-----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, EYq11e2ogwIpg6LBZUVYYnPzaH7RsAqlfBuBVjqrxLOQtUL3Cw38Ow4O6uruE6UY HWUW8lx6UW8im3RCJx/92g== 0000946644-01-500013.txt : 20010820 0000946644-01-500013.hdr.sgml : 20010820 ACCESSION NUMBER: 0000946644-01-500013 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEMISPHERX BIOPHARMA INC CENTRAL INDEX KEY: 0000946644 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 520845822 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13441 FILM NUMBER: 1717526 BUSINESS ADDRESS: STREET 1: 1617 JFK BLVD #660 STREET 2: ONE PENN CENTER CITY: PHILADELPHIA STATE: PA ZIP: 19104 BUSINESS PHONE: 2159880080 MAIL ADDRESS: STREET 1: 1617 JFK BLVD STREET 2: ONE PENN CENTER CITY: PHILADELPHIA STATE: PA ZIP: 19103 10-Q/A 1 r10q-0630_01.txt AMENDED FORM 10/Q HEMISPHERX BIOPHARMA, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2001 Commission File Number: 0-27072 HEMISPHERx BIOPHARMA, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 52-0845822 - ------------------------------ ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (215) 988-0080 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Not Applicable - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) 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. /X/ Yes / / No 30,330,382 shares of common stock issued and outstanding as of June 30, 2001. 2 PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, June 30, 2000 2001 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $3,721 $2,585 Short Term investments 4,657 2,395 Accounts receivable 60 11 Prepaid expenses and other current assets 607 536 ----------- ---------- Total current assets 9,045 5,527 Property and equipment, net 373 302 Patent and trademark rights, net 1,204 1,051 Investments in unconsolidated affiliates 2,421 2,392 Other assets 24 55 ----------- ---------- Total assets $13,067 $ 9,327 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,341 $ 919 Accrued expenses 154 203 ----------- ---------- Total current liabilities 1,495 1,122 ----------- ---------- Commitments and contingencies Stockholders' equity: Common stock 30 31 Additional paid-in capital 97,984 99,798 Accumulated other comprehensive income 34 38 Treasury stock - at cost (3,910) (4,273) Accumulated deficit (82,566) (87,389) ----------- ---------- Total stockholders' equity 11,572 8,205 ----------- ---------- Total liabilities and stockholders' equity $13,067 $ 9,327 =========== ==========
See accompanying notes to condensed consolidated financial statements. 3 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
For the Three months ended June 30, -------------------------- (Unaudited) 2000 2001 ---------- ---------- Revenues: Cost recovery - clinical treatment programs $ 216 $ 101 ---------- ---------- Costs and expenses: Research and development 1,587 1,468 General and administrative 823 1,036 ---------- ---------- Total cost and expenses 2,410 2,504 Interest and other income 160 86 Equity in loss of unconsolidated affiliate (Note4) (26) (26) ---------- ---------- Net loss $(2,060) $(2,343) ========== ========== Basic and diluted loss per share $ (.07) $ (.08) ========== ========== Basic and diluted weighted average common shares outstanding 29,031,926 30,109,219 =========== ==========
See accompanying notes to condensed consolidated financial statements. 4 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
For the Six months ended June 30, -------------------------- (Unaudited) 2000 2001 ---------- ---------- Revenues: Cost recovery - clinical treatment programs $ 426 $ 228 ---------- ---------- Costs and expenses: Research and development 3,022 3,176 General and administrative 1,722 2,004 ---------- ---------- Total cost and expenses 4,744 5,180 Interest and other income 312 180 Equity in loss of unconsolidated affiliate (Note 4) (26) (51) ---------- ---------- Net loss $(4,032) $ (4,823) ========== ========== Basic and diluted loss per share $ (.14) $ (.16) ========== ========== Basic and diluted weighted average common shares outstanding 28,801,993 30,035,522 ========== ==========
See accompanying notes to condensed consolidated financial statements. 5 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Six months ended June 30, -------------------------- (Unaudited) 2000 2001 ---------- ---------- Cash flows from operating activities: Net loss $ (4,032) $(4,823) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment 62 71 Amortization of patents rights 132 191 Write-off of patent rights 2 29 Stock option and warrant compensation and service expense 322 595 Equity in loss of unconsolidated affiliate 26 51 Changes in assets and liabilities: Accounts receivable (13) 49 Prepaid expenses and other current assets (225) 71 Accounts payable 13 (422) Accrued expenses (259) 49 Advances to affiliates (500) - Other assets 17 (21) --------- ---------- Net cash (used in) operating activities (4,455) (4,160) --------- ----------- Cash flows from investing activities: Purchase of property and equipment (119) - Additions to patent rights (64) (67) Maturity of short term investments 2,153 4,657 Purchase of short term investments (2,237) (2,401) Investments in unconsolidated affiliates (411) (22) Other investments (34) - -------- --------- Net cash (used in) provided by investing activities (712) 2,167 -------- --------- Cash flows from financing activities: Proceeds from issuance of common stock 2,250 73 Proceeds from exercise of warrants 7,989 1,147 Purchase of warrants (113) - Purchase of treasury stock (3,107) (363) -------- --------- Net cash provided by financing activities 7,019 857 --------- --------- Net increase(decrease) in cash and cash equivalents 1,852 (1,136) Cash and cash equivalents at beginning of period 6,397 3,721 --------- --------- Cash and cash equivalents at end of period $ 8,249 $ 2,585 ========= ==========
See accompanying notes to condensed consolidated financial statements. 6 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the Six Months Ended June 30, 2001 (in thousands, except share data)
Accumulated Common Stock Additional Other Treasury Treasury Total --------------- Paid-In Comprehensive Stock Stock Accumulated Stockholders' Shares Amount Capital Income shares deflict Equity ------- ------- ----------- ------------- --------- -------- ----------- ------------- Balance 12/31/2000 30,367,888 $30 $97,984 $34 395,646 $(3,910) $(82,566) $11,572 Common Stock Issued 441,800 1 1,219 1,220 Treasury Stock Purchased 83,660 (363) (363) Stock issued for R&D expenses 87 87 Stock warrant Compensation 508 508 Net Comprehensive loss 4 (4,823) (4,819) ------- ------- ----------- ------------- --------- -------- ----------- ------------- Balance 6/30/2001 30,809,688 $31 $99,798 $38 479,306 $(4,273) $(87,389) $8,205 ======= ======= =========== ============= ========= ======== =========== =============
See accompanying notes to condensed consolidated financial statements. 7 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Hemispherx BioPharma, Inc., a Delaware corporation and all its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been included. Such adjustments consist of normal recurring items. Interim results are not necessarily indicative of results for a full year. The interim consolidated financial statements and notes thereto are presented as permitted by the Securities and Exchange Commission, and do not contain certain information which will be included in our annual consolidated financial statements and notes thereto. These consolidated financial statements should be read in conjunction with our 2000 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2000, as amended on Form 10K/A, second amendment, filed with the SEC on June 19, 2001. Prior year amounts have been reclassified to conform to current period presentations. NOTE 2: STOCK COMPENSATION: Stock compensation expense was $595,000 in the six month period ended June 30, 2001. The expiration date of certain non-public stock warrants was extended by the Board of Directors. The extension produced non-cash stock/warrant compensation of $262,000 in the three month period ended March 31, 2001. Stock/warrant compensation expense in the three month period ended March 31, 2000 was $155,000. Stock/warrant compensation expense was $333,000 during the three month period ended June 30, 2001 versus $167,000 in the three month period ended June 30, 2000. Stock/warrant compensation expense had no effect on total shareholders equity as it is offset by an increase in additional paid in capital. In 2001 we retained a nationally based consultant group with expertise in executive compensation in the biotechnology sector to analyze the compensation of both the Chairman of the Board and Chief Executive Officer and the Chief Financial Officer. In accordance with the review, the Company granted 376,650 warrants to purchase our common stock to William A. Carter for services performed and to be performed and 30,000 warrants to the Chief Financial Officer. The Chief 8 Financial Officer's warrants are exercisable at $5.00 per share. The 376,650 warrants granted to the Chairman of Board and CEO consist 188,325 that are exercisable at $6.00 per share and 188,325 that are exercisable at $9.00 per share. We applied APB Opinion No. 25 in accounting for stock-based compensation of our company employees and directors and, accordingly, no compensation expense has been recognized for stock warrants rights issued to employees and directors in the financial statements because the exercise prices of the warrants exceeded the quoted market price of our stock on the dates of grant. NOTE 3: COMPREHENSIVE INCOME: In January, 1998, we adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("Statement 130"), Statement 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on our net loss or stockholders' equity. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The term "other comprehensive income" refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. The components of comprehensive (loss) are: (000's omitted) --------------------------- For six months ending -------------------------- June 30, 2000 June 30, 2001 -------------- --------------- Net Loss $(4,032) $(4,823) Unrealized gain on short term investments 4 ----------- ------------ Total comprehensive loss $(4,032) $(4,819) ========== ============ Note 4: INVESTMENTS: Investments in unconsolidated affiliates: In 1998, we invested $1,074,000 for a 3.3% equity interest in R.E.D. Laboratories ("R.E.D."). R.E.D. is a privately held biotechnology company for the development of diagnostic markers for Chronic Fatigue Syndrome and other chronic immune diseases. We have a research collaboration agreement with R.E.D. to assist in this development. R.E.D. is headquartered in Belgium. The investment has been recorded at cost. On May 11, 1999, we acquired a 15% interest in California Institute of Molecular Medicine ("CIMM") 9 for $375,000. On May 16, 2000, we acquired an additional 15% interest in CIMM for an additional $375,000. The Company currently has a total interest of 30% in CIMM for a total of $750,000. CIMM is developing therapy for Hepatitis C virus. The investment has been recorded by the equity method. The balance at June 30, 2001 was $619,000. Other investments include an initial equity investment of $290,625 in Chronix Biomedical ("Chronix"). Chronix focuses upon the development of diagnostics for chronic diseases. This initial investment was made in May 31, 2000 by the issuance of 50,000 shares of Hemispherx Biopharma, Inc. common stock from the treasury. On October 12, 2000, we issued an additional 50,000 shares of Hemispherx Biopharma, Inc. common stock and on March 7, 2001 we issued 12,000 more shares of Hemispherx Biopharma, Inc. common stock from our the treasury to Chronix for an aggregate equity investment of $700,000. Pursuant to a strategic alliance agreement, we provided Chronix with $250,000 during 2000 to conduct research in an effort to develop intellectual property on potential new products for diagnosing and treating various chronic illnesses such as chronic fatigue syndrome. The strategic alliance agreement provides us certain royalty rights with respect to certain diagnostic technology developed from this research and a right of first refusal to license certain therapeutic technology developed form this research. Note 5: LIQUIDITY: Our current cash and cash equivalents should fund operations through March 2002. In the event that our warrantholders do not exercise warrants at the level of funding needed to support our operations, we will seek access to the private or public equity market for the funding capital needed. Any additional funding may result in significant dilution and could involve the issuance of securities with rights, which are senior to those of existing stockholders. We may also need additional funding earlier than anticipated, and our cash requirements, in general, may vary materially from those now planned, for reasons including, but not limited to, changes in our research and development programs, clinical trials, competitive and technological advances, the regulatory process, and higher than anticipated expenses and lower than anticipated revenues from certain of the our clinical trials for which cost recovery from participants has been approved. ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations. SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS - -------------------------------------------------- Certain statements in this Report on Form 10-Q ("Form 10-Q"), constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 10 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995 (collectively, the "Reform Act"). Certain, but not necessary all, of such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. Such forward-looking statements involve known and unknown risks, uncertainties and other factors, including but not limited to, the risk factors discussed below, which may cause the actual results, performance or achievements of Hemispherx Biopharma, Inc. and its subsidiaries (collectively, the "Company", "we or "us") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements and other factors referenced in this Form 10-Q. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions which may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Overview We have spent almost thirty years in the exploration, understanding, and mastering the mechanism of ribonucleic acid (RNA) drug technology. The Company's longevity as a biomedical research and drug development institution, coupled with its record of enduring scientific achievement, is evidence of long-term commitment to these promising new classes of drugs for the chronically ill and to bring new therapeutic choices to the global health care community. Using nucleic acid technologies to develop therapeutic products for the treatment of viral diesease and certain cancers, the company has pioneered a new class of specially-configured ribonucleic acid (RNA) which targets the potential treatments of chronic fatigue syndrome (CFS), HIV associated disorders, chronic hepatitis B&C infection and cancers which include kidney cancer and metastatic malignant melanoma. Hemispherx and its predecessor (HEM Pharmaceuticals) is believed to be the only globally-operating biotechnology company using nucleic acid drug methodology which targets the body's natural anti-viral defense system. The company's intellectual property consists of over 350 patents issued and approximately 90 patents pending worldwide, which represents one of the larger patent portfolios in the worldwide biopharmaceutical sector. A Food and Drug Administration authorized, randomized, double-blind, placebo-controlled Phase III clinical trial is currently underway at multiple locations in the United States to test the efficacy of Ampligenr in the treatment of 230 patients afflicted with CFS. Some 85% of the required patients have completed the pre- trial clinical phase and have been admitted to the program. Upon completion of this trial, we will evaluate the clinical data collected and submit the results to the FDA for review and approval. Our European subsidiary, Hemispherx Biopharma Europe, is 11 engaged in establishing and conducting clinical trials in Europe for the treatment of patients afflicted with CFS. The Food and Drug Administration has authorized us to commence two phase II clinical trials designed to evaluate the use of Ampligenr in augmenting immunologic gains in patients receiving intense antiviral therapy for HIV disease. We expect to enroll over 200 patients in these clinical trials, which will be partly conducted in Europe. We were incorporated in Maryland in August 1966 under the name HEM Research, Inc. and originally served as a supplier of research support products. We redirected our focus in the early 1980's to the development of nucleic acid pharmaceutical technology and the commercialization of RNA drugs. We were reincorporated in Delaware and changed our name to HEM Pharmaceutical Corp. in January 1991. In June, 1995 we became Hemispherx Biopharma, Inc. The Company has three domestic subsidiaries BioPro Corp., BioAgean Corp.and Core BioTech Corp., all of which are incorporated in Delaware. Our foreign subsidiary, Hemispherx Biopharma- Europe was established in 1998. We expect to continue our research and clinical efforts for the next several years and may continue to incur losses due to clinical costs incurred in the continued development of Ampligenr for commercial application. Possible losses may fluctuate from quarter to quarter as a result of differences in the timing of significant expenses incurred and receipt of licensing fees and/or cost recovery treatment revenues in Europe, Canada and in the United States. Our research, development, clinical trials and the manufacturing and marketing of the Company's products are subject to extensive regulation by numerous governmental agencies in the United States and other countries. None of our products have been approved for commercial sale by the Food and Drug Administration or other foreign regulatory authorities. RISK FACTORS The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in the forward-looking statements made in this report. Among the key factors that have a direct bearing on our results of operations are: Our drug and related technologies are investigational and subject to regulatory approval. All of our drugs and associate technologies are investigational and must receive prior regulatory approval by appropriate regulatory authorities for general use and are currently legally available only through clinical trials with specified disorders. Our principal development efforts are currently focused on Ampligen, which has not been approved for commercial use. Our products, including Ampligenr are subject to 12 extensive regulation by numerous governmental authorities in the U.S. and other countries, including, but not limited to, the Food and Drug Administration in the U.S., the Health Protection Branch of Canada, and the European Medical Evaluation Agency in Europe. Obtaining regulatory approvals is a rigorous and lengthy process and requires the expenditure of substantial resources. In order to obtain final regulatory approval of a new drug, we must demonstrate to the satisfaction of the regulatory agency that the product is safe and effective for its intended uses and that we are capable of manufacturing the product to the applicable regulatory standards. We cannot assure you that the drug will ultimately be demonstrated to be safe or efficacious. In addition, while Ampligenr is authorized for use in clinical trials in the United States and other countries, we cannot assure you that additional clinical trial approvals will be authorized in the United States or in other countries, in a timely fashion or at all, or that we will complete these clinical trials. If Ampligenr or one of our other products does not receive regulatory approval in the U.S. or elsewhere, our operations will be materially adversely effected. We may continue to incur substantial losses and our future profitability is uncertain. We began operations in 1966 and last reported net profit from 1985 through 1987. Since 1987, we have incurred substantial operating losses. As of June 30, 2001 our accumulated deficit was approximately $87,389,000. We have not yet generated significant revenues from our products and may incur substantial and increased losses in the future. We cannot assure that we will ever achieve significant revenues from product sales or become profitable. We require, and will continue to require, the commitment of substantial resources to develop our products. We cannot assure that our product development efforts will be successfully completed or that required regulatory approvals will be obtained or that any products will be manufactured and marketed successfully, or profitability. Additional financing requirements. The development of our products will require the commitment of substantial resources to conduct the time-consuming research, preclinical development, and clinical trials that are necessary to bring pharmaceutical products to market. Based on our current operating plan, we anticipate receipt of limited revenues from the sales of Ampligenr under the Cost Recovery Clinical Programs and investors exercising our Class A Redeemable Warrants. The Company may need to raise substantial additional funds through additional equity or debt financing or from other sources in order to complete the necessary clinical trials and the regulatory approval processes and begin commercializing its products. There can be no assurances that our Class A Redeemable Warrants will be exercised or that we will raise any proceeds from possible equity financing, which may have a material effect on our ability to develop our products. 13 No regulatory agency has approved the full commercial sale of any of the our products. We cannot assure you that Ampligenr will ultimately be demonstrated to be safe or efficacious. While Ampligenr is authorized for use in clinical trials in the United States and other countries, we cannot assure you that additional clinical trial approvals will be authorized in the United States, or in other countries in a timely fashion or at all or that we will complete these clinical trials. If Ampligenr or one of our other products does not receive regulatory approval in the United States or elsewhere, our operations will be significantly affected. We may not be profitable unless we can protect our patents and/or receive approval for additional pending patents. We need to acquire enforceable patents covering the use of Ampligenr for a particular disease in order to obtain exclusive rights for the commercial sale of Ampligenr for such disease. Our success depends, in large part, on our ability to obtain patent protection for our products and to obtain and preserve our trade secrets and expertise. We have been issued certain patents on the use of Ampligenr and Ampligenr in combination with certain other drugs for the treatment of HIV. We have also been issued patents on the use of Ampligenr in combination with certain other drugs for the treatment of chronic hepatitis B virus, chronic hepatitis C virus, and a patent which affords protection on the use of Ampligenr in patients with chronic fatigue syndrome. We have not been issued any patents in the United States for the use of Ampligen as a sole treatment for any of the cancers which we have sought to target. If we cannot protect our patents covering the use of Ampligenr for a particular disease, or obtain additional pending patents, we may not be able to successfully market Ampligenr. The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves complex legal and factual questions. To date, no consistent policy has emerged regarding the breadth of protection afforded by pharmaceutical and biotechnology patents. There can be no assurance that patent applications relating to our products or technology will result in patents being issued or that, if issued, such patents will afford meaningful protection against competitors with similar technology. It is generally anticipated that there may be significant litigation in the industry regarding patent and intellectual property rights. Such litigation could require substantial resources from us. No assurance can be made that our patents will provide competitive advantages for our products or will not be successfully challenged by competitors. No assurance can be given that patents do not exist or could not be filed which would have a materially adverse effect on our ability to market our products or to obtain or maintain any competitive position the we may achieve with respect to our products. Our patents also may not prevent others from developing competitive products using related technology. 14 There can be no assurance that we will have the financial resources necessary to enforce patent rights we may hold. If we cannot enforce the patent rights we currently hold we may be required to obtain licenses from others to develop, manufacture or market our products. There can be no assurance that we would be able to obtain any such licenses on commercially reasonable terms, if at all. We currently license certain proprietary information from third parties, some of which may have been developed with government grants under circumstances where the government maintained certain rights with respect to the proprietary information developed. No assurances can be given that such third parties will adequately enforce any rights they may have or that the rights, if any, retained by the government will not adversely affect the value of our license. Certain of our know- how and technology is not patentable, particularly the procedures for the manufacture of our drug product which are carried out according to standard operating procedure manuals. We may not be profitable unless we can produce Ampligenr in commercial quantities at costs acceptable to us. We have never produced Ampligenr or any other products in large commercial quantities. Ampligenr is currently produced only for use in clinical trials. We must manufacture our products in compliance with regulatory requirements in commercial quantities and at acceptable costs in order for us to be profitable. We intend to utilize third-party manufacturers and/or facilities if and when the need arises or, if we are unable to do so, to build or acquire commercial-scale manufacturing facilities. If we cannot manufacture commercial quantities of Ampligenr or enter into third party agreements for its manufacture at costs acceptable to us, our operations will be significantly affected. If our distributors do not market our product successfully, we may notgenerate significant revenues or become profitable. We have limited marketing and sales capability. We need to enter into marketing agreements and third party distribution agreements for our products in order to generate significant revenues and become profitable. To the extent that we enter into co-marketing or other licensing arrangements, any revenues received by us will be dependent on the efforts of third parties, and there is no assurance that these efforts will be successful. Our agreement with Gentiva Health Services offers the potential to provide significant marketing and distribution capacity in the United States while licensing and marketing agreements with certain foreign firms should provide an adequate sales force in South America, Africa, United Kingdom, Australia and New Zealand, Canada and Austria. Gentiva Health Services is able to deliver treatment and services to chronic disease patients including infusion services, home nursing and other medical services through a national network of more than 500 locations. We cannot assure that Gentiva Health Services or our foreign marketing partners will be able to successfully distribute our products, or 15 that we will be able to establish future marketing or third party distribution agreements on terms acceptable to us, or that the cost of establishing these arrangements will not exceed any product revenues. The failure to continue these arrangements or to achieve other such arrangements on satisfactory terms could have a materially adverse effect on us. If we cannot enter into future marketing and distribution agreements at terms acceptable to us, or if these distributors cannot effectively market and distribute our products, our operations will be negatively affected. No assurance of successful product development of Ampligenr. The development of Ampligenr and our other products is subject to a number of significant risks. Ampligenr may be found to be ineffective or to have adverse side effects, fail to receive necessary regulatory clearances, be difficult to manufacture on a commercial scale, be uneconomical to market or be precluded from commercialization by proprietary rights of third parties. Our products are in various stages of clinical and pre-clinical development and, require further clinical studies and appropriate regulatory approval processes before any such products can be marketed. We do not know when, or if ever, Ampligenr will be generally available for commercial sale for any indication for at least the next several years, if at all. Generally, only a small percentage of potential therapeutic products are eventually approved by the FDA for commercial sale. Ampligenr safety profile. We believe that Ampligenr has been generally well tolerated with a low incidence of clinical toxicity, particularly given the severely debilitating or life threatening diseases that have been treated. A mild flushing reaction has been observed in approximately 15% of patients treated in our various studies. This reaction is occasionally accompanied by erythema, a tightness of the chest, tachycardia, anxiety, shortness of breath, subjective reports of ''feeling hot,'' sweating and nausea. The reaction is usually infusion-rate related and can generally be controlled by slowing the infusion rate. Other adverse side effects include liver enzyme level elevations, diarrhea, itching, urticaria (swelling of the skin), bronchospasm, hypotension, photophobia, rash, bradycardia, transient visual disturbances, transient arrhythmias, decreased visual activity in platelets and white blood cell counts, anemia, dizziness, confusion, elevation of kidney function tests, occasional temporary hair loss and various flu-like symptoms, including fever, chills, fatigue, muscular aches, joint pains, headaches, nausea and vomiting. These flu-like side effects typically subside within several months. There is no assurance that successful manufacture of a drug on a limited scale basis for investigational use will lead to a successful transition to commercial, large-scale production. Small changes in methods of manufacturing may 16 affect the chemical structure of Ampligen and other such RNA drugs, as well as their safety and efficacy. Changes in methods of manufacture, including commercial scale-up may affect the chemical structure of Ampligen and, can, among other things, require new clinical studies and affect orphan drug status, particularly, market exclusivity rights, if any, under the Orphan Drug Act. The transition from limited production of pre-clinical and clinical research quantities to production of commercial quantities of our products will involve distinct management and technical challenges and will require additional management and technical personnel and capital to the extent such manufacturing is not handled by third parties. There can be no assurance that our efforts will be successful or that any given product will be determined to be safe and effective, capable of being manufactured economically in commercial quantities or successfully marketed. Rapid technological change. The pharmaceutical and biotechnology industries are subject to rapid and substantial technological change. Technological competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Most of these entities have significantly greater research and development capabilities than us, as well as substantial marketing, financial and managerial resources, and represent significant competition for us. There can be no assurance that developments by others will not render our products or technologies obsolete or noncompetitive or that we will be able to keep pace with technological developments. Substantial competition. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects to products being developed by us. These competing products may be more effective and less costly than our products. In addition, conventional drug therapy, surgery and other more familiar treatments will offer competition to our products. Furthermore, many of our competitors have significantly greater experience than us in pre-clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA, HPB and other regulatory approvals of products. Accordingly, our competitors may succeed in obtaining FDA and HPB product approvals more rapidly than us. If any of our products receive regulatory approvals and we commence commercial sales of our products, we will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which we have no experience. Our competitors may possess or obtain patent protection or other intellectual property rights that prevent, limit or otherwise adversely affect our ability to develop or exploit our products. Limited manufacturing experience and capacity. 17 Ampligenr is currently produced only in limited quantities for use in our clinical trials and we are dependent upon certain third party supplies for key components of our products and for substantially all of the production process. The failure to continue these arrangements or to achieve other such arrangements on satisfactory terms could have a material adverse affect on us. Also, to be successful, our products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. To the extent we are involved in the production process, our current facilities are not adequate for the production of our proposed products for large-scale commercialization, and we currently do not have adequate personnel to conduct commercial-scale manufacturing. We intend to utilize third-party facilities if and when the need arises or, if we are unable to do so, to build or acquire commercial-scale manufacturing facilities. We will need to comply with regulatory requirements for such facilities, including those of the FDA and HPB pertaining to Good Manufacturing Practices ("GMP") regulations. There can be no assurance that such facilities can be used, built, or acquired on commercially acceptable terms, that such facilities, if used, built, or acquired, will be adequate for our long-term needs. We may be subject to product liability claims from the use of Ampligen or other of our products which could negatively affect our future operations. We face an inherent business risk of exposure to product liability claims in the event that the use of Ampligenr or other of our products results in adverse effects. This liability might result from claims made directly by patients, hospitals, clinics or other consumers, or by pharmaceutical companies or others manufacturing these products on our behalf. Our future operations may be negatively effected from the litigation costs, settlement expenses and lost product sales inherent to these claims. While we will continue to attempt to take appropriate precautions, we cannot assure that we will avoid significant product liability exposure. Although we currently maintain worldwide product liability insurance coverage in the amount of $1,000,000, there can be no assurance that this insurance will provide adequate coverage against product liability claims. While no product liability claims are pending or threatened against us to date, a successful product liability claim against us in excess of our insurance coverage could have a negative effect on our business and financial condition. Members of our Scientific Advisory Board may have conflicting interests and may disclose data and technical know how to our competitors. All of our Scientific Advisory Board members are employed by other entities, which may include our competitors. Although we require each of our Scientific Advisory Board members to sign a non-disclosure and non-competition agreement with respect to the data and information that he or she receives from us, we cannot assure you that members will abide by them. If a member were to reveal this information to outside sources, accidentally or otherwise, our operations could be negatively effected. 18 Since our business depends in large part on our ability to keep our technical expertise confidential, any revelation of this information to a competitor or other source could have an adverse effect on our operations. There is no guarantee that our trade secrets will not be disclosed or known by our competitors. To protect our rights, we require certain employees and consultants to enter into confidentiality agreements with us. There can be no assurance that these agreements will not be breached, that we would have adequate and enforceable remedies for any breach, or that any trade secrets of ours will not otherwise become known or be independently developed by competitors. The loss of Dr. Carter's services could hurt our chances for success. Our success is dependent on the continued efforts of Dr. William A. Carter because of his position as a pioneer in the field of nucleic acid drugs, his being the co-inventor of Ampligenr, and his knowledge of the company's overall activities, including patents, clinical trials, corporate relationships and relationships with governmental agencies which regulate our business. The loss of Dr. Carter's services could have a material adverse effect on our operations and chances for success. While we have an employment agreement with Dr. William A. Carter, and have secured key man life insurance in the amount of $2 million on the life of Dr. Carter, the loss of Dr. Carter or other personnel, or the failure to recruit additional personnel as needed could have a materially adverse effect on our ability to achieve our objectives. Uncertainty of health care reimbursement and potential legislation. Our ability to successfully commercialize our products will depend, in part, on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and from time to time legislation is proposed, which, if adopted, could further restrict the prices charged by and/or amounts reimbursable to manufacturers of pharmaceutical products. We cannot predict what, if any, legislation will ultimately be adopted or the impact of such legislation on us. There can be no assurance that third party insurance companies will allow us to charge and receive payments for products sufficient to realize an appropriate return on our investment in product development. Hazardous materials. Our business involves the controlled use of hazardous materials, carcinogenic chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply in all material respects with the standards prescribed by applicable regulations, the 19 risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident or the failure to comply with applicable regulations, we could be held liable for any damages that result, and any such liability could be significant. The company does not maintain insurance coverage against such liabilities. Exercise of Class A Redeemable Warrants may have dilutive effect on market. Holders of the Class A Redeemable Warrants may exercise the Class A Redeemable Warrants and purchase the underlying Common Stock at a time when we may be able to obtain capital by a new offering of securities on terms more favorable than that provided by such Class A Redeemable Warrants, in which event our ability to obtain additional capital would be affected adversely. Litigation in Pennsylvania involving us and Manuel Asensio and Asensio & Company,Inc. In 1998, we filed a multi-count complaint against Manuel P. Asensio, Asensio & Company, Inc., and others in the United States District Court for the Eastern District of Pennsylvania. The action presently includes claims of defamation, disparagement, tortious interference with existing and prospective business relations and conspiracy, arising out of the current defendants' false and defamatory statements. The complaint further alleges that defendants defamed and disparaged the Company in furtherance of a manipulative, deceptive and unlawful short-selling scheme between August, 1998, and the present. In 1999, Manuel P. Asensio, and Asensio & Company, Inc., and others filed an answer and counterclaim against the Company. The counterclaim alleges that in or around September 1998, and in response to defendants' strong sell recommendation and other press releases about the Company and its officers and directors, the Company made defamatory statements about defendants, including statements that defendants' attack and manipulative short-selling scheme may have constituted criminal wrongdoing on the part of defendants. The Company has denied the material allegations of the counterclaim and is vigorously defending against the counterclaim. In July 2000, following dismissal in federal court for lack of subject matter jurisdiction, we transferred the action to the Pennsylvania State Court. In March 2001, the defendents responded to the complaint as amended. In May 2001, the defendents moved for a summary judgement on all counts of the amended complaint. The motion is presently pending and no trial date has been set. Litigation in New York involving us and Manuel Asensio, Asensio & Company Inc., and Asensio.com Inc. In May 2000, we received notice of a claim by Manuel P. Asensio and Asensio & Company, Inc., in the Supreme Court of the State of New York against the Company, the Chairman and Chief Executive Officer, William A. Carter, and our prior auditors (the "first New York action") in which they allege that defendants defamed them in oral and written communications made in 20 March 2000. The allegations of Manuel P. Asensio and Asensio & Company, Inc. in the first New York action are similar in substance to the alleged defamation which is the subject of the counterclaims filed by them in the action presently pending in Pennsylvania State Court. In March 2001, Dr. Carter's motion to dismiss was granted. In July 2001, the company moved to dismiss the action based on the prior pendency of the action of the Pennsylvania State Court. The motion is presently pending. In June 2000, Manuel P. Asensio, Asensio & Company, Inc. and Asensio.com Inc.,("Asensio plaintiffs") filed a second action against the Company and Dr. William Carter, the Company's Chairman and Chief Executive Officer in the Supreme Court of the State of New York. (the "second New York action"). In September 2000, we were served with a complaint in this action. The second New York action purports to seek a declaratory judgment that the Asensio plaintiffs statements regarding the Company constituted protected speech, and that they did not engage in any actionable interference with our existing or prospective business relations. In June 2001, Asensio plaintiffs voluntarily withdrew the second New York action. We intend to vigorously defend against the claims asserted in the first New York actions. However, this litigation could subject us to significant liability for damages and, even if it does not subject us to liability for damages, it could be time-consuming and expensive to defend, and could result in the diversion of management time and attention. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward- looking statement speaks only as of the date on which it is made and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business of the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. RESULTS OF OPERATIONS Three months ended June 30, 2001 versus Three months - ----------------------------------------------------- ended June 30, 2000 - --------------------- Our net loss for the three months ended June 30, 2001 was $2,343,000 or approximately $283,000 more than recorded for the same period in 2000. Overall costs and expenses were higher by some $94,000 and cost recovery treatment revenue and interest income was down by $189,000. Revenues from Cost Recovery Clinical Treatment programs in the U.S. and Europe were down $115,000 primarily due 21 to our focus on recruiting patients for the double blind, placebo controlled phase III CFS clinical trial. Interest income was down by $74,000 due to lower money market interest rates and a smaller amount of invested funds. Overall Research and Development costs in the three months ended June 30, 2001 were lower by $119,000 compared to the same period in 2000. Most of this decrease relates to lower clinical trial and related costs. The costs related to the CFS phase III clinical trial were down some $379,000 as this trial nears completion. Costs related to cost recovery treatment revenues were lower by $73,000 due to lower revenues recorded in the three months ended June 30, 2001. Clinical costs related to the new HIV clinical trials were $42,000. Manufacturing and quality control costs increased $329,000 reflecting the increased cost of working with a new liquid Ampligenr producer as well as increased product testing and release efforts. General and Administrative expenses were $760,000 exclusive of $276,000 recorded for stock compensation in the three months ended June 30, 2001 compared to $656,000 exclusive of $167,000 of stock compensation recorded for the same period in 2000. The net increase in expenses of $104,000 basically reflects an increase in professional fees in the amount of $214,000 with offsets in lower Public Relations expenses of $50,000, lower temporary help costs of $20,000 and lower cost related to telephone, travel and other expenses. Stock Compensation expense was $276,000 in the three months ended June 30, 2001. This is an increase of $109,000 over the same period in 2000. Stock Compensation expense is a non-cash expense that reflects the fair value of common stock or warrants granted to non-employees of the Company. Six months ended June 30, 2001 versus six months ended - ------------------------------------------------------ June 30,2000 - ------------ Our net loss was approximately $4,823,000 for the six months ended June 30, 2001. This reflects an increase in losses in the amount of $791,000 compared to the same period in 2000. Elements contributing to the increase in losses include lower cost recovery treatment revenues totaling $198,000, increased R&D costs of $241,000, higher stock compensation expenses of $186,000, and lower interest income of $132,000. CFS cost recovery treatment revenues were $228,000 in the six months ended June 30, 2001 compared to $426,000 in the same period in 2000. This decline in revenue is reflected in the U.S. as well in Europe. U.S. revenues were down primarily due to our focus on recruiting CFS patients for the Phase III CFS trial. European revenues are basically produced by one clinic located in Belgium. Enrollment in the Belgium program has been slowed to allow the clinical investigator to compile and review the clinical data collected in the treatment of approximately 150 patients over the past several years. This data, when finalized, will be used to supplement the data collected from the phase III CFS 22 clinical trial in the U.S. Our European personnel are working to establish CFS cost recovery treatment programs in other European countries. Research & Development costs were $3,176,000 in the six months ended June 30, 2001 versus $3,022,000 for the same period in 2000. This increase of $154,000 is primarily due to costs related to the increased production and testing of Ampligenr in 2001. Compared to the first six months of 2000, the need for Ampligenr has increased in 2001 due to increased clinical trial activity. General and Administrative Expenses before charges for stock compensation, were $1,409,000 in the six months ended June 30, 2001 compared to expense of $1,400,000 for the same period in 2000. Basically, General and Administrative expenses in 2001 remained flat when compared to the six month period ended June 30,2000. Stock Compensation expense of $595,000 in the six months ended June 30, 2001 is $273,000 higher than recorded for the same period in 2000. The 2001 expense includes a cost of $262,000 due to the extension of the expiration dates of certain warrants granted to officers and Directors. Interest income of $180,000 in the six month end June 30, 2001 was down by $132,000 due to lower interest rates earned on money market instruments as well as less funds were available to invest. LIQUIDITY AND CAPITAL RESOURCES Our cash, cash equivalents and short term investments were $4,980,000 as of June 30, 2001 compared to $8,378,000 million at December 31, 2000 reflecting a net decrease of cash in the amount of $3,398,000 in the first six months of 2001. Operating activities consumed $4,160,000 million reflecting major cash outlays in support of the ME/CFS phase III clinical trial as well as support of the European clinical efforts. All clinical trial drug products were fully expensed although some of the costs are expected to be recovered under the expanded access, cost-recovery, pre-marketing programs authorized by FDA and various regulatory bodies in other countries. As the clinical testing effort in the United States accelerates and the European market development activity increases, the operating burn rate may increase periodically. However, certain of the operating, as well as the non-operating cash outlays are of a one time nature and are expected to decline. Also revenues from expanded access cost recovery treatments are expected to improve in the coming months. Proceeds from the exercise of warrants totaled $1,147,000 which is significantly lower than 23 experienced in the first six months of 2000. The decline in warrants being exercised is primarily due to the depressed market price of biotech stocks including ours. In the six months ended June 30,2001, our stock price traded in a range of $3.01 to $7.15. We have 3,916,208 outstanding publicly traded class A preferred redeemable warrants exercisable at $4.00 per share and 8,122,510 non-public warrants that are exercisable at an weighted average price of $4.12. The shares of common stock underlying 4,269,000 shares of the oustanding non-public warrants have been registered for sale under the Securities Act of 1933, as amended, by the holders thereof. We expect warrantholders to continue exercising both the public and non-public warrants from time to time depending on the trading price of our common stock. The publicly traded class A redeemable preferred warrants expire on November 2, 2001. Our current cash and cash equivalents should fund operations through April 2002. In the event that our warrantholders do not exercise warrants at the level of funding needed to support our operations, we will seek access to the private or public equity markets for the funding capital needed. Any additional funding may result in significant dilution and could involve the issuance of securities with rights, which are senior to those of existing stockholders. We may also need additional funding earlier than anticipated, and our cash requirements, in general, may vary materially from those now planned, for reasons including, but not limited to, changes in our research and development programs, clinical trials, competitive and technological advances, the regulatory process, and higher than anticipated expenses and lower than anticipated revenues from certain of our clinical trials for which cost recovery from participants has been approved. New Accounting Pronouncements In June 2001, the Financial Accounting Standards Board finalized FASB Statements No. 141, Business Combinations (SFAS 141), and NO. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of SFAS 142, that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill 24 for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's investment in CIMM was accounted for using the equity method. As of June 30, 2001, the net carrying amount of goodwill included in the investment balance was $503,000. Other intangible assets are primarly patents which currently have a net value of $1,051,000. Amortization expense of goodwill and patents during the six-month period ended June 30, 2001 was $18,000 and $191,000 respectively. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. ITEM 3: Quantitative and Qualitative Disclosures About Market Risk We had $4,980,000 in cash, cash equivalents and short term investments at June 30, 2001. To the extent that our cash and cash equivalents exceed our near term funding needs, we invest the excess cash in three to six month high quality financial instruments. The Company employs established policies and procedures to manage any risks with respect to investment exposure. Part II - OTHER INFORMATION ITEM 1: Legal Proceedings In September, 1998, we filed a multi-count complaint against Manuel P. Asensio, Asensio & Company, Inc., and others in the United States District Court for the Eastern District of Pennsylvania. In October 1998 and August 1999, we amended the complaint to add additional counts and to add Asensio.com, Inc. (formerly known as Asensio Holding, Inc.), the holding company of the defendant, Asensio & Company Inc., and 25 to add a conspiracy charge against the remaining defendants and certain unnamed John Does. As amended, our complaint seeks recovery on common law theories of intentional interference with existing and prospective business relations, defamation, commercial disparagement, and conspiracy on account of defendants' short selling of our stock and the publication, by defendants Asensio and ACI, of defamatory statements regarding the Company. In April 1999, defendants Asensio and ACI answered the complaint and asserted defamation and disparagement counterclaims against us seeking damages in an unspecified amount. Defendants' counterclaims allege that we, through our officers, defamed Asensio in oral and written communications accusing Asensio and ACI of having engaged in possibly criminal behavior with respect to the short selling of our stock and the subsequent publication of various defamatory statements regarding us . In May 1999, we filed an answer, including affirmative defenses, to these counterclaims. In June 2000, the United States District Court dismissed the Company's complaint and the defendants' counterclaims for lack of federal subject matter jurisdiction over the action. In July 2000, we transferred the action to the Pennsylvania State Court. In May 2001, the defendants moved for summary judgement on all counts. The motion is presently pending. No trial date has been re-set for this action. In May 2000, Asensio and ACI filed a separate action in the Supreme Court of the State of New York against our company, our Chairman and Chief Executive Officer, William A. Carter and our prior auditors ("the first New York action"). The action was commenced by Summons. In July 2000, Asensio and ACI filed a Complaint in which they alleged that the defendants defamed them in oral and written communications made in March 2000. Plaintiff's allegations in the first New York action are similar in substance to the alleged defamations which are the subject of the counterclaim filed by them in the action presently pending in Pennsylvania State Court. In August 2000, we filed an answer, including affirmative defenses to these claims, and Dr. Carter moved to dismiss the claims. In March 2001, Dr. Carter's motion to dismiss was granted. In July 2001, the Company moved to dismiss the action based on the prior pendency of the action of the Pennsylvania State Court. The motion is presently pending. In June 2000, Asensio, ACI and Asensio.Com, Inc. filed a second action against us and Dr. Carter in the Supreme Court of the State of New York ("the second New York action"). The action was commenced by Summons. In September 2000, plaintiffs filed a Complaint in the second New York action which purports to seek a declaratory judgment that the statements of Asensio, ACI and Asensio.com, Inc. about the Company constituted protected speech, and that plaintiffs did not engage in any actionable interference with existing or prospective business relations of the Company. In essence, the second New York action seeks to establish the validity of the affirmative defenses asserted by the defendants in the action now being 26 litigated in the Pennsylvania State Court. In June 2001, the plaintiffs voluntarily withdrew the second New York action. We intend to vigorously defend against the "claims" asserted by Asensio, ACI and Asensio.com, Inc. in the New York actions and we have moved to consolidate and dismiss the first New York action. Cook Imaging Corp. ("Cook") commenced action against us in March 2000, in the United States District Court for the Eastern District of Pennsylvania. From approximately 1997 through 1999, Cook manufactured the drug Ampligenr (as well as Ampligenr placebo) for us. Cook sued for in excess of $300,000 in unpaid invoices, including interest, related to four Ampligenr batches manufactured by Cook and delivered to us in 1999. The Company denied that such amounts are owed and asserted a counterclaim for failure to consistently manufacture Ampligenr in strict conformance with federal regulations known as current good manufacturing practices ("cGMP"). The court awarded Cook Imaging approximately $248,000 which reflects the amount of the unpaid invoices plus interest, less approximately $63,800 awarded the Company on its counterclaims. We paid this amount to Cook during the quarter ended June 30, 2001. ITEM 2: Changes in Securities None ITEM 3: Defaults in Senior Securities None ITEM 4: Submission of Matters to a Vote of Security Holders None ITEM 5: Other Information None 27 ITEM 6: Exhibits and Reports on Form 8K (a)Exhibits 3.1* Amended and Restated Certificate of Incorporation of the Company, as amended, along with Certificates of Designations 3.1.1** Series E Preferred Stock 3.2 By-laws of Registrant, as amended and restated 4.1* Specimen certificate representing our common stock 4.2* Form of Class A Redeemable Warrant Certificate 4.3* Form of Underwriter's Unit Option Purchase Agreement 4.4* Form of Class a Redeemable Warrant Agreement with Continental Stock and Transfer and Trust Company 10.1 Amended and Restated Employment Agreement by and between the Company and Dr. William A. Carter, dated as of December 3, 1998 10.2 Amended and Restated Engagement Agreement by and between the Company and Robert E. Peterson, dated April 1, 2001. * These exhibits were filed with the Securities and Exchange Commission ("SEC") as exhibits to the Company's Form S-1 Registration Statement (No. 33-93314) or amendments thereto and are hereby incorporated by reference. ** This exhibit was filed with the SEC as Exhibit 3.1.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and is hereby incorporated by reference. (b) Reports on Form 8-k None 28 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. HEMISPHERx BIOPHARMA, INC. /S/ William A. Carter --------------------------- Date: August 14, 2001 William A. Carter, M.D. Chief Executive Officer & President /S/ Robert E. Peterson -------------------------- Date: August 14, 2001 Robert E. Peterson Chief Financial Officer EX-99.2 BYLAWS 2 r10q_bylaws.txt AMENDED CORPORATE BYLAWS 1 RESTATED AND AMENDED BYLAWS of HEMISPHERX BIOPHARMA, INC. ARTICLE I. MEETINGS OF STOCKHOLDERS. Section 1.1. Annual Meeting. The annual meeting of stockholders shall be held at such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors from time to time. At the annual meeting, directors shall be elected and such other business transacted as shall have been properly brought before the meeting. Section 1.2. Special Meeting. Special meetings of stockholders for any purpose or purposes may be called by the Chairman of the Board, the President, a majority of the Board of Directors, or a majority of the Executive Committee, and shall be called by the Secretary upon the request, in writing, of the stockholders owning a majority of the shares of capital stock of the Corporation issued and outstanding and entitled to vote at such meeting. A stockholder request for a special meeting shall be signed, dated and delivered to the Secretary, shall state the purpose of the proposed meeting, and shall provide the information required by Section 1.4(c) hereof. The Board of Directors or, in the absence of action by the Board of Directors, the Chairman of the Board, shall have the sole power to determine the date, time and place for any special meeting of stockholders and to set a record date for the determination of stockholders entitled to vote at such meeting pursuant to Section 1.11 hereof. Following such determination, it shall be the duty of the Secretary to cause notice to be given to the stockholders entitled to vote at such meeting, in the manner set forth in Section 1.3 hereof, that a meeting will be held at the place, time and date and in accordance with the record date determined by the Board of Directors or the Chairman of the Board. The stockholders requesting the special meeting shall not have the power to give notice of the meeting. Section 1.3. Notice of Meetings. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given that shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the Certificate of Incorporation or these By-laws, the written notice of any meeting shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. Section 1.4. Advance Notice Requirements for Stockholder Proposals. The following procedures shall govern all cases in which a stockholder seeks to propose business to be addressed at a meeting of stockholders or to nominate persons to stand for election as directors of the Corporation (a "Stockholder Proposal"). No business shall be transacted at a meeting of stockholders except in accordance with the 2 following procedures. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation. Notwithstanding any language in these by-laws to the contrary, this section shall not apply to any right of holders of preferred shares of the Corporation to nominate and elect a specified number of directors in certain circumstances to the extent such procedures are set forth in the Certificate of Incorporation. (a) Annual Meetings of Stockholders. (1) A Stockholder Proposal may be brought before an annual meeting of stockholders only (i) pursuant to the Corporation's notice of meeting delivered pursuant to Section 1.3 hereof (or any supplement thereto), (ii) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or the Chairman of the Board or (iii) by any stockholder of the Corporation who was a stockholder of record of the Corporation at the time the notice provided for in this Section 1.4 is delivered to the Secretary of the Corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in subparagraphs (2) and (3) of this paragraph (a) in this Section 1.4. (2) For a Stockholder Proposal to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 1.4, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and the subject of the Stockholder Proposal must otherwise be a proper matter for stockholder action as determined by the Board of Directors. The stockholder's notice shall contain, at a minimum, the information set forth in Section 1.4(c). To be timely, a stockholder's notice , for all Stockholder Proposals other than the nomination of candidates for director, shall be delivered to the Secretary at the principal executive offices of the Corporation not less than sixty (60) nor more than ninety (90) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, the stockholder's notice in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. To be timely, a stockholder's notice , with respect to a Stockholder Proposal for nomination of candidates for director, shall be delivered to the Secretary at the principal executive offices of the Corporation not less than ninety (90) nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within thirty (30) days before or after such anniversary date, the stockholder's notice in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. In no event shall the public announcement of an adjournment or postponement of an annual meeting of stockholders commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. 3 (3) Notwithstanding anything in paragraph (a)(2) of this Section 1.4 to the contrary, in the event that the Stockholder Proposal relates to the nomination of candidates for director and the number of directors to be elected to the Board of Directors of the Corporation at an annual meeting is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 1.4 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been described in the Corporation's notice of meeting given pursuant to Section 1.3 hereof. To the extent such business includes the election of directors, a Stockholder Proposal nominating persons to stand for election as directors may be made at a special meeting of stockholders only (i) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or the Chairman of the Board, or (ii) by any stockholder of the Corporation who is a stockholder of record at the time the notice provided for in this Section 1.4(b) is delivered to the Secretary of the Corporation, who is entitled to vote at the special meeting and who gives timely notice in writing by the Secretary of the Corporation. The stockholder's notice shall contain, at a minimum, the information set forth in Section 1.4(c). To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. (c) Contents of Stockholder's Notice. Any stockholder's notice required by this Section 1.4 shall set forth the following information: As to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the Stockholder Proposal is made, the stockholder's notice shall set forth (i) the name and address of such stockholder and of such beneficial owner, as they appear on the Corporation's books, (ii) the class and number of shares of capital stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner and (iii) a representation that such stockholder intends to appear in person or by proxy at the stockholder meeting. For any Stockholder Proposal that seeks to nominate persons to stand for election as directors of the Corporation, the stockholder's notice also shall include (i) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made, (ii) a representation whether the stockholders or the beneficial owners, if any, intend or are part of a group which intends to (1) deliver a proxy statement and/or form of proxy to holders of at least the percentage of 4 the Corporation's outstanding capital stock required to elect the nominee and/or (2) otherwise solicit proxies from stockholders in support of such nomination, and (iii) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. For any Stockholder Proposal that seeks to nominate persons to stand for election as directors of the Corporation, the stockholder's notice also shall state, as to each person whom the stockholders propose to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation and employment of the person, (iii) the written consent of each proposed nominee to being named as a nominee and to serve as a director if elected., (iv) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (v) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation. For any Stockholder Proposal that seeks to propose matters to be considered at a stockholder meeting other than the nomination of persons to stand for election as directors of the Corporation, the stockholder's notice shall set forth for each item of business proposed for consideration (i) a description of the item of business, (ii) the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the by-laws of the Corporation, the language of the proposed amendment), (iii) the reasons for conducting such business at the stockholder meeting, (iv) and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the Stockholder Proposal is made, and (v) any other information relating to the stockholder, the beneficial owner, or the proposed business that would be required to be disclosed in a proxy statement or other filings in connection with solicitations of proxies relating to the proposed item of business pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. (d) Only Stockholder Proposals made in accordance with the procedures set forth in this Section 1.4 shall be considered at an annual or special meeting of stockholders of the Corporation. Except as otherwise provided by law, the chair of the meeting shall have the power and duty to (i) determine whether a Stockholder Proposal was made in accordance with the procedures set forth in this Section 1.4 and (ii) if any Stockholder Proposal is not in compliance with this Section 1.4, including whether the stockholder or beneficial owner, if any, on whose behalf the Stockholder Proposal is made solicits (or is part of a group which solicits) or fails to so solicit (as the case may be) proxies in support of the Stockholder Proposal in compliance with such stockholder's representation as required by Section (c) of this Section 1.4, to declare that such Stockholder Proposal shall be disregarded. 5 (e) For purposes of this Section 1.4, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (f) Notwithstanding the foregoing provisions of this Section 1.4, a stockholder also shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 1.4. Nothing in this Section 1.4 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a- 8 under the Exchange Act. Section 1.5. Postponement and Cancellation of Meeting. Any previously scheduled annual or special meeting of the stockholders may be postponed and any previously scheduled annual or special meeting of the stockholders called by the Chairman of the Board, the President, a majority of the Board of Directors, or a majority of the Executive Committee may be canceled by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. Section 1.6 Quorum. Except as otherwise provided by law, the Certificate of Incorporation or these by-laws, at each meeting of stockholders the presence in person or by proxy of the holders of a majority in voting power of the outstanding shares of stock entitled to vote at the meeting shall be necessary and sufficient to constitute a quorum. In the absence of a quorum, the chair of the meeting may adjourn the meeting from time to time in the manner provided in Section 1.10 hereof until a quorum shall attend. Shares of the Corporation's own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any subsidiary of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity. The chair of the meeting shall have the power and the duty to determine whether a quorum is present at any meeting of stockholders. Section 1.7. Officers for Meeting of Stockholders. Meetings of stockholders shall be presided over by the Chairman of the Board, if any, or in his absence by the President, or in his absence by a Vice President, or in the absence of the foregoing persons by a chair designated by the Board of Directors, or in the absence of such designation by a chair chosen at the meeting by a plurality vote. The Secretary shall act as secretary of the meeting, but in his absence the chair of the meeting may appoint any person to act as secretary of the meeting. Section 1.8. Conduct of Meetings. Every meeting of stockholders shall be presided over by the chair of the meeting selected pursuant to Section 1.7, hereof. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be determined by the chair of the meeting and announced at the meeting. The Board of Directors may adopt by 6 resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chair of the meeting shall have the exclusive right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of the chair, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chair of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chair of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on or the elimination of time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. Section 1.9. Voting; Proxies. Except as otherwise provided by or pursuant to the provisions of the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power upon the matter in question. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the Corporation. Voting at meetings of stockholders need not be by written ballot. At all meetings of stockholders, a plurality of the votes cast shall be sufficient to elect directors. All other elections and questions shall, unless otherwise provided by the Certificate of Incorporation, these by-laws, the rules or regulations of any stock exchange applicable to the Corporation, or applicable law or pursuant to any regulation applicable to the Corporation or its securities, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock of the Corporation which are present in person or by proxy and entitled to vote thereon. Section 1.10. Adjournment of Meeting. Any meeting of stockholders, annual or special, may be adjourned solely by the chair of the meeting from time to time to reconvene at the same or some other time, date and place. The stockholders present at a meeting shall not have authority to adjourn the meeting. Notice need not be given of any such adjourned meeting if the time, date and place thereof are announced at the meeting at which the adjournment is taken. If the time, date and place of the adjourned meeting are not announced at the meeting at which the adjournment is taken, then the Secretary of the Corporation shall give written notice of the time, date and place of the 7 adjourned meeting not less than ten (10) days prior to the date of the adjourned meeting. Notice of the adjourned meeting also shall be given if the meeting is adjourned in a single adjournment to a date more than 30 days or in successive adjournments to a date more than 120 days after the original date fixed for the meeting. At an adjourned meeting at which a quorum is present, the stockholders may transact any business which might have been transacted at the original meeting. Once a share is represented for any purpose at a meeting, it shall be present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. A new record date shall be set if the meeting is adjourned in a single or successive adjournments to a date more than 120 days after the original date fixed for the meeting. If after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting consistent with the new record date. Section 1.11 Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action other than stockholder action by written consent, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date: (i) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the original date of such meeting, and (ii) in the case of any other lawful action other than stockholder action by written consent, shall not be more than sixty days prior to such other action. If no record date is fixed by the Board of Directors: (i) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and (ii) the record date for determining stockholders for any other purpose (other than stockholder action by written consent) shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting and shall fix a new record date for the adjourned meeting if the meeting is adjourned in a single or successive adjournments to a date more than 120 days after the original date fixed for the meeting. Section 1.12. Procedures for Stockholder Action by Consent. 8 1.12.1 Request for Record Date. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the Board of Directors or as otherwise established under this Section 1.12.1. Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice addressed to the Secretary and delivered to the Corporation and signed by a stockholder of record, request that a record date be fixed for such purpose. The written notice shall contain at a minimum the information required in Section 1.4(c) for a Stockholder Proposal and shall state the reasons for soliciting consents for such action. The Board of Directors shall have ten (10) days following the date of receipt of the notice to determine the validity of the request, including the sufficiency of the information provided. During the ten (10) day period, the Corporation may require the stockholder of record and/or beneficial owner requesting a record date for proposed stockholder action by consent to furnish such other information as it may reasonably require to determine the validity of the request for a record date. Following the determination of the validity of the request, and no later than ten (10) days after the date on which such request is received by the Corporation, the Board of Directors may fix a record date for such purpose which shall be no more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors and shall not precede the date such resolution is adopted. If the Board of Directors fails within ten (10) days after the date the Corporation receives such notice to fix a record date for such purpose, the record date shall be the day on which the first written consent is delivered to the Corporation in the manner described in Section 1.12.3 below unless prior action by the Board of Directors is required by law, in which event the record date shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. 1.12.2 Form of Consent. Every written consent purporting to take or authorize the taking of corporate action and/or related revocations (each such written consent and related revocation is referred to in this Section 1.12 as a "Consent") shall bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated Consent delivered in the manner required by this Section 1.12, Consents signed by a sufficient number of stockholders to take such action are so delivered to the Corporation. 1.12.3 Delivery of Consent. A Consent shall be delivered to the Corporation by delivery to its registered office in the State of Delaware or to the Secretary of the Corporation at the Corporation's principal place of business. Delivery to the Corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. In the event of the delivery to the Corporation of a Consent, the Secretary of the Corporation shall provide for the safe-keeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the Consents and of the validity of the action to be taken by stockholder consent as the Secretary deems necessary or appropriate, including, without limitation, whether the holders of a number of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the 9 removal or replacement of one or more members of the Board of Directors, the Secretary of the Corporation shall promptly designate two persons, who shall not be members of the Board of Directors, to serve as Inspectors with respect to such Consent and such Inspectors shall discharge the functions of the Secretary of the Corporation under this Section 1.12.3. If after such investigation the Secretary or the Inspectors (as the case may be) shall determine that the Consent is valid and that the action therein specified has been validly authorized, that fact shall forthwith be certified on the records of the Corporation kept for the purpose of recording the proceedings of meetings of stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 1.12.3, the Secretary or the Inspectors (as the case may be) may, at the expense of the Corporation, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them, and shall be fully protected in relying in good faith upon the opinion of such counsel or advisors. No action by written consent without a meeting shall be effective until such date as the Secretary or the Inspectors (as the case may be) certify to the Corporation that the Consents delivered to the Corporation in accordance with Section 1.12.3 represent at least the minimum number of votes that would be necessary to take the action. Nothing contained in this Section 1.12.3 shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any Consent or revocation thereof, whether before or after such certification by the Secretary or the Inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation). Section 1.13. Inspectors of Election. The Corporation may, and shall if required by law, in advance of any meeting of stockholders, appoint one or more inspectors of election, who may be employees of the Corporation, to act at the meeting or any adjournment thereof and to make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. In the event that no inspector so appointed or designated is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector or inspectors so appointed or designated shall (i) ascertain the number of shares of capital stock of the Corporation outstanding and the voting power of each such share, (ii) determine the shares of capital stock of the Corporation represented at the meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares of capital stock of the Corporation represented at the meeting and such inspectors' count of all votes and ballots. Such certification and report shall specify such other 10 information as may be required by law. In determining the validity and counting of proxies and ballots cast at any meeting of stockholders of the Corporation, the inspectors may consider such information as is permitted by applicable law. No person who is a candidate for an office at an election may serve as an inspector at such election. Section 1.14 List of Stockholders Entitled to Vote. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. Upon the willful neglect or refusal of the directors to produce such a list at any meeting for the election of directors, they shall be ineligible for election to any office at such meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. 11 ARTICLE II. BOARD OF DIRECTORS. Section 2.1 Number. The Board of Directors shall consist of one or more members, the number thereof to be determined from time to time by resolution of the Board of Directors. Directors need not be stockholders. Section 2.2. Qualifications. No person who is or has been within the last five (5) years under Critical Investigation by the Food and Drug Administration ("FDA") (any such person, an "FDA Investigatee"), and no person who is or has been within the last five (5) years an Affiliate or Associate of any FDA Investigatee ("Related FDA Investigatee") shall be eligible to be elected or to serve as a director of the corporation; provided, however, that a director of the corporation who is validly nominated and elected a director but who after such election becomes a FDA Investigatee or Related FDA Investigatee shall not solely by reason of so becoming or being a FDA Investigatee or Related FDA Investigatee cease to be a director and instead shall continue as a director for the reminder of the term for which such director was elected or until such director's resignation or removal; provided further, however, that it shall be the duty of any such director promptly to notify the Board of Directors that such director is or has become a FDA Investigatee or Related FDA Investigatee and it also shall be the duty of any such director, either to promptly take all steps as may be necessary to cause such director to be neither a FDA Investigatee or Related FDA Investigatee, or, it all such steps cannot be or have not been taken and such director continues to be either a FDA Investigatee or Related FDA Investigatee and the pertinent Critical Investigation has not been Finally Resolved within the pertinent Resolution Period, to resign as a director of the corporation, effective immediately, at or before the end of such Resolution Period. (a) For purposes of this Section, the following terms shall have the following respective meanings: (i) Affiliate" means any person (or group of persons having any written or unwritten agreement , arrangement or understanding, whether of not enforceable, relating to any Critical Investigation) who or which, directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, any FDA Investigatee. For purposes of the foregoing definitions, the term "control" (including the terms "controlling" "controlled by" and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise, and a "controlling" relationship between any person (or such a group) and another person shall be deemed to exist whenever (but is not limited to the situation in which) the former person (or members of such a group) directly or indirectly holds or owns at least twenty percent (20%) of the aggregate voting power with respect to, the latter person. 12 (ii) "Associates" means any person who or which: (1) is an officer, partner, director, trustee or similar fiduciary of, or authorized to act in any similar capacity with respect to, any FDA Investigatee, any Affiliate or any other Associate of a FDA Investigatee; (2) is directly or indirectly, the holder of owner of at least ten percent (10%) any class or series of equity securities issued by any FDA Investigatee or Associate; (3) has a substantial beneficial interest in any FDA Investigatee or Affiliate which is a trust or estate; or (4) is a member of the immediate family of any FDA Investigatee, any Affiliate or any other person described in (1), (2), or (3) above. For purposes of the foregoing definition, a person's "immediate family" includes such person's spouse, children, siblings, parents-in-law, sons- and daughter-in-law, and brother- and sister-in-law. (III) Critical Investigation means any investigation by the FDA which has reached the stage of the issuance of a "Warning Letter" by the FDA and which might reasonably be expected, absent immediate and complete remediation, to lead to seizure of assets, injunctions or criminal indictments. (IV) When used with respect to any particular Critical Investigation, the term "Finally Resolved" means that the FDA has issued a written statement that the Critical Investigation has been satisfactorily resolved and terminated. (V) "Resolution Period" means, in any pertinent case, the ninety (90) day period (or longer period, not exceeding one hundred fifty (150) days, as hereafter contemplated by the proviso to this definition) beginning on the earlier of (1) the date on which a director of the corporation notifies the Board of Directors that such director is or has become a FDA Investigatee or Related Person or (2) the date on which the Board of Directors determines that a director of the corporation is or has become a FDA Investigatee or Related FDA Investigatee; provided, however, that the Board of Directors may (but is not required to) extend a Resolution Period for up to an additional sixty (60) days if the director establishes to the Board's satisfaction a reasonable likelihood that during such extended period the pertinent Critical Investigation will be Finally Resolved or such director will cease to be both a FDA Investigatee and a Related FDA Investigatee. (VI) "Subsidiary" means any corporation or other entity at least fifty percent (50%) of the equity of which is owned, directly or indirectly, by the corporation. (b) The Board of Directors of the corporation (acting by 13 at least a majority of all Directors, excluding any who have acknowledged themselves to be or have been determined to be FDA Investigatee or Related FDA Investigatee at the time of such Board action and excluding any director or directors whose status as FDA Investigatee or Related FDA Investigatee is the subject of such action) shall have the authority to determine whether any director of the corporation is or is not or has ceased to be a FDA Investigatee or Related FDA Investigatee, and the Board of Directors (acting by at least a majority of all directors, excluding any who have acknowledged themselves to be or have been determined to be FDA Investigatee or Related FDA Investigatee) shall have the authority to determine whether any person nominated or proposed for nomination as a director or who is the subject of a shareholder request as hereinafter provided is ineligible to be so nominated and elected by virtue or being a FDA Investigatee or Related FDA Investigatee. Each such Board determination shall be based upon such information as has been brought to the attention of the Board (whether in a shareholder request or otherwise) at the time such determination is made, and no Board determination that any director or other person is or is not or has ceased to be a FDA Investigatee or Related FDA Investigatee shall preclude the Board from reconsidering the matter and making the contrary determination in light of any facts or circumstances first coming to the attention of the Board after the prior determination was made. (c) The Board of Directors shall not nominate any person for election as a director of the corporation, unless such prospective nominee has provided the Board with all such information as the Board (or any member thereof not excluded from determining the status of such person as a FDA Investigatee or Related FDA Investigatee) has deemed necessary or appropriate to enable the Board to determine such status and with a signed statement by the prospective nominee that such person, having reviewed this Section, is aware of no reason not disclosed to the Board why he or she would or might be considered a FDA Investigatee or Related FDA Investigatee (which statement also shall include an undertaking by such person that if he or she is nominated, such person now promptly will inform the Board, by written notice to the Chairman of the Board or the Secretary of the corporation, if at any time prior to the election to which such person's nomination relates he or she becomes aware of any fact or circumstance, whether in existence on the date such undertaking is given or arising afterward, which has given such person any reason to believe that he or she is or might be considered a FDA Investigatee or Related FDA Investigatee), and unless after receipt of such information and such statement, the Board has determined that the prospective nominee is not a FDA Investigatee or Related FDA Investigatee. (d) Any shareholder who is uncertain whether any person such shareholder desires to nominate for election as a director of the corporation (a "candidate") is a FDA Investigatee or Related Person may request a determination from the Board concerning that matter. Any such request must be in writing, identify the candidate, set forth all reasons why the shareholder has such uncertainty concerning the candidate, explain why the shareholder believes that the candidate should not be considered a FDA Investigatee or Related FDA Investigatee and include an undertaking by or on behalf of the shareholder that, if the candidate is determined not to be a FDA Investigatee or Related FDA Investigatee, the shareholder promptly will inform the Board in the manner specified in paragraph (e) above if any time prior to the election 14 of directors next occurring the shareholder learns of any fact or circumstance (whether in existence on the dare of the request or arising afterward) which has given the shareholder any other reason to believe that or to be uncertain whether the candidate is or might be considered a FDA Investigatee or Related FDA Investigatee and believes for the reasons stated in the request that he or she should not be considered a FDA Investigatee or Related FDA Investigatee, which statement also shall include an undertaking by the candidate comparable to that of the requesting shareholder. With respect to any meeting at which directors are to be elected, a shareholder may submit requests as to any number of candidates up to and including five times at which the number of directors to be elected at such meeting. A request may be submitted at any time at which the shareholder properly may give notice of intent to nominate a candidate for election as a director (other than a time at which such giving of notice of intent is proper only by virtue of the provisions of paragraph (b) of this Section), and no request may be submitted at any other time. No request shall be deemed "submitted" for any purposes hereunder unless and until it is delivered in person to the Chairman of the Board or the Secretary of the corporation or delivered to the principal offices of the corporation addressed to the attention of the Chairman or the Secretary. No request shall constitute a notice of intent to nominate any candidate unless it expressly states that it is intend as such a notice and it otherwise complies with all applicable requirements for such a notice. Neither submission of a request, nor any action taken thereafter with respect to such request, shall operate as a waiver of or otherwise relieve any shareholder of any otherwise applicable procedural requirements respecting nomination of director candidates, except as and to the extent contemplated in paragraph (b). (e) If any request satisfying the requirements of paragraph (f) is timely and property submitted, the Board of Directors, within ten days following the date such request is submitted (i.e., if it is impossible or impracticable to do so during such period, as soon as practicable thereafter), shall consider the request and determine whether the candidate who is the subject of the request is ineligible to be nominated or elected a director by virtue of being a FDA Investigatee or Related FDA Investigatee. As promptly as possible following such action, the requesting shareholder shall be notified in writing of the nature of such determination and, if the determination made is that the candidate is a FDA Investigatee or Related FDA Investigatee, the basis for such determination. In any other case in which the Board determines that any candidate as to which a notice of intent to nominate has been given is ineligible to be nominated or elected a director by virtue of being a FDA Investigatee or Related FDA Investigatee (including any case in which a contrary determination previously has been made in response to a shareholder request), the shareholder having given such notice of intent shall be notified in writing of such determination and the basis therefor as promptly as possible thereafter. (f) If a candidate who is the subject of a proper and timely submitted request meeting the requirements of paragraph (f) is determined by the Board not to be a FDA Investigatee or Related FDA Investigatee and the request was submitted at least five days in advance of the last date on which the requesting shareholder otherwise would have been entitled to give notice of intent to nominate such candidate, then the Board's determination shall operate as a waiver of the time limits otherwise applicable to the giving of such notice of intent to the extent, if any, necessary to afford the shareholder a period of five days 15 following the date on which notice of the Board's determination is given to the shareholder within which to give notice of intent to nominate such candidate. If, in response to a timely and properly submitted request, the Board determines that the candidate who is the subject of the request is a FDA Investigatee or Related FDA Investigatee and the request was submitted at least five days in advance of the last date on which the requesting shareholder otherwise would have been entitles to give notice of intent to nominate, then the Board's determination shall operate as a waiver of the time limits otherwise applicable to the giving of notice of intent to nominate to the extent, if any, necessary to afford the requesting shareholder a period of fifteen days following the date on which notice of the Board's determination is given to the shareholder within which to give notice of intent to nominate another person in lieu of the ineligible candidate. In any other case in which the Board determines that a candidate is a FDA Investigatee or Related FDA Investigatee, such determination shall operate as a waiver if and only to the extent expressly so provided in the resolutions setting forth such determination or subsequent Board resolution. Whenever any shareholder is afforded an additional time period within which to give notice of intention to nominate, the Board may afford the other shareholders of the corporation a comparable additional period of time within which to give such notice. Section 2.3 Election; Resignation; Vacancies. At each annual meeting, the stockholders shall elect directors each of whom shall hold office for a term of one year or until his successor is duly elected and qualified, subject to such director's earlier death, resignation, disqualification or removal. Any director may resign at any time upon written notice to the Corporation. Such resignation need not be accepted to be effective. Unless otherwise provided by law or the Certificate of Incorporation, any newly created directorship or any vacancy occurring on the Board of Directors for any cause may be filled solely by a majority of the remaining members of the Board of Directors, although such majority is less than a quorum, or by the sole remaining director, and each director so elected shall hold office until the expiration of the term of office of the director so replaced or until the director's successor is elected and qualified. The stockholders shall not have the power to appoint directors to any newly created directorship or vacancy. Section 2.4 Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine. It shall not be necessary to give notice of regular meetings of the Board of Directors. Section 2.5 Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, the Executive Committee, or by three (3) or more directors. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting at least twenty-four hours before the special meeting if such notice is given personally or by telephone or sent by telegram, telecopier or other electronic means. Notice of a special meeting of the Board of Directors shall be given by the person or persons calling the meeting at least three days before the special meeting if given by regular mail. No notice of a special meeting shall be necessary if the time and place of the special meeting was set by 16 resolution at a validly convened meeting of the Board of Directors. The notice of a special meeting need not state the purpose or purposes of the meeting. Section 2.6 Telephonic Meetings Permitted. Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting. Section 2.7 Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the whole Board of Directors shall constitute a quorum for the transaction of business. Except in cases in which the certificate of incorporation, these by-laws or applicable law otherwise provides, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.8. Officers for Board Meetings. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, if any, or in his absence by the Vice Chairman of the Board, if any, or in his absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his absence the chair of the meeting may appoint any person to act as secretary of the meeting. Section 2.9. Independent Directors And Board Structure. A majority of the Board of Directors shall be comprised of independent directors. The Chief Executive Officer should be a member of the Board of Directors. In order to ensure the greatest number of independent directors on a board of manageable size, other direct management representation should be kept to a minimum and should in no event exceed two other management directors. The Board of Directors shall make clear to Senior Management of the Company that board membership is neither necessary to their present positions nor a prerequisite to a higher management position in the Company. Attendance of management staff at Board Meetings should be at the discretion of the Chairman of the Board but should be encouraged by the Board. The Board shall have full and direct access to members of Senior Management and should be encouraged to request reports directly to the Board by any member of Senior Management. Board members should use judgment in dealings with management so that they do not distract management from the business operations of the Company. Conflicts of Interest. A director's personal financial or family relationships may occasionally give rise to that director's material personal interest in a particular issue. There will be times when a director's material personal interest in an issue will limit that director's ability to vote on that issue. The Governance Committee of the Board of Directors shall determine whether such a conflict of interest exists on a case-by-case basis, including the determination as to materiality under items (c) and (f) of this Section 2.9. The Governance Committee shall 17 take appropriate steps to identify such potential conflicts and to ensure that a majority of the directors voting on an issue are both disinterested and independent with respect to that issue. A determination by the Governance Committee on any issue of independence or conflict of interest shall be final and not subject to review. For purposes of this Section, an "independent director" means a director who: (a) is neither a current employee nor a former member of Senior Management of the Company or an Affiliate; (b) is not employed by a provider of professional services to the Company; (c) does not have any business relationship with the Company, either personally or through a company of which the director is an officer or a controlling shareholder, that is material to the Company or to the director; (d) does not have a close family relationship, by blood, marriage or otherwise with any member of Senior Management of the Company or one of the Company's Affiliates; (e) is not an officer of a company of which the Company's chairman or chief executive officer is also a board member; or (f) does not personally receive or is not an employee of a foundation, university, or other institution that receives grants or endowments from the Company, that are material to the Company or to either the recipient and/or the foundation, university, or institution. "Senior Management" includes the chief executive, chief operating, chief financial, chief legal and chief accounting officers, president, vice president(s), treasurer, secretary and the controller of the Company. "Affiliate" includes any person or entity which, alone or by contractual obligation, owns or has the power to vote more than twenty- five (25) percent of the equity interest in another, unless some other person or entity acting alone or with another by contractual obligation owns or has the power to vote a greater percentage of the equity interest. A subsidiary is considered an affiliate if it is at least eighty (80) percent owned by the Company and accounts for at least twenty- five (25) percent of the Company's consolidated sales or assets. Section 2.10 Action by Written Consent of Directors. Unless otherwise restricted by the certificate of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee. Section 2.11 Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or 18 disqualified member. Any such committee, to the extent permitted by law and to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Section 2.12. Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II hereof. Section 2.13. Executive Committee. There shall be an Executive Committee to consist of such number of directors of the Board of Directors (the "Executive Committee") to consist of that number of directors as the Board of Directors may from time to time determine. The Board of Directors shall have power at any time to change the number of the Executive Committee, except that a reduction in the number of members of the Executive Committee shall not affect any currently serving member. The Board of Directors may remove any member of the Executive Committee at any time with or without cause and may fill vacancies in the Committee by election from the members of the Board of Directors. When the Board of Directors is not in session, the Executive Committee shall have and may exercise all the power and authority of the Board of Directors in the management and direction of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. All actions of the Executive Committee shall be reported to the Board of Directors at the meeting next succeeding such action, provided, however, that such report need not be made to the Board of Directors if prior to such meeting copies of the written minutes of the meetings of the Executive Committee at which such action has been taken shall have been mailed or delivered to all members of the Board of Directors. ARTICLE III. OFFICERS. Section 3.1 Executive Officers; Election; Qualifications; Term of Office; Resignation; Removal; Vacancies. The Board of Directors shall elect a President and Secretary, and it may, if it so determines, choose a Chairman of the Board and a Vice Chairman of the Board from among its members. The Board of Directors may also choose one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers. Each such officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding his election, and until his successor is elected and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Such resignation need not be accepted to be effective. The Board of Directors may remove any officer with or without cause at any time, but such removal shall be without prejudice to the 19 contractual rights of such officer, if any, with the Corporation. Any number of offices may be held by the same person. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors. Section 3.2 Powers and Duties of Executive Officers. The officers of the Corporation shall have such powers and duties in the management of the Corporation as may be prescribed in a resolution by the Board of Directors and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Board of Directors may require any officer, agent or employee to give security for the faithful performance of his duties. ARTICLE IV. SHARES OF STOCK. Section 4.1 Certificates. Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairman or Vice Chairman of the Board of Directors, if any, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation certifying the number of shares owned by him in the Corporation. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Section 4.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. ARTICLE V. MISCELLANEOUS PROVISIONS. Section 5.1 Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. Section 5.2 Seal. The corporate seal shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. Section 5.3. Signature of Checks, etc. All checks and drafts on the bank accounts of the Corporation, and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money shall be signed by such officer or 20 officers, or agent or agents, as shall be thereunto authorized, from time to time, by the Board of Directors or the Executive Committee. Section 5.4 Waiver of Notice of Meetings of Stockholders, Directors and Committees. Any written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice. Section 5.5 Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account, and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs, or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. Section 5.6 Amendment of By-laws. These by-laws may be altered, amended or repealed, and new by-laws made, by the Board of Directors, but the stockholders may make additional by-laws and may alter and repeal any by-laws whether adopted by them or otherwise. ARTICLE VI. INDEMNIFICATION OF DIRECTORS, OFFICERS OR OTHER PERSONS. Section 6.1 Right to Indemnification. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (a "Covered Person") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Covered Person. Notwithstanding the preceding sentence, except as otherwise provided in Section 6.3, the Corporation shall be required to indemnify a Covered Person in connection with a proceeding (or part thereof) commenced by such Covered Person only if the commencement of such proceeding (or part thereof) by the Covered Person was authorized by the Board of Directors of the Corporation. Section 6.2 Prepayment of Expenses. The Corporation shall pay the expenses (including attorneys' fees) incurred by a Covered 21 Person in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Covered Person to repay all amounts advanced if it should be ultimately determined that the Covered Person is not entitled to be indemnified under this Article VI or otherwise. Section 6.3 Claims. If a claim for indemnification or advancement of expenses under this Article VI is not paid in full within thirty days after a written claim therefor by the Covered Person has been received by the Corporation, the Covered Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the Covered Person is not entitled to the requested indemnification or advancement of expenses under applicable law. Section 6.4 Nonexclusivity of Rights. The rights conferred on any Covered Person by this Article VI shall not be exclusive of any other rights which such Covered Person may have or hereafter acquire under any statute, provision of the certificate of incorporation, these by- laws, agreement, vote of stockholders or disinterested directors or otherwise. Section 6.5 Other Sources. The Corporation's obligation, if any, to indemnify or to advance expenses to any Covered Person who was or is serving at its request as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by any amount such Covered Person may collect as indemnification or advancement of expenses from such other Corporation, partnership, joint venture, trust, enterprise or non- profit enterprise. Section 6.6 Amendment or Repeal. Any repeal or modification of the foregoing provisions of this Article VI shall not adversely affect any right or protection hereunder of any Covered Person in respect of any act or omission occurring prior to the time of such repeal or modification. Section 6.7. The rights conferred on any Covered Person by this Article VI are contract rights and shall continue as to a person who has ceased to be a director or officer and shall inure the benefit of the person's heirs, executors and administrators. Section 6.8. Other Indemnification and Prepayment of Expenses. This Article VI shall not limit the right of the Corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Covered Persons when and as authorized by appropriate corporate action. EX-99.A9 OTHER CONTR 3 r10q_agree.txt EMPLOYMENT AGREEMENT WILLIAM A. CARTER 1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this 3rd day of December, 1998, between HEMISPHERX BIOPHARMA, INC., a Delaware corporation (the "Company"), and William A. Carter, M.D., of Birchrunville, Pennsylvania (the "Employee"). WHEREAS, the Employee is employed by the Company pursuant to an Amended And Restated Employment Agreement dated July 1, 1993, (the "Existing Agreement"); WHEREAS, the Employee and the Company wish to amend and restate the terms and conditions of the Existing Agreement; NOW, THEREFORE, the Company and the Employee hereby amend and restate the Existing Agreement in its entirety and agree as follows: 1. Duties of Employee. The Employee shall, during the Employment Period (as defined below), be designated as the Chairman of the Board and Chief Scientific Officer of the Company. In the Employee's capacity as such, he shall perform such general management and administrative duties and functions for the Company as are customarily performed by the chief executive officer of corporations of a similar size in the medical research field. The Employee's duties and functions shall include the supervision and direction of all scientific and technical activities of the Company and such other administrative duties or functions as the Board of Directors of the Company may from time to time reasonably assign the Employee. The Employee shall report to the Board of Directors of the Company in connection with all of his duties and functions. The Employee agrees to devote his full working time to the performance of his duties under this Agreement, to exert his best efforts in the performance of his duties, and to perform his technical, scientific, and administrative duties so as to promote the profit, benefit and advantage of the business of the Company. Subject to the Employee's Confidentiality, Invention and NonCompete Agreement referred to in Section 7 hereof, and notwithstanding the foregoing, nothing herein shall prevent the Employee from maintaining his appointment as professor at Hahnemann University, and performing his duties in connection therewith. 2. Term. This Agreement shall commence on the date hereof and shall terminate on May 8, 2004 (the "Initial Termination Date") unless sooner terminated in accordance with Section 5 hereof or unless renewed as hereinafter provided (such period of employment together with any extension thereto hereinafter being called the "Employment Period"). This Agreement shall be automatically renewed for successive one (1) year periods after the initial Termination Date unless written notice of refusal to renew is given by one party to the other at least ninety 2 days prior to the Initial Termination Date or the expiration date of any renewal period. 3. Compensation. (a) As compensation for the services to be performed hereunder, the Company shall pay to the Employee a salary (the "Salary"), as hereinafter provided, payable at such times as salaries of other senior executives of the company are paid but no less frequently than monthly. The Salary shall be at a rate of Three Hundred Sixty One Thousand Five Hundred and Eighty Six Dollars ($361,586) per year (the "Base Salary"), which shall be subject to cost-of-living adjustments, as provided in the succeeding subsection (b). (b) The Salary shall consist of the Base Salary, adjusted as provided in this subsection. On May 9, 1999, and on May 9 of each succeeding calendar year during the Employment Period, the Base Rate shall be increased or decreased by a percentage equal to the percentage average increase or decrease in the Bureau of Labor Statistics "Consumer Price Index -- U.S. City Average -- All Items" from the December of the preceding year to the December of the second preceding year. (c) For each calendar year (or part thereof) during which the Agreement is in effect, the Employee shall be eligible to be paid the following bonuses: (i) a performance bonus in an amount up to twenty-five percent (25%) of his Salary as then in effect, in the sole discretion of the Compensation Committee of the Board of Directors based on the Employee's performance and/or the Company's operating results for such year; and (ii) an incentive bonus in an amount equal to .5% of the Gross Proceeds paid to the Company during such year from any joint ventures or corporate partnering arrangements. For purposes herein, Gross Proceeds shall mean those cash amounts paid to the Company by the other parties to the joint -venture or corporate partnering arrangement, but shall not include (i) any amounts paid to the Company as a result of sales of Ampligen or other Company products, whether to such joint venture or partnership, or to third parties; (ii) any amounts paid to the Company as reimbursement of expenses incurred; and (iii) any amounts paid to the Company in consideration for the Company's equity or other securities. After the termination of this Agreement, the Employee shall be entitled to receive the incentive bonus provided for in this subsection 3(c)(ii) based upon Gross Proceeds received by the Company during the 2 year period commencing on the termination of this Agreement with respect to any joint ventures or corporate partnering arrangements entered into by the Company during the term of this Agreement. The maximum aggregate amount to which the Employee shall be entitled under this subsection 3(c)(ii) shall in no event exceed $250,000. 3 The performance bonus shall be eligible to be paid in cash within 60 days of the close of the calendar year. The incentive bonus shall be paid in cash within 60 days of the receipt of the Gross Proceeds by the Company. (d) The Employee has been granted non-qualified stock options to purchase 80,000 shares of the Company's Common Stock, $.01 par value, (the "Common Stock"), in accordance with the terms of the Stock Option Agreement dated August 8, 1991, which is attached hereto as Exhibit A, provided, however, section 4 thereof is hereby deleted in its entirety and in lieu thereof the following is hereby substituted therefor: "The options shall, to the extent not theretofore exercised and, subject to the provisions of section 5, expire and become void on May 8, 2004, unless the employment period of William A. Carter, M.D. is extended beyond May 8, 2004, in which event the options shall, subject to the provisions of section 5, expire on the last day of the extended employment period of William A. Carter, M.D." 4. Fringe Benefits. During the Employment Period, the Employee shall be entitled to receive such fringe benefits as shall be applicable from time to time to the Company's executives generally, including but not limited to such pension, vacation, group life and health insurance, and disability benefit plans as may be maintained by the Company from time to time. Additionally, during the Employment Period, the Company shall pay, for the benefit of the Employee, the premiums for a disability insurance policy in the face amount of $200,000 and the premiums for term life insurance policies in the aggregate face amount of $1,800,000 insuring the life of the Employee, with the Employee having the right to designate the beneficiary or beneficiaries thereof. 5. Termination. (a) The Company may discharge the Employee for cause at any time as provided herein, For purposes hereof, "cause" shall refer to (i) habitual neglect by the Employee of his duties hereunder, or (ii) his neglect or refusal to comply with written directives of the Board of Directors. (b) The employment of the Employee shall terminate upon the death or disability of the Employee. For purposes of this subsection (b), "disability" shall mean the inability of the Employee effectively to carry out substantially all of his duties hereunder by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. (c) The Employee shall have the right to terminate this Agreement if upon not less than thirty (30) days, prior written notice of termination. 6. Effect of Termination. 4 (a) In the event that the Employees employment is terminated for "cause" pursuant to subsection 5(a) or at his election pursuant to subsection 5(c), the Company shall pay to the Employee only the compensation and benefits otherwise due and payable to him under Sections 3 and 4 through the last day of his actual employment by the Company. (b) In the event that the Employee is terminated at any time without "cause", as defined in subsection 5(a), the Company shall pay to the Employee the compensation and benefits otherwise due and payable to him under Sections 3 and 4 through the last day of the then current term of this Agreement. (c) In the event the Employee's employment is terminated due to his death or disability pursuant to 5(b), the Company shall pay to the Employee only the compensation and benefits otherwise due and payable to him under Sections 3 and 4 through the last day of the month in which such termination occurs. (d) Upon termination of Employee's employment, with or without cause, in accordance with the terms hereof, Employee shall resign from the Company's Board of Directors. 7. Employee's Representations and Warranties. The Employee hereby represents and warrants to the Company that he has the right to enter into this Agreement, and his execution, delivery and performance of this Agreement (a) will not violate any contract to which the Employee is a party or any applicable law or regulation nor give rise to any rights in any other person or entity and (b) are not subject to the consent of any other person or entity, including, without limitation, Hahnemann University. 8. Confidentiality, Invention and Non-Compete Agreement. The Employee confirms his obligation to be bound by the terms of the Confidentiality, Invention and Non-Compete Agreement attached hereto as Exhibit B, executed as of July 1, 1993. 9. Notices. Any notice or other communication pursuant to this Agreement shall be in writing and shall be sent by telecopy or by certified or registered mail addressed to the respective parties as follows: (i) If to the Company, to: HEMISPHERX BIOPHARMA, INC. One Penn Center 1617 JFK Boulevard Philadelphia, Pennsylvania 1910 Telecopier No.: (215) 988-1739 Attention: President 5 (ii) If to the Employee, to: William A. Carter, M.D. Jaine Lane Birchrunville, Pennsylvania 19421 Telecopier No.: (215) 469-0521 or to such other address as the parties shall have designated by notice to the other parties given in accordance with this section. Any notice or other communication shall be deemed to have been duly given if personally delivered or mailed via registered or certified mail, postage prepaid, return receipt requested, or, if sent by telecopy, when confirmed. 10. Survival. Notwithstanding anything in section 2 hereof to the contrary, the Confidentiality, Invention and Non-Compete Agreement shall survive any termination of this Agreement or any termination of the Employee's services. 11. Modification. No modification or waiver of this Agreement or any provision hereof shall be binding upon the party against whom enforcement of such modification or waiver is sought unless it is made in writing and signed by or on behalf of both parties hereto. 12. Miscellaneous. (a) This Agreement shall be subject to and construed in accordance with the laws of the Commonwealth of Pennsylvania. (b) The waiver by either party of a breach of any provision of this Agreement by the other party shall not operate and be construed as a waiver or a continuing waiver by that party of the same or any subsequent breach of any provision of this Agreement by the other party. (c) If any provisions of this Agreement or the application thereof to any person or circumstance shall be determined by an arbitrator (or panel or arbitrators) or any court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder hereof, or the application of such provision to persons or circumstances other than those as to which it is so determined to be invalid or unenforceable, shall not - be affected thereby, and each provision hereof shall be valid and shall be enforced to the fullest extent permitted by law. (d) This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, executors and administrators, successors and assigns. (e) This Agreement shall not be assignable in whole or in part by either party, except that the Company may assign this Agreement to and it shall be binding upon any patent, subsidiary or affiliate of the Company or any person, firm or corporation with 6 which the Company may be merged or consolidated or which may acquire all or substantially all of the assets of the Company. IN WITNESS WHEREOF, this Agreement has been signed by the parties hereto as of the date first above written. HEMISPHERX BIOPHARMA, INC. By: ______________________________ /s/ William A. Carter, M.D. _________________________________ William A. Carter, M.D. 6 1 7 EX-99.2K OTH CONTRCT 4 r10q_engage.txt ENGAGEMENT AGREEMENT ROBERT E. PETERSON Amendment to the Engagement Agreement By and Between Hemispherix Biopharama Inc. and Robert E. Peterson, an individual Hemispherix Biopharma, Inc. ("the Company") a Delaware Corporation and Robert E. Peterson, an individual, agree to amend the Engagement Agreement dated April 15, 1998 by and between the parties as follows: 1. Article 2 is to be deleted as written and amended to read: "This Agreement shall expire on April 30, 2002 subject to being amended by both parties and subject to the provisions of Article 7 herein provided. 2. All other provisions of the Engagement Agreement are to remain in full force and effect. As an individual to enter into this extension of the Engagement Agreement, the Company grants Robert E. Peterson the rights to 30,000 warrants to purchase the Company's common stock. Such warrants are to be for a term of ten years with an exercise price of $5.00 (five dollars) per share. Robert E. Peterson or his heirs are to have the right to exercise these or any other stock options/warrants previously granted and vested at any time during their term without any restrictions. IN WITNESS WHEREOF, the parties hereto have set their respective hands and seals as of the date noted below: HEMISPHERIX BIOPHARMA, INC. By: /s/ Ransom W. Etheridge DATE:4/01/01 ------------------- Ransom W. Etheridge Secretary By: /s/ Robert E. Peterson DATE:4/01/01 ----------------------- Robert E. Peterson An Individual -----END PRIVACY-ENHANCED MESSAGE-----