the Company's 1997 47 51 Annual Meeting, each eligible non-employee director annually will be automatically granted a nonstatutory option to purchase 4,000 shares of Common Stock upon such directors re-election to the Board. The terms and conditions of the automatic option grants are fixed by the Plan and are not subject to discretion of the Plan Administrator. The exercise price for each incentive stock option or for any option granted under the automatic option grant program must be at least 100% of the fair market value of the stock on the date of the option grant. The exercise price for each nonstatutory option or for any share issuance under the Plan must be at least 85% of the fair market value of the shares on the date of the option grant or stock issuance. The purchase price for any shares may be paid in cash, by delivery of shares of Common Stock or through a same-day sale program pursuant to which the purchased shares will be sold immediately and a portion of the sale proceeds applied to the payment of the purchase price. The Plan Administrator may also permit a participant (other than a non-employee director receiving automatic option grants) to deliver a promissory note in payment of the purchase price and any tax liability incurred in connection with the purchase. Options granted under the discretionary option grant program may be immediately exercisable for all the option shares, on either a vested or unvested basis, or may become exercisable for shares in one or more installments over the participant's period of service. Shares issued under the stock issuance program may either be fully vested or subject to a vesting schedule tied to future service. All unvested shares will be subject to repurchase by the Company, at the original purchase price paid for such shares, upon the participant's cessation of service prior to vesting in the shares. However, the Committee will have full discretionary authority to accelerate the exercisability of any outstanding discretionary option grant or the vesting of any issued shares. Each option granted under the Plan will have a maximum term of 10 years and will be subject to earlier termination in the event of the optionee's cessation of service. Options are not assignable or transferable by the optionee except in connection with the participant's death. The participant will have no shareholder rights with respect to the shares subject to his or her outstanding options until such options are exercised and the purchase price is paid for the shares. The participant will, however, have full shareholder rights with respect to any shares issued under the Plan. Participants subject to federal or state tax withholding in connection with any issuance of shares under the Plan may be permitted to apply a portion of the shares issuable upon the exercise of their outstanding options to the satisfaction of the federal and state withholding taxes incurred in connection with such exercise. Alternatively, such participants may be permitted to deliver existing shares of Common Stock in satisfaction of such tax liability. In either case, the Company will pay cash to the appropriate government authority equal to the fair market value of the stock as a deposit of taxes withheld. Directors of the Company receiving automatic option grants will have a special stock appreciation right in connection with their options under which the outstanding options can be surrendered for cancellation upon a hostile take-over of the Company in return for a cash distribution from the Company, based on the excess of the price per share paid by the acquiring entity in effecting the take-over above the option exercise price. Officers may be granted similar rights at the discretion of the Plan Administrator. The Committee may grant other stock appreciation rights with respect to discretionary option grants. The other stock appreciation rights would provide the holders with the right to receive an appreciation distribution from the Company equal to the excess of (i) the fair market value (on the date such right is exercised) of the shares of Common Stock in which the optionee is at the time vested under the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution would be able to be made, at the Plan Administrator's discretion, in shares of Common Stock valued at fair market value on the exercise date, in cash or in a combination of cash and Common Stock. In the event the Company is acquired, whether by merger, asset sale or change in control each outstanding option which is not to be assumed by the successor corporation or replaced with a 48 52 comparable option to purchase the capital stock of the successor corporation will automatically accelerate in full, and all unvested shares not assigned to the successor corporation will automatically vest, except to the extent such accelerated vesting is precluded by the terms of the agreements evidencing those unvested shares. The Committee can apply this acceleration to options outstanding under the Prior Plans. To the extent outstanding options terminate prior to exercise, the shares subject to those options will be available for subsequent grant. In addition, the Committee may effect cancellation/regrant programs pursuant to which outstanding options under the discretionary option grant program (including options incorporated from the Prior Plans) are cancelled and new options are granted for the same or different number of option shares at an exercise price per share not less than 85% of the fair market value of the Common Stock on the new grant date. The Board may amend or modify the Plan at any time, subject to certain shareholder approval requirements. The Plan will terminate September 28, 2005 unless sooner terminated by the Board. Employee Stock Purchase Plan The 1995 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board and the shareholders as of June 1995. The Purchase Plan covers an aggregate of 250,000 shares of Common Stock and is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). Under the Purchase Plan, eligible employees, including officers, will be entitled to participate in periodic offerings following the commencement of the Purchase Plan. The initial offering period commenced on September 28, 1995, and will terminate on the last business day in December 1997. Each subsequent offering period will commence immediately upon the termination of the prior offering period and end on the last business day of the next December. The Purchase Plan will terminate on the earlier of December 31, 2005, or the date on which all shares available under the Purchase Plan have been purchased by the participants. Employees are eligible to participate if they are employed by the Company (or a subsidiary of the Company designated by the Board) for at least 20 hours per week and at least five months per year. All employees of the Company as of the effective date of the Purchase Plan will be allowed to participate immediately in the initial offering period. Employees who first become an eligible employee after the start of an offering period may join that period at the beginning of the next semi-annual purchase date. Employees eligible to participate in an offering can elect to have up to 15% of their regular compensation withheld under the Purchase Plan and used to purchase shares of the Common Stock at semi-annual intervals. The price of Common Stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the Common Stock on (i) the commencement date of the offering period or (ii) the purchase date. Employees may end their participation in the offering at any time during the offering period, except the last five days of that period, and participation ends automatically on termination of employment with the Company. Employees who do not join an offering when first permitted to do so, or who end their participation in any offering, may not participate again until the next offering period. Employees may alter their level of participation on a limited basis. No participant may accrue rights to purchase more than $25,000 of stock in any calendar year. Upon an acquisition of the Company, the outstanding payroll deductions will be immediately applied to the purchase of Common Stock. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Articles of Incorporation that eliminate to the fullest extent permissible under California law the liability of its directors to the Company for monetary damages. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. 49 53 The Company's Articles of Incorporation and Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted under California law, and the forms of indemnification agreements include indemnification in circumstances in which indemnification is otherwise discretionary under California law. The Company has entered into indemnification agreements with its officers and directors containing provisions that may require the Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from intentional or knowing and culpable violations of law) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company has obtained an insurance policy covering officers and directors for claims made that such officers or directors may otherwise be required to pay or for which the Company is required to indemnify them, subject to certain exclusions. CERTAIN TRANSACTIONS In August 1995, the Company established a $4.0 million bank credit line. The Company immediately borrowed $4.0 million under the credit line which was repaid from the proceeds of the Company's initial public offering. In connection with the establishment of the credit line, certain principal shareholders of the Company committed to lend the Company $2.0 million and provide $1.0 million in a loan guarantee if the Company's aggregate cash, cash equivalents, and short-term investments declined to less than $5.5 million. As consideration for such commitments and guarantee, the Company issued 30,000 shares of Common Stock to the shareholders and warrants to purchase 714 shares of Common Stock to the bank and paid a cash fee of $25,000 to the bank. Mr. Erickson, the President and Chief Executive Officer and a director of the Company, entered into an employment arrangement with the Company in May 1993. See "Management -- Employment Arrangements." Mr. Thomas, Vice President, Quality Assurance and Regulatory Affairs, is a director and shareholder of Sierra Scientific Software, Inc. ("Sierra"). Sierra entered into a Software License Agreement dated June 30, 1993 with DepoTech pursuant to which Sierra provides DepoTech with certain scientific software and other software development services and earned an aggregate of approximately $81,000 in 1995. Dr. Howell, a director of the Company, entered into a consulting agreement with the Company in November 1993 for a period of four years. The agreement was subsequently amended in May 1995. Pursuant to the amended agreement, the Company pays $35,000 per year to Dr. Howell for consulting services in connection with which Dr. Howell will serve as the senior medical advisor to the Company's Board and senior management. In addition, in November 1993, Dr. Howell received stock options for 30,000 shares of common stock, at an exercise price of $0.80 per share, vesting over four years. The amended agreement provides for continued payments to Dr. Howell and continued vesting of the stock options for a period of 12 months in the event the Company terminates the agreement. Dr. Howell also received a grant of 6,000 options in connection with the amendment of the agreement, and received an additional option grant of 600 shares in 1995. In addition, Dr. Howell was granted 4,375 options in 1996 for his service to the Company in 1995. Certain holders of Common Stock are entitled to certain registration rights. See "Description of Capital Stock -- Registration Rights." 50 54 PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of June 1, 1996, and as adjusted to reflect the sale of the shares of the Common Stock offered hereby by the Company by (i) all those known by the Company to be beneficial owners of more than 5% of its outstanding Common Stock, (ii) each director and each of the Named Executive Officers of the Company and (iii) all directors and executive officers of the Company as a group.
PERCENTAGE BENEFICIALLY OWNED(2) NUMBER OF ---------------------------------- OFFICERS, DIRECTORS AND 5% SHAREHOLDERS SHARES(1) PRIOR TO OFFERING AFTER OFFERING - ------------------------------------------------------ --------- ----------------- -------------- Janus Capital Corp.(3)................................ 1,661,132 14.5% 12.3% 100 Fillmore Street, Suite 300 Denver, Colorado 80206 Sanderling Ventures(4)................................ 1,262,753 11.0% 9.4% 2730 Sand Hill Road, Suite 200 Menlo Park, California 94025 Funds affiliated with Burr, Egan, Deleage & Co. (5)... 584,295 5.1% 4.3% One Embarcadero Center, Suite 4050 San Francisco, California 94111 Fred A. Middleton (6)................................. 1,320,459 11.5% 9.8% Jean Deleage(7)....................................... 584,295 5.1% 4.3% Stephen B. Howell(8).................................. 525,361 4.6% 3.9% Sinil Kim, M.D.(9).................................... 432,043 3.7% 3.2% Edward L. Erickson(10)................................ 208,572 1.8% 1.5% Roger C. Davisson(11)................................. 196,396 1.7% 1.5% Peter Preuss(12)...................................... 154,844 1.3% 1.1% John P. Longenecker, Ph.D.(13)........................ 82,573 * * David B. Thomas(14)................................... 36,093 * * George W. Dunbar, Jr.................................. 833 * * Pieter Strijkert, Ph.D.(15)........................... -0- * * All directors and executive officers as a group (13 persons)(16)......................... 3,572,518 30.0% 25.7%
- ------------ * Less than 1% (1) Except as indicated in the footnotes to this table, the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them. Share ownership in each case includes shares issuable upon exercise of certain outstanding options and warrants as described in the footnotes below. The address for those individuals for which an address is not otherwise indicated is: 10450 Science Center Drive, San Diego, California 92121. (2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1). (3) Information reported in the table is based on disclosures made in the Schedule 13G filed on February 13, 1996 by Janus Capital Corp., as amended through May 1996. (4) Includes 724,936 shares and 7,500 shares issuable upon exercise of warrants within 60 days of June 1, 1996 held by Sanderling Ventures Partners II, L.P., 117,181 shares held by Sanderling Biomedical, L.P. and 408,731 shares and 4,405 shares issuable upon exercise of warrants within 60 days of June 1, 1996 held by Sanderling Ventures Limited, L.P. Mr. Middleton, a director of the Company, is a general partner of Sanderling Ventures. Mr. Middleton disclaims beneficial ownership of these shares other than to the extent of his individual partnership interest, but exercises shared voting and investment power with respect to all such shares. (5) Includes 494,136 shares and 70,685 shares issuable upon exercise of warrants within 60 days of June 1, 1996 beneficially owned by Alta V Limited Partnership and 9,398 shares and 743 shares issuable upon exercise of warrants within 60 days of June 1, 1996 beneficially owned by Customs House 51 55 Partners. Also includes 9,333 shares issuable upon exercise of stock options that are issuable upon exercise of stock options that are exercisable within 60 days of June 1, 1996. When the stock options are exercised, Mr. Deleage has agreed to transfer the net profit after tax to Alta V Limited Partnership and Customs House Partners. Burr, Egan, Deleage & Co. directly or indirectly provides investment advisory services to Alta V Limited Partnership and Customs House Partners. The respective general partners of Alta V Limited Partnership and Customs House Partners exercise sole voting and investment power with respect to the shares owned by such funds. The principals of Burr, Egan, Deleage & Co., including Mr. Deleage, are general partners of Alta V Management Partners, L.P. (which is the general partner of Alta V Limited Partnership) and Customs House Partners. As general partners of such funds, they may be deemed to share voting and investment power for the shares held by the funds. The principals of Burr, Egan, Deleage & Co. disclaim beneficial ownership of these shares, except to the extent of their proportionate pecuniary interests therein. Effective June 27, 1996, Alta V Limited Partnership distributed 151,224 shares of Common Stock and, as a result, currently beneficially owns 342,912 shares. (6) Includes 724,936 shares and 7,500 shares issuable upon exercise of warrants within 60 days of June 1, 1996 held by Sanderling Ventures Partners II, L.P., 117,181 shares held by Sanderling Biomedical, L.P., 408,731 shares and 4,405 shares issuable upon exercise of warrants within 60 days of June 1, 1996 held by Sanderling Ventures Limited, L.P. Also includes 48,373 shares and 9,333 shares issuable upon exercise of stock options beneficially held by Mr. Middleton and exercisable within 60 days of June 1, 1996. Mr. Middleton, a director of the Company, is a general partner of Sanderling Ventures. Mr. Middleton disclaims beneficial ownership of these shares other than to the extent of his individual partnership interest, but exercises shared voting and investment power with respect to these shares. (7) Includes 503,534 shares owned by funds affiliated with Burr, Egan, Deleage & Co. Also includes 71,428 shares and 9,333 shares issuable upon exercise of warrants and stock options, respectively, that are exercisable within 60 days of June 1, 1996. When the stock options are exercised, Mr. Deleage has agreed to transfer the net profit after tax to Alta V Limited Partnership and Customs House Partners. Mr. Deleage, a director of the Company, is Vice President of Burr, Egan, Deleage & Co., and a general partner of Alta V Management Partners, L.P. (which is the general partner of Alta V Limited Partnership) and Customs House Partners. As a general partner of these funds, he may be deemed to share voting and investment power for the shares held by the fund. Mr. Deleage disclaims beneficial ownership of these shares except to the extent of his proportionate pecuniary interest therein. Effective June 27, 1996, a fund affiliated with Burr, Egan, Deleage & Co. distributed 151,224 shares of Common Stock and, as a result, funds affiliated with Burr, Egan, Deleage & Co. beneficially owns 423,738 shares. (8) Includes 14,489 shares issuable upon exercise of stock options exercisable within 60 days of June 1, 1996. Dr. Howell is a trustee of the Howell Family Trust and two trusts for the benefit of his children. (9) Includes 47,343 shares issuable upon exercise of stock options exercisable within 60 days of June 1, 1996. (10) Includes 135,072 shares issuable upon exercise of stock options exercisable within 60 days of June 1, 1996. (11) Includes 162,945 shares and 11,904 shares issuable upon exercise of warrants exercisable within 60 days of June 1, 1996 held by Brentwood Associates V, L.P. and 9,333 shares issuable upon exercise of stock options exercisable within 60 days of June 1, 1996 held by Brentwood V Management Partners. Mr. Davisson, a director of the Company, is a general partner of the general partner of Brentwood Associates V, L.P. and a general partner of Brentwood V Management Partners. Mr. Davisson disclaims beneficial ownership of these shares other than to the extent of his individual partnership interest, but exercises shared voting and investment power with respect to these shares. Also includes 12,214 shares beneficially held by Mr. Davisson. 52 56 (12) Includes 4,761 shares and 49,646 shares issuable upon exercise of warrants and stock options, respectively, exercisable within 60 days of June 1, 1996. (13) Includes 15,803 shares issuable upon exercise of stock options exercisable within 60 days of June 1, 1996. (14) Includes 6,927 shares issuable upon exercise of stock options exercisable within 60 days of June 1, 1996. (15) Does not include 20,000 shares of stock options granted to Dr. Strijkert upon his appointment to the Board on June 10, 1996, of which 417 shares were issuable upon exercise of stock options exercisable within 60 days of June 1, 1996. (16) Includes 3,151,009 shares and 322,511 and 99,998 shares issuable upon exercise of stock options and warrants, respectively, exercisable within 60 days of June 1, 1996. 53 57 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, no par value ("Common Stock"), and 5,000,000 shares of Preferred Stock, no par value ("Preferred Stock"). COMMON STOCK At June 1, 1996, there were 11,475,404 shares of Common Stock outstanding and held of record by approximately 310 shareholders. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Subject to preferences that may be applicable to any outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board out of funds legally available. See "Dividend Policy." All outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Board has the authority to issue up to 5,000,000 shares of the Preferred Stock in one or more series and to fix the rights, priorities, preferences, qualifications, limitations and restrictions, including the dividend rates, conversion rights, voting rights, terms of redemption, terms of sinking funds, liquidation preferences and the number of shares constituting any series or the designation of such series, without any further vote or action by the shareholders, which could decrease the amount of earnings and assets available for distribution to holders of Common Stock or adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of the Company and may adversely affect the rights of the holders of Common Stock. There are no shares of Preferred Stock outstanding. The Company has no present intention of issuing any shares of Preferred Stock. See "-- Possible Anti-Takeover Effect of Certain Charter Provisions." WARRANTS TO PURCHASE COMMON STOCK At June 1, 1996, there were outstanding warrants to purchase 42,354 shares of Common Stock at $2.75 per share, warrants to purchase 22,400 shares of Common Stock at $6.25 per share and warrants to purchase 503,287 shares of Common Stock at $7.00 per share. Each warrant contains provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon exercise of the warrant under certain circumstances, including stock dividends, stock splits, reorganizations, reclassifications or consolidations. Holders of the warrants are entitled to certain registration rights with respect to the Common Stock issued or issuable upon exercise thereof. See "Certain Transactions" and "-- Registration Rights." REGISTRATION RIGHTS The holders of approximately 3,671,051 shares of Common Stock (assuming the exercise of outstanding warrants) or their permitted transferees (the "Holders") are entitled to certain rights with respect to the registration of such shares under the Securities Act. Under the terms of agreements between the Company and such Holders, if the Company proposes to register any of its securities under the Securities Act for its own account, such Holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in such registration. In addition, Holders of at least 40% of approximately 3,671,051 (assuming the exercise of outstanding warrants) shares of Common Stock with demand registration rights may require the Company to prepare and file a registration statement under the Securities Act with respect to the shares entitled to demand registration rights, and the Company is required to use its best efforts to effect such registration, subject to certain conditions and limitations. The Company is not obligated to effect more than one of these shareholder-initiated registrations nor to effect such a registration within 54 58 90 days following an offering of the Company's securities, including the Offering made hereby. The Holders of approximately 3,671,051 (assuming the exercise of outstanding warrants) shares of Common Stock may also request the Company to register such shares on Form S-3 provided the shares registered have an aggregate market value of at least $500,000. Generally, the Company is required to bear the expense of all such registrations. The registration rights of the Holders expire on October 4, 1999. In addition, Silicon Valley Bank is entitled to certain rights with respect to the registration of shares of the Common Stock under the Securities Act. If the Company proposes to register any of its securities under the Securities Act for its own account, Silicon Valley Bank is entitled to notice of such registration and is entitled to include shares of such Common Stock therein, provided, among other conditions, that the underwriters of any such offering have the right to limit the number of shares included in such registration. POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS The holders of Common Stock are currently entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders other than the election of directors, in which event any holder may demand cumulative voting. Under cumulative voting, the holders of Common Stock are entitled to cast for each share held the number of votes equal to the number of directors to be elected, which is currently eight. A holder may cast all of his or her votes for one nominee or distribute them among any number of nominees for election. The Company's Articles of Incorporation provide that the shareholders' right to cumulative voting will terminate when the Company's shares are qualified for trading as a National Market security on the Nasdaq if the Company has at least 800 shareholders as of the record date for the most recent annual meeting of shareholders. The absence of cumulative voting may have the effect of limiting the ability of minority shareholders to effect changes in the Board and, as a result, may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company. The Company's Articles of Incorporation also include, among other things, the Fair Price Provision that requires the approval of the holders of two-thirds of the Company's voting stock as a condition to a merger or certain other business transactions with, or proposed by, a holder of 15% or more of the Company's voting stock (an "Interested Shareholder"), except in cases where the Continuing Directors approve the transaction or certain minimum price criteria and other procedural requirements are met. A "Continuing Director" is a director who is not affiliated with an Interested Shareholder and was elected prior to the time such Interested Shareholder became an Interested Shareholder or any successor chosen by a majority of the Continuing Directors. The minimum price criteria generally require that, in a transaction in which shareholders are to receive payments, holders of Common Stock must receive a value equal to the highest price of either the price paid by the Interested Shareholder for Common Stock during the prior two years, the Fair Market Value (as defined) at the time or the amount paid in the transaction in which such person became an Interested Shareholder, and that such payment be made in cash or in the type of consideration paid by the Interested Shareholder for the greatest portion of its shares. The Company's Board believes that the Fair Price Provision will help assure that all of the Company's shareholders will be treated similarly if certain kinds of business combinations are effected. However, the Fair Price Provision may make it more difficult to accomplish certain transactions that could be beneficial to shareholders but are opposed by the incumbent Board. The Company's Articles of Incorporation also require that any action required or permitted to be taken by shareholders of the Company must be effected at a duly called annual or special meeting of shareholders and may not be effected by a consent in writing. The Company's Bylaws, as amended, also provide that the range of the authorized number of directors may be changed only by resolution of holders of two-thirds of the Company's voting stock, and the Company's Articles of Incorporation and Bylaws, as amended, provide that newly created directorships resulting from any increase in the authorized number of directors may only be filled by a majority vote of the directors then in office. In 55 59 addition, the Articles of Incorporation and Bylaws of the Company, as amended, require that shareholders give advance notice to the Company's secretary of any directorship nominations or other business to be brought by shareholders at any shareholders' meeting. The Articles of Incorporation, as amended, also require the approval of two-thirds of the Company's voting stock to amend certain provisions of the Articles of Incorporation. These provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of the Company. See "Risk Factors -- Possible Anti-Takeover Effect of Certain Charter Provisions" and "Management." TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Wells Fargo Bank N.A. 56 60 UNDERWRITING The names of the Underwriters of the shares of Common Stock offered hereby and the aggregate number of shares which each has severally agreed to purchase from the Company, subject to the terms and conditions specified in the Underwriting Agreement, are as follows:
NUMBER OF UNDERWRITERS SHARES - --------------------------------------------------------------------------------- --------- Dillon, Read & Co. Inc. ......................................................... UBS Securities LLC............................................................... Vector Securities International, Inc. ........................................... Total.......................................................................... 2,000,000 =========
The Managing Underwriters are Dillon, Read & Co. Inc., UBS Securities LLC and Vector Securities International, Inc. The Underwriters are committed to purchase all of the shares of Common Stock, if any are so purchased. The Underwriting Agreement contains certain provisions whereby, if any Underwriter defaults in its obligation to purchase such shares, and the aggregate obligations of the Underwriters so defaulting do not exceed 10% of the shares offered hereby, some or all of the remaining Underwriters must assume such obligations. The Underwriters propose to offer the shares of Common Stock to the public initially at the offering price per share set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share on sales to certain other dealers. The offering of the shares is made for delivery when, as, and if accepted by the Underwriters and subject to prior sale and withdrawal, cancellation or modification of the offer without notice. The Underwriters reserve the right to reject any order for the purchase of the shares. After the public offering of the Common Stock, the public offering price and the concessions may be changed by the Managing Underwriters. The Company has granted to the Underwriters an option for 30 days from the date of this Prospectus to purchase up to 300,000 additional shares of Common Stock. The Underwriters may exercise such option only to cover over-allotments of the Common Stock offered hereby. To the extent the Underwriters exercise this option, each Underwriter will be obligated, subject to certain conditions, to purchase the number of additional shares of Common Stock proportionate to such Underwriter's initial commitment. The Company has agreed to indemnify the Underwriters against certain liabilities, including any liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company, its executive officers and directors and certain shareholders of the Company have agreed not to offer, sell, contract to sell, grant any option to purchase, transfer or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable for Common Stock, or warrants or other rights to purchase Common Stock for a period of 90 days from the date of this Prospectus without the prior written consent of Dillon, Read & Co. Inc. The Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. Vector Securities International, Inc. ("Vector") is serving as financial advisor to the Company in connection with establishing certain collaborative arrangements with potential corporate partners. For 57 61 its services, Vector will receive from the Company a cash retainer and certain fees based on the aggregate consideration received by the Company, its shareholders or employees in a transaction. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Brobeck, Phleger & Harrison LLP, San Diego, California. A partner of such firm owns 1,868 shares of the Common Stock. Certain legal matters will be passed upon for the Underwriters by Cooley Godward Castro Huddleson & Tatum, San Diego, California. A member of such firm and affiliated investment partnerships own an aggregate of 29,977 shares of the Common Stock and warrants to purchase 100 shares of the Common Stock. An opinion with respect to certain government regulations will be provided to the Underwriters by Hyman, Phelps & McNamara, P.C., Washington, D.C. EXPERTS The financial statements of DepoTech Corporation at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995 appearing in this Prospectus and the Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The statements in this Prospectus under the caption "Risk Factors -- Patents and Proprietary Technology," "Business -- Product Research and Development Programs" and "Business -- Patents and Proprietary Rights" and other references therein to intellectual property have been reviewed and approved by Fish & Richardson, P.C., patent counsel for the Company, as experts in such matters and are included herein in reliance upon that review and approval. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules filed therewith. 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 therewith. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part thereof may be obtained at prescribed rates from the Commission's Public Reference Section at the same address. 58 62 INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors..................................... F-2 Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (unaudited)........... F-3 Statements of Operations for each of the three years in the period ended December 31, 1995, and the three months ended March 31, 1995 and 1996 (unaudited)................ F-4 Statements of Shareholders' Equity for each of the three years in the period ended December 31, 1995, and the three months ended March 31, 1996 (unaudited)............ F-5 Statements of Cash Flows for each of the three years in the period ended December 31, 1995, and the three months ended March 31, 1995 and 1996 (unaudited)................ F-6 Notes to Financial Statements......................................................... F-7
F-1 63 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders DepoTech Corporation We have audited the accompanying balance sheets of DepoTech Corporation as of December 31, 1994 and 1995, and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of DepoTech Corporation at December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California February 16, 1996 F-2 64 DEPOTECH CORPORATION BALANCE SHEETS
DECEMBER 31, ------------------------- 1994 1995 ----------- ----------- MARCH 31, 1996 ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......................... $ 4,624,340 $ 5,883,911 $ 6,373,076 Short-term investments............................. 5,358,706 32,777,623 24,172,490 Accounts receivable from Chiron collaboration...... 243,877 400,000 1,145,654 Other current assets............................... 128,384 566,924 855,913 ----------- ----------- ----------- Total current assets....................... 10,355,307 39,628,458 32,547,133 Property and equipment, net.......................... 4,326,742 8,610,978 12,508,819 Restricted cash...................................... 437,600 420,860 420,860 Deposits and other assets............................ 227,005 317,277 336,083 ----------- ----------- ----------- Total assets............................... $15,346,654 $48,977,573 $45,812,895 =========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 848,599 $ 1,741,724 $ 565,490 Other accrued liabilities.......................... 222,202 705,868 665,512 Facilities payable................................. 237,569 -- -- Current portion of obligations under capital leases and loans....................................... 516,367 1,805,494 1,502,668 ----------- ----------- ----------- Total current liabilities.................. 1,824,737 4,253,086 2,733,670 Deferred revenue from Chiron collaboration........... 1,000,000 -- -- Deferred rent........................................ 112,345 387,947 601,293 Obligations under capital leases, less current portion............................................ 1,274,381 2,831,010 3,592,219 Note payable......................................... 231,938 -- -- Commitments Shareholders' equity: Preferred stock, no par value; 5,000,000 shares authorized in 1995 and 1996 and 7,400,000 shares authorized in 1994; 5,982,991 shares issued and outstanding at December 31, 1994................ 26,560,830 -- -- Common stock, no par value; 11,600,000 authorized in 1994 and 30,000,000 shares authorized in 1995 and 1996; 1,531,263, 11,285,630 and 11,364,978 shares issued and outstanding at December 31, 1994 and 1995 and March 31, 1996, respectively.................................... 82,486 67,133,738 67,190,282 Deferred compensation related to stock options, net............................................. -- (214,448) (201,326) Unrealized gain on short-term investments.......... 26,928 206,172 6,924 Accumulated deficit................................ (15,766,991) (25,619,932) (28,110,167) ----------- ----------- ----------- Total shareholders' equity................. 10,903,253 41,505,530 38,885,713 ----------- ----------- ----------- Total liabilities and shareholders' equity................................... $15,346,654 $48,977,573 $45,812,895 =========== =========== ===========
See accompanying notes. F-3 65 DEPOTECH CORPORATION STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) Revenues: Contract revenue....... $ 69,500 $ 582,120 $ 5,825,784 $3,154,540 $ 1,200,654 Marketing rights fee... -- -- 1,000,000 1,000,000 -- ----------- ----------- ----------- ---------- ----------- Total revenues........... 69,500 582,120 6,825,784 4,154,540 1,200,654 Costs and expenses: Research and development......... 3,231,169 7,426,815 12,699,247 2,411,589 3,271,404 General and administration...... 827,250 1,880,861 2,826,538 463,431 786,261 ----------- ----------- ----------- ---------- ----------- Total costs and expenses............... 4,058,419 9,307,676 15,525,785 2,875,020 4,057,665 Income (loss) from operations............. (3,988,919) (8,725,556) (8,700,001) 1,279,520 (2,857,011) Interest income.......... 128,652 286,984 1,084,244 207,375 511,359 Interest expense......... (36,639) (122,915) (404,790) (52,417) (144,583) ----------- ----------- ----------- ---------- ----------- Net income (loss)........ $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235) =========== =========== =========== ========== =========== Net income (loss) per share.................. $ (0.78) $ (1.26) $ (0.92) $ 0.17 $ (0.22) =========== =========== =========== ========== =========== Shares used in computing net income (loss) per share.................. 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501 =========== =========== =========== ========== ===========
See accompanying notes. F-4 66 DEPOTECH CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY
DEFERRED CONVERTIBLE NOTES COMPENSATION PREFERRED STOCK COMMON STOCK RECEIVABLE RELATED ------------------------- ------------------------ FROM TO STOCK SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS OPTIONS ---------- ------------ ---------- ----------- ------------ ------------ Balance at January 1, 1993........ 3,333,127 $ 7,579,645 1,308,029 $ 13,080 $ (9,600) $ -- Issuance of common stock........ -- -- 1,082 11 -- -- Issuance of convertible preferred stock............... 1,045,974 6,428,860 -- -- -- -- Net loss........................ -- -- -- -- -- -- ---------- ----------- ---------- ----------- ------- --------- Balance at December 31, 1993...... 4,379,101 14,008,505 1,309,111 13,091 (9,600) -- Issuance of common stock........ -- -- 222,152 69,395 -- -- Issuance of convertible preferred stock............... 1,603,890 10,656,296 -- -- -- -- Accretion on convertible preferred stock............... -- 1,896,029 -- -- -- -- Forgiveness of notes receivable from shareholders............. -- -- -- -- 9,600 -- Unrealized gain on investments................... -- -- -- -- -- -- Net loss........................ -- -- -- -- -- -- ---------- ----------- ---------- ----------- ------- --------- Balance at December 31, 1994...... 5,982,991 26,560,830 1,531,263 82,486 -- -- Issuance of common stock........ -- -- 78,908 36,306 -- -- Exercise of warrants............ -- -- 242,468 308,654 -- -- Deferred compensation related to issuance of stock options..... -- -- -- 262,438 -- (262,438) Amortization of deferred compensation.................. -- -- -- -- -- 47,990 Accretion on convertible preferred stock............... -- 1,832,394 -- -- -- -- Unrealized gain on investments................... -- -- -- -- -- -- Issuance of common stock upon initial public offering, net........................... -- -- 3,450,000 38,050,630 -- -- Conversion of convertible preferred stock upon initial public offering............... (5,982,991) (28,393,224) 5,982,991 28,393,224 -- -- Net loss........................ -- -- -- -- -- -- ---------- ----------- ---------- ----------- ------- --------- Balance at December 31, 1995...... -- -- 11,285,630 67,133,738 -- (214,448) Issuance of common stock (unaudited)................... -- -- 79,348 56,544 -- -- Amortization of deferred compensation (unaudited)...... -- -- -- -- -- 13,122 Unrealized loss on investments (unaudited)................... -- -- -- -- -- -- Net loss (unaudited)............ -- -- -- -- -- -- ---------- ----------- ---------- ----------- ------- --------- Balance at March 31, 1996 (unaudited)..................... -- $ -- 11,364,978 $67,190,282 $ -- $ (201,326) ========== =========== ========== =========== ======= ========= UNREALIZED GAIN TOTAL ON ACCUMULATED SHAREHOLDERS' INVESTMENTS DEFICIT EQUITY --------------- ------------ ------------ Balance at January 1, 1993........ $ -- $ (1,412,569) $ 6,170,556 Issuance of common stock........ -- -- 11 Issuance of convertible preferred stock............... -- -- 6,428,860 Net loss........................ -- (3,896,906) (3,896,906 ) --------- ------------ ----------- Balance at December 31, 1993...... -- (5,309,475) 8,702,521 Issuance of common stock........ -- -- 69,395 Issuance of convertible preferred stock............... -- -- 10,656,296 Accretion on convertible preferred stock............... -- (1,896,029) -- Forgiveness of notes receivable from shareholders............. -- -- 9,600 Unrealized gain on investments................... 26,928 -- 26,928 Net loss........................ -- (8,561,487) (8,561,487 ) --------- ------------ ----------- Balance at December 31, 1994...... 26,928 (15,766,991) 10,903,253 Issuance of common stock........ -- -- 36,306 Exercise of warrants............ -- -- 308,654 Deferred compensation related to issuance of stock options..... -- -- -- Amortization of deferred compensation.................. -- -- 47,990 Accretion on convertible preferred stock............... -- (1,832,394) -- Unrealized gain on investments................... 179,244 -- 179,244 Issuance of common stock upon initial public offering, net........................... -- -- 38,050,630 Conversion of convertible preferred stock upon initial public offering............... -- -- -- Net loss........................ -- (8,020,547) (8,020,547 ) --------- ------------ ----------- Balance at December 31, 1995...... 206,172 (25,619,932) 41,505,530 Issuance of common stock (unaudited)................... -- -- 56,544 Amortization of deferred compensation (unaudited)...... -- -- 13,122 Unrealized loss on investments (unaudited)................... (199,248) -- (199,248 ) Net loss (unaudited)............ -- (2,490,235) (2,490,235 ) --------- ------------ ----------- Balance at March 31, 1996 (unaudited)..................... $ 6,924 $(28,110,167) $38,885,713 ========= ============ ===========
See accompanying notes. F-5 67 DEPOTECH CORPORATION STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------- 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net income (loss)................................. $(3,896,906) $(8,561,487) $(8,020,547) $ 1,434,478 $(2,490,235) Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization................... 79,842 582,939 837,168 186,675 326,529 Deferred revenue from Chiron collaboration...... -- 1,000,000 (1,000,000) (1,000,000) -- Amortization of deferred compensation........... -- -- 47,990 -- 13,122 Deferred rent................................... 15,024 7,173 275,602 22,457 213,346 Issuance of note payable in exchange for acquired technology........................... -- 231,938 -- -- -- Forgiveness of employee notes receivable........ -- 128,508 56,333 -- -- Changes in operating assets and liabilities: Accounts receivable from Chiron collaboration............................... -- (243,877) (156,123) (425,295) (745,654) Other current assets.......................... (245,204) 22,662 (494,873) 160,556 (288,989) Deposits and other assets..................... -- (162,064) (115,614) (13,244) (21,165) Accounts payable and other accrued liabilities................................. 383,065 592,537 1,376,791 (400,449) (1,216,589) ------------ ------------ ------------ ------------ ------------ Net cash used by operating activities............. (3,664,179) (6,401,671) (7,193,273) (34,822) (4,209,635) INVESTING ACTIVITIES Purchases of short-term investments............... -- (12,228,388) (38,410,705) (5,089,583) (5,227,801) Proceeds from sale or maturities of short-term investments..................................... -- 6,896,610 11,171,032 3,370,584 13,633,686 Purchases of property and equipment............... (675,669) (1,362,231) (1,419,044) (123,754) (3,419,548) Restricted cash................................... (604,251) 166,651 16,740 59,200 -- ------------ ------------ ------------ ------------ ------------ Net cash provided (used) by investing activities...................................... (1,279,920) (6,527,358) (28,641,977) (1,783,553) 4,986,337 FINANCING ACTIVITIES Repayment on capital lease obligations............ (61,663) (300,842) (831,262) (136,568) (347,335) Proceeds from issuance of common stock, net....... 11 69,395 38,163,652 2,656 56,544 Proceeds from issuances of convertible preferred stock, net...................................... 6,428,860 10,678,720 -- 35 -- Reimbursement for assets refinanced as capital leases.......................................... -- -- -- 173,129 3,254 Repayment of facilities payable................... -- (413,000) (237,569) -- -- Proceeds from bank borrowing...................... -- -- 4,000,000 -- -- Payment on bank borrowing......................... -- -- (4,000,000) -- -- ------------ ------------ ------------ ------------ ------------ Net cash provided (used) by financing activities...................................... 6,367,208 10,034,273 37,094,821 39,252 (287,537) ------------ ------------ ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents..................................... 1,423,109 (2,894,756) 1,259,571 (1,779,123) 489,165 Cash and cash equivalents at the beginning of period.......................................... 6,095,987 7,519,096 4,624,340 4,624,340 5,883,911 ------------ ------------ ------------ ------------ ------------ Cash and cash equivalents at the end of period.... 7,519,096 4,624,340 5,883,911 2,845,217 6,373,076 Short-term investments at the end of period....... -- 5,358,706 32,777,623 7,085,876 24,172,490 ------------ ------------ ------------ ------------ ------------ Cash, cash equivalents and short-term investments at the end of period............................ $ 7,519,096 9,983,046 $38,661,534 $ 9,931,093 $30,545,566 ============ ============ ============ ============ ============ SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Property and equipment acquired through capital leases and loans................................ $ 492,217 $ 1,661,036 $ 3,677,018 $ 493,529 $ 802,464 ============ ============ ============ ============ ============ Facilities payable recorded for leasehold improvements.................................... $ 413,000 $ 237,569 $ -- $ -- $ -- ============ ============ ============ ============ ============ Issuance of common stock in exchange for note payable......................................... $ -- $ -- $ 231,938 $ -- $ -- ============ ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Interest paid..................................... $ 35,639 $ 122,915 $ 404,790 $ 52,417 $ 144,582 ============ ============ ============ ============ ============
See accompanying notes. F-6 68 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Activities DepoTech Corporation (the "Company") was incorporated in California on October 30, 1989. The Company is a drug delivery company engaged in the development and manufacture of sustained-release therapeutic products based on DepoFoam, an injectable, depot drug delivery technology. Interim Financial Information The financial statements as of March 31, 1996, and for the three months ended March 31, 1995 and 1996, are unaudited, but in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair statement of financial position as of such date and the operating results and cash flows for such periods. Results for the interim period are not necessarily indicative of results to be expected for the entire year. Cash, Cash Equivalents and Short-Term Investments The Company invests its excess cash in deposit accounts, money market accounts, commercial paper and U.S. Government securities. The Company has established guidelines relative to diversification and maturities that maintain safety and an adequate level of liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. Short-term investments are classified as available-for-sale, and are carried at market value, in accordance with Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The unrealized gain or loss on such investments is reported as a separate component of shareholders' equity. Since such unrealized gain or loss had no cash effect, it is not reflected in the statements of cash flows. Property and Equipment Property and equipment consist primarily of manufacturing, laboratory and office equipment and leasehold improvements and are stated at cost. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful life of the assets (ranging from three to fifteen years) or the lease term. Restricted Cash Restricted cash consists of certificates of deposit maintained as collateral for letters of credit securing certain lease agreements. Patent Costs Included in deposits and other assets are patent and trademark filing costs totaling approximately $324,000 and $316,000 at December 31, 1995 and March 31, 1996, respectively, which are amortized over the estimated economic life of the patents or trademarks when issued. F-7 69 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED Deferred Rent Rent expense is recognized on a straight-line basis over the term of the lease. Accordingly, rent expense incurred in excess of rent paid is recorded as deferred rent. Contract Revenues and Expenses Contract revenue is recorded as earned based on the performance requirements of the contract. Research and development costs are expensed as incurred. Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is not less than the market price of the underlying stock on the date of grant, no compensation expense is recognized. Accounting Standard on Impairment of Long-Lived Assets In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121), regarding the impairment of long-lived assets, identifiable intangibles and goodwill related to those assets. FAS 121 is effective for financial statements for fiscal years beginning after December 15, 1995. The adoption of FAS 121 during the three months ended March 31, 1996 had no effect on the accompanying financial statements. Use of Estimates in the Preparation of Financial Statements 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. Net Income (Loss) Per Share For periods subsequent to the completion of the Company's initial public offering ("IPO") in October 1995, loss per share information is computed using the weighted average number of common shares outstanding. Common share equivalents have not been included in computing net loss per share since the effect would be antidilutive. Prior to the IPO, net income (loss) per share is computed using the weighted average number of common shares outstanding during the period, plus dilutive common share equivalents for the three months ended March 31, 1995. Pursuant to the requirements of the Securities and Exchange Commission ("SEC"), common stock issued by the Company during the twelve months immediately preceding the IPO, plus the number of common equivalent shares which were granted during the same period pursuant to the grant of stock options and warrants, have been included in the calculation of the shares used in computing net income (loss) per share as if these shares were outstanding for all periods presented using the treasury stock method. In addition, pursuant to SEC policy, the calculation of the F-8 70 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED shares used in computing net income (loss) per share also includes convertible preferred shares which converted into common shares upon the closing of the IPO as if they were converted into common shares as of the original dates of issuance. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 2. CHIRON COLLABORATION In March 1994, the Company entered into a collaboration agreement ("the Collaboration Agreement") with Chiron Corporation ("Chiron") to develop and commercialize sustained release formulations of selected generic products and certain Chiron proprietary products using the Company's drug delivery technology. Under the agreement, Chiron purchased 400,000 shares of the Company's Series C preferred stock for $6.25 per share and a warrant to purchase 365,000 shares of Series C preferred stock at an exercise price of $6.25 per share for $1 million. The warrant was terminated and converted into a marketing rights fee to the Company upon the achievement of a development milestone in January 1995. The Collaboration Agreement grants Chiron rights to market and sell the Company's initial product, DepoCyt, in the United States, Canada and Europe. Phase III clinical trial costs of DepoCyt incurred subsequent to June 1993 will be shared equally by Chiron and the Company. Any additional clinical trials required in Europe will be funded entirely by Chiron. Canadian registration expenses will be funded by Chiron. The Company will manufacture DepoCyt, Chiron will market, sell and distribute the product, and the parties will share all profits equally. Chiron will make additional payments to the Company upon achievement of certain milestones in the development of DepoCyt. Chiron also has a right of first refusal to obtain a license to alternate DepoFoam formulations of cytarabine under terms and conditions to be negotiated in the future. Reimbursable clinical trial costs incurred by the Company totaled $708,082, $1,790,460 and $2,541,847 for the years ended December 31, 1993, 1994 and 1995, respectively, and $576,441 and $990,403 for the three months ended March 31, 1995 and 1996, respectively. The cumulative amount due through December 31, 1994 became billable and was recognized as contract revenue upon the achievement of a development milestone in January 1995. The Collaboration Agreement also provides for the joint development of DepoFoam formulations of certain compounds proprietary to Chiron ("Chiron Products"). Feasibility studies on IGF-1 and IL-2 have been completed and scale-up and preclinical development are currently underway to support an IND filing for one of the compounds. In addition, Chiron and the Company have agreed to initiate another feasibility study on an additional Chiron proprietary compound or an additional indication for IGF-1 to begin in the second half of 1996. In 1997 and thereafter, Chiron must fund one feasibility program for a Chiron Product per year or lose its option to develop DepoFoam formulations of additional Chiron proprietary compounds. The agreement provides that Chiron will pay the Company for its feasibility efforts, and that Chiron will be responsible for all development costs thereafter. The agreement also provides for Chiron to make payments to the Company upon achievement of certain development milestones for the Chiron Products. Chiron will have exclusive, worldwide distribution rights to all Chiron Products and will manufacture the bulk unencapsulated drug. The Company will then encapsulate the bulk drug in DepoFoam creating the Chiron Products, and Chiron will market, sell and distribute the Chiron Products. Chiron will compensate the Company based on both manufacturing costs, including a manufacturing profit, and a percentage of Chiron's sale of the Chiron Products. F-9 71 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED Both the Company and Chiron have the ability to terminate a portion or all of the collaboration at certain intervals and with advance notice. In addition, Chiron has the ability to terminate the development of a Chiron Product with a limited amount of advance notice. 3. SHORT-TERM INVESTMENTS The following is a summary of available-for-sale short-term investments:
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- -------- -------- ----------- DECEMBER 31, 1994 U.S. Government Securities...... $ 4,328,270 $ 25,442 $ (6,232) $ 4,347,480 Corporate Obligations........... 500,000 7,158 -- 507,158 Certificates of Deposit......... 503,508 560 -- 504,068 ----------- ---------- -------- ----------- $ 5,331,778 $ 33,160 $ (6,232) $ 5,358,706 =========== ========== ======== ===========
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- -------- -------- ----------- DECEMBER 31, 1995 U.S. Government Securities...... $32,072,511 $205,047 $ -- $32,277,558 Certificates of Deposit......... 498,940 1,125 -- 500,065 ----------- ---------- -------- ----------- $32,571,451 $206,172 $ -- $32,777,623 =========== ========== ======== ===========
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- -------- -------- ----------- MARCH 31, 1996 U.S. Government Securities...... $23,666,626 $ 61,836 $(55,922) $23,672,540 Certificates of Deposit......... 498,940 1,010 -- 499,950 ----------- ---------- -------- ----------- $24,165,566 $ 62,846 $(55,922) $24,172,490 =========== ========== ======== ===========
The amortized cost and estimated fair value of short-term investments at December 31, 1995 and March 31, 1996, by contractual maturity, are shown below:
ESTIMATED FAIR COST VALUE ----------- ----------- DECEMBER 31, 1995 Due in one year or less................................. $ 9,067,985 $ 9,089,589 Due after one year through three years.................. 23,503,466 23,688,034 ----------- ----------- $32,571,451 $32,777,623 =========== ===========
F-10 72 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED
ESTIMATED FAIR COST VALUE ----------- ----------- MARCH 31, 1996 Due in one year or less................................. $ 1,974,751 $ 1,974,071 Due after one year through three years.................. 22,190,815 22,198,419 ----------- ----------- $24,165,566 $24,172,490 =========== ===========
4. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, -------------------------- MARCH 31, 1994 1995 1996 ---------- ----------- ----------- Manufacturing, laboratory and office equipment............................... $3,358,696 $ 7,184,905 $ 8,097,738 Leasehold improvements.................... 1,308,810 1,989,257 1,996,778 Leasehold improvements under construction............................ 350,602 939,853 4,241,510 ---------- ----------- ----------- 5,018,108 10,114,015 14,336,026 Less accumulated depreciation and amortization............................ (691,366) (1,503,037) (1,827,207) ---------- ----------- ----------- $4,326,742 $ 8,610,978 $12,508,819 ========== =========== ===========
5. TECHNOLOGY ASSIGNMENT In 1994, in connection with an assignment agreement under which the Company was assigned exclusive rights to certain intellectual property, the Company issued 108,029 shares of common stock and a warrant to purchase 154,327 shares of Preferred Stock at $2.00 per share. During 1994, the Company also issued a non-interest bearing note payable in the amount of $231,938, which was expensed as acquired in-process research and development. Upon the completion of the IPO, the warrant was exercised and the note and cash were exchanged for common stock. Royalties or a percentage of royalties will be paid to the assignor on revenues from the sale of DepoCyt or other products incorporating the acquired technology or other consideration received by the Company from licensees. The assignor has the right to terminate the agreement or to convert the exclusive nature of the rights granted under the agreement into a nonexclusive license in the event that the Company does not make certain minimum annual payments or upon certain other events. 6. COMMITMENTS The Company leases its facilities and certain equipment under operating and capital leases and loans. Provisions of the facilities leases provide for abatement of rent during certain periods and escalating rent payments during the lease terms which extend to dates through August 1, 2015. Included in restricted cash and deposits and other assets are $480,854, $449,107 and $465,076 related F-11 73 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED to these agreements at December 31, 1994 and 1995 and March 31, 1996, respectively. Annual future minimum lease and loan payments as of December 31, 1995 are as follows:
CAPITAL OPERATING LEASES AND LEASES LOANS ----------- ----------- Year Ending December 31: 1996.................................................. $ 2,828,159 $ 2,243,566 1997.................................................. 3,067,552 1,527,194 1998.................................................. 3,186,448 1,273,614 1999.................................................. 3,309,102 469,139 2000.................................................. 3,448,411 -- Thereafter.............................................. 55,119,881 -- ----------- ------------ Total......................................... $70,959,553 5,513,513 =========== Less amount representing interest....................... (877,009) ------------ Present value of net minimum payments................... 4,636,504 Less current portion.................................... (1,805,494) ------------ Amounts due after one year.............................. $ 2,831,010 ============
The Company subleased certain of its existing laboratory and administrative facilities. Rental income from the sublease agreement over the next five years will range from $71,000 to $298,000 per year. At December 31, 1995, the Company had short-term loans totaling $562,788 which were issued for progress payments on the purchase of manufacturing equipment. Such loans will be converted into capital leases over a term of four years. Assets acquired under capital leases and loans consist of manufacturing, laboratory and office equipment and leasehold improvements with an aggregate cost of approximately $2.1 million, $5.8 million and $6.6 million at December 31, 1994 and 1995 and March 31, 1996, respectively. Accumulated amortization of assets acquired under these arrangements is included in total depreciation and amortization. Rent expense was approximately $178,000, $583,000 and $1,467,000, during the years ended December 31, 1993, 1994 and 1995, respectively, and $202,000 and $817,000 for the three months ended March 31, 1995 and 1996, respectively. 7. SHAREHOLDERS' EQUITY Deferred Compensation Pursuant to certain provisions of the SEC regulations, the Company recorded and is amortizing over the related vesting periods deferred compensation representing the difference between the exercise price of stock options granted and the deemed fair value (for accounting purposes) of the Company's common stock at the date of grant. Stock options generally vest over four to five years. Shares included in the computation of deferred compensation include option grants to employees and officers of the Company from July 1994 through June 1995. F-12 74 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED Stock Purchase Warrants In connection with various stock purchase or lease financing transactions, the Company has issued warrants to purchase 42,354, 22,400 and 503,287 shares of common stock at prices of $2.75, $6.25 and $7.00 per share, respectively. The warrants are generally exercisable through 2001, and all remain outstanding at December 31, 1995 and March 31, 1996. Stock Option Plans The 1995 Stock Option/Stock Issuance Plan ("the Plan") provides for both incentive and nonqualified stock options to be granted to employees, directors and consultants of the Company. The Plan provides that incentive stock options will be granted at no less than the fair value of the Company's common stock (no less than 85% of the fair value for nonqualified stock options) at the date of the grant. In May 1996, the Company's shareholders approved increasing shares issuable under the Plan to 2,000,000 shares. No options granted under the Plan have a term in excess of ten years. The stock option activity for the three years ended December 31, 1995 and for the three months ended March 31, 1996 is as follows:
SHARES PRICE --------- --------------------- Outstanding at January 1, 1993...................... 308,700 $ .01 - .10 Options granted................................... 454,650 $ .10 - .80 Options exercised................................. (1,082) $ .01 Options cancelled................................. (3,418) $ .01 - .25 ---------- Outstanding at December 31, 1993.................... 758,850 $ .01 - .80 Options granted................................... 389,650 $ .80 - 2.50 Options exercised................................. (222,152) $ .01 - 2.00 Options cancelled................................. (9,034) $ .01 - 1.25 ---------- Outstanding at December 31, 1994.................... 917,314 $ .01 - 2.50 Options granted................................... 258,300 $ 3.00 - 15.25 Options exercised................................. (48,908) $ .01 - 4.00 Options cancelled................................. (24,267) $ .01 - 12.00 ---------- Outstanding at December 31, 1995.................... 1,102,439 $ .01 - 15.25 Options granted................................... 114,319 $19.625 - 21.1135 Options exercised................................. (79,348) $ .01 - 12.00 Options cancelled................................. (15,037) $ 2.00 - 12.00 ---------- Outstanding at March 31, 1996....................... 1,122,373 $ .01 - 21.113 ==========
At December 31, 1995, options for 415,790 shares were exercisable and 375,419 shares were available for future grant. At March 31, 1996, options for 422,953 shares were exercisable and 276,137 shares were available for future grant. Employee Stock Purchase Plan In June 1995, the Company adopted an Employee Stock Purchase Plan ("the ESPP") whereby employees, at their option, can purchase shares of Company common stock through payroll deductions at the lower of 85% of fair market value on the ESPP offering date or on certain other predetermined F-13 75 DEPOTECH CORPORATION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) INFORMATION AS OF MARCH 31, 1996, AND FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996, IS UNAUDITED exercise dates. The Company has reserved 250,000 shares of common stock for issuance under the ESPP. 8. INCOME TAXES At December 31, 1995, the Company has federal and California tax net operating loss carryforwards of approximately $22,300,000 and $6,500,000, respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to the capitalization of research and development expenses for California franchise tax purposes and the fifty-percent limitation on California loss carryforwards. The federal and California tax loss carryforwards will begin expiring in 2005 and 1997, respectively, unless previously utilized. The Company also has federal and California research and development tax credit carryforwards totaling $684,000 and $351,000, respectively, which will being expiring in 2005 unless previously utilized. Pursuant to Internal Revenue Code Sections 382 and 383, annual use of the Company's net operating loss and credit carryforwards may be limited if a cumulative change in ownership of more than 50% occurs within any three year period. Significant components of the Company's deferred tax assets and liabilities are shown below. A valuation allowance of $9,900,000, of which $3,770,000 is related to 1995, has been recognized to offset the deferred tax assets as realization of such assets is uncertain.
DECEMBER 31, -------------------------- 1994 1995 ---------- ----------- Deferred tax assets: Net operating loss carryforwards....................... $4,779,000 $ 8,192,000 Research and development credit carryforwards.......... 809,000 912,000 Capitalized research expenses.......................... 626,000 826,000 Other.................................................. 39,000 272,000 ---------- ----------- Net deferred tax assets.................................. 6,253,000 10,202,000 Valuation allowance for deferred tax assets.............. (6,130,000) (9,900,000) ---------- ----------- Total deferred tax assets................................ 123,000 302,000 Deferred tax liabilities: Depreciation........................................... (123,000) (302,000) ---------- ----------- Net deferred tax assets................................ $ -- $ -- ========== ===========
9. SUBSEQUENT EVENT (UNAUDITED) During April 1996, the Company entered into an agreement to expand an existing lease line from $2.6 million to $5.1 million. The incremental borrowing amount of $2.5 million was used to finance certain tenant improvement and equipment costs incurred in the first quarter of 1996. During June 1996, the Company established a credit line with a bank for borrowing up to $9 million to finance certain capital equipment expenditures. Borrowings under the credit line will bear interest at either a floating rate equal to prime plus .5% per annum or a fixed rate equal to the treasury rate, as defined, plus 4% per annum, as elected by the Company. The credit line expires on June 30, 2001. F-14 76 [PHOTOGRAPH SHOWING THE COMPANY'S DEPOFOAM 10X MANUFACTURING FACILITY] [PHOTOGRAPH SHOWING THE COMPANY'S HEADQUARTERS] [PHOTOGRAPH SHOWING VIALS OF CLIINICAL TRIAL MATERIALS] 77 ------------------------------------------------------------ ------------------------------------------------------------ NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO ANY MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary......................... 2 The Company................................ 5 Risk Factors............................... 6 Use of Proceeds............................ 15 Price Range of Common Stock................ 15 Dividend Policy............................ 15 Capitalization............................. 16 Dilution................................... 17 Selected Financial Data.................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 19 Business................................... 22 Management................................. 40 Certain Transactions....................... 50 Principal Shareholders..................... 51 Description of Capital Stock............... 54 Underwriting............................... 57 Legal Matters.............................. 58 Experts.................................... 58 Additional Information..................... 58 Index to Financial Statements.............. F-1
------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ ------------------------------------------------------------ [DEPOTECH CORPORATION LOGO] ------------------------ 2,000,000 Shares Common Stock PROSPECTUS , 1996 ------------------------ DILLON, READ & CO. INC. UBS SECURITIES VECTOR SECURITIES INTERNATIONAL, INC. ------------------------------------------------------------ ------------------------------------------------------------ 78 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses, other than underwriting discounts and commissions, payable by the Registrant in connection with the sale of the Common Stock being registered. All the amounts shown are estimates, except for the registration fee, the Nasdaq National Market filing fee and the NASD fee. Registration fee......................................................... 17,944 Nasdaq National Market fee............................................... 17,500 NASD fee................................................................. 5,704 Blue Sky fees and expenses............................................... 10,000 Printing and engraving expenses.......................................... 90,000 Legal fees and expenses.................................................. 100,000 Accounting fees and expenses............................................. 50,000 Transfer Agent and Registrar fees........................................ 5,000 Miscellaneous expenses................................................... 28,852 ---------- TOTAL.......................................................... $ 325,000 ==========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. (a) Section 317 of the California General Corporation Law provides for the indemnification of officers and directors of the Company against expenses, judgments, fines and amounts paid in settlement under certain conditions and subject to certain limitations. (b) Article VI of the Bylaws of the Company provides that the Company shall have power to indemnify any person who is or was an agent of the Company as provided in Section 317 of the California General Corporation Law. The rights to indemnity thereunder continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of the person. In addition, expenses incurred by a director or officer in defending a civil or criminal 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 California General Corporation Law. (c) Article IV of the Company's Articles of Incorporation provides that the liability of the directors of the Company for monetary damages shall be eliminated to the fullest extent permissible under California law. Accordingly, a director will not be liable for monetary damages for breach of duty to the Company or its shareholders in any action brought by or in the right of the Company. However, a director remains liable to the extent required by law (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (iii) for any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (vi) for any act or omission occurring prior to the date when the exculpation provision became effective and (vii) for any act or omission as an officer, notwithstanding that the officer is also a director or that his or her actions, if negligent or improper, have been ratified by the directors. The effect of the provisions II-1 79 in the Articles of Incorporation is to eliminate the rights of the Company and its shareholders (through shareholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of duty as a director, including breaches resulting from negligent behavior in the context of transactions involving a change of control of the Company or otherwise, except in the situations described in clauses (i) through (vii) above. These provisions will not alter the liability of directors under federal securities laws. (d) Pursuant to authorization provided under the Articles of Incorporation, the Company has entered into indemnification agreements with each of its directors and officers. Generally, the indemnification agreements attempt to provide the maximum protection permitted by California law as it may be amended from time to time. Moreover, the indemnification agreements provide for certain additional indemnification. Under such additional indemnification provisions, 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 reasonable expenses (including legal fees and expenses) incurred in investigating or defending any such action, suit or proceeding. In order to receive an advance of expenses, the individual must submit to the Company copies of invoices presented to him or her for such expenses. Also, the individual must repay such advances upon a final judicial decision that he or she is not entitled to indemnification. The Company's Bylaws contain a provision of similar effect relating to advancement of expenses to a director or officer, subject to an undertaking to repay if it is ultimately determined that indemnification is unavailable. (e) There is directors and officers liability insurance now in effect which insures directors and officers of the Company. (f) The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by which the Underwriters have agreed to indemnify 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, with respect to information furnished in writing by or on behalf of the Underwriters for use in the Registration Statement. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since June 30, 1993, the Company has sold and issued the following unregistered securities: (1) From June 30, 1993 to June 30, 1996, the Company issued an aggregate of 718,600 options to purchase shares of Common Stock under the Prior Plans and an aggregate of 466,122 shares of Common Stock were issued through the exercise of options granted under the Prior Plans. For additional information concerning these transactions, reference is made to the information contained under the caption "Management -- Benefit Plans" in the form of the Prospectus included herein. (2) On December 31, 1993, the Company issued an aggregate of 1,020,974 shares of Series C Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $6,381,088. (3) On January 1, 1994, the Company issued warrants to purchase an aggregate 22,400 shares of Series C Preferred Stock to Phoenix Leasing Incorporated ("PLI") in consideration of PLI having entered into a Master Lease Agreement with the Company. (4) On January 21, 1994, the Company issued an aggregate of 37,400 shares of Series C Preferred Stock to various investors for an aggregate consideration of $233,750. (5) On January 25, 1994, the Company issued an aggregate of 200,000 shares of Series C Preferred Stock to various venture capital funds for an aggregate consideration of $1,250,000. (6) On March 31, 1994, the Company issued an aggregate of 501,626 shares of Series C Preferred Stock to various venture capital funds and certain other institutional investors for an aggregate consideration of $3,135,163. II-2 80 (7) On March 31, 1994, the Company issued warrants to Chiron Corporation to purchase an aggregate of 365,000 shares of Series C Preferred Stock for an aggregate consideration of $1,000,000. (8) On December 16, 1994, the Company issued an aggregate of 864,864 shares of Series D Preferred Stock and warrants to purchase 288,288 shares of Series D Preferred Stock to various venture capital funds and certain other investors for an aggregate consideration of $6,082,878. (9) On December 16, 1994, the Company issued warrants to purchase an aggregate of 214,285 shares of Series D Preferred Stock to its landlord and certain affiliates. (10) On August 16, 1995, the Company issued 30,000 shares of Series D Preferred Stock and warrants to purchase 714 shares of Series D Preferred Stock to various venture capital funds and certain other investors. The sales and issuances of securities in the above transactions were deemed to be exempt under the Act by virtue of Section 4(2) thereof and/or Regulation D and Rule 701 promulgated thereunder as transactions not involving any public offering. The purchasers in each case represented their intention to acquire the securities for investment only and not with a view to the distribution thereof. Appropriate legends were affixed to the stock certificates issued in such transactions. Similar representations of investment intent were obtained and similar legends imposed in connection with any subsequent transfers of any such securities. The Company believes that all recipients had adequate access, through employment or other relationships, to information about the Company to make an informed investment decision. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits.
EXHIBIT NUMBER 1.1 Form of Underwriting Agreement. 3.1(1) Fourth Restated Articles of Incorporation of the Company (Exhibit 3.2). 3.2(1) Amended and Restated Bylaws of the Company (Exhibit 3.4). 4.1(1) Form of Certificate for Common Stock. 5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered. 10.1(1) Form of Written Consent of Holders of Series A, Series B, Series C and Series D Preferred Stock to conversion. 10.3(1) Amended and Restated Investors' Rights Agreement among the Company and certain shareholders of the Company, dated December 16, 1994, as amended pursuant to the Amendment to the Investors' Rights Agreement dated May 24, 1995. 10.7(1) Series D Preferred Stock and Warrant Purchase Agreement among the Company and the purchasers identified on Schedule 1 to the Agreement, dated December 16, 1994. 10.8(1) Master Equipment Lease Agreement dated March 30, 1992 between the Company and Western Technology Investment. 10.9(1) Warrant to Purchase a Maximum of 10,909 Shares of Series B Preferred Stock issued to Western Technology Investment. 10.10(1) Master Equipment Lease Agreement dated October 1, 1993 between the Company and Phoenix Leasing Incorporated. 10.12(1) Master Equipment Lease dated March 20, 1995 between the Company and Phoenix Leasing Incorporated. 10.13(1) Master Lease Agreement Number 10476 dated December 21, 1994, between the Company and and Lease Management Services, Inc.
II-3 81
EXHIBIT NUMBER 10.14(1) Addendum to Master Lease Agreement 10476 dated December 21, 1994, between the Company and Lease Management Services, Inc. 10.15(1) Negative Covenant Pledge Agreement dated December 21, 1994, between the Company and Lease Management Services, Inc. 10.16(1) Equipment Financing Agreement 10776 dated December 21, 1994, between the Company and Lease Management Services, Inc. 10.17(1) Addendum to Equipment Financing Agreement 10776 dated January 5, 1995, between the Company and Lease Management Services, Inc. 10.18(1) Lease for the Company's facilities at 11025 North Torrey Pines Road dated April 2, 1992, as amended. 10.19(1) Industrial Real Estate Triple Net Lease for the Company's facilities at 11011 North Torrey Pines Road dated August 17, 1993 10.20(1) Torrey Pines Science Center Industrial Real Estate Lease, dated December 8, 1994. 10.21(1) Sublease for the Company's facilities at 11025 North Torrey Pines Road dated July 9, 1993. 10.22(1) Sublease for the Company's industrial lease at 10933 North Torrey Pines Road dated January 31, 1994. 10.27(1) Form of Series B Preferred Stock Purchase Warrant dated July 14, 1992, July 15, 1992, October 15, 1992 and October 27, 1992 between the Company and certain individuals listed on the attached schedule. 10.30(1) Form of Series D Preferred Stock Purchase Warrant dated December 16, 1994 between the Company and certain individuals listed on the attached schedule. 10.31(1) Series D Preferred Stock Purchase Warrant dated June 9, 1995 between the Company and Lankford/DPI Limited Partnership, a California Limited Partnership. 10.32(1) Form of Amendment to Series B Warrant and Agreement to Exercise. 10.33(1) Assignment Agreement dated February 9, 1994 by and between the Company and Research Development Foundation (with certain confidential portions omitted). 10.34(1) Credit Note dated February 9, 1994 created by the Company in favor of Research Development Foundation. 10.35(1) Memorandum of Understanding dated December 2, 1993 between the Company and Merck & Co., Inc. (with certain confidential portions omitted). 10.36(1) Collaboration Agreement dated March 31, 1994 between the Company and Chiron Corporation (with certain confidential portions omitted). 10.38(1) Offer Letter dated May 25, 1993 between the Company and Edward L. Erickson. 10.39(1) Offer Letter dated June 2, 1994 between the Company and David B. Thomas. 10.40(1) Consulting Agreement dated November 1, 1993 between the Company and Stephen B. Howell, M.D., as amended May 24, 1995. 10.41(1) The Company's 1991 Stock Option Plan, as amended. 10.42(1) 1991 Stock Option Plan Form of Incentive Stock Option Agreement, as amended. 10.43(1) 1991 Stock Option Plan Form of Nonstatutory Option Agreement. 10.44(1) 1991 Stock Option Plan Form of Notice of Exercise and Stock Purchase Agreement. 10.45(1) The Company's 1994 Stock Option Plan. 10.46(1) 1994 Stock Option Plan Form of Notice of Grant. 10.47(1) 1994 Stock Option Plan Form of Stock Option Agreement. 10.48(1) 1994 Stock Option Plan Form of Stock Purchase Agreement.
II-4 82
EXHIBIT NUMBER 10.49(1) The Company's 1995 Stock Option Plan. 10.50(1) 1995 Stock Option Plan Form of Notice of Grant. 10.51(1) 1995 Stock Option Plan Form of Stock Option Agreement. 10.52(1) 1995 Stock Option Plan Form of Stock Purchase Agreement. 10.53 The Company's 1995 Stock Option/Stock Issuance Plan, as amended. 10.54(1) 1995 Employee Stock Purchase Plan. 10.55(1) Form of Employee Proprietary Information Agreement. 10.56(1) Form of Indemnification Agreements between the Company and each of its directors. 10.57(1) Form of Indemnification Agreement between the Company and each of its officers. 10.58(1) Research Agreement between the Company and Isis Pharmaceuticals, Inc. dated August 16, 1995 (with certain confidential portions omitted). 10.59(1) Loan and Security Agreement dated August 16, 1995 between the Company and Silicon Valley Bank. 10.60(1) Series D Preferred Stock Purchase Warrant dated August 16, 1995 between the Company and Silicon Valley Bank. 10.61(1) Registration Rights Agreement dated August 16, 1995 between the Company and Silicon Valley Bank. 10.62(1) Commitment Agreement dated August 16, 1995 among the Company and the lenders listed on attached Exhibit A. 10.63(1) Continuing Guaranty dated August 16, 1995 between the Company and funds affiliated with Sanderling Ventures. 10.64(1) Subordination Agreement dated August 16, 1995 between the Company and the lenders listed on Exhibit A to the Commitment Agreement. 10.65(2) Extension to Equipment Financing Agreement 10776 dated December 8, 1995 between the Company and Lease Management Services, Inc. 10.66 Loan and Security Agreement dated June 18, 1996 between the Company and Silicon Valley Bank. 11.1 Computation of net income (loss) per share. 14.1 List of Material Foreign Patents. 23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in its opinion filed as Exhibit 5.1). 23.2 Consent of Ernst & Young LLP, Independent Auditors. 23.3 Consent of Fish & Richardson, P.C. 24.1 Power of Attorney (see pages II-7 and II-8).
- ------------ (1) Incorporated by reference to the same-numbered exhibit (except as otherwise indicated) to the Company's Registration Statement on Form S-1 (No. 33-95890), as amended. (2) Incorporated by reference to the same-numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. II-5 83 (b) Financial Statement Schedules included separately in the Registration Statement. All schedules are omitted because they are not required, are not applicable or the information is included in the Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS. The undersigned hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described in Item 14, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 84 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, County of San Diego, State of California, on the 10th day of July, 1996. DEPOTECH CORPORATION By /s/ Edward L. Erickson -------------------------------------- Edward L. Erickson President and Chief Executive Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Edward L. Erickson and Dana S. McGowan, or either of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and any registration statement related to this Registration Statement and filed pursuant to Rule 462 under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------------ -------------- /s/ Edward L. Erickson President, Chief Executive Officer July 10, 1996 - ------------------------------------------ and Director (Edward L. Erickson) (Principal Executive Officer) /s/ Dana S. McGowan Director of Finance and July 10, 1996 - ------------------------------------------ Administration, Chief Financial (Dana S. McGowan) Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Roger C. Davisson Director July 10, 1996 - ------------------------------------------ (Roger C. Davisson) /s/ Jean Deleage Director July 10, 1996 - ------------------------------------------ (Jean Deleage) /s/ George W. Dunbar, Jr. Director July 10, 1996 - ------------------------------------------ (George W. Dunbar, Jr.) /s/ Stephen B. Howell Director July 10, 1996 - ------------------------------------------ (Stephen B. Howell)
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SIGNATURE TITLE DATE - ------------------------------------------ ------------------------------------ -------------- /s/ Fred A. Middleton Chairman of the Board, Director July 10, 1996 - ------------------------------------------ (Fred A. Middleton) /s/ Peter Preuss Director July 10, 1996 - ------------------------------------------ (Peter Preuss) /s/ Pieter Strijkert Director July 10, 1996 - ------------------------------------------ (Pieter Strijkert)
II-8 86 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - --------- ------------ 1.1 Form of Underwriting Agreement. ....................................... 3.1(1) Fourth Restated Articles of Incorporation of the Company (Exhibit 3.2). ................................................................. 3.2(1) Amended and Restated Bylaws of the Company (Exhibit 3.4). ............. 4.1(1) Form of Certificate for Common Stock. ................................. 5.1 Opinion of Brobeck, Phleger & Harrison LLP with respect to the Common Stock being registered. ............................................... 10.1(1) Form of Written Consent of Holders of Series A, Series B, Series C and Series D Preferred Stock to conversion. ............................... 10.3(1) Amended and Restated Investors' Rights Agreement among the Company and certain shareholders of the Company, dated December 16, 1994, as amended pursuant to the Amendment to the Investors' Rights Agreement dated May 24, 1995. ......................................................... 10.7(1) Series D Preferred Stock and Warrant Purchase Agreement among the Company and the purchasers identified on Schedule 1 to the Agreement, dated December 16, 1994. .............................................. 10.8(1) Master Equipment Lease Agreement dated March 30, 1992 between the Company and Western Technology Investment. ............................ 10.9(1) Warrant to Purchase a Maximum of 10,909 Shares of Series B Preferred Stock issued to Western Technology Investment. ........................ 10.10(1) Master Equipment Lease Agreement dated October 1, 1993 between the Company and Phoenix Leasing Incorporated. ............................. 10.12(1) Master Equipment Lease dated March 20, 1995 between the Company and Phoenix Leasing Incorporated. ......................................... 10.13(1) Master Lease Agreement Number 10476 dated December 21, 1994, between the Company and and Lease Management Services, Inc. ................... 10.14(1) Addendum to Master Lease Agreement 10476 dated December 21, 1994, between the Company and Lease Management Services, Inc. ............... 10.15(1) Negative Covenant Pledge Agreement dated December 21, 1994, between the Company and Lease Management Services, Inc. ........................... 10.16(1) Equipment Financing Agreement 10776 dated December 21, 1994, between the Company and Lease Management Services, Inc. ....................... 10.17(1) Addendum to Equipment Financing Agreement 10776 dated January 5, 1995, between the Company and Lease Management Services, Inc. ............... 10.18(1) Lease for the Company's facilities at 11025 North Torrey Pines Road dated April 2, 1992, as amended. ...................................... 10.19(1) Industrial Real Estate Triple Net Lease for the Company's facilities at 11011 North Torrey Pines Road dated August 17, 1993.................... 10.20(1) Torrey Pines Science Center Industrial Real Estate Lease, dated December 8, 1994. ..................................................... 10.21(1) Sublease for the Company's facilities at 11025 North Torrey Pines Road dated July 9, 1993. ................................................... 10.22(1) Sublease for the Company's industrial lease at 10933 North Torrey Pines Road dated January 31, 1994. ..........................................
87
SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - --------- ------------ 10.27(1) Form of Series B Preferred Stock Purchase Warrant dated July 14, 1992, July 15, 1992, October 15, 1992 and October 27, 1992 between the Company and certain individuals listed on the attached schedule. ...... 10.30(1) Form of Series D Preferred Stock Purchase Warrant dated December 16, 1994 between the Company and certain individuals listed on the attached schedule. ............................................................. 10.31(1) Series D Preferred Stock Purchase Warrant dated June 9, 1995 between the Company and Lankford/DPI Limited Partnership, a California Limited Partnership. .......................................................... 10.32(1) Form of Amendment to Series B Warrant and Agreement to Exercise. ...... 10.33(1) Assignment Agreement dated February 9, 1994 by and between the Company and Research Development Foundation (with certain confidential portions omitted). ............................................................. 10.34(1) Credit Note dated February 9, 1994 created by the Company in favor of Research Development Foundation. ...................................... 10.35(1) Memorandum of Understanding dated December 2, 1993 between the Company and Merck & Co., Inc. (with certain confidential portions omitted). ... 10.36(1) Collaboration Agreement dated March 31, 1994 between the Company and Chiron Corporation (with certain confidential portions omitted). ...... 10.38(1) Offer Letter dated May 25, 1993 between the Company and Edward L. Erickson. ................................................... 10.39(1) Offer Letter dated June 2, 1994 between the Company and David B. Thomas. ............................................................... 10.40(1) Consulting Agreement dated November 1, 1993 between the Company and Stephen B. Howell, M.D., as amended May 24, 1995. ..................... 10.41(1) The Company's 1991 Stock Option Plan, as amended. ..................... 10.42(1) 1991 Stock Option Plan Form of Incentive Stock Option Agreement, as amended. .............................................................. 10.43(1) 1991 Stock Option Plan Form of Nonstatutory Option Agreement. ......... 10.44(1) 1991 Stock Option Plan Form of Notice of Exercise and Stock Purchase Agreement. ............................................................ 10.45(1) The Company's 1994 Stock Option Plan. ................................. 10.46(1) 1994 Stock Option Plan Form of Notice of Grant. ....................... 10.47(1) 1994 Stock Option Plan Form of Stock Option Agreement. ................ 10.48(1) 1994 Stock Option Plan Form of Stock Purchase Agreement. .............. 10.49(1) The Company's 1995 Stock Option Plan. ................................. 10.50(1) 1995 Stock Option Plan Form of Notice of Grant. ....................... 10.51(1) 1995 Stock Option Plan Form of Stock Option Agreement. ................ 10.52(1) 1995 Stock Option Plan Form of Stock Purchase Agreement. .............. 10.53 The Company's 1995 Stock Option/Stock Issuance Plan, as amended. ...... 10.54(1) 1995 Employee Stock Purchase Plan. .................................... 10.55(1) Form of Employee Proprietary Information Agreement. ................... 10.56(1) Form of Indemnification Agreements between the Company and each of its directors. ............................................................
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SEQUENTIALLY EXHIBIT NUMBERED NUMBER PAGE - --------- ------------ 10.57(1) Form of Indemnification Agreement between the Company and each of its officers. ............................................................. 10.58(1) Research Agreement between the Company and Isis Pharmaceuticals, Inc. dated August 16, 1995 (with certain confidential portions omitted). ... 10.59(1) Loan and Security Agreement dated August 16, 1995 between the Company and Silicon Valley Bank. .............................................. 10.60(1) Series D Preferred Stock Purchase Warrant dated August 16, 1995 between the Company and Silicon Valley Bank. .................................. 10.61(1) Registration Rights Agreement dated August 16, 1995 between the Company and Silicon Valley Bank. .............................................. 10.62(1) Commitment Agreement dated August 16, 1995 among the Company and the lenders listed on attached Exhibit A. ................................. 10.63(1) Continuing Guaranty dated August 16, 1995 between the Company and funds affiliated with Sanderling Ventures. .................................. 10.64(1) Subordination Agreement dated August 16, 1995 between the Company and the lenders listed on Exhibit A to the Commitment Agreement. .......... 10.65(2) Extension to Equipment Financing Agreement 10776 dated December 8, 1995 between the Company and Lease Management Services, Inc. ............... 10.66 Loan and Security Agreement dated June 18, 1996 between the Company and Silicon Valley Bank. .................................................. 11.1 Computation of net income (loss) per share. ........................... 14.1 List of Material Foreign Patents. ..................................... 23.1 Consent of Brobeck, Phleger & Harrison LLP (contained in its opinion filed as Exhibit 5.1). ......................................................... 23.2 Consent of Ernst & Young LLP, Independent Auditors. ................... 23.3 Consent of Fish & Richardson, P.C. .................................... 24.1 Power of Attorney (see pages II-7 and II-8). ..........................
- ------------ (1) Incorporated by reference to the same-numbered exhibit (except as otherwise indicated) to the Company's Registration Statement on Form S-1 (No. 33-95890), as amended. (2) Incorporated by reference to the same-numbered exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 DEPOTECH CORPORATION 2,000,000 SHARES OF COMMON STOCK UNDERWRITING AGREEMENT ____________, 1996 2 UNDERWRITING AGREEMENT ____________, 1996 DILLON, READ & CO. INC. UBS SECURITIES LLC VECTOR SECURITIES INTERNATIONAL, INC. As Representatives of the Several Underwriters c/o Dillon, Read & Co. Inc. 535 Madison Avenue New York, New York 10022 Dear Sirs: DepoTech Corporation, a California company (the "Company") proposes to issue and sell to the underwriters named in Schedule A annexed hereto (the "Underwriters") an aggregate of 2,000,000 shares of Common Stock, no par value (the "Common Stock"), of the Company (the "Firm Shares"). In addition, solely for the purpose of covering over-allotments, the Company proposes to grant to the Underwriters the option to purchase from the Company up to an additional 300,000 shares of Common Stock (the "Additional Shares"). The Firm Shares and the Additional Shares are hereinafter collectively sometimes referred to as the "Shares." The Shares are described in the Prospectus which is referred to below. The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations thereunder (collectively called the "Act"), with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1, including a prospectus, relating to the Shares. The Company has furnished to you, for use by the Underwriters and by dealers, copies of one or more preliminary prospectuses (each thereof being herein called a "Preliminary Prospectus") relating to the Shares. Except where the context otherwise requires, the registration statement, as amended when it becomes effective, including all documents filed as a part thereof, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424(b) under the Act and deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430(A) under the Act, and, if applicable, any registration statement filed pursuant to Rule 462(b) under the Act, is herein called the "Registration Statement," and the prospectus, in the form filed by the Company with the Commission pursuant to Rule 424(b) under the Act or, if no such filing is required, the form of final prospectus included in the Registration Statement at the time it became effective, is herein called the "Prospectus." 3 Underwriting Agreement Page 2 The Company and the Underwriters agree as follows: 1. SALE AND PURCHASE. Upon the basis of the warranties and representations and the other terms and conditions herein set forth, the Company agrees to sell to the respective Underwriters, and each of the Underwriters, severally and not jointly, agrees to purchase from the Company the aggregate number of Firm Shares set forth opposite the name of such Underwriter in Schedule A attached hereto in each case at a purchase price of $____ per Share. You shall release the Firm Shares for public sale promptly after this Agreement becomes effective. You may from time to time increase or decrease the public offering price after the initial public offering to such extent as you may determine. In addition, the Company hereby grants to the several Underwriters the option to purchase, and, upon the basis of the warranties and representations and the other terms and conditions herein set forth, the Underwriters shall have the right to purchase, severally and not jointly, from the Company, ratably in accordance with the number of Firm Shares to be purchased by each of them, all or a portion of the Additional Shares as may be necessary to cover over-allotments made in connection with the offering of the Firm Shares, at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares. This option may be exercised at any time (but not more than once) on or before the thirtieth day following the date hereof, by written notice to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, and the date and time when the Additional Shares are to be delivered (such date and time being herein referred to as the additional time of purchase); provided, however, that the additional time of purchase shall not be earlier than the time of purchase (as defined below) nor earlier than the second business day* after the date on which the option shall have been exercised nor later than the eighth business day after the date on which the option shall have been exercised. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same proportion to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter on Schedule A hereto bears to the total number of Firm Shares (subject, in each case, to such adjustment as you may determine to eliminate fractional shares). 2. PAYMENT AND DELIVERY. Payment of the purchase price for the Firm Shares shall be made to the Company by certified or official bank check, in New York Clearing House funds, at the office of Dillon, Read & Co. Inc. in New York City, against - -------------------- * As used herein, "business day" shall mean a day on which the New York Stock Exchange is open for trading. 4 Underwriting Agreement Page 3 delivery of the certificates for the Firm Shares to you for the respective accounts of the Underwriters. Such payment and delivery shall be made at 10:00 A.M., New York City time, on ______________, 1996 (unless another time shall be agreed to by you and the Company or unless postponed in accordance with the provisions of Section 8 hereof). The time at which such payment and delivery are actually made is hereinafter sometimes called the "time of purchase." Certificates for the Firm Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify on the second business day preceding the time of purchase. For the purpose of expediting the checking of the certificates for the Firm Shares by you, the Company agrees to make such certificates available to you for such purpose at least one full business day preceding the time of purchase. Payment of the purchase price for the Additional Shares shall be made at the additional time of purchase in the same manner and at the same office as the payment for the Firm Shares. Certificates for the Additional Shares shall be delivered to you in definitive form in such names and in such denominations as you shall specify on the second business day preceding the additional time of purchase. For the purpose of expediting the checking of the certificates for the Additional Shares by you, the Company agrees to make such certificates available to you for such purpose at least one full business day preceding the additional time of purchase. 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each of the Underwriters that (a) when the Registration Statement becomes effective and at all times subsequent thereto up to the time of purchase and the additional time of purchase, the Registration Statement and the Prospectus, and any supplements or amendments thereto fully complied and will fully comply in all material respects with the provisions of the Act, and the Registration Statement and the Prospectus at all such times did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no warranty or representation with respect to any statement contained in the Registration Statement or the Prospectus in reliance upon and in conformity with information concerning the Underwriters and furnished in writing by or on behalf of any Underwriter through you to the Company expressly for use in the Registration Statement or the Prospectus; provided further, that such information furnished by or on behalf of the Underwriters shall be limited to certain information in the section of the Registration Statement and Prospectus entitled "Underwriting;" 5 Underwriting Agreement Page 4 (b) as of the date set forth herein, the Company has an authorized capitalization as set forth under the heading entitled "Actual" in the section of the Registration Statement and the Prospectus entitled "Capitalization" and, as of the time of purchase and the additional time of purchase, as the case may be, the Company will have an authorized capitalization as set forth under the heading entitled "As Adjusted" in the section of the Registration Statement and the Prospectus entitled "Capitalization"; all of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid, nonassessable and free of any preemptive rights; except as described in the Registration Statement and the Prospectus, there are no outstanding rights, subscriptions, warrants, calls, preemptive rights, options or other agreements (collectively, "Stock Rights") of any kind issued by the Company with respect to its capital stock and, to the best of the Company's knowledge, no outstanding Stock Rights issued by any other party with respect to the Company's capital stock; the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California, with full corporate power and authority to own its properties and conduct its business as described in the Registration Statement and the Prospectus, to execute and deliver this Agreement and to issue and sell the Shares as herein contemplated; (c) the Company does not have any subsidiaries; (d) the Company is duly qualified or licensed to do business by, and is in good standing in, each jurisdiction in which it owns or leases property or conducts its business and in each other jurisdiction in which the failure, individually or in the aggregate, to be so licensed or qualified could have a material adverse effect on the properties, assets, operations, business or condition (financial or otherwise) of the Company (a "Material Adverse Effect"); and the Company is in compliance with all laws, orders, rules, regulations and directives issued or administered by such jurisdictions, except where the failure so to comply could not have a Material Adverse Effect; (e) the Board of Directors of the Company has duly adopted resolutions authorizing the issuance and sale of the Firm Shares and the Additional Shares; and the Firm Shares and the Additional Shares, when issued and delivered to and paid for by the Underwriters as contemplated hereby, will be duly authorized, validly issued and fully paid and nonassessable, and free and clear of any pledge, lien, encumbrance, security interest, preemptive right or other claim; (f) the Company is not in violation of any provision of the Articles of Incorporation or Bylaws of the Company and is not in breach of, or in default under (nor has any event occurred which with notice, lapse of time, or both would constitute a 6 Underwriting Agreement Page 5 breach of, or default under), any provision of any obligation, agreement, covenant or condition contained in any license, indenture, lease, mortgage, deed of trust, bank loan, credit agreement or other material agreement or instrument to which the Company is a party or by which it is bound and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not conflict with, or result in any breach of or constitute a default under (nor constitute any event which with notice, lapse of time, or both would constitute a breach of, or default under), any provisions of the Articles of Incorporation or Bylaws of the Company or under any provision of any license, indenture, lease, mortgage, deed of trust, bank loan, credit agreement or other material agreement or instrument to which the Company is a party or by which it or its properties may be bound or affected, or under any federal, state, local or foreign law, regulation or rule or any decree, judgment or order applicable to the Company; (g) this Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws and except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general principles of equity, and each of the (i) Collaboration Agreement, dated March 30, 1994, between the Company and Chiron Corporation, and (ii) the Assignment Agreement, dated February 9, 1994, between the Company and the Research Development Foundation is a legal, valid and binding agreement of the Company enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general principles of equity; (h) the capital stock of the Company, including the Shares, conforms in all material respects to the description thereof contained in the Registration Statement and Prospectus, and the certificates for the Shares are in due and proper form and the holders of the Shares will not be subject to personal liability by reason of being such holders; (i) no approval, authorization, consent or order of or filing with any national, state, local or foreign governmental or regulatory commission, board, body, authority or agency is required in connection with the issuance and sale of the Shares as contemplated hereby other than registration of the Shares under the Act and any necessary qualification under the securities or blue sky laws of the various jurisdictions in which the Shares are being offered by the Underwriters and the review of the fairness and 7 Underwriting Agreement Page 6 reasonableness of the proposed underwriting and other terms and arrangements by the National Association of Securities Dealers, Inc. (the "NASD"); (j) except as described in the Registration Statement and the Prospectus, no person has the right, contractual or otherwise, to cause the Company to issue to it, or register pursuant to the Act, any shares of capital stock of the Company upon the issue and sale of the Shares to the Underwriters hereunder, nor does any person have preemptive rights, rights of first refusal or other rights to purchase any of the Shares, which rights have not been waived; (k) Ernst & Young LLP, whose reports on the consolidated financial statements of the Company are filed with the Commission as part of the Registration Statement and Prospectus, are independent public accountants as required by the Act; (l) the Company has all permits, licenses, authorizations, consents and approvals and has made all filings required under any federal, state, local or foreign law, regulation or rule, and has obtained all authorizations, consents and approvals from other persons, in order to conduct its business as described in the Registration Statement and the Prospectus; except where the failure to have such permit, license, authorization, consent or approval, to make any such filing or to obtain such authorization consent or approval could not have a Material Adverse Effect, and the Company is not in violation of, or in default under, any such permit, license, authorization, consent or approval or any federal, state, local or foreign law, regulation or rule or any decree, order or judgment applicable to the Company the effect of which could have a Material Adverse Effect; (m) all legal or governmental proceedings, contracts or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement have been so described or filed as required; (n) there are no actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened against the Company or any of its properties, at law or in equity, or before or by any federal, state, local or foreign governmental or regulatory commission, board, body, authority or agency which could result in a judgment, decree or order having a Material Adverse Effect; (o) the audited financial statements included in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the dates indicated and the results of operations and cash flows of the Company for the periods specified, subject, in the case of the Company's unaudited financial statements, to normal recurring year-end adjustments; such financial statements have been prepared in 8 Underwriting Agreement Page 7 conformity with generally accepted accounting principles applied on a consistent basis during the periods involved; (p) subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as may be otherwise stated in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the properties, assets, operations, business, regulatory environment, prospects or condition (financial or otherwise), present or prospective, of the Company, (ii) any transaction which is, or the Company reasonably expects could be, material to the Company contemplated or entered into by the Company, or (iii) any obligation, contingent or otherwise, directly or indirectly incurred by the Company which is, or the Company reasonably expects could be, material to the Company; (q) the Company has obtained the agreement of each of its directors and officers and certain of its shareholders designated by you not to sell, contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of the Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to purchase Common Stock for a period of 90 days after the date of the Prospectus without the prior written consent of Dillon, Read & Co. Inc.; (r) the business, operations and facilities of the Company have been and are being conducted in compliance with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, pollution, protection of health or the environment, or reclamation (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) or otherwise relating to remediating real property in which the Company has any interest, whether owned or leased, of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof or any foreign jurisdiction and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and order relating thereto (collectively, "Environmental Regulations"), except such failures to comply as would not in the aggregate have a Material Adverse Effect; and the Company has not received any notice from a governmental instrumentality or any third party alleging any violation of any Environmental Regulation or liability thereunder (including, without limitation, liability 9 Underwriting Agreement Page 8 for costs of investigating or remediating sites containing hazardous substances or damages to natural resources); (s) the Company is not and, upon the sale of the Shares to be issued and sold in accordance herewith and the temporary investment of the net proceeds of such sale as set forth under the caption "Use of Proceeds" in the Registration Statement and Prospectus, will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and is not, and will not upon such sale be, subject to regulation under the Investment Company Act; (t) to the best of the Company's knowledge after reasonable investigation, no valid United States patent issued to date is or would be infringed by the activities of the Company in the manufacture, use or sale of any drug or component thereof or other material as described in the Registration Statement and Prospectus; (u) the issued patents owned by or licensed to the Company and described in the Registration Statement and Prospectus are valid and enforceable patents and, except as described in the Registration Statement and Prospectus, no other entity or individual has any right or claim in any of such issued patents; the patent applications owned by or licensed to the Company and described in the Registration Statement and Prospectus have been properly prepared and filed and are being diligently pursued on behalf of the Company; and each of such patent applications is owned or controlled by the Company, and no other entity or individual has any right or claim in any of the patent applications or any patent to be issued therefrom, except as described in the Registration Statement and Prospectus; and each patent application owned by or licensed to the Company and described in the Registration Statement and Prospectus discloses patentable subject matter; (v) except as described in the Registration Statement and Prospectus, there are no judicial proceedings pending relating to patents, patent applications or proprietary information to which the Company is a party or of which any property of the Company is subject, and to the best of the Company's knowledge, no such judicial proceedings are threatened by governmental authorities or others; (w) the Company owns or possesses sufficient licenses or other rights to use all patents, patent applications, trademarks, copyrights, trade names, trade secrets, technology and know-how necessary to conduct the Company's business as described in the Registration Statement and Prospectus; and the assignment of the patents and patent applications to which the Company has exclusive rights under the Assignment Agreement, dated February 9, 1994, between the Company and the Research 10 Underwriting Agreement Page 9 Development Foundation, as described in the Registration Statement and the Prospectus, has been properly prepared and filed on behalf of the Company with the appropriate governmental agency or agencies and is in full force and effect; (x) except as described in the Registration Statement and Prospectus, the Company is not aware of any pending or threatened action, suit, proceeding or claim by others that the Company is infringing or otherwise violating any patents or patent applications of others and is not aware of any rights of third parties to any of the patents or patent applications owned by or licensed to the Company which could have a material adverse effect on the use thereof by the Company; and the Company is not aware of any pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of any patents or patent applications owned by or licensed to the Company; (y) the Company has filed with the United States Food and Drug Administration (the "FDA"), and all applicable state and local regulatory bodies, for and received approval of all registrations, applications, licenses, requests for exemptions, permits and other regulatory authorizations necessary to conduct the Company's business as it is described in the Registration Statement and Prospectus based on all available information provided to the Company through the date hereof by applicable regulatory authorities; the Company is in compliance with all such registrations, applications, licenses, requests for exemptions, permits and other regulatory authorizations, and all applicable FDA, state and local rules, regulations, guidelines and policies, including, but not limited to, applicable FDA, state and local rules, regulations and policies relating to current good manufacturing practice and current good laboratory practice, except where the failure so to comply would not have a Material Adverse Effect; and the Company has no reason to believe that any party granting any such registration, application, license, request for exemption, permit or other authorization is considering limiting, suspending or revoking the same and knows of no basis for any such limitation, suspension or revocation; and (z) the human clinical trials, animal studies and other preclinical tests conducted by the Company or in which the Company has participated that are described in the Registration Statement and Prospectus or the results of which are referred to in the Registration Statement and Prospectus, and such studies and tests conducted on behalf of the Company, were and, if still pending, are being conducted in accordance with experimental protocols, procedures and controls pursuant to accepted professional scientific standards for the preclinical or clinical study of new drugs; the descriptions of the results of such studies, tests and trials contained in the Registration Statement and Prospectus are accurate and complete in all material respects, and the Company has no knowledge of any other trials, studies or tests, the results of which reasonably call into 11 Underwriting Agreement Page 10 question the results described or referred to in the Registration Statement and Prospectus; and the Company has not received any notices or correspondence from the FDA or any other governmental agency requiring the termination, suspension or modification of any animal studies, preclinical tests or clinical trials conducted by or on behalf of the Company or in which the Company has participated that are described in the Registration Statement and Prospectus or the results of which are referred to in the Registration Statement and Prospectus. 4. CERTAIN COVENANTS OF THE COMPANY. The Company hereby agrees: (a) to furnish such information as may be required and otherwise to cooperate in qualifying the Shares for offering and sale under the securities or blue sky laws of such states as you may designate and to maintain such qualifications in effect so long as required for the distribution of the Shares, provided that the Company shall not be required to qualify as a foreign corporation or to consent to the service of process under the laws of any such state (except service of process with respect to the offering and sale of the Shares); and to promptly advise you of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (b) to make available to you in New York City, as soon as practicable after the Registration Statement becomes effective, and thereafter from time to time to furnish to the Underwriters, as many copies of the Prospectus (or of the Prospectus as amended or supplemented if the Company shall have made any amendments or supplements thereto after the effective date of the Registration Statement) as the Underwriters may request for the purposes contemplated by the Act; (c) to advise you promptly and (if requested by you) to confirm such advice in writing, (i) when the Registration Statement (including any registration statement filed pursuant to Rule 462(b) under the Act) has become effective and when any post-effective amendment thereto becomes effective, and (ii) if Rule 430A under the Act is used, when the Prospectus is filed with the Commission pursuant to Rule 424(b) under the Act (which the Company agrees to file in a timely manner under such Rules); (d) to advise you promptly, confirming such advice in writing, of any request by the Commission for amendments or supplements to the Registration Statement or Prospectus or for additional information with respect thereto, or of notice of institution of proceedings for, or the entry of a stop order suspending the effectiveness of the Registration Statement and, if the Commission should enter a stop order suspending the effectiveness of the Registration Statement, to make every reasonable effort to obtain the 12 Underwriting Agreement Page 11 lifting or removal of such order as soon as possible; to advise you promptly of any proposal to amend or supplement the Registration Statement or Prospectus and to file no such amendment or supplement to which you shall object in writing; (e) to furnish to you and, upon request, to each of the other Underwriters for a period of five years from the date of this Agreement (i) copies of any reports or other communications which the Company shall send to its shareholders generally or shall from time to time publish or publicly disseminate, (ii) copies of all annual, quarterly and current reports filed with the Commission on Forms 10-K, 10-Q and 8-K, or such other similar form as may be designated by the Commission, (iii) copies of any document in the form filed with the Commission by the Company pursuant to Sections 12, 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (iv) such other information as you may reasonably request regarding the Company; (f) to advise the Underwriters promptly of the happening of any event known to the Company within the time during which a Prospectus relating to the Shares is required to be delivered under the Act which, in the judgment of the Company, would require the making of any change in the Prospectus then being used so that the Prospectus would not include an untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading, and, during such time, to prepare and furnish, at the Company's expense, to the Underwriters promptly such amendments or supplements to such Prospectus as may be necessary to reflect any such change and to furnish you a copy of such proposed amendment or supplement before filing any such amendment or supplement with the Commission; (g) to make generally available to its security holders, and to deliver to you, an earnings statement of the Company (which will satisfy the provisions of Section 11(a) of the Act) covering a period of twelve months beginning after the effective date of the Registration Statement but ending not later than fifteen months after the effective date of the Registration Statement, as soon as is reasonably practicable after the termination of such twelve-month period; (h) to furnish to you or your counsel three signed copies of the Registration Statement, as initially filed with the Commission, and of all amendments thereto (including all exhibits thereto) and sufficient conformed copies of the foregoing (other than exhibits) for distribution of a copy to each of the other Underwriters; 13 Underwriting Agreement Page 12 (i) to furnish to you as early as practicable prior to the time of purchase and the additional time of purchase, as the case may be, but not later than two business days prior thereto, a copy of the latest available unaudited interim financial statements, if any, of the Company which have been read by the Company's independent certified public accountants, as stated in their letter to be furnished pursuant to Section 6(b) of this Agreement; (j) to apply the net proceeds from the sale of the Shares in the manner set forth under the caption "Use of Proceeds" in the Prospectus; (k) to use its best efforts to cause the Common Stock to be authorized for listing by the Nasdaq National Market upon official notice of issuance; (l) to pay all out-of-pocket expenses, fees and taxes (other than any transfer taxes and fees and disbursements of counsel for the Underwriters except as set forth under Section 5 hereof and (iii) and (iv) below) in connection with (i) the preparation and filing of the Registration Statement, each Preliminary Prospectus, the Prospectus, and any amendments or supplements thereto, and the printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (ii) the issue, sale and delivery of the Shares, (iii) the word processing and/or printing of this Agreement, any Agreement Among Underwriters, any dealer agreements, any Statements of Information and Powers of Attorney and the reproduction and/or printing and furnishing of copies of each thereof to the Underwriters and to dealers (including costs of mailing and shipment), (iv) the qualification of the Shares for offering and sale under state laws and the laws of any province of Canada and the determination of their eligibility for investment under such law as aforesaid (including the legal fees and filing fees and other disbursements of counsel for the Underwriters) and the printing and furnishing of copies of any blue sky surveys or legal investment surveys to the Underwriters and to dealers, (v) any listing of the Shares on any securities exchange or qualification of the Shares to be included in the Nasdaq National Market and any registration thereof under the Exchange Act, (vi) any filing for review of the public offering of the Shares by the NASD and (vii) the performance of the Company's other obligations hereunder; and (m) not to sell, contract to sell, grant any option to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock or securities convertible into or exchangeable for Common Stock or warrants or other rights to purchase Common Stock or permit the registration under the Act of any shares of Common Stock, except for (i) the registration of the Shares and the sales to the Underwriters pursuant to this Agreement, (ii) issuances of Common Stock upon the exercise of outstanding options, 14 Underwriting Agreement Page 13 warrants and debentures, and (iii) the grant of options or rights to purchase no more than an aggregate of 200,000 shares of Common Stock to employees, consultants and directors of the Company pursuant to the stock option plans of the Company in effect on the date hereof as approved by the Board of Directors of the Company, for a period of 90 days after the date hereof, without the prior written consent of Dillon, Read & Co. Inc. 5. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the Shares are not delivered for any reason other than the termination of this Agreement pursuant to the first two paragraphs of Section 8 hereof or the default by one or more of the Underwriters in its or their respective obligations hereunder, the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the fees and disbursements of their counsel. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters hereunder are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof and at the time of purchase (and the several obligations of the Underwriters at the additional time of purchase are subject to the accuracy of the representations and warranties on the part of the Company on the date hereof and at the time of purchase (unless previously waived) and at the additional time of purchase, as the case may be), the performance by the Company of its obligations hereunder and to the following conditions: (a) The Company shall furnish to you at the time of purchase and at the additional time of purchase, as the case may be, an opinion of Brobeck, Phleger & Harrison, counsel for the Company, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with reproduced copies for each of the other Underwriters and in form satisfactory to Cooley Godward Castro Huddleson & Tatum, counsel for the Underwriters, stating that: (i) the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of California, with full corporate power and authority to own its properties and conduct its business as described in the Registration Statement and the Prospectus, execute and deliver this Agreement and issue, sell and deliver the Shares as herein contemplated; (ii) the Company is duly qualified to do business as a foreign corporation, and is in good standing in each state or jurisdiction of the United States where its failure, individually or in the aggregate, to do so would have a material adverse effect on the properties, assets, operations, business or condition (financial or otherwise) of the Company; 15 Underwriting Agreement Page 14 (iii) this Agreement has been duly authorized, executed and delivered by the Company; (iv) the Shares, when issued and delivered to and paid for by the Underwriters in accordance with this Agreement, will be duly authorized, validly issued, fully paid and nonassessable and free of any preemptive rights; (v) the outstanding shares of capital stock of the Company have been duly and validly authorized and issued, are, to the best of such counsel's knowledge, fully paid and nonassessable; (vi) the authorized capital stock of the Company, including the Shares, conforms as to legal matters in all material respects to the description thereof contained in the Registration Statement and Prospectus; the certificates for the Shares are in due and proper form; (vii) the Registration Statement and the Prospectus (except as to the financial statements and schedules and other financial and statistical data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act; (viii) the Registration Statement has become effective under the Act, and, to the best of such counsel's knowledge, no stop order proceedings suspending the effectiveness of the Registration Statement have been instituted or threatened or are pending under the Act; (ix) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or regulation or the articles of incorporation or bylaws of the Company, or, to such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any of its property, or to such counsel's knowledge, constitute a breach or default under (nor constitute any event which, with notice, lapse of time or both, would constitute a breach or default under) any agreement or other instrument filed as an exhibit to the Registration Statement and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or blue sky laws of the various states or other jurisdictions (on which such counsel expresses no opinion) in connection with the purchase and distribution of the Shares by the Underwriters. 16 Underwriting Agreement Page 15 Registration Statement or under any law, regulation or rule or any decree, judgment or order applicable to the Company; (x) such counsel is not aware of any legal or governmental proceeding pending or threatened to which the Company is or may become a party or to which any of the properties of the Company is or may become subject that is required to be described in the Registration Statement or the Prospectus and is not so described, or of any statute, regulation, contract or other document that is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described or filed as required; (xi) such counsel is not aware that there is any action, proceeding or governmental investigation pending, against the Company or any of its officers or directors, which are required to be described in the Prospectus but are not so described; (xii) to the best of such counsel's knowledge and except as otherwise described in the Registration Statement and the Prospectus, no person has the right, contractual or otherwise, to cause the Company to issue to it, or register pursuant to the Act, any shares of capital stock of the Company upon the sale of the Shares to the Underwriters, nor does any person have preemptive rights, rights of first refusal or other rights to purchase any of the Shares; and (xiii) the description of the charter and bylaws of the Company and of statutes and contracts contained in "Risk Factors -- Registration Rights; Lockup," "Risk Factors -- Possible Anti-Takeover Effect of Certain Charter Provisions," "Business -- Legal Proceedings," "Management," "Certain Transactions" and "Description of Capital Stock" (other than the statements under "--Transfer Agent and Registrar") and in Items 14 and 15 of Part II of the Registration Statement are accurate and fairly present the information required to be presented by the Act or the Rules and Regulations. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, representatives of the independent public accountants of the Company and representatives of the Underwriters at which the contents of the Registration Statement and Prospectus were discussed and, although such counsel is not passing upon and does not assume responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or Prospectus (except as and to the extent stated in subparagraphs (vi), (vii), (viii) and (xvi) above), on the basis of the foregoing nothing has come to the attention of such counsel that causes it to believe that the Registration Statement or any amendment thereto at the time such Registration Statement or amendment became effective and at all 17 Underwriting Agreement Page 16 times up to and including the time of purchase or additional time of purchase, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus or any supplement thereto at the date of such Prospectus or such supplement, and at all times up to and including the time of purchase or additional time of purchase, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Registration Statement or Prospectus). (b) The Company shall furnish to you at the time of purchase and at the additional time of purchase, as the case may be, an opinion of Hyman, Phelps & McNamara, P.C., special FDA counsel for the Company, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with reproduced copies for each of the other Underwriters and in a form reasonably satisfactory to Cooley Godward Castro Huddleson & Tatum, counsel for the Underwriters, stating that the statements in the Registration Statement and Prospectus appearing under the captions "Risk Factors - -- Government Regulation; Uncertainty of Obtaining Regulatory Approval," "Business -- Product Research and Development Programs" and "Business - Government Regulation" and other statements and references in the Registration Statement and Prospectus to United States Federal regulatory matters, insofar as such statements and references constitute descriptions or summaries of matters of the law arising out of the Orphan Drug Act, the Federal Food, Drug and Cosmetic Act and applicable FDA regulations, are accurate and complete in all material respects. (c) The Company shall furnish to you at the time of purchase and at the additional time of purchase, as the case may be, an opinion of Fish & Richardson, P.C., patent counsel for the Company, addressed to the Underwriters, and dated the time of purchase or the additional time of purchase, as the case may be, with reproduced copies for each of the other Underwriters and in a form reasonably satisfactory to Cooley Godward Castro Huddleson & Tatum, counsel for the Underwriters, stating that: (i) the statements in the Registration Statement and Prospectus appearing under the captions "Risk Factors -- Patents and Proprietary Technology" and "Business -- Patents and Proprietary Rights" and other statements and references in the Registration Statement and Prospectus to patents and patent applications owned by and licensed to the Company, insofar as such statements and references constitute descriptions or summaries of patents or patent applications owned by and licensed to the Company or 18 Underwriting Agreement Page 17 documents and proceedings relating thereto, are accurate and complete in all material respects; (ii) such counsel has reviewed the patents and patent applications owned by the Company and filed or pending in the United States, including, without limitation, those patents and patent applications assigned to the Company by the Research Development Foundation, and based upon such review, a review of the United States patents of record in the patents and patent applications owned by the Company and discussions with Company scientific personnel, such counsel is not aware of any valid United States patent that is or would be infringed by the activities of the Company in the manufacture, use or sale of any proposed product, drug or other material as described in the Registration Statement and Prospectus and made or used according to the claims of the United States patents and patent applications owned by the Company; (iii) the assignment of the patents and patent applications to which the Company has exclusive rights under the Assignment Agreement, dated February 9, 1994, between the Company and the Research Development Foundation, as described in the Registration Statement and Prospectus, has been properly prepared and filed on behalf of the Company with the appropriate governmental agency or agencies and is in full force and effect; (iv) such counsel has reviewed the patent applications owned by or licensed to the Company, including, without limitation, those patent applications assigned to the Company by the Research Development Foundation, have been properly prepared and filed on behalf of the Company and are being diligently pursued on behalf of the Company; to such counsel's knowledge and except as described in the Registration Statement and Prospectus, no other entity or individual has any right or claim in any of such patents or patent applications; (v) to such counsel's knowledge, the Company owns or possesses sufficient licenses or other rights to practice in the United States the specific embodiments of technology disclosed and claimed in the patents and patent applications of the Company described in the Registration Statement and Prospectus; and (vi) such counsel is not aware of (a) any pending or threatened action, suit, proceeding or claim by others that the Company is infringing or otherwise violating any patents of others or (b) any pending or threatened action, suit, proceeding or claim by others challenging the validity or scope of the patents and patent applications owned by or licensed to the Company, including, without limitation, those patents and patent applications assigned to the Company by the Research Development Foundation. 19 Underwriting Agreement Page 18 (d) You shall have received from Ernst & Young LLP letters dated, respectively, the date of this Agreement and the time of purchase and additional time of purchase, as the case may be, and addressed to the Underwriters (with reproduced copies for each of the Underwriters) in the forms heretofore approved by Dillon, Read & Co. Inc. (e) You shall have received at the time of purchase and at the additional time of purchase, as the case may be, the opinion of Cooley Godward Castro Huddleson & Tatum, counsel for the Underwriters, dated the time of purchase or the additional time of purchase, as the case may be, as to the matters referred to in subparagraphs (iii), (iv), (v) (as to subclause (a) only), (vi) and (vii) of paragraph (a) of this Section 6. In addition, such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company, counsel for the Company, representatives of the independent public accountants of the Company and representatives of the Underwriters at which the contents of the Registration Statement and Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus (except as to matters referred to under subparagraph (vii) of paragraph (a) of this Section 6), on the basis of the foregoing, no facts have come to the attention of such counsel which lead it to believe that the Registration Statement or any amendment thereto at the time such Registration Statement or amendment became effective contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of its date or any supplement thereto as of its date contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no comment with respect to the financial statements and schedules and other financial and statistical data included in the Registration Statement or Prospectus). (f) No amendment or supplement to the Registration Statement or Prospectus shall be filed prior to the time the Registration Statement becomes effective to which you object in writing. (g) The Registration Statement shall become effective at or before 5:00 P.M. on the date of this Agreement and, if Rule 430A under the Act is used, the Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the 20 Underwriting Agreement Page 19 Act at or before 5:00 P.M., New York City time, on the second full business day after the date of this Agreement; provided, however, that the Company and you and any group of Underwriters, including you, who have agreed hereunder to purchase in the aggregate at least 50% of the Firm Shares may from time to time agree on a later date. (h) Prior to the time of purchase or the additional time of purchase, as the case may be, (i) no stop order with respect to the effectiveness of the Registration Statement shall have been issued under the Act or proceedings initiated under Section 8(d) or 8(e) of the Act; (ii) the Registration Statement and all amendments thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and (iii) the Prospectus and all amendments or supplements thereto, or modifications thereof, if any, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading. (i) Between the time of execution of this Agreement and the time of purchase or the additional time of purchase, as the case may be, (i) no material adverse change (other than as referred to in the Registration Statement and Prospectus) in the properties, assets, operations, business, prospects or condition (financial or otherwise) of the Company shall occur or become known and (ii) no transaction which is material and unfavorable to the Company shall have been entered into by the Company; and (iii) there has not been any obligation, contingent or otherwise, directly or indirectly incurred by the Company, which would have a Material Adverse Effect. (j) The Company will, at the time of purchase or additional time of purchase, as the case may be, deliver to you a certificate of two of its executive officers to the effect that the representations and warranties of the Company as set forth in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to each such date. (k) You shall have received signed letters, dated the date of this Agreement, from each of the directors and officers of the Company and certain shareholders of the Company designated by you as contemplated by Section 3(q) to the effect set forth in such Section. (l) The Company shall have furnished to you such other documents and certificates as to the accuracy and completeness of any statement in the Registration 21 Underwriting Agreement Page 20 Statement and the Prospectus as of the time of purchase and the additional time of purchase, as the case may be, as you may reasonably request. (m) The Company shall perform such of its obligations under this Agreement as are to be performed by the terms hereof at or before the time of purchase and at or before the additional time of purchase, as the case may be. (n) The Shares shall have been approved for listing on the Nasdaq National Market, subject only to notice of issuance at or prior to the time of purchase. 7. EFFECTIVE DATE OF AGREEMENT; TERMINATION. This Agreement shall become effective (i) if Rule 430A under the Act is not used, when you shall have received notification of the effectiveness of the Registration Statement, or (ii) if Rule 430A under the Act is used, when the parties hereto have executed and delivered this Agreement. The obligations of the several Underwriters hereunder shall be subject to termination in the absolute discretion of you or any group of Underwriters (which may include you) which has agreed to purchase in the aggregate at least 50% of the Firm Shares, if, at any time prior to the time of purchase or, with respect to the purchase of any Additional Shares, the additional time of purchase, as the case may be, trading in securities on the New York Stock Exchange shall have been suspended or minimum prices shall have been established on the New York Stock Exchange, or if a banking moratorium shall have been declared either by the United States or New York State authorities, or if the United States shall have declared war in accordance with its constitutional processes or there shall have occurred any material outbreak or escalation of hostilities or other national or international calamity or crisis of such magnitude in its effect on the financial markets of the United States as, in your judgment or in the judgment of such group of Underwriters, to make it impracticable to market the Shares. If you or any group of Underwriters elects to terminate this agreement as provided in this Section 7, the Company and each other Underwriter shall be notified promptly by letter or telegram. If the sale to the Underwriters of the Shares, as contemplated by this Agreement, is not carried out by the Underwriters for any reason permitted under this Agreement or if such sale is not carried out because the Company shall be unable to comply with any of the terms of this Agreement, the Company shall not be under any obligation or liability under this Agreement (except to the extent provided in Sections 4(l), 5 and 9 hereof), and the Underwriters shall be under no obligation or liability to the Company under this Agreement (except to the extent provided in Section 9 hereof) or to one another hereunder. 22 Underwriting Agreement Page 21 8. INCREASE IN UNDERWRITERS' COMMITMENTS. If any Underwriter shall default in its obligation to take up and pay for the Firm Shares to be purchased by it hereunder and if the number of Firm Shares which all Underwriters so defaulting shall have agreed but failed to take up and pay for does not exceed 10% of the total number of Firm Shares, the nondefaulting Underwriters shall take up and pay for (in addition to the aggregate principal amount of Firm Shares they are obligated to purchase pursuant to Section 1 hereof) the number of Firm Shares agreed to be purchased by all such defaulting Underwriters, as hereinafter provided. Such Shares shall be taken up and paid for by such non-defaulting Underwriter or Underwriters in such amount or amounts as you may designate with the consent of each Underwriter so designated or, in the event no such designation is made, such Shares shall be taken up and paid for by all non-defaulting Underwriters pro rata in proportion to the aggregate number of Firm Shares set opposite the names of such non-defaulting Underwriters in Schedule A. Without relieving any defaulting Underwriter from its obligations hereunder, the Company agrees with the non-defaulting Underwriters that it will not sell any Firm Shares hereunder unless all of the Firm Shares are purchased by the Underwriters (or by substituted Underwriters selected by you with the approval of the Company or selected by the Company with your approval). If a new Underwriter or Underwriters are substituted by the Underwriters or by the Company for a defaulting Underwriter or Underwriters in accordance with the foregoing provision, the Company or you shall have the right to postpone the time of purchase for a period not exceeding five business days in order that any necessary changes in the Registration Statement and Prospectus and other documents may be effected. The term Underwriter as used in this agreement shall refer to and include any Underwriter substituted under this Section 8 with like effect as if such substituted Underwriter had originally been named in Schedule A. 9. INDEMNITY BY THE COMPANY AND THE UNDERWRITERS. (a) The Company agrees to indemnify, defend and hold harmless each Underwriter and any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and the agents, employees, officers and directors of any Underwriter or any such controlling person (collectively, the "Underwriter indemnified parties") from and against any loss, expense, liability or claim (including the reasonable fees and expenses of counsel and other expenses in connection with investigating, defending or settling any such action or claim) which, jointly or severally, such person may incur as they are incurred (and regardless of whether the Underwriter indemnified party is a party to the litigation, if any), arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or in the Registration Statement as amended by any post-effective 23 Underwriting Agreement Page 22 amendment thereof by the Company) or in a Prospectus (the term Prospectus for the purpose of this Section 9 being deemed to include any Preliminary Prospectus, the Prospectus and the Prospectus as amended or supplemented by the Company), or arising out of or based upon any omission or alleged omission to state a material fact required to be stated in either such Registration Statement or Prospectus or necessary to make the statements made therein not misleading, except insofar as any such loss, expense, liability or claim arises out of or is based upon any untrue statement or alleged untrue statement of a material fact contained in and in conformity with information furnished in writing by any Underwriter through you to the Company expressly for use with reference to such Underwriter in such Registration Statement or such Prospectus or arises out of or is based upon any omission or alleged omission to state a material fact in connection with such information required to be stated in either such Registration Statement or Prospectus or necessary to make such information not misleading; provided, however, that the indemnity agreement contained in this subsection (a) with respect to any Preliminary Prospectus or amended Preliminary Prospectus shall not inure to the benefit of any Underwriter indemnified party if the Prospectus corrected any such alleged untrue statement or omission giving rise to such losses, expenses, liabilities or claims and you or such Underwriter indemnified party failed to send or give a copy of the final Prospectus (i.e., the Prospectus forming part of the Registration Statement (including any registration statement filed pursuant to Rule 462(b) under the Act) at the time of effectiveness under the Act or the Prospectus filed pursuant to Rule 424(b) if Rule 430A under the Act is applicable) to the person in respect of whom such losses, expenses, liabilities or claims arose at or prior to the written confirmation of the corresponding sale of such Shares to such person. (b) If any action or proceeding (including any governmental or regulatory investigation or proceeding) is brought against an Underwriter indemnified party or parties in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such Underwriter indemnified party or parties shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment of counsel and payment of expenses. Such Underwriter indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action, (ii) the Company shall not have employed counsel to have charge of the defense of such action promptly after having received notice of such action, or (iii) such Underwriter indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the 24 Underwriting Agreement Page 23 Company shall not have the right to direct the defense of such action on behalf of the Underwriter indemnified party or parties), in any of which events such fees and expenses shall be borne by the Company and paid as incurred (it being understood, however, that the Company shall not be liable for the expenses of more than one separate counsel (other than local counsel) in any one action or series of related actions in the same jurisdiction representing the Underwriter indemnified party or parties who are parties to such action). Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. (c) Each Underwriter severally agrees to indemnify, defend and hold harmless the Company, its directors, its officers who sign the Registration Statement and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act (collectively, the "Company indemnified parties") from and against any loss, expense, liability or claim to the same extent as the indemnity from the Company to the Underwriter indemnified parties contained in Section 9(a) hereof, but only with respect to information furnished in writing by the Underwriters through you to the Company expressly for use in the Registration Statement, the Prospectus or any Preliminary Prospectus. In case any action shall be brought against any Company indemnified party based on the Registration Statement, the Prospectus or any Preliminary Prospectus and in respect of which indemnity may be sought against the Underwriters pursuant to this Section 9(c), the Underwriters shall have the rights and duties given to the Company by Section 9(b) hereof (except that if the Company shall have assumed the defense thereof, the Underwriters shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, provided that the fees and expenses of such counsel shall be at the Underwriters' expense), and the Company indemnified parties shall have the rights and duties given to the Underwriter indemnified parties by Section 9(b) hereof. (d) If the indemnification provided for in this Section 9 is unavailable to or insufficient to hold harmless an indemnified party under Section 9(a) or Section 9(c) in respect of any loss, expense, liability or claim referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, expense, liability or claim (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such loss, expense, liability or claim, as well as any other 25 Underwriting Agreement Page 24 relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and of the Underwriters on the other shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission relates to information supplied by the Company or by the Underwriters (such information so furnished by the Underwriters shall be limited to certain information in the Underwriting section of the Preliminary Prospectus and Prospectus) and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, expenses, liabilities and claims referred to above shall be deemed to include any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any claim or action. (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 9(d). Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by such Underwriter and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue statement or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriter's obligations to contribute pursuant to this Section 9 are several in proportion to their respective underwriting commitments and not joint. (f) The indemnity and contribution agreements contained in this Section 9 and the covenants, warranties and representations of the Company contained in this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of any Underwriter indemnified party, or by or on behalf of any Company indemnified party, and shall survive any termination of this Agreement or the issuance and delivery of the Shares. The Company and each Underwriter agree promptly to notify the others of the commencement of any litigation or proceeding against it or a related 26 Underwriting Agreement Page 25 indemnified party in connection with the issuance and sale of the Shares, or in connection with the Registration Statement or Prospectus. 10. NOTICES. Except as otherwise herein provided, all statements, requests, notices and agreements shall be in writing or by telegram and, if to the Underwriters, shall be sufficient in all respects if delivered or sent to Dillon, Read & Co. Inc., 535 Madison Avenue, New York, NY 10022, Attention: Syndicate Department; and, if to the Company, shall be sufficient in all respects if delivered or sent to the Company at the offices of the Company at 10450 Science Center Drive, San Diego, CA 92121 Attention: President. 11. CONSTRUCTION. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without regard to principles of conflict or choice of law. The Section headings in this Agreement have been inserted as a matter of convenience of reference and are not a part of this Agreement. 12. PARTIES IN INTEREST. The Agreement herein set forth has been and is made solely for the benefit of the Underwriters and the Company and the controlling persons, directors and officers referred to in Section 9 hereof, and their respective successors, assigns, executors and administrators. No other person, partnership, association or corporation (including a purchaser, as such purchaser, from any of the Underwriters) shall acquire or have any right under or by virtue of this Agreement. 13. COUNTERPARTS. This Agreement may be signed by the parties in counterparts which together shall constitute one and the same agreement among the parties. 14. SEVERABILITY. If any provision of this Agreement shall, for any reason, be invalid, illegal or unenforceable, the validity, legality and unenforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. If the foregoing correctly sets forth the understanding among the Company and the Underwriters, please so indicate in the space provided below for the purpose, whereupon 27 Underwriting Agreement Page 26 this letter and your acceptance shall constitute a binding agreement among the Company and the Underwriters, severally. Very truly yours, DEPOTECH CORPORATION By: ____________________________ Title: _________________________ Accepted and agreed to as of the date first above written, on behalf of themselves and the other several Underwriters named in Schedule A DILLON, READ & CO. INC. UBS SECURITIES LLC VECTOR SECURITIES INTERNATIONAL, INC. By: DILLON, READ & CO. INC. By: _________________________ Title: ______________________ 28 SCHEDULE A
NUMBER OF UNDERWRITER FIRM SHARES Dillon, Read & Co. Inc..................... UBS Securities LLC.......................... Vector Securities International, Inc........ TOTAL..................... 2,000,000
EX-5.1 3 OPINION OF BROBECK, PHLEGER & HARRISON 1 EXHIBIT 5.1 July 10, 1996 DepoTech Corporation 10450 Science Center Drive San Diego, California 92121 Re: 2,300,000 Shares of Common Stock of DepoTech Corporation Ladies and Gentlemen: We have acted as counsel to DepoTech Corporation, a California corporation (the "Company"), in connection with the proposed issuance and sale by the Company of 2,300,000 shares of the Company's Common Stock (the "Shares"), pursuant to the Company's Registration Statement on Form S-1 filed on July 10, 1996, as amended through its effective date. In connection with this opinion, we have examined and relied upon the Registration Statement and related Prospectus, the Company's Articles of Incorporation as in effect on the date hereof, the Company's bylaws as in effect on the date hereof, and originals, or copies certified to our satisfaction, of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Shares, if, as and when sold and issued in accordance with the Registration Statement and Prospectus (as amended and supplemented through the date of issuance), will be validly issued, fully paid and nonassessable. We consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement and related Prospectus and to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, BROBECK, PHLEGER & HARRISON LLP EX-10.53 4 1995 STOCK OPTION/STOCK ISSUANCE PLAN 1 Exhibit 10.53 DEPOTECH CORPORATION 1995 STOCK OPTION/STOCK ISSUANCE PLAN AMENDED AND RESTATED AS OF JANUARY 16, 1996 ARTICLE ONE GENERAL I. PURPOSE OF THE PLAN This 1995 Stock Option/Stock Issuance Plan ("Plan") is intended to promote the interests of DepoTech Corporation, a California corporation (the "Corporation"), by providing (i) key employees (including officers) of the Corporation (or its parent or subsidiary corporations) who are responsible for the management, growth and financial success of the Corporation (or its parent or subsidiary corporations), (ii) Directors and (iii) consultants and other independent contractors who provide valuable services to the Corporation (or its parent or subsidiary corporations) with the opportunity to acquire or increase their proprietary interest in the Corporation as an incentive for them to remain in the service of the Corporation (or its parent or subsidiary corporations). II. GENERAL A. Effective Date. The Plan shall become effective on the first date on which shares of the Corporation's common stock are registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Such date is hereby designated as the "Effective Date" of this Plan. B. Predecessor Plans. This Plan shall serve as the successor to the Corporation's 1991 Stock Option Plan, 1994 Stock Option Plan and 1995 Stock Option Plan (together, the "Predecessor Plans"), and no further option grants or share issuances shall be made under the Predecessor Plans from and after the Effective Date. Each outstanding option or share issuances under the Predecessor Plans immediately prior to the Effective Date are hereby incorporated into this Plan and shall accordingly be treated as outstanding options or share issuances under this Plan. However, each such option or share issuance shall continue to be governed solely by the terms and conditions of the instrument evidencing such grant or issuance, and, except as otherwise expressly provided herein, no provision of this Plan shall affect or otherwise modify the rights or obligations of the holders of such incorporated options or shares with respect to their acquisition of shares of the Corporation's common stock or otherwise modify the rights or obligations of the holders of such options or shares. 2 C. Definitions. For purposes of this Plan, the following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a PARENT of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a SUBSIDIARY of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. D. No Limitation on Corporate Action. Neither the grant of options nor the issuance of any shares pursuant to this Plan shall in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. E. No Rights as Shareholder. The holder of an option grant under this Plan shall have none of the rights of a shareholder with respect to any shares subject to such option until such individual shall have exercised the option, paid the exercise price for the purchased shares and been issued a stock certificate for such shares. III. STRUCTURE OF THE PLAN A. Components of Plan. The Plan shall be divided into three separate components: the Discretionary Option Grant Program specified in Article Two; the Automatic Option Grant Program specified in Article Three; and the Stock Issuance Program specified in Article Four. Under the Discretionary Option Grant Program, eligible individuals may be granted options to purchase shares of the Corporation's common stock at not less than 85% of the fair market value of such shares on the grant date. Under the Automatic Option Grant Program, non-employee Directors will automatically be granted options to purchase Common Stock of the Corporation at 100% of the fair market value on the grant date. Under the Stock Issuance Program, eligible individuals may be allowed to purchase shares of the Corporation's common stock at discounts from the fair market value of such shares of up to 15%. Such shares may be issued as fully-vested shares or as shares to vest over time. -2- 3 B. Application of Certain Articles. The provisions of Articles One and Five of the Plan, except as otherwise expressly provided, shall apply to the Discretionary Option Grant Program, the Automatic Option Grant Program and the Stock Issuance Program, and shall accordingly govern the interests of all individuals in the Plan. IV. ADMINISTRATION OF THE PLAN A. Plan Administrator. This Plan shall be administered by a committee ("Committee") of two (2) or more non-employee Board members who assume full responsibility for the administration of the Plan (the "Plan Administrator"). No member of the Committee shall have either been eligible for or received any discretionary grant pursuant to Article Two of the Plan within one (1) year prior to their appointment to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. B. Authority. The Plan Administrator shall have full power and authority (subject to the express provisions of the Plan) to establish such rules and regulations as it may deem appropriate for the proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding option grants or stock issuances as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any outstanding option or stock issuance. C. Restriction on Discretion. Notwithstanding the above, the administration of the Automatic Option Grant Program under Article Three shall be self executing in accordance with the terms and conditions thereof and the Plan Administrator shall not exercise any discretionary functions in respect to matters governed by Article Three. V. OPTION GRANTS AND STOCK ISSUANCES A. Eligible Persons. The persons eligible to receive stock issuances under the Stock Issuance Program ("Participant") and/or option grants pursuant to the Discretionary Option Grant Program ("Optionee") are as follows: (i) officers and other key employees of the Corporation (or its parent or subsidiary corporations) who render services which contribute to the management, growth and financial success of the Corporation (or its parent or subsidiary corporations); (ii) Directors, provided that no non-employee Director shall be eligible to be an Optionee after the last day of the first full calendar month following such Director's election to the Board; and -3- 4 (iii) those consultants or other independent contractors who provide valuable services to the Corporation (or its parent or subsidiary corporations). B. Limitations on Grants to Directors. Notwithstanding any other provision of this Plan, no option grants under the Discretionary Option Grant Program or stock issuances under the Stock Issuance Program shall be made to any director hereunder unless, at the time of such option or issuance, the Plan Administrator is a Committee composed entirely of non-employee Board members none of whom have received an option grant or stock issuance under this Plan or any other stock plan of the Corporation (or any parent or subsidiary corporation), other than under the Automatic Option Grant Program, during the preceding one year period. No member of a committee serving as Plan Administrator shall be eligible to receive any option grant under the Discretionary Grant Program or any stock issuances under the Stock Issuance Program. C. Eligible Directors. The individuals who will receive option grants under the Automatic Option Grant Program are (i) those individuals who are elected, re-elected or appointed as non-employee Board members on or after the Effective Date of this Plan, provided they have not otherwise been in the prior employ of the Corporation (or any parent or subsidiary corporation) within the preceding two-year period. D. Plan Administrator Authority. The Plan Administrator shall have full authority to determine, (I) with respect to the option grants made under the Discretionary Option Grant Program, which eligible individuals are to receive option grants, the number of shares to be covered by each such grant, whether the granted option is to be an incentive stock option ("Incentive Option") which satisfies the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") or a non-statutory option not intended to meet such requirements, the time or times at which and the circumstances under which each granted option is to become exercisable and the maximum term for which the option may remain outstanding and (II) with respect to stock issuances under the Stock Issuance Program, the number of shares to be issued to each Participant, the vesting schedule and conditions to vesting (if any) to be applicable to the issued shares, and the consideration to be paid by the individual for such shares. The Plan Administrator shall have no discretion with regard to the Automatic Option Grant Program. The Plan Administrator shall not have the discretion to affect in material fashion any option grants or the terms of any option under the Automatic Option Grant Program. -4- 5 E. Limitation on Option Grants. Notwithstanding any other provision of this Plan, no individual shall be granted options to acquire more than one million (1,000,000) shares of stock hereunder. VI. STOCK SUBJECT TO THE PLAN A. Shares Available. Shares of the Corporation's Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 2,000,000 shares, subject to adjustment from time to time in accordance with the provisions of this Section VI. As of June 1, 1995, such authorized number of shares is comprised of (i) 226,859 shares issued under the Predecessor Plans, (ii) 1,037,369 shares reserved for issuance under the options granted under the Predecessor Plans, (iii) 235,772 shares which would have been available for future option grant or share issuance under the Predecessor Plans as last approved by the shareholders, plus (iv) an additional increase of 500,000 shares. Such number will be subject to further adjustment prior to the Effective Date as a result of additional grants of options, exercises of outstanding options and option terminations. B. Additional Available Shares. Should one or more outstanding options under this Plan (including outstanding options under the Predecessor Plans incorporated into this Plan) expire or terminate for any reason prior to exercise in full (including any option cancelled in accordance with the cancellation-regrant provisions of Section III of Article Two of the Plan), then the shares subject to the option not so exercised shall be available for subsequent option grant or share issuance under this Plan. Shares subject to any option or portion thereof surrendered or cancelled in accordance with Section I.D of Article Five and all share issuances under the Plan, whether or not such shares are subsequently repurchased by the Corporation pursuant to repurchase rights, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent option grant or stock issuance under the Plan. In addition, should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised. C. Adjustments. In the event any change is made to the Common Stock issuable under the Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares, conversion or other change affecting the outstanding Common Stock, or any class of Common Stock as a class, without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the number and/or class of shares issuable under the Plan, (ii) the number and/or class of shares and price per share in effect under each outstanding option under -5- 6 this Plan (including outstanding options incorporated into this Plan from the Predecessor Plans). Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. D. Additional Possible Restrictions. Common Stock issuable under the Discretionary Option Grant Program or the Stock Issuance Program may be subject to such restrictions on transfer, repurchase rights or such other restrictions as determined by the Plan Administrator. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF OPTIONS Options granted to employees of the Corporation (or its parent or subsidiary corporations) pursuant to this Article Two shall be authorized by action of the Plan Administrator and may, at the Plan Administrator's discretion, be either Incentive Options or non-statutory options. Individuals who are not employees of the Corporation or its parent or subsidiary corporations may only be granted non-statutory options. Each granted option shall be evidenced by one or more instruments in a form approved by the Plan Administrator; provided, however, that each such instrument shall comply with the terms and conditions specified below. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section II of this Article Two. A. Option Price. (i) In General. The option price per share shall be fixed by the Plan Administrator. In no event, however, shall the option price for any share be less than eighty-five percent (85%) of the fair market value of that share on the date of the option grant. (ii) 10% Shareholder. If any individual to whom an option is granted is the owner of stock (as determined under Section 424(d) of the Internal Revenue Code) possessing 10% or more of the total combined voting power of all classes of stock of the Corporation (or any one of its parent or subsidiary corporations), then the option price per share shall not be less than one hundred and ten percent (110%) of the fair market value per share of Common Stock on the grant date. (iii) How Payable. The option price shall become immediately due upon exercise of the option and, subject to the provisions of Article Five, Section III and the instrument evidencing the grant, shall be payable in one of the following alternative forms specified below: -6- 7 - full payment in cash or check drawn to the Corporation's order; - full payment in shares of Common Stock held for at least six (6) months and valued at fair market value on the Exercise Date (as such term is defined below); - full payment in a combination of shares of Common Stock held for at least six (6) months and valued at fair market value on the Exercise Date and cash or check; or - full payment through a broker-dealer sale and remittance procedure pursuant to which the Optionee (I) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and State income and employment taxes required to be withheld by the Corporation in connection with such purchase and (II) shall provide written directives to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this subparagraph (iii), the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation. Except to the extent the sale and remittance procedure is utilized in connection with the exercise of the option, payment of the option price for the purchased shares must accompany such notice. B. Term and Exercise of Options. Each option granted under this Article Two shall have such term as may be fixed by the Plan Administrator, be exercisable at such time or times and during such period, and on such conditions, as is determined by the Plan Administrator and set forth in the stock option agreement evidencing the grant. No such option, however, shall have a maximum term in excess of ten (10) years from the grant date and no option granted to a 10% shareholder shall have a maximum term in excess of five (5) years from the grant date. During the lifetime of the Optionee, the option (together with any related stock appreciation right) shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee otherwise than by will or by the laws of descent and distribution following the Optionee's death. C. Termination of Service. (i) Except to the extent otherwise provided pursuant to Section V of this Article Two, the following provisions shall govern the exercise period applicable -7- 8 to any outstanding options under this Article Two which are held by the Optionee at the time of his or her cessation of Service or death. - Should an Optionee's Service terminate for any reason (including death or permanent disability as defined in Section 22(e)(3) of the Internal Revenue Code) while the holder of one or more outstanding options under the Plan, then none of those options shall (except to the extent otherwise provided pursuant to Section V of this Article Two) remain exercisable beyond the later of (i) the limited post-Service period designated by the Plan Administrator at the time of the option grant and set forth in the option agreement; or (ii) (A) ninety (90) days from the date of termination if termination was caused by other than the death or disability (as defined in Section 22(e)(3) of the Internal Revenue Code) of such Optionee or (B) twelve (12) months from the date of termination if termination was caused by death or disability of Optionee. - Any option granted to an Optionee under this Article Two and exercisable in whole or in part on the date of the Optionee's death may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution, provided and only if such exercise occurs prior to the earlier of (i) the first anniversary of the date of the Optionee's death or (ii) the specified expiration date of the option term. Upon the occurrence of the earlier event, the option shall terminate and cease to be exercisable. - Notwithstanding the above, under no circumstances will any option be exercisable after the specified expiration date of the option term. - During the limited post-Service period of exercisability, the option may not be exercised for more than the number of shares for which the option was exercisable on the date the Optionee's Service terminates. Upon the expiration of such limited exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable. (ii) The Plan Administrator shall have complete discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to permit one or more options held by the Optionee under this Article Two to be exercised, during the limited period of exercisability provided under subparagraph (1) above, not only with respect to the number of shares for which each such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more subsequent installments of purchasable shares for which the option would otherwise have become exercisable had such cessation of Service not occurred. -8- 9 (iii) For purposes of the foregoing provisions of this Section I.C of Article Two (and for all other purposes under the Plan): - The Optionee shall (except to the extent otherwise specifically provided in the applicable option or issuance agreement) be deemed to remain in the SERVICE of the Corporation for so long as such individual renders services on a periodic basis to the Corporation (or any parent or subsidiary corporation) in the capacity of an employee, a non-employee member of the Board or an independent consultant or advisor. - The Optionee shall be considered to be an EMPLOYEE for so long as he or she remains in the employ of the Corporation or one or more parent or subsidiary corporations, subject to the control and direction of the employer entity not only as to the work to be performed but also as to the manner and method of performance. II. INCENTIVE OPTIONS The terms and conditions specified below shall be applicable to all Incentive Options granted under this Article Two. Incentive Options may only be granted to individuals who are employees of the Corporation. Options which are specifically designated as "non-statutory" options when issued under the Plan shall not be subject to such terms and conditions. A. Option Price. The option price per share of any share of Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the fair market value of such share of Common Stock on the grant date. B. Dollar Limitation. The aggregate fair market value (determined as of the respective date or dates of grant) of the Common Stock for which one or more Incentive Options granted to any employee after December 31, 1986, under this Plan (or any other option plan of the Corporation or its parent or subsidiary corporations) may for the first time become exercisable as Incentive Options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the employee holds two or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. C. Application of Certain Articles. Except as modified by the preceding provisions of this Section II, the provisions of Articles One, Two and Five of the Plan shall apply to all Incentive Options granted hereunder. Any option designated as an Incentive Option but which fails to meet any requirement of this Section II or of the Internal Revenue Code for qualification as an Incentive Option shall nevertheless be a valid and outstanding option under the Plan and shall be treated as a non-statutory option. -9- 10 III. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected Optionees, the cancellation of any or all outstanding options under this Article Two (including outstanding options under the Predecessor Plans incorporated into this Plan) and to grant in substitution new options under this Article Two covering the same or different numbers of shares of Common Stock but having an option price for each share which is not less than (i) eighty-five percent (85%) of the fair market value of such share on the new grant date or (ii) one hundred percent (100%) of such fair market value in the case of an Incentive Option. IV. STOCK APPRECIATION RIGHTS A. Provided and only if the Plan Administrator determines in its discretion to implement the stock appreciation right provisions of this Section IV, one or more Optionees under the Discretionary Option Grant Program may be granted the right, exercisable upon such terms and conditions as the Plan Administrator may establish, to surrender all or part of an unexercised option under this Article Two in exchange for a distribution from the Corporation in an amount equal to the excess of (i) the fair market value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (ii) the aggregate option price payable for such vested shares. B. No surrender of an option shall be effective hereunder unless it is approved by the Plan Administrator. If the surrender is so approved, then the distribution to which the Optionee shall accordingly become entitled under this Section IV may be made in shares of any class of Common Stock valued at fair market value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. C. If the surrender of an option is rejected by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (i) five (5) business days after the receipt of the rejection notice or (ii) the last day on which the option is otherwise exercisable in accordance with the terms of the instrument evidencing such option, but in no event may such rights be exercised after the specified expiration date for the option. D. One or more officers of the Corporation subject to the short-swing profit restrictions of the Federal securities laws may, in the Plan Administrator's sole discretion, be granted limited stock appreciation rights in tandem with their outstanding options under this Article Two. Upon the occurrence of a Hostile Take-Over (as defined in Section II.B of Article Five) effected at any time when the Corporation's outstanding Common Stock is registered under Section 12(g) of the 1934 Act, each outstanding option with such a limited stock appreciation right in effect for at -10- 11 least six (6) months shall automatically be cancelled, to the extent such option is at the time exercisable for fully-vested shares of Common Stock. The Optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the vested shares of Common Stock at the time subject to the cancelled option (or cancelled portion of such option) over (ii) the aggregate exercise price payable for such shares. The cash distribution payable upon such cancellation shall be made within five (5) days following the consummation of the Hostile Take-Over. Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option cancellation and cash distribution. The balance of the option (if any) shall continue to remain outstanding and exercisable in accordance with the terms of the instrument evidencing such grant. E. The shares of Common Stock subject to any option surrendered or cancelled for an appreciation distribution pursuant to this Section IV shall NOT be available for subsequent option grant under the Plan. V. EXTENSION OF EXERCISE PERIOD The Plan Administrator shall have full power and authority to extend the period of time for which any option granted under this Article Two is to remain exercisable following the Optionee's cessation of Service or death from the limited period in effect under Section I.C.(i) of this Article Two to such greater period of time as the Plan Administrator shall deem appropriate; provided, however, that in no event shall such option be exercisable after the specified expiration date of the option term. ARTICLE THREE AUTOMATIC OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS A. Grant of Options. Beginning at the annual meeting of shareholders held in 1997, nonstatutory option grants to purchase 4,000 shares of Common Stock shall be made automatically to each non-employee Board member annually as of the date of the annual shareholder meeting commencing with the first such meeting following such member's initial election or appointment to the Board. The number of shares granted pursuant to this Automatic Grant Program shall be subject to periodic adjustment pursuant to the applicable provisions of Section VI.C of Article One. B. Exercise Price. The exercise price per share of each automatic option grant made under this Article Three shall be equal to one hundred percent (100%) of the fair market value per share of Common Stock on the grant date. C. Payment. The exercise price shall be payable in one of the alternative forms specified below: -11- 12 (i) full payment in cash or check drawn to the Corporation's order; (ii) full payment in shares of Common Stock held for at least six (6) months and valued at fair market value on the Exercise Date (as such term is defined below); (iii) full payment in a combination of shares of Common Stock held for at least six (6) months and valued at fair market value on the Exercise Date and cash or check; or (iv) full payment through a broker-dealer sale and remittance procedure pursuant to which the non-employee Board member (A) shall provide irrevocable written instructions to a designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate option price payable for the purchased shares plus all applicable Federal and state income taxes required to be withheld by the Corporation in connection with such purchase and (B) shall provide written directives to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. For purposes of this Section I.C. of Article Three, the Exercise Date shall be the date on which written notice of the option exercise is delivered to the Corporation, and the fair market value per share of Common Stock on any relevant date shall be determined in accordance with the provisions of Section II.A of Article Five. Except to the extent the sale and remittance procedure is utilized in connection with the exercise of the option, payment of the option price for the purchased shares must accompany such notice. D. Option Term. Each automatic grant under this Article Three shall have a term of ten (10) years measured from the automatic grant date. E. Exercisability. Each option granted pursuant to this automatic option grant program shall become exercisable in a series of four (4) equal annual installments during the optionee's period of service on the Board, with the first such installment to become exercisable one year after the automatic grant date. No option shall become exercisable for any additional option shares following the optionee's cessation of Board service for any reason. F. Non-Transferability. During the lifetime of the optionee, each automatic option grant, together with the limited stock appreciation right pertaining to such option, if any, shall be exercisable only by the optionee and shall not be assignable or transferable by the optionee other than a transfer of the option effected by will or by the laws of descent and distribution following optionee's death. -12- 13 G. Effect of Termination of Board Membership. Should the optionee cease to serve as a Board member for any reason (other than death) while holding one or more automatic option grants under this Article Three, such optionee shall have a six (6) month period following the date of such cessation of Board membership in which to exercise each such option for any or all of the shares of Common Stock for which the option was exercisable at the time of such cessation of Board service. Each such option shall immediately terminate and cease to be outstanding at the time of such cessation of Board service with respect to any shares for which the option is not then exercisable. Should the optionee die while serving as a member of the Board or within six (6) months after cessation of Board service, then each outstanding automatic option grant held by the optionee at the time of death may subsequently be exercised, for any or all of the shares of Common Stock for which the option is exercisable at the time of the optionee's cessation of Board service (less any option shares subsequently purchased by the optionee prior to death), by the personal representative of the optionee's estate or by the person or persons to whom the option is transferred pursuant to the optionee's will or in accordance with the laws of descent and distribution. Any such exercise must occur within twelve (12) months after the date of the optionee's death. However, each such automatic option grant shall immediately terminate and cease to be outstanding, at the time of the optionee's cessation of Board service, with respect to any option shares for which it is not otherwise at such time exercisable. In no event shall any automatic grant under this Article Three remain exercisable after the specified expiration date of the ten (10)-year option term. Upon the expiration of the applicable exercise period in accordance with this paragraph G or (if earlier) upon the expiration of the ten (10) year option term, the automatic grant shall terminate and cease to be outstanding for any unexercised shares for which the option was exercisable at the time of the optionee's cessation of Board service. II. LIMITED STOCK APPRECIATION RIGHT. A. Upon the occurrence of a Hostile Take-Over (as defined in Section II.B of Article Five), each non-employee Board member holding an automatic option grant which has been outstanding under this Article Three for a period of at least six (6) months shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender such option in return for a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not the option is otherwise at the time exercisable for such shares) over (ii) the aggregate exercise price payable for such shares. Such cash distribution shall be paid within five (5) days following the option surrender date. Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. -13- 14 B. The shares of Common Stock subject to each option surrendered in connection with the Hostile Take-Over shall NOT be available for subsequent issuance under this Plan. ARTICLE FOUR STOCK ISSUANCE PROGRAM I. TERMS AND CONDITIONS OF STOCK ISSUANCES Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate purchases without any intervening stock option grants. The issued shares shall be evidenced by a Stock Issuance Agreement ("Issuance Agreement") that complies with the terms and conditions of this Article Four. A. Consideration. Shares of Common Stock shall be issued under the Plan for one or more of the following items of consideration, which the Plan Administrator may deem appropriate in each individual instance: (i) cash or cash equivalents (such as a personal check or bank draft) paid to the Corporation; (ii) in common stock of the Corporation valued at fair market value on the date of issuance; (iii) a promissory note payable to the Corporation's order in one or more installments, which may be subject to cancellation in whole or in part upon terms and conditions established by the Plan Administrator; (iv) past services rendered to the Corporation or any parent or subsidiary corporation; (v) any combination of the above approved by the Plan Administrator. Shares may, in the absolute discretion of the Plan Administrator, be issued for consideration with a value less than one-hundred percent (100%) of the fair market value of such shares, but in no event less than eighty-five percent (85%) of such fair market value. Notwithstanding the foregoing, in the case of 10% shareholders, Shares must be issued at one hundred percent (100%) of fair market value of such shares. B. Vesting Provisions. -14- 15 1. Shares of Common Stock issued under this Article Four may, in the absolute discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service (as such term is defined in Section I.C.(iii) of Article Two); provided, that such vesting must be at a rate of at least 20% per year over no more than five years from the date such shares are issued. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Plan, namely: (i) the Service period to be completed by the Participant or the performance objectives to be achieved by the Corporation, (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, (iv) any conditions or contingencies to vesting, and (v) the effect which death, disability or other events designated by the Plan Administrator are to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Issuance Agreement executed by the Corporation and the Participant at the time such unvested shares are issued. 2. The Participant shall have full shareholder rights with respect to any shares of Common Stock issued to him or her under this Article Four, whether or not his or her interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. Any new, additional or different shares of stock or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to his or her unvested shares by reason of any stock dividend, stock split, reclassification of Common Stock or other similar change in the Corporation's capital structure or by reason of any Corporate Transaction under Section I of Article Five shall be issued, subject to (i) the same vesting requirements applicable to his or her unvested shares and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock under this Article Four, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further shareholder rights with respect to those shares. The Corporation shall repay to the Participant the cash consideration paid for the -15- 16 surrendered shares and shall cancel the principal balance of any outstanding purchase- money note of the Participant to the extent attributable to such surrendered shares. The surrendered shares may, at the Plan Administrator's discretion, be retained by the Corporation as Treasury Shares or may be retired to authorized but unissued share status. 4. The Plan Administrator may in its discretion elect to waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. II. TRANSFER RESTRICTIONS/SHARE ESCROW A. Escrow Arrangements and Legends. Unvested shares under this Article Four may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing such unvested shares. To the extent an escrow arrangement is utilized, the unvested shares and any securities or other assets issued with respect to such shares (other than regular cash dividends) shall be delivered in escrow to the Corporation to be held until the Participant's interest in such shares (or other securities or assets) vests. Alternatively, if the unvested shares are issued directly to the Participant, the restrictive legend on the certificates for such shares shall read substantially as follows: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE UNVESTED AND ARE ACCORDINGLY SUBJECT TO (I) CERTAIN TRANSFER RESTRICTIONS AND TO (II) CANCELLATION OR REPURCHASE IN THE EVENT THE REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) CEASES TO REMAIN IN THE CORPORATION'S SERVICE. SUCH TRANSFER RESTRICTIONS AND THE TERMS AND CONDITIONS OF SUCH CANCELLATION OR REPURCHASE ARE SET FORTH IN A STOCK ISSUANCE AGREEMENT BETWEEN THE CORPORATION AND THE REGISTERED HOLDER (OR HIS/HER PREDECESSOR IN INTEREST) DATED __________, 19__, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION." B. Limited Transferability. The Participant shall have no right to transfer any unvested shares of Common Stock issued to him or her under this Article -16- 17 Four. For purposes of this restriction, the term "transfer" shall include (without limitation) any sale, pledge, assignment, encumbrance, gift, or other disposition of such shares, whether voluntary or involuntary. Upon any such attempted transfer, the unvested shares shall immediately be cancelled, and neither the Participant nor the proposed transferee shall have any rights with respect to those shares. However, the Participant shall have the right to make a gift of unvested shares acquired under the Plan to his or her spouse or issue, including adopted children, or to a trust established for such spouse or issue, provided the donee of such shares delivers to the Corporation a written agreement to be bound by all the provisions of the Plan and the Issuance Agreement applicable to the gifted shares. ARTICLE FIVE MISCELLANEOUS I. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. Assumption of Options. Each outstanding option which is assumed in connection with a Corporate Transaction (as defined below) or is otherwise to continue in effect following a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would be issuable, in consummation of such Corporate Transaction, to an actual holder of the same number of shares of Common Stock as are subject to such option immediately prior to such Corporate Transaction, and appropriate adjustments shall also be made to the option price payable per share, provided the aggregate option price payable for such securities shall remain the same. Appropriate adjustments shall also be made to the class and number of securities available for issuance under the Plan following the consummation of such Corporate Transaction. B. Acceleration of Options. In the event of any Corporate Transaction the exercisability of each option grant at the time outstanding under this Plan which is not continued under paragraph A above shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares. Upon the consummation of the Corporate Transaction, all option grants under this Plan shall terminate and cease to be outstanding. The Plan Administrator may, in its discretion, extend the provisions of this paragraph B to options outstanding under the Predecessor Plans. C. Corporate Transaction. A Corporate Transaction means: (i) a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the -17- 18 principal purpose of which is to change the State of the Corporation's incorporation, (ii) the sale, transfer or disposition of all or substantially all of the assets of the Corporation, or (iii) any reverse merger in which the Corporation is the surviving entity but in which the holders of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities (as measured immediately prior to such merger) transfer ownership of those securities to person or persons not otherwise part of the transferor group. D. Change in Control. Except as otherwise provided by the Plan Administrator in agreements governing the grant of discretionary option grants or stock issuances, in connection with any Change in Control of the Corporation, the exercisability of each option grant at the time outstanding under this Plan shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Change in Control, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares. Similarly, all unvested shares issued under the Plan shall automatically vest immediately prior to the effective date of the Change in Control. For purposes of this Article Five, a Change in Control shall be deemed to occur in the event: (i) a Hostile Take-Over (as defined below) (ii) there is a change in the composition of the Board over a period of twenty-four (24) consecutive months or less such that a majority of the Board members (rounded up to the next whole number) cease, by reason of one or more proxy contests for the election of Board members, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (A) who were still in office at the time such election or nomination was approved by the Board. The provisions of this paragraph D shall apply to option grants and/or stock issuances under the Predecessor Plans only to the extent expressly extended thereto by the Plan Administrator. II. CERTAIN DEFINITIONS A. Fair Market Value. The FAIR MARKET VALUE of a share of Common Stock shall be determined in accordance with the following provisions: -18- 19 - If shares of the Class of Common Stock to be valued are not at the time listed or admitted to trading on any national stock exchange but is traded on the Nasdaq National Market, the fair market value shall be the closing selling price per share of a share of that class on the date in question, as such price is reported by the National Association of Securities Dealers through the Nasdaq National Market or any successor system. If there is no reported closing selling price for the series on the date in question, then the closing selling price on the last preceding date for which such quotation exists shall be determinative of fair market value. - If shares of the class of common stock to be valued are at the time listed or admitted to trading on any national stock exchange, then the fair market value of a share of that class shall be the closing selling price per share on the date in question on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of a share of the class on such exchange on the date in question, then the fair market value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. - If shares of the series of common stock to be valued at the time are neither listed nor admitted to trading on any stock exchange nor traded on the Nasdaq National Market, then the fair market value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate, which may include independent professional appraisals. B. Hostile Take-Over. A HOSTILE TAKE-OVER shall be deemed to occur in the event (i) any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders which the Board does not recommend such shareholders to accept. C. Take-Over Price. The TAKE-OVER PRICE per share shall be deemed to be equal to the greater of (a) the fair market value per share on the option surrender date, as determined pursuant to the valuation provisions of Section II.A of this Article Five, or (b) the highest reported price per share paid by the tender offeror in effecting such Hostile Take-Over. -19- 20 III. LOANS OR GUARANTEE OF LOANS A. Loans or Guarantees. The Plan Administrator may, in its discretion, assist any Optionee or Participant (including an Optionee or Participant who is an officer of the Corporation) in the exercise of one or more options granted to such Optionee under the Article Two Discretionary Option Grant Program or the purchase of one or more shares issued to such Participant under the Article Four Stock Issuance Program, including the satisfaction of any Federal and State income and employment tax obligations arising therefrom by (i) authorizing the extension of a loan from the Corporation to such Optionee or Participant or (ii) permitting the Optionee or Participant to pay the option price or purchase price for the purchased Common Stock in installments over a period of years. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) will be upon such terms as the Plan Administrator specifies in the applicable option or issuance agreement or otherwise deems appropriate under the circumstances. Loans and installment payments may be granted with or without security or collateral (other than to individuals who are consultants or independent contractors, in which event the loan must be adequately secured by collateral other than the purchased shares). However, the maximum credit available to the Optionee or Participant may not exceed the option or purchase price of the acquired shares (less the par value of such shares) plus any Federal and State income and employment tax liability incurred by the Optionee or Participant in connection with the acquisition of such shares. B. Discretion of Plan Administrator. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under this financial assistance program shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Plan Administrator may deem appropriate. IV. TAX WITHHOLDING A. Withholding. The Company's obligation to deliver shares or cash upon the exercise of stock options or stock appreciation rights granted under the Discretionary Option Grant Program or the Automatic Option Grant Program or upon direct issuance under the Stock Issuance Program shall be subject to the satisfaction of all applicable Federal, State and local income and employment tax withholding requirements. B. Withholding of Shares Otherwise Issuable. The Plan Administrator may, in its discretion and upon such terms and conditions as it may deem appropriate (including the applicable safe-harbor provisions of SEC Rule 16b-3), provide any or all holders of outstanding option grants under the Discretionary Option Grant Program with the election to have the Company withhold, from the shares of Common Stock otherwise issuable upon the exercise of such options, a portion of such shares with an aggregate fair market value equal to the designated percentage (up to 100% as specified by the optionee) of the Federal and State income taxes ("Taxes") incurred in connection with the acquisition of such shares. In lieu of such direct withholding, one or more option -20- 21 holders may also be granted the right to deliver shares of Common Stock to the Company in satisfaction of such Taxes. The withheld or delivered shares shall be valued at the fair market value on the applicable determination date for such Taxes or such other date required by the applicable safe-harbor provisions of SEC Rule 16b-3. V. AMENDMENT OF THE PLAN AND AWARDS A. Amendment. Except as herein provided, the Board has complete and exclusive power and authority to amend or modify the Plan (or any component thereof) in any or all respects whatsoever. No amendment or modification may adversely affect the rights and obligations of an Optionee with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any Participant with respect to Common Stock issued under the Plan prior to such action, unless the Optionee or Participant consents to such amendment. In addition, the Board may not, without the approval of the Corporation's shareholders, amend the Plan to (i) materially increase the maximum number of shares issuable under the Plan (except for permissible adjustments under Article One, Section VI) or (ii) materially modify the eligibility requirements for participation in the Plan or materially increase the benefits accruing to Optionees or Participants under the Plan. B. Limitation on Amendment of Options. Notwithstanding Article Five, Section V.A, neither the provisions of the Automatic Option Grant Program nor the options outstanding under Article Three may be amended at intervals more frequently than once every six (6) months, other than to the extent necessary to comport with changes in the Internal Revenue Code, the Employee Retirement Income Security Act or any rules thereunder. C. Escrow Prior to Shareholder Approval. (i) Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and (ii) shares of Common Stock may be issued under the Stock Issuance Program, which are in both instances in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Discretionary Option Grant Program or the Stock Issuance Program are held in escrow until shareholder approval is obtained for a sufficient increase in the number of shares available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the first such excess option grants or excess share issuances are made, then (I) any unexercised excess options shall terminate and cease to be exercisable and (II) the Corporation shall promptly refund the purchase price paid for any excess shares actually issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow. -21- 22 VI. EFFECTIVE DATE AND TERM OF PLAN A. Effective Date. This Plan, as successor to the Company's Predecessor Plans, shall become effective as of the Effective Date, and no further option grants shall be made under the Predecessor Plans after such Effective Date. If shareholder approval of this Plan is not obtained within twelve (12) months after the date this Plan is adopted by the Board, then each option granted under this Plan from and after the Effective Date shall terminate without ever becoming exercisable for the option shares and all shares issued hereunder shall be repurchased by the Corporation at the purchase price paid, together with interest (at the applicable Short Term Federal Rate). However, in the event such shareholder approval is not obtained, the Predecessor Plans shall continue in effect in accordance with the terms and provisions last approved by the Corporation's shareholders, and all outstanding options and unvested stock issuances under the Predecessor Plans shall remain in full force and effect in accordance with the instruments evidencing such options and issuances. B. Predecessor Plans. Each outstanding option and share issuance under the Predecessor Plans immediately prior to the Effective Date of this Plan are hereby incorporated into this Plan and shall accordingly be treated as an outstanding option or share issuance under this Plan. However, each such option or share issuance shall continue to be governed solely by the terms and conditions of the instrument evidencing such grant or issuance, and except as otherwise expressly provided in this Plan, no provision of this Plan shall affect or otherwise modify the rights or obligations of the holders of such options or shares with respect to their acquisition of shares of Common Stock, or otherwise modify the rights or obligations of the holders of such options or shares. C. Applicability of Certain Procedures to Predecessor Plans. The sale and remittance procedure authorized for the exercise of outstanding options under this Plan shall be available for all options granted under this Plan on or after the Effective Date and for all non-statutory options outstanding under the Predecessor Plans and incorporated into this Plan. The Plan Administrator may also allow such procedure to be utilized in connection with one or more disqualifying dispositions of Incentive Option shares effected after the Effective Date, whether such Incentive Options were granted under this Plan or the Predecessor Plans. D. Termination. The Plan shall terminate upon the earlier of (i) the tenth anniversary of the Effective Date or (ii) the date on which all shares available for issuance under the Plan shall have been issued or cancelled pursuant to the exercise, surrender or cash-out of the options granted under the Discretionary Option Grant Program or the issuance of shares (whether vested or unvested) under the Stock Issuance Program. If the date of termination is determined under clause (i) above, then all option grants and unvested stock issuances outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such grants or issuances. -22- 23 VII. USE OF PROCEEDS Cash proceeds received by the Company from the sale of shares under the Plan shall be used for general corporate purposes. VIII. REGULATORY APPROVALS A. Regulatory Approvals. The implementation of the Plan, the granting of any option under the Discretionary Option Grant Program, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise or surrender of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. B. Federal and State Securities Laws. No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until there shall have been compliance with all applicable requirements of Federal and State securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any securities exchange on which stock of the same class is then listed. IX. NO EMPLOYMENT/SERVICE RIGHTS Neither the action of the Corporation in establishing the Plan, nor any action taken by the Plan Administrator hereunder, nor any provision of the Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Corporation (or any parent or subsidiary corporation) for any period of specific duration, and the Corporation (or any parent or subsidiary corporation retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. X. MISCELLANEOUS PROVISIONS A. Assignment. The right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionee or Participant. B. Successors. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, whether by Corporate Transaction or otherwise, and the Participants and Optionees, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. -23- EX-10.66 5 LOAN AGREEMENT W/ SILICON VALLEY BANK 6-18-96 1 [NOTE: TEXT IN BRACKETS IS STRICKEN IN THE ORIGINAL.] Exhibit 10.66 [LOGO] SILICON VALLEY BANK LOAN AND SECURITY AGREEMENT BORROWER: DEPOTECH CORPORATION ADDRESS: 10450 SCIENCE CENTER DRIVE SAN DIEGO, CALIFORNIA 92121 DATE: JUNE 18, 1996 THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between SILICON VALLEY BANK ("Silicon"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and the borrower named above (the "Borrower"), whose chief executive office is located at the above address ("Borrower's Address"). 1. LOANS. 1.1 LOANS. Silicon, in its reasonable discretion, will make loans to the Borrower (the "Loans") in amounts determined by Silicon in its reasonable discretion up to the amount (the "Credit Limit") shown on the Schedule to this Agreement (the "Schedule"), provided no Event of Default and no event which, with notice or passage of time or both, would constitute an Event of Default has occurred. The Borrower is responsible for monitoring the total amount of Loans and other Obligations outstanding from time to time, and Borrower shall not permit the same, at any time, to exceed the Credit Limit. If at any time the total of all outstanding Loans and all other Obligations exceeds the Credit Limit, the Borrower shall immediately pay the amount of the excess to Silicon, without notice or demand. 1.2 INTEREST. All Loans and all other monetary Obligations shall bear interest at the rate shown on the Schedule hereto. Interest shall be payable monthly, on the due date shown on the monthly billing from Silicon to the Borrower. Silicon may, in its discretion, charge interest to Borrower's deposit accounts maintained with Silicon. 1.3 FEES. The Borrower shall pay to Silicon a loan origination fee in the amount shown on the Schedule hereto concurrently herewith. This fee is in addition to all interest and other sums payable to Silicon and is not refundable. 2. GRANT OF SECURITY INTEREST. 2.1 OBLIGATIONS. The term "Obligations" as used in this Agreement means the following: the obligation to pay all Loans and all interest thereon when due, and to pay and perform when due all other present and future indebtedness, liabilities, obligations, guarantees, covenants, agreements, warranties and representations of the Borrower to Silicon, whether joint or several, monetary or non-monetary, and whether created pursuant to this Agreement or any other present or future agreement or otherwise. Silicon may, in its discretion, require that Borrower pay monetary Obligations in cash to Silicon, or charge them to Borrower's Loan account, in which event they will bear interest at the same rate applicable to the Loans. Silicon may also, in its discretion, charge any monetary Obligations to Borrower's deposit accounts maintained with Silicon. 2.2 COLLATERAL. As security for all Obligations, the Borrower hereby grants Silicon a continuing security interest in all of the Borrower's interest in the types of property described below, whether now owned or hereafter acquired, and wherever located (collectively, the "Collateral"): [(a) All accounts, contract rights, chattel paper, letters of credit, documents, securities, money, and instruments, and all other obligations now or in the future owing to the Borrower; (b) All inventory, goods, merchandise, materials, raw materials, work in process, finished goods, farm products, advertising, packaging and shipping materials, supplies, and all other tangible personal property which is held for sale or lease or furnished under contracts of service or consumed in the Borrower's business, and all warehouse receipts and other documents;] and (c) All equipment, including without limitation all machinery, fixtures, trade fixtures, vehicles, furnishings, furniture, materials, tools, machine tools, office equipment, computers and peripheral devices, appliances, apparatus, parts, dies, and jigs; [(d) All general intangibles including, but not limited to, deposit accounts, goodwill, names, trade names, trademarks and the goodwill of the business symbolized thereby, trade secrets, drawings, blueprints, customer lists, patents, patent applications, copyrights, security deposits, loan commitment fees, federal, state and] -1- 2 [local tax refunds and claims, all rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Silicon, all rights to purchase or sell real or personal property, all rights as a licensor or licensee of any kind, all royalties, licenses, processes, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation credit, liability, property and other insurance), and all other rights, privileges and franchises of every kind; (e) All books and records, whether stored on computers or otherwise maintained;] and (f) All substitutions, additions and accessions to any of the foregoing, and all [products], proceeds and insurance proceeds of the foregoing, and all guaranties of and security for the foregoing; and all books and records relating to any of the foregoing. [Silicon's security interest in any present or future technology (including patents, trade secrets, and other technology) shall be subject to any licenses or rights now or in the future granted by the Borrower to any third parties in the ordinary course of Borrower's business; provided that if the Borrower proposes to sell, license or grant any other rights with respect to any technology in a transaction that, in substance, conveys a major part of the economic value of that technology, Silicon shall first be requested to release its security interest in the same, and Silicon may withhold such release in its discretion.] * *FOLLOWING THE EARLIER OF (A) THE END OF THE SECOND DISBURSEMENT PERIOD (AS DEFINED IN THE SCHEDULE) OR (B) THE DATE OF THE COMPLETE DRAWDOWN OF THE AVAILABLE LOANS HEREUNDER, SILICON AGREES, ON REQUEST OF BORROWER, TO RELEASE ITS SECURITY INTEREST IN EQUIPMENT OF THE BORROWER WHICH DOES NOT CONSTITUTE FINANCED EQUIPMENT (AS DEFINED IN THE SCHEDULE), UPON CONFIRMATION THAT SILICON HAS A FIRST-PRIORITY, PERFECTED SECURITY INTEREST IN ALL OF THE FINANCED EQUIPMENT AND THAT NO EVENT OF DEFAULT AND NO EVENT WHICH, WITH NOTICE OR PASSAGE OF TIME OR BOTH, WOULD CONSTITUTE AN EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER. The Borrower represents and warrants to Silicon as follows, and the Borrower covenants that the following representations will continue to be true, and that the Borrower will comply with all of the following covenants: 3.1 CORPORATE EXISTENCE AND AUTHORITY. The Borrower, if a corporation, is and will continue to be, duly authorized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Borrower is and will continue to be qualified and licensed to do business in all jurisdictions in which any failure to do so would have a material adverse effect on the Borrower. The execution, delivery and performance by the Borrower of this Agreement, and all other documents contemplated hereby have been duly and validly authorized, are enforceable against the Borrower in accordance with their terms, and do not violate any law or any provision of, and are not grounds for acceleration under, any agreement or instrument which is binding upon the Borrower. 3.2 NAME; TRADE NAMES AND STYLES. The name of the Borrower set forth in the heading to this Agreement is its correct name. Listed on the Schedule hereto are all prior names of the Borrower and all of Borrower's present and prior trade names. The Borrower shall give Silicon 15 days' prior written notice before changing its name or doing business under any other name. The Borrower has complied, and will in the future comply, with all laws relating to the conduct of business under a fictitious business name. 3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in the heading to this Agreement is the Borrower's chief executive office. In addition, the Borrower has places of business and Collateral is located only at the locations set forth on the Schedule to this Agreement. The Borrower will give Silicon at least 15 days prior written notice before changing its chief executive office or locating the Collateral at any other location. 3.4 TITLE TO COLLATERAL; PERMITTED LIENS. The Borrower is now, and will at all times in the future be, the sole owner of all the Collateral, except for items of equipment which are leased by the Borrower. The Collateral now is and will remain free and clear of any and all liens, charges, security interests, encumbrances and adverse claims, except for the following ("Permitted Liens"): (i) purchase money security interests in specific items of equipment; (ii) leases of specific items of equipment; (iii) liens for taxes not yet payable; (iv) additional security interests and liens consented to in writing by Silicon in its reasonable discretion, which consent shall not be unreasonably withheld; and (v) security interests being terminated substantially concurrently with this Agreement. [Silicon will have the right to require, as a condition to its consent under subparagraph (iv) above, that the holder of the additional security interest or lien sign an intercreditor agreement on Silicon's then standard form, acknowledge that the security interest is subordinate to the security interest in favor of Silicon, and agree not to take any action to enforce its subordinate security interest so long as any Obligations remain outstanding, and that the Borrower agree that any uncured default in any obligation secured by the subordinate security interest shall also constitute an Event of Default under this Agreement.] Silicon now has, and will continue to have, a perfected and enforceable security interest in all of the Collateral, subject only to the Permitted Liens, and the Borrower will at all times defend Silicon and the Collateral against all claims of others. [None of the Collateral now is or will be affixed to any real property in such a manner, or with such intent, as to become a fixture.] 3.5 MAINTENANCE OF COLLATERAL. The Borrower will maintain the Collateral in good working condition, and the Borrower will not use the Collateral for any unlawful purpose. The Borrower will immediately advise Silicon in writing of any material loss or damage to the Collateral. -2- 3 3.6 BOOKS AND RECORDS. The Borrower has maintained and will maintain at the Borrower's Address complete and accurate books and records, comprising an accounting system in accordance with generally accepted accounting principles. 3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the financial condition of the Borrower, at the times and for the periods therein stated. Since the last date covered by any such statement, there has been no material adverse change in the financial condition or business of the Borrower. The Borrower is now and will continue to be solvent. The Borrower will provide Silicon: (i) within 30 days after the end of each month, a monthly financial statement prepared by the Borrower, and a Compliance Certificate in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of the Borrower, certifying that as of the end of such month the Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth on the Schedule and such other information as Silicon shall reasonably request; and (ii) within 120 days following the end of the Borrower's fiscal year, complete annual financial statements, certified by independent certified public accountants acceptable to Silicon and accompanied by the unqualified report thereon by said independent certified public accountants. 3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. The Borrower has timely filed, and will timely file, all tax returns and reports required by foreign, federal, state and local law, and the Borrower has timely paid, and will timely pay, all foreign, federal, state and local taxes, assessments, deposits and contributions now or in the future owed by the Borrower. The Borrower may, however, defer payment of any contested taxes, provided that the Borrower (i) in good faith contests the Borrower's obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Silicon in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to keep the contested taxes from becoming a lien upon any of the Collateral. The Borrower is unaware of any claims or adjustments proposed for any of the Borrower's prior tax years which could result in additional taxes becoming due and payable by the Borrower. The Borrower has paid, and shall continue to pay all amounts necessary to fund all present and future pension, profit sharing and deferred compensation plans in accordance with their terms, and the Borrower has not and will not withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any such plan which could result in any liability of the Borrower, including, without limitation, any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency. 3.9 COMPLIANCE WITH LAW. The Borrower has complied, and will comply, in all material respects, with all provisions of all foreign, federal, state and local laws and regulations relating to the Borrower, including, but not limited to, those relating to the Borrower's ownership of real or personal property, conduct and licensing of the Borrower's business, and environmental matters. 3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim, suit, litigation, proceeding or investigation pending or (to best of the Borrower's knowledge) threatened by or against or affecting the Borrower in any court or before any governmental agency (or any basis therefor known to the Borrower) which may result, either separately or in the aggregate, in any material adverse change in the financial condition or business of the Borrower, or in any material impairment in the ability of the Borrower to carry on its business in substantially the same manner as it is now being conducted. The Borrower will promptly inform Silicon in writing of any claim, proceeding, litigation or investigation in the future threatened or instituted by or against the Borrower involving amounts in excess of $250,000. 3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for lawful business purposes. 4. ADDITIONAL DUTIES OF THE BORROWER. 4.1 FINANCIAL AND OTHER COVENANTS. The Borrower shall at all times comply with the financial and other covenants set forth in the Schedule to this Agreement. [4.2 OVERADVANCE; PROCEEDS OF ACCOUNTS. If for any reason the total of all outstanding Loans and all other Obligations exceeds the Credit Limit, without limiting Silicon's other remedies, and whether or not Silicon declares an Event of Default, Borrower shall remit to Silicon all checks and other proceeds of Borrower's accounts and general intangibles, in the same form as received by Borrower, within one day after Borrower's receipt of the same, to be applied to the Obligations in such order as Silicon shall determine in its discretion.] 4.3 INSURANCE. The Borrower shall, at all times insure all of the tangible personal property Collateral and carry such other business insurance, with insurers reasonably acceptable to Silicon, in such form and amounts as Silicon may reasonably require. All such insurance policies shall name Silicon as an additional loss payee, and shall contain a lenders loss payee endorsement in form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such insurance, Silicon shall apply such proceeds in reduction of the Obligations as Silicon shall determine in its sole and absolute discretion, except that, provided no Event of Default has occurred, Silicon shall release to the Borrower insurance proceeds with respect to equipment totaling less than [$100,000]*, which shall be utilized by the Borrower for the replacement of the equipment with respect to which the insurance proceeds were paid. Silicon may require reasonable assurance that the insurance proceeds so released will be so used. If the Borrower fails to provide or pay for any insurance, Silicon may, but is not obligated to, obtain the same at the Borrower's expense. -3- 4 The Borrower shall promptly deliver to Silicon copies of all reports made to insurance companies. * $250,000 4.4 REPORTS. The Borrower shall provide Silicon with such written reports with respect to the Borrower (including without limitation budgets, sales projections, operating plans and other financial documentation), as Silicon shall from time to time reasonably specify *. * SUBJECT, HOWEVER, TO SILICON ENTERING INTO A CONFIDENTIALITY AGREEMENT REGARDING THE USE AND DISCLOSURE OF BORROWER'S CONFIDENTIAL INFORMATION, WHICH SHALL BE SUBSTANTIALLY SIMILAR IN FORM AND SUBSTANCE TO THE EXISTING CONFIDENTIALITY AGREEMENT (AS DEFINED IN SECTION 7.3 HEREOF) AND SUBJECT TO THE RIGHTS TO DISCLOSURE UNDER SECTION 4.5 HEREOF 4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times, and upon one business day notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy the Borrower's accounting books and records and Borrower's books and records relating to the Collateral. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. [The foregoing audits shall be at Silicon's expense, except that the Borrower shall reimburse Silicon for its reasonable out of pocket costs for semi-annual accounts receivable audits by third parties retained by Silicon, and Silicon may debit Borrower's deposit accounts with Silicon for the cost of such semi-annual accounts receivable audits (in which event Silicon shall send notification thereof to the Borrower)]. Notwithstanding the foregoing, after the occurrence of an Event of Default all audits shall be at the Borrower's expense *. * , WITH REASONABLE COSTS AND EXPENSES TO BE CHARGED TO THE BORROWER IN CONNECTION THEREWITH 4.6 NEGATIVE COVENANTS. Except as may be permitted in the Schedule hereto, the Borrower shall not, without Silicon's prior written consent, do any of the following: (i) merge or consolidate with another corporation, except that the Borrower may merge or consolidate with another corporation if the Borrower is the surviving corporation in the merger and the aggregate value of the assets acquired in the merger do not exceed 25% of Borrower's Tangible Net Worth (as defined in the Schedule) as of the end of the month prior to the effective date of the merger, and the assets of the corporation acquired in the merger are not subject to any liens or encumbrances, except Permitted Liens; (ii) acquire any assets outside the ordinary course of business for an aggregate purchase price exceeding 25% of Borrower's Tangible Net Worth (as defined in the Schedule) as of the end of the month prior to the effective date of the acquisition; (iii) enter into any other transaction outside the ordinary course of business (except as permitted by the other provisions of this Section); (iv) sell or transfer any Collateral, [except for the sale of finished inventory in the ordinary course of the Borrower's business,] and except for the sale of obsolete or unneeded equipment in the ordinary course of business*; (v) make any loans of any money or any other assets **; (vi) incur any debts, outside the ordinary course of business, which would have a material, adverse effect on the Borrower or on the prospect of repayment of the Obligations; (vii) guarantee or otherwise become liable with respect to the obligations of another party or entity; (viii) pay or declare any dividends on the Borrower's stock (except for dividends payable solely in stock of the Borrower); (ix) redeem, retire, purchase or otherwise acquire, directly or indirectly, any of the Borrower's stock; (x) make any change in the Borrower's capital structure which has a material adverse effect on the Borrower or on the prospect of repayment of the Obligations; or (xi) dissolve or elect to dissolve ***. Transactions permitted by the foregoing provisions of this Section are only permitted if no Event of Default and no event which (with notice or passage of time or both) would constitute an Event of Default would occur as a result of such transaction. * (OTHER THAN EQUIPMENT SPECIFICALLY FINANCED BY SILICON) ** EXCEPT AS PERMITTED IN THE SCHEDULE HERETO *** PROVIDED THAT NOTHING IN THIS SECTION SHALL PREVENT BORROWER FROM EFFECTING A PUBLIC OFFERING OF BORROWER'S STOCK 4.7 LITIGATION COOPERATION. Should any third-party suit or proceeding be instituted by or against Silicon with respect to any Collateral or in any manner relating to the Borrower, the Borrower shall, without expense to Silicon, make available the Borrower and its officers, employees and agents and the Borrower's books and records to the extent that Silicon may deem them reasonably necessary in order to prosecute or defend any such suit or proceeding. [4.8 VERIFICATION. Silicon may, from time to time, following prior notification to Borrower, verify directly with the respective account debtors the validity, amount and other matters relating to the Borrower's accounts, by means of mail, telephone or otherwise, either in the name of the Borrower or Silicon or such other name as Silicon may reasonably choose, provided that no prior notification to Borrower shall be required following an Event of Default.] 4.9 EXECUTE ADDITIONAL DOCUMENTATION. The Borrower agrees, at its expense, on request by Silicon, to execute all documents in form satisfactory to Silicon, as Silicon, may deem reasonably necessary or useful in order to perfect and maintain Silicon's perfected security interest in the Collateral, and in order to fully consummate all of the transactions contemplated by this Agreement. 5. TERM. 5.1 MATURITY DATE. This Agreement shall continue in effect until the maturity date set forth on the Schedule hereto (the "Maturity Date"). -4- 5 5.2 EARLY TERMINATION. This Agreement may be terminated prior to the Maturity Date as follows: (i) by the Borrower, effective three business days after written notice of termination is given to Silicon; or (ii) by Silicon at any time after the occurrence of an Event of Default, without notice, effective immediately. 5.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier effective date of termination, the Borrower shall pay and perform in full all Obligations, whether evidenced by installment notes or otherwise, and whether or not all or any part of such Obligations are otherwise then due and payable. [Without limiting the generality of the foregoing, if on the Maturity Date, or on any earlier effective date of termination, there are any outstanding letters of credit issued by Silicon or issued by another institution based upon an application, guarantee, indemnity or similar agreement on the part of Silicon, then on such date Borrower shall provide to Silicon cash collateral in an amount equal to the face amount of all such letters of credit plus all interest, fees and cost due or to become due in connection therewith, to secure all of the Obligations relating to said letters of credit, pursuant to Silicon's then standard form cash pledge agreement.] Notwithstanding any termination of this Agreement, all of Silicon's security interests in all of the Collateral and all of the terms and provisions of this Agreement shall continue in full force and effect until all Obligations have been paid and performed in full; provided that, without limiting the fact that Loans are subject to the reasonable discretion of Silicon, Silicon may, in its sole discretion, refuse to make any further Loans after termination. No termination shall in any way affect or impair any right or remedy of Silicon, nor shall any such termination relieve the Borrower of any Obligation to Silicon, until all of the Obligations have been paid and performed in full. Upon payment and performance in full of all the Obligations, Silicon shall promptly deliver to the Borrower termination statements, requests for reconveyances and such other documents as may be required to fully terminate any of Silicon's security interests. 6. EVENTS OF DEFAULT AND REMEDIES. 6.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an "Event of Default" under this Agreement, and the Borrower shall give Silicon immediate written notice thereof: (a) Any warranty, representation, statement, report or certificate made or delivered to Silicon by the Borrower or any of the Borrower's officers, employees or agents, now or in the future, shall be untrue or misleading in any material respect; or (b) the Borrower shall fail to pay when due any Loan or any interest thereon or any other monetary Obligation; or (c) the total Loans and other Obligations outstanding at any time exceed the Credit Limit; or (d) the Borrower shall fail to comply with any of the financial covenants set forth in the Schedule or shall fail to perform any other non-monetary Obligation which by its nature cannot be cured; or (e) the Borrower shall fail to pay or perform any other non-monetary Obligation, which failure is not cured within 5 business days after the date due; or (f) Any levy, assessment, attachment, seizure, lien or encumbrance is made on all or any part of the Collateral which is not cured within [10]* days after the occurrence of the same; or (g) Dissolution, termination of existence, insolvency or business failure of the Borrower; or appointment of a receiver, trustee or custodian, for all or any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding by the Borrower under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect; or (h) the commencement of any proceeding against the Borrower or any guarantor of any of the Obligations under any reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in effect, which is not cured by the dismissal thereof within 30 days after the date commenced; (i) revocation or termination of, or limitation or denial of liability upon, any guaranty of the Obligations or any attempt to do any of the foregoing; or commencement of proceedings by any guarantor of any of the Obligations under any bankruptcy or insolvency law; or (j) revocation or termination of, or limitation or denial of liability upon, any pledge of any certificate of deposit, securities or other property or asset of any kind pledged by any third party to secure any or all of the Obligations, or any attempt to do any of the foregoing; or commencement of proceedings by or against any such third party under any bankruptcy or insolvency law; or (k) the Borrower makes any payment on account of any indebtedness or obligation which has been subordinated to the Obligations other than as permitted in the applicable subordination agreement or if any person who has subordinated such indebtedness or obligations terminates or in any way limits his subordination agreement; or (l) there shall be a change in the record or beneficial ownership of an aggregate of more than [20%]** of the outstanding shares of stock of the Borrower, in one or more transactions, compared to the ownership of outstanding shares of stock of the Borrower in effect on the date hereof, without the prior written consent of Silicon; or (m) the Borrower shall generally not pay its debts as they become due; or the Borrower shall conceal, remove or transfer any part of its property, with intent to hinder, delay or defraud its creditors, or make or suffer any transfer of any of its property which may be fraudulent under any bankruptcy, fraudulent conveyance or similar law***. Silicon may cease making any Loans hereunder during any of the above cure periods, and thereafter if an Event of Default has occurred. *20 **49% ***OR (N) BORROWER RECEIVES A NON-APPROVABLE LETTER FROM THE FOOD AND DRUG ADMINISTRATION REGARDING DEPOCYT AND SUCH LETTER CONTAINS CORRECTIVE ACTIONS NOT CAPABLE OF BEING CURED WITHIN ONE YEAR AFTER THE DATE OF SUCH LETTER 6.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time thereafter, Silicon, at its option, -5- 6 and without notice or demand of any kind (all of which are hereby expressly waived by the Borrower), may do any one or more of the following: (a) Cease making Loans or otherwise extending credit to the Borrower under this Agreement or any other document or agreement; (b) Accelerate and declare all or any part of the Obligations to be immediately due, payable, and performable, notwithstanding any deferred or installment payments allowed by any instrument evidencing or relating to any Obligation; (c) Take possession of any or all of the Collateral wherever it may be found, and for that purpose the Borrower hereby authorizes Silicon without judicial process to enter onto any of the Borrower's premises without interference to search for, take possession of, keep, store, or remove any of the Collateral, and remain on the premises or cause a custodian to remain on the premises in exclusive control thereof without charge for so long as Silicon deems it reasonably necessary in order to complete the enforcement of its rights under this Agreement or any other agreement; provided, however, that should Silicon seek to take possession of any or all of the Collateral by Court process, the Borrower hereby irrevocably waives: (i) any bond and any surety or security relating thereto required by any statute, court rule or otherwise as an incident to such possession; (ii) any demand for possession prior to the commencement of any suit or action to recover possession thereof; and (iii) any requirement that Silicon retain possession of and not dispose of any such Collateral until after trial or final judgment; (d) Require the Borrower to assemble any or all of the Collateral and make it available to Silicon at places designated by Silicon which are reasonably convenient to Silicon and the Borrower, and to remove the Collateral to such locations as Silicon may deem advisable; (e) [Require Borrower to deliver to Silicon, in kind, all checks and other payments received with respect to all accounts and general intangibles, together with any necessary indorsements, within one day after the date received by the Borrower;] (f) Complete the processing, manufacturing or repair of any Collateral prior to a disposition thereof and, for such purpose and for the purpose of removal, Silicon shall have the right to use the Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other property without charge; (g) Sell, lease or otherwise dispose of any of the Collateral in its condition at the time Silicon obtains possession of it or after further manufacturing, processing or repair, at any one or more public and/or private sales, in lots or in bulk, for cash, exchange or other property, or on credit, and to adjourn any such sale from time to time without notice other than oral announcement at the time scheduled for sale. Silicon shall have the right to conduct such disposition on the Borrower's premises without charge, for such time or times as Silicon deems reasonable, or on Silicon's premises, or elsewhere and the Collateral need not be located at the place of disposition. Silicon may directly or through any affiliated company purchase or lease any Collateral at any such public disposition, and if permissible under applicable law, at any private disposition. Any sale or other disposition of Collateral shall not relieve the Borrower of any liability the Borrower may have if any Collateral is defective as to title or physical condition or otherwise at the time of sale; [(h) Demand payment of, and collect any accounts and general intangibles comprising Collateral and, in connection therewith, the Borrower irrevocably authorizes Silicon to endorse or sign the Borrower's name on all collections, receipts, instruments and other documents, to take possession of and open mail addressed to the Borrower and remove therefrom payments made with respect to any item of the Collateral or proceeds thereof, and, in Silicon's sole discretion, to grant extensions of time to pay, compromise claims and settle accounts and the like for less than face value]; (i) Offset against any sums in any of Borrower's general, special or other deposit accounts with Silicon; and [(j) Demand and receive possession of any of the Borrower's federal and state income tax returns and the books and records utilized in the preparation thereof or referring thereto]. All reasonable attorneys' fees, expenses, costs, liabilities and obligations incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. Without limiting any of Silicon's rights and remedies, from and [after]* the occurrence of any Event of Default, the interest rate applicable to the Obligations shall be increased by an additional four percent per annum. *DURING 6.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. The Borrower and Silicon agree that a sale or other disposition (collectively, "sale") of any Collateral which complies with the following standards will conclusively be deemed to be commercially reasonable: (i) Notice of the sale is given to the Borrower at least seven days prior to the sale, and, in the case of a public sale, notice of the sale is published at least seven days before the sale in a newspaper of general circulation in the county where the sale is to be conducted; (ii) Notice of the sale describes the collateral in general, non-specific terms; (iii) The sale is conducted at a place designated by Silicon, with or without the Collateral being present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash or by cashier's check or wire transfer is required; (vi) With respect to any sale of any of the Collateral, Silicon may (but is not obligated to) direct any prospective purchaser to ascertain directly from the Borrower any and all information concerning the same. Silicon may employ other methods of noticing and selling the Collateral, in its discretion, if they are commercially reasonable. 6.4 POWER OF ATTORNEY. Upon the occurrence of any Event of Default, without limiting Silicon's other rights and remedies, the Borrower grants to Silicon an irrevocable power of attorney coupled with an interest, authorizing and permitting Silicon (acting through any of its employees, attorneys or agents) at any time, at its option, but without obligation, with or without notice to the Borrower, and at the Borrower's expense, to do any or all of the following, in the Borrower's name or otherwise: (a) Execute on behalf of the Borrower any documents that -6- 7 Silicon may, in its sole and absolute discretion, deem advisable in order to perfect and maintain Silicon's security interest in the Collateral, or in order to exercise a right of the Borrower or Silicon, or in order to fully consummate all the transactions contemplated under this Agreement, and all other present and future agreements; (b) Execute on behalf of the Borrower any document exercising, transferring or assigning any option to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any real or personal property which is part of Silicon's Collateral or in which Silicon has an interest; [(c) Execute on behalf of the Borrower, any invoices relating to any account, any draft against any account debtor and any notice to any account debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other lien, or assignment or satisfaction of mechanic's, materialman's or other lien]; (d) Take control in any manner of any cash or non-cash items of payment or proceeds of Collateral; endorse the name of the Borrower upon any instruments, or documents, evidence of payment or Collateral that may come into Silicon's possession; (e) Endorse all checks and other forms of remittances received by Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security interest and adverse claim in or to any of the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; [(g) Grant extensions of time to pay, compromise claims and settle accounts and general intangibles for less than face value and execute all releases and other documents in connection therewith;] (h) Pay any sums required on account of the Borrower's taxes or to secure the release of any liens therefor, or both; (i) Settle and adjust, and give releases of, any insurance claim that relates to any of the Collateral and obtain payment therefor; (j) Instruct any third party having custody or control of any books or records belonging to, or relating to, the Borrower to give Silicon the same rights of access and other rights with respect thereto as Silicon has under this Agreement; and (k) Take any action or pay any sum required of the Borrower pursuant to this Agreement and any other present or future agreements. Silicon shall exercise the foregoing powers in a commercially reasonable manner. Any and all reasonable sums paid and any and all reasonable costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon with respect to the foregoing shall be added to and become part of the Obligations, shall be payable on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations. In no event shall Silicon's rights under the foregoing power of attorney or any of Silicon's other rights under this Agreement be deemed to indicate that Silicon is in control of the business, management or properties of the Borrower. 6.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any sale of the Collateral shall be applied by Silicon first to the costs, expenses, liabilities, obligations and attorneys' fees incurred by Silicon in the exercise of its rights under this Agreement, second to the interest due upon any of the Obligations, and third to the principal of the Obligations, in such order as Silicon shall determine in its sole discretion. Any surplus shall be paid to the Borrower or other persons legally entitled thereto; the Borrower shall remain liable to Silicon for any deficiency. If, Silicon, in its [sole]* discretion, directly or indirectly enters into a deferred payment or other credit transaction with any purchaser at any sale or other disposition of Collateral, Silicon shall have the option, exercisable at any time, in its [sole]* discretion, of either reducing the Obligations by the principal amount of purchase price or deferring the reduction of the Obligations until the actual receipt by Silicon of the cash therefor. *REASONABLE 6.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in this Agreement, Silicon shall have all the other rights and remedies accorded a secured party under the California Uniform Commercial Code and under all other applicable laws, and under any other instrument or agreement now or in the future entered into between Silicon and the Borrower, and all of such rights and remedies are cumulative and none is exclusive. Exercise or partial exercise by Silicon of one or more of its rights or remedies shall not be deemed an election, nor bar Silicon from subsequent exercise or partial exercise of any other rights or remedies. The failure or delay of Silicon to exercise any rights or remedies shall not operate as a waiver thereof, but all rights and remedies shall continue in full force and effect until all of the Obligations have been fully paid and performed. 7. GENERAL PROVISIONS. 7.1 NOTICES. All notices to be given under this Agreement shall be in writing and shall be given either personally or by regular first-class mail, or certified mail return receipt requested, addressed to Silicon or the Borrower at the addresses shown in the heading to this Agreement, or at any other address designated in writing by one party to the other party. All notices shall be deemed to have been given upon delivery in the case of notices personally delivered to the Borrower or to Silicon, or at the expiration of two business days following the deposit thereof in the United States mail, with postage prepaid. 7.2 SEVERABILITY. Should any provision of this Agreement be held by any court of competent jurisdiction to be void or unenforceable, such defect shall not affect the remainder of this Agreement, which shall continue in full force and effect. 7.3 INTEGRATION. This Agreement* and such other written agreements, documents and instruments as may be executed in connection herewith are the final, entire and complete agreement between the Borrower and Silicon and supersede all prior and contemporaneous negotiations and oral representations and agreements, all of which are merged and integrated in this Agreement. There are no oral understandings, representations or agreements between the parties which are not set forth in this Agreement or in other written agreements signed by the parties in connection herewith. -7- 8 *,THE DEPOTECH CORPORATION CONFIDENTIAL DISCLOSURE AGREEMENT DATED JUNE 10, 1996 BETWEEN SILICON AND BORROWER (THE "EXISTING CONFIDENTIALITY AGREEMENT") (SUBJECT TO THE RIGHT OF SILICON TO DISCLOSE CONFIDENTIAL INFORMATION IN ACCORDANCE WITH SECTION 4.5 HEREOF), 7.4 WAIVERS. The failure of Silicon at any time or times to require the Borrower to strictly comply with any of the provisions of this Agreement or any other present or future agreement between the Borrower and Silicon shall not waive or diminish any right of Silicon later to demand and receive strict compliance therewith. Any waiver of any default shall not waive or affect any other default, whether prior or subsequent thereto. None of the provisions of this Agreement or any other agreement now or in the future executed by the Borrower and delivered to Silicon shall be deemed to have been waived by any act or knowledge of Silicon or its agents or employees, but only by a specific written waiver signed by an officer of Silicon and delivered to the Borrower. The Borrower waives demand, protest, notice of protest and notice of default or dishonor, notice of payment and nonpayment, release, compromise, settlement, extension or renewal of any commercial paper, instrument, account, general intangible, document or guaranty at any time held by Silicon on which the Borrower is or may in any way be liable, and notice of any action taken by Silicon, unless expressly required by this Agreement. 7.5 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Silicon, nor any of its directors, officers, employees, agents, attorneys or any other person affiliated with or representing Silicon shall be liable for any claims, demands, losses or damages, of any kind whatsoever, made, claimed, incurred or suffered by the Borrower or any other party through the ordinary negligence of Silicon, or any of its directors, officers, employees, agents, attorneys or any other person affiliated with or representing Silicon. 7.6 AMENDMENT. The terms and provisions of this Agreement may not be waived or amended, except in a writing executed by the Borrower and a duly authorized officer of Silicon. 7.7 TIME OF ESSENCE. Time is of the essence in the performance by the Borrower of each and every obligation under this Agreement. 7.8 ATTORNEYS FEES AND COSTS. The Borrower shall reimburse Silicon for all reasonable attorneys' fees and all filing, recording, search, title insurance, appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to, or in connection with, or relating to this Agreement (whether or not a lawsuit is filed), including, but not limited to, any reasonable attorneys' fees and costs Silicon incurs in order to do the following: prepare and negotiate this Agreement and the documents relating to this Agreement; obtain legal advice in connection with this Agreement; enforce, or seek to enforce, any of its rights; prosecute actions against, or defend actions by, account debtors; commence, intervene in, or defend any action or proceeding; initiate any complaint to be relieved of the automatic stay in bankruptcy; file or prosecute any probate claim, bankruptcy claim, third-party claim, or other claim; examine, audit, copy, and inspect any of the Collateral or any of the Borrower's books and records; protect, obtain possession of, lease, dispose of, or otherwise enforce Silicon's security interest in, the Collateral; and otherwise represent Silicon in any litigation relating to the Borrower. In satisfying Borrower's obligation hereunder to reimburse Silicon for attorneys fees, Borrower may, for convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas, but Borrower acknowledges and agrees that Levy, Small & Lallas is representing only Silicon and not Borrower in connection with this Agreement. If either Silicon or the Borrower files any lawsuit against the other predicated on a breach of this Agreement, the prevailing party in such action shall be entitled to recover its reasonable costs and attorneys' fees, including (but not limited to) reasonable attorneys' fees and costs incurred in the enforcement of, execution upon or defense of any order, decree, award or judgment. All attorneys' fees and costs to which Silicon may be entitled pursuant to this Paragraph shall immediately become part of the Borrower's Obligations, shall be due on demand, and shall bear interest at a rate equal to the highest interest rate applicable to any of the Obligations*. *PROVIDED THAT THE BORROWER SHALL NOT BE DEEMED TO HAVE EXCEEDED THE CREDIT LIMIT HEREUNDER SOLELY BY VIRTUE OF THE ADDITION OF THE AMOUNT OF SUCH ATTORNEYS' FEES AND COSTS TO THE OBLIGATIONS IF BORROWER OTHERWISE WOULD NOT HAVE EXCEEDED THE CREDIT LIMIT HAD THE AMOUNT OF SUCH ATTORNEYS' FEES AND COSTS NOT BEEN ADDED TO THE OBLIGATIONS 7.9 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective successors, assigns, heirs, beneficiaries and representatives of the parties hereto; provided, however, that the Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Silicon, and any prohibited assignment shall be void. No consent by Silicon to any assignment shall release the Borrower from its liability for the Obligations. 7.10 JOINT AND SEVERAL LIABILITY. If the Borrower consists of more than one person, their liability shall be joint and several, and the compromise of any claim with, or the release of, any Borrower shall not constitute a compromise with, or a release of, any other Borrower. -8- 9 7.11 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in this Agreement for convenience. The Borrower acknowledges that the headings may not describe completely the subject matter of the applicable paragraph, and the headings shall not be used in any manner to construe, limit, define or interpret any term or provision of this Agreement. This Agreement has been fully reviewed and negotiated between the parties and no uncertainty or ambiguity in any term or provision of this Agreement shall be construed strictly against Silicon or the Borrower under any rule of construction or otherwise. 7.12 MUTUAL WAIVER OF JURY TRIAL. THE BORROWER AND SILICON EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN SILICON AND THE BORROWER, OR ANY CONDUCT, ACTS OR OMISSIONS OF SILICON OR THE BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR THE BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. 7.13 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and transactions hereunder and all rights and obligations of Silicon and the Borrower shall be governed by, and in accordance with, the laws of the State of California. Any undefined term used in this Agreement that is defined in the California Uniform Commercial Code shall have the meaning assigned to that term in the California Uniform Commercial Code. As a material part of the consideration to Silicon to enter into this Agreement, the Borrower (i) agrees that all actions and proceedings relating directly or indirectly hereto shall, at Silicon's option, be litigated in courts located within California, and that the exclusive venue therefor shall be San Diego County; (ii) consents to the jurisdiction and venue of any such court and consents to service of process in any such action or proceeding by personal delivery or any other method permitted by law; and (iii) waives any and all rights the Borrower may have to object to the jurisdiction of any such court, or to transfer or change the venue of any such action or proceeding. BORROWER: DEPOTECH CORPORATION BY /s/ Edward L. Erickson _______________________________ PRESIDENT OR VICE PRESIDENT BY /s/ Faye H. Russell _______________________________ SECRETARY OR ASS'T SECRETARY SILICON: SILICON VALLEY BANK BY /s/ RITA PERKL _______________________________ TITLE Senior Vice President ____________________________ 44,531-2 -9- 10 SILICON VALLEY BANK SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: DEPOTECH CORPORATION ADDRESS: 10450 SCIENCE CENTER DRIVE SAN DIEGO, CALIFORNIA 92121 DATE: JUNE 18, 1996 THIS SCHEDULE is an integral part of the Loan and Security Agreement between Silicon Valley Bank ("Silicon") and the above-named borrower ("Borrower") of even date. CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of (a) $9,000,000 at any one time outstanding, or (b) 100% of the net purchase price of new equipment purchased by Borrower (the "Financed Equipment") during the Purchase Period (as defined below, which is general purpose, scientific, laboratory, manufacturing and test equipment and associated software components, or office furniture and equipment, and which is acceptable to Silicon in its discretion. The net purchase price of Financed Equipmentmeans the purchase price thereof, as shown on the applicable invoice, net of all charges for taxes, freight, delivery, insurance, set-up, training, manuals, fees, service charges and other similar items. The "Purchase Period" is the period from 30 days prior to the date of this Agreement through June 30, 1997. DISBURSEMENT AND LOAN REPAYMENT (Section 1.1): Loans shall be made only during the following two disbursement periods (the "Disbursement Periods"): The date hereof to and including December 31, 1996 (the "First Disbursement Period"); and January 1, 1997 to and including June 30, 1997 (the "Second Disbursement Period"). There shall be no more than one disbursement in any one calendar month. Requests for disbursement shall be in writing and shall be accompanied by the following: (1) A list of the Financed Equipment being purchased. -1- 11 (2) For each piece of Financed Equipment being purchased, the name and address of the vendor, the invoice number, the serial number of the equipment, the total purchase price, and the net purchase price (as defined above); and (3) A copy of the invoice relating to the Financed Equipment. Silicon will prepare a UCC-1 Financing Statement incorporating the list of the Financed Equipment and will send the completed UCC-1 to Borrower for signature. Borrower, in turn, agrees to return forthwith the signed UCC-1 to Silicon for filing with the appropriate governmental office. Loans shall be repaid as follows: For each Disbursement Period, Borrower shall at the time of the making of the first Loan in each Period notify Silicon in writing whether it elects to begin amortizing the Loans made in each Period in the month immediately following the making of each Loan ("Immediate Amortization") or to begin amortization of all Loans made in each Disbursement Period at the end of such Disbursement Period ("Delayed Amortization"). Once Borrower has elected Immediate Amortization or Delayed Amortization, Borrower may not change its election for such Disbursement Period. If Borrower fails to notify Silicon in writing of whether it has elected Immediate Amortization or Delayed Amortization at the time of the making of the first Loan for each Disbursement Period, then the Immediate Amortization method shall be presumed for all Loans made in such Disbursement Period. If Immediate Amortization applies to a Disbursement Period, each Loan made during such Period shall be repaid as follows: (i) if the "Fixed Rate" is selected (as provided below), then principal and interest shall be paid in 48 equal monthly installments of principal and interest, commencing on first day of the month following the making of such Loan and continuing on the first day of each of the succeeding 47 months, until such Loan and related interest are paid in full; (ii) if the "Floating Rate" is selected (as provided below), then the principal amount of such Loan shall be paid in 48 equal monthly installments of principal, commencing on first day of the month following the making of such Loan and continuing on the first day of each of the succeeding 47 months, until paid in full, and accrued interest shall be paid monthly on the first day of each month. If Delayed Amortization applies to a Disbursement Period, the aggregate amount of the Loans made during each Disbursement Period and outstanding on the last day of such Disbursement Period shall be repaid as follows: (i) if the "Fixed Rate" is selected (as provided below), then the principal and interest relating to the aggregate amount of all such Loans shall be paid in 48 equal monthly installments of principal and interest, commencing on January 1, 1997, with respect to the First Disbursement Period, and July 1, 1997, with respect to the Second Disbursement Period, and continuing on the first day of each succeeding month, until the aggregate amount of such -2- 12 Loans and related interest are paid in full; (ii) if the "Floating Rate" is selected (as provided below), then the aggregate principal amount of such Loans shall be paid in 48 equal monthly installments of principal, commencing on January 1, 1997, with respect to the First Disbursement Period, and July 1, 1997, with respect to the Second Disbursement Period, and continuing on the first day of each of the succeeding 47 months, until paid in full, and accrued interest shall be paid monthly on the first day of each month. Notwithstanding the foregoing, all outstanding Loans and all other outstanding Obligations shall be due and payable on the Maturity Date. INTEREST RATE (Section 1.2): If Immediate Amortization applies to a Disbursement Period, the interest rate applicable to the Loans for such Disbursement Period is determined as follows: Borrower shall elect, by written notice to Silicon delivered on or before the making of the first Loan in the First Disbursement Period and on or before the making of the first Loan in the Second Disbursement Period, whether Loans disbursed during such periods will bear interest at the Floating Rate or the Fixed Rate, and such election shall remain in effect for all Loans made during such Disbursement Period until they are repaid in full. In the event Borrower fails to give written notice to Silicon of whether Borrower elects the Floating Rate or the Fixed Rate by said date, the interest rate in effect shall be the Floating Rate. Borrower understands that if it elects the Fixed Rate option, the Fixed Rate for each Loan will be based on the Fixed Rate as in effect on the date of the making of such Loan. If Delayed Amortization applies to a Disbursement Period, Loans relating to such Disbursement Period shall bear interest at the "Floating Rate" (as defined below) during such Disbursement Period. On and after the end of such Disbursement Period, the interest rate applicable to such Loans shall be determined as follows: Borrower shall elect, by written notice to Silicon delivered on or before the last day of the First Disbursement Period and on or before the last day of the Second Disbursement Period, whether Loans disbursed during such periods will bear interest at the Floating Rate or the Fixed Rate, and such election shall remain in effect for such Loans until they are repaid in full. In the event Borrower fails to give written notice to Silicon of whether Borrower elects the Floating Rate or the Fixed Rate by said date, the interest rate in effect shall be the Floating Rate. As used herein, "Floating Rate" shall mean: A rate equal to the "Prime Rate" in effect from time to time plus 0.50% per annum. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. As used herein, "Fixed Rate" shall mean: A rate equal to the "Treasury Rate" plus 4% per annum "Treasury Rate" shall mean the most recent four-year U.S. Treasury Note rate, at the date the Fixed Rate is to go into effect, published in the most current edition of the -3- 13 Federal Reserve Statistical Release H.15 (519), provided that if, for any reason, such information is not available, Silicon may base the Treasury Rate on quotations (with whatever adjustments or averaging it may deem necessary) of the most recent four-year Treasury Note rate received by Silicon from one or more leading primary U.S. government securities dealers selected by Silicon. In either case, interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. LOAN ORIGINATION FEE (Section 1.3): $45,000. (The $25,000 previously paid by Borrower shall be applied to this fee.) MATURITY DATE (Section 5.1): JUNE 30, 2001 PREPAYMENT FEE (Section 5.2): In the event this Agreement is terminated prior to the Maturity Date, while the Fixed Rate is in effect as to any portion of the outstanding Loans, Borrower agrees to pay Silicon a termination fee in an amount equal to the following percentage of the principal amount of the Loans which are prepaid prior to the Maturity Date:
Date of Prepayment Percentage of Amount Prepaid ------------------ ---------------------------- Date hereof to and including December 31, 1997 3% January 1, 1998 to and including December 31, 1998 2% January 1, 1999 to and including December 31, 1999 1% January 1, 2000 and thereafter 0%
PRIOR NAMES OF BORROWER (Section 3.2): NONE TRADE NAMES OF BORROWER (Section 3.2): NONE OTHER LOCATIONS AND ADDRESSES (Section 3.3): 11011 North Torrey Pines Road, La Jolla, 7396 Trade Street, San Diego, CA; and 11025 North Torrey Pines Road, Suite 100, La Jolla, CA 92037 MATERIAL ADVERSE LITIGATION (Section 3.10): NONE NEGATIVE COVENANTS-EXCEPTIONS (Section 4.6): Without Silicon's prior written consent, Borrower may do the following, provided that, after giving effect thereto, no Event of Default has occurred and no event has occurred which, with notice or -4- 14 passage of time or both, would constitute an Event of Default, and provided that the following are done in compliance with all applicable laws, rules and regulations: (i) repurchase shares of Borrower's stock pursuant to any employee stock purchase or benefit plan, provided that the total amount paid by Borrower for such stock does not exceed $500,000 in any fiscal year; (ii) make employee loans strictly for relocation purposes provided that the aggregate amount of such loans does not exceed $500,000 outstanding at any time; and (iii) enter into joint venture transactions with other entities relating to the development of products which may involve the issuance of shares of stock of Borrower to such other entity (subject to Section 6.1(l) hereof), provided that such transactions do not materially adversely affect the Borrower, provided, further, that Borrower does not merge or combine with such other entity as part of such transaction, and provided, further, that Borrower gives prior written notice to Silicon of such transactions together with delivering to Silicon such documentation relating thereto as Silicon may reasonably request. FINANCIAL COVENANT (Section 4.1): Borrower shall comply with the following covenant. Compliance shall be determined as of the end of each month. MINIMUM CASH Borrower shall maintain "Cash" (as defined below) in an amount not less than 167% multiplied by the following amounts during the following periods:
Period Amount ------ ------ Date hereof through and including June 30, 1997: $9,000,000 From and after July 1, 1997: An amount equal to the unpaid principal balance of the Loans
For purposes of the foregoing, "Cash" means cash on hand or on deposit in banks, readily marketable securities issued by the United States, readily marketable commercial paper rated "A-1" by Standard & Poor's Corporation (or a similar rating by a similar rating organization), certificates of deposit and banker's acceptances less restricted cash, as such term is reflected on Borrower's audited financial statements, including, without limitation, the amount of restricted cash relating to Borrower's lease obligations. MATURITY DATE (Section 5.1): JUNE 30, 2001 OTHER COVENANTS (Section 4.1): Borrower shall at all times comply with all of the following additional covenants: 1. BANKING RELATIONSHIP. At such time that DepoTech Advanced Technology is established as a separate legal entity, Borrower shall cause DepoTech Advanced Technology to open future bank accounts and maintain its bank accounts and primary banking relationship with Silicon. -5- 15 2. PROVIDING SEC FILINGS/INFORMATION TO SILICON. Without limitation of the other terms and conditions hereof, Borrower agrees to provide Silicon with copies of all reports and filings made with the Securities and Exchange Commission, if any, within 5 days after the date such filings are made or are otherwise due. 3. INTELLECTUAL PROPERTY. Borrower covenants that all of Borrower's present and future patents, patent applications, copyrights, trade secrets, drawings, blueprints, processes, proprietary information, license rights and all other intellectual property now is and will at all times during the term hereof remain free and clear of any and all liens, charges, security interests, encumbrances, licenses, and adverse claims, voluntary and involuntary, and that Borrower will not transfer or permit the transfer of any of the foregoing or any interest therein, except for the following: (i) rights under the Assignment Agreement dated February 9, 1994 between Research Development Foundation and Borrower and under the Collaboration Agreement dated March 30, 1994 between Chiron Corporation and Borrower; (ii) licenses in the ordinary course of business for research, development, manufacturing and distribution. BORROWER: DEPOTECH CORPORATION BY /s/ Edward L. Erickson ------------------------------- PRESIDENT OR VICE PRESIDENT BY /s/ Faye H. Russell -------------------------------- SECRETARY OR ASS'T SECRETARY SILICON: SILICON VALLEY BANK BY /s/ Rita Perkl ------------------------------- TITLE Senior Vice President --------------------------- -6- EX-11.1 6 COMPUTATION OF NET INCOME (LOSS) PER SHARE. 1 EXHIBIT 11.1 DEPOTECH CORPORATION COMPUTATION OF NET INCOME (LOSS) PER SHARE
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------ 1993 1994 1995 1995 1996 ----------- ----------- ----------- ---------- ----------- (UNAUDITED) Net income (loss)....................... $(3,896,906) $(8,561,487) $(8,020,547) $1,434,478 $(2,490,235) =========== =========== =========== =========== ============ Calculation of shares outstanding for computing net income (loss) per share: Weighted average common shares outstanding used in calculating net income (loss) per share in accordance with generally accepted accounting principles.............. 1,308,562 1,422,478 4,005,468 1,531,262 11,320,501 Common stock equivalents.............. -- -- -- 775,716 -- Adjustments to reflect requirements of the SEC: Effects of SAB 83..................... 332,175 332,175 224,839 303,094 -- Conversion of preferred stock -- weighted average shares... 3,348,595 5,018,525 4,487,243 5,982,991 -- ----------- ----------- ----------- ----------- ------------ Shares used in computing net income (loss) per share...................... 4,989,332 6,773,178 8,717,550 8,593,063 11,320,501 =========== =========== =========== =========== ============ Net income (loss) per share............. $ (0.78) $ (1.26) $ (0.92) $ 0.17 $ (0.22) =========== =========== =========== =========== ============
EX-14.1 7 LIST OF MATERIAL FOREIGN PATENTS. 1 EXHIBIT 14.1 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
========================================================================================================================= Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Staffing Filing Date Issue Date ========================================================================================================================= 002001 M. Sankaram et al. ABANDONED 08/153,657 SYNTHETIC MEMBRANE VESICLES WITH PD-3177 JRW.JRW.JXL 11/16/93 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002AU1 Depotech Corporation PENDING 10535/95 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002BG1 Depotech Corporation PENDING 100596 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002BR1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002CA1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002CN1 Depotech Corporation UNFILED SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002EP1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002FI1 Depotech Corporation PENDING 962048 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE - -------------------------------------------------------------------------------------------------------------------------
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========================================================================================================================= Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Staffing Filing Date Issue Date ========================================================================================================================= - ------------------------------------------------------------------------------------------------------------------------- SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002HU1 Depotech Corporation PENDING P9601316 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002IL1 Depotech Corporation PENDING 111628 SYNTHETIC MEMBRANE VESICLES WITH FD-3177 ISRAEL JRW.JRW.JXL 11/14/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002JP1 Depotech Corporation PENDING 07-514500 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002KR1 Depotech Corporation PENDING 702583/96 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002MX1 Depotech Corporation PENDING 948858 SYNTHETIC MEMBRANE VESICLES WITH FD-3177 MEXICO JRW.JRW.JXL 11/15/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002NO1 Depotech Corporation PENDING 962024 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002NZ1 Depotech Corporation PENDING 276305 SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002PL1 Depotech Corporation PENDING SYNTHETIC MEMBRANE VESICLES WITH - -------------------------------------------------------------------------------------------------------------------------
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========================================================================================================================= Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Staffing Filing Date Issue Date ========================================================================================================================= OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002RO1 Depotech Corporation UNFILED SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002RU1 Depotech Corporation UNFILED SYNTHETIC MEMBRANE VESICLES WITH OTHER ACIDS JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002WO1 Depotech Corporation NAT'L PHASE US94/12957 SYNTHETIC MEMBRANE VESICLES WITH FD-3177 PCT JRW.JRW.JXL 11/10/94 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 002ZA1 Depotech Corporation PENDING 94/9063 94/9063 SYNTHETIC MEMBRANE VESICLES WITH FD-3177 S. AFRICA JRW.JRW.JXL 11/15/94 11/29/95 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------- 008001 Sinil Kim et al. ISSUED 08/062,799 5,455,044 METHOD FOR TREATING NEUROLOGICAL PD-2764 JRW.JRW.JXL 05/14/93 10/03/95 DISORDERS - ------------------------------------------------------------------------------------------------------------------------- 008002 Sinil Kim et al. ALLOWED 08/484,501 METHOD FOR TREATING NEUROLOGICAL NEUROLOGICAL DISORDERS JRW.JRW.JXL 06/07/95 DISORDERS - ------------------------------------------------------------------------------------------------------------------------- 008CA1 DepoTech Corporation PENDING 2162854 METHOD FOR TREATING NEUROLOGICAL PD-2764 CANADA JRW.JRW.JXL 05/14/93 DISORDERS - ------------------------------------------------------------------------------------------------------------------------- 008JP1 DepoTech Corporation PENDING 6-525365 METHOD FOR TREATING NEUROLOGICAL PD-2764 JAPAN JRW.JRW.JXL 05/14/93 DISORDERS - ------------------------------------------------------------------------------------------------------------------------- 008WO1 Depotech Corporation NAT'L PHASE US93/04645 FD-2764 PCT JRW.JRW.LAH 05/14/93 - -------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 3 4 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
========================================================================================================================= Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Staffing Filing Date Issue Date ========================================================================================================================= 009001 Stephen B. Howell et al. ISSUED 07/514,665 5,173,219 UNIFORM SPHERICAL MULTILAMELLAR PD-3135 JRW.JRW.JRW 04/25/90 12/22/92 LIPOSOMES OF DEFINED AND ADJUSTABLE SIZE DISTRIBUTION - ------------------------------------------------------------------------------------------------------------------------- 010001 Stephen B. Howell et al. ABANDONED 07/151,553 MULTIVESICULAR LIPOSOMES HAVING A PD-3136 JRW.JRW.JXL 02/18/88 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010AT1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 AUSTRIA JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010AU1 Depotech Corporation ISSUED 12055/88 602190 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 AUSTRALIA JRW.JRW.JXL 02/23/88 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010BE1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 BELGIUM JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010CA1 Depotech Corporation ISSUED 559596 1323568 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 CANADA JRW.JRW.JXL 02/23/88 10/26/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010CH1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 SWITZERLAND JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010DE1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 GERMANY JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE - -------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 4 5 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
========================================================================================================================= Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Staffing Filing Date Issue Date ========================================================================================================================= - ------------------------------------------------------------------------------------------------------------------------- ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010DK1 Depotech Corporation PENDING 0939/88 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 DENMARK JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010EP1 Depotech Corporation GRANTED 88301512.5 280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 EPC JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010ES1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 SPAIN JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010FI1 Depotech Corporation ISSUED 880841 95439 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 FINLAND JRW.JRW.JXL 02/23/88 02/12/96 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010FR1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 FRANCE JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010GB1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 GREAT BRITAIN JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010GR1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 GREECE JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - -------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 5 6 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
========================================================================================================================= Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Staffing Filing Date Issue Date ========================================================================================================================= - ------------------------------------------------------------------------------------------------------------------------- 010IE1 Depotech Corporation ISSUED 486/88 62221 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 IRELAND JRW.JRW.JXL 02/23/88 01/11/95 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010IL1 Depotech Corporation ISSUED 85509 85509 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 ISRAEL JRW.JRW.JXL 02/23/88 06/30/92 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010IT1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 ITALY JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010JP1 Depotech Corporation PENDING 40522/1988 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 JAPAN JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010KR1 Depotech Corporation PENDING 88-1859 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 S. KOREA JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010LU1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 LUXEMBOURG JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010NL1 Depotech Corporation GRANTED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 NETHERLANDS JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010NO1 Depotech Corporation ISSUED 880768 174087 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 NORWAY JRW.JRW.JXL 02/22/88 03/16/94 BIOLOGICALLY ACTIVE SUBSTANCE - -------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 6 7 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
========================================================================================================================= Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Staffing Filing Date Issue Date ========================================================================================================================= - ------------------------------------------------------------------------------------------------------------------------- ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010NZ1 Depotech Corporation ISSUED 223599 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 NEW ZEALAND JRW.JRW.JXL 02/23/88 01/25/91 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010PT1 Depotech Corporation ISSUED 86805 86805 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 PORTUGAL JRW.JRW.JXL 02/23/88 11/13/91 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010SE1 Depotech Corporation ISSUED 88301512.5 0280503 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 SWEDEN JRW.JRW.JXL 02/23/88 04/07/93 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010TW1 Depotech Corporation ISSUED 77101015 39083 MULTIVESICULAR LIPOSOMES HAVING A FD-3136 TAIWAN JRW.JRW.JXL 02/23/88 05/01/90 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 010ZA1 Depotech Corporation ISSUED 88/1241 88/1241 MULTIVESICULAR LIPOSOMES HAVING A FD3136 SOUTH AFRICA JRW.JRW.JXL 02/23/88 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 011001 Stephen B. Howell et al. PENDING 07/563,365 MULTIVESICULAR LIPOSOMES HAVING A PD-3137 (CIP OF PD-3136) . .JXL 08/06/90 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------- 012001 Stephen B. Howell et al. ABANDONED 07/709,744 MULTIVESICULAR LIPOSOMES HAVING A PD-3138 . .JXL 06/03/91 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - -------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 7 8 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
==================================================================================================================================== Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Filing Date Issue Date ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ 013001 Stephen B. Howell et al. ABANDONED 08/352,342 MULTIVESICULAR LIPOSOMES HAVING A PD-3139 JRW.JRW.JXL 12/07/94 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------------------ 014001 Sinil Kim ABANDONED 07/196,590 HETEROVESICULAR LIPOSOMES PD-3140 . .JXL 05/20/88 - ------------------------------------------------------------------------------------------------------------------------------------ 015001 Sinil Kim ABANDONED 07/496,846 HETEROVESICULAR LIPOSOMES PD-3141 (CIP/PD3140) JRW.JXL.JXL 03/21/90 - ------------------------------------------------------------------------------------------------------------------------------------ 015AT1 DepoTech Corporation ISSUED E123412 0524968 HETEROVESICULAR LIPOSOMES FD-3141 AUSTRIA JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015AU1 DepoTech Corporation ISSUED 75806/91 655177 HETEROVESICULAR LIPOSOMES FD-3141 AUSTRALIA JRW.JXL.JXL 03/20/91 06/08/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015BE1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 BELGIUM JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015CA1 DepoTech Corporation PENDING 2078666 HETEROVESICULAR LIPOSOMES FD-3141 CANADA JRW.JXL.JXL 03/20/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015CH1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 SWITZERLAND JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015CN1 DepoTech Corporation PENDING 91102478.6 HETEROVESICULAR LIPOSOMES FD-3141 CHINA JRW.JXL.JXL 03/21/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015DE1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 GERMANY JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015DK1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 DENMARK JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015EP1 DepoTech Corporation GRANTED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 EPC JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015ES1 DepoTech Corporation ISSUED 91906733.0 2073164 T3 HETEROVESICULAR LIPOSOMES - ------------------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 8 9 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
==================================================================================================================================== Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Filing Date Issue Date ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ FD-3141 SPAIN JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015FI1 DepoTech Corporation PENDING 924193 HETEROVESICULAR LIPOSOMES FD-3141 FINLAND JRW.JXL.JXL 03/20/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015FR1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 FRANCE JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015GB1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 GREAT BRITIAN JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015GR1 DepoTech Corporation ISSUED 91906733.0 950401499 HETEROVESICULAR LIPOSOMES FD-3141 GREECE JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015IE1 DepoTech Corporation ISSUED 911/91 62772 HETEROVESICULAR LIPOSOMES FD-3141 IRELAND JRW.JXL.SRY 03/19/91 02/06/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015IL1 DepoTech Corporation ISSUED 97615 97615 HETEROVESICULAR LIPOSOMES FD-3141 ISRAEL JRW.JXL.JXL 03/20/91 10/01/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015IT1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 ITALY JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015JP1 DepoTech Corporation PENDING 507280/1991 HETEROVESICULAR LIPOSOMES FD-3141 JAPAN JRW.JXL.JXL 03/20/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015KR1 DepoTech Corporation PENDING 92-702302 HETEROVESICULAR LIPOSOMES FD-3141 S. KOREA JRW.JXL.JXL 03/20/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015KW1 DepoTech Corporation PENDING 12 PA/91 HETEROVESICULAR LIPOSOMES FD-3141 KUWAIT JRW.JXL.JXL 06/20/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015LU1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 LUXEMBOURG JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015NL1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 HOLLAND JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015NO1 DepoTech Corporation PENDING P923624 HETEROVESICULAR LIPOSOMES FD-3141 NORWAY JRW.JXL.JXL 03/20/91 - ------------------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 9 10 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
==================================================================================================================================== Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Filing Date Issue Date ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ 015NZ1 DepoTech Corporation ISSUED 237464 237464 HETEROVESICULAR LIPOSOMES FD-3141 NEW ZEALAND JRW.JXL.JXL 03/18/91 06/08/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015NZ2 DepoTech Corporation ISSUED 247547 247547 HETEROVESICULAR LIPOSOMES FD-3442 (Div/PD3141) NEW JRW.JXL.SRY 03/18/91 05/14/96 ZEALAND - ------------------------------------------------------------------------------------------------------------------------------------ 015PT1 DepoTech Corporation PENDING 97101 HETEROVESICULAR LIPOSOMES FD-3141 PORTUGAL JRW.JXL.JXL 03/21/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015RU1 DepoTech Corporation PENDING 5053129/081 HETEROVESICULAR LIPOSOMES FD-3141 RUSSIA JRW.JXL.JXL 03/20/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015SA1 DepoTech Corporation PENDING 93130496 HETEROVESICULAR LIPOSOMES FD-3141 SAUDI ARABIA JRW.JXL.JXL 04/27/93 - ------------------------------------------------------------------------------------------------------------------------------------ 015SE1 DepoTech Corporation ISSUED 91906733.0 0524968 HETEROVESICULAR LIPOSOMES FD-3141 SWEDEN JRW.JXL.JXL 03/20/91 06/07/95 - ------------------------------------------------------------------------------------------------------------------------------------ 015TW1 DepoTech Corporation PENDING 80102163 HETEROVESICULAR LIPOSOMES FD-3141 TAIWAN JRW.JXL.JXL 03/19/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015WO1 DepoTech Corporation NAT'L PHASE US91/01849 HETEROVESICULAR LIPOSOMES FD-3141 PCT JRW.JXL.JXL 03/20/91 - ------------------------------------------------------------------------------------------------------------------------------------ 015ZA1 DepoTech Corporation ISSUED 91/1974 91/1974 HETEROVESICULAR LIPOSOMES FD-3141 S. AFRICA JRW.JXL.JXL 03/18/91 09/28/94 - ------------------------------------------------------------------------------------------------------------------------------------ 016001 Sinil Kim ISSUED 08/078,701 5,422,120 HETEROVESICULAR LIPOSOMES CIP/PD3141 JRW.JRW.JXL 06/16/93 06/06/95 - ------------------------------------------------------------------------------------------------------------------------------------ 017001 Sinil Kim ABANDONED 08/051,135 CYCLODEXTRIN LIPOSOMES PD-3403 JRW.JRW.JXL 04/22/93 ENCAPSULATING PHARMACOLOGIC COMPOUNDS AND METHODS FOR THEIR USE - ------------------------------------------------------------------------------------------------------------------------------------ 017CA1 DepoTech Corporation PENDING 2161225 CYCLODEXTRIN LIPOSOMES CYCLODEXTRIN JRW.JRW.JXL 04/22/94 ENCAPSULATING PHARMACOLOGIC COMPOUNDS AND METHODS FOR THEIR USE - ------------------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 10 11 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
==================================================================================================================================== Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Filing Date Issue Date ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ 017EP1 DepoTech Corporation PENDING 94916558.3 CYCLODEXTRIN LIPOSOMES CYCLODEXTRIN JRW.JRW.SRY 04/22/94 ENCAPSULATING PHARMACOLOGIC COMPOUNDS AND METHODS FOR THEIR USE - ------------------------------------------------------------------------------------------------------------------------------------ 017JP1 DepoTech Corporation PENDING 6-523593 CYCLODEXTRIN LIPOSOMES CYCLODEXTRIN JRW.JRW.JXL 04/22/94 ENCAPSULATING PHARMACOLOGIC COMPOUNDS AND METHODS FOR THEIR USE - ------------------------------------------------------------------------------------------------------------------------------------ 017TW1 Depotech Corporation PENDING 82107009 CYCLODEXTRIN LIPOSOMES FD-3403 TAIWAN JRW.JRW.JXL 08/28/93 ENCAPSULATING PHARMACOLOGIC COMPOUNDS AND METHODS FOR THEIR USE - ------------------------------------------------------------------------------------------------------------------------------------ 017WO1 Depotech Corporation NAT'L PHASE US94/04490 CYCLODEXTRIN LIPOSOMES FD-3536 PCT (CIP/PD3403) JRW.JRW.JXL 04/22/94 ENCAPSULATING PHARMACOLOGIC COMPOUNDS AND METHODS FOR THEIR USE - ------------------------------------------------------------------------------------------------------------------------------------ 018001 Mantripragada B. Sankaram ABANDONED 08/227,776 PREPARATION OF MULTIVESICULAR PD-3481 JRW.JRW.JXL 04/13/94 LIPOSOMES FOR CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------------------ 019001 M. Sankaram et al. PENDING 08/305,158 PREPARATION OF MULTIVESICULAR PD-3636 JRW.JRW.JXL 09/13/94 LIPOSOMES FOR CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------------------ 019WO1 Depotech Corporation INT'L PHASE US95/11609 PREPARATION OF MULTIVESICULAR FD-3636 - PCT JRW.JRW.JXL 09/13/95 LIPOSOMES FOR CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------------------ 020001 Sinil Kim ALLOWED 08/393,724 HETEROVESICULAR LIPOSOMES PD-4140 (CIP/PD3142) JRW.JRW.JXL 02/23/95 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 11 12 DEPOTECH CORPORATION (07333) PATENTS AND APPLICATIONS
==================================================================================================================================== Matter Inventors Status Serial No. Patent No. Title of Application Number Matter Name Filing Date Issue Date ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ 021001 Sinil Kim PENDING 08/502,569 EPIDURAL ADMINISTRATION OF EPIDURAL . .JXL 07/14/95 THERAPEUTIC - ------------------------------------------------------------------------------------------------------------------------------------ 022001 Mantripragada Sankaram et PENDING 08/473,013 MULTIVESICULAR LIPOSOMES WITH ACIDS JRW.JRW.JXL 06/06/95 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------------------ 023001 Mantripragada Sankaram et PENDING 08/486,272 MULTIVESICULAR LIPOSOMES WITH ACIDS JRW.JRW.JXL 06/06/95 CONTROLLED RELEASE OF ENCAPSULATED BIOLOGICALLY ACTIVE SUBSTANCES - ------------------------------------------------------------------------------------------------------------------------------------ 024001 Sinil Kim et al. PENDING 08/473,019 MULTIVESICULAR LIPOSOMES HAVING A HYDROCHLORIDE JRW.JRW.JXL 06/06/95 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------------------ 025001 Sinil Kim et al. PENDING 08/472,126 MULTIVESICULAR LIPOSOMES HAVING A HYDROCHLORIDE JRW.JRW.JXL 06/06/95 BIOLOGICALLY ACTIVE SUBSTANCE ENCAPSULATED THEREIN IN THE PRESENCE OF A HYDROCHLORIDE - ------------------------------------------------------------------------------------------------------------------------------------ 027001 Sinil Kim PENDING 08/535,256 CYCLODEXTRIN LIPOSOMES CYCLODEXTRIN CIP JRW.JRW.JXL 10/23/95 ENCAPSULATING PHARMACOLOGIC COMPOUNDS AND METHODS FOR THEIR USE - ------------------------------------------------------------------------------------------------------------------------------------ 030001 UNFILED ENCAPSULATION EFFICIENCY IN JRW.JRW.JXL LIPOSOMES - ------------------------------------------------------------------------------------------------------------------------------------
Generated: July 8, 1996 Page: 12 EX-23.2 8 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Financial Data" and to the use of our report dated February 16, 1996, in the Registration Statement (Form S-1 No. 333- ) and related Prospectus of DepoTech Corporation for the registration of 2,000,000 shares of its common stock. ERNST & YOUNG LLP San Diego, California July 10, 1996 EX-23.3 9 CONSENT OF FISH & RICHARDSON, P.C. 1 EXHIBIT 23.3 CONSENT OF COUNSEL The undersigned hereby consents to the use of our name and the statement with respect to us that appears under the heading "Experts" in the Registration Statement. FISH & RICHARDSON P.C. BY: /s/ John Wetherell John Wetherell July 10, 1996 -----END PRIVACY-ENHANCED MESSAGE-----