SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For The Fiscal Year Ended December 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM __________________ TO __________________.
Commission File No. 0-14691
SENETEK PLC
(Exact Name of registrant as specified in its charter)
ENGLAND 77-0039728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
620 Airpark Road CA 94558
NAPA, CALIFORNIA, U.S.A. (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: 707 226 3900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
AMERICAN DEPOSITARY SHARES
(each American Depositary share represents
1 Ordinary share, pound sterling 0.05 par value)
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K ( ).
As of March 06, 2001, the Registrant had 58,432,117 Ordinary shares outstanding,
including 58,060,029 represented by American Depositary shares. The aggregate
market value of voting stock held by non-affiliates of the Registrant as of
March 06, 2001 was $56,331,317 based on the average bid and asked prices as
quoted on the Nasdaq Stock Market. This sum excludes shares held by directors,
officers and stockholders whose ownership exceeded 5% of the outstanding shares
at March 6, 2001, in that such persons may be deemed affiliates of the
Registrant. This calculation does not reflect a determination that certain
persons are affiliates of the Registrant for any other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
INDEX
Page
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PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related 12
Stockholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial 16
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on 30
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers or the Registrant 30
Item 11. Executive Compensation 32
Item 12 Security Ownership of Certain Beneficial Owners and Management 35
Item 13. Certain Relationships and Related Transactions 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 36
Signatures and Power of Attorney 39
2
PART I
The information set forth below includes "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements include, but are not limited to, statements about our plans,
objectives, expectations, intentions and assumptions and other statements that
are not historical facts. Because these forward-looking statements involve risks
and uncertainties, including but not limited to our ability to obtain regulatory
approvals for our products and market acceptance of our products, actual results
may differ materially from those expressed or implied by these forward-looking
statements.
ITEM 1--BUSINESS
OVERVIEW
Senetek PLC ("Senetek") is a science-driven biotechnology company that develops,
manufactures and markets proprietary products for the enhancement of quality of
life. The company focuses on two therapeutic categories, sexual dysfunction and
anti-aging, which are widely known to be multi-billion dollar markets. In
connection with product development activities, we sponsor research in the life
sciences and biotechnology fields.
Senetek PLC is a public limited company that was registered in England in 1983
(registration number 1759068). As of December 31, 2000 we have two wholly owned
subsidiaries, Senetek Drug Delivery Technologies Inc. and Carme Cosmeceutical
Sciences Inc., both of which are Delaware corporations. In addition, in March
2001 we formed a new subsidiary based in Hong Kong. This was done to establish a
presence in Asia to facilitate expansion in this region.
PRODUCT RESEARCH AND DEVELOPMENT
Biopharmaceuticals
Invicorp(TM) - We estimate that 100 million men worldwide suffer from some form
of erectile dysfunction. Our Invicorp(TM) product employs an easy to use self-
administered automatic delivery system to deliver a combination therapy of two
specific drugs, vasoactive intestinal polypeptide and phentolamine mesylate, for
the treatment of erectile dysfunction. Phase III clinical trials for
Invicorp(TM) are now complete. In clinical trials, more than 80% of patients
responded successfully to treatment with Invicorp(TM). Of these patients, 60%
had withdrawn from previous treatment with alternative erectile dysfunction
therapies. Invicorp(TM) was approved for marketing in Denmark in July 1998. In
December 1998 we received news from the Medicines Evaluation Agency in Ireland
that Invicorp(TM) received clearance on safety and efficacy and we are now
waiting final approval. In June 2000 the New Zealand Medicines Assessment
Advisory Committee granted a Marketing Authorization Approval for Invicorp(TM)
in New Zealand. In October 2000 the United Kingdom Medicines Control Agency
granted a Marketing Authorization for Invicorp(TM) in the United Kingdom.
Invicorp(TM) has received Investigational New Drug approval from the United
States Federal Food and Drug Administration (FDA). An application for European
wide Marketing Authorization Approvals under the European Mutual Recognition
Procedure has been initiated selecting Denmark as the Reference Member State.
In May 2000 we initiated a research and development collaboration with Tel Aviv
University - Ramot and the Weizmann Institute of Science - Yeda for the
development of novel compounds for the topical treatment of erectile dysfunction
and female sexual dysfunction. From this collaboration we have the option to
acquire exclusive rights to seventeen patented compounds of pharmacological
interest for the treatment of erectile dysfunction and female sexual
dysfunction. The patented compounds are analogs of Vasoactive Intestinal
Polypeptide and have been designed to permeate the outer skin barrier and
facilitate topical administration. A specific
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analog has undergone pre-clinical studies and is ready to enter Phase 1 clinical
trials for the treatment of erectile dysfunction and female sexual dysfunction.
During the first quarter of 2000, we entered into an alliance with Owen Mumford
Limited to supply their Autoject(R) Mini exclusive to Erectile Dysfunction for
the automatic delivery of Invicorp(TM). The Autoject(R) Mini is a cost effective
therapeutic delivery system that is aesthetically appealing, utilizing an ultra
fine needle. The Autoject(R) Mini offers proven manufacturability and universal
contract manufacturing capabilities, thus resolving outstanding production
issues. Stability studies are currently being scheduled and will be done
concurrently with other regulatory requirements.
The timeline to market for Invicorp(TM) is dependent on several factors,
including approval under the European Mutual Recognition Procedure. Review of
alternative drug delivery systems are also underway to include needleless
autoinjectors and topical administration.
Adrenaject(TM) uses an automatic injector syringe to deliver a self-injectable
formulation of epinephrine, an emergency antidote for anaphylactic shock.
Anaphylactic shock is a life threatening condition triggered by a severe
allergic reaction to insect stings, insect bites and certain foods. In 1998, we
filed an Abbreviated New Drug Application ( ANDA ) with the FDA for the
Adrenaject(TM). On January 14, 1999, we received notification from the FDA that
our ANDA was found to have several deficiencies. We have explored several
alternative solutions which will result in getting this product to market in
2001. The product offers differential advantages over competitor products
currently in the market through ease of use, reduced spring force, and push
button activation for safe, gentle and reliable administration of the drug.
Other Products
Monoclonal Antibodies - We market monoclonal antibodies to the scientific
community for research on Alzheimer's disease under an exclusive license
agreement with the Research Foundation for Mental Hygiene. Customers include
Glaxo, Pfizer, Wyeth Ayerst, Amgen, Pharmacia Upjohn, Eli Lilly and Genentech.
As Monoclonal Antibodies are not a core business, we entered into a license
agreement with Signet Laboratories in August 2000 and they have taken over the
marketing of our existing cell lines and will develop additional available cell
lines under the Senetek license. Founded in 1989, Signet was created as a spin-
off from Johnson & Johnson's Cambridge Research Laboratory. Signet Laboratories,
Inc. is a leading medical diagnostic/research company specializing in the
development of monoclonal antibodies for Cancer, Infectious Disease, and
Neurodegenerative disease applications. Signet has developed patented technology
for diagnosis and recurrence monitoring of these diseases, and for risk
assessment of asymptomatic patients in these areas.
Reliaject(TM) - Our Reliaject(TM) disposable autoinjector offers advantages that
cannot be gained through the use of pre-filled syringes or re-loadable
autoinjectors. We continue to work towards finalizing the development of
Reliaject(TM) for Invicorp(TM) epinephrine and other products. Products that are
currently being considered include migraine treatment drugs, infertility
treatment regimens, human growth hormones and new analgesic pain therapies. The
cost of continued development is estimated to be $500,000.
Skincare
Cytokinins - Senetek has five patents on two natural growth factors, Kinetin and
Zeatin.
Kinetin - Kinetin (N6-furfuryladenine) retards aging of plants and delays age-
related changes in cultured human skin cells. In clinical studies conducted over
the past two years at the University of California, Irvine, Kinetin showed a
good-to-excellent response in the majority of patients in partially reversing
the clinical signs of photodamaged skin and in restoring normal skin barrier
function. In contrast to other anti-aging products such as retinoids and alpha-
hydroxy acids, Kinetin did not produce any clinical signs or symptoms of
irritation. We are currently continuing development of new products and
performing work on Kinetin Plus and Kinetin analog products in collaboration
with our research associates.
Zeatin - We hold patents for anti-aging and psoriasis on a promising new
Cytokinin, Zeatin. Zeatin is an analogue of Kinetin with preliminary in vitro
data suggesting that it is more active than Kinetin at higher concentrations. We
have established a development program to study the safety and efficacy of
Zeatin for both photo-damaged skin and psoriasis.
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In October 1998, we granted to ICN Pharmaceuticals Inc. ("ICN") an exclusive
worldwide license to market Kinetin to the ethical skin care market, which
includes dermatologists and cosmetic surgeons. The ICN license agreement
includes a manufacturing supply agreement and royalty income on net sales. ICN
has launched Kinerase(R) in USA, Canada, Argentina and Mexico and expects to
expand to other Latin American countries in 2001.
On December 15, 1999 we entered into a license and supply agreement with OMP
Inc., ("OMP") for the exclusive marketing and distribution of Kinetin limited to
the mass market channel of distribution for China, Hong Kong, Japan, Singapore,
Korea and other designated Asian countries. In addition, OMP receives
exclusivity for Kinetin limited to the multi-level marketing channel of
distribution for Taiwan. For the grant of the distribution rights the agreement
provides for payments to Senetek of a $1,150,000 license fee, $450,000 of which
was received in 1999 with the remainder received in 2000. OMP launched Kinetin
in Taiwan in the first half of 2000 and in Korea in the first quarter 2001. OMP
anticipates launching Kinetin products in Japan in the third quarter of 2001 on
completion of the product registration requirements. On March 14, 2000, OMP
entered into a joint venture to market Kinetin products with Rohto
Pharmaceuticals Co., Ltd., Osaka, Japan, founded in 1899 and listed on the Tokyo
and Osaka stock exchanges since 1964. The distribution structure in Japan will
bring us access to the largest cosmetics market in Asia. We believe this license
will contribute substantially to the overall success of Kinetin world wide not
only financially but also in terms of international recognition of Kinetin as a
key technology in skin care.
On June 5, 2000 we entered into an agreement with The Body Shop for North
America to develop and market a range of skincare products in North America
based on a formulation of Kinetin. The products are due for launch in the U.S.
in the second quarter of 2001.
On June 15, 2000 we entered into a licensing agreement with Revlon Inc. granting
them worldwide rights, except for certain Asian countries, for marketing and
distribution of Kinetin in the mass market. In return for these rights we
received a non refundable license fee in the amount of $3,000,000 and the
agreement provides for receipt of royalties subject to annual minimums. The
products are scheduled for launch in the third quarter of 2001.
On December 22, 2000, we granted Med Beauty AG a supply agreement for Kinetin
products in the salon and esthetician market in Switzerland and Germany. In
return for these rights we will receive royalties. The products are scheduled
for launch in Switzerland in the first half of 2001.
In July 1998, we granted to Osmotics Corporation an exclusive license to market
Kinetin to the high-end prestige market (department stores). On January 21,
2000, we notified Osmotics that they are in breach of contract for non-payment
of royalties and selling in unauthorized channels of distribution. Currently,
the agreement is before the American Arbitration Association for resolution.
Other Products
Our products are designed to meet specific niche segments of the market. These
include Mill Creek(R), Sleepy Hollow Botanicals and Biotene H-24. We also have
two specialty mass market lines: Silver Fox(R), a product for gray hair, and
Allercreme(R), a hypoallergenic range of skincare products for sensitive skin,
developed in conjunction with dermatologists.
In May 1999, we granted exclusive rights for the worldwide distribution of Mill
Creek(R) and Silver Fox(R) products to the United States International Trading
Corporation (the "USITC"). At this time CCSI also sold its inventories of Mill
Creek(R) and Silver Fox(R) products to USITC. For the grant of the distribution
rights CCSI received an initial license fee of $100,000. The agreement provides
for minimum quarterly royalty payments based on net sales of the products. The
agreement calls for an option where USITC can purchase these product lines for
$2.8 million.
In May 1999, the contract with Quimlam, Inc., (d.b.a. Omega Distributing), was
extended through May 2000. The contract with Quimlam was terminated on
January 1, 2001 and the distribution rights transferred to USITC.
Research and Development
We sponsor research in the life sciences and biotechnology fields, with
5
particular emphasis on research relating to the diagnosis and treatment of
healthcare problems related to aging. We develop and market biopharmaceutical
and skincare products based upon the results of this research.
A significant proportion of our historic and current operating expenses have
related to our clinical research agreements with consultants, clinicians and
research scientists. Under these agreements, we fund agreed-upon programs of the
consultants', clinicians' or research scientists' work and retain exclusive
rights to manufacture and market worldwide any products arising from this
research. Several of our products have reached the marketing stage including
monoclonal antibodies with Signet, our Mill Creek and Allercreme line of
products with USITC and products incorporating Kinetin with ICN Pharmaceuticals
Inc. and OMP. Revlon, The Body Shop and Med Beauty AG are currently engaged in
their marketing campaigns for the launch of Kinetin products later in 2001. If
other products arise from research that we fund, certain researchers will become
entitled to royalties under the terms of their agreements with us.
Typically, our research agreements oblige us to fund research in amounts to be
determined between the parties. The researchers are responsible for filing
progress reports with us. We work with these researchers and with specialized
consultants on matters such as product formulation, stability, clinical trials
and regulatory matters. In addition, we operate a development center in
Kettering, United Kingdom. Our Kettering facility is responsible for monitoring
Phase III clinical trials in the United Kingdom and Europe, European product
licensing applications and European regulatory approvals.
Our research and development expenditures amounted to $821,000, $2,702,000 and
$7,980,000 for 2000, 1999 and 1998, respectively. For more information see
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MANUFACTURING AND MARKETING
General
In the case of any emerging products, we anticipate that manufacturing and
marketing activities may be arranged through co-development and marketing
agreements with companies which have already established a majority presence in
specialized fields. In this event, any revenues will arise primarily through
third party distribution or licensing arrangements or co-ventures whereby we
will seek to receive a percentage of sales, license fees and/or milestone
payments in consideration for our grant of specified marketing rights to our
products, or by profit participation through third party equity investments or
joint ventures.
Invicorp(TM)
The active materials, vasoactive intestinal polypeptide and phentolamine
mesylate, for the Invicorp(TM) are currently available in commercial quantities
from two suppliers. In conjunction with Senetek, these suppliers have developed
synthetic methods which are included in the product licensing applications. We
rely on these specialized suppliers for continued supply of materials.
Skincare
We outsource the manufacture, filling and labeling of our skincare and health
and beauty products. All our skincare and health and beauty products are sold
through our marketing partners covering the professional, multi-level marketing,
natural and specialty mass markets. We have signed distribution agreements for
distribution within the U.S. and abroad. We do not significantly rely on any
specialized suppliers for our skincare and health and beauty products, and we do
not anticipate that problems will arise over access to raw materials that are
generally available and that will be required for our contract manufacturing
processes.
Monoclonal Antibodies
In accordance with an agreement entered into with the Research Foundation for
Mental Hygiene Inc., we have been granted the exclusive right to certain of the
Foundation's cell lines capable of producing certain monoclonal antibodies,
including those applicable to Alzheimer's disease. We have sub-licensed these
6
antibodies to Signet who will market our existing cell lines and develop new
ones and sell these products to the scientific community for research purposes.
We receive guaranteed minimum payments under the sub-license arrangement and in
turn pay a royalty entitlement in favor of the Foundation. The arrangement
relies on the supply of the monoclonal antibodies from a specific biotech
organization at the present time.
COMPETITION
General
The biopharmaceutical, pharmaceutical and cosmeceutical industries are highly
competitive. Our business and research efforts compete with drug discovery
programs at biotechnology, drug delivery, biopharmaceutical and pharmaceutical
companies, as well as with internal drug discovery efforts of pharmaceutical
companies acting independently or in collaboration with other companies. In
addition, academic institutions, government agencies throughout the world and
public and private organizations conducting research may seek intellectual
property protection, discover competing products, or establish collaborative
arrangements in our area of research and development.
The majority of our existing or potential competitors have substantially greater
financial, technical and human resources and name recognition than we do. These
competitors are often better equipped to research, develop, patent, conduct pre-
clinical testing and human clinical trials, manufacture, and market products. In
addition, many of these companies have extensive experience in pre-clinical
testing and human clinical trials. These companies may develop, license or
acquire products that compete with our products. The timing of the market
introduction of our and our competitors' products will be important competitive
factors. Accordingly, the relative speed with which we can develop products and
technologies, complete pre-clinical testing, conduct human clinical trials,
initiate the necessary regulatory approval processes, and supply commercial
quantities of the products to the market will be critical to our success.
We cannot predict the extent to which any of the products we are currently
developing may become commercially viable. Once products have been approved for
sale, we believe that competition will be based, among other things, on product
efficacy, product safety, product reliability, price and patent position. Our
competitive position also depends upon our ability to attract and retain
qualified and experienced personnel to develop proprietary products, processes
or technologies that we can market and sell and the degree of intellectual
property protection obtainable for those products. We expect competition to
intensify in all fields in which we are involved as new products in these areas
are developed and become more widely known. Moreover, the patent situation in
this field is complex, and the protection afforded by patents in any particular
jurisdiction may be limited.
Invicorp(TM)
Management is presently engaged in discussions with the objective of entering
into licensing arrangements with pharmaceutical companies. Products that compete
with Invicorp (have been or are being developed by our competitors, include
Pfizer ("Viagra"), Pharmacia & Upjohn ("Caverject") and Vivus ("Muse"). Although
our management believes that there will be a substantial demand for
Invicorp(TM), we cannot assure that Invicorp(TM) or future products will obtain
necessary regulatory approvals or that we will be able to successfully market
these products.
Skincare
The skincare and health and beauty care market is dominated by large multi-
national organizations, who have far greater resources and market exposure than
we do.
Our non-Kinetin products are designed to meet specific niche segments of the
market. Our products include the Mill Creek line, Sleepy Hollow Botanicals and
Biotene H-24. The specialty mass market lines are Silver Fox (a product for gray
hair) and the Allercreme Hypoallergenic range for sensitive skins, that was
developed in conjunction with dermatologists and are currently being marketed
under a distribution agreement entered into with USITC.
Products containing Kinetin are designed to meet the requirements of the
professional, prestige, multi-level and mass markets, internet channel of
7
distribution, salon and esthetician, and alternative markets. The products are
currently sold under license and supply agreements with ICN Pharmaceuticals Inc.
and OMP for the prestige, ethical and mass market in certain territories. During
2000 we entered into licensing agreements with The Body Shop, Revlon and Med
Beauty AG for marketing and distribution in the alternative market, mass market
and salon and esthetician market respectively.
GOVERNMENT REGULATION
General
Our research, pre-clinical development, clinical trials, manufacturing and
marketing of products are subject to extensive regulation, rigorous testing
and approval processes of the FDA and equivalent foreign regulatory agencies.
Product Approval--U.S.
In the U.S., the Federal Food, Drug and Cosmetic Act and the Public Health
Service Act governs the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising, and promotion of our products.
Product development and approval within this regulatory framework takes a number
of years and involves the expenditure of substantial resources. Many products
ultimately do not reach the market because of toxicity or lack of effectiveness
as demonstrated by required testing. In addition, there can be no assurance that
this regulatory framework will not change or that additional regulations will
not arise at any stage of our product development that may affect approval,
delay an application, or require additional expenditures.
The steps required before a pharmaceutical product may be marketed in the U.S.
include:
. Preclinical laboratory testing;
. Submission to the FDA of an Investigational New Drug application which
must become effective before human clinical trials may be commenced;
. Adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug;
. Submission of a New Drug Application to the FDA; and
. FDA approval of the New Drug Application prior to any commercial sale
or shipment of the drug.
Invicorp(TM) has received Investigational New Drug approval from the FDA, and we
plan to file a New Drug Application with the FDA for Invicorp(TM) at the
earliest practicable opportunity.
Clinical testing of new compounds in humans is designed to establish both safety
and efficacy in treating a particular disease or condition. These studies are
usually conducted in three phases of testing. In Phase I, a small number of
volunteers are given the new compound in order to identify toxicities and
characterize the compound's behavior in humans. In Phase II, small numbers of
patients with the targeted disease are given the compound to test its efficacy
in treating the targeted disease and to establish dose levels. Phase III
studies, which we have concluded for Invicorp(TM), are large-scale studies
designed to confirm a compound's efficacy for the targeted disease and identify
toxicities that might not have been seen in smaller studies. Once adequate data
has been obtained in clinical testing to demonstrate that the compound is both
safe and effective for the intended use, all available data is submitted to the
FDA as part of the New Drug Application.
Our clinical trials for future products will generate safety data as well as
efficacy data and will require substantial time and significant funding. We
cannot assure that clinical trials related to future products would be completed
successfully within any specified time period, if at all. Furthermore, the FDA
may suspend clinical trials at any time if it is believed that the subjects
participating in such trials are being exposed to unacceptable health risks.
Under current regulations, the market introduction of non-medicated cosmetics
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and skin care products do not require prior formal registration or approval by
the FDA, although this could change in the future. The Cosmetics Division of the
FDA monitors matters of safety and adulteration. The situation for non-medicated
cosmetic and skin care products is the same for Europe.
Product Approval - Other Countries
Marketing of products in other countries requires regulatory approval from the
relevant medicines evaluation in a particular country. The current approval
process varies from country to country, and the time to approval may vary from
that required for FDA approval. The review of clinical studies by regulatory
agencies in foreign jurisdictions follows a similar process to that in the U.S.
Invicorp(TM) was approved for marketing in Denmark (July 1998), New Zealand
(June 2000) and UK (October 2000). An application for European wide Marketing
Authorization Approvals under the European Mutual Recognition Procedure has been
initiated selecting Denmark as the Reference Member State. We cannot assure that
further approvals under the Mutual Recognition Procedure will be granted or that
these approvals if granted, will not contain significant limitations in the form
of warnings, precautions or contraindications with respect to condition of use.
Any delay in obtaining, or failure to obtain such approval would adversely
affect our ability to generate product revenue. In Japan we currently require
regulatory approval from the Ministry of Health for the marketing of Kinetin as
a cosmeceutical product. Our licensee, OMP, anticipates regulatory approval in
this region in the first half of 2001, which will facilitate greater ease of
imports. In addition, in certain European countries, the sales price of a
product must be approved. The pricing review period often begins after market
approval is granted.
Noncompliance
Failure to comply with the applicable regulatory requirements can, among other
things, result in fines, suspensions of regulatory approvals, product recalls,
operating restrictions and criminal prosecution. In addition, the marketing and
manufacturing of pharmaceutical products are subject to continuing FDA and other
regulatory review, and later discovery of previously unknown problems with a
product, manufacturer or facility may result in the FDA and other regulatory
agencies requiring further clinical research or restrictions on the product or
the manufacturer, including withdrawal of the product from the market. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on our business, financial condition and results of operations.
Post-Approval
After regulatory approval is obtained, our products are subject to continual
review. Manufacturing, labeling and promotional activities are continually
regulated by the FDA and equivalent foreign regulatory agencies, and we must
also report certain adverse events involving our drugs to these agencies.
Previously unidentified adverse events or an increased frequency of adverse
events that occur post-approval could result in labeling modifications of
approved products, which could adversely effect future marketing of a drug.
Finally, approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on our business, financial condition and results of operations.
We obtain certain materials and components for the manufacture of our products
from third parties. In addition, we out-source the manufacture of certain
products (see "Business--Manufacturing and Marketing"). These parties are
required to comply with strict standards established by us. Certain
manufacturers and suppliers are required by the Federal Food, Drug, and Cosmetic
Act, as amended, and by FDA regulations, to follow Good Manufacturing Practices,
or GMP, requirements and are subject to routine periodic inspections by the FDA
and certain state and foreign regulatory agencies for compliance with GMP and
other applicable regulations. Upon routine inspection of these facilities, we
cannot assure that the FDA and other regulatory agencies will find the
manufacturing process or facilities to be in compliance with GMP and other
regulations. Failure to achieve satisfactory GMP compliance as confirmed by
9
routine inspections could have a material adverse effect on our ability to
continue to manufacture and distribute our products and, in the most serious
case, result in the issuance of a regulatory warning letter or seizure or recall
of products, injunction and/or civil fines or closure of our manufacturing
facility until GMP compliance is achieved.
Import Restrictions and Duties
Because Senetek may be importing certain of its products or product ingredients
into the United States, Senetek could be subject to quantity limitations, duties
and tariffs imposed by countries in which the products are to be sold. The
United States does not have quantity restrictions for goods such as Senetek's
proposed products but does impose tariffs based on the value of the products
imported. Other countries may have different restrictions and duties.
PATENTS
We believe that patents and other proprietary rights are an essential element of
our business. As part of our grant agreements with various researchers, we have
exclusive license rights to any commercially valuable products developed by the
contracted researchers within the scope of the agreements, in exchange for
royalty entitlements. Our policy is to file patent applications to protect
inventions and improvements that we consider important to the development of our
business. Typically, patents in the U.S. expire 17 years after the grant date.
We also rely upon trade secrets, know-how, continuing technological innovations
and licensing opportunities to develop and maintain our competitive position. We
have filed patent applications for our products in most major countries,
including those that are signatories to the Patent Conference Treaty. Thus far,
our technology is patented in most of these countries (which include US, Canada
and the major European countries) and in major areas in Asia and South America.
We have also received patent approvals covering our technology in the following
areas:
. Two patents for Invicorp(TM) for the use of vasoactive intestinal
polypeptide and phentolamine mesylate in the treatment of Erectile
Dysfunction have been granted in 16 countries and are pending in 9
other countries.
. Three patents for Kinetin and Zeatin for ameliorating the effects of
aging on skin have been granted in 27 countries and are pending in 9
other countries.
. Two patents for Kinetin and Zeatin for ameliorating the effects of
hyperproliferative skin diseases, including psoriasis have been
granted in 15 countries and are pending in 1 other country.
. Three autoinjector patents for the delivery of therapeutic ingredients
have been granted in 24 countries and are pending in 12 other
countries.
Patent positions generally, including those for pharmaceutical and health
service organizations such as Senetek, are uncertain and involve complex legal
and factual questions for which important legal principles are largely
unresolved. In addition, the coverage claimed in a patent application can be
significantly reduced before a patent is issued. Consequently, we cannot be sure
that any patents that are or may be issued to us will provide significant
proprietary protection or will not be circumvented or invalidated. Because
patent applications in the U.S. are maintained in secrecy until patents issued,
and publication of discoveries in the scientific or patent literature often lags
behind actual discoveries, we cannot be certain that we or any licensor was the
first creator or that we or our licensor was the first to file patent
applications for these inventions. Moreover, we might have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine priority of inventions, which could result in substantial cost to us,
whether or not the eventual outcome was favorable to us. We cannot assure that
our patents, if issued, would be held valid by a court or that a competitor's
technology or product would be found to infringe such patents.
A number of pharmaceutical and health services companies and research and
academic institutions have developed technologies, filed patent applications, or
10
received patents in areas that may be related to our business. Some of these
Technology applications or patents may conflict with our development efforts or
patent applications.
We have been granted trademark protection for our major brand names in 14
countries and have applications pending in 20 others. To the best of our
knowledge, there has been no indication to date that such trademarks are invalid
or are subject to challenge.
Typically, we require our employees, consultants and sponsored researchers to
execute confidentiality agreements as part of their employment, consulting or
research arrangements with us. We cannot assure, however, that these agreements
will produce meaningful or adequate protection for our trade secrets.
EMPLOYEES
As of December 31, 2000, we employed 8 full-time persons. Senetek PLC employees
comprised 2 persons at our drug development center at Kettering in the United
Kingdom, and 6 in the U.S., all of whom are employed in our Napa headquarters.
As of December 31, 2000, our wholly owned subsidiary, Senetek Drug Delivery
Technologies, Inc., employed one person in the U.S. who concentrates on the
scientific, engineering and production aspects of evaluating new drug delivery
technologies. Our other wholly owned subsidiary, Carme Cosmeceutical Sciences
Inc., has one U.S employee covering the supply chain requirements of our
skincare and health and beauty products.
ITEM 2--PROPERTIES
We lease approximately 31,000 square feet in Napa, California for our U.S.
headquarters. Our headquarters facility includes approximately 7,300 square feet
of manufacturing space and 23,700 square feet of research, marketing and
administrative space. Our lease for the Napa facility expires in December 2007.
We also lease an approximately 5,000 square foot building in Kettering, United
Kingdom under a 15-year lease with a break option after five years. We have
sublet approximately 2,250 square feet of this space to two unaffiliated
companies. We believe that our leased facilities are adequate for our current
operations.
ITEM 3--LEGAL PROCEEDINGS
On June 11, 1998 we filed a lawsuit against Mad Dogs & Englishmen Inc. and Mad
Dog Enterprises d/b/a Mad Dogs & Englishmen (together "Mad Dogs") in the Supreme
Court of New York. On December 11, 1996 we entered into a written agreement with
Mad Dogs under which Mad Dogs agreed to promote our cosmetics business and to
hire a consultant familiar with the Cosmetics industry in connection therewith.
We are seeking damages of approximately $10 million for a breach of that
agreement. Mad Dogs served us with an answer to our complaint in August 1998 and
subsequently counterclaimed alleging that CCSI is liable to Mad Dogs for at
least $40,000 in unpaid fees and other unspecified damages. There have been no
substantive developments in the lawsuit since the filing of the answer to our
complaint.
During January 2000, Senetek and CCSI terminated the licensing agreement with
Osmotics Corporation for multiple breaches of contract, including non-payment of
royalties and selling outside its authorized channel of distribution. The
dispute is now pending before the American Arbitration Association (AAA).
Osmotics claims that it owes no royalties or damages arising from post-
termination or other infringement of Senetek's Kinetin patents, because the
patents are invalid. In August 2000 Osmotics filed suit in the United States
District Court for the Northern District of California seeking a declaratory
judgment that Senetek's Kinetin-related patents are invalid. Senetek and CCSI
intend to defend Osmotics' claims vigorously. Senetek and CCSI seek to have
their claims of breach of contract decided by the panel of AAA arbitrators in
Los Angeles, California pursuant to the arbitration provision in the licensing
agreement with Osmotics, notwithstanding Osmotics' filing of the declaratory
judgment on patent issues in Federal District Court. Management does not feel
that the termination of the Osmotics license agreement, the AAA dispute, nor
Osmotics' request for declaratory judgment will have a material adverse effect
on the company.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
11
None.
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) GENERAL DISCUSSION
There is currently no established public trading market for our Ordinary
shares in the United Kingdom. Our American Depositary shares (each
representing one Ordinary share and evidenced by one American Depositary
Receipt) were traded on the over-the-counter market in the United States
beginning in November 1984 and have been traded through The Nasdaq Stock
Market since our public offering in the U.S. in May 1986.
The following table sets out the range of high and low closing bid prices
for our American Depositary shares during each quarter of our two most
recent fiscal years, as reported by the Nasdaq Smallcap Stock Market.
12
FISCAL YEAR ENDED DECEMBER 31, 2000
QUARTER ENDED: HIGH LOW
---- ---
March 31 $ 3.66 $ 1.44
June 30 2.44 1.31
September 30 2.38 1.53
December 31 1.72 0.88
FISCAL YEAR ENDED DECEMBER 31, 1999
QUARTER ENDED: HIGH LOW
---- ---
March 31 $ 2.38 $ 1.19
June 30 1.69 1.31
September 30 1.47 1.09
December 31 1.69 1.94
As of March 06, 2001 there were approximately 215 holders of record of our
Ordinary shares, including approximately 1,014 holders of record of
American Depositary shares. The share price at March 06, 2001 was a high
of $1.06 and a low of $1.00.
We have not paid, nor do we presently contemplate the payment of, any cash
dividends on our Ordinary shares. The decision whether to pay, and the
amount of such dividends, will be based upon, among other things, our
earnings, capital requirements and financial conditions. Any dividend,
either cash or stock, must be recommended by our board of directors and
approved by our shareholders. The board of directors is, however,
empowered to declare interim dividends. Under the English Companies Act of
1985, a limited company may not declare or pay cash dividends while it has
an accumulated deficit. We had an accumulated deficit of $88,484 at
December 31, 2000. Accordingly, we will not be in a position to consider
the question of dividends until the accumulated deficit has been absorbed
by profits or by the application against the deficit with the approval of
stockholders and the United Kingdom Companies' Court, which forms part of
the Chancery Division of the High Court, of an equivalent figure forming
part of the share premium on our balance sheet.
(b) SALES OF UNREGISTERED SECURITIES
FISCAL 2000
None
(c) TAXATION
General
The following is a summary of the principal U.S. federal and United
Kingdom tax consequences applicable to the ownership of Ordinary Shares
and American Depositary shares, by a beneficial holder that is a citizen
or resident of the United States, a corporation or partnership created or
organized under the laws of the U.S. or any state thereof or that
otherwise is subject to U.S. Federal income tax on a net income basis in
respect of the Ordinary shares or American Depositary shares (a "U.S.
Holder"). This summary is not exhaustive of all possible tax
considerations, and U.S. Holders are advised to consult their own tax
advisers as to the overall tax consequences, including specifically the
consequences under state and local laws, of the purchase, ownership and
disposition of Ordinary shares or American Depositary shares.
This summary does not address the United Kingdom tax consequences to a
U.S. Holder who is resident or (in the case of an individual) ordinarily
resident in the United Kingdom or who carries on business there through a
branch or agency. A disposition of Ordinary shares or American Depositary
shares, by such a person may be subject to United Kingdom tax.
This summary also does not address the U.S. tax consequences to a U.S.
13
Holder (i) controlling, directly or indirectly, together with affiliates
and associates, 10% or more of the voting shares of Senetek PLC, (ii) who
does not hold the Ordinary shares or American Depositary shares as capital
assets, (iii) who does not use the U.S. dollar as the U.S. Holder's
functional currency or (iv) who holds the Ordinary shares or American
Depositary shares as part of a larger integrated financial transaction or
straddle.
The statements regarding U.S. federal and United Kingdom tax laws set out
below are based on those laws as in force on the date of this Form 10-K.
For the purposes of the current U.S./United Kingdom double taxation
conventions (the "Income Tax Convention") and for the purposes of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), U.S. Holders of
American Depositary shares will be treated as owners of the underlying
Ordinary shares.
Taxation of Dividends
No tax will be withheld from dividend payments by Senetek PLC to United
Kingdom resident shareholders. An individual shareholder resident in the
United Kingdom is treated for United Kingdom tax purposes as having
taxable income equal to the sum of the dividend plus a tax credit equal
to 10% of the sum of the dividend plus the tax credit (such aggregate
sum being hereinafter referred to as the "Gross Dividend"). The tax
credit is non-repayable but is available as a tax credit against the
individual's tax liability on the relevant dividend.
Prior to April 6, 1999, U.S. resident shareholders were normally
entitled to a refund from the United Kingdom Inland Revenue of taxation
as a result of the dividends paid to them. After April 6, 1999, a
corporate U.S. Holder (which is not also a resident of the United
Kingdom the purposes of the Income Tax Convention) who controls,
directly or indirectly (either alone or with one of more associated
Corporations) 10% or more of the voting power of Senetek PLC may still
apply for a refund but generally other shareholders may not.
ITEM 6--SELECTED FINANCIAL DATA
The selected consolidated statement of operations data presented below for each
of the years in the three-year period ended December 31, 2000 and the selected
consolidated balance sheet data as of December 31, 2000 and 1999 has been
derived from and should be read in conjunction with our financial statements
included in Part IV of this Report on Form 10-K. The selected consolidated
statements of operations data for the years ended December 31, 1996 and 1997 and
the selected consolidated balance sheet data as of December 31, 1996, 1997 and
1998 has been derived from the audited financial statements contained in our
annual reports to shareholders. The presentation of consolidated balance sheet
data below for all periods presented reflects a reclassification of accrued
compensation on stock option grants to share premium in stockholders' deficit.
In accordance with FIN 44, which became effective July 2000, we have changed our
accounting principles for the recognition of stock compensation expense for our
non executive directors all of whom retire by rotation and can stand for
re-election at the Company's shareholder annual general meeting. We have,
included our non executive directors within the scope of APB 25 and have
reported the cumulative effect of changing to this new accounting principle in
net income of the period of the change. This change in accounting principle has
increased net income in 2000 by $1,038,000.
14
YEAR ENDED DECEMBER 31,
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues $ 3,759 8,263 4,672 5,722 6,486
Loss before extraordinary loss
on extinguishment of debt and change
in accounting principle $ (5,692) (10,205) (22,492) (15,539) (4,020)
Extraordinary loss on
extinguishment of debt $ -- (1,657) -- -- --
Cumulative effect of change
in accounting principle $ 1,038 -- -- -- --
Net loss $ (4,654) (11,862) (22,492) (15,539) (4,020)
======== ======= ====== ====== ======
Basic and diluted net loss before
extraordinary loss on extinguishment
of debt and change in accounting
principle per Ordinary share
outstanding $ (0.10) (0.18) (0.41) (0.32) (0.10)
Extraordinary loss on
extinguishment of debt $ -- (0.03) -- -- --
Cumulative effect of change
in accounting principle $ 0.02 -- -- -- --
Basic and diluted net loss
per Ordinary share outstanding $ (0.08) (0.21) (0.41) (0.32) (0.10)
AS OF DECEMBER 31,
2000 1999 1998 1997 1996
-------- ------- ------ ------ ------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Assets:
Cash and cash equivalents $ 828 1,840 808 6,216 2,975
Inventory 596 511 731 890 1,657
Trade receivables and other
current assets 1,392 1,605 1,809 2,486 997
-------- -------- -------- -------- --------
Total current assets 2,816 3,956 3,348 9,592 5,629
Property & equipment, net 3,748 4,060 4,311 1,909 1,182
Goodwill and other intangible
assets, net 1,441 1,631 1,766 1,900 2,128
Deferred financing costs 1,381 2,581 1,241 -- 902
-------- -------- -------- -------- --------
Total assets $ 9,386 $ 12,228 $ 10,666 $ 13,401 $ 9,841
======== ======== ======== ======== ========
Liabilities:
Capital leases -- 42 -- -- --
Accounts payable 1,378 2,230 1,602 1,754 1,236
Accrued liabilities 804 1,095 1,630 1,353 412
Line of Credit -- -- 2,389 900 230
Note payable 546 700 -- -- --
-------- -------- -------- -------- --------
Total Current Liabilities $ 2,728 $ 4,067 $ 5,621 $ 4,007 $ 1,878
Long term liabilities:
Notes payable 7,227 7,101 -- -- 1,700
Capital Leases -- -- 46 -- --
Deferred license fees 3,154 543 -- -- --
Accumulated deficit (88,484) (83,830) (71,968) (49,476) (33,939)
Stockholders' (deficit)/equity $ (3,723) 517 4,999 9,394 6,263
Total Liabilities & Stockholders'
(deficit)/equity $ 9,386 $ 12,228 $ 10,666 $ 13,401 $ 9,841
======== ======== ======== ======== ========
15
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
We received our initial funding from a public issuance of Ordinary shares in the
United Kingdom in November 1983. In May 1986, we completed a public financing in
the U.S. resulting in the issuance of 1,322,500 Units, each consisting of one
Ordinary share and one "A" and one "B" warrant for the purchase of an equivalent
number of Ordinary shares. The Ordinary shares were issued as American
Depositary shares, evidenced by American Depositary Receipts, and together with
the "A" and "B" warrants, were traded under the Nasdaq Automated Quotations
System. 143,018 unexercised "A" and 1,285,400 unexercised "B" warrants ceased
trading upon the lapsing of their respective extended exercise dates in May
1997. Since May 1986, we have relied on private placements of Ordinary shares,
convertible debentures and warrants to add to our capital base.
Our accounts set forth in Part IV of this Report have been prepared in
accordance with U.S. generally accepted accounting principles (U.S. GAAP). Our
financial information included in this Form 10-K is presented in U.S. dollars.
MATERIAL CHANGES IN FINANCIAL CONDITION
During the year ended December 31, 2000, our liquid position, represented by
cash and deposits at banks and liquid investments, decreased by $1,012,000 to
$828,000. This decrease is attributable to the excess of operational losses,
movements in net working capital(which included the payment of past due
liabilities including commitments under supply and capital projects and other
contractual obligations incurred by previous management) and capital expenditure
over the receipt of Kinetin license fees and proceeds from the exercise of stock
options as discussed in "Liquidity and Capital Resources" below.
SIGNIFICANT TRENDS
A substantial decrease in our operating and net losses and a marked improvement
in our current ratio were the major financial highlights in 2000.
2000 1999 1998
------ ------ ------
($ IN THOUSANDS)
Operating Loss $ (3,678) $ (5,819) $ (17,089)
% improvement 36.8% 66.0%
Net Loss (4,654) (11,862) (22,492)
% improvement 60.8% 47.2%
Current ratio 1.03 0.97 0.60
% improvement 6.1% 61.7%
Despite a decrease in revenues (discussed below) we have been able to achieve a
60.8% decrease in our net loss for the period. This has been largely achieved
through greater management focus, the outsourcing of non core businesses and
more efficient research and procurement programs.
We have also shown a continuous improvement in our current ratio (current assets
divided by current liabilities). At December 31, 2000 our current ratio exceeds
1, a result achieved by tighter management of our net working capital.
RESULTS OF OPERATIONS
Our operations are carried out in the areas of pharmaceuticals development and
drug delivery systems development ("pharmaceuticals") and the supply of skincare
products ("cosmeceuticals") to licensees.
16
YEAR ENDED DECEMBER 31,
2000 1999 1998
------- ------- -------
($ IN THOUSANDS)
Loss from Operations:
Pharmaceuticals:
Revenues $ 1,192 $ 1,301 $ 1,517
Cost of sales 583 560 611
-------- --------- ---------
Gross profit 609 741 906
Operating expenses
Research & Development 753 2,639 7,955
General & Administrative 4,206 4,290 7,482
Marketing & Promotion -- 272 847
Loss on Impairment of Fixed Assets -- 1,407 --
-------- --------- ---------
Total Operating Expenses 4,959 8,608 16,284
-------- --------- ---------
Loss from operations $ (4,350) $ (7,867) $ (15,378)
-------- --------- ---------
Skincare:
Revenues $ 2,567 $ 6,962 $ 3,155
Cost of sales 886 2,484 2,429
-------- --------- ---------
Gross Profit 1,681 4,478 726
Operating expenses
Research & Development 68 63 25
General & Administrative 941 2,134 1,680
Marketing & Promotion -- 118 276
Selling -- -- 456
Loss on Impairment of Fixed Assets -- 115 --
-------- --------- ---------
Total Operating Expenses 1,009 2,430 2,437
-------- --------- ---------
Income/(loss) from operations 672 2,048 (1,711)
-------- --------- ---------
Total loss from operations $ (3,678) $ (5,819) $ (17,089)
-------- --------- ---------
2000 1999 1998
-------- --------- ----------
($ IN THOUSANDS)
Overall Loss Before Taxation:
Pharmaceuticals:
Loss from operations $ (4,350) $ (7,867) $ (15,378)
Interest income 46 82 188
Interest (expense) including
amortization of Deferred Finance
costs (2,001) (1,442) (3,355)
Other expense including
extraordinary expense (5) (4,449) (2,389)
Change in accounting principle 1,038 -- --
-------- --------- ---------
Loss before tax $ (5,272) $ (13,676) $ (20,934)
-------- --------- ---------
Skincare:
Income/(loss) from operations 672 2,048 (1,711)
Interest expense (54) (234) (41)
Other income/(expense) -- -- 194
-------- --------- ---------
Income/(loss) before tax $ 618 $ 1,814 $ (1,558)
-------- --------- ---------
Total overall loss before taxation $ (4,654) $ (11,862) $ (22,492)
======== ========= =========
17
REVENUES
Our product sales revenues of $3,759,000 for the year ended December 31, 2000
comprised $76,000 from the sale of named patient products, $1,116,000 from the
sale of monoclonal antibodies, and $2,567,000 from the sale of skincare
products.
Our product sales revenues of $8,263,000 for the year ended December 31, 1999
comprised $259,000 from the sale of named patient products, $1,042,000 from the
sale of monoclonal antibodies, and $6,962,000 from the sale of skincare
products.
In May 1999, exclusive rights for the worldwide distribution of Mill Creek(R)
and Silver Fox(R) products were granted to United States International Trading
Corporation ("USITC"). In return for the grant of the distribution rights, CCSI
received a $100,000 license fee and will receive guaranteed minimum quarterly
royalties based on net sales from September 1999. CCSI also sold its trading
inventories to USITC.
On December 15, 1999, we entered into a license and supply agreement with OMP
Inc. for the exclusive marketing and distribution of Kinetin products in the
mass marketing channel of distribution in a number of major Asian countries.
Also, OMP Inc. receives exclusivity for Kinetin in the multi level marketing
channel of distribution in Taiwan. For the grant of the distribution rights the
agreement calls for Senetek to receive $1,150,000 license fees. Of this, we
received $450,000 in 1999 and $700,000 in 2000. We have recorded these fees as
deferred income and will recognize revenue under the terms of the agreement.
On June 15, 2000, we entered into a license and royalty agreement with Revlon
Inc, for Kinetin in the mass market, excluding certain Asian countries. In
exchange for these rights we received a non refundable license fee of
$3,000,000. We have recorded these fees as deferred income and will recognize
revenue under the terms of the agreement.
The overall sales decrease of 54.5% for the year ended December 31, 2000
compared to the year ended December 31, 1999 was represented by a decrease in
skincare sales of 63.1% and a decrease in pharmaceutical sales, comprising named
patient sales and monoclonal antibodies sales of 8.4%.
The 8.4% decrease in pharmaceutical sales was due to a decrease in sales volume.
The sales of monoclonal antibodies, some of which are used for the early
diagnosis of Alzeimers disease, follow sales patterns determined by project
driven research organizations and are subject to fluctuation.
The 63.1% decrease in sales of skincare products was mainly due to decreased
sales of products to ICN Pharmaceuticals Inc. ICN has been reducing its
inventory position throughout 2000 but has been maintaining its sales to third
party customers. We have also experienced a decrease in direct sales of Mill
Creek products which have been replaced with quarterly royalties under the USITC
licensing agreement. Partially offsetting these decreases are skincare sales to
OMP which commenced in the first half of 2000.
Our sales revenues of $4,672,000 for 1998 comprised $401,000 from the sale of
named patient products, $1,116,000 from the sales of monoclonal antibodies and
$3,155,000 from the sale of skincare products.
The overall sales increase of 76.9% for the year ended December 31, 1999
compared to the year ended December 31, 1998 was represented by an increase of
skincare sales of 121% and a decrease in pharmaceutical sales, comprising named
patient sales and monoclonal antibodies sales of 14.2%
The 14.2% decrease in sales of pharmaceutical sales was mainly due to decreased
sales volumes in 1999. Sales of monoclonal antibodies, some of which are used
for the early diagnosis of Alzeimers disease, follow sales patterns determined
by project driven research organizations and are subject to fluctuation.
The 121% increase in sales of skincare products was mainly due to sales of
product to ICN Pharmaceuticals Inc. under a licensing and supply agreement
entered into in the fourth quarter of 1998. The strong sales to ICN in 1999
resulted in them having high inventory levels at December 31, 1999 which they
have been reducing in 2000. This inventory reduction has resulted in a one time
decrease in sales to ICN in 2000.
18
COST OF SALES
Cost of goods sold for the year ended December 31, 2000, which includes contract
manufacturing and material costs, was $1,469,000, down 51.7% from the year ended
December 31, 1999. Cost of goods sold as a percentage of sales was 39% for the
year ended December 31, 2000 compared to 37% for year ended December 31, 1999.
The cost of goods sold as a percentage of sales increase is due to start up
contract manufacturing costs for additional skincare supply arrangements which
include quality and assurance testing and process validation and a change in the
method of calculating royalties on the sale of monoclonal antibodies to our
licensor and the payment of a management fee to a new distributor. In addition,
cost of goods sold was increased by $82,000 as a result of an increase of the
inventory reserve on various products of non-core businesses being outsourced.
The gross profit percentage of 61% for 2000 would have been 63.1% had the
inventory reserve not been increased.
In the Pharmaceutical Sector, cost of goods sold for the year ended December 31,
2000 was $583,000, up 4.1% from $560,000 from the year ended December 31, 1999.
Despite a decrease of $109,000 in sales volume from 1999 this is due mainly to a
change in the method of determining royalties on the sale of monoclonal
antibodies to our licensor and the payment of a management fee to a new
distributor. Offsetting this was a decrease in named patient sales resulting
from an interruption of Invicorp supply during repositioning of the product in a
more cost efficient drug delivery device.
In the Skincare Sector, cost of goods sold for the year ended December 31, 2000
was $886,000, a decrease of 64.3% from $2,484,000 for the year ended December
31, 1999. This is mainly due to a 65.2% decrease in net sales that include a
reduction in sales volumes as a result of decreased sales to ICN and the out-
licensing of the Mill Creek and Silver Fox lines for which the company receives
royalties in lieu of direct sales revenues.
RESEARCH AND DEVELOPMENT
Pharmaceutical Division
Research and development expenses in the year ended December 31, 2000 were
$753,000, compared with $2,639,000, and $7,955,000 in 1999 and 1998,
respectively.
The decrease of $1,886,000 in 2000 compared with 1999 was primarily due to:
A reduction in expenditures resulting from improved efficiencies in our
R&D programs and decreased spending for the development of Invicorp and
Adrenaject as both projects near final stages of development. We have
also recognized five months of savings arising from the closure of our St
Louis research and development operations in August 1999.
In August 1999 Senetek announced that it had received word from the
Medicines Control Agency of the United Kingdom and the Federal Food and
Drug Administration of the US that a competitor's safety trial on
phentolamine mesylate revealed preclinical tumors (proliferation of brown
fat cells). The Committee on Safety of Medicines in the UK met at the end
of July to review the phentolamine situation. We received a letter dated
August 8, 2000 from the Medicines Control Agency confirming that the
Committee on the Safety of Medicines had advised the Medicines Control
Agency that the development of hibernomas in rat carcinogenicity studies
with phentolamine mesylate does not represent a significant carcinogenic
risk to humans. The Medicines Control Agency went on to say that as there
is no longer a safety concern with Invicorp, it has lifted the clinical
hold on Invicorp.
In October 2000 the Medicines Control Agency granted Senetek a Marketing
Authorization Approval for Invicorp in the United Kingdom. In June 2000
the Medicines Assessment Advisory Committee granted Senetek a Marketing
Authorization Approval for Invicorp in New Zealand. In July 1998 the
Danish Medicines Agency granted Senetek a Marketing Authorization
Approval for Invicorp in Denmark.
However, we expect future research and development spending for erectile
dysfunction and female sexual dysfunction to increase significantly as we
progress the Mutual Recognition Procedure in Europe, prepare for Invicorp
clinical trials in the U.S. and start development work on the topical
peptide program with Tel Aviv University and the Weizmann Institute of
Science in Israel.
Pharmaceutical Sector research and development accounted for 91.7% of our
19
total research and development spending for the year ended December 31,
2000, compared to 97.7% for the year ended December 31, 1999.
The decrease of $5,316,000 in 1999 compared with 1998 was primarily due to:
Substantially reduced levels of Phase 111 clinical trials for
Invicorp(TM) as these reach completion in Europe.
Reduction of excess and overlapping staff now covered by a more
efficient and effective fee for service program.
One time purchase of vasoactive intestinal polypeptide and
phentolamine mesylate for $1,200,000 in 1998.
Reduced spending levels on Reliaject(TM) and Invicorp(TM) in the fourth
quarter of 1999 as we developed a new drug delivery strategy for
Invicorp(TM) utilizing a cost effective, state of the art delivery
system.
Reduced levels of external consultancy in the area of regulatory
affairs.
Skincare Division
Research and development expenses in the year ended December 31, 2000 were
$68,000 compared with $63,000 and $25,000 in 1999 and 1998, respectively.
The increase of $3,000 in 2000 compared with 1999 has no significance as we
continued with formulation development on our Kinetin products in 2000 at
similar levels compared to 1999.
The increase of $38,000 in 1999 compared with 1998 is mainly due to additional
formulation work undertaken on our Kinetin plus products. Our current strategy
is to utilize our partners research and development resources for the further
development of Kinetin, Kinetin plus and Zeatin products.
GENERAL AND ADMINISTRATIVE
Pharmaceutical Division
General and administrative expenses totaled $4,206,000 for 2000, compared with
$4,290,000 and $7,482,000 for 1999 and 1998, respectively.
The decrease of $84,000 in 2000 compared to 1999 was primarily due to:
A change in accounting principle regarding stock compensation expense for
non executive directors who are elected by shareholders at the Annual
General Meeting. This was offset by increased legal expenses in
connection with the Osmotics litigation, the negotiation of additional
commercial agreements and the development of a rigorous patent and
trademark strategy to protect our key intellectual property. Also, a one
time credit of $840,000 was recorded in the third quarter of 1999 for the
cancellation of unvested stock compensation accruals relating to prior
management.
The decrease of $3,192,000 in 1999 compared to 1998 was primarily due to:
Net savings arising from the corporate consolidation and cost reduction
program. The main results of the program were the substantial reduction
of our headcount and the consolidation of offices mentioned below. We
incurred one time costs in our Corporate restructuring program, which was
launched at the beginning of 1999. In May 1999 we closed our UK, London
operations and combined those functions in our UK Kettering office. We
also pared down our UK clinical monitoring and development staff and have
substantially moved these functions to our Napa office. The reduction in
headcount was 6 people and the severance packages of $125,000 which
included full settlement with a former Director, were expensed in the
second quarter of 1999. Also, during the third quarter of 1999 we closed
our St Louis research facility and transferred their functions to Napa.
There were no significant one time costs incurred, arising from the
closure of the St. Louis facility. The financial impact of the St. Louis
closure are annualized savings of approximately $300,000 in salaries and
office overheads. Furthermore, we settled our legal disputes with a
former director and consultant and recognized the settlement
20
costs of $77,000 in the second quarter of 1999. Also, in the third
quarter we executed Release and Separation agreements with our former
Chairman and CEO and our former President and COO both of whom left our
employment towards the end of the fourth quarter 1998. In the case of the
Chairman and CEO there were no settlement costs and 1.5 million stock
options were cancelled. In the case of the President and COO we settled
outstanding expenses of $23,000 and cancelled 500,000 stock options. We
also incurred in the second quarter of 1999 expenses of $140,000 relating
to the write off of expense advances for former employees. Legal costs of
$1,458,000 relating primarily to the settlements of disputes arising from
commitments made by former management to lenders, together with disputes
with former employees and consultants and, to a lesser extent, the April
financing arrangements, were incurred in the second, third and fourth
quarters of 1999.
In 1999 we recognized a charge to stock compensation expense of $77,000
as compared to $2,278,000 in 1998. The 1999 expense is reconciled as
follows: (1) stock compensation expense $376,000 for employee based stock
option plans in accordance with Accounting Principle Board Opinion No. 25
("APB 25") and $776,000 for non employee based stock option plans in
accordance with Statement of Financial Accounting Standard No 123 ("FAS
123") and (2) reversal of previously recorded stock compensation expense
on the cancellation of non vested options of $1,075,000.
Offsetting the net savings mentioned above were provisions for doubtful
accounts receivable of $582,000.
Skincare Division
General and administrative costs for the year ended December 31, 2000 were
$941,000, compared with $2,134,000 and $1,680,000 for 1999 and 1998,
respectively.
The decrease of $1,193,000 in 2000 compared to 1999 was mainly due to a
reduction in costs arising from the licensing of our skincare product lines and
the establishment of substantial bad debt provisions amounting to $582,000
during the fourth quarter of 1999.
The increase of $569,000 in 1999 compared to 1998 was mainly due to costs
incurred in relation to the new license and supply arrangements and provision
for bad debts.
MARKETING AND PROMOTION
Pharmaceutical Division
We incurred no marketing and promotion expenses for 2000, compared with $272,000
and $847,000 for 1999 and 1998, respectively. The $272,000 decrease in 2000
compared to 1999 is due to the elimination of non essential marketing
expenditures.
The $575,000 decrease in 1999 compared to 1998 is mainly due to the elimination
of external consulting arrangements and non essential advertising expenditure.
Skincare Division
We incurred no marketing and promotion expenses for 2000, compared with $118,000
and $276,000 for 1999 and 1998, respectively.
The decrease of $118,000 in 2000 compared to 1999 is due to the elimination of
marketing expenditures as all the skincare product lines were under third party
licensing arrangements.
The decrease of $158,000 in 1999 compared to 1998 was mainly due to the
implementation of a focused marketing plan, which resulted in all the skincare
product lines coming under third party licensing arrangements.
SELLING EXPENSES
Skincare Division
We incurred no selling expenses in 2000 and 1999 compared with $456,000 in 1998.
21
No field selling expenses have been recorded during 2000 and 1999. This is due
to the establishment of licensing and distribution arrangements in the skincare
sector and the elimination of direct selling activities.
IMPAIRMENT COSTS
In December 1999, the Company abandoned certain fixed assets. As a result of
this abandonment, the Company recorded an impairment loss of $1,522,000. The
assets written down comprised of assets in progress associated with the
Reliaject development and computers and office equipment. The pharmaceutical and
skincare business segments were written down by $1,407,000 and $115,000
respectively.
OTHER INCOME AND EXPENSE
In April 1999, the Company received $4,751,000 (net of $249,000 in expenses) in
cash and refinanced the balance owed of $2,389,000 under a 1998 Credit
Agreement, in exchange for two new notes that currently bear interest at 9% per
annum and mature in April 2002. The notes require semi annual payment of
interest only until maturity and are secured by all of the Company's assets.
Interest may be paid in cash or in Ordinary shares that have been registered
with the SEC.
The Company issued Series A warrants to purchase an aggregate of 738,857
Ordinary shares at $1.50 per share, which were adjusted down to $1.20 in
accordance with certain terms of the agreement under which they were issued. The
Series A warrants expire five years from the date of issuance. Series B and C
warrants to purchase approximately 3.3 million and 1.2 million Ordinary shares
at $1.50 and $2 per share were issued in connection with the Company's 1999
settlement and refinancing agreements are only exercisable to the extent the
outstanding principal balance of $7,389,000 is not repaid in cash. The Series B
and C warrants expire ten years from the date of issuance.
The fair value of 500,000 of the Series A warrants and all of the Series B
warrants was determined to be $3.1 million using the Black Scholes model. The
fair value of these warrants will be amortized over the life of the new notes
because such warrants, under the terms of the financing agreement, were issued
in connection with the $5.0 million new financing. On the other hand, the $1.0
million fair value of the remaining 238,857 Series A warrants and all of the
Series C warrants was included in the loss on extinguishment of debt discussed
below because these warrants were issued to refinance existing debt under the
terms of the April 1999 financing agreement. The amortization of the deferred
finance costs on the $5.0 million new financing amounted to $1,200,000 for the
year ended December 31, 2000 compared to $803,000 for the year ended
December 31, 1999.
As the outstanding borrowings under the 1998 Credit Agreement were refinanced by
notes with substantially different terms as defined by EITF 96-19, Debtors
Accounting for a Modification or Extinguishment of Debt Instruments, (EITF
96-19), the Company is required to recognize the difference between the fair
value of the new notes issued to refinance the old debt and the carrying value
of the old debt net of unamortized issuance costs as a loss on the
extinguishment of debt. During 1999, the Company recognized a $1,657,000 loss on
the extinguishment of debt.
Also, in April 1999 the Company entered into a settlement agreement to resolve
the terms of various transactions that had been entered into by the previous
management of the Company. The settlement terms required the issuance of
2,300,000 Series A warrants and 625,000 new Ordinary shares. Accordingly the
Company recorded $2,718,000 of expense in the second quarter of 1999 related to
the settlement terms. Included in the $2,718,000 settlement expense is the fair
value of the 625,000 Ordinary shares issued in 1999.
Also, included in other expense for the year ended December 31, 2000 is $665,000
of external interest expense on the notes payable of $7,389,000 compared with
$526,000 for the year ended December 31, 1999.
CHANGE IN ACCOUNTING PRINCIPLE
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a
22
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination.
In accordance with FIN 44, which became effective July 2, 2000 we have changed
our accounting principles for the recognition of stock compensation expense for
our non executive directors all of whom retire by rotation and can stand for
re-election at the Company's shareholder annual general meeting. We have,
included our non executive directors within the scope of APB 25 and have
reported the cumulative effect of changing to this new accounting principle in
net income of the period of the change. This change in accounting principle has
decreased the net loss in 2000 by $1,038,000.
TAXATION
Refer to Note 16 to the Financial Statements for discussion of the Company's net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1,012,000 during 2000 to $828,000. This
decrease is due to the excess of our operational losses, capital expenditure and
net movements in working capital over the receipt of license fees from Revlon
and OMP and proceeds arising from the exercise of stock options. Despite the
significant payment of past due liabilities and contractual commitments in 2000
associated with decisions of past management, we have increased our current
ratio to 1.03, a substantial improvement since 1998. We may continue, as in the
past, to rely on additional sources of private financing through equity
financing, short term loans or proceeds from the exercise of options and
warrants to fund operations. Our independent auditors report on our consolidated
financial statements included in Item 8 states that "......[Senetek] has
suffered recurring losses from its pharmaceutical operations and its ability to
continue research activities to a stage where it has a product available for
sale is dependent upon securing additional sources of financing and achieving
profitability. These conditions raise substantial doubt about [Senetek's]
ability to continue as a going concern."
However, management is encouraged by the performance of the Company over the
past two years and is budgeting for continued improvement. Discussions in
connection with new licensing agreements, new skincare markets and erectile
dysfunction markets combined with reduced and more efficient spending may yield
better financial results. Management expects better financial performance to
fund our increased research and development budget for 2001 which is estimated
at $ 2 million. However, we may also continue to rely on additional sources of
private financing through equity financing, short term loans or proceeds from
the exercise of options and warrants. A substantial decrease in our operating
and net losses and a marked improvement in our current ratio were the major
financial highlights in 2000.
2000 1999 1998
------ ------ ------
($ IN THOUSANDS)
Operating Loss $ (3,678) $ (5,819) $ (17,089)
% improvement 36.8% 66.0%
Net Loss (4,654) (11,862) (22,492)
% improvement 60.8% 47.2%
Current ratio 1.03 0.97 0.60
% improvement 6.1% 61.7%
Despite a decrease in revenues (discussed below) we have been able to achieve a
60.8% decrease in our net loss for the period. This has been largely achieved
through greater management focus, the outsourcing of non core businesses and
more efficient research and procurement programs.
In April 1999, we issued $7,389,000 in aggregate principal amount of secured
promissory notes. The notes currently bear interest at a rate of 9.0% per year,
payable semi-annually, and are due and payable in full in April 2002. The
repayment of the notes is secured by all of the assets of Senetek PLC and its
subsidiaries. In exchange for the issuance of the notes, we received $5,000,000
in cash (less expenses) and refinancing of $2,389,000 of our previously
outstanding debt. We also
23
issued warrants to purchase Ordinary shares in connection with the issuance of
the notes. Although we have received no commitment for the advance of any
further funds, other lenders who advance up to an additional $7,611,430 may
share in the collateral securing the notes described above on pari passu basis
with the existing note holders.
Our other most significant expenditure commitments are our research agreements,
consulting agreements, employment agreements and property leases.
We anticipate spending approximately $2 million during 2001 on the development
of our pharmaceutical and skincare products, including our auto-injector
projects, and on our administrative and marketing operations. Our management is
of the opinion that although we will generate increased revenues from the
licensing of our skincare product lines, monoclonal antibodies and the
Invicorp(TM) product to customers in countries where we have existing Marketing
Authorization Approvals these may not be sufficient to meet our short term
financial requirements.
Our management is discussing the possibility of entering into licensing
arrangements with several major pharmaceutical companies. Although these
discussions may lead to a license agreement of a substantial nature in due
course, we cannot assure that we will be successful in securing such an
agreement.
Additionally, certain holders of a substantial number of warrants may exercise
their right to convert their warrants into shares upon payment to us of the
exercise price as the conversion dates approach.
GOVERNMENT POLICY
It is the opinion of our board of directors that there are no aspects of
government policy which, as far as can be foreseen, are likely to have a
material effect on the conduct of our business, except as generally described in
Part I, Item 1, of this Form 10-K under the heading "Government Regulation."
IMPACT OF INFLATION
We believe that inflation has not had any material effect on the results of our
operations to date.
YEAR 2000
We have not experienced any hardware or software problems related to the
millennium date change. We do not anticipate any significant latent software or
hardware problems, but we have retained the company that performed our testing
and evaluation on an annual maintenance contract.
FOREIGN CURRENCIES
We have operations in the United Kingdom, where the functional currency is the
pound sterling. The Company follows currency translation principles established
by SFAS No. 52. All assets and liabilities in the balance sheets of the UK
operation are translated at period-end exchange rates. All income and
expenditure items in the profit and loss account of the UK operation are
translated at average monthly exchange rates. Translation gains and losses
arising from the translation of the financial statements of the UK Operation are
not included in determining net income but are accumulated in a separate
component of stockholders' equity. Foreign currency transaction gains and losses
are included in the determination of net income in the period in which they
occur. We do not use any methods to hedge the effect of changes in the pound
sterling exchange rate.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits. SFAS No. 132, revised employers'
disclosures about pensions and other postretirement benefits. It did not change
the measurement of recognition of those plans, and, accordingly, had no effect
on results of operations and financial position upon adoption by the Company as
of October 1, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 Requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically
24
designated as hedge, the object of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are attributable to the
hedged risk, or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. In June 1999, the FASB issued SFAS
137, Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, which amends SFAS 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. In June 2000, the FASB issued SFAS No. 138, Accounting for Derivative
Instruments and Hedging Activities - An Amendment of FASB Statement No. 133,
which addressed certain implementation issues of SFAS 133. Historically, we have
not entered into derivative contracts either to hedge existing risks or for
speculative purposes. Accordingly, adoption of this new standard has no impact
on our financial position, results of operations or cash flows.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
We have reported a change in accounting principle as a result of the
introduction of this new interpretation.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements: ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. The guidance in SAB 101, as amended by SAB 101B, is
required to be followed starting with the fourth quarter of 2000. We do not
believe that the guidance contained in SAB 101 will have a material affect on
our financial results.
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
IF WE CONTINUE TO INCUR OPERATING LOSSES FOR A PERIOD LONGER THAN
ANTICIPATED, WE MAY BE UNABLE TO CONTINUE OUR OPERATIONS.
Although we began operating almost 18 years ago in October 1983,
our business is subject to the risks inherent in the establishment of a
relatively new business enterprise in the field of biopharmaceuticals.
You should consider likelihood of the success of our business in light
of the problems, expenses, difficulties and delays frequently
encountered in connection with the development of new products and the
competitive and regulatory environment in which we operate. Since
inception, we have produced $32,140,000 in gross revenues and have had
cumulative losses of $88,484,000 (including net losses of $4,654,000
for the year ended December 31, 2000).
As a result of these losses, our independent auditors have added
an explanatory paragraph to their report on the December 31, 2000
financial statements that these losses raise substantial doubt about
our ability to continue as a going concern. Although we may market
certain of our biopharmaceutical products in the second half of 2001,
we cannot assure you that we will begin marketing those products when
we expect to, if at all, or that revenues from our other products,
including Kinetin, will rise to a level that will allow us to operate
profitably during the fiscal year ending December 31, 2001.
OUR OPERATING RESULTS FLUCTUATE FROM QUARTER TO QUARTER, WHICH MAKES IT
DIFFICULT TO PREDICT OUR FUTURE PERFORMANCE.
Our operating results have fluctuated in the past and are likely
to do so in the future. These fluctuations could cause our stock price
to decline.
Because many of our expenses are relatively fixed in the short-
term, our earnings will decline if revenue declines in a given
25
quarter. This could be due to delays in recognizing revenue or for
other reasons. In particular, research and development and general and
administrative expenses are not affected directly by variations in
revenue.
Due to fluctuations in our revenue and operating expenses, we
believe that period-to-period comparisons of our results of operations
are not a good indication of our future performance. In future quarter
or quarters, our operating results could will be below the expectations
of securities analysts or investors. In that case, our stock price
could fluctuate significantly or decline.
IF WE ARE UNABLE TO OBTAIN FURTHER FUNDING, OUR ABILITY TO OPERATE
COULD SUFFER.
In the event that we are unable to obtain further funding, or
the costs of development and operations prove greater than anticipated,
we may be required to further curtail our operations or seek
alternative financing arrangements. Additional financing may not be
available to us on favorable terms or at all. If we have insufficient
funds or are unable to raise additional funds, we may be required to
delay, reduce or cease certain of our programs. This would materially
and adversely affect our business. Our auditors have included an
uncertainty paragraph in their opinion on our financial statements
suggesting that substantial doubt exists about our ability to continue
as a going concern.
IF WE CANNOT DEVELOP COMMERCIALLY SUCCESSFUL PRODUCTS, WE WILL NOT BE
ABLE TO GENERATE SIGNIFICANT REVENUES.
Our product launches to date have generated limited revenues.
We have product candidates in various stages of development and will
undertake substantial additional research and development and
preclinical and clinical testing of our products. These efforts may not
result in the development of any commercially successful products.
Some of our potential products are subject to the risks of
failure inherent in the development of new biopharmaceutical products
including the risks that:
. a product candidate fails in preclinical studies;
. a potential product is not shown to be safe and effective
in clinical trials;
. we fail to obtain regulatory approval for the product;
. we fail to produce a product in commercial quantities at
an acceptable cost; and
. a product does not gain market acceptance.
Future financings may result in the substantial dilution of
stockholders' interests and may result in future investors being
granted rights superior to those of existing stockholders.
CONTINUED RESEARCH AND DEVELOPMENT EFFORTS ARE REQUIRED OR OUR PRODUCTS
MAY BE RENDERED OBSOLETE BY OTHER TECHNOLOGICAL DEVELOPMENTS.
Our field is characterized by extensive research efforts. Our
research could prove unproductive. Furthermore, other companies could
engage in research or development which renders our programs
superfluous or obsolete. This is true for all companies who operate in
the same field.
COMPETITION IN OUR INDUSTRY IS INTENSE, AND AN INABILITY TO COMPETE
SUCCESSFULLY MAY HARM OUR BUSINESS.
The biomedical, drug delivery, biopharmaceutical and
pharmaceutical industries are highly competitive. Our business and
research efforts compete with drug discovery programs at
26
biotechnology, drug delivery, biopharmaceutical and pharmaceutical
companies, as well as with internal drug discovery efforts of
pharmaceutical companies acting independently or in collaboration with
other companies. In addition, academic institutions, government
agencies throughout the world and public and private organizations
conducting research may seek intellectual property protection, discover
competing products, or establish collaborative arrangements in our area
of research and development.
WE FACE EXPOSURE TO LIABILITY FOR OUR PRODUCTS.
During recent years, lawsuits resulting in very substantial
liability have been filed against companies engaged in the manufacture
of pharmaceutical and other medical-related products or devices which
have subsequently proved harmful to human health. Many of these cases
have exposed companies to liability long after the products have been
brought to market even though, at the time of their development, based
on extensive research, there were no perceived risks of injury. Thus,
notwithstanding United States Food and Drug Administration ("FDA") or
other foreign governmental approval, we cannot assure you that we will
not be subject to liability from the use of our products, or that our
product liability coverage will be adequate to protect against future
claims. Management intends to have third parties manufacture and
distribute certain of our products in order to lessen our liability.
However, we cannot assure you that this result will be achieved.
WE RELY ON CERTAIN KEY SUPPLIERS IN ORDER TO PRODUCE OUR PRODUCTS.
We manufacture all of our products through third-party
contractors and purchase raw materials from third-party suppliers. We
recently established a dual supply chain for Kinetin. Although we
believe that other suppliers are available who can produce similar
materials and products, we cannot assure you that such materials would
be available to us on an immediate basis if needed, or at prices
similar to those now paid by us.
IF WE ARE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY, WE
WILL BE UNABLE TO PREVENT THIRD PARTIES FROM USING OUR TECHNOLOGY,
WHICH COULD IMPAIR OUR ABILITY TO COMPETE IN THE MARKET.
Our success will depend in part on our ability to obtain and
maintain meaningful patent protection for our products, both in the
United States and in other countries. Our inability to do so could harm
our competitive position. We rely on our issued and pending patent
applications in the United States and in other countries to protect a
large part of our intellectual property and our competitive position.
We cannot assure you that any of the currently pending or future patent
applications will issue as patents, or that any patents issued to us
will not be challenged, invalidated, held unenforceable or
circumvented. Further, we cannot assure you that our intellectual
property rights will be sufficiently broad to prevent third parties
from producing competing products similar in design to our products.
In addition to patent protection, we also rely on protection
of trade secrets, know-how and confidential and proprietary
information. We generally enter into confidentiality agreements with
our employees, consultants and our collaborative partners upon
commencement of a relationship with us. However, we cannot assure you
that these agreements will provide meaningful protection against the
unauthorized use or disclosure of our trade secrets or other
confidential information or that adequate remedies would exist if
unauthorized use or disclosure were to occur. The exposure of our trade
secrets and other proprietary information would impair our competitive
advantages and could have a material adverse effect on our operating
results, financial condition and future growth prospects. Further, we
cannot assure you that others have not or will not independently
develop substantially equivalent know-how and technology.
Our commercial success also depends in part on avoiding the
infringement of other parties' patents or proprietary rights and the
27
breach of any licenses that may relate to our technologies and
products. We are aware of several third-party patents that may relate
to our technology. We believe that we do not infringe these patents but
cannot assure you that we will not be found in the future to infringe
these or other patents or proprietary rights of third parties, either
with products we are currently developing or with new products that we
may seek to develop in the future. If third parties assert infringement
claims against us, we may be forced to enter into license arrangements
with them. We cannot assure you that we could enter into the required
licenses on commercially reasonably terms, if at all. The failure to
obtain necessary licenses or to implement alternative approaches may
prevent us from commercializing products under development and would
impair our ability to be commercially competitive.
We may also become subject to interference proceedings
conducted in the U.S. Patent and Trademark Office to determine the
priority of inventions.
THE COST OF ENFORCING OUR PROPRIETARY RIGHTS MAY BE EXPENSIVE AND
RESULT IN INCREASED LOSSES.
The defense and prosecution, if necessary, of intellectual
property suits, U.S. Patent and Trademark Office interference
proceedings and related legal and administrative proceedings will
result in substantial expense to us and significant diversion of effort
by our technical and management personnel. An adverse determination in
litigation or interference proceedings to which we may become a party
could subject us to significant liabilities to third parties, could put
our patents at risk of being invalidated or interpreted narrowly and
could put our patent applications at risk of not issuing.
Further, there is a risk that some of our confidential
information could be compromised during the discovery process of any
litigation. During the course of any lawsuit, there may be public
announcements of the results of hearings, motions and other interim
proceedings or developments in the litigation. If securities analysts
or investors perceive these results to be negative, it could have a
substantial negative effect on the trading price of our stock.
REGULATION BY GOVERNMENT AGENCIES IMPOSES SIGNIFICANT COSTS AND
RESTRICTIONS ON OUR BUSINESS ACTIVITIES.
The production and sale of pharmaceutical products is highly
regulated. Our ability and the ability of our partners to secure
regulatory approval for our products and to continue to satisfy
regulatory requirements will determine our future success. We may not
receive required regulatory approvals for our products or receive
approvals in a timely manner. In particular, FDA and comparable
agencies in foreign countries, including the European Medicines
Evaluation Agency and the Medicines Control Agency ("MCA") in the U.K.,
must approve human therapeutic and preventive products before they are
marketed. This approval process can involve lengthy and detailed
laboratory and clinical testing, sampling activities and other costly
and time-consuming procedures. While the time required to obtain
approval varies, it can take several years. Delays in obtaining
regulatory approvals could adversely affect the marketing of products
and our ability to receive product revenues or royalties. We cannot
guarantee that we will be able to obtain the necessary approvals for
clinical testing or for the manufacturing and marketing of any products
that we develop.
We are also subject to ongoing regulatory review. Discovery of
previously unknown problems with a product, manufacturer or facility or
other violations of regulatory requirements may result in:
. fines;
. suspensions of regulatory approvals;
28
. product recalls; and
. criminal prosecution
The failure to obtain regulatory approvals, the restriction,
suspension or revocation of regulatory approvals or any other failure
to comply with regulatory requirements or changes in the regulatory
framework could materially and adversely affect our business.
PROFESSIONAL GUIDELINES COULD ADVERSELY AFFECT OUR BUSINESS.
Private health organizations and science foundations may
publish recommendations for treatments, which affect various therapies,
drugs or procedures, including any products we might develop. These
recommendations may relate to:
. usage;
. dosage;
. method of administration; and
. use of other therapies simultaneously.
If patients and health care providers follow recommendations
or guidelines that result in decreased use of our products, our
business could be materially and adversely affected.
THE PRICE OF OUR ADSs IS VOLATILE.
The market price of our ADSs, like that of other biotechnology
companies, has fluctuated significantly. Factors that could cause our
stock price to fluctuate in the future may include:
. announcements by us or our competitors of clinical trial
results and other product developments;
. adverse developments in the protection of intellectual
property or other legal matters;
. announcements in the scientific and research community or
by other biotechnology companies;
. regulatory changes that affect our products;
. fluctuations in our operating results; and
. changes in third-party reimbursement policies or in
medical practices.
THIRD-PARTY REIMBURSEMENT AND HEALTH CARE COST CONTAINMENT INITIATIVES
MAY CONSTRAIN OUR FUTURE REVENUES.
Our ability to successfully market any product we develop, and
particularly with respect to our Invicorp product candidate, will
depend in part on the level of reimbursement that government health
administration authorities, private health coverage insurers and other
organizations provide for the cost of our products and related
treatments. We may not be able to sell our products profitably if
reimbursement is unavailable or limited in scope. Third-party payors
may not reimburse patients for newly approved health care products such
as those that we are developing. Increasingly, third-party payors are
attempting to contain health care costs in ways that are likely to
impact our development of products including:
. challenging the prices charged for health care products;
29
. limiting both coverage and the amount of reimbursement for
new therapeutic products;
. denying or limiting coverage for products that are
approved by the regulatory agencies but are considered
experimental or investigational by third-party payors; and
. refusing to provide coverage when an approved product is
used in a way that has not received regulatory marketing
approval.
UNITED STATES JUDGMENTS MAY NOT BE ENFORCEABLE AGAINST US.
Judgments of United States courts, including those predicated
on the civil liability provisions of the federal securities laws of the
United States, may not be enforceable against us in English courts. As
a result, stockholders who obtain a judgment against us in the United
States may not be able to require us to pay the amount of the judgment.
ITEM 7A--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risks include fluctuations in interest rates, variability in
interest rate spread relationships (i.e., Prime to LIBOR spreads) and exchange
rate variability.
We believe that fluctuations in interest rates and currency exchange rates in
the near term would not materially affect our consolidated operating results,
financial position or cash flows as we have limited risks related to interest
rate and currency exchange rate fluctuations.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)(1) and 14(a)(2) of Part IV of this Report on Form 10-K.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Company currently has four Directors.
Director
Name Position with Company Since Age
- ---- -------------------------------------- ------- ---
Frank James Massino....... Chairman of the Board of Directors and 1998 53
Chief Executive Officer
Steven Georgiev........... Director 1997 66
Uwe Thieme................ Director 1998 59
Andreas Tobler............ Director 1998 50
Mr. Massino became Chairman and CEO of Senetek PLC in November 1998. Drawing on
professional management experience at major corporations such as Glaxo, Ortho
Pharmaceutical Corporation, Johnson & Johnson, Pfizer and IBM, Mr. Massino has
reshaped the corporate structure of Senetek, defined its strategic direction and
focused the Company soundly on its core competencies.
During his career, Mr. Massino has successfully negotiated more than 40
licensing agreements with major pharmaceutical companies. For nine years he held
executive management positions at Ortho Pharmaceutical, including Director of
Business Development and New Products, and in 1982 was named "Division Manager
of the Year." While at Ortho, Mr. Massino was involved in the development of
Renova, which in 1995, was also approved for anti-aging applications under the
Renova trademark, and directed major product launches for the company.
30
As Product Director of Marketing and Division Sales Manager at Glaxo Inc., he
repositioned a mature line of corticosteroids into a $50 million psoriasis
business, successfully launched two new ethical pharmaceutical products and
championed the internal development of two critically important product line
extensions.
Mr Massino holds a degree in Finance and Chemistry from the University of
Illinois and is a graduate of the Marketing Management Program of the Columbia
Executive Program at Columbia University and the Management of Managers Program
of the Graduate School of Business Administration at the University of Michigan.
Mr. Massino is highly experienced in drug delivery technology and holds a
patent on a drug delivery device. He is an active member of the Licensing
Executives Society.
Steven Georgiev was appointed a director in February 1997. Since 1993 he has
acted as Chairman of the Board of Directors and Chief Executive Officer of
Palomar Medical Technologies Inc. He became Chairman of the Board of Directors
of Palomar in September 1991 after its merger with Dymed.
Mr. Georgiev is also Chairman of American Materials and Technology Inc. and a
director of Excel Technology Inc., a public company he co-founded in 1972 which
was later acquired by EG&G Inc., a company listed on the New York Stock
Exchange. He has a Bachelor of Science in Engineering Physics from Cornell
University and a Master of Science in Management from the Massachusetts
Institute of Technology (Sloan Fellow).
Andreas O. Tobler was appointed a director in November 1998. Since 1996 he has
acted as Chief Executive Officer of Mediphore-Biotechnologie AG, and Austrian
based biotechnology company. Mr. Tobler is also Chairman of Online Capital
Group, Inc., a US based international financial services company. Previously Mr.
Tobler held senior positions at Cornerstone Financial Corporation, New York
(1996 - 1998) and U.S. Industrial Services, Inc. (1991 - 1996).
Mr. Tobler's past experience also includes Managing Partner, Royal Trust Bank
(Switzerland), Zurich (1988-1991); Vice President and Head of Corporate Finance
Citibank, New York and Zurich (1987-1988); and Vice President and Head of
Capital Markets, Credit Suisse, New York (1982-1987).
Mr. Tobler has a law degree from the University of Zurich and a Master's degree
from New York University.
Uwe Thieme was appointed a director in April 1998. He qualified as a Doctor of
Medicine at the University of Gottingen in 1968 and became a Board Certified
Radiologist in 1975. He currently practices as a senior partner in a private
Radiology practice and is a Board Member of the German Radiology Association
("GRA") and the German Radiology Science Association ("GRSA"). He is a member of
the management advisory committee for the GRSA's five billion Deutsche Mark
pension fund. Until recently he has held the positions of Deputy Mayor of the
City of Goslar and Deputy Governor of the County of Goslar, Germany.
Board Meetings, Committees and Compensation
The Company's Board of Directors met 12 times in 2000. Other than the Board
Meeting held on November 14, 2000 which was attended by all Directors, the other
meetings related to business conducted by Board Committees where a quorum was
present.
During 2000, the Compensation Committee consisted of Mr. Tobler (Chairman), Mr.
Georgiev and Dr.Frentz. The Compensation Committee reviews and authorizes
salaries and other matters relating to compensation including the grant of
options for the principal officers of the Company and its subsidiaries, subject
subsequently to board approval.
During 2000, the Audit Committee consisting of Mr. Tobler (Chairman), Dr.
Frentz, and Mr. Georgiev. The duties of the Audit Committee comprise, among
other things, assessing the Company's financial reporting process and internal
controls, reviewing the independence of the Company's public accountants, and
monitoring lines of communication between directors, financial management and
the Company's independent accountants.
Directors do not receive salaries or cash fees for serving as Directors nor do
they receive cash compensation for serving on any committee. However, all
members of the Board of Directors who are not employees of the Company are
reimbursed for attendance and out-of-pocket expenses incurred in their capacity
as members of the Board of Directors. In November of 2000, the Board of
Directors authorized the grant to Mr. Tobler, Mr. Georgiev and Dr. Thieme of
options to purchase 250,000, 250,000
31
and 50,000 Ordinary shares, respectively, at an exercise price of $1.4062 per
share, for services rendered to the Company.
Certain Directors have been retained from time to time to provide consulting
services to the Company in their areas of expertise. When these services are
performed the Directors receive $1,250 per day.
The Company maintains stock option plans for employees, including Directors, and
for non-executive Directors and consultants to the Company, as described under
"Stock Option Plans" below.
Executive Officers
George Van Lear was appointed President and Chief Operating Officer in April
1999. From 1996 until 1999 he was Vice President of Research and Development at
DPT Laboratories and designed and implemented development programs for in excess
of twenty new products. From 1989 until 1995 Dr. Van Lear was Director of
Scientific Services at Glaxo Dermatology. At Glaxo he was responsible for taking
eight products to the commercial stage, six New Drug Applications filed and
approved, eleven Investigational New Drug applications, one Abbreviated
Antibiotic New Drug Application and one PLA acquired, managed and approved. From
1988 until 1989 Dr. Van Lear headed a firm which provided consulting services to
the pharmaceutical industry. From 1984 until 1988 he served as Vice President
and Chief Operating Officer at Applied Analytical Industries. In this capacity
Dr. Van Lear directed the research efforts of more than one hundred and fifty
scientists who performed work on more than one hundred New Drug Applications and
Abbreviated New Drug Applications. From 1968 until 1984 he served in a variety
of capacities of increasing seniority at Lederle Laboratories where he directed
the efforts of around fifty analytical chemists in the areas of formulation and
chemical process development.
Dr. Van Lear received a Ph.D in organic chemistry from the University of Utah in
1966 and was awarded NIH and NSF postdoctoral fellowships from Purdue University
and the University of Illinois.
Dr. Van Lear resigned from the Company in July 2000.
Stewart Slade, was appointed Chief Financial Officer in July 1998. From October
1997 until July 1998 Mr. Slade served as a financial consultant to the Company.
From 1991 until 1997 he served as Financial Director of European Operations at
DiverseyLever Limited, a business unit of Unilever. Mr. Slade was involved in
the strategic planning of the European supply chain, the implementation of
corporate change initiatives and the introduction of key performance indicators
in the supply chain and financial reporting processes.
From 1986 until 1991 he was Financial Director of DuBois Chemicals Limited a
subsidiary of Chemed Corporation. Prior to Chemed Mr. Slade served with Colgate
Palmolive for six years, including the position of Financial Controller for the
Eastern Caribbean region. Prior to Colgate Palmolive he was an auditor with
Coopers & Lybrand in London. Earlier in his career Mr. Slade was in research and
development as a biochemist with the Smith Kline Corporation.
Mr. Slade has a Bachelor of Science degree in Chemistry from the University of
Leeds and is a member of the Institute of Chartered Accountants in England and
Wales.
On January 1, 2000, Mr. Slade was appointed Vice President European Operations
and continues to perform his duties as Company Secretary and Acting Principal
Financial Officer.
ITEM 11--EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning the compensation
of the Chief Executive Officer, one executive officer and one former executive
officer of the Company (the "Named Executive Officers").
32
Annual Long-Term
Compensation Compensation
------------------- ------------
Fiscal All Other
Name and Principal Position Year Salary Bonus Options(1) Compensation
--------------------------- ------ --------- ----- ----------- ------------
Frank Massino.......................... 2000 326,963(2) -- 1,250,000 $ --
Chairman and Chief Executive Officer 1999 312,809(2) $50,000 800,000 --
1998 170,314 -- 300.000 --
George Van Lear........................ 2000 99,653(3) -- --
President and Chief Operating Officer 1999 141,677 -- 350,000 --
1998 -- -- -- --
Stewart Slade.......................... 2000 116,580 -- 110,000 --
Vice President European Operations 1999 105,950(4) -- 50,000 --
Acting Principal Financial Officer 1998 -- -- -- --
and Company Secretary
(1) Options entitle the grantee to purchase Ordinary shares from the Company.
There is no public trading market for the Company's Ordinary shares,
although there is a trading market in the United States for Ordinary
shares represented by American Depositary shares. Any subsequent
conversion from Ordinary shares into American Depositary shares, evidenced
by American Depositary Receipts, entails the grantee paying UK Inland
Revenue Reserve Stamp Duty at 1.5% on the deemed market value or, in
certain cases, on the exercise price, of the shares so converted, and a
present fee of either $0.030 or $0.020 per Ordinary share converted into
an ADR, to The Bank of New York, the US Depositary for such conversion.
(2) Salary includes payment for accrued but unused vacation.
(3) Dr. Van Lear resigned as President and Chief Operating Officer effective
July 1, 2000.
(4) Mr. Slade was appointed Vice President European Operations effective
January 1, 2000.
Employment Contracts
The Company has entered into employment agreements with Mr. Massino. Mr. Massino
has an employment contract with an effective term from November 1, 1998 until
December 31, 2005. The contract provides for a salary of $250,000 per annum and
an automobile allowance of $1,200 per month.
STOCK OPTION PLANS
The Company has two stock option plans pursuant to which options to purchase the
Company's Ordinary shares may be granted. The first plan relates to the grant of
options to employees, including employee Directors, and officers of the Company.
The second plan relates to the grant of options to non-executive (non-employee)
Directors and consultants to the Company. In both cases, the exercise price of
these options may not be less than the fair market value of American Depositary
share representing one of the Company's Ordinary shares twenty-one days before
the date of grant.
The following table sets forth information with respect to the options granted
in 2000 exercisable by the Named Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Percentage of Price Appreciation
Number of Total Options Option for Individual
Securities Granted to Term Grants in 2000
Underlying Employees in Exercise or Expiration --------------------
Name Options Granted Fiscal Year Base Price Date 5% 10%
- ---- --------------- ------------- ----------- ---------- -------- ----------
F. Massino.............. 1,250,000 74.2 $1.41 11/13/2007 $717,514 $1,672,114
S. Slade................ 110,000 6.5 $1.41 5/29/2007 $ 63,141 $ 147,146
33
Aggregated Option Exercises During 2000 And Fiscal Year-end Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Shares Options at Fiscal Year-End (#) Fiscal Year-End
Acquired on Value ------------------------------ ------------------------------
Name Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ----------- ----------- ------------- ----------- -------------
F. Massino -- -- 1,237,500 1,475,000 -- --
S. Slade -- -- 32,500 167,500 -- --
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation Principles
The Company's compensation policy is administered by two Directors acting as the
Compensation Committee and is designed to complement the Company's short and
long term business strategy for attracting and retaining key executives critical
to the Company's success.
At its present stage of development, the Company's corporate performance cannot
be gauged nor can compensation be measured in terms of profitability as it has
focused on developing its products, obtaining the necessary regulatory
approvals, attracting sufficient equity finance for this purpose and endeavoring
to negotiate licensing agreements for the development and marketing of its
products.
Currently the Company and its two subsidiaries Senetek Drug Delivery
Technologies Inc. and Carme Cosmeceutical Sciences, Inc. have 8 employees, 6 in
the United States (including one executive Director), and 2 in the United
Kingdom. Given its personnel structure and the Company's formative stage of
development, it had not, in the past, been practicable for the Company to set up
a detailed and integrated compensation philosophy for its executives, nor to
specify levels of seniority, areas of responsibility, performance criteria and
profitability-related awards.
Executive Compensation
Typically, executives have been awarded fixed term employment agreements. In the
cases of Mr. Massino for a fixed period to December 31, 2005.
The compensation of executive officers, including the Chief Executive Officer,
has been determined by a consideration of the compensation paid to officers in
companies in a similar position to Senetek. In certain cases the agreements
provide for consideration by the Board of a bonus but there is otherwise no
provision for a review of compensation during the fixed term of the agreements.
A bonus to Mr. Massino of $50,000 was granted in 1999. No bonus was paid to Mr.
Massino in 2000.
Additionally, stock options entitling the grantee to purchase Ordinary shares in
the Company may be issuable at such times when the Board considers that certain
critical stages in the Company's product development or funding requirements
have been achieved.
Employee Option Plan
The Company's shareholders approved the adoption of a Share Option Scheme for
Employees (the No. 1 Plan) and a Share Option Scheme for Non-Executive Directors
(the No. 2 Plan) at a Special Meeting of shareholders on December 20, 1985. At
the Annual Meeting of shareholders on May 23, 1997, the total number of options
available for issuance under the No. 1 and No. 2 Plans was increased to
6,000,000 and 4,000,000 respectively. Options under the No. 1 and No. 2 Plans
may not be granted at an exercise price lower than the market price for the
Company's shares 21 days prior to the date of grant.
A. TOBLER
S. GEORGIEV
Members of the Compensation Committee
December 31, 2000
Compensation Committee Interlocks and Insider Participation
34
No member of the Compensation Committee is a current or former officer or
employee of the Company or any of its subsidiaries.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership
The following table sets forth certain information regarding the beneficial
ownership of Senetek's outstanding Ordinary shares as of December 31, 1999 by
each of Senetek's Directors, who is a stockholder; (ii) the Company's Chief
Executive Officer; (iii) Senetek's other executive officers currently in office;
(iv) one former officer; (v) all executive officers and directors of Senetek as
a group; and (vi) each person believed by Senetek to own beneficially more than
5% of its outstanding Ordinary shares. Except as indicated by the notes to the
following table, the holders listed below have sole voting power and investment
power over the shares beneficially held by them. The address of each of the
Company's Directors and executive officers is that of the Company.
Number of
Shares Percentage
Beneficially of
Name of Beneficial Owner Owned(1) Class(1)
------------------------ ------------ ----------
Frank J. Massino.............................. 1,237,500(2) 2.1%
Steven Georgiev............................... 280,200(2) *
Uwe Thieme.................................... 180,200(2) *
Andreas Tobler................................ 370,200(2) *
Stewart Slade................................. 32,500(2) *
All Directors and Executive Officers as a
group (5 persons)............................ 2,100,800 3.6%
- --------
* Less than 1%
(1) For purposes of this table, a person or a group of persons is deemed to have
"beneficial ownership" as of a given date of any shares which that person
has the right to acquire within 60 days after that date. For purposes of
computing the percentage of outstanding shares held by each person or group
of persons named above on a given date, any shares which that person or
persons has the right to acquire within 60 days after that date are deemed
to be outstanding, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Includes the following number of shares issuable upon exercise of options
or warrants that are currently exercisable or will become exercisable
within 60 days of December 31, 2000: Mr. Massino: 1,237,500; Mr. Georgiev:
280,000; Dr. Thieme: 180,000; Mr. Tobler: 370,000; Mr. Slade: 32,500.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under Section 16(a) of the United States Securities Exchange Act of 1934, the
Company's Directors, executive officers and any persons holding more than 10% of
the Company's equity securities are required to report their ownership of equity
securities and any changes in their ownership, on a timely basis, to the SEC. To
the Company's knowledge, based solely on materials provided and representation
made to the Company, for the fiscal year ended December 31, 2000, all reports
required by Section 16(a) were filed on a timely basis except as follows: Mr.
Frentz did not timely file a Form 4 during 2000 with respect to an exercise of
stock options to ordinary shares. Marjorie Hays did not timely file a Form 3
during 2000 with respect to her appointment as an officer of the company.
35
The Company is not in a position to determine whether reports under Section
16(a) were timely filed by directors and officers who are no longer employed by
the Company.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation--Employment Contracts" for a description of certain
relationships.
Directors do not receive salaries or cash fees for serving as Directors nor do
they receive cash compensation for serving on any committee. However, all
members of the Board of Directors who are not employees of the Company are
reimbursed for attendance and out-of-pocket expenses in incurred in their
capacity as member of the Board of Directors. In November of 2000, the Board of
Directors authorized the grant to Mr. Tobler, Mr. Georgiev and Dr. Thieme of
options to purchase 250,000, 250,000 and 50,000 Ordinary shares respectively, at
an exercise price of $1.4062 per share, for services rendered to the Company.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are included in Item 8:
Page
----
Reports of Independent Auditors F-2
Consolidated Balance Sheet as of December 31, 2000 and 1999 F-3
Consolidated Statement of Operations for the Years Ended F-4
December 31, 2000, 1999 and 1998
Consolidated Statement of Stockholders' (Deficit)/Equity for
the Years Ended December 31, 1998, 1999, and 2000 F-5
Consolidated Statement of Cash Flows for the Years Ended F-6
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements F-7 to F-26
(a)(2) The following financial statement schedules are submitted herewith:
Schedule II is included in Item 8.
(a)(3) The following Exhibits are filed or incorporated by reference as part of
this Report on Form 10-K:
3.1 Certificate of Incorporation of Senetek PLC.
Filed as an Exhibit with corresponding Exhibit Number to Registrant's
Registration Statement on Form F-1, Registration No. 33-3535, and
incorporated herein by reference.
3.2 Memorandum and Articles of Association of Senetek PLC (defining the
rights of security holders, subject to the provisions of the United
Kingdom Companies Act 1985).
Filed as an Exhibit with corresponding Exhibit Number to Registrant's
Registration Statement on Form F-1, Registration No. 33-3535, and
incorporated herein by reference.
10.1 Senetek No. 1 Share Option Scheme for Employees.
Filed as an Exhibit to Registrant's Report on Form S-8 on October 8,
1993, Registration No. 33-70136, and incorporated herein by reference.
10.2 Asset Purchase Agreement dated as of July 31, 1995, between Carme
International, Inc. a wholly owned subsidiary of Senetek PLC and Carme
Inc.
Filed as an Exhibit on Form 8-K, dated October 10, 1995 (as amended),
and incorporated herein by reference.
36
10.3 Senetek No. 2 Executive Share Option Scheme for non-Executive Directors
and Consultants.
Filed as an Exhibit to Registrant's Registration Statement on Form S-8
on October 8, 1993, Registration No. 33-70136, and incorporated herein
by reference.
10.4 Amended and restated Deposit Agreement dated November 6, 1992 between
Senetek PLC and The Bank of New York.
The form of such Agreement was filed as an Exhibit on Form F-6 with the
Securities and Exchange Commission on March 19, 1992, Registration No.
33-46638, and is incorporated herein by reference.
10.14 Service Agreement dated December 30, 1998 between Senetek PLC and Mr. F.
J. Massino.
Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
10.16 Securities Purchase Agreement dated April 13, 1999 by and among Senetek
PLC and certain other parties thereto.
Filed as an exhibit to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by reference.
10.17 Securities Purchase Agreement ("Securities Purchase Agreement") dated
April 14, 1999 between Senetek PLC and the various purchasers designated
in the agreement.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.18 Form of Senior Secured Note due April 14, 2002 issued by Senetek PLC
pursuant to the Securities Purchase Agreement.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.19 Form of Series A Warrant issued by Senetek pursuant to the Securities
Purchase Agreement.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.20 Form of Series B Warrant issued by Senetek pursuant to the Securities
Purchase Agreement.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.21 Form of Series C Warrant issued by Senetek pursuant to the Securities
Purchase Agreement.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.22 Registration Rights Agreement dated as of April 14, 1999 among Senetek
PLC and the parties designated therein.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.23 Security Agreement dated as of April 14, 1999 by and between Senetek PLC
and the parties designated therein.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.24 Pledge Agreement dated as of April 14, 1999 by and between Senetek PLC
and the parties designated therein.
37
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.25 Pledge Agreement dated April 14, 1999 by and between Senetek Drug
Delivery Technologies Inc. and the parties designated therein.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.26 Guaranty dated as of April 14,1999 executed by Senetek Drug Delivery
Technologies Inc. and Carme Cosmeceutical Sciences Inc.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.27 Patent and Security Agreement dated as of April 14, 1999 between Senetek
PLC and the parties designated therein.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.28 Fixed and Floating Security Document dated April 14, 1999 executed by
Senetek PLC in favor of the Collateral Agent named therein.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.30 Settlement Agreement dated April 13, 1999 among Senetek PLC and the
parties named therein.
Filed as an exhibit to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1990 and incorporated herein by reference.
10.31 Form of Amended Series A Warrant issued by Senetek pursuant to the
Securities Purchase Agreement.
Filed as an exhibit to Amendment No. 1 of Registrant's Registration
Statement on Form S-3, Registration No. 333-37782, filed on January 23,
2001 and incorporated herein by reference.
10.32 Form of Amended B Warrant issued by Senetek pursuant to the Securities
Purchase Agreement.
Filed as an exhibit to Amendment No. 1 of Registrant's Registration
Statement on Form S-3, Registration No. 333-37782, filed on January 23,
2001 and incorporated herein by reference.
10.33 Form of Amended C Warrant issued by Senetek pursuant to the Securities
Purchase Agreement.
Filed as an exhibit to Amendment No. 1 of Registrant's Registration
Statement on Form S-3, Registration No. 333-37782, filed on January 23,
2001 and incorporated herein by reference.
21 Subsidiaries of Senetek PLC.
Filed as an exhibit with corresponding Exhibit Number to Registrant's
Annual report on Form 10 -K for the year ended December 31, 1995 and
incorporated herein by reference.
24 Power of Attorney.
Included on the signature page to this Annual Report on Form 10-K.
(b) Reports on Form 8-K
None
(c) Exhibits.
38
The Company has filed as part of this Report on Form 10-K the exhibits
in Item 14(a)(3) as set forth above.
(d) Financial Statement Schedules.
See Item 14(a)(2) of this Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the city of Napa, State
of California, on this 9th day of March, 2000.
SENETEK PLC
BY: /s/ F. J. Massino
-------------------------------------
FRANK J. MASSINO
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
does hereby constitute and appoint Frank J. Massino and Stewart W. Slade, and
each of them, with full power of substitution and full power to act without the
other, his true and lawful attorney-in-fact and agent to act for him in his
name, place and stead, in any and all capacities to sign any or all amendments
to this Annual Report on Form 10-K, and to file the same, with all exhibits
hereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to all intents and purposes, as they or he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ F. J. Massino Chairman of the Board March 9, 2000
- ------------------------------- and Chief Executive Officer
Frank J. Massino (Principal Executive Officer)
/s/ S. W. Slade Acting Principal Financial March 9, 2000
- ------------------------------- and Accounting Officer
Stewart W. Slade
/s/ A. Tobler Director March 9, 2000
- -------------------------------
A. Tobler
/s/ U. Thieme Director March 9, 2000
- ------------ ------------------
U. Thieme
/s/ S. Georgiev Director March 9, 2000
- -------------------------------
S. Georgiev
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F2
Consolidated Balance Sheets F3
December 31, 2000 and 1999
Consolidated Statements of Operations F4
for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' (Deficit)/Equity F5
for the years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows F6
for the years ended December 31, 2000, 1999 and 1998
Notes to the Consolidated Financial Statements F7-F25
Schedule II - Valuation and Qualifying Accounts F26
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Board of Directors and
Stockholders of Senetek PLC
We have audited the accompanying consolidated balance sheets of Senetek PLC and
its subsidiaries ("the Company") as of December 31, 2000 and 1999, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 2000. We have also
audited Schedule II - Valuation and Qualifying Accounts (the Schedule). These
financial statements and the Schedule are the responsibility of Senetek PLC's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the Schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and Schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and Schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements and Schedule.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2q to the financial statements, the Company changed its
method of accounting for equity awards granted to its Board of Directors.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Senetek PLC and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31,2000 in conformity with accounting principles generally accepted in the
United States of America.
Also, in our opinion, the Schedule presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has a stockholders' deficit and has suffered
recurring losses from its operations. Its ability to continue research
activities to a stage where it has a product available for sale is dependent
upon securing additional sources of financing and achieving profitable operating
results. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to this matter are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
San Francisco, California
February 21, 2001
F-2
SENETEK PLC
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
2000 1999
------------- -------------
($ in thousands, except share amounts)
ASSETS (Note 11)
Cash and Cash Equivalents $ 828 $ 1,840
Trade Receivables
(net of allowance for doubtful accounts
of $885,000 in 2000 & $776,000 in 1999)(Note 3) 1,154 1,234
Non-trade Receivables
(net of provisions of $136,000 in 2000 & $261,000 in 1999)(Note 4) 48 188
Employee Receivables 10 --
Inventory
(net of provision of $92,000 in 2000 and $160,065 in 1999)(Note 5) 596 511
Prepaids and Deposits 180 183
------------- -------------
Total Current Assets 2,816 3,956
Property & Equipment - net (Note 6) 3,748 4,060
Goodwill - net (Note 7) 1,441 1,631
Deferred Financing Costs (Note 8) 1,381 2,581
------------- -------------
Total Assets 9,386 12,228
============= =============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)/EQUITY
Current Liabilities
Accounts Payable (Note 9) 1,378 2,230
Accrued Liabilities (Note 9) 804 1,095
Capital Leases -- 42
Convertible Short Term Debt (Note 6) 546 700
------------- -------------
Total Current Liabilities 2,728 4,067
------------- -------------
Long Term Liabilities
Notes Payable, net of discount of $162,000 in 2000 7,227 7,101
And $288,000 in 1999 (Note 11)
Deferred License Fees (Note 2e) 3,154 543
Commitments and Contingencies (Note 18) -- --
Stockholders' (Deficit)/Equity
Ordinary shares Authorized shares:
$0.08 (5 pence) par value: 100,000,000
Issued and Outstanding shares 2000: 58,432,117
(1999: 58,148,517) 4,720 4,697
Share Premium 80,018 79,600
Accumulated Deficit (88,484) (83,830)
Accumulated other comprehensive income -- currency translation 23 50
------------- -------------
Total Stockholders' (Deficit)/Equity (3,723) 517
------------- -------------
Total Liabilities and Stockholders' (Deficit)/Equity $ 9,386 $ 12,228
============= =============
See accompanying notes to consolidated financial statements.
F-3
SENETEK PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
-------- -------- --------
($ IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue
Product Sales $ 2,503 $ 7,402 $ 4,658
Royalties & Licensing 1,256 861 14
-------- --------- --------
Total Revenue 3,759 8,263 4,672
Cost of Sales - Products 1,469 3,044 3,040
-------- --------- --------
Gross Profit 2,290 5,219 1,632
-------- --------- --------
Operating Expenses:
Research & Development 821 2,702 7,980
General & Administrative 5,147 6,424 9,162
Marketing & Promotion -- 390 1,123
Selling Expenses -- -- 456
Loss on Impairment of Property
& Equipment (Note 6) -- 1,522 --
-------- --------- --------
Total Operating Expenses 5,968 11,038 18,721
-------- --------- --------
Loss from Operations (3,678) (5,819) (17,089)
Interest Income 46 82 188
Other (Expense)/Income - net (5) (74) 194
Debt modification expense (Note 10) -- -- (2,389)
Settlement Expense (Note 11) -- (2,718) --
Interest Expense (including amortization
of deferred financing cost) (2,055) (1,676) (3,396)
-------- --------- --------
Loss before extraordinary loss
on extinguishment of debt and change
in accounting principle $ (5,692) $ (10,205) $(22,492)
Extraordinary loss on
extinguishment of debt (Note 11) -- (1,657) --
Cumulative effect of change in accounting
principle (Note 2(q)) 1,038 -- --
-------- --------- --------
Net Loss available to common stockholders $( 4,654) $ (11,862) $(22,492)
======== ========= ========
Basic and Diluted Loss before extraordinary
item and change in accounting principle
per Ordinary share outstanding $ (0.10) $ (0.18) $ (0.41)
Basic and Diluted Loss from extinguishment
of debt per Ordinary share outstanding -- (0.03) --
Basic and Diluted Loss from change in
accounting principle per Ordinary
share outstanding 0.02 -- --
-------- --------- --------
Basic and Diluted Loss per Ordinary
share outstanding $ (0.08) $ (0.21) $ (0.41)
======== ========= ========
Pro-forma Net Loss if newly adopted accounting
principle was used in all years -- $ (11,436) $(22,043)
Pro-forma Basic and Diluted Loss per
ordinary Share outstanding -- $ (0.20) $ (0.41)
Weighted average Ordinary shares outstanding 58,388 57,562 54,229
See accompanying notes to consolidated financial statements.
F-4
SENETEK PLC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)/EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000
($ IN THOUSANDS, EXCEPT FOR SHARE DATA)
Accumulated
Other
Comprehensive
Income- Net
Share Accumulated Currency Stockholders'
Shares Amount Premium Deficit Translation Equity/(Deficit)
---------- ------- ------- ----------- ----------- --------
Balances, January 1, 1998: 52,186,821 $ 4,215 $ 54,599 $ (49,476) $ 56 $ 9,394
Issuance of Ordinary Shares in Private
Placements 1,100,500 90 3,485 -- -- 3,575
Warrant Conversions 458,706 38 534 -- -- 572
Deferred Financing Costs -- -- 3,936 -- -- 3,936
Conversion of Debt to Equity (Note 10) 2,105,714 173 4,038 -- -- 4,211
Debt Modification Expense (Note 10) -- -- 2,389 -- -- 2,389
Options Exercised 1,364,115 109 1,379 -- -- 1,488
Stock Options granted 1,932 1,932
Comprehensive (Loss):
Net Loss -- -- -- (22,492) -- (22,492)
Translation Loss, net of tax -- -- -- -- (6) (6)
---------- ------- --------- ----------- ----------- -----------
Total Comprehensive Income (Loss) -- -- -- (22,492) (6) (22,498)
---------- ------- --------- ----------- ----------- -----------
Balances, December 31, 1998: 57,215,856 $ 4,625 $ 72,292 $ (71,968) $ 50 $ 4,999
Issuance of Ordinary Shares in Private
Placements 801,000 65 974 -- -- 1,039
Warrant Conversions 15,000 1 16 -- -- 17
Warrants issued in connection with $5 million
note, $2.4 million re-finance and April 1999
settlement agreement -- -- 6,072 -- -- 6,072
Options Exercised 116,661 6 169 -- -- 175
Stock Options granted -- -- 77 -- -- 77
Comprehensive (Loss):
Net Loss -- -- -- (11,862) -- (11,862)
Translation Loss, net of tax -- -- -- -- -- --
---------- ------- --------- ----------- ----------- -----------
Total Comprehensive Income (Loss) -- -- -- (11,862) -- (11,862)
---------- ------- --------- ----------- ----------- -----------
Balances, December 31, 1999: 58,148,517 $ 4,697 $ 79 ,600 $ (83,830) $ 50 $ 517
Options Exercised 283,600 23 467 -- -- 490
One million warrants issued in connection
with Revlon Licensing Agreement -- -- 762 -- -- 762
Fair Value of Options issued to consultants -- -- 227 -- -- 227
Change of Accounting Principle in respect
of Fair Value of Options issued to Non
Executive Directors -- -- (1,038) -- -- (1,038)
Comprehensive (Loss):
Net Loss -- -- -- (4,654) (4,654)
Translation Loss -- -- -- -- (27) (27)
---------- -------- --------- ----------- ----------- -----------
Total Comprehensive Income (Loss) -- -- -- (4,654) (27) (4,681)
Balances, December 31, 2000 58,432,117 $ 4,720 $ 80,018 $ (88,484) $ 23 $ (3,723)
========== ======== ========= =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------- -------- -------
($ IN THOUSANDS)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Loss $ (4,654) $(11,862) $(22,492)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and Amortization 824 997 540
Bad Debt Expense (16) 582 418
Loss/(Gain) on Sale of Equipment -- -- 29
Loss on Impairment of Assets -- 1,522 --
Stock Option Compensation 227 77 2,532
Stock Option Compensation - Change in accounting principle (1,038) -- --
Debt Modification Expense -- -- 2,389
Settlement Expense -- 2,718 --
Loss on Extinguishment of debt -- 1,657 --
Amortization of Deferred Finance costs 1,200 1,042 3,355
Changes in Assets and Liabilities:
Trade Receivables (29) (763) (560)
Non-trade Receivables 265 153 (16)
Receivable from Employee (10) -- 311
Inventory (85) 220 159
Prepaids 3 232 (421)
Accounts Payable and Accrued Liabilities (1,185) 198 171
Deferred License Fees 3,373 543 --
--------- -------- --------
Net Cash Used by Operating Activities $ (1,125) $ (2,684) $(13,585)
--------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Property & Equipment (196) (1,227) (1,892)
--------- -------- --------
Net Cash Used by Investing Activities $ (196) $ (1,227) $ (1,892)
YEAR ENDED DECEMBER 31,
2000 1999 1998
-------- ------- ------
($ IN THOUSANDS)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds of Issuance of Ordinary Shares
from exercise of Warrants and Options 490 192 2,646
Proceeds from line of credit -- -- 6,600
Proceeds from issuance of 9% Notes Payable -- 5,000 --
Costs of Financing -- (249) (660)
Short-term Loans and Overdrafts (154) -- 1,489
------ ------- ------
Net Cash Provided by Financing Activities $ 336 $ 4,943 $ 10,075
------- ------- ------
NET (DECREASE)/INCREASE IN CASH
AND CASH EQUIVALENTS (985) 1,032 (5,402)
Cash and Cash Equivalents at the Beginning
of the year 1,840 808 6,216
Effects of Exchange Rate Changes on Cash (27) -- (6)
-------- ------- ------
Cash and Cash Equivalents at the End of the Year $ 828 1,840 808
======= ======= ======
Supplemental disclosures of cash flow information
Interest $ 591 169 41
Income Taxes $ -- -- --
F-6
During 1999, the Company refinanced the $2,389,000 line of credit with a new
investment note in a non cash transaction. At the same time the Company
recognized a loss on extinguishment of debt expense and settlement expense
related to the issuance of warrants. For a full discussion of the non cash items
relating to the new financing and settlement agreements, see Note 11.
During 1998, the Company issued 2,105,714 shares to settle part of its line of
credit for which no cash was received.
See accompanying notes to consolidated financial statements
SENETEK PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. ACTIVITIES
Senetek PLC ("the Company") is a science-driven biotechnology company that
develops, manufactures and markets proprietary products for the enhancement of
quality of life. The company focuses on two therapeutic categories, sexual
dysfunction and anti-aging, which are widely known to be multi-billion dollar
markets. In connection with product development activities, we sponsor research
in the life sciences and biotechnology fields.
The Company also sells monoclonal antibodies purchased from outside suppliers
and derived from sponsored research into diagnostic procedures for Alzheimer's
disease and other cell lines to the scientific community for research purposes.
Senetek PLC is a public limited company that was registered in England in 1983
(registration number 1759068). As of December 31, 2000 we have two wholly owned
subsidiaries, Senetek Drug Delivery Technologies Inc. ("SDDT") and Carme
Cosmeceutical Sciences Inc. ("CCSI") both of which are Delaware corporations. In
February 2001, we formed a new Hong Kong subsidiary, Senetek Asia (HK) Limited
which is expected to facilitate and promote sales in Asia.
Subsidiary Undertakings
SDDT (formerly named MEIS Corporation) was incorporated in the State of Delaware
in December 1993. Its main activity is the development, production and
distribution of the auto-injector systems for use with the Company's Erectile
Dysfunction compound.
CCSI (formerly named Carme International, Inc.) was incorporated in the State of
Delaware in June 1995. Its main activity is the supply of skincare products to
various segments of the skincare market.
2. PRINCIPAL ACCOUNTING POLICIES
(a) Basis of Consolidation
The consolidated financial statements incorporate the accounts of Senetek PLC
and its wholly owned subsidiaries, CCSI and SDDT. All significant intercompany
balances and transactions have been eliminated in consolidation. The accounts
have been prepared in accordance with U.S. generally accepted accounting
principles (U.S. GAAP).
(b) Going concern uncertainty
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's ability to continue as a
going concern may depend on its ability to obtain financing sufficient to
support its operations and business development plans and to achieve profitable
operating results.
F-7
Management is encouraged by the performance of the Company over the past two
years and is budgeting for continued improvement. Discussions in connection with
new licensing agreements, new skincare markets and erectile dysfunction markets
combined with reduced and more efficient spending may yield better financial
results. Management expects better financial performance to help fund increased
research and development budget for 2001 which is estimated at $ 2 million.
However, we may also continue to rely on additional sources of private financing
through equity financing, short term loans or proceeds from the exercise of
options and warrants. Furthermore, the Company cannot provide any assurance that
it will be successful.
The financial statements reflect a loss for the year ended December 31, 2000 of
$4,654,000, which, when taken with the previous years results, results in an
accumulated deficit of $88,484,000 at December 31, 2000. Cash and cash
equivalents decreased by $1,012,000 during fiscal 2000, from $1,840,000 to
$828,000. The Company has partially funded the loss of $4.7 million for the year
ended December 31, 2000 from (a) revenues, (b) $3.7 million of license fees
received during the year, and (c) approximately $0.5 million of proceeds
received in connection with the exercise of options. Management has reduced
operational expenditures through the elimination of non essential facilities,
reduction in staffing, improved purchasing efficiencies and the out licensing of
non-core product lines.
In June 2000 we received a $3 million non-refundable license fee from Revlon
Consumer Products in exchange for worldwide rights for Kinetin in the mass
market, excluding parts of Asia. Revenue will be recognized over the term of the
license agreement. In connection with the Revlon licensing agreement we issued
to Revlon 1.0 million warrants to purchase an equivalent number of Senetek PLC
Ordinary shares at an exercise price of $6.00 per share. These warrants expire
three years from the date of issuance. The fair value of the warrants issued was
calculated as $762,000 using the Black Scholes option pricing model, assuming an
expected life of 3 years, annualized volatility of 92% and a risk free
investment return of 6.0% per annum. The $762,000 deferred financing cost has
been netted against the $3.0 million deferred license income and will be
amortized over the term of the agreement.
Under the terms of an agreement dated December 13, 1999 the Company issued to a
capital equipment supplier a Convertible Promissory Note for $700,000 in
exchange for an equivalent amount previously recorded in accounts payable. The
Note was due for repayment on August 1, 2000. Conversion was not elected and
under the terms of the agreement the note is being liquidated by the assignment
of our USITC and Omega accounts receivable. We are accruing interest from August
1, 2000 on the outstanding debt. As at December 31, 2000 the amount owed on this
note was $546,000.
In April 1999 we received $4.8 million (net of expenses) in cash and refinanced
$2,389,000 of our previously outstanding indebtedness that would have been due
in April 2000 for two new notes bearing interest at 9% per annum and maturing in
April 2002.
(c) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures;
contingent assets and liabilities at the date of the financial statements; and,
the reported amounts of revenue and expenses during the reporting period.
Accordingly, actual results could differ from those estimates. It is at least
reasonably possible that the significant estimates used will change within a
year.
(d) Cash and Cash Equivalents
For the purposes of the statement of cash flows and balance sheet, the Company
considers any highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
(e) Revenues
Revenues are recognized at the time of shipment (or time of rendering services)
and are stated at the net invoiced value of goods and services supplied to
customers after deduction of sales and value added tax where applicable. License
fees received on the licensing out of distribution rights for our Kinetin
products are treated as deferred income and are recognized as revenues earned
during the contract period.
F-8
(f) Inventories
Inventories, constituting finished goods, raw materials and work-in-progress are
stated at the lower of cost or market value. Cost is determined using the
average costing method.
(g) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated on a straight line basis using the following
estimated useful lives:
. Office Furniture, Fixtures and Equipment: 3 to 15 years
. Laboratory equipment: 5 years
. Leasehold improvements are amortized over the estimated useful lives
of the assets or the related lease term, whichever is the shorter.
(h) Intangible Assets
Goodwill is being amortized on the straight line method over 15 years. Goodwill
included in the consolidated financial statements relates to the Company's
acquisition on September 26, 1995 of certain assets of CCSI.
(i) Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
Be Disposed Of", the Company reviews the carrying value of its property and
equipment and intangible assets for impairment in value whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable.
(j) Research and Development
Expenditures on research and development are expensed as incurred.
(k) Foreign Exchange
The Company follows currency translation principles established by SFAS No. 52.
All assets and liabilities in the balance sheets of foreign branches and
subsidiaries whose functional currency is other than U.S. dollars are translated
at period-end exchange rates. All income and expenditure items in the profit and
loss account of foreign branches and subsidiaries whose functional currency is
other than U.S. dollars are translated at average monthly exchange rates.
Translation gains and losses arising from the translation of the financial
statements of foreign branches and subsidiaries whose functional currency is
other than the U.S. dollar are not included in determining net income but are
accumulated in a separate component of stockholders' equity . Foreign currency
transaction gains and losses are included in the determination of net income in
the period in which they occur. The functional currency of the Company's United
Kingdom operation is the Pound Sterling.
(l) Calculation of the Number of Shares in Issue and Net Loss per Share
Earnings per share were computed under the provisions of Statement of Financial
Accounting Standards No.128, Earnings per Share. The following is a
reconciliation of the numerators and denominators of basic and fully diluted
earnings per share computation.
F-9
December 31,
2000 1999 1998
Numerator:
Loss Before Extraordinary Loss
on Extinguishment of Debt and cumulative
change in accounting principle $ (5,692) $(10,205) $(22,492)
Extraordinary Loss on Extinguishment
of Debt -- (1,657) --
Cumulative change in Accounting Principle 1,038 -- --
(See note 1(q))
------- ------- -------
Net Loss available to common
Stockholders $ (4,654) $ (11,862) $ (22,492)
======= ======== =======
Denominator:
Basic and Diluted weighted average
Ordinary shares outstanding 58,388 57,562 54,229
Options and warrants to purchase 15,550,143, 13,922,743 and 7,160,315 Ordinary
shares were outstanding at December 31, 2000, 1999 and 1998 respectively, but
were not included in the computation of diluted loss per Ordinary share
outstanding because their effect would have been antidilutive.
(m) Financial Instruments
The carrying value of cash, receivables and current liabilities, approximate
fair value due to the short term nature of these items. The fair value of the
Company's long term notes payable at December 31, 2000 and 1999 are
approximately $6,500,000 and $6,000,000. The carrying value of these notes at
December 31, 2000 and 1999 are $7,227,000 and $7,101,000. Fair value is the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation.
(n) Income Taxes
The Company's recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Accordingly, deferred tax liabilities and assets are
determined based on the difference between financial statements and tax basis of
assets and liabilities using enacted rules in effect for the year in which
differences are expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
A valuation allowance is established to reduce the deferred tax assets when
management determines it is more likely than not that the related tax benefits
will not be realized.
(o) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the object of which is
to match the timing of gain or loss recognition on the hedging derivative with
the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133 as amended by SFAS No. 137, "Accounting
F-10
for Derivative Instruments and Hedging Activities - Deferral of The Effective
Date of FASB Statement No. 133", is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Historically, the Company has not entered
into derivative contracts either to hedge existing risks or for speculative
purposes. The adoption of this standard has no effect on the Company's financial
statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 2, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
We have reported a change in accounting principle as a result of the
introduction of this new interpretation. See 2q.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements: ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosure of revenue
in the financial statements. The guidance in SAB 101, as amended by SAB 101B, is
required to be followed starting with the fourth quarter of 2000. We do not
believe that the guidance contained in SAB 101 will have a material affect on
our financial results.
(p) Reclassification
Certain amounts for 1999 have been reclassified to conform to current year
presentation. In prior years financial statements accrued compensation on stock
options was reflected as a liability. In the current year such amounts have been
reclassified to share premium in Stockholders' deficit for all periods
presented.
(q) Change in Accounting Principle
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44") Accounting for Certain Transactions Involving Stock
Compensation, and Interpretation of APB Opinion No. 25. FIN 44 clarifies the
application of Opinion No. 25 for (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination.
In accordance with FIN 44, which became effective July 2, 2000 we have changed
our accounting principles for the recognition of stock compensation expense for
our non employee directors all of whom retire by rotation and can stand for
re-election at the Company's shareholder annual general meeting. We have,
included our non employee directors within the scope of APB 25 and have reported
the cumulative effect of changing to this new accounting principle in the net
loss of the period of the change. This change in accounting principle has
decreased the net loss in 2000 by $1,038,000.
3. CONCENTRATION OF CREDIT RISK
The Company's customers are principally in the United States. Accounts
receivable typically are unsecured. The allowance for doubtful accounts is
established based on payment trends, age of the receivables and other economic
factors. Three customers in the Company's skincare sector account for
approximately 46%, 29% and 12% of the Company's revenues in 2000 and 56%, 12%
and 18% of the Company's net revenue in 1999. The same customers account for
55%, 28% and 7% of the Company's net trade receivables at December 31, 2000 and
22%, 16% and 38% of the Company's net trade receivables at December 31, 1999.
There is a therefore a significant concentration of credit risk with respect to
these customers.
4. NON TRADE RECEIVABLES
Non trade receivables of $48,000 (1999 $188,000) principally comprise amounts
receivable under two promissory notes relating to the April 13, 1999 settlement
agreement.
F-11
5. INVENTORY
Inventory at the lower of cost or market value comprises the following:
December 31, 2000 December 31, 1999
----------------- -----------------
($ in thousands)
Finished Goods $ 131 $ 44
Raw Materials 324 467
Work in Progress 141 --
---- ----
$ 596 $ 511
==== ====
6. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
December 31, 2000 December 31, 1999
----------------- -----------------
($ in thousands)
Cost:
Office Furniture, Fixtures and Equipment $ 1,300 $ 1,567
Laboratory equipment (2) 363 365
Leasehold Improvements (2) 832 832
Assets under construction (3) 2,955 2,820
------- -------
5,450 5,584
------- -------
Accumulated depreciation (1)
Office Furniture, Fixtures and Equipment 1,125 1,104
Laboratory equipment 330 266
Leasehold Improvements 247 154
------- -------
1,702 1,524
------- -------
Net Carrying Value $ 3,748 $ 4,060
======= =======
In December 1999, the Company abandoned certain fixed assets. As a result of
this abandonment, the Company recorded an impairment loss of $1,522,000. The
assets abandoned comprised of assets in progress associated with the Reliaject
development and computers and office equipment. The pharmaceutical and skincare
business segments were written down by $1,407,000 and $115,000 respectively.
Under the terms of an agreement dated December 13, 1999 the Company issued to a
capital equipment supplier a Convertible Promissory Note for $700,000 in
exchange for an equivalent amount recorded in accounts payable. The Note could
have been converted into Senetek 5p Ordinary shares at a conversion rate of
$2.00 per share after August 1, 2000 for a period of 31 days from that date.
Conversion was not elected and under the terms of the agreement the note is
being liquidated by the assignment of our USITC and Omega accounts receivable.
We have accrued interest from August1, 2000 on the outstanding debt. As at
December 31, 2000 the amount owed on this note was $546,000.
F-12
NOTES:
1. Depreciation charge during the year amounted to $508,000 (1999:
$773,000, 1998: $406,000)
2. The tangible fixed assets of the Company includes furniture &
fixtures and laboratory equipment owned under Capital leases as
follows:
2000 1999
----- ----
($ in thousands)
Cost $ 492 $ 492
Accumulated Depreciation (492) (455)
----- ----
Net carrying value $ -- $ 37
===== ====
3. The additional cost of continued development of the asset in the
course of construction is estimated to be $500,000.
7. GOODWILL
The amount in the Company's Balance Sheet represented by these
intangible assets is made up as follows:
December 31, 2000 December 31, 1999
----------------- -----------------
($ in thousands)
Goodwill:
Cost $ 2,141 $ 2,202
Accumulated Amortization (700) (571)
------- -------
Net $ 1,441 $ 1,631
======= =======
The Goodwill relates to the acquisition of certain of the assets of Carme by
CCSI in 1995.
8. DEFERRED FINANCING COSTS
December 31, 2000 December 31, 1999
----------------- -----------------
($ in thousands)
Deferred financing costs $ 3,400 $3,400
Accumulated Amortization (2,019) (819)
------- ------
Net $ 1,381 $2,581
------- ------
Deferred financing costs for 2000 and 1999 principally relate to the fair value
of warrants issued in connection with the new $5 million Note issued on April
14, 1999 (see Note 11).
F-13
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities comprise the following:
December 31, 2000 December 31, 1999
Accounts Accrued Accounts Accrued
Payable Liabilities Payable Liabilities
-------- ----------- ---------- -----------
($ in thousands)
Trade Creditors $ 397 $ 15 $1,378 $ 63
Accrued Salaries and Benefits -- 23 -- 176
Legal and Professional Fees 334 68 261 52
Customer Advances 310 -- 310 --
Interest on Notes Payable 296 125 -- 295
Audit and Accountancy Fees 41 180 62 104
Accrued Rent -- 103 -- 50
Other Liabilities and accruals -- 290 219 355
----- ------ ------ ------
$1,378 $ 804 $2,230 $1,095
====== ====== ====== ======
Customer advances relates to monies received to finance the purchase of raw
material inventories for products supplied.
10. LINE OF CREDIT
On July 8, 1998 the Company received $5,940,000 ($6,600,000 less a 10% fee)
under the terms of a $10 million Credit Agreement with a third party. This line
of credit was non interest bearing and became due in April 2000. In connection
with this line of credit 1,885,714 warrants at an exercise price of $3.50 and
377,150 warrants at an exercise price of $6 were granted. The fair value of
these warrants, calculated using the Black Scholes model was calculated at
$3,936,000. The fair value of these warrants was being amortized, using the
interest rate method, over the term of the credit agreement. (See Note 14).
In September 1998, the $3.50 warrants were exercised, without payment, and
1,885,714 Ordinary shares were issued by the Company to extinguish this line of
credit. Subsequent to that date the Company entered into discussions with the
third party involving a dispute over the actual exercise price of the warrants
and whether any amounts remained outstanding under the original $6.6 million
loan agreement.
Pursuant to these discussions, the Company agreed to reduce the exercise price
of the warrants from $3.5 to $2 and sell an additional 220,000 shares at $2 per
share. As a result of these transactions, approximately $4.2 million of the
original $6.6 million credit agreement was exchanged for approximately 2,105,000
shares of common stock. As a result of the Company reducing the exercise price
of the warrants, the Company recognized a debt modification expense totaling
$2,389,000. Refer to Note 11 for discussion of 1999 activity.
11. NOTES PAYABLES AND SETTLEMENT EXPENSE
In April 1999, the Company received $4,751,000 (net of $249,000 in expenses) in
cash and refinanced the balance owed of $2,389,000 under a 1998 Credit
Agreement, in exchange for two new notes currently bearing interest at 9% per
annum and maturing in April 2002. The notes require semi annual payment of
interest only until maturity and are secured by all of the Company's assets.
Interest may be paid in cash or Ordinary shares that have been registered with
the SEC.
Future minimum annual payments mature as follows:
Year ended December 31, Minimum Annual Payment
----------------------
2001 --
2002 $7,389,000
F-14
The Company issued Series A warrants to purchase an aggregate of 738,857
Ordinary shares at $1.50 per share, which have been adjusted to $1.20 according
to certain terms of the agreement. The Series A warrants expire after five
years. Series B and C warrants to purchase approximately 3.3 million and 1.2
million Ordinary shares at $1.50 and $2 per share were issued in connection with
the Agreement. The Series C warrants are only exercisable to the extent the
outstanding principal balance of $2,389,000 on one of the investment notes is
not repaid in cash. The Series B and C warrants expire in ten years.
The fair value of 500,000 of the Series A warrants and all of the Series B
warrants was determined to be $3.1 million using the Black Scholes model. The
fair value of these warrants will be amortized over the life of the new notes as
such warrants, under the terms of the financing agreement, were issued in
connection with the $5.0 million new financing. On the other hand, the $1.0
million fair value of the remaining 238,857 Series A warrants and all of the
Series C warrants was included in the loss on extinguishment of debt discussed
below because these warrants were issued to refinance existing debt under the
terms of the April 1999 financing agreement.
As the outstanding borrowings under the 1998 Credit Agreement were refinanced by
notes with substantially different terms as defined by EITF 96-19, Debtors
Accounting for a Modification or Extinguishment of Debt Instruments, (EITF
96-19), the Company is required to recognize the difference between the fair
value of the new notes issued to refinance the old debt and the carrying value
of the old debt net of unamortized issuance costs as a loss on the
extinguishment of debt. During the year ended December 31,1999, the Company
recognized a $1.7 million loss on the extinguishment of debt.
Also, in April 1999 the Company entered into a settlement agreement to resolve
the terms of various transactions that had been entered into by the previous
management of the Company. The settlement terms involve the issue of 2,300,000
Series A warrants and 625,000 new Ordinary shares. Accordingly the Company has
recorded $2.7 million of expense in the second quarter of 1999 related to the
settlement terms. Included in the $2.7 million settlement expense is the fair
value of the 625,000 Ordinary shares issued in 1999.
12. STOCK OPTIONS PLANS
(a) In December 1985, the Company adopted a share option plan (the "No. 1
Plan") for employees. Under the Plan, options to purchase Ordinary
shares are granted by the Board of Directors, subject to the exercise
price of the option being not less than the market value of an Ordinary
share twenty-one days prior to the grant date. After the first twelve
months following the date of the grant, options are exercisable at the
rate of 25 percent, for each full year of employment. In the event the
optionee's employment is terminated; the option may not be exercised
unless the Board of Directors so permits. The options expire seven years
from the date of the grant. On May 16, 1997 shareholders approved the
extension of the Plan until December 1, 2005 and an increase in the
number of shares available for grant to 6,000,000.
F-15
The following table summarizes option transactions under the No. 1
Plan for the three years ended December 31, 2000:
Shares Exercise
Available Options Options Price
For Grant Outstanding Vested Per Share
---------- ----------- ---------- ----------
Balance at January 1, 1998 2,830,000 2,691,375 1,112,125 $0.75-4.88
Authorized -- -- -- --
Cancelled 404,000 (404,000) (18,250) $ 3.50
Exercised -- (664,115) (664,115) $1.25-2.00
Granted (1,751,000) 1,751,000 -- $2.00-3.75
Options Vested -- -- 633,655 $1.25-4.88
---------- ---------- ---------- ----------
Balance at December 31, 1998 1,483,000 3,374,260 1,063,415 $0.75-4.88
---------- ---------- ---------- ----------
Exercised -- (116,660) (116,660) $ 1.50
Granted (1,541,500) 1,541,500 -- $1.31-2.00
Options Vested -- -- 1,371,750 $1.32-4.88
Cancelled 1,683,975 (1,683,975) (707,880) $1.25-4.00
---------- ---------- ---------- ----------
Balance at December 31, 1999 1,625,475 3,115,125 1,610,625 $1.25-4.88
---------- ---------- ---------- ----------
Cancelled 1,177,500 (1,094,000) (383,250) $1.32-4.88
Exercised -- (245,500) (245,500) $1.47-2.00
Granted (1,685,000) 1,685,000 -- $0.87-2.03
Options Vested -- -- 248,375 $1.31-3.75
---------- ---------- ---------- ----------
Balance at December 31, 2000 1,117,975 3,460,625 1,230,250 $0.87-3.75
========== ========== ========== ==========
The following table summarizes information about the Executive No. 1
Scheme options outstanding at December 31, 2000.
Weighted Weighted Average
Number Average Weighted Number Exercise Price of
Range of Outstanding Remaining Average Exercisable Exercisable
Exercise Price as of 12/31/00 Contractual Life Exercise Price as of 12/31/00 Options
-------------- ------------- ---------------- -------------- ------------- -----------------
$ 0.87-$ 0.87 10,000 6.97 $ 0.87 -- $ --
$ 1.31-$ 1.75 2,698,125 5.51 $ 1.49 823,500 $ 1.61
$ 2.00-$ 2.19 685,000 4.93 $ 2.01 387,500 $ 2.00
$ 3.50-$ 3.75 67,500 4.23 $ 3.70 19,250 $ 3.68
----------- ------ ---------- --------
$ .87-$ 3.75 3,460,625 5.37 $ 1.64 1,230,250 $ 1.77
=========== ====== ========== ========
Not included in the above are options granted to directors and certain employees
outside the No. 1 Plan, 350,000 and 150,000 options were granted in 1991 to Dr.
G. Homan and Mr. P.A. Logan respectively, under the general powers granted to
directors for the allotment of equity securities, approved at an Extraordinary
General Meeting. In June 1997, in conjunction with the issuance of new
employment agreements, 1.8 million options were granted to the directors and
certain employees of the company. The following table summarizes option
transactions outside the No. 1 Plan in the years ended December 31, 2000, 1999
and 1998. Except for the granting of the above options, there were no
transactions prior to 1998.
F-16
Options Outstanding Options Vested Exercise Price
------------------- -------------- --------------
Balance at January 1, 1998 2,300,000 1,100,000 $0.75 - $1.50
Exercised (700,000) (700,000) $0.75 - $1.50
Options Vested -- 500,000
Cancelled (200,000) -- $1.50
--------- ---------
Balance at December 31 1998 1,400,000 900,000 $1.50
--------- ---------
Exercised -- --
Options Vested -- --
Cancelled (700,000) (400,000) $1.50
--------- ---------
Balance at December 31 1999 700,000 500,000 $1.50
--------- ---------
Exercised -- --
Options Vested -- --
Cancelled (500,000) (300,000) $1.50
--------- ---------
Balance at 31 December 31, 2000 200,000 200,000 $1.50
========= =========
The following table summarizes information about the Outside No. 1
Scheme Options outstanding at December 31, 2000.
Weighted Weighted Average
Number Average Weighted Number Exercise Price of
Range of Outstanding Remaining Average Exercisable Exercisable
Exercise Price as of 12/31/00 Contractual Life Exercise Price as of 12/31/00 Options
-------------- -------------- ---------------- -------------- ------------- -----------------
$ 1.50 200,000 3.50 $ 1.50 200,000 $ 1.50
---------- ----- --------- --------
$ 1.50 200,000 3.50 $ 1.50 200,000 $ 1.50
========== ===== ========= ========
(b) In May 1987 the Company adopted a share option plan ("the No. 2 Plan")
for non-Executive Directors and Consultants. Under the No. 2 Plan,
options to purchase Ordinary shares are granted by the Board of
Directors, subject to the exercise price being not less than the market
value of an Ordinary share 21 days prior to the grant date. Options
granted under this plan are exercisable in their entirety one year after
the date of grant. In the event the optionee ceases to be a non-
executive Director or consultant, the option may not be exercised unless
the Board of Directors so permits. The options expire seven years from
the date of grant. On May 16, 1997 shareholders approved an extension of
the Plan until December 1, 2005 and an increase in the number of shares
available for grant to 4,000,000.
F-17
The following table summarizes option transactions under the No. 2
Plan for the three years ended December 31, 2000:
Shares Exercise
Available Options Options Price
For Grant Outstanding Vested Per Share
---------- ----------- -------- ----------
Balance at January 1, 1998 3,577,500 298,625 68,625 $1.22-3.53
Granted (415,000) 415,000 -- $2.00-4.28
Vested -- -- 230,000 $1.50-3.43
---------- ---------- ---------- ----------
Balance at December 31, 1998 3,162,500 713,625 298,625 $1.22-4.28
---------- ---------- ---------- ----------
Granted (600,000) 600,000 -- $1.44-1.69
Vested -- -- 815,000 $1.69-4.28
Cancelled 13,625 (13,625) (13,625) --
---------- ---------- ---------- ----------
Balance at December 31, 1999 2,576,125 1,300,000 1,100,000 $1.44-4.28
---------- ---------- ---------- ----------
Granted (820,000) 820,000 -- $1.31-1.41
Exercised -- (38,100) (38,100) $1.41-2.00
Vested -- -- 375,000 $1.31-1.44
---------- ---------- ---------- ----------
Balance at December 31, 2000 1,756,125 2,081,900 1,436,900 $1.31-4.28
========== ========== ========== ===========
The following table summarizes information about the No. 2 Scheme
for non-executive directors and consultants options outstanding at
December 31, 2000.
Weighted Weighted Average
Number Average Weighted Number Exercise Price of
Range of Outstanding Remaining Average Exercisable Exercisable
Exercise Price as of 12/31/00 Contractual Life Exercise Price as of 12/31/00 Options
-------------- -------------- ---------------- -------------- -------------- -----------------
$ 1.31-$ 1.69 1,501,900 6.05 $ 1.49 856,900 $ 1.55
$ 2.00 135,000 3.77 $ 2.00 135,000 $ 2.00
$ 3.25-$ 3.97 395,000 4.06 $ 3.52 395,000 $ 3.52
$ 4.28 50,000 4.40 $ 4.28 50,000 $ 4.28
---------- ------ ---------- -------
$ 1.31-$ 4.28 2,081,900 5.49 $ 1.97 1,436,900 $ 2.23
========== ====== ========== =======
Not included in the above are options granted to non-executive directors and
consultants outside the No. 2 Plan under the general powers granted to the
directors for the allotment of equity securities, approved at the Annual General
Meeting of the Company held on May 16,1997.
F-18
The following table summarizes option transactions outside the
No. 2 Plan for the three years ended December 31, 2000. There
were no transactions prior to 1997.
Options Outstanding Options Vested Exercise Price
Balance at January 1, 1998 132,500 110,000 $1.22 - $4.50
Granted 60,000 -- $1.50
Options Vested -- 22,500 $2.90 - $4.50
------- -------
Balance at December 31, 1998 192,500 132,500 $1.22 - $4.50
Granted 60,000 60,000 $1.25
Options Vested -- 60,000 $1.50
Cancelled (72,500) (72,500) $2.90
------- -------
Balance at December 31, 1999 180,000 180,000 $1.25 - $4.50
Granted -- -- --
Options Vested -- -- --
Cancelled -- -- --
------- -------
Balance at December 31, 2000 180,000 180,000 $1.25 - $4.50
======= =======
The following table summarizes information about the outside
No. 2 Scheme for non executive directors and consultants
options outstanding at December 31, 2000.
Weighted Weighted Average
Number Average Weighted Number Exercise Price of
Range of Outstanding Remaining Average Exercisable Exercisable
Exercise Price as of 12/31/99 Contractual Life Exercise Price as of 12/31/99 Options
-------------- -------------- ---------------- -------------- -------------- -----------------
$ 1.22-$ 1.50 120,000 4.95 $ 1.38 120,000 $ 1.38
$ 3.53-$ 4,50 60,000 4.56 $ 3.69 60,000 $ 3.69
------------- ------- ------- ------- -------
$ 1.22-$ 4.50 180,000 4.81 $ 2.15 180,000 $ 2.15
============= ======= ======= ======= =======
13. STOCK COMPENSATION EXPENSE
Under U.S. GAAP, the Company applies Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issues to Employees" and related interpretations in
accounting for its option plans. 2000 $Nil (1999: $(699,000); 1998: $1,664,000)
of expense has been recognized for stock based employee compensation in
accordance with APB 25. These expense amounts relate to options issued outside
the No. 1 Plan. Had compensation expense been determined based upon the fair
value at the grant date for awards as an alternate provided by SFAS 123,
"Accounting for Stock-Based Compensation", the Company's pro-forma net loss and
loss per share would be $5,010,000 and $0.09 per share respectively in 2000,
$13,641,000 and $0.24 per share respectively in 1999, and $24,394,000 and $0.45
per share, respectively in 1998. These amounts are for disclosure purposes only
and may not be representative of future calculations, since the estimated fair
value of stock options is amortized to expense over the vesting period, and
additional options may be granted in future years.
The fair value of the options granted are estimated using the Black Scholes
option pricing model with the following assumptions:
Dividend yield of nil, volatility of 77% (1999 - 53% and 1998 - 76%), risk-free
investment rate of 5.0% (1999 - 6.1%, 1998 - 6.1%), and an expected life of 4
years.
F-19
The average fair values of the options granted for each Ordinary share American
Depositary Receipt during 2000, 1999 and 1998 are estimated at:
EXERCISE PRICE ON
DATE OF GRANT 2000 1999 1998
----------------- ---- ---- ----
equals market price $ 0.85 $ 0.91 $ 2.48
exceeds market price -- -- --
below market price -- -- --
All options $ 0.85 $ 0.91 $ 2.48
During 2000, the Company recognized $227,000 (1999 $776,000; 1998: $868,000) of
general and administrative expense relating to all stock options awarded to
non-employees and consultants in exchange for services based upon the fair value
of the awards at the grant date which were estimated using the Black Scholes
option pricing model with the following assumptions:
Dividend yield of nil, volatility of 77%, (1998:53%, 1997:76%) risk free
investment rate of 5.0% (1999:6.1%,1998:6.1%) and an expected life of 7 years
(1999: 4 years, 1998: 4 years).
14. STOCKHOLDERS' EQUITY
During the year ended December 31, 2000, the outstanding Ordinary shares of the
Company increased by 283,600 to 58,432,117. The exercise of 283,600 Employee
stock options into an equivalent number of Ordinary shares took place in the
first half of 2000.
In connection with the Revlon licensing agreement we issued to Revlon 1.0
million warrants to purchase an equivalent number of Senetek PLC Ordinary shares
at an exercise price of $6.00 per share. These warrants expire three years from
the date of issuance.
The other warrants, were mainly issued in association with the new Securities
Purchase Agreement and the Settlement Agreement, dated on April 14, 1999 and
April 13, 1999 respectively and a private placement in April 1999 and to Revlon
as part of a license in June 2000.
The warrants referred to above entitle the holder to purchase American
Depository Receipts of the Company at the purchase prices referred to above at
any time commencing 90 days from the date of subscription and prior to the
expiration date. The offer and sale of the warrants is being made in compliance
with and in reliance upon the provision of Regulation S under the United States
Securities Act of 1933, as amended.
Warrants Exercise Expiration Warrants
Issued Price Date Unexercised
--------- --------- ---------- -----------
1,100,000 $ 5.0000 April 2001 1,100,000
3,000,000 1.2000 April 2004 3,000,000
3,333,333 1.5000 April 2009 3,333,333
1,194,285 2.0000 April 2009 1,194,285
--------- -----------
Balance at
December 31, 1999 8,627,618 8,627,618
1,000,000 6.000 June 2003 1,000,000
--------- -----------
Balance at
December 31, 2000 9,627,618 9,627,618
========= ===========
F-20
15. CALCULATION OF THE NUMBER OF ORDINARY SHARES OUTSTANDING
Shares Weighted
Issued and Average Shares
Outstanding Outstanding
----------- -----------
1998:
Shares outstanding at the beginning of the period 52,186,821 52,186,821
Exercise and Conversion of Warrants 458,706 416,793
Options Exercised 1,364,115 665,038
Private Placements and Conversion of Debentures 3,206,214 960,752
---------- ----------
Shares outstanding at December 31, 1998 57,215,856 54,229,404
---------- ----------
1999:
Shares outstanding at the beginning of the period 57,215,856 57,215,856
Exercise and Conversion of Warrants 15,000 739
Options Exercised 116,661 89,112
Private Placements 801,000 256,481
---------- ----------
Shares outstanding at December 31, 1999 58,148,517 57,562,188
---------- ----------
2000:
Shares outstanding at the beginning of the period 58,148,517 58,148,517
Options Exercised 283,600 239,349
---------- ----------
Shares outstanding at December 31, 2000 58,432,117 58,387,866
========== ==========
16. TAXATION
The Company is incorporated in England with two U.S. subsidiaries. The Company
is subject to United Kingdom corporation tax on a worldwide basis with relief
for foreign taxes in cases where double taxation relief agreements have been
established. The Company will be liable for United States tax (including state
taxes) through the U.S. subsidiaries.
No income tax charges/(credits) have been reflected in the Consolidated
Statement of Operations due to the net operating losses in the year which
substantially accounts for the gross deferred tax asset.
Deferred tax assets are comprised of the following:
December 31,
2000 1999
Net operating loss carry forwards $23,000,000 $22,900,000
Start up and organization costs 3,500,000 3,500,000
Reserves and accruals 2,100,000 600,000
--------- ----------
Gross Deferred Tax Asset 28,600,000 27,000,000
Valuation Allowance (28,600,000) (27,000,000)
----------- -----------
Net Deferred Tax Asset $ -- $ --
=========== ===========
The difference between the effective tax rate and statutory tax rate is
primarily due to the increase in the valuation allowance.
Provisional tax losses available to the Company in the United Kingdom are
estimated to be approximately $38,100,000 at the end of fiscal year 2000. The
deferred tax
F-21
asset value of these losses is approximately $12,000,000 but no benefit has been
recognized in the financial statements as the benefit is offset by an equal
valuation allowance as it is more likely than not that the Company will not
generate taxable income in the foreseeable future to utilize the deferred tax
asset.
Federal provisional tax losses available to the Company in the U.S. are
estimated to be approximately $30,300,000 at the end of fiscal year 2000. The
deferred tax asset value of these losses is approximately $10,300,000 but no
benefit has been recognized in the financial statements as the benefit is offset
by an equal valuation allowance as it is more likely than not that the Company
will not generate taxable income in the foreseeable future to utilize the
deferred tax asset. Federal net operating losses expire at varying dates from
2002 through 2018. California net operating losses are estimated to be
approximately $10,900,000. The resulting deferred tax asset from California net
operating losses is approximately $700,000. A 100% provision has also been
established for this asset. California net operating losses expire at varying
dates from 2001 through 2004.
17. INDUSTRY AND GEOGRAPHIC AREA SEGMENT
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," was issued effective for fiscal years ending after
December 15, 1998. The Company's reportable segments are strategic business
units that offer different products and services. They are managed separately
because each business requires different technology and marketing strategies.
The Company has two reportable segments: Pharmaceutical operations and skincare
operations. The Pharmaceutical operations comprise Senetek PLC and SDDT and
include biopharmaceuticals, drug development, drug delivery development and the
sale of monoclonal antibodies. The skincare operation comprises CCSI and
includes the distribution of primarily Kinetin based skin care products to a
number of markets in North America and Asia. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. All inter-segment sales prices are market based. The
Company evaluates performance based on operating results of the respective
business units.
F-22
INDUSTRY SEGMENTS 2000 1999 1998
----------------- -------- -------- --------
($ IN THOUSANDS)
Net Sales
Pharmaceuticals $ 1,192 $ 1,301 $ 1,517
Skincare 2,567 6,962 3,155
-------- -------- --------
Net Sales for reportable segments
and consolidated net sales 3,759 8,263 4,672
-------- -------- --------
Operating (Loss)/Profit
Pharmaceuticals (4,350) (7,867) (15,378)
Skincare 672 2,048 (1,711)
-------- -------- --------
Total Operating (Loss) for reportable segments (3,678) (5,819) (17,089)
-------- -------- --------
Pharmaceuticals
Operating Loss (4,350) (7,867) (15,378)
Interest Income 46 82 188
Interest Expense (including amortization of
Deferred Financing costs 2000 $1,326;
1999 $1,042) and 1998 $3,355) (2,001) (1,442) (3,355)
Other (Expense (5) (74) --
Settlement Expense -- (2,718) --
Debt modification expense -- -- (2,389)
-------- -------- --------
Loss Before Extraordinary item and Change
in Accounting Principle (6,310) (12,019) (20,934)
Loss on extinguishment of debt -- (1,657) --
Change in Accounting Principle 1,038 -- --
-------- -------- --------
Loss available to common stockholders (5,272) (13,676) (20,934)
-------- -------- --------
Skincare
Operating Profit/(Loss) 672 2,048 (1,711)
Interest Expense (54) (234) (41)
Other Income/(Expense) -- -- 194
-------- -------- --------
Income (Loss) available to common stockholders 618 1,814 (1,558)
-------- -------- --------
Loss available to common stockholders for
reportable segments (4,654) (11,862) (22,492)
Assets:
Pharmaceuticals 6,185 7,251 7,408
Skincare 3,201 4,977 3,258
-------- -------- --------
Total Consolidated Assets $ 9,386 $ 12,228 $ 10,666
-------- -------- --------
Capital Expenditure:
Pharmaceuticals 57 1,227 1,824
Skincare -- -- 68
-------- -------- --------
Total consolidated capital expenditure $ 57 $ 1,227 $ 1,892
======== ======== ========
INDUSTRY SEGMENTS 2000 1999 1998
----------------- -------- ------- --------
($ IN THOUSANDS)
Depreciation and Amortization:
Pharmaceuticals 473 633 406
Skincare 351 364 134
-------- ------- --------
Total Consolidated Depreciation
and Amortization $ 824 $ 997 $ 540
======== ======= ========
F-23
GEOGRAPHIC AREAS 2000 1999 1998
---------------- -------- -------- -------
($ IN THOUSANDS)
Net Sales
United States 3,109 7,101 3,954
United Kingdom 200 717 628
Other foreign countries 450 445 90
-------- -------- --------
Total Consolidated 3,759 8,263 4,672
-------- -------- --------
Long Lived Assets
United States 5,189 5,602 5,988
United Kingdom -- 89 89
-------- -------- --------
$ 5,189 $ 5,691 $ 6,077
======== ======== ========
The Company's registered office is located in the United Kingdom from which
certain scientific research and development activities are operated. The
Company's Chairman is based in the United States from where liaison is effected
with the U.S. investing public and from where the development of the activities
of SDDT Corporation and Carme Cosmeceutical Sciences, Inc. are directed.
18. COMMITMENTS AND CONTINGENCIES
(a) Research
Under existing agreements, the Company is committed to provide
funding for research programs and clinical trials of
approximately $100,000 during the year ending December 31, 2001.
(b) Commitments Under Operating Leases
The Company leases certain office, laboratory and factory space
and equipment under operating leases in the United Kingdom and,
through its subsidiaries SDDT Inc and Carme Cosmeceutical
Sciences Inc., in the United States.
Minimum future lease payments under non cancelable leases are as
follows:
YEARS ENDING DECEMBER 31 FUTURE MINIMUM PAYMENT
------------------------ ----------------------
($ IN THOUSANDS)
2001 $384
2002 387
2003 298
2004 310
2005 300
Thereafter 600
------
$2,279
======
Rent expense was approximately $339,000, $468,000 and $575,000
in 2000, 1999 and 1998 respectively.
F-24
(c) Litigation
Various claims, suits and complaints, such as those involving patents,
commercial transactions and employee matters, arise in the ordinary
course of the Company's business. In the opinion of management, all
such pending matters are without merit or involve such amounts, which
would not have a material adverse effect on the Company's consolidated
financial position, liquidity, cashflows or results of operations for
any year.
(d) Employment Contracts
The Company has entered into employment agreements with one of its
officers, Frank Massino (CEO). The agreement was for a three year
period, but was extended for a further two years in 2000. The
agreement will automatically renew unless specifically terminated by
the Company or the employee. If the employment agreement is terminated
by the Company, the employee will be entitled to an additional three
years of compensation. Annual compensation under the employment
agreement is $250,000. In addition the agreements provide for
incentive and additional compensation under certain circumstances.
19. QUARTERLY INFORMATION (unaudited)
First Second Third(1) Fourth 2000
Quarter Quarter Quarter Quarter
Net Revenue $ 980 $ 778 $ 1,223 $ 778 $ 3,759
Gross Profit 558 498 747 487 2,290
Operating income (loss) (872) (1,279) (478) (1,049) (3,678)
Loss before cumulative effect
of change in accounting principle (1,365) (1,779) (982) 1,566) (5,692)
Cumulative effect of change in
accounting principle -- -- 1,038 -- 1,038
Net Loss (1,365) (1,779) 56 (1,566) (4,654)
Basic and diluted per share data
Loss before cumulative effect
of change in accounting principle (0.02) (0.03) (0.02) (0.03) (0.10)
Cumulative effect of change in
accounting principle -- -- 0.02 -- 0.02
Net loss (0.02) (0.03) (0.00) (0.03) (0.08)
First Second Third Fourth 1999
Quarter Quarter Quarter Quarter
Net Revenue $ 934 $ 1,759 $3,405 $ 2,165 $ 8,263
Gross Profit 341 1,139 1,340 2,399 5,219
Operating (loss) income (2,204) (1,893) 393 (2,115) (5,819)
Settlement expense -- (2,718) -- -- (2,718)
(Loss) income before
extraordinary loss on
extinguishment of debt (2,420) (5,158) 181 (2,808) (10,205)
Extraordinary loss from
extinguishment of debt -- (1,657) -- -- (1,657)
Net (loss) income (2,420) (6,815) 181 (2,808) (11,862)
Basic and diluted per share data:
(Loss)Income before extraordinary
loss on extinguishment of debt (0.04) (0.09) 0.00 (0.05) (0.18)
Extraordinary loss from
extinguishment of debt -- (0.03) -- -- (0.03)
Net (loss) income (0.04) (0.12) 0.00 (0.05) (0.21)
(1) The Company's net loss for the three and nine months ended September 30,
2000 as originally reported on Form 10-Q did not include the cumulative effect
of the change in accounting principle of $1,038.
F-25
SCHEDULE II
SENETEK PLC
VALUATION AND QUALIFYING ACCOUNTS
Additions -
---------------------
Balance, Charges to Revenues Deductions- Balance,
Beginning of or Costs and Write-offs End of
Period Expenses Charged to Reserve Period
------------- --------------------- ------------------- -----------
ALLOWANCES AGAINST TRADE
AND NON TRADE RECEIVABLES:
- --------------------------
Year Ended December 31,
2000........................... $ 1,037,810 $ -- $ (16,280) $ 1,021,530
1999........................... 455,474 582,336 -- 1,037,810
1998........................... 37,000 418,474 -- 455,474
ALLOWANCES AGAINST INVENTORIES:
- ------------------------------
Year Ended December 31,
2000........................... $ 160,065 $ 92,000 $ (160,065) $ 92,000
1999........................... 194,932 (34,867) -- 160,065
1998........................... 95,000 99,932 -- 194,932
F-26