-----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, ALR7uy0E3WN0IG2QBUmL06Bkxm7FiLAPZYwLZhedw+Vip5bQEI90yY7dqpWbiGRp pmtOUbavNVEv+dEfgccWoA== 0000936392-98-000842.txt : 19980518 0000936392-98-000842.hdr.sgml : 19980518 ACCESSION NUMBER: 0000936392-98-000842 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 10-Q SEC ACT: SEC FILE NUMBER: 033-85362 FILM NUMBER: 98625861 BUSINESS ADDRESS: STREET 1: 10450 SCIENCE CENTER DRIVE STREET 2: STE 100 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 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___ to ___. Commission file number 0-26862 DEPOTECH CORPORATION (Exact name of Registrant as specified in its charter) CALIFORNIA 33-0387911 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Identification No.) Organization) 10450 SCIENCE CENTER DRIVE SAN DIEGO, CALIFORNIA 92121 (Address of principal executive offices, zip code) (619) 625-2424 (Registrant's telephone number) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock: No par value, 14,521,542 shares as of April 30, 1998 2 DEPOTECH CORPORATION TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION Item 1 Financial Statements Condensed Balance Sheets as of March 31, 1998 (Unaudited) and December 31, 1997.......... 1 Condensed Statements of Operations for the Three Months ended March 31, 1998 and 1997 (Unaudited)....................... 2 Condensed Statements of Cash Flows for the Three Months ended March 31, 1998 and 1997 (Unaudited)....................... 3 Notes to Condensed Financial Statements................... 4 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 5 Item 3 Quantitative and Qualitative Disclosures About Market Risk...................................................... 21 PART II OTHER INFORMATION Item 1 Legal Proceedings........................................ 22 Item 6 Exhibits and Reports on Form 8-K......................... 22 Signatures....................................................... 23
3 DEPOTECH CORPORATION CONDENSED BALANCE SHEETS
MARCH 31, DECEMBER 31, 1998 1997 ------------- ------------- ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents $ 2,405,389 $ 6,194,153 Short-term investments 18,808,393 21,166,402 Accounts receivable from collaborations 1,474,496 1,361,837 Other current assets 1,180,586 1,141,210 ------------- ------------- Total current assets 23,868,864 29,863,602 Property and equipment, net 27,445,146 26,948,328 Deposits and other assets 921,983 857,756 ============= ============= Total assets $ 52,235,993 $ 57,669,686 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and other accrued liabilities $ 3,040,526 $ 3,250,460 Current portion of obligations under capital leases 2,003,689 2,037,416 Current portion of note payable 2,837,591 2,509,467 ------------- ------------- Total current liabilities 7,881,806 7,797,343 Obligations under capital leases, less current portion 1,592,382 2,089,931 Note payable, less current portion 7,116,265 6,901,982 Deferred rent 2,529,177 2,313,133 Other long-term liabilities 436,558 494,506 Shareholders' equity: Common stock, no par value; 30,000,000 shares authorized, 14,430,594 and 14,237,216 shares issued and outstanding at March 31, 1998 and December 31, 1997, respectively 102,372,226 101,970,346 Deferred compensation related to stock options, net (417,230) (109,472) Unrealized (loss) gain on short-term investments (14,733) 15,784 Accumulated deficit (69,260,458) (63,803,867) ------------- ------------- Total shareholders' equity 32,679,805 38,072,791 ------------- ------------- Total liabilities and shareholders' equity $ 52,235,993 $ 57,669,686 ============= =============
See accompanying notes to condensed financial statements. Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date, but does not include all of the disclosures required by generally accepted accounting principles. 1 4 DEPOTECH CORPORATION CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ------------------------------ 1998 1997 ------------ ------------ (UNAUDITED) Contract revenue $ 1,214,733 $ 1,171,810 ------------ ------------ Total revenue 1,214,733 1,171,810 Costs and expenses: Research and development 5,411,138 4,382,903 General and administrative 1,260,783 933,595 ------------ ------------ Total costs and expenses 6,671,921 5,316,498 ------------ ------------ Loss from operations (5,457,188) (4,144,688) Interest income 360,078 453,793 Interest expense (359,481) (219,949) ------------ ------------ Net loss $ (5,456,591) $ (3,910,844) ============ ============ Basic and diluted net loss per share $ (0.38) $ (0.30) ============ ============ Shares used in computing basic and diluted net loss per share 14,363,523 13,032,336 ============ ============
See accompanying notes to condensed financial statements. 2 5 DEPOTECH CORPORATION CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ------------------------------ 1998 1997 ------------ ------------ (Unaudited) OPERATING ACTIVITIES Net cash used by operating activities $ (5,056,189) $ (4,823,206) INVESTING ACTIVITIES Purchases of short-term investments (3,041,443) (22,093,588) Proceeds from sale of short-term investments 5,368,935 11,215,866 Purchases of property and equipment (1,114,831) (1,685,767) Restricted cash (25,847) (37,119) ------------ ------------ Net cash provided (used) by investing activities 1,186,814 (12,600,608) FINANCING ACTIVITIES Repayments on capital lease obligations (531,276) (499,791) Repayments on note payable (562,494) (137,706) Proceeds from note payable 1,104,901 1,575,604 Proceeds from issuance of common stock, net 69,480 19,096,268 ------------ ------------ Net cash provided by financing activities 80,611 20,034,375 ------------ ------------ Net (decrease) increase in cash and cash equivalents (3,788,764) 2,610,561 Cash and cash equivalents at beginning of period 6,194,153 1,966,626 ------------ ------------ Cash and cash equivalents at end of period 2,405,389 4,577,187 Short-term investments at end of period 18,808,393 27,031,227 ------------ ------------ Cash, cash equivalents and short-term investments at end of period $ 21,213,782 $ 31,608,414 ============ ============ SUPPLEMENTAL INFORMATION Interest paid $ 359,481 $ 219,949 ============ ============
See accompanying notes to condensed financial statements. 3 6 DEPOTECH CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation and Significant Accounting Policies The interim unaudited condensed financial statements contained herein have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These interim unaudited condensed financial statements should be read in conjunction with the Company's December 31, 1997 audited financial statements. In management's opinion, the unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Interim results are not necessarily indicative of results to be expected for the full year. Certain prior year amounts have been reclassified to conform with the current year presentation. 2. Net Loss Per Share Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"), which replaced the calculation of primary and fully diluted net loss per share with basic and diluted net loss per share. Basic net loss per share is calculated using the weighted-average number of common shares outstanding. 3. New Accounting Standards Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") and Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). Comprehensive loss is not materially different from the net loss disclosed on the statements of operations and the Company operates in one business segment. 4 7 4. 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 DepoCyt(TM) 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, or an aggregate consideration of $2.5 million, and a warrant to purchase 365,000 shares of Series C preferred stock at an exercise price of $6.25 per share for $1.0 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. In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe from Chiron for aggregate cash payments of up to $13.7 million. Chiron will retain exclusive marketing rights to DepoCyt in the United States. An initial $2.0 million cash payment was paid by DepoTech to Chiron and expensed in 1997. If, prior to December 31, 1998, the U.S. Food and Drug Administration ("FDA") issues a letter or other notification to DepoTech indicating that DepoCyt is approvable or approved, the remaining balance of $11.7 million shall be payable no later than December 31, 1998. If no FDA notification is received prior to December 31, 1998, the remaining amount shall be payable no later than six months from the earlier of U.S. or European Union regulatory notification that the application to market or sell DepoCyt is approvable or approved. If all applications for regulatory approval to sell DepoCyt in the U.S. and European Union are permanently withdrawn, DepoTech shall be relieved of any obligation to pay the remaining $11.7 million. Therefore, such amount will be recorded upon the receipt of the required notification. Reimbursable clinical and manufacturing scale up costs for DepoCyt incurred by the Company totaled $10.4 million through March 31, 1998 and $8.7 million through March 31, 1997. The Collaboration Agreement also provides for the joint development of DepoFoam formulations of certain compounds proprietary to Chiron ("Chiron Products"). The agreement provides that Chiron will pay the Company for its feasibility efforts. 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. Through April 1997, the Company had completed feasibility studies on four Chiron proprietary compounds. No further feasibility studies on Chiron Products will be performed under the Collaboration Agreement. Both the Company and Chiron have the ability to terminate a portion or all of the collaboration at certain intervals and with advance notice. 5. Pharmacia & Upjohn Agreement In July 1997, DepoTech entered into a Marketing and Distribution Agreement with Pharmacia & Upjohn S.p.A ("P&U"), an affiliate of Pharmacia & Upjohn Inc., for rights to market and sell DepoCyt in countries outside the United States. P&U will generally be 5 8 responsible for submitting regulatory filings, labeling, packaging, distribution, marketing and sales of DepoCyt in this territory. The Company will manufacture DepoCyt and receive a share of the net sales of DepoCyt sold by P&U. The Company received a cash payment of $2.0 million upon execution of the agreement and may receive additional payments of up to $17.0 million upon achievement of certain regulatory milestones. The agreement also provides for reimbursement by P&U of certain clinical trial expenses and regulatory fees incurred by the Company. Cumulative reimbursable costs incurred by the Company under this agreement totaled $1.6 million as of March 31, 1998. Both the Company and P&U have the ability to terminate a portion or all of the collaboration at certain intervals and with advance notice. 6. Contingencies In April 1998, a class action suit was filed against the Company and two of its former officers in the United States District Court for the Southern District of California. The lawsuit alleges violations of the federal securities laws and purports to seek unspecified monetary damages on behalf of a class of shareholders who purchased DepoTech common stock during the period April 1, 1996 through December 18, 1997. The Company believes that the lawsuit is without merit and intends to defend it vigorously. 6 9 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Since its inception in October 1989, DepoTech Corporation ("DepoTech" or 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. The Company has been unprofitable since its inception and expects to incur additional operating losses over at least the next two years. As of March 31, 1998, the Company's accumulated deficit was approximately $69.3 million. The following discussion is qualified in its entirety by the more detailed information and the Condensed Financial Statements and Notes thereto appearing elsewhere in this Quarterly Report, including the information under "Risks and Uncertainties." This Quarterly Report may contain, 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 such forward-looking statements. Factors that could cause or contribute to such differences include those discussed under "Risks and Uncertainties." RESULTS OF OPERATIONS The Company had total revenues of $1.2 million for the three months ended March 31, 1998 and 1997. Total revenues in 1998 were principally generated by the Company's collaborative agreements with Chiron Corporation ("Chiron") and Pharmacia & Upjohn S.p.A., an affiliate of Pharmacia & Upjohn, Inc. ("P&U"). Total revenues for the three months ended March 31, 1997 were principally generated by the Company's collaborative agreement with Chiron. Total revenues were primarily derived from reimbursement of certain clinical trial and manufacturing scale-up expenses for the Company's lead product, DepoCyt(TM), an anti-cancer drug, under the collaborative agreements. In addition, Chiron reimbursed DepoTech for 100% of certain pre-clinical and feasibility studies performed on their behalf. Further, DepoTech is reimbursed for conducting feasibility studies for various pharmaceutical companies. Revenues may fluctuate from period to period depending on the level of clinical and process development activity for projects under collaborative agreements and the achievement of future milestones. Research and development expenses for the first quarter ended March 31, 1998 increased to $5.4 million compared to $4.4 million for the same period in 1997. Factors contributing to this increase include expanded efforts in clinical trials, manufacturing scale-up and preclinical development of potential DepoFoam(TM) products. A non-randomized Phase IV clinical trial of DepoCyt in solid tumor patients is continuing, as are randomized trials of DepoCyt in leukemia and lymphoma patients. DepoTech is also conducting a dose-finding study of DepoCyt in pediatric patients. In addition, clinical trials and manufacturing 7 10 scale-up of DepoMorphine(TM) sustained-release encapsulated morphine sulfate to treat acute post-surgical pain are underway. Further, the Company is evaluating the feasibility of developing several early stage compounds for corporate partners. Research and development expenses are expected to continue to increase during 1998. General and administrative expenses for the first quarter of 1998 increased to $1.3 million from $0.9 million for the same period in 1997. The increase was primarily due to expansion in administrative staffing. In addition, the Company reduced its workforce in February 1998. Included in general and administrative expenses in the first quarter of 1998 is $0.1 million of severance and outplacement expenses associated with the workforce reduction. Interest income was $0.4 million for the three months ended March 31, 1998 compared to $0.5 million for the same period in 1997. Interest expense increased to $0.4 million for the three months ended March 31, 1998 from $0.2 million for the comparable period in 1997. The increase in interest expense was due to a higher balance outstanding for the note payable. LIQUIDITY AND CAPITAL RESOURCES From its inception through March 31, 1998, DepoTech has financed its operations primarily through public and private placements of equity securities, which provided aggregate net proceeds of approximately $101.9 million, and through capital equipment leases and notes payable. Chiron and DepoTech had been jointly developing DepoCyt in the U.S., Canada and Europe since March 1994. In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe from Chiron for aggregate cash payments of up to $13.7 million, of which $2.0 million was paid to Chiron in December 1997. Chiron will retain exclusive marketing rights to DepoCyt in the U.S. If, prior to December 31, 1998, the U.S. Food and Drug Administration ("FDA") issues a letter or other notification to DepoTech indicating that DepoCyt is approvable or approved, the remaining balance of $11.7 million shall be payable no later than December 31, 1998. If no FDA notification is received prior to December 31, 1998, the remaining amount shall be payable no later than six months from the earlier of U.S. or European Union regulatory notification that the application to market or sell DepoCyt is approvable or approved. If all applications for regulatory approval to sell DepoCyt in the U.S. and European Union are permanently withdrawn, DepoTech shall be relieved of any obligation to pay the remaining $11.7 million. In July 1997, DepoTech entered into a Marketing and Distribution Agreement with P&U for rights to market and sell DepoCyt in countries outside the U.S. P&U will be responsible for submitting regulatory filings, labeling, packaging, distribution, marketing and sales of DepoCyt in this territory. The Company will manufacture DepoCyt and receive a share of the net sales of DepoCyt sold by P&U. The Company received a cash payment of $2.0 million upon execution of the agreement and may receive additional payments of up to $17.0 million upon achievement of certain regulatory milestones. The agreement also provides for P&U to reimburse the Company for certain clinical trial expenses and regulatory fees incurred by the Company. Future 8 11 milestone payments, if any, totaling up to the obligation to Chiron of $11.7 million will be set aside in a restricted cash account for payment to Chiron for the repurchase of DepoCyt rights. As of March 31, 1998, the Company had cash, cash equivalents and short-term investments of $21.2 million as compared to $27.4 million at December 31, 1997. The decrease of $6.2 million in cash, cash equivalents and short-term investments was due primarily to net cash used to fund operations of $5.1 million and repayment of capital lease obligations and note payable totaling $1.1 million. Working capital decreased to $16.0 million as of March 31, 1998 compared to $22.1 million as of December 31, 1997. The Company has financed its capital expenditures through capital leases and bank credit lines. At March 31, 1998, the Company has capital lease obligations and a note payable associated with capital expenditures totaling $13.5 million of which principal payments of $4.8 million is payable over the next twelve months. All borrowings are secured by the capital equipment financed. The terms of the Company's loan agreement with a bank contains a covenant requiring the Company to maintain certain cash balances. At March 31, 1998, the company was in compliance with the terms of the covenant. The Company is required to post some form of cash collateral if the covenant is violated. The Company leases its headquarters which house most of its administrative, research, clinical and manufacturing activities. The minimum rental commitment for this facility ranges from $2.5 million to $4.3 million per year over the next 18 years, based upon pre-established annual rent increases. In April 1998, a class action suit was filed against the Company and two of its former officers alleging violations of the federal securities laws and purporting to seek unspecified monetary damages on behalf of a class of shareholders. The Company believes that the lawsuit is without merit and intends to defend it vigorously. The Year 2000 Issue is the result of computer programs written in the past that use two digits rather than four to define the applicable year. As a result, these computer programs may not properly recognize calendar dates beginning in the Year 2000. This problem may cause systems to fail or miscalculate causing disruptions of operations, including a temporary inability to process transactions or engage in similar normal business activities. The Company believes that the total internal Year 2000 Issue costs will be minimal and that the Year 2000 conversion requirements will be achieved through routine upgrades to its software programs. The Company expects to complete these upgrades by the end of 1998. These costs and the expected completion date are based on management's best estimates and there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. The Company has also initiated communications with all of its significant suppliers to determine the extent to which the Company's systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. There can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted and will not have an adverse effect on the Company's systems. 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. DepoTech anticipates that its existing available cash, cash equivalents and short-term 9 12 investments, committed future contract revenue, projected funding from equipment financing and interest income will be adequate to satisfy its capital requirements and fund operating losses through 1998. The development and commercialization of the Company's potential 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's future capital requirements will depend on many factors, including, without limitation, the time and costs involved in obtaining regulatory approvals, continued scientific progress in its products and process development programs and changes in existing collaborative programs. The Company anticipates that it will be required to raise additional capital in the near-term in order to continue to conduct its operations. Such capital may be raised through public or private financings, as well as collaborative arrangements, borrowings and other available sources. There can be no assurance that additional funding, if necessary, will be available on favorable terms if at all. If adequate funds are not available, the Company will be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, potential products or potential markets that the Company would not otherwise relinquish. The failure to receive additional funding would have a material adverse effect on the Company. RISKS AND UNCERTAINTIES This Quarterly Report may contain, in addition to historical information, forward-looking statements that involve risk and uncertainties. The Company's actual results could differ materially from the results discussed in such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below as well as those discussed elsewhere in this Quarterly Report. Early Stage Company. DepoTech's products are at an early stage of development, and, to date, only three of the Company's DepoFoam formulations, DepoCyt, DepoMorphine and DepoAmikacin, have been subject to any human clinical testing. 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, DepoMorphine, 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 arise, delaying approval longer than 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 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. 10 13 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 U.S. Food and Drug Administration ("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. In April 1997, the Company completed a New Drug Application ("NDA") for DepoCyt for the treatment of NM from solid tumors. As with all drugs subject to accelerated approval, the FDA requested that the Company conduct a Phase IV clinical trial on DepoCyt which is in process. In December 1997, the Oncologic Drugs Advisory Committee ("ODAC") declined to recommend approval of DepoCyt for use in patients with NM from solid tumors. In April 1998, DepoTech submitted, to the FDA, an amendment to the NDA which provided data from a Phase IV clinical trial of NM from solid tumors and interim data from a Phase III study of NM from lymphomas. Submission of the amendment approximately doubled the number of patients treated with DepoCyt under review, and extended the review time for an FDA decision by three months, to July 28, 1998. The final decision regarding the approval of new therapeutics resides with FDA officials subsequent to any recommendation of ODAC. The Company has been notified by the FDA's District Office that they are recommending approval for commercial manufacturing of DepoCyt. However, this does not imply FDA product approval of DepoCyt which currently remains subject to FDA review as described above. There can be no assurance that the data from the Phase III clinical trial reported to date will be sufficient to gain FDA approval, that additional results from the still ongoing arms of the pivotal Phase III trial for NM from lymphomas and leukemia will be positive and/or confirm earlier results or that the Phase IV, pediatric, European and other clinical trials of DepoCyt will generate positive results. There can be no assurance that these results and data will meet the requirements for regulatory approvals necessary to commercialize DepoCyt in the United States or otherwise. 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. 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 11 14 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, will be required for products approved under this provision. 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 NM. There can be no assurance that the Company will receive the first FDA approval to market DepoCyt to treat NM, and thus, receive market exclusivity for DepoCyt to treat NM arising from leukemia, lymphoma or solid tumor metastases. 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, manufacturing and marketing approval for drugs and biologics in such foreign jurisdictions. In January 1998, the Company's marketing partner, P&U, submitted a Marketing Authorization Application for DepoCyt to the European Medicines Evaluation Agency. The requirements relating to the conduct of clinical trials, manufacturing, 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. 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. In June 1997, DepoTech reacquired rights to DepoCyt in Canada and Europe from Chiron for aggregate cash payments of up to $13.7 million, of which $2.0 million was expensed and paid to Chiron in December 1997. If prior to December 31, 1998, the FDA issues a letter or other notification to DepoTech indicating that DepoCyt is approvable or approved, the remaining balance of 12 15 $11.7 million shall be payable no later than December 31, 1998. If no FDA notification is received prior to December 31, 1998, the remaining amount shall be payable no later than six month from the earlier of U.S. or European Union regulatory notification that the application to market or sell DepoCyt is approvable or approved. If all applications for regulatory approval to sell DepoCyt in the U.S. and European Union are permanently withdrawn, DepoTech shall be relieved of any obligation to pay the remaining $11.7 million. The Company leases its headquarters housing most of its administrative, research and clinical and manufacturing activities. The minimum rental commitment for this facility ranges from approximately $2.5 million to $4.3 million per year, over 18 years, with a future minimum rental commitment, based upon pre-established annual rent increases. In addition, the company has financed its capital expenditures through capital leases and bank credit lines. At March 31, 1998, the Company has capital lease obligations and notes payable associated with capital expenditures totaling $13.5 million of which principal payments of $4.8 million is payable over the next twelve months. All borrowings are secured by the capital equipment financed. The terms of the Company's loan agreement with a bank contains a covenant requiring the Company to maintain certain cash balances. At March 31, 1998, the company was in compliance with the terms of the covenant. The Company is required to post some form of cash collateral if the covenant is violated. There can be no assurance that the Company will be able to successfully reach agreement with the lender regarding the amount of cash collateral required. The Company's additional 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 costs involved in filing patents, competing technological and market developments, changes in existing collaborative relationships, the ability of the Company to establish development arrangements, 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, committed future contract revenue, projected funding from equipment and other financing and interest income will be adequate to satisfy its capital requirements and fund operations through 1998. Uncertainty of Additional Funding. The Company anticipates that it will be required to raise additional capital in the near-term in order to continue to conduct its operations. Such capital may be raised through public or private financings, as well as collaborative arrangements, borrowings and other available sources. There can be no assurance that additional funding, if necessary, will be available on favorable terms if at all. If adequate funds are not available, the Company will be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, potential products or potential markets that the Company would not otherwise relinquish. The failure to receive additional funding would have a material adverse effect on the Company. 13 16 Limited Manufacturing Experience, Risk of Scale-Up. The Company has no experience manufacturing products for commercial purposes. The Company's manufacturing operations will need to meet ongoing commercial requirements for all markets in which products have been approved. The Company has been notified by the FDA's District Office that they are recommending approval for commercial manufacturing of DepoCyt. However, this does not imply FDA product approval of DepoCyt which currently remains subject to FDA review. The manufacturing operations for DepoCyt may require passing preapproval inspection by regulatory agencies for countries in which there are regulatory filings to market DepoCyt. For all other products, the Company will need to significantly scale-up its current manufacturing operations and 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. 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 and the P&U Agreement. History of Operating Losses; Uncertainty of Future Profitability. The Company has incurred an accumulated deficit of $69.3 million through March 31,1998. The Company expects to continue to incur substantial losses over at least the next two years as the Company's research and development efforts, 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. Legal Proceedings. In April 1998, a class action suit was filed against the Company and two of its former officers in the United States District Court for the Southern District of California. The lawsuit alleges violations of the federal securities laws and purports to seek unspecified monetary damages on behalf of a class of shareholders who purchased DepoTech common stock during the period April 1, 1996 through December 18, 1997. The Company believes that the lawsuit is without merit and intends to defend against it vigorously. The pending litigation against the Company and any future litigation against the company or its employees, regardless of the outcome, may result in substantial costs and expense to the Company and significant diversions of time and effort by the Company's personnel. Depending on the amount and timing, an unfavorable resolution of such litigation could materially affect the Company's business, future results of operations, cash flow, or financial condition. 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 collaborations with Chiron and P&U, 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 14 17 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 under the Chiron Agreement and P&U under the P&U Agreement have the ability to terminate a portion or all of the collaboration at certain intervals and with advance notice. Termination of a portion or all of the Chiron Agreement and/or P&U Agreement would have a material adverse effect on the Company. To date the Company has retained the rights to formulate and manufacture its products and intends in the future generally to formulate and manufacture pharmaceuticals for partners, however, 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. Reliance on Technology Rights From Research Development Foundation. 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. 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, may 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 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 15 18 exclusive nature to a nonexclusive agreement would have a material adverse effect on the Company. 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 March 2, 1998, the Company owned or had exclusive rights to 10 issued or allowed United States patents, 10 pending United States patent applications, 45 issued foreign patents and 53 pending foreign 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 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. 16 19 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. 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. 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. 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 17 20 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." 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 intense and the inability to retain additional key employees or the loss of one or more current key employees could adversely affect the Company. There can be no assurance that the Company will be successful in retaining required personnel in the future. 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. 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 18 21 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. Year 2000 Compliance. Year 2000 Issue is the result of computer programs written in the past that use two digits rather than four to define the applicable year. As a result, these computer programs may not properly recognize calendar dates beginning in the Year 2000. This problem may cause systems to fail or miscalculate causing disruptions of operations, including a temporary inability to process transactions or engage in similar normal business activities. The Company believes that the total internal Year 2000 Issue costs will be minimal and that the Year 2000 conversion requirements will be achieved through routine upgrades to its software programs. The Company expects to complete these upgrades by the end of 1998. These costs and the expected completion date are based on management's best estimates and there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. The Company has also initiated communications with all of its significant suppliers to determine the extent to which the Company's systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. There can be no assurance that the systems of other companies on which the Company's systems rely will be timely converted and will not have an adverse effect on the Company's systems. Hazardous Materials. The Company's research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds. 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 cost to comply with environmental regulations. 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. Pursuant to a bank credit facility, DepoTech may not, without the bank's prior written consent pay or declare dividends except for dividends payable solely in the Company's stock. 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, the status of submissions to the FDA or its international equivalent, as well as variations in the Company's results of operations, market conditions, analysts' estimates and the stock 19 22 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, or through the exercise of outstanding registration rights, could have an adverse effect on the price of the Company's Common Stock. Possible Anti-Takeover Effect of Certain Charter Provisions. The Company's Articles of Incorporation includes certain charter provisions which may discourage certain types of transactions involving an actual or potential change in control of the Company, including transactions in which shareholders might otherwise receive a premium for their shares over the 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 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. 20 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None 21 24 PART II - OTHER INFORMATION Item 1 Legal Proceedings. In April 1998, a class action suit was filed against the Company and two of its former officers in the United States District Court for the Southern District of California. The lawsuit alleges violations of the federal securities laws and purports to seek unspecified monetary damages on behalf of a class of shareholders who purchased DepoTech common stock during the period April 1, 1996 through December 18, 1997. The Company believes that the lawsuit is without merit and intends to defend against it vigorously. Item 2 Change in Securities. None Item 3 Defaults Upon Senior Securities. None Item 4 Submission of Matters to a Vote of Security Holders. None Item 5 Other Information. None Item 6 Exhibits and Reports on Form 8-K. (a) Exhibits
Exhibit Number ------ 10.1 Amended and Restated Consulting Agreement Between DepoTech Corporation and Stephen B. Howell, M.D. dated March 1, 1998. 10.2 Consulting Agreement Between DepoTech Corporation and Stephen B. Howell dated March 16, 1998. 10.3 Confidential Separation Agreement Between DepoTech Corporation and Linda Paradiso, DVM dated January 7, 1998. 10.4 Common Stock Purchase Warrant Agreement Between DepoTech Corporation and Sanderling Management Company, LLC dated February 25, 1998. 27.1 Financial Data Schedule
22 25 DEPOTECH CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DEPOTECH CORPORATION /s/ Fred A. Middleton --------------------------------- Date: May 15, 1998 Fred A. Middleton Chairman of the Board and Chief Executive Officer (Principal Executive Officer) /s/ Dana S. McGowan --------------------------------- Date: May 15, 1998 Dana S. McGowan Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 23 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 AMENDED AND RESTATED CONSULTING AGREEMENT This Amended and Restated Consulting Agreement is made and entered into this 1st day of March, 1998, by and between DEPOTECH CORPORATION, a California corporation, having its principal place of business at 10450 Science Center Drive, San Diego, California 92121 ("Company"), and STEPHEN B. HOWELL, M.D., an individual, residing at 13612 Nogales Drive, Del Mar, California 92014 ("Consultant"). WHEREAS, Company desires to retain Consultant to perform certain services, and Consultant is agreeable to doing so; and WHEREAS, Company and Consultant desire to amend and restate certain provisions of that certain Consulting Agreement dated as of November 1, 1993, as previously amended pursuant to Amendment No. 1 to Consulting Agreement dated May 25, 1995 (the "Prior Agreement"). NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and conditions set forth below, the parties agree as follows: 1. Services; Fees. Consultant hereby is retained as an independent contractor to provide consulting services described in Exhibit A hereto. Consultant shall receive consulting fees for such services and reimbursement for expenses as set forth in Exhibit A hereto. Such consulting services shall be performed as requested from time to time by Company's executive officers. 2. Term. The initial term of this Agreement shall commence on November 1, 1997 and continue through October 31, 1999. Consultant's services shall be rendered as requested by Company and in a manner satisfactory to Company. This Agreement shall be cancelable by either party upon the giving of thirty (30) days prior written notice; provided, in the event that the Company terminates this Agreement prior to its term, Consultant shall continue to receive consulting fees and reimbursement for expenses as set forth in Exhibit A hereto for a period equal to the greater of (a) twelve (12) months from the date of termination or (b) through October 31, 1999. 3. Manner of Performance. Consultant represents that Consultant has the requisite expertise, ability and legal right to render the consulting services, and will perform the consulting services in an efficient manner and in accordance with the terms of this Agreement. Consultant will abide by all laws, rules and regulations that apply to the performance of the consulting services and when on Company premises, will comply with Company's policies with respect to conduct of visitors. -1- 2 4. Confidentiality. (a) Consultant recognizes that in performing services under this Agreement he will have contact with information of substantial value to Company, which is not generally known and which gives Company an advantage over its competitors who do not know or use it, including but not limited to improvements to the DepoFoam Technology, techniques, drawings, processes, inventions, developments, sales and customer information, and business and financial information, relating to the business, products, practices or techniques of Company and of any other corporation or entity that may be a party to a particular transaction with the Company (hereinafter referred to as "Confidential Information"). Confidential Information shall also include information belonging to a third party which Company is obligated to keep confidential from others. Consultant agrees, at all times, to regard and preserve as confidential such Confidential Information, and to refrain from publishing or disclosing any part of such Confidential Information and from using it except on behalf of Company, without prior written consent of Company. Consultant further agrees, at all times, to refrain from any other acts or omissions that would reduce the value of such Confidential Information to Company. (b) Upon termination of this Agreement, Consultant agrees to promptly surrender to Company all documents or items which are the property of Company or which contain or comprise such Confidential Information. (c) Consultant's duties of confidence to Company and other duties pursuant to this Agreement, shall survive the termination of this Agreement for any reason. 5. Reports. Any reports, specifications or other materials prepared by Consultant for the purpose of or pursuant to this Agreement shall be the property of Company exclusively and shall be maintained in confidence by Consultant. 6. Inventions. (a) Consultant agrees to promptly and fully disclose in writing to Company any invention, discovery, development, improvement, method or product, know-how and data, whether or not patentable, which are made, conceived or reduced to practice by Consultant during the term of this Agreement that result from any work performed by Consultant for Company pursuant to this Agreement. (b) Consultant agrees that such inventions shall be the sole property of Company and agrees to assign and hereby assigns to Company such inventions. 7. Independent Contractor. Consultant's relationship with Company is and shall be that of an independent contractor, and neither party is authorized to nor shall act as the agent of the other. Consultant agrees that he will be solely responsible for the payment of all taxes relating to the compensation paid pursuant to this Agreement. -2- 3 8. Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address for such party set forth in the introductory paragraph above, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 9. Remedies. Consultant acknowledges that any disclosure or unauthorized use of Proprietary Information will constitute a material breach of this Agreement and cause substantial harm to Company for which damages would not be a fully adequate remedy, and, therefore, in the event of any such breach, in addition to other available remedies, Company shall have the right to obtain injunctive relief. 10. Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to other relief to which such party may be entitled. 11. Successors and Assigns. This Agreement shall be binding upon Consultant, and inure to the benefit of, the parties hereto and their respective heirs, successors, assigns, and personal representatives; provided, however, that it shall not be assignable by Consultant. 12. Amendment and Modification. No amendment, modification or supplement of this Agreement shall be binding unless executed in writing and signed by all of the parties hereto. 13. Entire Agreement; Governing Law. This Agreement contains the entire understanding of the parties with respect to the matters contained herein. This Agreement shall supersede any and all previous and existing Consulting Agreements between Company and Consultant. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to principles of conflicts of law. [Remainder of Page Intentionally Left Blank] -3- 4 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. DEPOTECH CORPORATION, a California corporation By: /s/ John P. Longenecker -------------------------------- Title: President and Chief Operating Officer ------------------------------ CONSULTANT By: /s/ STEPHEN B. HOWELL -------------------------------- STEPHEN B. HOWELL, M.D. Social Security No.: ###-##-#### 5 EXHIBIT A Scope of Services of Consultant: The scope of consulting work contemplated by this Agreement shall be as follows: The Consultant shall act as "Senior Medical Advisor" to the Board of Directors and management team of the Company, including: (i) input to and review of the Company's product portfolio in terms of new product ideas, strategic balance, medical applications and product positioning; (ii) review and opinion on new drug delivery technologies; (iii) identification and evaluation of new molecular entities as candidates for formulation and DepoFoam(TM) or new drug delivery technologies being developed or considered by DepoTech; (iv) access and introductions as the need may arise to Consultant's personal contacts (subject to Consultant's agreement on a case-by-case basis) in the medical, scientific and business communities; and (v) membership on the Company's Strategy Committee. Consulting Fees: Consultant shall be compensated as follows: At the rate of $40,000.00 per year, assuming contribution of at least 25 days but no more than 35 days per year, excluding travel time, to be billed no less frequently than monthly. The fee shall be paid to Consultant. Compensation payable pursuant to this Agreement will be reviewed annually by the Compensation Committee of the Board of Directors on the basis of fairness and comparability to the officers of the Company taking into account the pro-rata share of Consultant's time actually spent in consulting to DepoTech. Reimbursement of Expenses: Consultant shall be reimbursed for reasonable expenses on approval of the CEO. A-1 EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 CONSULTING AGREEMENT This Consulting Agreement is made and entered into this 16th day of March, 1998, by and between DEPOTECH CORPORATION, a California corporation, having its principal place of business at 10450 Science Center Drive, San Diego, California 92121 ("Company"), and STEPHEN B. HOWELL, M.D., an individual, residing at 13612 Nogales Drive, Del Mar, California 92014 ("Consultant"). WHEREAS, Company desires to retain Consultant to perform certain services, and Consultant is agreeable to doing so. NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual covenants and conditions set forth below, the parties agree as follows: 1. Services; Fees; Issuance of Stock. (a) Consultant hereby is retained as an independent contractor to provide consulting services described in Exhibit A hereto. Consultant shall receive consulting fees for such services and reimbursement for expenses as set forth in Exhibit A hereto. Such consulting services shall be performed as requested from time to time by Company's executive officers. (b) In addition to the consulting fees for such services and reimbursement for expenses as set forth in Section 1(a) above, Company shall issue to Consultant Twenty Five Thousand (25,000) shares (the "Shares") of Company Common Stock in recognition of Consultant's past services related to consulting services described in Exhibit A (performed prior to the date of this Agreement). Such Shares shall be issued within sixty (60) days of the date of this Agreement, with an issue date of the date of this Agreement. (c) Consultant hereby acknowledges, in connection with the issuance of the Shares under Section 1(b), as follows: (i) The issuance of the Shares has not been registered under the Securities Act of 1933, as amended (the "1933 Act") and such Shares are being issued to Consultant in reliance upon the exemption from such registration provided by Section 4(2) of the 1933 Act. Consultant hereby confirms that Consultant has been informed that the Shares are restricted securities under the 1933 Act and may not be resold or transferred unless the Shares are first registered under the Federal securities laws or unless an exemption from such registration is available. Accordingly, Consultant hereby acknowledges that Consultant is prepared to hold the Shares for an indefinite period and that Consultant is aware that SEC Rule 144 issued under the 1933 Act which exempts certain resales of unrestricted securities is not presently available to exempt the resale of the Shares from the registration requirements of the 1933 Act. -1- 2 ii) Consultant shall make no disposition of the Shares (other than a transfer of title to the Shares effected pursuant to Consultant's will or the laws of intestate succession following Consultant's death) unless and until there is compliance with all of the following requirements: (A) Consultant shall have provided Company with a written summary of the terms and conditions of the proposed disposition; (B) Consultant shall have complied with all requirements of this Agreement applicable to the disposition of the Shares; and (C) Consultant shall have provided Company with written assurances, in form and substance satisfactory to Company, that the proposed disposition does not require registration of the Shares under the 1933 Act or all appropriate action necessary for compliance with the registration requirements of the 1933 Act or any exemption from registration available under the 1933 Act (including Rule 144) has been taken. (iii) The Corporation shall not be required (i) to transfer on its books any Shares which have been sold or transferred in violation of the provisions of this Agreement or (ii) to treat as the owner of the Shares, or otherwise to accord voting, dividend or liquidation rights to, any transferee to whom the Shares have been transferred in contravention of this Agreement. (d) The stock certificates for the Shares shall be endorsed with the following restrictive legend: "The shares represented by this certificate have not been registered under the Securities Act of 1933. The shares may not be sold or offered for sale in the absence of (a) an effective registration statement for the shares under such Act, (b) a 'no action' letter of the Securities and Exchange Commission with respect to such sale or offer or (c) satisfactory assurances to the Corporation that registration under such Act is not required with respect to such sale or offer." 2. Term. The term of this Agreement shall commence on March 16, 1998 and continue through March 16, 1999 ("Term"). Consultant's services shall be rendered as requested by Company and in a manner satisfactory to Company. The Agreement may not be terminated by Company or Consultant during the Term. 3. Manner of Performance. Consultant represents that Consultant has the requisite expertise, ability and legal right to render the consulting services, and will perform the consulting services in an efficient manner and in accordance with the terms of this Agreement. Consultant will abide by all laws, rules and regulations that apply to the performance of the consulting services and when on Company premises, will comply with Company's policies with respect to conduct of visitors. -2- 3 4. Confidentiality. (a) Consultant recognizes that, in performing services under this Agreement, he will have contact with information of substantial value to Company, which is not generally known and which gives Company an advantage over its competitors who do not know or use it, including but not limited to improvements to the DepoFoam Technology, techniques, drawings, processes, inventions, developments, sales and customer information, and business and financial information, relating to the business, products, practices or techniques of Company and of any other corporation or entity that may be a party to a particular transaction with the Company (hereinafter referred to as "Confidential Information"). Confidential Information shall also include information belonging to a third party which Company is obligated to keep confidential from others. Consultant agrees, at all times, to regard and preserve as confidential such Confidential Information, and to refrain from publishing or disclosing any part of such Confidential Information and from using it except on behalf of Company, without prior written consent of Company. Consultant further agrees, at all times, to refrain from any other acts or omissions that would reduce the value of such Confidential Information to Company. (b) Upon termination of this Agreement, Consultant agrees to promptly surrender to Company all documents or items which are the property of Company or which contain or comprise such Confidential Information. (c) Consultant's duties of confidence to Company and other duties pursuant to this Agreement, shall survive the termination of this Agreement for any reason. 5. Reports. Any reports, specifications or other materials prepared by Consultant for the purpose of or pursuant to this Agreement shall be the property of Company exclusively and shall be maintained in confidence by Consultant. 6. Inventions. (a) Consultant agrees to promptly and fully disclose in writing to Company any invention, discovery, development, improvement, method or product, know-how and data, whether or not patentable, which are made, conceived or reduced to practice by Consultant during the term of this Agreement that result from any work performed by Consultant for Company pursuant to this Agreement. (b) Consultant agrees that such inventions shall be the sole property of Company and agrees to assign and hereby assigns to Company such inventions. 7. Independent Contractor. Consultant's relationship with Company is and shall be that of an independent contractor, and neither party is authorized to nor shall act as the agent of the other. Consultant agrees that he will be solely responsible for the payment of all taxes relating to the compensation paid pursuant to this Agreement. -3- 4 8. Notices. Unless otherwise provided, any notice required or permitted under this Agreement shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address for such party set forth in the introductory paragraph above, or at such other address as such party may designate by ten (10) days' advance written notice to the other parties. 9. Remedies. Consultant acknowledges that any disclosure or unauthorized use of Proprietary Information will constitute a material breach of this Agreement and cause substantial harm to Company for which damages would not be a fully adequate remedy, and, therefore, in the event of any such breach, in addition to other available remedies, Company shall have the right to obtain injunctive relief. 10. Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to other relief to which such party may be entitled. 11. Successors and Assigns. This Agreement shall be binding upon Consultant, and inure to the benefit of, the parties hereto and their respective heirs, successors, assigns, and personal representatives; provided, however, that it shall not be assignable by Consultant. 12. Amendment and Modification. No amendment, modification or supplement of this Agreement shall be binding unless executed in writing and signed by all of the parties hereto. 13. Entire Agreement; Governing Law. This Agreement contains the entire understanding of the parties with respect to the matters contained herein. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to principles of conflicts of law. [Remainder of Page Intentionally Left Blank] -4- 5 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the date first above written. DEPOTECH CORPORATION, a California corporation By: /s/ John P. Longenecker --------------------------------- Title: President and Chief Operating Officer ------------------------------ CONSULTANT By: /s/ STEPHEN B. HOWELL --------------------------------- STEPHEN B. HOWELL, M.D. Social Security No.: ###-##-#### 6 EXHIBIT A Scope of Services of Consultant: The scope of consulting work contemplated by this Agreement shall be as follows: The Consultant shall provide consulting services to Company, at the direction of the Company's chief executive officer, for: (i) DepoCyt data analysis and (ii) preparation and attendance of meetings of the Company with the United States Food and Drug Administration ("FDA") and the Oncologic Drugs Advisory Committee to the FDA. Consulting Fees: Consultant shall be compensated as follows: At the rate of $138,000 per year, assuming contribution of at least forty nine percent (49%) of a full-time effort, to be billed no less frequently than monthly. The fee shall be paid to Consultant. Reimbursement of Expenses: Consultant shall be reimbursed for reasonable expenses on approval of the President. A-1 EX-10.3 4 EXHIBIT 10.3 1 EXHIBIT 10.3 Date: January 7, 1998 To: Linda Paradiso, DVM From: John Longenecker Subject: Confidential Separation Agreement Dear Linda: Consistent with our discussions concerning your voluntary termination of employment and separation from DepoTech (the "Company") this letter will constitute the Confidential Separation Agreement (the "Agreement") setting forth the terms of your employment and separation of employment from the Company. By signing this Agreement, you will be agreeing to these terms. It is important that you understand clearly both what your benefits are and what is expected of you by the Company. 1. Transition Period: Commencing on January 7, 1998 and continuing until January 30, 1998 (hereinafter referred to as the "transition period"), you and the Company will be on notice of the discontinuance of your employment with the Company. During this transition period, you shall remain a regular full-time employee of the Company. The parties may mutually agree in writing to extend this transition period, but neither is under any obligation to do so (hereinafter referred to as the "extended transition period"). Any written extension of the transition period will effectively change the date on which employment with the company will terminate. 2. Duties: You will make yourself available to the Company for the purpose of transitioning your work to other employees and to answer any questions regarding matters assigned to you before the effective date of Separation, as defined below. 3. Salary: During the transition period the Company agrees to pay you your full monthly base salary of $14,583.33 less applicable deductions for taxes and health and other benefits. All salary payments during this transition period shall be made on or about the time of the Company's normal bi-monthly pay cycle. 4. Benefits: During the transition period the Company will continue your current health benefits, Long Term Disability, Life Insurance, and participation in the Company's 401(k) and ESPP plans. 5. Expiration of Transition Period/Separation of Employment: Your employment with the Company will terminate on January 30, 1998, unless sooner terminated pursuant to paragraph 6, the "Termination", or extended pursuant to paragraph 1, the "Transition Period". As part of your Separation, the Company agrees to provide you with the following additional compensation and benefits package: a. Severance Payment: The Company agrees to provide a lump sum severance payment equal to six (6) months base salary ($87,500), less applicable taxes, on the date the transition period ends, as defined in paragraph 5, above. 2 Linda Paradiso 2 03/24/98 b. Accelerated Stock Option Grant Vesting: The Company agrees to accelerate the vesting of all remaining unvested Stock Option Grants awarded in these quantities and on the following dates: ISO GRANT 2,050 SHARES GRANTED 02-26-97 ISO GRANT 8,000 SHARES GRANTED 04-28-97 The exercise period for all vested shares will be 90 days following the date the transition period ends. c. Management Incentive Bonus: You will be eligible for 1997 Management Incentive Bonus consideration to be paid out in 1998, based on the combination of your performance and that of the Company during the 1997 fiscal year. The Management Incentive Bonus target for 1997 is twenty percent (20%) of base salary, however it can be as little as 0% or as high as 33% of base salary depending on overall company and individual performance. This bonus shall be no less than the average bonus granted to all other Vice Presidents. d. Outplacement: The Company further agrees to provide you with up to one hundred eighty (180) days job search preparation/assistance with the firm of Lee Hecht Harrison following the date the transition period ends. e. Extended Benefits: You and your eligible dependents will be entitled to continue your medical coverage, pursuant to COBRA, for an additional 18 months from the date the transition period ends, at your own expense. It is understood that the Company reserves the right to change health plans at any time. All other employee benefits, including Long Term Disability, Life Insurance, 401(k) and ESPP plan participation will expire on the date the transition period ends. f. FTO Balance: The Company further agrees to pay you all earned but unused FTO pay as of the date the transition period ends. 6. Termination: Either party may terminate your employment during the transition period or any extended transition period, under the following terms and conditions: a. You may terminate your employment with the Company during the transition period, for any reason, upon five (5) days written notice to the Company. Upon such a termination, your employment will be terminated and all compensation and benefits pursuant to paragraphs 3 and 4 will end. In addition, you will not be entitled to any compensation or benefits described in paragraph 5 subsections (a-d). b. The Company reserves the right to terminate your employment during the transition period or any extended transition period for cause. Cause for termination includes: (a) a material breach of the terms of this Agreement; (b ) major infractions of the Company's standards of conduct as set forth in Company policies; or (c) your acceptance of employment with another entity or person such that you can no longer devote your full energies to employment with the Company. Upon termination for cause, all compensation and benefits pursuant to paragraphs 3 and 4 will end. In addition, you will not be entitled to any compensation or benefits described in paragraph 5 subsections (a -d). 3 Linda Paradiso 3 03/24/98 7. Confidentiality: You agree that as a specific condition to the performance of this Agreement by the Company, you will not disclose for any purpose, the existence of this Agreement, the terms of this Agreement or the negotiations leading up to this Agreement to any person, except to your immediate family or as may be necessary for purposes of securing legal or tax advice or as otherwise may be required by law. 8. Inventions/Confidential Information: You agree that the Employee Proprietary Information and Inventions Agreement signed by you shall remain in full force and effect following the date of separation. In addition, we wish to remind you of your obligations regarding the confidentiality of the Company's commercial and technical proprietary information. You understand and agree that all confidential and proprietary information that you may have received during your employment or may receive during the transition period with the Company shall remain strictly confidential and held by you in confidence. 9. Goodwill and Compliance with Company Policies: You agree that you shall not make, encourage or otherwise cause to be made any negative or disparaging comments or statements (whether verbal or written) about the Company or take any action which will place the Company in a bad light or false light. You further agree that during the transition period you will abide by and comply with the policies and procedures of the Company. The Company further agrees that it will not hinder Linda J. Paradiso in her efforts to obtain alternative employment by encouraging or otherwise causing to be made any negative or disparaging comments or statements (whether verbal or written) regarding her employment with the Company. Nor will the Company place Linda J. Paradiso in a bad light or false light during or after the transition period. 10. No Admission: This severance package or Agreement shall not be construed or used as an admission of liability or wrongdoing by either you or the Company. 11. General Release: In consideration of the above promises and payments to be made to you, you fully and forever release and discharge the Company and each of its current, former and future parents, subsidiaries, related entities, employee benefit plans and their fiduciaries, predecessors, successors, officers, directors, shareholders, agents, employees and assigns (collectively, "Releasees"), with respect to any and all claims, liabilities and causes of action, of every nature, kind and description, in law, equity or otherwise, which have arisen, occurred or existed at any time prior to the signing of this Agreement, including, without limitation, any and all claims, liabilities and causes of action arising out of or relating to your employment with the Company or the cessation of that employment. 12. Knowing Waiver of Employment - Related Claims: You acknowledge that you understand and agree that you are waiving any and all rights you may have had or now have, to pursue against any of the Releasees any and all remedies available to you under any employment - related causes of action, including without limitation, claims of wrongful discharge, breach of contract, breach of the covenant of good faith and fair dealing, fraud, violation of public policy, defamation, discrimination, personal injury, physical injury, emotional distress, claims under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in employment Act, the Americans With Disabilities Act, the Federal Rehabilitation Act, the Family and Medical Leave Act, the California Fair Employment and Housing Act, the California Family Rights Act, the Equal Pay Act of 1963, the provisions of the California Labor Code and any other federal, state or local laws and regulations relating to employment, conditions of employment (including wage and hour lows) and/or employment discrimination. You specifically acknowledge and agree that you waive any claim against the Company arising out of the termination of your employment with the Company which the parties have agreed will become effective on or before January 30, 1998. 4 Linda Paradiso 4 03/24/98 13. Waiver of Civil Code Section 1542: You expressly waive any and all rights and benefits conferred upon you by Section 1542 of the Civil Code of the State of California, which states as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." You expressly agree and understand that the Release given by you pursuant to this Agreement applies to all unknown, unsuspected and unanticipated claims, liabilities and causes of action which you may have against the Company or any of the other Releasees, as of the date this agreement is executed. 14. Severability of Release Provisions: You agree that if any provision of the release given by you under this Agreement is found to be unenforceable, it will not affect the enforceability of the remaining provisions and the courts may enforce all remaining provisions to the extent permitted by law. 15. Promise to Refrain from Suit or Administrative Action: You promise and agree that you will never sue the Company or any of the other Releasees, or otherwise institute or participate in any legal or administrative proceedings against the Company or any of the other Releasees, with respect to any claim covered by the release provisions of this Agreement, including but not limited to claims arising out of your employment with Company or the cessation of that employment, unless you are compelled by legal process to do so. 16. Indemnification: Not withstanding Linda Paradiso's departure from the Company, in the event that a claim is made against Linda Paradiso in connection with her performance of her job duties while employed by DepoTech Corporation, the Company will indemnify Linda Paradiso under the conditions and to the extent required by California Labor Code Section 2802. Nothing in this Agreement shall constitute a waiver of any objections or defenses available to the Company, which are expressly reserved. 17. Entire Understanding: This Agreement contains the entire understanding between you and the Company relating to your Separation and severance package, superseding all prior understandings and agreements between the parties, if any. 18. Arbitration: In the event of a dispute over the performance, interpretation or validity of this Agreement, the parties agree to submit any and all disputes relating to this Agreement to binding arbitration before JAMS/Endispute, Southern California. Any arbitration award shall be final and binding on the parties and may be entered in any court having jurisdiction. 19. Applicable Law: This Agreement will be governed by California Law. Linda, you are entitled by law to review this Agreement for a period of 21 days. The Company encourages you to use this opportunity to review the Agreement with an attorney. Should you decide not to use the full 21 days, then you knowingly and voluntarily waive any claims that you were not in fact given 21 days to consult an attorney and/or review the Agreement. In addition, for a period of seven (7) days following your execution of this Separation Agreement, you may revoke this Separation Agreement, and the Separation Agreement shall not become effective or enforceable until the revocation period has expired. Any revocation within the seven days must be in writing, addressed to Thomas Swedberg, SPHR at DepoTech Corporation's address. If you revoke this Separation Agreement, it shall not be affective or enforceable and you will not receive the benefits described in paragraphs 3, 4 and 5 (a-d). 5 Linda Paradiso 5 03/24/98 If you agree with the foregoing package and release, please sign below. You agree that you have read and understand this Separation Agreement, and that you have signed it freely and voluntarily. Sincerely, /s/ John P. Longenecker John P. Longenecker Senior Vice President and COO Agreed: /s/ Linda Paradiso 1/12/98 ---------------------------------------- ----------------------- Linda Paradiso, DVM Date EX-10.4 5 EXHIBIT 10.4 1 EXHIBIT 10.4 THE TRANSFER OF THIS WARRANT IS SUBJECT TO RESTRICTIONS CONTAINED HEREIN. THIS WARRANT HAS BEEN ISSUED IN RELIANCE UPON THE REPRESENTATION OF THE HOLDER THAT IT HAS BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD THE RESALE OR OTHER DISTRIBUTION THEREOF. NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. DEPOTECH CORPORATION COMMON STOCK PURCHASE WARRANT To Subscribe for and Purchase February 25, 1998 Shares of Common Stock of DEPOTECH CORPORATION VOID AFTER 5:00 P.M., PACIFIC TIME FEBRUARY 24, 2001 THIS CERTIFIES that, for value received, SANDERLING MANAGEMENT COMPANY, LLC, or its registered assigns (the "Holder"), is entitled to subscribe for and purchase from DEPOTECH CORPORATION, a California corporation (hereinafter called the "Corporation"), up to One Hundred Thousand (100,000) shares (subject to adjustment as hereinafter provided) of fully paid and non-assessable Common Stock of the Corporation, (the "Common Stock"), at $4.375 per share (such price as from time to time to be adjusted as hereinafter provided being hereinafter called the "Warrant Price"), at any time from May 25, 1998 but at or prior to 5:00 p.m. Pacific time on February 24, 2001 (the "Exercise Period") subject, however, to the provisions and upon the terms and conditions hereinafter set forth. This Warrant and any Warrant or Warrants subsequently issued upon exchange or transfer hereof are hereinafter collectively called the "Warrant." Section 1. Exercise of Warrant. The rights represented by this Warrant may be exercised by the Holder, in whole or in part (but not as to fractional shares) at any time or from time to time in part, but not as to a fractional share of Common Stock, by the 2 completion of the purchase form attached hereto and by the surrender of this Warrant (properly endorsed) at the office of the Corporation as it may designate by notice in writing to the Holder hereof at the address of the Holder appearing on the books of the Corporation, and by payment to the Corporation of the Warrant Price for each share purchased, in cash, or by certified or official bank check, or by tender of shares of Common Stock held for the required period of time, if any, along with a written statement specifying that the Holder intends to pay the Exercise Price by tender of such shares (such shares to be valued at fair market value (as such term is defined below) on the date on which the Corporation receives the Warrant, the shares of Common Stock and such written statement, or such later date as specified therein). In the event of any exercise of the rights represented by this Warrant, a certificate or certificates for the shares of Common Stock so purchased, registered in the name of the Holder, or its nominee or other party designated in the purchase form by the Holder hereof, shall be delivered to the Holder within a reasonable time, but in no event more than thirty (30) business days after the date in which the rights represented by this Warrant shall have been so exercised; and, unless this Warrant has expired or has been exercised in full, a new Warrant representing the number of shares (except a remaining fractional share), if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder within such time. The person in whose name any certificate for shares of Common Stock is issued upon exercise of this Warrant shall for all purposes be deemed to have become the Holder of record of such shares on the date on which this Warrant was surrendered and payment of the Warrant Price, except that, if the date of such surrender and payment is a date on which the stock transfer books of the Corporation are closed, such person shall be deemed to have become the Holder of such shares at the close of business on the next succeeding date on which the stock transfer books are open. No fractional shares shall be issued upon exercise of this Warrant and no payment or adjustment shall be made upon any exercise on account of any cash dividends on the Common Stock issued upon such exercise. If any fractional interest in a share of Common Stock would, except for the provision of this Section 1, be delivered upon such exercise, the Corporation, in lieu of delivery of a fractional share thereof, shall pay to the Holder an amount in cash equal to the current market price of such fractional share as determined pursuant to Section 2(c) below. Section 2. Net Issuance. (a) Right to Convert. In addition to and without limiting the rights of the Holder under the terms of this Warrant, the Holder shall have the right to convert this Warrant or any portion thereof (the "Conversion Right") into shares of Common Stock as provided in this Section 2 at any time or from time to time during the Exercise Period. Upon exercise of the Conversion Right with respect to a particular number of shares subject to the Warrant (the "Converted Warrant Shares"), the Corporation shall deliver to the Holder (without payment by the Holder of any exercise price or any cash or other consideration) that number of shares of fully paid and nonassessable Common Stock computed using the following formula: -2- 3 X = Y (A - B) ----- A Where X = the number of shares of Common Stock to be delivered to the holder Y = the number of Converted Warrant Shares A = the fair market value of one share of the Corporation's Common Stock on the Conversion Date (as defined below) B = the per share exercise price of the Warrant (as adjusted to the Conversion Date) The Conversion Right may only be exercised with respect to a whole number of shares subject to the Warrant. No fractional shares shall be issuable upon exercise of the Conversion Right, and if the number of shares to be issued determined in accordance with the foregoing formula is other than a whole number, the Corporation shall pay to the Holder an amount in cash equal to the fair market value of the resulting fractional share on the Conversion Date (as defined below). Shares issued pursuant to the Conversion Right shall be treated as if they were issued upon the exercise of the Warrant. (b) Method of Exercise. The Conversion Right may be exercised by the Holder by the surrender of the Warrant at the principal office of the Corporation together with a written statement specifying that the Holder thereby intends to exercise the Conversion Right and indicating the total number of shares under the Warrant that the Holder is exercising through the Conversion Right. Such conversion shall be effective upon receipt by the Corporation of the Warrant together with the aforesaid written statement, or on such later date as is specified therein (the "Conversion Date"). Certificates for the shares issuable upon exercise of the Conversion Right and, if applicable, a new warrant evidencing the balance of the shares remaining subject to the Warrant, shall be issued as of the Conversion Date and shall be delivered to the Holder promptly following the Conversion Date. (c) Determination of Fair Market Value. For purposes of this Section 2, fair market value of a share of Common Stock on the Conversion Date shall mean: (i) If traded on a stock exchange, the fair market value of the Common Stock shall be deemed to be the average of the closing selling prices of the Common Stock on the stock exchange determined by the Board to be the primary market for the Common Stock over the ten (10) trading day period (or such shorter period immediately following the closing of an initial public offering) ending on the date prior to the Conversion Date, as such prices are officially quoted in the composite tape of transactions on such exchange; (ii) If traded over-the-counter, the fair market value of the Common Stock shall be deemed to be the average of the closing bid prices (or, if such information is available, the closing selling prices) of the Common Stock over the ten (10) trading day -3- 4 period (or such shorter period immediately following the closing of an initial public offering) ending on the date prior to the Conversion Date, as such prices are reported by the National Association of Securities Dealers through its Nasdaq system or any successor system; and (iii) If there is no public market for the Common Stock, then the fair market value shall be determined by the Board of Directors of the Corporation. Section 3. Stock Splits, Consolidation, Merger and Sale. In the event that the outstanding shares of Common Stock shall be split, combined or consolidated, by dividend, reclassification or otherwise, into a greater or lesser number of shares of Common Stock, the Warrant Price in effect immediately prior to such combination or consolidation and the number of shares purchasable under this Warrant shall, concurrently with the effectiveness of such combination or consolidation, be proportionately adjusted. If there shall be effected any consolidation or merger of the Corporation with another corporation, or a sale of all or substantially all of the Corporation's assets to another corporation, and if the holders of Common Stock shall be entitled pursuant to the terms of any such transaction to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Holder of this Warrant shall thereafter have the right to receive, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore receivable upon the exercise of such Warrant, such shares of stock, securities or assets as may be issuable or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such Common Stock immediately theretofore so receivable had such consolidation, merger or sale not taken place, and in any such case appropriate provisions shall be made with respect to the rights and interests of the Holder to the end that the provisions hereof shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise of this Warrant. Section 4. Stock to Be Reserved; Issue Tax; Books. (a) The Corporation will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issue upon the exercise of this Warrant as herein provided, such number of shares of Common Stock as shall then be issuable upon the exercise of this Warrant. The Corporation shall from time to time in accordance with applicable law increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit exercise of this Warrant. The Corporation covenants that all shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof, and, without limiting the generality of the foregoing, the Corporation will take all such action as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which shares of capital stock of the Corporation may be listed. -4- 5 (b) The issuance of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Holders of this Warrant for any issuance tax in respect thereof provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the Holder of this Warrant. (c) The Corporation will at no time close its transfer books against the transfer of the shares of Common Stock (or Common Stock issued upon the conversion of Common Stock) issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. Section 5. Notices of Record Dates. In the event of (a) any taking by the Corporation of a record of the Holders of any class of securities for the purpose of determining the Holders thereof who are entitled to receive any dividend or other distribution (other than cash dividends out of earned surplus), or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or (b) any capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation or any transfer of all or substantially all the assets of the Corporation to or consolidation or merger of the Corporation with or into any other corporation, or (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Corporation, then and in each such event the Corporation will give notice to the Holder of this Warrant specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right and stating the amount and character of such dividend, distribution or right, and (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the Holders of record of Common Stock will be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up. Such notice shall be given at least ten (10) days and not more than ninety (90) days prior to the date therein specified, and such notice shall state that the action in question or the record date is subject to the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act") or to a favorable vote of shareholders, if either is required. Section 6. No Shareholder Rights or Liabilities. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a shareholder of the Corporation. No provision hereof, in the absence of affirmative action by the Holder hereof to purchase shares of Common Stock, and no mere enumeration hereon of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Warrant Price or as a shareholder of the Corporation, whether such liability is asserted by the Corporation or by creditors of the Corporation. -5- 6 Section 7. Representations of Holder. The Holder hereby represents and acknowledges to the Corporation that: (a) this Warrant, the Common Stock issuable upon exercise of this Warrant and any securities issued with respect to any of them by way of a stock dividend or stock split or in connection with a recapitalization, merger, consolidation or other reorganization will be "restricted securities" as such term is used in the rules and regulations under the Securities Act and that such securities have not been and will not be registered under the Securities Act or any state securities law, and that such securities must be held indefinitely unless registration is effected or transfer can be made pursuant to appropriate exemptions; (b) the Holder has read, and fully understands, the terms of this Warrant set forth on its face and the attachments hereto, including the restrictions on transfer contained herein; (c) the Holder has either a pre-existing personal or business relationship with the Corporation or one of its officers, directors or controlling persons; (d) the Holder is purchasing for investment for its own account and not with a view to or for sale in connection with any distribution of this Warrant, the Common Stock of the Corporation issuable upon exercise of this Warrant or the Common Stock of the Corporation issuable upon conversion of the Common Stock and it has no intention of selling such securities in a public distribution in violation of the federal securities laws or any applicable state securities laws; provided that nothing contained herein will prevent Holder from transferring such securities in compliance with the terms of this Warrant and the applicable federal and state securities laws; (e) the Holder is an "accredited investor" within the meaning of paragraph (a) of Rule 501 of Regulation D promulgated by the Securities and Exchange Commission (the "Commission") and an "excluded purchaser" within the meaning of Section 25102(f) of the California Corporate Securities Law of 1968; and (f) the Corporation may affix the following legend (in addition to any other legend(s), if any, required by applicable state corporate and/or securities laws) to certificates for shares of Common Stock (or other securities) issued upon exercise of this Warrant and the shares of Common Stock issued upon conversion of the Common Stock ("Warrant Shares"): "These securities have not been registered under the Securities Act of 1933, as amended. They may not be sold, offered for sale, pledged or hypothecated in the absence of a registration statement in effect with respect to the securities under such Act or an opinion of counsel satisfactory to the Company that such registration is not required or unless sold pursuant to Rule 144 of such Act." Section 8. Notice of Proposed Transfers. The Holder of this Warrant, by acceptance hereof, agrees to comply in all respects with the provisions of this Section 7. Prior to any -6- 7 proposed transfer of this Warrant or any Warrant Shares, unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the Holder of such securities shall give written notice to the Corporation of such Holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied (except in transactions in compliance with Rule 144) by either (i) a written opinion of legal counsel which shall be reasonably satisfactory to the Corporation addressed to the Corporation and reasonably satisfactory in form and substance to the Corporation's counsel, to the effect that the proposed transfer of the Warrant and/or Warrant Shares may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that enforcement action be taken with respect thereto, whereupon the Holder of such securities shall be entitled to transfer such securities in accordance with the terms of the notice delivered by the Holder to the Corporation. Each new certificate evidencing the Warrant and/or Warrant Shares so transferred shall bear the appropriate restrictive legends set forth in Section 7 above, except that such certificate shall not bear such restrictive legend if, in the opinion of counsel for the Corporation, such legend is not required in order to establish or assist in compliance with any provisions of the Securities Act or any applicable state securities laws. Section 9. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Corporation may, on such terms as to indemnity or otherwise as it may in its discretion reasonably impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall constitute an original contractual obligation of the Corporation, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone. Section 10. Presentment. Prior to due presentment of this Warrant together with a completed assignment form attached hereto for registration of transfer, the Corporation may deem and treat the Holder as the absolute owner of the Warrant, notwithstanding any notation of ownership or other writing thereon, for the purpose of any exercise thereof and for all other purposes, and the Corporation shall not be affected by any notice to the contrary. Section 11. Notice. Notice or demand pursuant to this Warrant shall be sufficiently given or made, if sent by first-class mail, postage prepaid, addressed, if to the Holder of this Warrant, to the Holder at its last known address as it shall appear in the records of the Corporation, and if to the Corporation, at 10450 Science Center Drive, San Diego, California 92121, Attention: Secretary. The Corporation may alter the address to which communications are to be sent by giving notice of such change of address in conformity with the provisions of this Section 11 for the giving of notice. Section 12. Governing Law. The validity, interpretation and performance of this Warrant shall be governed by the laws of the State of California without regard to principles of conflicts of laws. -7- 8 Section 13. Successors, Assigns. Subject to the restrictions on transfer by Holder set forth in Section 8 hereof, all the terms and provisions of the Warrant shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. Section 14. Amendment. This Warrant may be modified, amended or terminated by a writing signed by the Corporation and the Holder. Section 15. Severability. Should any part but not the whole of this Warrant for any reason be declared invalid, such decision shall not affect the validity of any remaining portion, which remaining portion shall remain in force and effect as if this Warrant had been executed with the invalid portion thereof eliminated, and it is hereby declared the intention of the parties hereto that they would have executed the remaining portion of this Warrant without including therein any such part which may, for any reason, be hereafter declared invalid. IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly executed and delivered on and as of the day and year first above written by one of its officers thereunto duly authorized. DEPOTECH CORPORATION, a California corporation Dated: February 25, 1998 By: /s/ John P. Longenecker ------------------------------------- John P. Longenecker President and Chief Operating Officer The undersigned Holder agrees and accepts this Warrant and acknowledges that it has read and confirms each of the representations contained in Section 7. By: /s/ FRED A. MIDDLETON --------------------------------- Fred A. Middleton General Partner Its: Sanderling Management Company --------------------------------- Address: 2730 Sand Hill Road --------------------------------- Suite 200 --------------------------------- Menlo Park, CA 94025 --------------------------------- [SIGNATURE PAGE TO DEPOTECH COMMON STOCK PURCHASE WARRANT] -8- 9 PURCHASE FORM (To be executed by the Warrant Holder if he desires to exercise the Warrant in whole or in part) To: DEPOTECH CORPORATION The undersigned, whose Social Security or other identifying number is ________, hereby irrevocably elects the right of purchase represented by the within Warrant for, and to purchase thereunder, _________________________________ shares of securities provided for therein and tenders payment herewith to the order of DEPOTECH CORPORATION in the amount of $__________ The undersigned requests that certificates for such shares be issued as follows: Name: _____________________________ Address: __________________________ Deliver to: _______________________ Address: __________________________ and, if said number of shares shall not be all the shares purchasable hereunder, that a new Warrant for the balance remaining of the shares purchasable under the within Warrant be registered in the name of, and delivered to, the undersigned at the address stated below Address: _____________________________ Dated: _________________ , 19__ Signature___________________ (Signature must conform in all respects to the name of the Warrant Holder as specified on the face of the Warrant, without alteration, enlargement or any change whatsoever) -9- 10 ASSIGNMENT (To be executed by the Warrant Holder if he desires to effect a transfer of the Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto _________________________________ whose Social Security or other identification number is____________________________ [residing/located] at ______________________ the attached Warrant, and appoints_____________________________ residing at ________________________________________ _________________________________________ the undersigned's attorney-in-fact to transfer said Warrant on the books of the Corporation, with full power of substitution in the premises. Dated: ________________ , 19 . In the presence of: - ---------------------------- ______________________________ (Signature must conform in all respects to the name of the Warrant Holder as specified on the face of the Warrant, without alteration, enlargement or any change whatsoever). -10- EX-27.1 6 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 2,405 18,808 1,474 0 0 23,869 32,998 (5,553) 52,236 8,318 0 0 0 102,372 (69,692) 52,236 0 1,215 0 5,411 0 0 359 (5,457) 0 0 0 0 0 (5,457) (0.38) 0.00
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