1
Registration No. 33-49082
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 5 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LIDAK PHARMACEUTICALS
(Exact name of registrant as specified in its charter)
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CALIFORNIA 7391 33-0314804
(Jurisdiction of incorporation) (Primary standard industrial (I.R.S. employer I.D. number)
classification code number)
11077 North Torrey Pines Road
La Jolla, California 92037
(619) 558-0364
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
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David H. Katz, M.D.
President and Chief Executive Officer
LIDAK Pharmaceuticals
11077 North Torrey Pines Road
La Jolla, California 92037
(619) 558-0364
(Names, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
John J. Hentrich, Esq.
Baker & McKenzie
101 West Broadway, Suite 1200
San Diego, CA 92101
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Approximate date of proposed commencement of sale to public: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. /X/
Pursuant to Rule 416, there are also being registered such additional
shares as may become issuable pursuant to anti-dilution provisions of the Class
D Warrants of the Registrant.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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LIDAK PHARMACEUTICALS
Pursuant to Item 501(b) of Regulation S-K
Cross-Reference Sheet
Item and Caption Location in Prospectus
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1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus............... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus .................................. Inside Front Cover Pages;
Additional Information; Available
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges ................... Prospectus Summary; Risk Factors
4. Use of Proceeds ............................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price ............. Outside Front Cover Page; Risk
Factors
6. Dilution .................................... Dilution
7. Selling Security Holders .................... Selling Securityholders
8. Plan of Distribution ........................ Outside Front Cover Page;
Prospectus Summary; Plan of
Distribution
9. Description of Securities To Be Registered .. Outside Front Cover Page;
Description of Securities
10. Interest of Named Experts and Counsel ....... Not applicable.
11. Information with Respect to the Registrant .. Prospectus Summary; The
Company; Capitalization; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business;
Management; Principal
Stockholders; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not applicable.
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PROSPECTUS
LIDAK PHARMACEUTICALS
2,846,013 Shares of Class A Common Stock(*)
This Prospectus relates to 2,846,013 shares of Class A Common Stock, no
par value (the "Class A Common Stock"), of LIDAK Pharmaceuticals (the "Company")
reserved for issuance upon the exercise of 1,728,354 outstanding Class D
Warrants of the Company as of September 30, 1996 (the "Class D Warrants") and
1,117,659 shares of outstanding Class A Common Stock which resulted from the
conversion of Series B Preferred and/or exercise of Class D Warrants and Class E
Warrants. The Class D Warrants were originally issued to certain investors in
private placements which occurred in July 1991 and February 1992. The Class E
Warrants were originally issued to Whale Securities Co., L.P., and its
designees, as partial consideration for services as placement agent in the
private placement which occurred in February 1992. The holders of the Class D
Warrants and the Class A Common Stock resulting from their exercise are referred
to herein as the "Selling Securityholders." See "Selling Securityholders."
The Class D Warrants are exercisable through February 26, 1997 to
purchase, for $1.50, one share of Class A Common Stock. The exercise price of
the Class D Warrants is subject to adjustment under certain circumstances. See
"Description of Securities." (The Class D Warrants are referred to herein
collectively as the "Securities.")
The Class A Common Stock issued or issuable upon conversion or exercise of
the Securities may be sold from time-to-time by the Selling Securityholders or
by their transferees. At the date of this Prospectus, no underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the Class A Common Stock by the Selling Securityholders may be
effected in one or more transactions that may take place in the over-the-counter
market, or such other market on which the Company's securities may from
time-to-time be trading, including ordinary brokers' transactions or through
sales to one or more dealers for resale of such shares as principals, at market
prices prevailing at the time of sale or at prices determined in privately
negotiated transactions. Usual and customary or specifically negotiated
brokerage fees or commissions may be paid by the Selling Securityholders in
connection with such sales of Class A Common Stock. See "Description of
Securities" and "Plan of Distribution."
The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company will not receive any of the
proceeds from the sale of Class A Common Stock by the Selling Securityholders.
Cumulative expenses of this offering (this "Offering"), estimated at $175,000
are payable by the Company. In the event Class D Warrants are exercised, the
Company will receive cash in the amount of the exercise price. See "Description
of Securities" and "Selling Securityholders."
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* These numbers and the numbers of shares and warrants of Lidak
stock covered in this Post-Effective Amendment represent the
number of originally registered shares and warrants still held
by the "Selling Securityholders" and subject to registration.
The balance of such shares and warrants have been disposed of
by the Selling Stockholders prior to the date of the
Prospectus.
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The date of this Prospectus is January ___, 1997.
The Class A Common Stock are included on the National Market System of the
Automated Quotation System of the National Association of Securities Dealers,
Inc. ("NASDAQ") under the symbol LDAKA. On January 13, 1997, the closing bid and
asked prices of the Class A Common Stock were $2.50 and $2.5625 respectively.
See "Price Range of Securities."
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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The Company will furnish its stockholders and holders of warrants with
annual reports containing audited financial statements and such unaudited
interim reports as it deems appropriate.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY........................................................... 4
THE COMPANY.................................................................. 7
USE OF PROCEEDS............................................................. 15
DIVIDEND POLICY............................................................. 16
PRICE RANGE OF SECURITIES................................................... 16
DILUTION.................................................................... 17
CAPITALIZATION.............................................................. 18
SELECTED FINANCIAL DATA..................................................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................... 20
BUSINESS.................................................................... 24
MANAGEMENT.................................................................. 35
PRINCIPAL STOCKHOLDERS...................................................... 44
SELLING SECURITYHOLDERS..................................................... 47
PLAN OF DISTRIBUTION........................................................ 49
DESCRIPTION OF SECURITIES................................................... 50
LEGAL MATTERS............................................................... 52
EXPERTS..................................................................... 52
ADDITIONAL INFORMATION...................................................... 52
AVAILABLE INFORMATION....................................................... 52
INDEX TO FINANCIAL STATEMENTS............................................... F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus.
THE COMPANY
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development stage
company organized to engage in research, development and commercialization of
innovative pharmaceutical products. The Company was incorporated in California
in 1988 and since inception has operated in one business segment -- research and
development of pharmaceutical products. The Company is currently focusing on the
development and commercialization of two proprietary products/technologies: 1)
n-docosanol 10% cream (LIDAKOL(R)) as a topical treatment for oral herpes (cold
sores or fever blisters) and other topical and systemic uses; and 2) Large
Multivalent Immunogen ("LMI") technology as a potential immunotherapeutic
vaccine treatment for malignant melanoma and other human cancers.
The Company's executive offices are located at 11077 North Torrey Pines
Road, La Jolla, California 92037, and its telephone number is (619) 558-0364.
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THE OFFERING
Securities Offered.............. 2,846,013 shares of Class A Common Stock issuable upon
exercise of 1,728,354 Class D Warrants and 1,117,659 shares
of outstanding Class A Common Stock which resulted from
the conversion and/or exercise of Series B Preferred Stock,
Class D Warrants and Class E Warrants. The Class D
Warrants entitle the respective holders thereof to purchase one
share of Class A Common Stock at $1.50 through February 26, 1997.
The exercise prices and number of shares issuable upon
exercise of the Class D Warrants are subject to adjustment in
certain circumstances. See "Description of Securities."
Securities Outstanding:(1)
Class A Common Stock ....................................... 36,225,736 shares
Class B Common Stock(2):.................................... 283,000 shares
Total......................................................... 36,508,736 shares
==========
Use of Proceeds................. The Company will not receive any proceeds from the sale of
the Securities by the Selling Securityholders. Net proceeds
received upon exercise of the Class D and E Warrants will be
added to working capital. See "Use of Proceeds."
Risk Factors .................. The securities offered hereby involve a high degree of risk.
See "Risk Factors."
NASDAQ Symbol .................. Class A Common Stock - LDAKA
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(1) Represents securities outstanding as of December 31, 1996.
(2) The Class B Common Stock, which is convertible into Class A Common Stock
on a share for share basis, entitles its holders to five votes per share
and has limited transferability but is otherwise identical to the Class A
Common Stock. See "Principal Stockholders" and "Description of
Securities."
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SUMMARY FINANCIAL INFORMATION
FROM INCEPTION
YEARS ENDED SEPTEMBER 30, (AUGUST 31, 1988)
---------------------------------------------------------------------------- THROUGH
1992 1993 1994 1995 1996 SEPT. 30, 1996
---- ---- ---- ---- ---- --------------
Statement of Operations
Data:
Revenues .............. $ 427,086 $ 590,822 $ 1,016,719 $ 884,589 $ 4,158,038 $ 8,001,016
Net loss .............. (2,361,855) (6,139,223) (4,813,341) (10,173,001) (6,130,241) (34,296,198)
Net loss per share(1) . $ (.26) $ (.35) $ (.19) $ (.35) $ (.19)
Weighted average number
of common shares
outstanding(1) ....... 9,150,776 17,310,231 25,166,958 29,338,418 32,072,944
Balance Sheet Data: SEPTEMBER 30, 1996
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Cash, cash equivalents and short-term investments $20,374,010
Working capital ................................. 13,759,577
Total assets .................................... 22,846,879
Convertible notes payable ....................... 5,721,087
Total liabilities ............................... 7,778,760
Stockholders' equity ............................ 15,068,119
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(1) The Escrow Shares outstanding in fiscal years ended 1992 through 1994 were
excluded from the computation of net loss per share. See Note 1 to Notes
to Financial Statements.
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THE COMPANY
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development stage
company organized to engage in research, development and commercialization of
innovative pharmaceutical products. The Company was incorporated in California
in 1988 and since inception has operated in one business segment -- research and
development of pharmaceutical products. The Company is currently focusing on the
development and commercialization of two proprietary products/technologies 1)
n-docosanol 10% cream (LIDAKOL(R)) as a topical treatment for oral herpes (cold
sores or fever blisters) and other topical and systemic uses; and 2) Large
Multivalent Immunogen ("LMI") technology as a potential immunotherapeutic
vaccine treatment for malignant melanoma and other human cancers.
In Spring 1996, the Company reported preliminary results from three Phase
3 clinical trials comparing LIDAKOL cream to a placebo cream as a treatment of
recurrent oral herpes episodes. In these trials, LIDAKOL demonstrated clinical
effectiveness compared to historical episode features experienced by the
patients in the study, including reduced healing times, episode abortion and
shortening of pain symptoms. However, similar results were obtained with the
cream used as the intended placebo in the trials. If these trials had shown a
statistically and clinically significant advantage of LIDAKOL versus placebo,
the Company could have filed a New Drug Application ("NDA") with the U.S. Food
and Drug Administration ("FDA") for marketing approval of LIDAKOL as a treatment
of recurrent oral herpes. As a result of the inconclusive outcome, the Company
obtained FDA approval to use an alternative placebo and to conduct additional
Phase 3 clinical trials to prove the efficacy of LIDAKOL versus the alternative
placebo. In July and September 1996, the Company initiated two additional Phase
3 clinical trials of LIDAKOL in the United States. The Company anticipates
completion of these studies, including data availability, around the summer of
1997. If successful, these trials will complete the final requirements to file
an NDA for marketing approval. If FDA approval is obtained in a timely manner
thereafter, the Company believes that it is possible that commercial sales could
commence sometime in 1998. See "Research and Development - LIDAKOL."
To date, the Company has entered into five licensing agreements relating
to marketing certain topical indications of LIDAKOL. These agreements are with:
1) Yamanouchi Europe, b.v., of the Netherlands ("Yamanouchi"), for rights in
certain European and other countries (November, 1991); 2) CTS Chemical
Industries, Ltd. ("CTS"), for rights in Israel (July, 1993); 3) Boryung
Pharmaceuticals Company, Ltd. ("Boryung"), of Seoul, Korea, for rights in the
Republic of Korea (July, 1994); 4) Grelan Pharmaceutical Co., Ltd. ("Grelan"),
of Tokyo, Japan, for rights in Japan (October, 1994); and 5) Bristol-Myers
Squibb Company ("BMS"), headquartered in the U.S., for rights in the United
States, Canada and all remaining major territories throughout the world which
were not licensed to other parties (February, 1996). In November 1996, LIDAK
reacquired from BMS the rights to market LIDAKOL in all territories covered in
the LIDAK/BMS agreement except the U.S., Canada and Mexico and is now free to
engage new licensing partners in these reacquired territories which include
China, South America, Central America, Australia, India and portions of the Far
East. In each of the territories covered by the above agreements, and other
territories not covered by these agreements, marketing of LIDAKOL is subject to
obtaining appropriate government approvals.
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The Company's second current area of clinical development uses the LMI
technology as a new therapeutic approach to cancer. This technology involves the
use of antigen-containing artificial cell membranes to stimulate the immune
system's defense against cancer cells. Under an Investigational New Drug
Application ("IND"), approved by the FDA, the Company is currently conducting a
Phase 1/Phase 2 clinical trial of LMI in patients with malignant melanoma. The
Company anticipates completion of this trial in early 1997. The Company's rights
to the LMI technology, and certain other technologies, derive from a licensing
agreement with Medical Biology Institute ("MBI"), a non-profit research
organization founded in 1981 by Dr. David H. Katz, the founder, President and
Chief Executive Officer of the Company.
The Company has experienced significant losses since inception and its
business is subject to significant risks. See "Risk Factors." Except as noted
above with respect to LIDAKOL, the Company does not expect any other of its
proposed products, including LMI, to be available for commercial sale for
several years, if at all. There is no assurance that the ongoing U.S. Phase 3
clinical trials of LIDAKOL or the current and/or future clinical trials of LMI
will demonstrate satisfactory efficacy to support the filing of NDA's with the
FDA in the U.S. or with regulatory agencies outside the U.S. Moreover, filing of
any such NDA's does not assure that marketing approvals will be granted for
these products in the U.S. or elsewhere. There is no assurance that pre-clinical
and clinical testing of the Company's earlier-stage technologies will
demonstrate appropriate safety and efficacy requirements to warrant further
development and/or to achieve the requirements of regulatory marketing approvals
in the U.S. or elsewhere.
Even if the Company obtains applicable regulatory marketing approvals for
LIDAKOL, LMI or any of its other products, it will still be necessary for the
Company to make appropriate arrangements, for which no assurance can be made, to
finance the ultimate commercialization of such products. These arrangements
could include obtaining additional licensing agreements or other collaborative
interactions with outside parties which have sufficient financial resources and
expertise and/or raising additional financing to support completion of any
remaining non-clinical and clinical development, regulatory approval filings
and, if approved, eventual marketing of such products.
The Company was incorporated in California on August 31, 1988. The
Company's executive offices are located at 11077 North Torrey Pines Road, La
Jolla, California 92037, and its telephone number is (619) 558-0364. See "Risk
Factors--Relationship with and Dependence on Medical Biology Institute."
RISK FACTORS
1. Development Stage Company; Explanatory Paragraph in Independent
Auditors' Report for the Fiscal Year Ended September 30, 1996; History of
Continuing Losses. The Company's independent auditors have included an
explanatory paragraph in their report issued in connection with their audit of
the Company's financial statements as of and for the fiscal year ended September
30, 1996 that refers to the Company's activities as those of a development stage
enterprise. Through September 30, 1996 the Company has generated only limited
revenues. Primarily as a result of expenses incurred in organizational and
research and development activities, the Company has incurred net losses
aggregating approximately $34.3 million from its inception through September 30,
1996. Since September 30, 1996, the Company has incurred operating losses, and
anticipates that it will continue to incur substantial operating losses until
such time, if ever, that the Company achieves significant revenue from its
products. There can be no assurance that the Company will be able to
successfully implement its marketing strategy or achieve significant revenues or
profitable operations. Potential investors should be aware of the problems,
delays, expense, and difficulties encountered by any company in the development
stage, many of which may be beyond the Company's control. These include, but are
not limited to, unanticipated problems relating to product development and
formulation, clinical testing, regulatory compliance, production and marketing
additional costs and competition. There can be no assurance
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that the Company's proposed products, if fully developed and if required
regulatory approvals are obtained, can be successfully marketed or that the
Company will ever achieve significant revenues or profitable operations.
2. Significant Capital Requirements; Need for Working Capital and
Additional Financing. The commercialization of LIDAKOL or any of the Company's
other products will require capital reserves substantially greater than those
currently available to the Company. Accordingly, the Company will be required to
raise additional capital and, with the exception of LIDAKOL for oral herpes,
will be required to collaborate with one or more large pharmaceutical companies
which will provide the necessary financing and expertise to obtain regulatory
approvals, complete clinical development, manufacture and market other
indications of LIDAKOL and other proposed products. To date, the Company has
entered into five such agreements relating to LIDAKOL for herpes. See
"Business--Manufacturing and Marketing." There can be no assurance that the
Company will be able to raise additional capital or to enter into other
collaborative arrangements necessary to further develop or commercialize LIDAKOL
or any of its other proposed products on acceptable terms. Failure to obtain
required additional financing, or to enter into additional collaborative and
licensing arrangements for the continued development, manufacturing and
distribution of the Company's products, would materially limit the Company's
ability to finance or undertake its proposed operations. In such event, if the
Company were unable to obtain from alternative sources the substantial financing
necessary on acceptable terms, it would be unable to commercialize any products.
3. Early Stage of Research Development; Unproven Products; Possible Loss
of Product Development Costs. There can be no assurance that LIDAKOL or any of
the Company's other proposed products will be successfully developed, prove to
be safe and efficacious in clinical trials, prove to be more effective than
formulated products based on existing or newly developed technologies, meet
applicable regulatory standards, demonstrate substantial therapeutic benefits in
the treatment of any disease, be capable of being produced in commercial
quantities at reasonable costs or be successfully marketed. There can be no
assurance that effectiveness of these technologies in preclinical studies
performed in vitro or in animal models will be pertinent to the development of,
or indicative of the efficacy of, a product for human use. The continued
development of the Company's products, including LIDAKOL, remain subject to all
the risks inherent in the development of products based on innovative
technologies, including unanticipated development problems and the possible
insufficiency of funds which could result in the abandonment or substantial
change in the development of a specific product. The development of medical
products is a lengthy and capital intensive process. The risk of failure to
complete development of the Company's proposed products is substantial.
Unsuccessful Phase 3 clinical trial results for proposed products or the
inability to successfully complete development, or a determination by the
Company, for economic or other reasons, not to undertake to complete development
of a particular product, could have a material adverse effect on the Company.
Such material adverse effect with respect to unsuccessful clinical trial results
for LIDAKOL for oral herpes would be virtually assured.
4. Uncertainty of Market Acceptance; Limited Marketing Arrangements for
Proposed Products. Except for its arrangement with Molecular Probes, Inc., the
Company has not commenced marketing of any products to date, and at the present
time, has limited marketing capabilities. Achieving market acceptance will
require substantial marketing efforts and the expenditure of significant funds
to inform potential customers of the perceived benefits of the Company's
proposed products. The Company has no experience in the marketing or
distribution of its proposed products. Moreover, the Company does not have the
financial and other resources to undertake extensive marketing and advertising
activities. Accordingly, the Company intends generally to rely on marketing
arrangements, including possible joint ventures, license or distribution
arrangements with third parties. To date, the Company has entered into marketing
agreements with Yamanouchi, CTS, Boryung, Grelan, BMS and Molecular Probes, Inc.
See "Manufacturing and Marketing" and "Research and Development-ADIFAB." There
can be no assurance that it will be successful in entering into similar
agreements with other parties in the future or that its products can be
successfully marketed.
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5. Government Regulation. The development, production, testing,
manufacturing and marketing of pharmaceutical products is subject to significant
regulation by governmental authorities in the United States, including the FDA,
and other countries. The clinical testing and regulatory approval process can
take a number of years and require the expenditure of substantial resources.
There can be no assurance that regulatory approval will be obtained for any of
the Company's proposed products. A significant portion of the proceeds of the
Company's financings are being used for research and development and clinical
trials necessary for seeking such approvals for the Company's products. There is
no assurance that the Company will be able to enter into additional
collaborative arrangements with large pharmaceutical companies to provide the
financing necessary to complete the required testing and regulatory review
process for the Company's products. Further, the expenditures by the Company
will be made without any assurance that approvals will be obtained and before it
can be ascertained whether the Company's products can be commercialized. The
inability to obtain, or delays in obtaining, such approval would adversely
affect the Company's ability to commence marketing such products and could have
a material adverse effect on the Company. The Company is unable to predict the
extent of adverse governmental regulation which might arise from future United
States or foreign legislative or administrative action. Moreover, the Company
cannot predict with accuracy the effect of unspecified, but possible, future
changes in the regulatory approval process and in the domestic health care
system. Possible future changes could affect the time frame required for
regulatory review and the sale prices of the Company's products, if approved for
sale.
6. Technological Change and Competition. The pharmaceutical industry is
subject to rapid, unpredictable and significant technological change.
Competition from universities, research institutions and pharmaceutical,
chemical and bio-engineering companies may be intense. There can be no assurance
that developments by the Company's competitors or potential competitors will not
render the Company's proposed products obsolete. Most of such competitors have
greater financial resources, research and development facilities and
manufacturing and marketing experience than the Company. If the Company's first
proposed product, LIDAKOL, is successfully developed, it will compete with
prescription products for oral herpes known to the Company currently on the
market in the United States and other over-the-counter preparations, as well as
other products or potential products which are or may be under development or
undergoing the FDA regulatory approval process. See "Business--Competition."
7. Relationship With and Dependence on Medical Biology Institute. With the
exception of LIDAKOL, the Company's technologies have been obtained by license
from MBI, a non-profit research organization founded by Dr. Katz and principally
funded by research grants awarded by the National
Institutes of Health. Dr. Katz serves as President and Chief Executive Officer
of MBI. Under the MBI Agreement, as amended, the Company was granted a
twenty-year exclusive worldwide license to all technology and know-how which MBI
developed or had under development as of October 10, 1988, the date of the MBI
Agreement, and a right of first preference to license future technology subject
to restrictions, if any, in the funding agreements by which MBI develops the
technology. In consideration of these rights, MBI received 2,000,000 shares of
the Company's nonvoting Series A Preferred Stock, licensing fees in the amount
of $900,000, 10 percent of all net license fees obtained by the Company based on
licensed technology, 20 percent of all royalties paid to the Company by any
sublicensee and 6% percent royalties (for patented inventions) or 3 percent
royalties (for non-patented inventions) on net sales of products based on
licensed technology manufactured and marketed directly by the Company or any of
its subsidiaries. In addition, if the Company failed to market on a product
scale at least one product derived from a licensed technology or pay a royalty
of at least $100,000 per year for the calendar year ending December 31, 1995, or
any calendar year thereafter, MBI had the right to convert the license to a
nonexclusive license upon six months' notice. MBI may terminate the MBI
Agreement upon 180 days' notice in the event of default thereunder by the
Company which remains uncured in 90 days.
In July 1993, the MBI Agreement was amended, and pursuant to the terms of
the amendment, the Company issued 1,500,000 shares of Class A Common Stock to
MBI in consideration for a 5-year extension of
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their exclusive technology rights (until October 10, 2013) and a 5-year
postponement (until December 31, 2000) of the Company's obligation to pay
minimum royalties to MBI. The shares granted to MBI pursuant to the amendment
are restricted stock under federal securities laws and do not enjoy any
registration rights. Additionally, in connection with the issuance of the new
shares, MBI waived all rights to 1,500,000 of its Series A Preferred Shares
which were then held in escrow.
In July 1994, the MBI Agreement was further amended to provide for future
research funding and support for projects outside the realm of the initial
license agreement. This amendment provides for the transfer of ownership rights
for each specific project during the time it is being funded by the Company.
There can be no assurance that the Company will have the ability to
satisfy all of its obligations under the MBI Agreement, that the MBI Agreement
will result in the development of any additional products or technologies, that
the Company will be able to maintain its exclusivity to the MBI technology, that
MBI will be able to continue to receive additional research funding, or that MBI
will be able to attract and/or maintain qualified scientific or administrative
personnel. Modification or termination of the MBI Agreement could have a
material adverse effect on the Company.
8. Dependence Upon Key Personnel. The Company is dependent on its
executive management and scientific staff, particularly Dr. David H. Katz, its
President and Chief Executive Officer. Dr. Katz also serves as President, Chief
Executive Officer and a Director of MBI and devotes a portion of his time to
MBI. A reduction in the amount of time Dr. Katz or other key personnel devote to
the Company or the loss of any key person could have a material adverse effect
upon the Company's business. The Company has entered into an employment
agreement with Dr. Katz and has obtained "key-man" life insurance on the life of
Dr. Katz in the amount of $1,000,000. In addition, in order to carry out its
business plan, the Company will be required to retain additional qualified
scientific, technical and administrative personnel. There can be no assurance
the Company will be able to attract or maintain such additional personnel.
9. Patents and Proprietary Rights. The Company owns six United States and
three European patents and has additional foreign patent applications pending
relating to the topical and systemic uses of LIDAKOL and has been granted rights
under certain United States and foreign patents and patent applications relating
to LIDAKOL held by a third party. In addition, the Company has been granted
rights to certain United States and foreign patents and patent applications
related to LMI, and other technologies pursuant to the MBI Agreement. There can
be no assurance that the claims in the pending patent applications will issue as
patents, that any issued patents will provide the Company with significant
competitive advantages, or that challenges will not be instituted against the
validity or enforceability of any patent owned by the Company or, if instituted,
that such challenges will not be successful. The cost of litigation to uphold
the validity and prevent infringement of the Company's patents could be
substantial. Furthermore, there can be no assurance that others will not
independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There is no assurance that the Company's proposed technologies
will not infringe patents or other rights owned by others, licenses to which may
not be available to the Company. In this regard, the Company was at one time
negotiating to acquire another company working on an anti-viral topical
therapeutic product, but such negotiations were terminated. Although there can
be no assurance that this other company will not assert rights with respect to
LIDAKOL in the future, the Company believes it will have meritorious defenses to
such assertions. Finally, federal NIH regulations provide that if
federally-funded institutions do not timely pursue patent applications for
patentable inventions, the government can exercise its right to own such
inventions. Accordingly, the Company must monitor MBI's filing of patent
applications in order to protect the value of its license agreement with MBI.
The MBI Agreement requires the Company to pay the costs of pursuing and
obtaining patents on the licensed technologies and improvements thereto.
- 11 -
14
In some cases, the Company may rely on trade secrets and confidentiality
agreements to protect its innovations. There can be no assurance that trade
secrets will be established, that secrecy obligations will be honored or that
others will not independently develop similar or superior technology. To the
extent that consultants, key employees or other third parties apply
technological information independently developed by them or by others to
Company projects, disputes may arise as to the proprietary rights to such
information which may not be resolved in favor of the Company.
10. Dependence Upon a Limited Number of Proposed Products. The Company's
principal efforts to date have been devoted to the development of LIDAKOL, LMI,
ADIFAB and hu-PBL-SCID mouse technologies. Of these products and technologies,
the Company believes LIDAKOL, for the treatment of oral herpes, is the product
most likely to be first available for commercial distribution. However, the
Company does not expect LIDAKOL to be available for commercial sale or use in
the United States and certain foreign markets until sometime in 1998, if at all.
The ADIFAB assay is currently available for sale to the research community and
the Company has entered into a distribution agreement with an independent,
third-party distributor. The Company does not believe that revenues from the
distribution of the ADIFAB assay will materially add to the revenues of the
Company for several years, if ever. Accordingly, it is not anticipated that the
Company will generate any significant revenues from sales for several years.
The failure of these products to achieve commercial viability would have a
material adverse effect upon the business and financial condition of the
Company.
11. Potential Conflicts of Interest. The Company's President and Chief
Executive Officer is also employed by MBI and serves on the board of directors
of MBI. Other than LIDAKOL, it is hoped that a large part of the Company's
business activities will relate to development of technologies licensed from
MBI. However, conflicts could arise with respect to, among other things, the
funding for development of licensed projects between the Company and MBI, as
well as the terms of licenses to future developments at MBI pursuant to the
Company's right of first preference to such developments. Although the decisions
with respect to such matters must be approved by a majority of the members of
the Board of Directors not employed by MBI, there can be no assurance that
effective transactions between the Company and MBI will be advantageous to the
Company, that conflicts of interest will not arise with respect to such
transactions or that, if conflicts of interest do arise, they will be resolved
in a manner favorable to the Company.
12. Control by Insiders. As of December 31, 1996, the officers and
directors of the Company own approximately 4% of the outstanding capital stock
of the Company and possess approximately 6% of the voting power. At that date,
the officers and directors of the Company also held options and warrants to
purchase an additional 3,488,006 shares of Class A Common Stock and 407,000
shares of Class B Common Stock. Assuming exercise of these options and warrants,
the officers and directors of the Company would be able, as a practical matter,
to influence considerably the election of directors and thereby select
management and direct the policies of the Company.
13. Dependence Upon Third-Party Arrangements. The Company does not have
and does not expect to have in the foreseeable future the resources to
manufacture or directly market on a large commercial scale LIDAKOL or any other
products which it may develop. To successfully commercialize LIDAKOL or any
other products it will be necessary for the Company to enter into collaborative
arrangements with pharmaceutical or biotechnology companies to assist in funding
development costs, including the costs of clinical testing necessary to obtain
regulatory approvals, and costs of manufacturing and marketing. The Company
believes that these arrangements will be more effective in promoting and
distributing its products in view of the Company's limited resources and the
extensive marketing networks and large promotional and advertising budgets of
established pharmaceutical companies. The Company has entered into several
licensing agreements to cover the clinical development, manufacturing and
marketing of LIDAKOL. There can be no assurance, however, that the
- 12 -
15
Company will be able to finalize any licensing or distributorship arrangements
for territories not covered by existing agreements on favorable terms or at all.
The Company may ultimately determine to establish its own manufacturing and/or
marketing capability, at least for certain products, in which case it will
require substantial additional funds and personnel.
14. Risks Related to Foreign Sales. The Company is subject to various
risks inherent in foreign trade in connection with the continued development of
LIDAKOL by foreign licensees, and the manufacture, marketing and distribution of
LIDAKOL, if ever, overseas by foreign licensees. Such risks could include
economic or political instability, shipping delays, fluctuations in foreign
currency exchange rates, customs duties and export quotas and other trade
restrictions, all of which could have a significant impact on the Company's
ability to deliver its products.
15. Possible Volatility of Stock Price. Recent history relating to the
market prices of the shares of biotechnology companies in general, and the
historical fluctuations in the market price of the Company's Class A Common
Stock, indicates that, following this Offering, the market price of the
Company's Class A Common Stock may be highly volatile. Factors such as
fluctuations in the Company's operating results, developments relating to the
progress of clinical trials for the Company's products and the Company's
relationships with present and potential licensees and distributors,
announcements of technological innovations or new products by the Company or its
competitors, and changes in market conditions and in the economy generally, may
have a significant impact in the market price of the Company's Class A Common
Stock. Further, the market price for securities of many necessarily related to
the operating performance of such companies.
16. Dilution. Purchasers of the shares of the Class A Common Stock offered
hereby will experience immediate and substantial dilution in the net tangible
book value of their shares of approximately $2.06 per share or 81% based on the
last reported sales price of the Company's Common Stock on January 13, 1997.
17. Product Liability; Absence of Insurance Coverage. The testing,
marketing and sale of pharmaceutical products entails a risk of product
liability claims by consumers and others. Claims may be asserted against the
Company by end users of any of the Company's proposed products which may be
developed. The Company has obtained product liability insurance coverage for its
clinical trials in the amount of $2,000,000 per incident, and aggregate. There
is no assurance that such insurance will be sufficient to cover all possible
liabilities. In the event of a successful suit against the Company, lack or
insufficiency of insurance coverage could have a material adverse effect on the
Company. Further, certain distributors of pharmaceutical products require
minimum product liability insurance coverage as a condition precedent to
purchasing or accepting products for distribution. Failure to satisfy such
insurance requirements could impede the ability of the Company to achieve broad
distribution of its proposed products, which would have a material adverse
effect upon the business and financial condition of the Company.
18. Future Sales of Common Stock. All of the Company's shares of Class B
Common Stock currently outstanding are "restricted securities" as the term is
defined in Rule 144 promulgated under the Securities Act and under certain
circumstances may be sold without registration pursuant to such Rule. The
outstanding shares of Class B Common Stock, which will convert into Class A
Common Stock upon certain sales or transfers, are eligible for sale under Rule
144. The Company is unable to predict the effect that sales made under Rule 144,
or otherwise, may have on the then prevailing market price of the Class A Common
Stock although any substantial sale of restricted securities pursuant to Rule
144 may have an adverse effect.
19. Effect of Outstanding Convertible Stock, Options and Warrants: As of
December 31, 1996, there were outstanding stock options to purchase an aggregate
of 5,207,827 shares of Class A Common Stock, which have exercise prices ranging
between $0.9375 to $6.4375 per share, and 429,000 shares of Class B
- 13 -
16
Common Stock which have exercise prices ranging between $0.0125 to $0.50 per
share. In addition, the Company had outstanding 283,000 shares of Class B Common
Stock at that date, each share of which is convertible into one share of Class A
Common Stock. In addition, the Company had outstanding at December 31, 1996,
Class D Warrants with an exercise price of $1.50 per share, which, if exercised,
would result in the issuance of 1,728,354 shares of Class A Common Stock.
To the extent that these outstanding securities are exercised or
converted, dilution of the percentage of ownership of the Company's Stockholders
will occur. Sales in the public market of the Class A Common Stock underlying
options and warrants may adversely affect prevailing market prices for the Class
A Common Stock. This, in turn, might adversely affect the terms upon which the
Company will be able to obtain additional equity capital.
20. Dividends Unlikely. The Company does not intend to declare or pay cash
dividends in the foreseeable future. Earnings are expected to be retained to
finance its business.
21. Lack of Trading Market in Certain Jurisdictions. Although securities
of the Company have been qualified for sale only in certain jurisdictions, the
Company's Listed Securities are exempted from the qualification requirements for
offers in the secondary market of most states because of their listing on the
NMS/NASDAQ. However, the Company has not qualified the secondary offering of its
securities in the state of Hawaii and Nebraska and NMS/NASDAQ exemption is not
available in Hawaii. Consequently, the secondary trading of securities of the
Company in Hawaii and Nebraska can only be conducted through unsolicited buy and
sell orders, privately negotiated transactions, or through other exempt
transactions. Similar restrictions may apply in other jurisdictions.
- 14 -
17
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Securities by the Selling Securityholders. The Company will, however, receive
gross proceeds of $2,592,531 in the event of the exercise of all Class D
Warrants held by the Selling Stockholders. There can be no assurance that all or
any portion of such securities will be exercised at any particular time, if
ever. It is likely that the Selling Securityholders will not exercise their
securities unless and until the market price of the Class A Common Stock is
significantly greater than the exercise prices of their securities for an
extended period of time. See "Selling Securityholders" and "Description of
Securities."
The use to which the Company would put proceeds received upon the exercise
of the Class D Warrants offered by this Prospectus after the payment of
expenses, will depend upon the amount of proceeds received at any given time,
the then current cash balance of the Company and the then current funding
priorities of the Company. As of the date of this Prospectus, if all of such
securities were exercised concurrently the Company expects that, after the
payment of expenses, it would apply all of the net proceeds to working capital.
- 15 -
18
DIVIDEND POLICY
The Company has never paid a cash dividend and does not anticipate the
payment of cash dividends in the foreseeable future as earnings, if any, are
expected to be retained to finance the Company's operations. Declaration of
dividends in the future will remain within the discretion of the Company's Board
of Directors, which may review its dividend policy from time to time.
PRICE RANGE OF SECURITIES
The Company's shares of Class A Common Stock have traded on the NASDAQ
National Market System under the symbol LDAKA since September 30, 1993. Previous
to that date, these securities were traded on the NASDAQ Small-Cap Market since
May 8, 1990. The prices set forth below represent quotes between dealers and do
not include commissions, mark-ups or mark-downs, and may not necessarily
represent actual transactions.
Class A
Common Stock
High Low
---- ---
1995
First Quarter $2.50 $1.50
Second Quarter $4.0625 $1.5625
Third Quarter $4.75 $3.0625
Fourth Quarter $7.0625 $3.75
1996
First Quarter $4.8125 $3.5625
Second Quarter $5.9375 $2.50
Third Quarter $3.3125 $2.1875
Fourth Quarter $2.5625 $1.6875
1997
First Quarter $1.9375 $1.375
Second Quarter $3.125 $1.75
(through 1/13/97)
On January 13, 1997, there were 1,054 holders of record of Class A Common
Stock and the closing bid and asked prices were $2.50 and $2.5625, respectively.
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19
DILUTION
As of September 30, 1996, the pro forma net tangible book value of the
Company's common stock was approximately $17,078,880 or $0.47 per share of
common stock. Pro forma net tangible book value per share represents the amount
of total tangible assets of the Company adjusted to give effect to the proceeds
that would be received in the event of exercise of the Class D Warrants
registered herein, reduced by the total liabilities and divided by the number of
shares of common stock outstanding after giving effect to the exercise of the
Class D Warrants, subject to this registration, for shares of Class A Common
Stock. No additional shares of common stock will be issued, nor will any
proceeds be received by the Company, as a result of the sale by the Selling
Securityholders of the Securities offered by this Prospectus. See "Use of
Proceeds" and "Selling Securityholders." Therefore, the pro forma net tangible
book value at September 30, 1996, after the distribution of all shares of Class
A Common Stock offered hereby, will remain $0.47 per share of common stock.
Assuming a price to the public of $2.53 per share (based upon the last reported
sales price of the Class A Common Stock on NASDAQ at January 13, 1997), there
will be an immediate dilution per share of $2.06 to new investors purchasing the
shares of Class A Common Stock offered hereby. The dilution to be experienced by
new investors will be the same regardless of the number of Securities sold
because the Company would receive no consideration for the sale.
The following table illustrates the dilution per share as described above:
Assumed price to public per share .......................... $2.53
-----
Pro forma net tangible book value per share at
September 30, 1996, before giving effect to
this Offering ............................... 0.47
----
Increase attributable to purchase of Class A
Common Stock by new investors
0.00
----
Pro forma net tangible book value per share of common
stock at September 30, 1996, after giving effect
to this Offering................................ $0.47
-----
Dilution to new investors .................................. $2.06
=====
At December 31, 1996, the Company also had outstanding options to purchase
an aggregate of 5,207,827 shares of Class A Common Stock at exercise prices
ranging between $0.9375 and $6.4375 per share, and 429,000 shares of Class B
Common Stock, at exercise prices ranging between $0.0125 and $0.50 per share. To
the extent such options are exercised and shares of Class B Common are
converted, there will be further dilution to the purchasers of the Class A
Common Stock offered hereby from the public offering price.
- 17 -
20
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996.
Short-Term Debt (1) $5,721,087
==========
Long-Term Debt --
----------
Stockholders' Equity(2)
Common Stock--no par value:
Class A-- 99,490,000 shares authorized,
34,054,022 issued and
outstanding (2) 49,216,569
Class B-- 510,000 shares authorized,
283,000 shares issued and
outstanding (convertible to
Class A
Common Stock) 147,748
Deficit accumulated during the development stage (34,296,198)
------------
Total stockholders' equity 15,068,119
------------
Total capitalization $20,789,206
============
- ------------------
(1) Includes $5,213,333 principal amount of the Convertible Notes (the
"Notes") and $507,754 of accrued conversion discount. See Note 6 to Notes
to Financial Statements. Between October 1, 1996 and January 10, 1997, the
Company issued common stock from the conversion of $2,540,116 in principal
amount of the Notes and repaid the noteholders an aggregate total of
$2,673,217 in principal amount of the Notes plus premium and accrued
interest. As of January 10, 1997, the Company had no further obligation
related to the Notes.
(2) Does not include (a) 283,000 shares of Class A Common Stock issuable upon
conversion of the Company's outstanding shares of Class B Common Stock,
(b) an aggregate of 3,419,166 shares of Class A Common Stock issued
between October 1, 1996 and January 10, 1997 from the conversion of the
Notes, (c) an aggregate of 5,636,827 shares of Class A Common Stock
reserved for issuance pursuant to outstanding options at December 31,
1996, (d) 1,728,354 shares of Class A Common Stock issuable upon exercise
of outstanding Class D Warrants, and (e) 75,000 shares of Class A Common
Stock issued subsequent to September 30,1996 from the exercise of Class E
Warrants. See "Plan of Distribution," "Management's Discussion and
Analysis - Liquidity and Capital Resources" and "Description of
Securities."
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21
SELECTED FINANCIAL DATA
The selected financial data presented below at September 30, 1995 and
1996, for the years ended September 30, 1994, 1995, and 1996 and the period from
August 31, 1988 (Inception) to September 30, 1996 are derived from, and are
qualified by reference to, the audited financial statements of the Company
included elsewhere herein and should be read in conjunction with those financial
statements and notes thereto and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected financial data
presented below at September 30, 1992, 1993 and 1994, and for the years ended
September 30, 1992 and 1993, are derived from audited financial statements not
included herein.
FROM
YEARS ENDED SEPTEMBER 30, AUG. 31, 1988
------------------------------------------------------------------ (INCEPTION) TO
1992 1993 1994 1995 1996 SEPT. 30, 1996
---- ---- ---- ---- ---- --------------
STATEMENT OF OPERATIONS DATA:
Revenues ......................... $ 427,086 $ 590,822 $ 1,016,719 $ 884,589 $ 4,158,038 $ 8,001,016
Net loss ......................... (2,361,855) (6,139,223) (4,813,341) (10,173,001) (6,130,241) (34,296,198)
Net loss per share(1) ............ ($ 0.26) ($ 0.35) ($ 0.19) ($ 0.35) ($ 0.19)
Weighted average number of shares
of common stock outstanding (1) 9,150,776 17,310,231 25,166,958 29,338,418 32,072,944
SEPTEMBER 30,
BALANCE SHEET DATA: 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments . $10,460,558 $10,256,445 $17,402,896 $10,035,727 $20,374,010
Working capital .......... 10,164,854 10,063,769 16,837,299 8,567,966 13,759,577
Total assets ............. 10,874,448 10,877,700 18,244,299 10,954,043 22,846,879
Convertible notes payable 5,721,087
Total liabilities ........ 430,474 378,529 847,904 1,705,443 7,778,760
Stockholders' equity ..... 10,443,974 10,499,171 17,396,395 9,248,600 15,068,119
- ------------------
(1) The Escrow Shares outstanding in fiscal years ended 1992 through
1994 are excluded from the computation of net loss per share. See
Note 1 to Notes to Financial Statements.
- 19 -
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a development stage company. Since inception in August
1988, the Company has been engaged primarily in the research, development and
commercialization of innovative pharmaceutical products. The Company is
currently focusing its efforts primarily on the commercialization of n-docosanol
10% cream (LIDAKOL (R)) and its Large Multivalent Immunogen (LMI) technology.
The Company has not generated any significant product revenues and has been
unprofitable since inception in August 1988. For the period from inception to
September 30, 1996, the Company incurred a cumulative net loss of $34.3 million.
The Company's research and development, clinical trial and general and
administrative expenses will continue to be substantial and the Company expects
to continue to incur operating losses during the next several years.
In Spring 1996, the Company reported preliminary results from three Phase
3 clinical trials comparing LIDAKOL cream to placebo cream as a treatment of
recurrent oral herpes episodes. In these trials, LIDAKOL demonstrated clinical
effectiveness compared to historical episode features reported by the patients
in the study, including reduced healing times, episode abortion and shortening
of pain symptoms. However, similar results were obtained with the cream used as
the intended placebo in the trials. If these trials had shown statistically
significant advantage of LIDAKOL versus placebo, the Company could have filed a
New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA")
for marketing approval of LIDAKOL as a treatment of recurrent oral herpes. As a
result of the inconclusive outcome, the Company obtained FDA approval to use an
alternative placebo to conduct additional Phase 3 clinical trials to prove the
efficacy of LIDAKOL versus an alternative placebo in order to complete final
requirements to file an NDA for marketing approval. In July and September 1996,
the Company initiated two additional Phase 3 clinical trials of LIDAKOL in the
United States. The Company estimates that, during the fiscal year ended
September 30, 1997, it will incur direct costs for these two studies of
approximately $2.5 to $3.0 million. The Company anticipates completion of these
studies including data availability, around the summer of 1997. See
"Business--General" and "--Research and Development-LIDAKOL."
The Company's business is subject to significant risks including, but not
limited to, the success of its research and development efforts, uncertainties
associated with obtaining and enforcing patents important to the Company's
business and lengthy and expensive regulatory approval processes and competition
from pharmaceutical and biotechnology companies, increasing pressure on
pharmaceutical pricing from payors, patients, and government agencies and
limitations on the availability of capital. Even if the Company's products
appear promising at an early stage of development, they may not reach the market
for a number of reasons. Such reasons include, but are not limited to, the
possibilities that the potential products will be found ineffective or toxic
during clinical trials, fail to receive the necessary regulatory approvals, be
difficult to manufacture on a large scale, be uneconomical to market, or be
precluded from commercialization by proprietary rights of third parties, or that
the Company may not have sufficient financial resources. Additional expenses,
delays and losses of opportunities that may arise out of these and other risks
could have a material adverse effect on the Company's financial condition and
results of operations.
- 20 -
23
RESULTS OF OPERATIONS
COMPARISON OF FISCAL 1995 AND 1996
During the fiscal year ended September 30, 1996 ("fiscal 1996"), the
Company incurred a net loss of $6.1 million compared to a net loss of $10.2
million in the fiscal year ended September 30, 1995 ("fiscal 1995").
Revenues totaled $4.2 million for fiscal 1996 compared to $885,000 for
fiscal 1995. Revenues for fiscal 1996 consisted of license fee/contract research
income of $3.0 million, interest and other income of $1.1 million and federal
research grant income of $58,000. The increase in revenues during fiscal 1996
was attributable primarily to license fee revenues in the amount of $3.0 million
earned in connection with certain licensing agreements, most of which was
derived from the Company's agreement with Bristol-Myers Squibb Company. Interest
and other income increased in fiscal 1996 to $1.0 million compared to $885,000
in fiscal 1995. This increase is primarily attributable to higher cash balances
available for investment during fiscal 1996. See "--Liquidity and Capital
Resources." Federal research grant income increased to $58,000 during fiscal
1996 related to income earned from research grants issued by the National
Institutes of Health which were not in place during fiscal 1995.
Research and development expenses decreased by $3.1 million to $4.6
million during fiscal 1996 as compared to fiscal 1995. This decrease in expenses
is primarily attributable to decreased activities related to toxicology testing
and the completion of certain U.S./Canadian Phase 3 clinical trials of LIDAKOL
in fiscal 1996.
General and administrative expenses decreased to $2.7 million during
fiscal 1996 from $3.3 million during fiscal 1995. This decrease in expenses
during fiscal 1996 is primarily attributable to a one-time payment of fees
related to a consulting agreement which was no longer in effect in fiscal 1996
and non-recurring expenses incurred in fiscal 1995 of investment banking fees
paid in connection with the Company's license agreement for LIDAKOL in Japan,
and for legal and investment banking services related to a proposed acquisition
which is no longer being pursued by the Company.
Interest expenses recorded during fiscal 1996 represents interest
associated with the Notes issued during the fiscal year. Of the $2.9 million in
interest expense, $2.7 million represents non-cash interest expense from the
recognition of the conversion discount on the Notes. See "--Liquidity and
Capital Resources" and Note 6 to Notes to Financial Statements.
COMPARISON OF FISCAL 1994 AND 1995
During fiscal 1995, the Company incurred a net loss of $10.2 million
compared to a net loss of $4.8 million in the fiscal year ended September 30,
1994 ("fiscal 1994").
Revenues totaled $885,000 for fiscal 1995 as compared to $1.0 million for
fiscal 1994. The entire amount of fiscal 1995 revenue is attributable to
interest and other income representing an increase of $402,000 over the fiscal
1994 amount. No revenue was earned during fiscal 1995 from contract research and
federal grant revenue as compared to an aggregate of $534,000 from these
categories in fiscal 1994. The increase in interest and other income during
fiscal 1995 is attributable primarily to higher average cash balances available
for investment and higher interest rates during the year. See "--Liquidity and
Capital Resources." The decrease in contract research and federal grant revenue
during fiscal 1995 is due to the completion of all such agreements prior to the
beginning of fiscal 1995.
- 21 -
24
Research and development expenses increased by $4.6 million to $7.7
million during fiscal 1995 as compared to fiscal 1994. This increase is
attributable primarily to expenditures associated with the Phase 3 clinical
trials in the United States and Canada, the non-clinical toxicology program for
LIDAKOL for the topical treatment of oral herpes which began in fiscal 1995, and
the continued preclinical development of LMI.
General and administrative expenses increased to $3.3 million during
fiscal 1995 from $2.6 million in fiscal 1994. The increase in fiscal 1995
expenses is attributable primarily to the one-time payment of fees in connection
with the completion of a two-year consulting agreement in February 1995, and
investment banking fees associated with the Company's license agreement with
Grelan Pharmaceutical Co., Ltd. of Japan. General and administrative expenses
also increased during the year due to personnel costs related to staff
additions, market research expenditures, and occupancy costs related to an
expansion of office space. In addition, consulting, legal and other costs
increased as a consequence of a proposed acquisition during the year.
Contract research expenses decreased during fiscal 1995 by $155,000 as
compared to fiscal 1994 as a direct result of decreased contract research
revenue as noted above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
the sale of equity and debt securities and stockholder loans. Net cash provided
from financing activities through September 30, 1996 was $47.5 million.
At September 30, 1996, the Company had cash, cash equivalents and
short-term investments totaling $20.4 million and working capital of $13.8
million, as compared to $10.0 million and $8.6 million, respectively, at
September 30, 1995. The increases in cash and working capital during fiscal 1996
are attributable primarily to net proceeds of approximately $14.5 million
received by the Company through the sale of $1.5 million of Class A Common Stock
and $13.5 million of the Notes in a private financing and $386,000 from the
exercise of certain options and warrants during fiscal 1996. Cash utilized by
the Company to fund operating activities for fiscal 1996 and from inception to
September 30, 1996, was $4.1 million and $26.7 million, respectively, as a
result of net losses incurred during these periods. In addition, $122,000 and
$543,000 of cash was utilized for capital expenditures during fiscal 1996 and
from inception to September 30, 1996, respectively. Offsetting such cash
utilization during fiscal 1996 was the receipt of $500,000 in connection with a
licensing agreement which has been recorded as deferred revenue.
The Company does not believe that the net cash used to fund operating
activities during fiscal 1996 is representative of future cash requirements. Net
cash requirements during the fiscal year ended September 30, 1997 ("fiscal
1997") are expected to increase to levels more consistent with net cash used in
the 1995 period as a result of continuing research and development, clinical
trial and general and administrative expenses.
As discussed above, the results of the clinical studies reported in the
Spring of 1996 of the Company's most developed drug candidate, LIDAKOL, do not
support the filing of an NDA at this time. The Company has recently initiated
two additional clinical studies to prove the efficacy of LIDAKOL versus an
alternative placebo which, if successful, would enable it to file an NDA. The
Company estimates that during fiscal 1997, it will incur direct costs for these
two additional clinical studies of approximately $2.5 to $3.0 million.
In November 1995, December 1995 and January 1996, the Company issued an
aggregate $13.5 million in principal amount of the Notes. The Notes accrue
interest at an annual rate of 7% beginning six months from the date of issue,
with the principal due and payable two-years from the date of issue if, and to
the extent that the Notes are not previously converted. The Notes are
convertible into Class A Common Stock at a price equal to 80% of the average
closing bid price of the Company's Class A Common Stock on the NASDAQ for seven
- 22 -
25
trading days prior to the date of conversion. The $13.5 million original
principal amount of Notes was convertible into an aggregate maximum of 5,513,018
shares of the Company's Class A Common Stock at the option of the holders, with
each individual Note limited to a pro-rata amount of such number of shares. In
the event that shares of Class A Common Stock underlying a particular Note
cannot be issued upon request for conversion due to the above referenced maximum
share limitations, the Company is immediately obligated to repay the principal
of that portion of the Note which is presented for conversion which cannot be
converted plus a premium equal to 25% of such principal plus any accrued and
unpaid interest. Through January 10, 1997 a total of 5,513,080 shares of Class A
Common Stock had been issued in connection with the conversion of $10,826,783
principal amount of the Notes. As a result of these events, the noteholders
reached their pro-rata portion of the maximum share limitation described above.
On December 19, 1996 and January 10, 1997, the Company repaid $1,728,393 and
$1,635,810, respectively, representing $1,375,539 and $1,297,678, respectively,
of original principal and $352,854 and $338,132, respectively, of premium and
accrued interest to such noteholders pursuant to the terms of the Notes, thus
retiring the entire balance of principal and interest on the Notes.
At December 31, 1996 the Company had additional exercisable warrants and
options outstanding which, if fully exercised, would result in the aggregate
issuance of approximately 7.4 million shares of the Company's Class A Common
Stock and would result in approximate gross proceeds to the Company of $17.0
million. Included in such warrants and options are Class D Warrants, exercisable
through February 26, 1997 into approximately 1.8 million shares of the Company's
Class A Common Stock at an exercise price of $1.50 per share. Such warrants are
redeemable by the Company, at a price of $.05 per warrant, upon 30 days notice
if the average closing bid price of the Company's Class A Common Stock for the
30 days prior to the notice exceeds $3.45 per share. In the event the Company
does call the Class D Warrants for redemption, there can be no assurance
regarding the number of warrants which would be exercised or the amount of
proceeds which the Company would receive. The remaining exercisable options and
warrants are not redeemable by the Company and can be exercised by the holders
at various times through 2006. The average exercise price of the remaining
exercisable options and warrants is approximately $2.52 per share which is
higher than the market price of the Company's Class A Common Stock on January
13, 1997. There can be no assurance that voluntary option and warrant exercises
will continue to occur in the future.
The Company had available cash, cash equivalents and short term
investments of approximately $16 million at December 31, 1996. On January 10,
1997, the Company repaid $1,635,810 in connection with the Notes described
above. The Company expects to continue to incur substantial operating losses for
the foreseeable future. The Company's available funds may not be sufficient to
permit the Company to successfully complete development or commercialize any of
its proposed products. Accordingly, the Company may be required to raise
substantial additional capital or to collaborate with one or more large
pharmaceutical or biotechnology companies which could provide the necessary
financing and expertise to complete clinical development, manufacture and
package finished product and obtain regulatory approvals to market its products.
There can be no assurance that the Company can successfully obtain such
additional capital or enter into the collaborative arrangements necessary to
fully develop or commercialize any of its proposed products on acceptable terms.
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BUSINESS
GENERAL
LIDAK Pharmaceuticals ("LIDAK" or the "Company") is a development stage
company organized to engage in research, development and commercialization of
innovative pharmaceutical products. The Company was incorporated in California
in 1988 and since inception has operated in one business segment -- research and
development of pharmaceutical products. The Company is currently focusing on the
development and commercialization of two proprietary products/technologies 1)
n-docosanol 10% cream (LIDAKOL(R)) as a topical treatment for oral herpes (cold
sores or fever blisters) and other topical and systemic uses; and 2) Large
Multivalent Immunogen ("LMI") technology as a potential immunotherapeutic
vaccine treatment for malignant melanoma and other human cancers.
In Spring 1996, the Company reported preliminary results from three Phase
3 clinical trials comparing LIDAKOL cream to a placebo cream as a treatment of
recurrent oral herpes episodes. In these trials, LIDAKOL demonstrated clinical
effectiveness compared to historical episode features experienced by the
patients in the study, including reduced healing times, episode abortion and
shortening of pain symptoms. However, similar results were obtained with the
cream used as the intended placebo in the trials. If these trials had shown a
statistically and clinically significant advantage of LIDAKOL versus placebo,
the Company could have filed a New Drug Application ("NDA") with the U.S. Food
and Drug Administration ("FDA") for marketing approval of LIDAKOL as a treatment
of recurrent oral herpes. As a result of the inconclusive outcome, the Company
obtained FDA approval to use an alternative placebo and to conduct additional
Phase 3 clinical trials to prove the efficacy of LIDAKOL versus the alternative
placebo. In July and September 1996, the Company initiated two additional Phase
3 clinical trials of LIDAKOL in the United States. The Company anticipates
completion of these studies, including data availability, around the summer of
1997. If successful, these trials will complete the final requirements to file
an NDA for marketing approval. If FDA approval is obtained in a timely manner
thereafter, the Company believes that it is possible that commercial sales could
commence sometime in 1998. See "--Research and Development - LIDAKOL."
To date, the Company has entered into five licensing agreements relating
to marketing certain topical indications of LIDAKOL. These agreements are with:
1) Yamanouchi Europe, b.v., of the Netherlands ("Yamanouchi"), for rights in
certain European and other countries (November, 1991); 2) CTS Chemical
Industries, Ltd. ("CTS"), for rights in Israel (July, 1993); 3) Boryung
Pharmaceuticals Company, Ltd. ("Boryung"), of Seoul, Korea, for rights in the
Republic of Korea (July, 1994); 4) Grelan Pharmaceutical Co., Ltd. ("Grelan"),
of Tokyo, Japan, for rights in Japan (October, 1994); and 5) Bristol-Myers
Squibb Company ("BMS"), headquartered in the U.S., for rights in the United
States, Canada and all remaining major territories throughout the world which
were not licensed to other parties (February, 1996). In November 1996, LIDAK
reacquired from BMS the rights to market LIDAKOL in all territories covered in
the LIDAK/BMS agreement except the U.S., Canada and Mexico and is now free to
engage new licensing partners in these reacquired territories which include
China, South America, Central America, Australia, India and portions of the Far
East. In each of the territories covered by the above agreements, and other
territories not covered by these agreements, marketing of LIDAKOL is subject to
obtaining appropriate government approvals.
The Company's second current area of clinical development uses the LMI
technology as a new therapeutic approach to cancer. This technology involves the
use of antigen-containing artificial cell membranes to stimulate the immune
system's defense against cancer cells. Under an Investigational New Drug
Application ("IND"), approved by the FDA, the Company is currently conducting a
Phase 1/Phase 2 clinical trial of LMI in patients with malignant melanoma. The
Company anticipates completion of this trial in early 1997. The Company's rights
to the LMI technology, and certain other technologies, derive from a licensing
agreement with Medical Biology Institute ("MBI"), a non-profit research
organization founded in 1981 by Dr. David H. Katz, the founder, President and
Chief Executive Officer of the Company.
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The Company has experienced significant losses since inception and its
business is subject to significant risks. See "Risk Factors." Except as noted
above with respect to LIDAKOL, the Company does not expect any other of its
proposed products, including LMI, to be available for commercial sale for
several years, if at all. There is no assurance that the ongoing U.S. Phase 3
clinical trials of LIDAKOL or the current and/or future clinical trials of LMI
will demonstrate satisfactory efficacy to support the filing of NDA's with the
FDA in the U.S. or with regulatory agencies outside the U.S. Moreover, filing of
any such NDA's does not assure that marketing approvals will be granted for
these products in the U.S. or elsewhere. There is no assurance that pre-clinical
and clinical testing of the Company's earlier-stage technologies will
demonstrate appropriate safety and efficacy requirements to warrant further
development and/or to achieve the requirements of regulatory marketing approvals
in the U.S. or elsewhere.
Even if the Company obtains applicable regulatory marketing approvals for
LIDAKOL, LMI or any of its other products, it will still be necessary for the
Company to make appropriate arrangements, for which no assurance can be made, to
finance the ultimate commercialization of such products. These arrangements
could include obtaining additional licensing agreements or other collaborative
interactions with outside parties which have sufficient financial resources and
expertise and/or raising additional financing to support completion of any
remaining non-clinical and clinical development, regulatory approval filings
and, if approved, eventual marketing of such products.
RESEARCH AND DEVELOPMENT
LIDAKOL: Company scientists have developed a therapeutic compound,
n-docosanol, trademarked under the name LIDAKOL, which has demonstrated
anti-viral and anti-inflammatory properties. The Company has been focusing on
approval for LIDAKOL as a topical treatment for oral herpes infections. During
fiscal 1995, a Phase 3 clinical trial of LIDAKOL as a topical treatment for oral
herpes was completed in Europe by Yamanouchi, the Company's licensing partner in
Europe. In this double blind study, LIDAKOL was compared to acyclovir
(Zovirax(R)) 5% cream in approximately 400 patients initiating treatment at
early stages of a recurrent herpes episode. Results of this trial demonstrated
that LIDAKOL showed statistically comparable therapeutic efficacy to Zovirax 5%
cream, a product approved for marketing in Europe as a treatment for recurrent
oral herpes, but which is not available in the U.S., (Zovirax ointment, which is
available in the U.S., has not been approved by the FDA for use as a treatment
for recurrent oral herpes). Demonstrating comparable efficacy to an approved
product is a requirement for obtaining regulatory approval in most major
European countries, but is not a requirement for approval in the U.S. Results of
this trial will be used by Yamanouchi, along with results from the Phase 3
U.S./Canadian placebo-controlled trials described below, for submission to the
appropriate regulatory agencies for marketing approval in Europe.
In Spring 1996, the Company obtained the results of three double-blind
placebo-controlled Phase 3 U.S. and Canadian clinical trials of LIDAKOL 10%
cream as a topical treatment for recurrent oral herpes. Two of these studies
focused on early treatment and the third focused on late treatment of oral
herpes. In the two early treatment studies, in which 648 patients were treated
early in the course of oral herpes episodes, LIDAKOL had a very good safety
profile and was well-tolerated. With regard to healing time, the average
duration of oral herpes episodes averaged 5.5 days in both the LIDAKOL and
placebo-treated groups, compared to an average duration of 8.9 days in prior
untreated episodes experienced by these patients. This represents a 35%
reduction (P <= 0.0001) in time to healing. Furthermore, in one of these
studies, both LIDAKOL and placebo treatment resulted in significant benefit (73%
and 50%, respectively) in aborting the progression of oral herpes to the
vesicle, or blister, stage in patients who initiated treatment at the early sign
of an outbreak., Moreover, complete elimination of pain was observed by the
patients in 2.6 and 4.0 days, respectively, compared to 6.0 days when the
disease is left untreated, as published in the scientific literature. The
absence of a difference between LIDAKOL and placebo treatment was unexpected.
The Company believes that this result was due to unanticipated anti-herpes
activity of the cream used as the intended placebo in the trials.
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The third Phase 3 U.S./Canadian late treatment study of LIDAKOL was
conducted in 544 oral herpes patients initiating treatment in the late stage of
a recurrent episode. This study demonstrated that late-stage treatment was
ineffective in altering overall healing times. This outcome was expected in view
of the Company's understanding of the mode of action of LIDAKOL, in which
interference with viral infection occurs early when infecting herpes viruses
begin to enter target cells, rather than after the virus has entered the cell
and begun to multiply.
If these trials had shown a statistically and clinically significant
advantage of LIDAKOL versus placebo, the Company could have filed an NDA with
the FDA for marketing approval of LIDAKOL as a treatment of recurrent oral
herpes. However, LIDAKOL did not show a statistically significant difference in
healing times versus the cream used as the intended placebo in the trials. As a
result of this outcome and because the Company believes that the cream used as
the intended placebo displayed unexpected anti-herpes activity, the Company is
conducting additional clinical trials to prove the efficacy of LIDAKOL compared
to what it believes to be an alternative, inert placebo.
In July 1996 and September 1996, the Company initiated two additional
Phase 3 clinical trials in the United States of LIDAKOL as an early treatment of
recurrent oral herpes. A minimum of 500 patients will be evaluated in the two
double-blind, placebo-controlled studies using a totally different placebo than
was used in the original studies. The alternative placebo cream being used in
these additional studies has been shown in previous human clinical trials to be
inactive as a treatment for oral herpes. Consequently, the Company believes that
these trials should provide the Company with a more valid comparison of LIDAKOL
activity versus an inert placebo. The primary endpoint of these studies will be
overall time-to-healing, with secondary endpoints including percentage of
aborted outbreaks and relief of pain symptoms. The studies will be conducted at
many of the same sites used in previous Phase 3 studies of LIDAKOL. The Company
anticipates completion of these studies around the summer of 1997. If
successful, the Company will use these results in support of filing an NDA.
In January 1996, the Company initiated two separate Phase 2 clinical
trials of LIDAKOL in AIDS patients as a topical treatment for Kaposi's Sarcoma
cutaneous lesions (KS) and Molluscum Contagiosum (MC) under the Company's IND
with the FDA. Each of these conditions occurs in increased frequency with
patients infected with human immunodeficiency virus (HIV). KS is a malignant
vascular tumor typified by purplish skin lesions which may appear anywhere on
the body. Recently published studies suggest that a new herpes virus, human
herpes virus 8 (HHV-8), may be the causative agent of KS. MC is a viral
infection resulting in raised skin lesions, or warts, currently treatable only
by surgical removal. Each of the trials involve adult male HIV-infected patients
(18 in the KS and 10 in the MC studies, respectively) in an open label, single
center study in which patients apply LIDAKOL five times daily over a 14 to 28
day period. Clinical endpoints of both trials will include reduction in the size
of lesions and time-to-heal responses. The Company anticipates results from
these studies in early 1997.
In late fiscal 1997 the Company plans to initiate a Phase 2 clinical
trial using LIDAKOL as a topical therapeutic treatment for burns and wound
healing. The Company is also investigating the possibility of initiating
additional clinical trials for other topical indications of LIDAKOL which may
include therapeutic use in genital herpes, shingles, fungal infections and other
skin conditions, although no specific plan has been established for initiation
of such trials. In addition, the Company has preliminary data indicating that a
topical formulation of LIDAKOL might be beneficial in preventing sexually
transmitted HIV.
The Company is also developing LIDAKOL for systemic (internally
administered) anti-viral and anti-inflammatory use. Preclinical studies indicate
that systemically formulated LIDAKOL inhibits viral replication of certain
lipid-enveloped viruses. Several medically significant diseases are caused by
these viruses which, besides herpes, include shingles, cytomegalovirus,
influenza, respiratory syncytial virus, hepatitis and HIV.
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Patents covering medical and veterinary uses of the topical and
systemic formulations of LIDAKOL have been issued to LIDAK in the U.S. and
Europe. The Company has additional foreign patent applications pending covering
topical and systemic uses of LIDAKOL and has been granted rights under certain
United States and foreign patents and patent applications relating to LIDAKOL
held by a third party. See "--Patents and Proprietary Rights."
LARGE MULTIVALENT IMMUNOGEN (LMI): Utilizing LMI technology acquired
through its license agreement with MBI, the Company is attempting to develop
anti-cancer and anti-viral therapeutic products. See "--Relationship with
Medical Biology Institute." This technology incorporates homogeneous cell-sized
beads coated with purified cell membranes containing cancer or virus antigens.
These coated beads are injected into patients' skin to stimulate the immune
system, in particular cytotoxic T lymphocytes ("CTL") or "killer cells", to
attack and kill the cancer cells or virus infected cells. CTL's play a major
role in the immune system's defense against diseases. Provided they are
effectively stimulated into their killing action, CTL's can recognize foreign
antigens on cancer or virus-infected cells and kill such cells. In experimental
animals, the LMI approach has been shown to effectively stimulate and enhance
cancer-specific CTL responses against a variety of mouse tumors and, when
combined with traditional chemotherapy, has been shown to significantly improve
survival rates of cancer-bearing mice.
In August 1993, the Company entered into an agreement with Ribi
Immunochem Research, Inc. ("Ribi") under which Ribi granted the Company a
license to use Ribi's melanoma cell lines in the clinical development of LMI
technology for use in malignant melanoma. The Company granted Ribi an option for
an exclusive license to commercialize the Company's LMI technology with Ribi's
melanoma cell lines for the treatment of melanoma. This agreement does not
restrict the Company from using its LMI technology for the treatment of melanoma
using melanoma antigens from other sources.
In December 1995, the Company began a Phase 1/Phase 2 clinical trial of
LMI in patients with malignant melanoma under its IND with the FDA. This
clinical trial is investigating the safety of LP 2307 Injectable LMI Suspension
("LP 2307") in 18 patients with late stage disease. LP 2307 is created by
attaching high concentrations of isolated melanoma antigens derived from
melanoma cell lines onto cell- sized microspheres. The study will also evaluate
varying doses of the LP 2307, and its ability to elicit melanoma-specific immune
responses and possible stabilization of the disease and prolongation of patient
life. The Company anticipates completion of this study in early 1997.
Although research efforts are still at an early stage, Company
scientists believe that the LMI approach may also be effective for stimulating
enhanced virus-specific CTL responses, thereby providing the opportunity to also
develop improved therapies and vaccines for viral diseases.
Patents covering the use of LMI to treat human tumors have been issued
to MBI in the U.S. and Europe. The rights to these patents belong to the Company
through the license agreement with MBI described below under "Relationship with
Medical Biology Institute"(the "MBI Agreement"). Both U.S. and foreign patents
are pending for use of LMI as a treatment for viral diseases. See "--Patents and
Proprietary Rights." The Company intends to obtain outside funding for any
future development of the LMI technology.
ADIFAB TECHNOLOGY: Using technology acquired through its license
agreement with MBI, Company scientists have developed an assay which rapidly
measures, with high precision, levels of unbound Free Fatty Acids ("FFA") in
blood plasma and other tissue fluids. See "Relationship with Medical Biology
Institute." Modest but statistically significant increases in blood plasma
levels of unbound FFA were found to be associated with cancer and diabetes.
However, major increases in unbound FFA, (14 fold), were found in patients
undergoing balloon angioplasty for coronary artery disease. Thus, in preliminary
clinical studies, this assay appears to be an extremely sensitive detector of
ischemia in heart disease and may prove to be a simple, rapid
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and cost-effective early diagnostic tool to identify individuals with ischemia
caused by coronary artery disease or stroke. The Company is currently seeking
outside parties to further develop this technology into a new clinically
important diagnostic tool. The ADIFAB assay is currently available for sale to
the medical research community through a non-exclusive distribution agreement
with Molecular Probes, Inc. of Eugene, Oregon, although such sales have not and
are not expected to result in significant revenues to the Company. Both U.S. and
foreign patents have been issued for the ADIFAB technology. The rights to these
patents belong to the Company through the MBI Agreement. See "--Patents and
Proprietary Rights."
HUMAN IMMUNE SYSTEM-RECONSTITUTED SCID MOUSE TECHNOLOGY: The human
immune system- reconstituted SCID mouse technology (hu-PBL-SCID), which the
Company acquired through its license agreement with MBI, creates a functional
human immune system in mice which have a genetic defect known as Severe Combined
ImmunoDeficiency ("SCID") by reconstituting such mice with human blood cells.
See "Relationship with Medical Biology Institute." Certain aspects of the human
immune system are thereby created to function in laboratory animals. Both U.S.
and foreign patents have been issued for the hu-PBL-SCID technology. The rights
to these patents belong to the Company through the MBI Agreement. See "--Patents
and Proprietary Rights." The Company believes there may be both commercial and
scientific applications of the hu-PBL-SCID mouse technology. The focus of work
with this model has been diseases of the human immune system, including AIDS.
This model permits basic studies on the infection of human cells with human
viruses, such as Human Immunodeficiency Virus ("HIV"), without risk to human
life and efficacy testing of possible vaccines for prevention of disease or
drugs for therapy. The Company is currently investigating the use of this
technology in the production of human monoclonal antibodies.
To date, the Company has completed work under twelve contract research
agreements pursuant to which the Company used hu-PBL-SCID mice infected with HIV
to screen compounds developed by other pharmaceutical and biotechnology
companies for potential therapeutic efficacy in human AIDS and other
virus-induced diseases. The Company does not expect that long term future
revenue from contract research agreements to test compounds in hu-PBL-SCID mice
will be significant. Therefore, the Company does not intend to continue to
perform this research service to other pharmaceutical and biotechnology
companies.
In August, 1996, the Company entered into a five-year license agreement
with Southern Research Institute ("SRI") under which the Company granted SRI a
non-exclusive license to use its hu-PBL-SCID technology in performing certain
contract research testing. The Company does not anticipate significant revenues
under this agreement. The Company will continue to offer non-exclusive licenses
to the research community for the use of this technology.
OTHER RESEARCH & DEVELOPMENT
GENE SEQUENCE ANALYSIS (INDEL) TECHNOLOGY: Using a new drug discovery
method based on gene sequence analysis which the Company acquired through its
license agreement with MBI, Company scientists have identified several new
potential anti-inflammatory compounds which the Company believes may inhibit
very early stages of inflammation caused by activation of the complement system.
See "--Relationship with Medical Biology Institute." The Company believes that
there are no currently available therapeutic products which specifically inhibit
complement activation involved in a variety of human diseases including
autoimmune diseases, such as rheumatoid arthritis and lupus, adult respiratory
distress syndrome, certain neurological disorders, reperfusion injury following
heart attacks, and organ transplant rejection. Complement inhibitors can
potentially suppress inflammatory responses at earlier stages than other
anti-inflammatory drugs by blocking interactions between complement proteins.
Identifying potential peptide inhibitors capable of blocking interaction among
complement system proteins requires knowledge of the proteins' structures,
especially the location of binding sites involved in protein-protein
interactions. In the past, scientists have relied on time-intensive
three-dimensional techniques such as X-ray crystallography to determine
structures and possible binding sites. The
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INDEL technology appears to rapidly identify potential interactive binding sites
on proteins based on analysis of gene and protein sequences. Although research
efforts are at an early stage, Company scientists believe that the INDEL
technology has the potential to reduce the drug discovery process from years to
months. The Company is also using the INDEL technology to discover active sites
on a variety of clinically important proteins. Both U.S. and foreign patent
applications have been filed for the INDEL technology. The rights to these
patent applications belong to the Company through the MBI Agreement. See
"--Patents and Proprietary Rights."
The Company is also supporting research and development efforts on
other technologies developed at MBI including work related to IgE receptor
modulation, dendritic cell-based vaccines and hematopoietic stem cell
development. See "--Relationship with Medical Biology Institute."
Research and development efforts relating to the FFA, hu-PBL-SCID,
INDEL and other technologies are at an early stage. There can be no assurance
that efforts to develop commercial applications of these technologies will be
continued. In the event that the Company proceeds with efforts to develop
commercial applications of these technologies, it may require additional
financing either from collaborative arrangements with pharmaceutical or
biotechnology companies or from other sources to commercialize any such
applications. There can be no assurance that the required development and
testing will be successfully completed and result in safe and effective products
for human use, that the Company will be able to raise additional financing, or
that the Company will be able to enter into licensing or other collaborative
arrangements on favorable terms, if at all.
RELATIONSHIP WITH MEDICAL BIOLOGY INSTITUTE
In October 1988, the Company entered into an exclusive license
agreement with MBI, a non-profit research organization founded by David H. Katz,
M.D. Dr. Katz serves as President, Chief Executive Officer and a director of
MBI. MBI was incorporated in California in 1981 to conduct interdisciplinary
basic research in biological sciences. MBI currently conducts research on a
variety of projects funded predominantly by Federal grants. Certain of the
founders, scientific consultants, staff scientists and administrative personnel
of the Company are affiliated with and/or employed by MBI. See "--Human
Resources." The MBI Agreement was amended in 1993 and 1994.
Under the MBI Agreement, as amended, the Company has been granted an
exclusive worldwide license to all technology and know-how of MBI which had been
developed or which was under development as of the original date of the MBI
Agreement and a right of first preference to license future technology of MBI
through the year 2013 subject to restrictions, if any, in the funding agreements
by which MBI develops the technology. The Company expects that, if rights to
additional technologies developed at MBI are acquired pursuant to right of first
preference under the MBI Agreement, the Company will assume responsibility
including funding, for the commercial development efforts including remaining
research and development, clinical testing and regulatory approvals.
MBI currently leases office and laboratory facilities in La Jolla,
California. The lease expires in 1997. MBI intends to renew its lease under a 5
year renewal option which it exercised on May 31, 1996. MBI's laboratories are
designed for all phases of biological, biochemical, molecular biology and
immunochemical studies, including tissue culture facilities, walk-in
environmental rooms, facilities for recombinant DNA experimentation and modern
computer equipment. MBI maintains a modern vivarium for breeding and housing of
certain rodents in ample numbers to meet the needs of its researchers. The
Company entered into a sublease agreement with MBI for laboratory and
administrative facilities, equipment and services. The MBI Agreement provides
that MBI will perform research services for the Company at its request on a
fee-for-service basis not to exceed MBI's cost of providing such services,
including reasonable overhead and administrative costs. Excluded from the
computation of such fees are salaries of scientists also employed by the
Company, as well as
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the costs of facilities, equipment and administrative services already included
in the sublease agreement. See "--Human Resources," and "--Properties."
There can be no assurance that the Company will have the ability to
satisfy all of its obligations under the MBI Agreement, that the MBI Agreement
will result in the development of any additional products or technologies, that
MBI will be able to continue to receive adequate research funding, or that MBI
will be able to attract and/or maintain qualified scientific or administrative
personnel. Modification or termination of the MBI Agreement could have a
material adverse effect on the Company.
GOVERNMENT REGULATIONS
The manufacture and sale of pharmaceutical products under development
by the Company are subject to extensive regulation by the FDA in the United
States and by comparable regulatory agencies in certain foreign countries. The
FDA has established guidelines and safety standards which are applicable to the
preclinical evaluation and clinical investigation of therapeutic products and
stringent regulations which govern the manufacture and sale of such products.
The process of obtaining FDA approval for a new therapeutic product,
such as LIDAKOL or LMI, usually takes a significant amount of time and
substantial resources. The steps typically required before such a product can be
produced and marketed for human use include preclinical evaluation in vitro and
in animal models, the filing of an IND, the conduct of human clinical
investigations and the filing of an NDA which must be approved by the FDA.
Preclinical studies are conducted in vitro and in animal models in
order to gain preliminary information on the safety and efficacy of a drug. The
results of such preclinical studies are submitted to the FDA as part of the IND
application. After the sponsor files an IND, the sponsor may commence
investigating the drug in humans within 30 days unless otherwise notified by the
FDA.
The human clinical testing program for a drug generally involves three
phases. Phase 1 investigations are conducted on volunteers or, in the case of
certain anti-tumor agents, on volunteers with a terminal disease to determine
the maximum tolerated doses and any side effects of the product. Phase 2 studies
are conducted on a small number of patients with the disease or condition to be
studied, in order to determine whether the product demonstrates some level of
effectiveness against the disease and to determine the most effective doses and
schedule of administration. Phase 3 studies involve wide-scale, well controlled
investigations on patients who have the disease or condition for the purpose of
determining whether the drug is safe and effective in a rigorously controlled
trial. Data from Phase 1, Phase 2 and Phase 3 trials are submitted to the FDA in
an NDA. The NDA involves considerable data collection, verification and
analysis, as well as the preparation of summaries of the manufacturing and
testing processes, preclinical studies and clinical trials. The FDA's Center for
Drug Evaluation and Research must approve an NDA for a drug before the drug may
be marketed in the United States.
The Company is currently conducting Phase 3 clinical trials of LIDAKOL
as a topical treatment of oral herpes infections and two Phase 2 clinical trials
of LIDAKOL as a topical treatment for KS lesions and MC under an IND with the
FDA. See "--Research and Development - LIDAKOL." In addition, the Company is
conducting a Phase 1/Phase 2 human clinical trial of its LMI technology as a
treatment for late stage melanoma under an IND with the FDA. See "--Research and
Development-LMI." A Phase 1/Phase 2 trial combines the safety and efficacy
testing, described above, into one trial. No other IND applications have been
filed with the FDA or any other agency with respect to any of the Company's
other products or technologies.
At such time, if ever, that the Company begins marketing its products
for commercial sale in the United States, any manufacturing operations which may
be established within or outside the United States will be subject
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to rigorous regulation, including the need to comply with Federal Good
Manufacturing Practice Regulations. See "--Manufacturing and Marketing." The
Company may also be subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substance Control Act,
Export Control Act and other present and future laws of general application.
Additionally, the handling, care and use of laboratory mice, such as
the hu-PBL-SCID mice, and rats is subject to the Guidelines for the Humane Use
and Care of Laboratory Animals published by the NIH.
The Company intends to seek approval to market its products in foreign
countries which may have regulatory processes that materially differ from that
of the FDA. The Company anticipates that it will rely upon the pharmaceutical or
biotechnology companies to which it has licensed or may license its products, or
independent consultants, to seek approvals to market its products in foreign
countries. There can be no assurance that approvals to market any of the
Company's products can be obtained in any country. Approval to market a product
in any one foreign country does not necessarily indicate that approval can be
obtained in other countries.
PATENTS AND PROPRIETARY RIGHTS
The Company owns six United States and three European patents and has
additional foreign patent applications pending relating to the topical and
systemic uses of LIDAKOL and has been granted rights under certain United States
and foreign patents and patent applications relating to LIDAKOL held by a third
party. In addition, the Company has been granted rights to certain United States
and foreign patents and patent applications related to LMI, FFA, hu-PBL-SCID
technologies pursuant to the MBI Agreement. United States and Foreign patent
applications have been filed related to INDEL and other technologies pursuant to
the MBI Agreement. The MBI Agreement requires the Company to pay the costs of
pursuing and obtaining patents on the licensed technology and any improvements
thereto. See "--Research and Development" and "--Relationship with Medical
Biology Institute."
There can be no assurance that the claims in the pending patent
applications will issue as patents, that any issued patents will provide the
Company with significant competitive advantages, or that challenges will not be
instituted against the validity or enforceability of any patent owned by the
Company or, if instituted, that such challenges will not be successful. The cost
of litigation to uphold the validity and prevent infringement of the Company's
patents could be substantial. Furthermore, there can be no assurance that others
will not independently develop similar technologies or duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. There is no assurance that the Company's proposed technologies
will not infringe patents or other rights owned by others, licenses to which may
not be available to the Company. Finally, NIH regulations provide that if
federally-funded institutions do not timely pursue patent applications for
patentable inventions, the government can exercise its right to own such
inventions. Accordingly, the Company must monitor MBI's filing of patent
applications in order to protect the value of its license agreement with MBI.
The process for the approval of patent applications in foreign
countries may differ significantly from the process in the United States.
Approval in one country does not necessarily indicate that approval can be
obtained in other countries. The patent authorities in each country administer
that country's laws and regulations relating to patents independently of the
laws and regulations of any other country and the patents must be sought and
obtained separately.
In some cases, the Company may rely on trade secrets and
confidentiality agreements to protect its innovations. There can be no assurance
that trade secrets will be established, or that secrecy obligations will be
honored, or that others will not independently develop similar or superior
technology. To the extent that consultants, key employees or other third parties
apply technological information independently developed by
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34
them or by others to Company projects, disputes may arise as to the proprietary
rights to such information which may not be resolved in favor of the Company.
PRODUCT LIABILITY
The testing, marketing and sale of pharmaceutical products entails a
risk of product liability claims by consumers and others. Claims may be asserted
against the Company by end users of any of the Company's proposed products which
may be developed. The Company has obtained product liability insurance coverage
in the amount of $2,000,000 per incident and in aggregate for its clinical
trials. There is no assurance that such insurance will be sufficient to cover
all possible liabilities. In the event of a successful suit against the Company,
lack or insufficiency of insurance coverage could have a material adverse effect
on the Company. Further, certain distributors of pharmaceutical products require
minimum product liability insurance coverage as a condition precedent to
purchasing or accepting products for distribution. Failure to satisfy such
insurance requirements could impede the ability of the Company to achieve broad
distribution of its proposed products, which would have a material adverse
effect upon the business and financial condition of the Company.
MANUFACTURING AND MARKETING
The Company has established certain contractual manufacturing
relationships with respect to the manufacturing of LIDAKOL and LMI. The Company
does not have the resources to directly manufacture or directly market LIDAKOL
or any other products which it may develop on a large commercial scale. To
successfully commercialize LIDAKOL or any other products, it will be necessary
for the Company to enter into collaborative and licensing arrangements with
pharmaceutical or biotechnology companies to assist in funding development
costs, including the costs of clinical testing necessary to obtain regulatory
approvals, and costs of manufacturing and marketing. The Company believes that
these arrangements will be more effective in promoting and distributing its
products in view of the Company's limited resources and the extensive marketing
networks and large advertising budgets of established companies. Such
third-party arrangements, however, will reduce the Company's profit margin on
its products.
In November 1991, the Company entered into a licensing agreement with
Yamanouchi for the clinical development, manufacturing, marketing and
distribution of LIDAKOL in certain European and other countries. Pursuant to
this agreement the Company and Yamanouchi have jointly designed clinical trials
of LIDAKOL which were conducted by Yamanouchi to confirm clinical efficacy and
generate data to support regulatory approval for market introduction of LIDAKOL
for topical treatment of herpes in covered territories. See "--Research and
Development-LIDAKOL."
In July 1993, the Company entered into a licensing agreement with CTS
Chemical Industries, Ltd. ("CTS"), a subsidiary of CTS Ltd., located in Kiryat
Malachi, Israel, for the promotion of LIDAKOL in Israel, including obtaining
governmental approvals for its manufacture and distribution. Separate clinical
trials in Israel are not required for marketing approval. Accordingly, CTS will
be able to file for marketing approval based on the data generated in U.S. and
Canadian clinical trials, if successful, and European clinical trials. See
"--Research and Development-LIDAKOL."
In July 1994, the Company entered into a licensing agreement with
Boryung Pharmaceuticals Company, Ltd. located in Seoul, Korea, for the promotion
of LIDAKOL in the Republic of Korea, including obtaining governmental approvals
for its manufacture and distribution. In Korea, certain local clinical trials,
in addition to clinical data generated in the U.S., Canada and Europe, are
required in order to apply for marketing approval. To date, local clinical
trials have not been initiated. See "--Research and Development-LIDAKOL."
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35
In October 1994, the Company entered into a licensing agreement with
Grelan Pharmaceutical Company, Ltd. located in Tokyo, Japan, for the promotion
of LIDAKOL in Japan, including obtaining governmental approvals for its
manufacture and distribution. In Japan complete Phase 1, 2 and 3 clinical
trials, conducted in Japan, are required in order to apply for marketing
approval.
In February 1996, the Company entered into an exclusive license and
distribution agreement with Bristol-Myers Squibb Company ("BMS"), under which
BMS received the rights to manufacture, market and distribute LIDAKOL as a
topical treatment for oral herpes in the United States, Canada and all remaining
major territories throughout the world which were not licensed to other parties.
In November 1996, the Company reacquired the rights to market LIDAKOL in all
territories except the U.S., Canada, and Mexico and is now free to engage new
licensing partners in these reacquired territories which include China, South
and Central America, Australia and India, and portions of the Far East.
The Company is currently discussing licensing agreements for LIDAKOL in
the territories not covered by the above agreements with other pharmaceutical
companies. The Company may ultimately decide to establish its own manufacturing
and/or marketing capability, at least for certain products or certain
applications related thereto, in which case it would require substantial
additional funds and personnel. There can be no assurances, however, that the
Company will be able to finalize any substantial additional licensing
arrangements on favorable terms, if at all, or that the Company will be able to
raise additional financing necessary to develop and market LIDAKOL and any of
its other products.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including major
pharmaceutical companies and specialized biotechnology companies, are engaged in
activities similar to those of the Company. Many of the Company's competitors
have substantially greater financial and other resources, larger research and
development staffs and, unlike the Company, have significant experience in
pre-clinical testing, human clinical trials and other regulatory approval
procedures. In addition, colleges, universities, governmental agencies and other
public and private research organizations will continue to conduct research and
are becoming more active in seeking patent protection and licensing arrangements
to collect royalties for use of technology that they have developed, some of
which may be directly competitive with that of the Company. In addition, these
institutions compete with commercial firms, such as the Company, in recruiting
highly qualified scientific personnel. The Company does not have the resources
and does not intend to compete with major pharmaceutical companies on a wide
scale basis in the areas of clinical testing, regulatory approvals,
manufacturing and marketing. See "--Manufacturing and Marketing" and
"--Government Regulations."
The Company's first proposed product, LIDAKOL, if successfully
developed and approved for commercialization for the treatment of oral herpes,
will compete with acyclovir (Zovirax(R)), a product marketed by Glaxo-Wellcome
Corp., and famciclovir (Famvir(R)) and penciclovir (Denavir(R)), products
marketed by SmithKline Beecham, and over-the-counter preparations. In addition,
there are products and compounds being developed by other pharmaceutical and
biotechnology companies for treatment of oral herpes, including the
Glaxo-Wellcome product Valtrex(TM) (valaciclovir). There can be no assurance
that LIDAKOL, if successfully developed and approved for sale by the FDA, will
gain widespread acceptance by the medical community or consumer market.
The Company's LMI technology will compete with technologies being
developed by other companies and academic institutions which attempt to
stimulate an immune response. There can be no assurance that these competing
technologies will be less efficacious than LMI or that LMI will gain widespread
acceptance by the medical community.
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HUMAN RESOURCES
At December 31, 1996, the Company employed 44 persons, of whom 26 were
engaged in research and development activities and 18 in finance, business
development and administrative functions. The Company's staff includes 16
employees with Ph.D. or M.D. degrees. Eight of the Company's employees are also
employed by MBI (including Dr. Katz, the Company's President and Chief Executive
Officer). In addition the Company has consulting agreements with four senior
scientists at MBI. Pursuant to its arrangement with MBI, MBI may perform
research services at the request of the Company on a fee-for-service basis. See
"--Relationship with the Medical Biology Institute."
LEGAL PROCEEDINGS
There are no pending material legal proceedings to which the Company is
a party.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages at
December 31, 1996 are as follows:
Name Age Position
---- --- --------
David H. Katz, M.D.(1)(4) 53 President, Chief Executive Officer, Acting Chief
Financial Officer, Secretary and Director
Timothy R. Russell 54 Vice President of Business Development and
Licensing
Gerald J. Yakatan, Ph.D. 54 Vice President of Drug Development
Helmer P.K. Agersborg, Jr., Ph.D.(4) 68 Director
William N. Jenkins(1)(2) 68 Director
Kenneth E. Olson(1)(3) 60 Director
Daniel J. Paracka(2)(3)(4) 55 Chairman of the Board
Stuart A. Samuels(4) 55 Director
Sidney N. Towle, Jr.(3) 52 Director
- ---------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Executive Compensation and Stock Option Committee.
(4) Member of the Technology Review Committee.
Dr. Katz, M.D., has served as Chief Executive Officer and as a director
of the Company since its inception in 1988 and as its President from inception
through October 8, 1989 and from March 14, 1992 to the present. Since October,
1996, Dr. Katz has served as Vice President, Chief Financial Officer and
Secretary. Dr. Katz is the founder of MBI and has served as its President and
Chief Executive Officer since its inception in 1981 and as a director since
August 1990. He was also founder of QUIDEL Corporation, a San Diego based
biotechnology company ("QUIDEL"), serving as its Chairman of the Board and Chief
Executive Officer from inception in 1981 through March 1985, and as its Chairman
of the Board and Chief Scientific Officer through March 1988. Prior to founding
MBI and QUIDEL, Dr. Katz was Chairman of the Department of Cellular and
Developmental Immunology at Scripps Clinic and Research Foundation from 1976.
From 1971 to 1976, Dr. Katz was on the Faculty of Medicine at Harvard Medical
School. Dr. Katz has authored over 300 scientific publications, a comprehensive
textbook on Immunology and edited a half-dozen other books in his field. Dr.
Katz has served on the editorial boards of six major scientific journals, and
was elected to membership in the American Society for Clinical Investigation in
1977. He has been an advisor to the National Institutes of Health ("NIH"), and
served as Member of the Cancer Preclinical Program Project Research Committee of
the National Cancer Institute at the NIH, and on the Medical and Scientific
Advisory Board and the National Board of Trustees of the Leukemia Society of
America. Dr. Katz received his B.A. in Biology from the University of Virginia
in 1965 and
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his M.D. degree from Duke University Medical School in 1968. He trained in
Internal Medicine at Johns Hopkins and then served on the staff of NIH.
Mr. Russell has served as Vice President of Business Development and
Licensing since September, 1992. Mr. Russell also serves as President of
Carlsson-Rensselaer Corporation, a licensing and development consulting company
which he founded in 1990. Mr. Russell currently devotes less than 5% of his time
to the Carlsson-Rensselaer Corporation. Prior to 1990, Mr. Russell held various
positions in McNeil Pharmaceuticals, a subsidiary of Johnson & Johnson,
including serving as a board member (1983-1990), Vice President of Corporate
Relations (1986-1990), Vice President of Business Development (1983-1986) and
other business development and planning functions (1975-1983). Mr. Russell also
serves as a director of Scandipharm, Inc., a privately held pharmaceutical
company based in Birmingham, Alabama. Mr. Russell received a B.S. degree in
Engineering in 1964 from Rensselaer- Polytechnic Institute and an M.B.A. in 1987
from the Wharton School of the University of Pennsylvania.
Dr. Yakatan has served the Company on a half-time basis as Vice
President of Drug Development since July, 1995. Dr. Yakatan also currently
serves as an independent consultant to other biotechnology companies. From 1990
until 1995, Dr. Yakatan served as President and Chief Executive Officer of San
Diego based Tanabe Research Laboratories, USA, Inc., an inflammation drug
discovery research and development company. From 1987 until 1990, Dr. Yakatan
was Executive Vice President for Research and Development, and Vice President of
Pharmaceutical Development at Immunetech Pharmaceuticals, the predecessor
company to Tanabe Research. From 1980 to 1987, Dr. Yakatan held various
positions at Warner-Lambert Co., initially joining the
Warner-Lambert/Parke-Davis Pharmaceutical Research Division as Director,
Pharmokinetics/Drug Metabolism and later serving as Vice President of Product
Development for the Pharmaceutical Research Division. From 1972 to 1980, Dr.
Yakatan was on the faculty of the University of Texas at Austin and Assistant
Director of the Drug Dynamics Institute at the College of Pharmacy. Dr. Yakatan
has over 60 scientific and professional publications in the areas of
pharmokinetics, biopharmaceutics, analysis of drugs in biological fluids and
drug stability. He is a Fellow of the American Association of Pharmaceutical
Scientists and the American College of Clinical Pharmacology. Dr. Yakatan
received his B.S. in Pharmacy in 1963 and M.S. in Pharmaceutical Chemistry in
1965 from Temple University. In 1971, Dr. Yakatan received his Ph.D. in
Pharmaceutical Sciences from the University of Florida.
Dr. Helmer P. K. Agersborg, Jr., has served as a director of the
Company since October 17, 1992. Dr. Agersborg has been a pharmaceutical industry
consultant since 1990. Prior to 1990, Dr. Agersborg served as president of
Wyeth-Ayerst Research, a division of Wyeth Laboratories, Inc. (1987 to 1990), as
chief executive officer and a director of Afferon Corporation (September 1991 to
present), as president and a director of CholesteRex Corporation of St. Louis,
Missouri (November 1991 to March 1992), and as chief executive officer and a
director of Collagenex, Inc. (February 1992 to present). From 1958 to 1990 Dr.
Agersborg held various clinical and managerial positions with Wyeth
Laboratories, Inc.
Mr. William N. Jenkins has served as a director of the Company since
inception. Mr. Jenkins is retired, having served as an attorney specializing in
corporate and securities law and for more than 30 years. During that period he
was a partner of, and subsequently of-counsel to the law firm of Musick, Peeler
& Garrett, the former general counsel to the Company.
Mr. Kenneth E. Olson has served as a director of the Company since
inception. He serves as Chairman of the Board (since 1989) and, from December
1990 through February 1996, served as Chief Executive Officer of Proxima
Corporation, a publicly-held manufacturer of liquid crystal display desktop
projection systems for microcomputers. Mr. Olson was a founder of Topaz, Inc., a
publicly-held computer peripheral equipment firm, and served as its Chairman and
Chief Executive Officer from 1971 until 1987.
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39
Mr. Daniel J. Paracka has served as a director of the Company since
March 1992 and as Chairman of the Board of Directors since April 1993. Since
April 1991 he has served as a senior consultant for The Rand Group, a management
consulting firm based in Rome, Georgia. From January 1986 to May 1990 Mr.
Paracka was a vice president and chief financial officer of Rorer Group, Inc.,
and from May 1990 to March 1991 he was a senior advisor, to Rhone-Poulenc Rorer,
Inc., a pharmaceuticals firm. He earlier served as a vice president and
controller of the Revlon Health Care Group of Revlon, Inc. (November 1983 to
January 1986) and as controller of the U.S. Products Division of Revlon, Inc.
(February 1983 to November 1983).
Mr. Stuart A. Samuels has served as a director of the Company since
April 1992. Mr. Samuels has been an independent management and marketing
consultant to pharmaceutical firms since 1990. From 1986 to 1990, Mr. Samuels
was Senior Vice President of Rorer Pharmaceutical Corporation, a subsidiary of
Rorer Group, and General Manager of the Rorer Pharmaceuticals division and
President of the Dermik Laboratories division of Rorer Pharmaceuticals
Corporation. Prior to 1986 he held various positions in the Revlon Health Care
Group of Revlon, Inc. as Vice President, Marketing for International Operations
(1985 to 1986); Vice President, Marketing and Sales for USV/Armour (1981 to
1985); and Director, Marketing for Revlon Health Care Group (1980-1981).
Mr. Sidney N. Towle, Jr., has served as a director of the Company since
inception. Since June 1990, Mr. Towle has been a registered representative and
since January 1994, a Vice President of H.C. Wainwright & Co., Inc., a stock
brokerage firm in Boston, Massachusetts. From December 1988 until June 1990, he
was a registered representative for Homans, McGraw, Trull, Valeo and Company,
Inc., also a stock brokerage firm in Boston, Massachusetts. Prior thereto, he
was Vice-Chairman of J.T. Moran Financial Corp. ("Moran"). Mr. Towle founded
Buttonwood Securities Corporation of Massachusetts in 1974, where he remained
Chief Executive Officer until it was acquired by Moran in 1988. He was also Vice
President of John Magee, Inc., a wholly-owned subsidiary of Moran, from February
1977 until October 1988.
Dr. Katz may be deemed a "founder" of the Company within the meaning of
the Securities Act and the rules and regulations promulgated thereunder.
The Company has a classified Board of Directors whereby directors are
divided into two classes, Class I and Class II each of which serves for a term
of two years or until their successors are elected and qualified. The terms of
Class I Directors (currently Dr. Agersborg, Messrs. Jenkins and Samuels) expire
at the Company's 1998 Annual Meeting of Stockholders. The terms of the Class II
Directors (currently Dr. Katz, Messrs. Olson, Paracka and Towle) expire at the
Company's 1997 Annual Meeting of Stockholders. Officers serve at the discretion
of the Board of Directors subject to rights, if any, under contracts of
employment.
The California General Corporation Law permits a corporation through
its Articles of Incorporation to eliminate the personal liability of its
directors to the corporation or its stockholders for monetary damages for breach
of fiduciary duty of loyalty and care as a director, with certain exceptions.
The exceptions include a breach of the director's duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, improper declarations of dividends, and transactions from
which the directors derived an improper personal benefit. The Company's Articles
of Incorporation exonerates its directors from monetary liability to the fullest
extent permitted by this statutory provision. The Company has also purchased and
maintained directors and officers insurance coverage in the aggregate amount of
$5,000,000 since August 1992. The insurance policies indemnify the Company's
officers and directors against certain liabilities and expenses which they may
incur in their capacities as officers and directors of the Company.
The Company has been advised that it is the position of the Securities
and Exchange Commission that insofar as the foregoing provision may be invoked
to disclaim liability for damages arising under the Securities Act, that
provision is against public policy as expressed in the Securities Act and is
therefore unenforceable.
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SENIOR MANAGEMENT
The following sets forth information with respect to other members of
Management of the Company:
James E. Berg, has been Director of Clinical Affairs and Product
Development since August, 1992. Prior to joining the Company, Mr. Berg was
employed by QUIDEL Corporation, since 1984, where he held positions as Regional
Manager, Autoimmune Products, National Accounts Manager, Director of Materials,
Materials Manager and Product Manager. From 1979 to 1984, Mr. Berg was the Sales
Manager, Eastern Region at Bilstein Corporation. Mr. Berg received his B.A.
degree from the University of Wisconsin in 1973.
Carol O. Cowing, Ph.D., has been Director of Biological Sciences since
May 1996. Prior to joining the Company as a full-time employee, Dr. Cowing
served as a consultant to the Company since 1989. Dr. Cowing has been on the
scientific staff of the Medical Biology Institute since 1985, serving as an
Associate Member from 1985 to 1993 and as Member from 1993 to 1996. From 1979 to
1985, Dr. Cowing was an Assistant Professor of Pathology and a Member of the
Immunology Graduate Group at the University of Pennsylvania School of Medicine.
Prior to 1979, Dr. Cowing performed postdoctoral research in the Department of
Genetics at Washington University Medical School and the National Cancer
Institute of the National Institutes of Health. Dr. Cowing has over 40
publications in the field of Immunology and has served on several national
advisory committees of the National Institutes of Health, the National Science
Foundation and the U.S. Army Medical Research Breast Cancer Program. Dr. Cowing
received her B.A. from Stanford University in 1963 and a Ph.D. in Medical
Microbiology from Stanford University School of Medicine in 1973.
Laura E. Pope, Ph.D., has been Director of Preclinical Development
since May, 1996. Prior to May, 1996, Dr. Pope was Manager of Drug Metabolism and
Pharmacokinetics from October, 1994 and a Senior Scientist Company since
September, 1990. From 1987 to 1990, Dr. Pope served as a Research Associate in
the Division of Biochemistry, Department of Molecular and Experimental Medicine
at the Research Institute of Scripps Clinic. From 1984 to 1987, Dr. Pope was the
recipient of Postdoctoral Fellowship awards from the American Cancer Society and
National Cancer Institute while at Scripps. Dr. Pope received her B.A. degree
from the University of Kansas in 1978, and her Ph.D. in Biological Chemistry
from the University of California, Los Angeles, in 1983.
Jagadish Sircar, Ph.D., has been Director of Biological Chemistry since
May 1996. Dr. Sircar served as a full-time consultant to the Company from
November 1995. Prior to joining the Company, Dr. Sircar was Senior Vice
President of Research and Discovery at Biofor, Inc. from 1992 to 1995. From 1969
to 1991, Dr. Sircar held various positions at Warner Lambert/Parke Davis,
including the position of Research Fellow and Chairman of the
Immuno-Inflammatory Project Team. During his 22 years at Parke-Davis, Dr. Sircar
was responsible for the design and implementation of two significant
inflammation research programs and the discovery and preclinical development of
six compounds. Dr. Sircar is also responsible for the discovery of PNP
inhibitors, under development by Parke-Davis and BioCryst Pharmaceuticals, Inc.
Dr. Sircar holds in excess of 70 patents and has in excess of 74 scientific
publications relating to inflammation, asthma/allergy, cardiovascular diseases
and fungal infections. Dr. Sircar received his B.Sc., in 1956, his M.S. in 1958
and Ph.D. in Chemistry in 1964 from the University of Calcutta.
SENIOR SCIENTIFIC & REGULATORY PERSONNEL
The following sets forth information with respect to other Senior
Scientists, and Medical and Regulatory Staff of the Company:
Naghmana Z. Bajwa, M.D., has been Associate Medical Director since
October 1996. Prior to joining the Company, Dr. Bajwa was the Primary Clinical
Data Manager In Parexel International Corporation's
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41
Biostatistics and Data Management Division since 1995. From 1994 to 1995, Dr.
Bajwa was a Project Coordinator and Medical Consultant at VRG International.
Prior to that, Dr. Bajwa was the Supervising Medical Officer at the Rural Health
Center in Girjat, Pakistan from 1992 until 1994 and Medical Officer/Surgery at
the Mayo Hospital in Lahore, Pakistan from 1991 until 1992. Dr. Bajwa received
her Pre-Medical Degree at Lahore College in Lahore, Pakistan in 1983 and her
M.B., B.S. degree from Fatima Jinnah Medical College in Lahore, Pakistan in
1990.
Robert C. Davis, Ph.D., has been a Senior Scientist of the Company
since May, 1992. Before joining the Company, Dr. Davis was an independent
consultant from 1988. From 1976 to 1988 he was employed by the Battelle Columbus
Div. of Columbus, Ohio, concluding as a Senior Research Scientist at Battelle.
From 1969 to 1976, Dr. Davis was an Assistant Professor of Chemistry at the
University of Pennsylvania in Philadelphia. Dr. Davis received his B.A. from
University of Rochester in 1962 and his Ph.D. in Chemistry from the University
of California at Berkeley in 1967.
M.H. Khalil, Ph.D., has served as a Senior Scientist at the Company
since inception. From 1985 to 1989, Dr. Khalil was Associate Director of
Diagnostic R & D at QUIDEL Corporation where he managed the research and
development of rapid, solid phase enzymatic and nonenzymatic visual
immunoassays. From 1979 through 1985, Dr. Khalil was Manager and Senior
Scientist at International Diagnostic Technology ("IDT") where he was involved
in the research and development of immunofluorescence instrumentation and
reagents. From 1978 through 1979, Dr. Khalil was a Research Scientist at SYVA
Diagnostics working on the research and development of diagnostic equipment and
reagents for therapeutic drug monitoring. From 1975 through 1978, Dr. Khalil did
his postdoctoral training at North Dakota State University and California State
University of Long Beach. Dr. Khalil received a Ph.D. in Organic Chemistry from
the University of North Dakota.
John F. Marcelletti, Ph.D., has been a Senior Scientist at the Company
since inception and since July, 1993, has been Head of Experimental Medicine.
Before joining the Company, Dr. Marcelletti served as an Assistant Member at the
Medical Biology Institute from 1982. During that period, he was involved in the
study of the role of IgE antibodies in allergic and arthritic diseases. Also
during this time period, he was employed as a scientific consultant to the
therapeutics group of QUIDEL. Dr. Marcelletti received his Ph.D. from Wayne
State University School of Medicine, Department of Immunology and Microbiology,
in 1979. He received his M.B.A from Western Michigan University in 1981.
Phillip R. Morrow, Ph.D., has been a Senior Scientist at the Company
since July 1991. Prior to joining the Company, Dr. Morrow was the Director of
Research and Technical Services at Imdyne, Inc., where he was responsible for
research and technical support involving commercial and scientific applications
of immunodeficient rodents. From 1989 to 1990, Dr. Morrow was Project Manager
and Senior Scientist at QUIDEL Corporation where he supervised the development
of two in vitro diagnostic tests for antibodies to H. pylori, an infectious
organism involved in gastric ulcer pathogenesis. From 1987 to 1989, Dr. Morrow
was Manager, Clinical Trials and Manager, Hybridoma Facility at Cytotech, Inc.,
where he supervised production and purification of monoclonal antibodies and the
procurement and testing of patient samples for FDA submission. From 1981 to
1986, Dr. Morrow was a Research Fellow and Senior Research Associate in the
Department of Immunology at the Research Institute of Scripps Clinic. Dr. Morrow
received a B.A. degree in Mathematics in 1971 from the University of California,
Riverside; his M.S. degree and his Ph.D. degree in Genetics in 1974 and 1979,
respectively, from the University of California, Davis, where he also completed
his postdoctoral training from 1979 to 1981.
In April 1993, the Company established a Clinical Development Advisory
Panel consisting of individuals with expertise spanning the major disciplines
related to the Company's clinical development programs. Individuals selected to
this panel will be available to the Company for advice on clinical development
strategy, protocol design and design and data accumulation and analysis.
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42
EXECUTIVE COMPENSATION
Summary of Compensation
The following executive compensation disclosures reflect all
compensation awarded to, earned by or paid to the named executive officers and
directors of the Company for fiscal 1996, fiscal 1995 and fiscal 1994. The named
executive officers ("Executive Officers") are the Company's Chief Executive
Officer ("CEO"), regardless of compensation level, and the other executive
officers who received in excess of $100,000 in total annual salary and bonus for
fiscal 1996.
SUMMARY COMPENSATION TABLE
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Securities
Restricted Underlying
Name and Principal Other Annual Stock Options/ LTIP
Position Year Salary ($)(2) Bonus ($) Compensation ($) Awards ($)(3) SARs (#)(4) Payouts ($)(5)
- ----------------------- ---- ---------- --------- ---------------- ---------- -------- -----------
David H. Katz(1) 1996 228,000 --- --- --- --- ---
President and Chief 1995 228,000 --- --- --- 30,000 ---
Executive Officer 1994 219,817 --- --- --- 20,000 ---
Timothy R. Russell 1996 168,046 --- --- --- 25,000 ---
Vice President of 1995 161,949 --- --- --- 15,000 ---
Business Development 1994 157,269 --- --- --- 70,000 ---
and Licensing
Michael H. Lorber (6) 1996 128,870 --- --- --- 25,000 ---
Vice President and 1995 48,077 --- --- --- --- ---
Chief Financial Officer 1994 96,006 --- --- --- --- ---
Gerald J. Yakatan 1996 104,723 --- --- --- 25,000 ---
Vice President of 1995 21,154 --- --- --- 100,000 ---
Drug Development
All Other
Compensation
Name and Principal ------------
Position ($)
- ----------------------- ---
David H. Katz(1) ---
President and Chief ---
Executive Officer ---
Timothy R. Russell ---
Vice President of ---
Business Development ---
and Licensing
Michael H. Lorber (6) ---
Vice President and ---
Chief Financial Officer ---
Gerald J. Yakatan ---
Vice President of ---
Drug Development
(1) See "Employment Contracts and Termination of Employment Agreements."
(2) Amounts shown include compensation earned and received by executive
officers that exceeded $100,000 in the fiscal year. No amounts were
earned but deferred at the election of those officers.
(3) The Company has not made any Restricted Stock Awards.
(4) The Company has not made any grants of SARs.
(5) The Company has not made any Long Term Incentive Plan ("LTIP") Payouts.
(6) Mr. Lorber served the Company as Vice President and Chief Financial
Officer from August 31, 1988 to July 22, 1994 and from May 15, 1995
until October 11, 1996. Mr. Lorber is no longer employed by the
Company.
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43
Stock Option Grants
The following table shows all individual grants of stock options to the
named executive officers during fiscal 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Percent of
Total Potential Realizable Value at
Options/SARs Exercise Assumed Annual Rates of
Granted to or Base Appreciation For
Options/SARs Employees in Price Expiration Option Terms(3)
Name Granted (#) Fiscal Year ($/SH)(2) Date 5% 10%
- ---- ----------- ------------- ---------- ------ ------------ --------
Timothy R. Russell 25,000(1) 10% 2.50 03/16/06 $46,185 $117,040
Vice President of
Business
Development and
Licensing
Michael H. Lorber 25,000(4) 10% 2.50 03/16/06 $46,185 $117,040
Vice President
and Chief
Financial Officer
Gerald J. Yakatan 25,000(1) 10% 2.50 03/16/06 $46,185 $117,040
Vice President of
Drug Development
- ---------------------------
(1) Vesting may be accelerated and the options may be repriced at the
discretion of the Board. In the event of a specified corporate
transaction such as a dissolution, merger or other reorganization of
the Company in which more than 50% of the Company's stock is exchanged,
vesting on such options shall be accelerated unless the surviving
corporation assumes the options outstanding, substitutes similar rights
for outstanding options, or the options shall continue.
(2) Market price on date of grant.
(3) The potential realizable value is calculated by assuming that the stock
price on the date of grant appreciates at the indicated rate,
compounded annually, for the entire term of the option and that the
option is exercised and sold on the last day of its term at this
appreciated stock price.
(4) Such options expired October 11, 1996.
-41-
44
Option Exercises
Set forth below is information with respect to exercises of Stock
Options by the Executive Officers during fiscal 1996 and the fiscal year-end
value of all unexercised Stock Options held by such persons.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS HELD AT FISCAL IN-THE-MONEY OPTIONS
YEAR-END (#) AT FISCAL YEAR-END ($)(1)
SHARES
ACQUIRED ON VALUE
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
David H. Katz --- --- 375,000 --- 675,000 ---
Timothy R. Russell --- --- 110,000 --- 55,000 ---
Gerald J. Yakatan --- --- --- --- --- ---
Michael H. Lorber --- --- --- --- --- ---
- ---------------------------
(1) Based upon the closing bid price of the Company's Common Stock of
$1.8125 quoted on the NASDAQ National Market System on September 30,
1996.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
In April 1993, the Company entered into an employment agreement with
David H. Katz, M.D. (the "1993 Employment Agreement"), which replaced the prior
employment agreement between Dr. Katz and the Company dated September 9, 1988,
as amended on September 19, 1989 and October 8, 1989, respectively (the "1988
Employment Agreement"). The 1993 Employment Agreement provides that Dr. Katz's
employment with the Company shall be at an "at will" basis, subject to the
discretion of the Board, for an annual base salary of $207,692. Dr. Katz's
salary is reviewed by the Compensation Committee of the Board of the Company
from time to time to determine, within the Board's discretion, whether an
increase is appropriate. In March 1994, the Board increased Dr. Katz's annual
base salary to $228,000. In addition, Dr. Katz's base salary increases or
decreases in proportion to any future mutually agreed upon increase or decrease
in the percentage amount of time Dr. Katz allocates to the Company (currently
75%) compared with MBI (currently 25%).
In the event that Dr. Katz is terminated for any reason other than
cause, Dr. Katz will receive a severance payment in the amount of his base
salary. Dr. Katz is also entitled to all benefits generally available to the
Company's employees.
The 1993 Employment Agreement further provides that, except for Dr.
Katz's involvement with MBI, Dr. Katz's services shall be exclusive to the
Company. The terms of the 1993 Employment Agreement prohibit Dr. Katz from
engaging in any other businesses or providing services of a business or
commercial nature to any other person or organization unless such activity is
fully disclosed to the Company and approved by the Company's Board of Directors.
-42-
45
CERTAIN RELATIONSHIPS AND TRANSACTIONS
David H. Katz, President and CEO of the Company, is also President and
CEO of MBI. In October 1988, the Company and MBI entered into a twenty-year
licensing agreement (the "MBI Agreement"), which granted the Company an
exclusive, worldwide license to all existing technology of MBI and a right of
first preference to license future technology developed at MBI. The MBI
Agreement was amended in 1993 and 1994. Under the MBI Agreement, as amended, the
Company has been granted an exclusive worldwide license to all technology and
know-how of MBI which had been developed or which was under development as of
the original date of the MBI Agreement and a right of first preference to
license future technology of MBI through the year 2013, subject to restrictions,
if any, in the funding agreements by which MBI develops the technology. The
Company expects that, if rights to additional technologies developed at MBI are
acquired pursuant to right of first preference under the MBI Agreement, the
Company will assume responsibility, including funding, for the commercial
development efforts including remaining research and development, clinical
testing and regulatory approvals.
The Company and MBI have also entered into agreements for the leasing
of facilities and equipment and the use of certain research and administrative
services. During fiscal 1996, the Company incurred charges to MBI totaling
$428,981 and $218,867, respectively, under these agreements.
-43-
46
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's voting shares (Class A Shares and Class B
Shares) as of January 3, 1997 by: (i) each director, nominee and named executive
officer of the Company; (ii) all current executive officers and directors of the
Company as a group; and (iii) all persons known by the Company to own
beneficially 5% or more of the outstanding shares or voting power of the
Company's voting securities. The table is based upon information supplied by
directors, officers and principal stockholders. Unless otherwise indicated, each
of the listed persons has sole voting and sole investment power with respect to
the Shares beneficially owned, subject to community property laws where
applicable.
Amount and
Nature of
Name and Address of Beneficial Beneficial Percent of Percent of Total
Title of Class Owner or Identity of Group (1) Ownership(2) Class (2) Voting Power (3)
- ---------------------------- ------------------------------------ --------------- ----------------- --------------------
Class A Common Stock David H. Katz (4) (5) 3,414,673 8.84% 15.51%
Class B Common Stock 619,000 92.66%
Class A Common Stock William N. Jenkins (6) (7) 257,000 * *
Class B Common Stock 16,000 5.35%
Class A Common Stock Kenneth E. Olson (8) (9) 203,400 * *
Class B Common Stock 16,000 5.35%
Class A Common Stock Daniel J. Paracka (10) 35,000 * *
Class B Common Stock -0- -0-
Class A Common Stock Stuart A. Samuels (11) 25,000 * *
Class B Common Stock -0- -0-
Class A Common Stock Sidney N. Towle, Jr. (12) 157,000 * *
Class B Common Stock -0- -0-
Class A Common Stock Helmer P.K. Agersborg, Jr. (13) 50,000 * *
Class B Common Stock -0- -0-
Class A Common Stock Timothy R. Russell (14) 164,735 * *
Class B Common Stock -0- -0-
Class A Common Stock Gerald J. Yakatan (15) 54,336 * *
Class B Common Stock -0- -0-
Class A Common Stock All officers and directors as a 4,361,144 11.03% 17.69%
Class B Common Stock group (nine persons)(16) (17) 651,000 93.00%
- ---------------------------
* Percentage of shares beneficially owned does not exceed 1%.
(1) C/O LIDAK Pharmaceuticals, 11077 North Torrey Pines Road, La Jolla,
California 92037.
(2) Based upon 36,232,136 shares of Class A Common Stock and 283,000 shares
of Class B Common Stock outstanding as of January 3, 1997, plus any
shares of Common Stock under options and warrants or subject to
conversion rights of the particular individual or, in the case of all
directors and executive officers, as a group. Includes all shares of
Common Stock under options, warrants, or other conversion rights
exercisable or convertible within 60 days of January 3, 1997.
-44-
47
(3) Percentage of voting power is based upon total cumulative voting power
of Class A Common Stock and Class B Common Stock combined as of January
3, 1997 Each share of Class A Common Stock entitles the holder to one
vote per share on matters to be voted on by stockholders; each share of
Class B Common Stock entitles the holder to five votes per share. The
percentage ownership and voting power for each stockholder is
calculated by assuming the exercise or conversion of all warrants,
options exercisable within 60 days of January 3, 1997 and convertible
securities held by such holder and the nonexercise and nonconversion of
all other outstanding warrants, options and convertible securities.
(4) Includes options to purchase 1,866,470 shares of Class A Common Stock
and 480,006 shares of Class A Common Stock issuable upon exercise of
Class D Warrants. Also includes options to purchase 41,194 shares of
Class A Common Stock held by a member of his family. Does not include
options to purchase 10,530 shares of Class A Common Stock and options
to purchase 9,806 shares of Class A Common Stock held by a member of
his family which are not exercisable within 60 days of January 3, 1997.
(5) Includes options to purchase 375,000 shares of Class B Common Stock
granted under Dr. Katz' employment agreement and options to purchase
10,000 shares of Class B Common Stock held by a member of his family.
(6) Includes options to purchase 257,000 shares of Class A Common Stock.
Does not include options to purchase 20,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
(7) Includes options to purchase 16,000 shares of Class B Common Stock.
(8) Includes options to purchase 167,000 shares of Class A Common Stock.
Does not include options to purchase 20,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
(9) Includes options to purchase 16,000 shares of Class B Common Stock.
(10) Includes options to purchase 35,000 shares of Class A Common Stock.
Does not include options to purchase 20,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
(11) Includes options to purchase 25,000 shares of Class A Common Stock.
Does not include options to purchase 20,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
(12) Includes options to purchase 157,000 shares of Class A Common Stock.
Does not include options to purchase 20,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
(13) Includes options to purchase 50,000 shares of Class A Common Stock.
Does not include options to purchase 20,000 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
(14) Includes options to purchase 164,735 shares of Class A Common Stock.
Does not include options to purchase 30,265 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
-45-
48
(15) Includes options to purchase 54,336 shares of Class A Common Stock.
Does not include options to purchase 70,664 shares of Class A Common
Stock which are not exercisable within 60 days of January 3, 1997.
(16) Includes 1,063,400 shares of Class A Common Stock and options and
warrants to purchase an aggregate of 3,714,741 shares of Class A Common
Stock. Does not include options to purchase 241,265 shares of Class A
Common Stock which are not exercisable within 60 days of January 3,
1997.
(17) Includes 234,000 shares of Class B Common Stock and options to purchase
417,000 shares of Class B Common Stock.
-46-
49
SELLING SECURITYHOLDERS
The following table sets forth the names of Selling Stockholders who
are known as of the date of this Prospectus to be eligible to resell the Common
Stock reserved for issuance upon conversion or exercise of the Securities. The
following table also sets forth the number of shares of Class A Common Stock
issuable upon conversion or exercise of the Securities held by the Selling
Stockholders as of the date of this Prospectus. Moreover, the amounts of common
stock listed below assumes that all such shares currently held in the form of
options are exercised and are subsequently sold, regardless of whether any such
individuals have a present intent to sell.
NUMBER OF SHARES OF CLASS A
COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF
NAME THE SECURITIES
============================================================ =======================================================
Jeffrey S. Aaron 40,000
Joseph Arsenault 142,833
Virginia Bahler 13,333
Don Baker 13,333
Oscar Boonshoft 39,999
Morton H. Brown 53,334
Harold R. Cunningham 66,667
Christian Flechter 13,333
Gregory Gomes 80,001
Robert B. Grindley 26,667
Robert P. Hauptfuhrer 46,667
Peter W. Janssen 28,334
Irwin D. Kaplan 20,000
David H. Katz (1) 1,440,009
James R. Kelleher 13,333
Allan R. Koretz 26,667
Duane R. Kullberg 106,668
Irwin H. Markowitz, Trustee Irwin H.
Markowitz DDS Retirement Fund 26,667
John W. Marriott III 34,500
Richard U. Mascera 13,333
-47-
50
NUMBER OF SHARES OF CLASS A
COMMON STOCK ISSUABLE UPON
CONVERSION OR EXERCISE OF
NAME THE SECURITIES
============================================================ =======================================================
Ernest E. Miller 80,001
Alfred B. Muirhead, Jr. 13,333
James T. O'Hara 26,667
Prudential Securities 13,333
Wallace O. Raubenheimer 106,668
William Richmond 40,000
Thomas C. Rowan, Trustee for the benefit of
Thomas C. Rowan and Gail D. Rowan 133,335
Michael I. Ruxin 13,333
Victor Shamieh 6,999
Samir Shamieh 6,666
Michael Silverman 26,667
Donna K. Vito 13,333
J. Edward Willard 80,001
Porter J. Womeldorff 13,333
Robert A. Woods 13,333
Richard F. & Barbara A. Zaccagni 13,333
TOTAL 2,846,013
- ---------------------------
(1) Dr. Katz is a director and President and Chief Executive Officer of the
Company. The amount listed does not include options to 1,877,000 shares
of Class A Common Stock and 375,000 shares of Class B Common Stock; nor
does the amount include options to purchase 51,000 shares of Class A
Common Stock and 10,000 shares of Class B Common Stock held by a member
of his family. See "Principal Stockholders."
To the Company's knowledge, except for David H. Katz, none of the
foregoing persons, after the sale of all shares of Class A Common Stock offered
hereby, would own more than 1% of the aggregate of the Company's outstanding
shares of Class A Common Stock and Class B Common Stock at December 31, 1996, as
adjusted to include the 1,728,354 shares of Class A Common Stock to be issued
upon the conversion and exercise of the Securities. Specifically, Dr. Katz
beneficially owned 4,033,673 shares of Common Stock prior to this Offering
(10.27% of the aggregate outstanding Common Stock), and will own 2,593,664
shares of Common Stock after this Offering (6.40% of the aggregate outstanding
Common Stock).
-48-
51
PLAN OF DISTRIBUTION
The Class A Common Stock issuable to the Selling Stockholders upon
conversion or exercise of the Securities may be offered and sold from time to
time as market conditions permit in the over-the-counter market, or otherwise,
at prices and terms then prevailing or at prices related to the then current
market price, or in privately negotiated transactions. At the date of this
Prospectus, no underwriting arrangements have been entered into by the Selling
Securityholders. The shares offered hereby may be sold by one or more of the
following methods, without limitation: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers; and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from Selling Securityholders in amounts to be
negotiated. Such brokers and dealers, any other participating brokers or
dealers, and the Selling Securityholders, may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales and any
profits realized or commissions received may be deemed underwriting
compensation.
The Company will pay certain expenses incident to this Offering and
sale of the securities offered hereby to the public by the Selling
Securityholders. The Company will not pay for, among other expenses, commissions
and discounts of underwriters, dealers or agents or the fees and expenses of
counsel for the Selling Securityholders, if any.
-49-
52
DESCRIPTION OF SECURITIES
COMMON STOCK
General. The Company is authorized to issue 99,490,000 shares of Class
A Common Stock, no par value, 36,225,736 of which were issued and outstanding at
December 31, 1996, and 510,000 shares of Class B Common Stock, no par value,
283,000 of which were issued and outstanding at December 31, 1996.
Holders of Class A Common Stock and Class B Common Stock have equal
rights to receive dividends when, as and if declared by the Board of Directors
out of funds legally available therefor.
Holders of Class A Common Stock have one vote for each share held of
record and holders of Class B Common Stock have five votes for each share held
of record on all matters to be voted on by the stockholders. The Class A Common
Stock and Class B Common Stock vote as one class on all matters requiring
stockholder approval except that under California law the affirmative vote of a
majority of the outstanding shares of Class A Common Stock and a majority of the
outstanding shares of Class B Common Stock, each voting separately as a class,
is required for any amendment to the Company's Articles of Incorporation which
would alter or change the powers, preferences or special rights of, or increase
or decrease the number of shares of, or create a new class or series of shares
having rights, preferences or privileges prior to, each respective class of the
Company's common stock.
Holders of both classes of Common Stock are entitled upon liquidation
of the Company to share ratably in the net assets available for distribution
subject to the rights, if any, of holders of any preferred stock then
outstanding. Shares of both classes of Common Stock are not redeemable and have
no preemptive or similar rights. The Class B Common Stock may be converted into
Class A Common Stock on a share for share basis at any time at the election of
the holder and will automatically convert into Class A Common Stock upon sale or
transfer other than to another holder of Class B Common Stock.
Dividend Policy. The Company does not anticipate paying cash dividends
on its common stock in the foreseeable future.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock containing such rights, preferences, privileges and restrictions as the
Company's Board of Directors may determine.
WARRANTS
Class D Warrants. The Class D Warrants entitle the respective holders
thereof to purchase one share of Class A Common Stock at an exercise price of
$1.50 from the date of issuance until 5:00 p.m., New York City Time, through
February 26, 1997. The Class D Warrants are redeemable by the Company on 30
days' written notice at a redemption price of $0.05 per Class D Warrant, if the
closing price of the Class A Common Stock for any 30 consecutive trading days
ending within 15 days of the notice of redemption averages in excess of $3.45
per share. All Class D Warrants must be redeemed if any are redeemed. As of
December 31, 1996, 1,728,354 Class D Warrants were outstanding.
General. The Class D Warrants were issued pursuant to warrant
agreements under which American Stock Transfer & Trust Company, New York, New
York serves as warrant agent. The warrants are evidenced by warrant certificates
in registered form. The warrants provide for adjustment of the exercise price
and for a
-50-
53
change in the number of shares issuable upon exercise or market price
to protect holders against dilution in the event of a stock dividend, stock
split, combination or reclassification of the common stock or upon issuance of
shares of common stock at prices lower than the warrant exercise price then in
effect other than issuances upon exercise of options granted to employees,
directors and consultants to the Company, or options to be granted under the
Company's stock option plan.
The exercise prices of all outstanding Warrants were determined by
negotiation between the Company and its previous underwriters, and should not be
construed to be predictive of or to imply that any price increases in the
Company's securities will occur or be sustained.
A warrant may be exercised upon surrender of the warrant certificate on
or prior to its expiration date (or earlier redemption date) at the offices of
American Stock Transfer & Trust Company, New York, New York, with the form of
"Election to Purchase" on the reverse side of the warrant certificate completed
and executed as indicated, accompanied by payment of the full exercise price (by
certified or bank check payable to the order of the Company) for the number of
shares with respect to which the warrant is being exercised. Shares issued upon
exercise of warrants and payment in accordance with the terms of the warrants
will be fully paid and nonassessable.
The Company has agreed not to solicit exercises of the Class D Warrants
other than through Whale Securities Co., L.P. ("Whale"). Upon exercise of the
Class D Warrants, the Company will pay Whale a fee of 5% of the aggregate
exercise price, if (i) the market price of the Company's Class A Common Stock on
the date the warrant is exercised is greater than the then exercise price of the
warrant; (ii) the exercise of the warrant was solicited by a member of the
National Association of Securities Dealers, Inc.; (iii) the warrant is not held
in a discretionary account; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the warrant
and (v) the solicitation of exercise of the warrant was not in violation of Rule
10b-6 promulgated under the Securities Exchange Act of 1934, as amended.
No warrants confer upon any warrantholder any voting or other rights of
a stockholder of the Company. Upon notice to the warrantholders, the Company has
the right to reduce the exercise price or extend the expiration date of the
warrants.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York currently
serves as transfer agent for the Common Stock and warrant agent for the Class D
Warrants.
REGISTRATION RIGHTS
The Company has registered under the Securities Act the shares of Class
A Common Stock underlying the Class D Warrants pursuant to registration rights
previously granted. The Company has agreed to use its best efforts to keep such
registration effective until all of such shares of Class A Common Stock are sold
pursuant to such registration, or an opinion of counsel satisfactory to the
Company is received that the shares may be sold under the provisions of Rule
144(k) under the Securities Act.
In March 1994, the Company also registered under the Securities Act the
Class A Common Stock underlying certain options granted in July 1993 ("July 1993
Options") on a Form S-3 Registration Statement. The Company has agreed to keep
such registration statement effective during the ten year term of the exercise
of the July 1993 Options.
-51-
54
In January 1996, the Company also registered 5,513,018 shares of Class
A Common Stock that were issued in connection with the conversion of the Notes
in the amount of $13,500,000 due in 1997 and 1998, plus 481,651 shares of Class
A Common Stock sold to an investor as part of the placement of the Notes.
LEGAL MATTERS
The validity of the securities offered hereby have been passed upon for
the Company by Musick, Peeler & Garrett, San Diego, California.
EXPERTS
The financial statements of the Company as of September 30, 1995 and
1996 and for each of the three years in the period ended September 30, 1996 and
for the period from August 31, 1988 (inception) to September 30, 1996, included
in the Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein (which report expresses an
unqualified opinion and includes an explanatory paragraph referring to the
status of the Company as a development stage enterprise), and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a Registration Statement on Form S-1 under the Securities Act,
covering the securities offered by this Prospectus. For further information with
respect to the Company and the securities offered, reference is made to the
Registration Statement and the exhibits filed as part thereof, which may be
examined without charge and copies of such material can be obtained at
prescribed rates from the Public Reference Section maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this
Prospectus as to the contents of any contract or other document referred to are
not necessarily complete. In each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, files
reports and other information with the Commission. Such reports and other
information can be inspected and copies of such material can be obtained upon
payment of prescribed rates at the following public reference facilities
maintained by the Commission: 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048, 5757 Wilshire Boulevard,
Suite 500 East, Los Angeles, California 90036-3648 and Everett McKinley Dirksen
Building, 219 South Dearborn Street, Room 1204, Chicago, Illinois 60604.
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55
LIDAK PHARMACEUTICALS
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Balance Sheets at September 30, 1995 and 1996 F-3
Statements of Operations for the years ended
September 30, 1994, 1995 and 1996, and the period
August 31, 1988 (inception) to September 30, 1996 F-4
Statements of Stockholders' Equity (Deficit) for the
period August 31, 1988 (inception) to
September 30, 1996 F-5
Statements of Cash Flows for the years
ended September 30, 1994, 1995 and 1996, and the period
August 31, 1988 (inception) to September 30, 1996 F-9
Notes to Financial Statements F-11
F-1
56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of LIDAK Pharmaceuticals:
We have audited the accompanying balance sheets of LIDAK Pharmaceuticals (a
development stage enterprise) as of September 30, 1995 and 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended September 30, 1996 and for the
period August 31, 1988 (inception) to September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of LIDAK Pharmaceuticals at September 30, 1995
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended September 30, 1996 and the period August 31,
1988 (inception) to September 30, 1996 in conformity with generally accepted
accounting principles.
The Company is in the development stage as of September 30, 1996. As discussed
in Note 1 to the financial statements, the Company has not yet completed product
development, obtained required regulatory approvals or verified the market
acceptance and demand for its products.
DELOITTE & TOUCHE LLP
San Diego, California
November 6, 1996, (December 20, 1996 as to Note 6)
F-2
57
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
- --------------------------------------------------------------------------------
ASSETS 1995 1996
CURRENT ASSETS:
Cash and cash equivalents $ 4,244,575 $ 13,347,508
Short-term investments 5,791,152 7,026,502
Interest receivable 54,751 338,403
Prepaid and other 182,931 825,924
------------ ------------
Total current assets 10,273,409 21,538,337
PROPERTY - at cost (less accumulated depreciation of $178,729 and $266,668) 241,486 275,972
PATENT COSTS (less accumulated amortization of $18,719 and $39,654) 438,883 581,770
DEBT ISSUE COSTS 185,015
OTHER ASSETS 265 265,785
------------ ------------
TOTAL $ 10,954,043 $ 22,846,879
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible notes payable $ 5,721,087
Accounts payable $ 1,520,231 1,329,418
Accrued compensation and payroll taxes 168,885 206,445
Due to MBI 16,327 21,810
Deferred revenue 500,000
------------ ------------
Total current liabilities 1,705,443 7,778,760
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, 6, 7, and 10)
STOCKHOLDERS' EQUITY:
Common stock - no par value:
Class A - 99,490,000 shares authorized;
29,847,064 and 34,054,022 shares issued and outstanding 37,235,484 49,216,569
Class B - 510,000 shares authorized; 343,000 and 283,000 shares
issued and outstanding (convertible to Class A Common Stock) 179,073 147,748
Deficit accumulated during the development stage (28,165,957) (34,296,198)
------------ ------------
Total stockholders' equity 9,248,600 15,068,119
------------ ------------
TOTAL $ 10,954,043 $ 22,846,879
============ ============
See notes to financial statements.
F-3
58
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996, AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
-------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
REVENUES:
License fees/Contract research $ 322,000 $ 3,016,800 $ 3,982,625
Federal SBIR grants 211,875 58,000 798,777
Interest and other 482,844 $ 884,589 1,083,238 3,219,614
------------ ------------ ------------ ------------
Total revenues 1,016,719 884,589 4,158,038 8,001,016
------------ ------------ ------------ ------------
EXPENSES:
Research and development 3,115,602 7,715,807 4,576,426 24,388,809
General and administrative 2,559,781 3,341,783 2,745,166 14,276,342
Cost of contract research 154,677 533,270
Interest 2,966,687 3,098,793
------------ ------------ ------------ ------------
Total expenses 5,830,060 11,057,590 10,288,279 42,297,214
------------ ------------ ------------ ------------
NET LOSS $ (4,813,341) $(10,173,001) $ (6,130,241) $(34,296,198)
============ ============ ============ ============
NET LOSS PER SHARE $ (0.19) $ (0.35) $ (0.19)
============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING 25,166,958 29,338,418 32,072,944
============ ============ ============
See notes to financial statements.
F-4
59
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK COMMON
STOCK
----------------------------------- -----------------------------------------------
SERIES A SERIES B CLASS A CLASS B
------ ------ ------ ------ -------- ---------- ------ ------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ -------- ---------- ------ ------
BALANCE, AUGUST 31, 1988 (INCEPTION)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share 4,235,000 $ 52,937
Issuance of preferred stock in October
1988 for license and other rights 2,000,000 $1
Issuance of common stock for cash in
October 1988 at $.05 per share 80,000 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 80,000 4,000
Issuance of stock options effective in
August 1989 to purchase 600,000 shares
of Class B common stock at $.0125
per share (with an estimated fair market
value of $.05 per share) 22,500
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share) 400,000 20,000
Collection on notes receivable
Net loss
--------- -- ------ ------ --------- ---------- --------- -------
BALANCE, SEPTEMBER 30, 1989 2,000,000 1 4,795,000 103,437
Conversion of advances to common stock in
October 1989 at $.50 per share 250,000 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totalling $1,033,280) 5,000,000 $3,966,820
Issuance of common stock for cash in June
1990 at $1.00 per share (net of stock
issue costs totalling $97,500) 750,000 652,500
Exercise of stock options in July and
August 1990 at $.50 per share 21,500 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable
Net loss
--------- -- ------ ------ --------- -------- ---------- --------
BALANCE, SEPTEMBER 30, 1990 2,000,000 1 5,750,000 4,619,320 5,066,500 306,110
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----
BALANCE, AUGUST 31, 1988 (INCEPTION)
Issuance of common stock for notes
receivable and cash in September 1988
at $.0125 per share $ (14,525) $ 38,412
Issuance of preferred stock in October
1988 for license and other rights 1
Issuance of common stock for cash in
October 1988 at $.05 per share 4,000
Issuance of common stock for cash in
January 1989 at $.05 per share 4,000
Issuance of stock options effective in
August 1989 to purchase 600,000 shares
of Class B common stock at $.0125
per share (with an estimated fair market
value of $.05 per share) 22,500
Issuance of common stock for cash in
September 1989 at $.0125 per share
(with an estimated fair market value
of $.05 per share) 20,000
Collection on notes receivable 1,635 1,635
Net loss $(409,718) (409,718)
--------- -------- --------
BALANCE, SEPTEMBER 30, 1989 (409,718) (12,890) (319,170)
Conversion of advances to common stock in
October 1989 at $.50 per share 125,000
Issuance of common stock for cash in May
1990 at $1.00 per share (net of stock
issue costs totalling $1,033,280) 3,966,820
Issuance of common stock for cash in June
1990 at $1.00 per share (net of stock
issue costs totalling $97,500)
Exercise of stock options in July and
August 1990 at $.50 per share 10,750
Forgiveness of compensation obligation 66,923
Collection on notes receivable 12,890 12,890
Net loss (2,319,231) (2,319,231)
---------- ----------- ----------
BALANCE, SEPTEMBER 30, 1990 (2,728,949) - 2,196,482
F-5
60
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------
SERIES A SERIES B
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
BALANCE, SEPTEMBER 30, 1990 2,000,000 $ 1
Exercise of stock options in November
1990 at $.50 per share
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totalling $130,339) 960,003 $ 769,670
Conversion of common stock
Net loss
---------------- --- ----------------- ----------
BALANCE, SEPTEMBER 30, 1991 2,000,000 1 960,003 769,670
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $428,605) 4,266,680 3,571,395
Exercise of stock options in March 1992 at
$.50 per share
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue
costs totalling $317,930)
Conversion of common stock
Net loss
---------------- --- ----------------- ----------
BALANCE, SEPTEMBER 30, 1992 2,000,000 1 5,226,683 4,341,065
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totalling $8,720)
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totalling $4,122)
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totalling $42,125)
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash
Exercise of Class F Warrants between October 1992
and September 1993 at $100,000 per warrant for
cash 320,000 300,000
COMMON STOCK
---------------------------------------------------------
CLASS A CLASS B
----------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
BALANCE, SEPTEMBER 30, 1990 5,750,000 $ 4,619,320 5,066,500 $ 306,110
Exercise of stock options in November
1990 at $.50 per share 2,000 1,000
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totalling $130,339)
Conversion of common stock 115,000 5,750 (115,000) (5,750)
Net loss
------------ ------------ --------- ---------
BALANCE, SEPTEMBER 30, 1991 5,865,000 4,625,070 4,953,500 301,360
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $428,605)
Exercise of stock options in March 1992 at
$.50 per share 119,000 59,500
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue
costs totalling $317,930) 5,650,200 8,157,370
Conversion of common stock 395,000 6,250 (395,000) (6,250)
Net loss
------------ ------------ --------- ---------
BALANCE, SEPTEMBER 30, 1992 11,910,200 12,788,690 4,677,500 354,610
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash 793,645 600,010
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash 793,645 749,995
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totalling $8,720) 96,897 209,298
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totalling $4,122) 103,050 98,928
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totalling $42,125) 836,335 1,212,376
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash 315,000 63,000
Exercise of Class F Warrants between October 1992
and September 1993 at $100,000 per warrant for
cash
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----- ------------ -----
BALANCE, SEPTEMBER 30, 1990 $ (2,728,949) - $ 2,196,482
Exercise of stock options in November
1990 at $.50 per share 1,000
Issuance of preferred stock in July 1991
for cash (net of stock issue costs
totalling $130,339) 769,670
Conversion of common stock
Net loss (1,949,588) (1,949,588)
------------- --- ------------
BALANCE, SEPTEMBER 30, 1991 (4,678,537) - 1,017,564
Issuance of preferred stock in February 1992
for cash (net of stock issue costs
totalling $428,605) 3,571,395
Exercise of stock options in March 1992 at
$.50 per share 59,500
Exercise of Class A warrants in May 1992 at
$1.50 per share for cash (net of stock issue
costs totalling $317,930) 8,157,370
Conversion of common stock
Net loss (2,361,855) (2,361,855)
------------ --- ------------
BALANCE, SEPTEMBER 30, 1992 (7,040,392) - 10,443,974
Exercise of Unit Purchase Options between October
1992 and September 1993 for cash 600,010
Exercise of Class A Warrants between October 1992
and September 1993 at $.9450 per share for cash 749,995
Exercise of Class B Warrants between October 1992
and September 1993 at $2.25 per share for cash
(net of stock issue costs totalling $8,720) 209,298
Exercise of Class C Warrants between October 1992
and September 1993 at $1.00 per share for cash
(net of stock issue costs totalling $4,122) 98,928
Exercise of Class D Warrants between October 1992
and September 1993 at $1.50 per share for cash
(net of stock issue costs totalling $42,125) 1,212,376
Exercise of Class E Warrants between October 1992
and September 1993 at $.20 per share for cash 63,000
Exercise of Class F Warrants between October 1992
and September 1993 at $100,000 per warrant for
cash 300,000
F-6
61
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1996
CONVERTIBLE PREFERRED STOCK
--------------------------------------------------------
SERIES A SERIES B
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash 96,000 $ 90,000
Exercise of stock options in August 1993 and
September 1993 at exercise prices ranging from
$0.81 to $1.53 per share
Compensation expense related to stock options
granted at an exercise price below fair market
value
Cancellation of Series A Preferred and Class B
Common Stock in July 1993 (1,500,000)
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement
Conversion of preferred and common stock (100,000) (5,642,653) (4,731,065)
Cancellation of partial shares (30)
Net loss
----------- ---- ----------- -----------
BALANCE, SEPTEMBER 30, 1993 400,000 $ 1 - -
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totalling $541,340)
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $4,414)
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totalling $2,875)
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash 106,666 100,000
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share
Compensation expense related to stock options granted
at an exercise price below fair market value
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215)
Conversion of preferred and common stock (400,000) (1) (106,666) (100,000)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994
Cancellation of partial shares
Net loss
----------- ---- ----------- -----------
BALANCE, SEPTEMBER 30, 1994 - - - -
----------- ---- ----------- -----------
COMMON STOCK
--------------------------------------------------------
CLASS A CLASS B
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash
Exercise of stock options in August 1993 and
September 1993 at exercise prices ranging from
$0.81 to $1.53 per share 27,480 $ 37,480
Compensation expense related to stock options
granted at an exercise price below fair market
value 163,333
Cancellation of Series A Preferred and Class B
Common Stock in July 1993 28,003 (2,240,250) $ (28,003)
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement 1,500,000 2,670,000
Conversion of preferred and common stock 6,040,653 4,790,121 (298,000) (59,056)
Cancellation of partial shares
Net loss
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1993 22,416,905 23,411,234 2,139,250 267,551
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash 17,202 24,384
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totalling $541,340) 4,312,060 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $4,414) 106,340 101,926
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totalling $2,875) 78,335 114,627
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share 113,267 156,048
Compensation expense related to stock options granted
at an exercise price below fair market value 245,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215) 522,449 1,807,785
Conversion of preferred and common stock 653,416 113,911 (146,750) (13,910)
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994 (70,000) 20,794 (1,546,500) (20,794)
Cancellation of partial shares (3)
Net loss
----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994 28,149,971 35,156,504 446,000 232,847
----------- ----------- ----------- -----------
DEFICIT
ACCUMULATED NOTES
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----- ------------ -----
Exercise of Preferred Stock Units between October 1992
and September 1993 for cash $ 90,000
Exercise of stock options in August 1993 and
September 1993 at exercise prices ranging from
$0.81 to $1.53 per share 37,480
Compensation expense related to stock options
granted at an exercise price below fair market
value 163,333
Cancellation of Series A Preferred and Class B
Common Stock in July 1993
Issuance of Class A Common Stock in July 1993 in
connection with amendment to a license agreement 2,670,000
Conversion of preferred and common stock
Cancellation of partial shares
Net loss $(6,139,223) (6,139,223)
----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1993 (13,179,615) - 10,499,171
Exercise of non-redeemable Class B Warrants in
April 1994 at $1.4175 per share for cash 24,384
Exercise of redeemable Class B Warrants between
October 1993 and June 1994 at $2.25 per share for
cash (net of stock issue costs totalling $541,340) 9,160,795
Exercise of Class C Warrants between October 1993
and September 1994 at $1.00 per share for cash
(net of commissions totalling $4,414) 101,926
Exercise of Class D Warrants between October 1993
and September 1994 at $1.50 per share for cash
(net of commissions totalling $2,875) 114,627
Exercise of Class F Warrants between October 1993
and November 1993 at $100,000 per warrant for cash 100,000
Exercise of stock options between October 1993 and
September 1994 at exercise prices ranging from
$0.50 to $2.4375 per share 156,048
Compensation expense related to stock options granted
at an exercise price below fair market value 245,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in September 1994 (net
of issue costs of $192,215) 1,807,785
Conversion of preferred and common stock
Cancellation of Class A Common and Class B Common
Stock between January 1994 and May 1994
Cancellation of partial shares
Net loss (4,813,341) (4,813,341)
----------- ----------- -----------
BALANCE, SEPTEMBER 30, 1994 (17,992,956) - 17,396,395
----------- ----------- -----------
F-7
62
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1996
CONVERTIBLE PREFERRED STOCK
------------------------------------------------------------
SERIES A SERIES B
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B
Warrants in January and February, 1995 at
$1.4175 per share for cash
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totaling $26,743)
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share
Compensation expense related to stock options
granted at an exercise price below fair market
value
Conversion of common stock
Net loss
----------- -------- ---------- ----------
BALANCE, SEPTEMBER 30, 1995 - - - -
----------- -------- ---------- ----------
OCTOBER 1, 1995 TO SEPTEMBER 30, 1996
Exercise of Class D Warrants between October, 1995
and September, 1996 at $1.50 per share for cash
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in November 1995 (net
of issue costs of $83,495)
Conversion of Convertible Notes to Class A Common
Stock between February and September, 1996
(including interest and discount applied of
$2,263,276 and net of issue costs of $402,268)
Exercise of stock options between October, 1995
and September, 1996 at exercise prices ranging
from $0.50 per share to $3.56 per share
Conversion of common stock
Net loss
---------- ------- ----------- ----------
BALANCE, SEPTEMBER 30, 1996 - - - -
========== ======= =========== ==========
COMMON STOCK
---------------------------------------------------------
CLASS A CLASS B
----------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B
Warrants in January and February, 1995 at
$1.4175 per share for cash 97,202 137,783
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totaling $26,743) 415,600 388,857
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash 153,335 230,003
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash 85,000 17,000
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share 842,956 1,121,771
Compensation expense related to stock options
granted at an exercise price below fair market
value 129,792
Conversion of common stock 103,000 53,774 (103,000) (53,774)
Net loss
----------- ------------ ---------- ---------
BALANCE, SEPTEMBER 30, 1995 29,847,064 37,235,484 343,000 179,073
----------- ------------ ---------- ---------
OCTOBER 1, 1995 TO SEPTEMBER 30, 1996
Exercise of Class D Warrants between October, 1995
and September, 1996 at $1.50 per share for cash 78,334 117,500
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash 25,000 5,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in November 1995 (net
of issue costs of $83,495) 481,651 1,416,505
Conversion of Convertible Notes to Class A Common
Stock between February and September, 1996
(including interest and discount applied of
$2,263,276 and net of issue costs of $402,268) 3,419,166 10,147,676
Exercise of stock options between October, 1995
and September, 1996 at exercise prices ranging
from $0.50 per share to $3.56 per share 142,807 263,079
Conversion of common stock 60,000 31,325 (60,000) (31,325)
Net loss
----------- ------------ ------------ ---------
BALANCE, SEPTEMBER 30, 1996 34,054,022 $49,216,569 283,000 $147,748
=========== =========== ============ =========
DEFICIT
ACCUMULATED
DURING THE RECEIVABLE
DEVELOPMENT FROM
STAGE STOCKHOLDERS TOTAL
----------- ------------ -----
OCTOBER 1, 1994 TO SEPTEMBER 30, 1995
Exercise of non-redeemable Class B
Warrants in January and February, 1995 at
$1.4175 per share for cash 137,783
Exercise of Class C Warrants between October,
1994 and June, 1995 at $1.00 per share for
cash (net of commissions totaling $26,743) 388,857
Exercise of Class D Warrants between April, 1995
and September, 1995 at $1.50 per share for cash 230,003
Exercise of Class E Warrants in April and August,
1995 at $0.20 per share for cash 17,000
Exercise of stock options between October, 1994
and September, 1995 at exercise prices ranging
from $0.50 per share to $3.56 per share 1,121,771
Compensation expense related to stock options
granted at an exercise price below fair market
value 129,792
Conversion of common stock
Net loss (10,173,001) (10,173,001)
--------------- ------- -----------
BALANCE, SEPTEMBER 30, 1995 (28,165,957) - 9,248,600
--------------- ------- -----------
OCTOBER 1, 1995 TO SEPTEMBER 30, 1996
Exercise of Class D Warrants between October, 1995
and September, 1996 at $1.50 per share for cash 117,500
Exercise of Class E Warrants in March, 1996
at $0.20 per share for cash 5,000
Issuance of Class A Common Stock in connection with
Stock Purchase Agreement in November 1995 (net
of issue costs of $83,495) 1,416,505
Conversion of Convertible Notes to Class A Common
Stock between February and September, 1996
(including interest and discount applied of
$2,263,276 and net of issue costs of $402,268) 10,147,676
Exercise of stock options between October, 1995
and September, 1996 at exercise prices ranging
from $0.50 per share to $3.56 per share 263,079
Conversion of common stock
Net loss (6,130,241) (6,130,241)
--------------- ------- -----------
BALANCE, SEPTEMBER 30, 1996 $(34,296,198) - $15,068,119
============== ======= ===========
See notes to financial statements.
F-8
63
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996 AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1996
OPERATING ACTIVITIES:
Net loss $ (4,813,341) $(10,173,001) $ (6,130,241) $(34,296,198)
Adjustments to reconcile net loss to
net cash used for operating activities:
Technology license fee 3,545,713
Depreciation and amortization 61,399 84,867 292,943 596,883
Non-cash interest expense 2,771,030 2,771,030
Compensation paid with common stock
and stock options 245,000 129,792 575,625
Compensation forgiven by stockholder 66,923
Imputed interest under technology
license fee 82,613
Changes in assets and liabilities:
Interest receivable (3,070) (16,913) (283,652) (338,403)
Prepaid and other 51,946 (77,111) (908,513) (1,091,709)
Patent costs (83,073) (113,535) (163,822) (621,424)
Organizational costs (20,242)
Accounts payable 493,360 812,040 (190,813) 1,329,418
Accrued compensation and payroll taxes (22,975) 44,436 37,560 206,445
Due to MBI (1,010) 1,064 5,483 21,810
Deferred revenue 500,000 500,000
------------ ------------ ------------ ------------
Net cash used for operating activities (4,071,764) (9,308,361) (4,070,025) (26,671,516)
INVESTING ACTIVITIES:
Short-term investments (6,599,940) 7,115,856 (1,235,350) (7,026,502)
Capital expenditures (108,701) (92,871) (122,425) (542,640)
Note receivable - employee (138,649) 138,649
------------ ------------ ------------ ------------
Net cash provided by (used for)
investing activities (6,847,290) 7,161,634 (1,357,775) (7,569,142)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common
and preferred stock 12,206,408 1,922,157 1,885,579 38,678,271
Stock issue costs (740,843) (26,743) (83,495) (2,913,703)
Advances for purchase of common stock 125,000
F-9
64
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996 AND THE PERIOD
AUGUST 31, 1988 (INCEPTION) TO SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
AUGUST 31, 1988
YEARS ENDED SEPTEMBER 30, (INCEPTION) TO
------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1996
FINANCING ACTIVITIES (Continued):
Collection of notes receivable for
common stock 14,525
Proceeds from stockholder loans 322,788
Repayment of stockholder loans (322,788)
Proceeds from the issuance of
convertible notes payable 13,500,000 13,500,000
Debt issue costs (771,351) (771,351)
Proceeds from issuance of
subordinated notes payable -
net of issue costs 538,750
Repayment of subordinated notes payable (625,000)
Payment on technology license fee (958,326)
------------ ------------ ------------ ------------
Net cash provided by financing activities 11,465,565 1,895,414 14,530,733 47,588,166
------------ ------------ ------------ ------------
NET INCREASE (DECREASE)
IN CASH AND CASH EQUIVALENTS 546,511 (251,313) 9,102,933 13,347,508
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,949,377 4,495,888 4,244,575
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 4,495,888 $ 4,244,575 $ 13,347,508 $ 13,347,508
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION:
Interest paid $ 77,433 $ 209,539
============ ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH OPERATING AND FINANCING ACTIVITIES:
In October 1989, advances of $125,000 were converted into 250,000 shares of
Class B Common Stock. In May 1990 and September 1992, the Company recorded an
expense and a liability in the amount of $817,387 and $58,326, respectively,
related to the technology license agreement and the grant-in-aid agreement with
MBI (see Note 2).
During 1993, the Company recorded expense and equity in the amount of $2,670,000
related to the amendment of the technology license agreement with MBI (see Note
2).
During 1993, 1994 and 1995, the Company recorded expense and equity in the
amount of $163,333, $245,000 and $81,666, respectively, related to the issuance
of stock options (below fair market value) as compensation for services provided
under a consulting agreement, and $48,126 in 1995 related to compensation to an
employee.
See notes to financial statements.
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65
LIDAK PHARMACEUTICALS
(A DEVELOPMENT STAGE ENTERPRISE)
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - LIDAK Pharmaceuticals (the "Company") was
incorporated in the state of California on August 31, 1988. The Company is
organized to engage in research, development, and commercialization of
innovative pharmaceutical products.
BASIS OF ACCOUNTING - The Company has not yet completed product
development, obtained required regulatory approvals or verified the market
acceptance and demand for its products. The Company has completed certain
clinical trials on one of its products and is currently undergoing clinical
trials on two of its products under Investigational New Drug ("IND")
applications filed with the United States Food & Drug Administration ("FDA").
The Company is also currently performing research in connection with other
technologies. Accordingly, the Company's activities have been accounted for as
those of a "development stage enterprise" as set forth in Financial Accounting
Standards Board Statement No. 7 ("FAS 7"). Among the disclosures required by FAS
7 are that the Company's financial statements be identified as those of a
"development stage enterprise" and that the Statements of Operations,
Stockholders' Equity (Deficit) and Cash Flows disclose activities since the date
of the Company's inception.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents
consist of highly liquid investments purchased with original maturities of three
months or less, or other investments which provide for liquidity within three
months. Short-term investments represent certificates of deposit, U.S.
government securities, commercial paper, and other money market instruments with
maturities of approximately one year or less. Cash equivalents and short-term
investments are carried at cost, which approximates market value. At October 1,
1995, the Company adopted Statement of Financial Standards No. ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities". In
accordance with SFAS 115, management determined that the appropriate
classification of its investments is "held-to-maturity". (See Note 4).
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash
in certificates of deposit, U.S. government securities, commercial paper, and
other money market instruments and has established guidelines relative to
diversification and maturities in an effort to maintain safety and liquidity.
These guidelines are periodically reviewed and modified to take advantage of
trends in yields and interest rates. The Company has not experienced any
significant losses on its cash equivalents or short-term investments.
PROPERTY - Property is recorded at cost and represents primarily
scientific equipment. Depreciation is provided over the estimated useful lives
of the property (generally five years) on the straight-line method. Depreciation
expense for the years ended September 30, 1994, 1995 and 1996 and the period
from inception to September 30, 1996 was $56,818, $74,799, and $87,939 and
$266,668, respectively.
PATENT COSTS - Legal expenses incurred in connection with
applications for patents are capitalized. Amortization of the costs of approved
patent applications is provided over the useful lives
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66
of the patents. For patent applications that are abandoned, accumulated costs
are charged to expense.
DEBT ISSUE COSTS - Debt issue costs represent costs related to the
issuance of the Convertible Notes Payable (the "Notes") which will be amortized
over the life of the Notes, for a maximum of two-years from the date of
issuance. As of September 30, 1996, $184,068 of the debt issue costs have been
amortized and $402,268 have been reclassified to stock issue costs in connection
with the conversion of the Notes into common stock. In the event the Notes are
converted prior to their due date, any remaining unamortized costs will be
charged to the equity resulting from the conversion of the Notes. (See Note 6).
DEFERRED REVENUE - Deferred Revenue represents payments received
under licensing agreements that require additional performance by the Company
prior to recognition of such amounts as revenue.
REVENUES - Revenues from license fees are recognized when the
performance requirements of the license agreements are met. Revenues from
federal research grants and contracts are recognized during the period in which
related expenditures are incurred. Revenues from research contracts are
recognized on the percentage of completion method. Under this method, revenues
and costs are recognized as the work is performed based on the ratio that
incurred costs bear to the estimated total costs. Provisions for anticipated
losses on such contracts would be made in the period in which they first become
determinable.
RESEARCH AND DEVELOPMENT - Research and development costs are
expensed as incurred.
NET LOSS PER SHARE - Net loss per share is computed using the
weighted average number of common shares outstanding during the period. Certain
shares of common stock which were outstanding during the fiscal year ended
September 30, 1994 were excluded from the number of shares used in the
calculation of weighted average number of common shares outstanding during that
period as these shares had been placed in escrow and were subject to forfeiture.
All shares which had been placed in escrow were subsequently cancelled (see Note
5). Common equivalent shares have been excluded from the number of shares used
in the calculation of weighted average number of common shares outstanding as
their inclusion would be antidilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION - In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-based Compensation," which
requires the Company to adopt disclosure provisions for stock based compensation
effective January 1, 1996. The standard defines a fair value method of
accounting for stock options and other equity instruments. Under the fair value
method, compensation is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the
vesting period. This standard encourages rather than requires companies to adopt
the fair value method of accounting for employee stock-based transactions.
Companies are permitted to continue to account for such transactions under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," but will be required to disclose in a note to the financial
statements pro forma net income and net income per share as if the new method of
accounting had been applied. The Company has elected to continue to apply APB
Opinion No. 25 in its financial statements and will disclose in future reports
the required pro forma information in a footnote.
ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the
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67
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the
1994 and 1995 balances to conform with the 1996 presentation.
2. MBI AND THE LICENSE AGREEMENT
Medical Biology Institute ("MBI"), is a non-profit research
organization incorporated in 1981 to conduct interdisciplinary basic research in
biological sciences. The President, Chief Executive Officer and director of the
Company is also President, Chief Executive Officer and a director of MBI.
The Company and MBI entered into a twenty year licensing agreement
("Agreement") as of October 10, 1988 which granted the Company an exclusive,
worldwide license to all existing technology of MBI and a right of first
preference to license future technology arising from the research and
development efforts of MBI. As consideration for entering into the agreement,
MBI was granted 2,000,000 shares of the Company's preferred stock, which was
recorded at the nominal value of $1. Upon completion by the Company of its
initial capitalization in May 1990, the Company became obligated to MBI for
$900,000 payable in three equal annual installments. The payments were made in
May 1990, 1991 and 1992, respectively. The present value of the obligation
(approximately $818,000) as of May 1990 was reflected in the financial
statements as a charge to research and development expense in May 1990. In
addition, MBI shall receive 10% of all net license fees and 20% of royalties
relating to sub licenses of the licensed technology. For products manufactured
and sold by the Company, MBI will receive royalties of 6% and 3% of sales
relating to patented (issued or pending) and non patented licensed technology,
respectively.
Prior to the amendment of the Agreement, if the annual fees and
royalties paid to MBI failed to exceed $100,000 for the calendar year ending
December 31, 1995 or any calendar year thereafter then MBI had the right to
convert the license to a non-exclusive license upon six months notice. Fees and
royalties on future technology are subject to negotiation.
In July 1993 the Agreement was amended. Pursuant to the terms of the
amendment, the Company issued 1,500,000 shares of Class A common stock to MBI as
consideration for a 5-year extension to its exclusive technology rights (until
October 10, 2013) and a 5-year postponement (until December 31, 2000) of the
Company's obligation to pay minimum royalties to MBI. Additionally, MBI waived
its rights to 1,500,000 shares of the Company's Series A preferred stock which
were being held in escrow (See Note 5). The value of the common stock issued
($2,670,000) was reflected in the financial statements as a charge to research
and development expense in July 1993.
In November 1993 the Company and MBI entered into a Grant-in-Aid
agreement as an addendum to the October 10, 1988 license agreement. Under this
grant the Company agreed to provide direct laboratory support to fund a specific
research program. Such grant will automatically renew for additional one year
periods until terminated in writing by the Company.
In July 1994 the Agreement was further amended to provide for future
research funding and support for projects not included in the initial license
agreement. This amendment provides for the transfer of ownership rights for each
specific project during the time it is being funded by the Company.
F-13
68
3. CONTRACT ARRANGEMENTS
CONTRACT RESEARCH AGREEMENTS - During 1994, the Company recognized
revenue from a contract research agreement with a third party whereby the
Company performed research related to the screening of certain compounds.
FEDERAL GRANTS & CONTRACTS - During fiscal 1994 and 1996, the
Company recognized revenues from Small Business Innovation Research ("SBIR")
grants and contracts issued by the National Institutes of Health related to
research on specific technologies.
4. SHORT-TERM INVESTMENTS
Short-term investments include the following (at cost which approximates
fair value):
September 30,
1995 1996
---------- ----------
Corporate Debt Securities $4,204,841 $7,026,502
U.S. Government Securities 495,967
Commercial Paper 991,344
Certificates of Deposit 99,000
---------- ----------
$5,791,152 $7,026,502
========== ==========
The marketable securities held by the Company at September 30, 1996,
have contractual maturities of approximately one year.
5. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Common stock consists of Class A and B. Each share of Class A and B common
stock (i) participates equally in dividends, (ii) is entitled to one and five
votes, respectively, (iii) upon liquidation of the Company, shares ratably in
the net assets available for distribution, subject to the rights of Preferred
Stock. Class B common stock automatically converts into Class A common stock at
the option of the holder or upon sale or transfer to someone other than a holder
of Class B common stock.
Stock Purchase Agreement In September 1994 the Company entered into a stock
purchase agreement with Grelan Pharmaceutical Co. Ltd. of Japan ("Grelan").
Pursuant to the agreement, Grelan purchased 522,449 shares of the Company's
Class A common stock for $2,000,000.
Warrants
Class B Warrants - Each Class B warrant entitled the holder to purchase one
share of Class A common stock at an exercise price of $2.25. In May 1994,
1,920,489 Class B warrants were redeemed at a total cost to the Company of
$94,577. The Class B Warrants outstanding at September 30, 1994 were
non-redeemable warrants issued as a result of the exercise of certain Class A
Warrants. All such Class B Warrants were exercised at a price of $1.4175 per
warrant into one share of Class A Common Stock prior to their May 8, 1995
expiration date.
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69
Class C Warrants - Each Class C warrant entitled the holder to purchase one
share of Class A common stock at an exercise price of $1.00 per share through
May 26, 1995.
Class D Warrants- Each Class D warrant entitles the holder to purchase one
share of Class A common stock at an exercise price of $1.50 per share. Such
warrants are redeemable by the Company, upon 30 days written notice, at a price
of $.05 per warrant, if the average closing price of the Company's Class A
common stock for the 30 days prior to notice exceeds $3.45 per share. If the
Company exercises it's redemption right, it is are obligated to redeem all
outstanding Class D warrants. Such warrants expire at various dates through
February 26, 1997.
Class E Warrants- Each Class E warrant entitles the holder to purchase one
share of Class A common stock at an exercise price of $.20 per share. All such
warrants expire on January 7, 1997.
CLASS A CLASS B CLASS C CLASS D CLASS E
WARRANTS WARRANTS WARRANTS WARRANTS WARRANTS
Balance at August 31,
1988 (Inception) and
September 30, 1989
Issued 5,750,000 625,000
---------- ---------- ---------- ---------- -----------
Balance at September 30, 1990 5,750,000 625,000
Issued 480,006
---------- ---------- ---------- ---------- -----------
Balance at September 30, 1991 5,750,000 625,000 480,006
Issued 5,650,200 2,133,360 500,000
Exercised (5,650,200)
Redeemed (99,800)
---------- ---------- ---------- ---------- -----------
Balance at September 30, 1992 5,650,200 625,000 2,613,366 500,000
Issued 793,650 793,650 207,995
Exercised (793,650) (96,897) (103,050) (836,335) (315,000)
---------- ---------- ---------- ---------- -----------
Balance at September 30, 1993 6,346,953 521,950 1,985,026 185,000
Issued 53,334
Exercised (4,329,262) (106,340) (78,337)
Redeemed (1,920,489)
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1994 97,202 415,610 1,960,023 185,000
Exercised (97,202) (415,600) (153,335) (85,000)
Canceled (10)
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1995 1,806,688 100,000
---------- ---------- ---------- ---------- ----------
Exercised (78,334) (25,000)
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1996 1,728,354 75,000
---------- ---------- ---------- ---------- ----------
Exercise Price per Warrant - - - $ 1.50 $ 0.20
========== ========== ========== ========== ===========
Underwriter Agreements
On May 8, 1990, the Company entered into an agreement with an
underwriter for the sale of common stock units. Among other things, the
agreement provides for: (i) underwriter shall have a right of first refusal to
act as underwriter on any offerings of securities for a period of five years,
(ii) upon the exercise of any warrants after May 8, 1991 the Company shall pay
underwriter a fee of 4% of the aggregate exercise price if the market price of
the Company's common stock exceeds the exercise price on the date of exercise,
and (iii) certain anti-dilution rights.
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70
On November 3, 1993, the Company entered into an agreement whereby
the underwriter waived its right of first refusal and any and all rights under a
merger and acquisition agreement dated May 15, 1990. As compensation for such
waivers, the Company paid the underwriter $40,000 and issued non-qualified
options exercisable until November 3, 1996 into 50,000 shares of the Company's
Class A common stock at an exercise price of $6.75 per share.
Escrow Agreement
Pursuant to an agreement between the Company and the underwriter of
the Company's initial public offering, 3,783,750 shares of Class B common stock,
1,500,000 shares of Series A convertible preferred stock, and options to
purchase 2,216,250 shares of Class B common stock were placed in an escrow
account to be held until January 1994. During fiscal 1992, 70,000 of these
options were exercised resulting in 70,000 shares of Class A common stock being
placed in the escrow account. In July 1993, certain holders of the shares and
options placed in escrow waived all rights to their respective shares and
options, resulting in the cancellation of 2,240,250 shares of Class B common
stock, 1,500,000 shares of Series A convertible preferred stock and options to
purchase 1,603,500 shares of Class B common stock. At September 30, 1993, there
were 70,000 shares and 1,546,500 shares, respectively, of Class A common and
Class B common stock remaining in escrow which were cancelled during fiscal
1994.
Stock Options
In March 1994 the Company's shareholders approved the adoption of
the 1994 Stock Option Plan ("the 1994 Plan") pursuant to which an aggregate of
750,000 shares of Class A Common Stock were reserved for issuance. Such options
may be granted to officers, directors, employees and consultants of the Company.
The options are to be granted at an exercise price of at least fair market value
on the date of grant and generally vest over a three year period. The 1994 Plan
provides for an automatic annual grant of an option to purchase 10,000 shares to
each director who is not also an employee of the Company. The 1994 Plan shall
terminate on January 14, 2004. In March, 1995 and March, 1996 the Company's
shareholders voted to increase the shares reserved for issuance under the plan
to an aggregate of 1,100,000 and 1,350,000 shares, respectively. At September
30, 1996, there were 527,558 shares of Class A Common Stock remaining available
for grant under the 1994 Plan.
Prior to the adoption of the 1994 Plan, the Company had other stock
option plans which provided for the grant of options to purchase up to 1,200,000
and 1,500,000 shares of Class A and Class B common stock, respectively, to key
employees and others at an option price of at least fair market value at date of
grant. In March 1994 and November 1989, respectively, the Company terminated
these plans as to the issuance of new options.
In September 1988, under an employment agreement with its President
and Chief Executive Officer, the Company issued options to purchase 900,000
shares of Class B common stock at an option price of $.0125 per share
representing the estimated fair market value on the date of grant. Effective in
August 1990, the employment agreement was amended to provide for the grant of
options to purchase an additional 600,000 shares of Class B common stock at an
option price of $.0125 per share (which was below the estimated fair market
value of $.05 per share on the date of grant resulting in the recording of
related compensation expense) in return for the cancellation of certain
anti-dilution rights. The options were fully exercisable when issued and expire
on September 9, 2003. In July 1993 options to purchase 1,125,000 shares were
canceled and replaced pursuant to certain of the July 1993 grants discussed
below. As of September 30, 1996, fully vested options to purchase 375,000 shares
of Class B common stock remained outstanding.
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71
In February 1993 the Company granted options to purchase 500,000
shares of Class A common stock to a consultant at an option price of $0.50 per
share (which was below the estimated fair market value of $1.48 on the date of
grant). In June 1994 the Company issued additional options to purchase 100,000
shares of Class A common stock at an exercise price of $2.25 per share pursuant
to the consulting agreement. In February 1995, the consultant exercised options
to purchase 500,000 shares of the Company's Class A Common Stock at the option
price of $0.50 per share.
In July 1993 the Company granted options to purchase an aggregate of
3,843,750 shares of Class A common stock to certain current employees,
consultants, directors and original investors of the Company at an option price
of $3.56 per share. Recipients of these options waived all of their respective
rights to an aggregate of 3,843,750 shares of Class B common stock and options
to purchase Class B common stock held in an escrow account. These options were
fully exercisable when issued and expire on July 17, 2003.
In September 1994 the Company reduced the exercise price on options
granted to certain employees, officers and consultants to purchase 3,285,250
shares of Class A and Class B common stock to $2.75 per share.
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72
The following summarizes all common stock option activity for the period August
31, 1988 (inception) to September 30, 1996:
NUMBER OF SHARES
------------------------------------- OPTION PRICE
CLASS A CLASS B PER SHARE
Granted in September 1988 900,000 $0.0125
-------
Outstanding September 30, 1988 900,000 $.0125
Granted 28,000 $0.025
-------
Outstanding September 30, 1989 928,000 $0.0125-$0.025
Granted 133,500 2,027,000 $.0125-$1.53
Exercised (21,500) $0.50
Canceled (72,500) $0.50
--------- -------
Outstanding at September 30, 1990 133,500 2,861,000 $0.0125-$1.53
Granted 120,100 $0.9375-$1.00
Exercised (2,000) $0.50
Canceled (60,000) (104,000) $0.050-$1.53
--------- -------
Outstanding at September 30, 1991 193,600 2,755,000 $0.0125-$1.53
Granted 365,000 $1.3125-$2.4375
Exercised (119,000) $0.50
Canceled (89,100) (498,000) $0.50-$1.53
--------- -------
Outstanding at September 30, 1992 469,500 2,138,000 $0.0125-$2.4375
Granted 4,865,250 $0.50-$6.8755
Exercised (27,480) $0.81-$1.53
Canceled (7,420) (1,603,500) $0.0125-$2.25
--------- -------
Outstanding at September 30, 1993 5,299,850 534,500 $0.0125-$6.8755
Granted 619,000 $2.00 - $6.75
Exercised (70,767) (42,500) $0.025-$2.4375
Canceled (180,966) $0.9375-$6.8750
--------- -------
Outstanding at September 30, 1994 5,667,117 492,000
Granted 319,500 $0.0125-$6.75
Exercised (795,956) (47,000) $2.9375-$6.4375
Canceled (168,746) $1.0625-$2.9375
--------- -------
Outstanding at September 30, 1995 5,021,915 445,000
Granted 243,500 $2.50 - $3.00
Exercised (126,807) (16,000) $0.50 - $3.56
Canceled (18,586) $1.0625-$6.4375
--------- -------
Outstanding at September 30, 1996 5,120,002 429,000
========= =======
Exercisable at September 30, 1996 5,077,943 429,000 $0.0125-$6.75
========= =======
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6. CONVERTIBLE NOTES PAYABLE
In November 1995, December 1995 and January 1996, the Company sold a
total of $13.5 million of Convertible Notes Payable (the "Notes") to
institutional investors as part of a private placement. The Notes accrue
interest at an annual rate of 7%, beginning six months from the date of issue,
with the principal due and payable two years from the date of issue if and to
the extent that the Notes are not previously converted. The Notes are
convertible at the option of the holder (subject to the maximum share
limitations set forth below) into Class A Common Stock at a price equal to 80%
of the average closing bid price for the Class A Common Stock on the NASDAQ for
the seven trading days prior to the date of conversion.
The conversion of the Notes at 80% of the average closing bid price
of the Company's Class A Common Stock results in the Notes being issued at a 25%
discount (the "Conversion Discount"). The Conversion Discount is being
recognized by the Company as non-cash interest expense over the term of the
Notes with a corresponding increase to the original principal amount of the
Notes. Any portion of the Conversion Discount not recognized upon conversion of
the Notes is recorded as interest expense on that date. In addition, the stated
7% annual interest is being recognized ratably over the term of the Notes.
During the fiscal year ended September 30, 1996, a total of $2,966,687 was
recorded as interest expense relating to the Notes, including $2,579,442
relating to the Conversion Discount.
The $13.5 million original principal amount of the Notes is
convertible into an aggregate maximum of 5,513,018 shares of the Company's Class
A Common Stock, with each individual note limited to a pro-rata amount of such
number of shares. As of September 30, 1996, the $5,721,087 outstanding balance
of the Notes consisted of $5,213,333 of the original principal amount of the
Notes and $507,754 of Conversion Discount. During fiscal 1996, an aggregate of
$8,286,668 of the original principal amount of Notes had been converted into
3,419,166 shares of Class A Common Stock.
In the event that the shares of Class A Common Stock underlying a
particular Note cannot be issued upon request for conversion due to the above
referenced maximum share limitations, the Company is immediately obligated to
repay the original principal of that portion of the Note which is presented for
conversion which cannot be converted plus a premium equal to 25% of such
principal plus any accrued and unpaid interest. At its option, the holder(s) of
the $1.3 million of principal amount of the Notes sold in January, 1996 can
require the Company to issue shares of Class A Common Stock based on a
conversion price equal to 100% of the average closing bid price for the Class A
Common Stock for the seven trading days prior to the date of conversion in lieu
of the above-referenced principal and premium payment.
From October 1, 1996 to December 20, 1996, the Company issued a
total of 2,092,514 shares of its Class A Common Stock in connection with the
conversion of $2,537,794 of the original principal amount of the Notes.
Including these issuances, a total of 5,511,680 shares of Class A Common Stock
have been issued through December 20, 1996 in connection with the conversion of
the Notes. On December 19, 1996, the Company repaid certain noteholders a total
of $1,728,393 representing $1,375,539 of original principal and $352,854 of
premium and accrued interest in accordance with the provisions of these notes.
After these events, the original principal amount outstanding on the notes was
$1,300,000.
At December 20, 1996, the Company would be required to pay
approximately $1.6 million as repayment of remaining principal plus premium and
any accrued and unpaid interest. At its option, the noteholder can require the
Company to issue shares of Class A Common Stock at the then fair market value in
exchange for the above-referenced principal and premium payment.
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74
7. LICENSE AGREEMENTS
YAMANOUCHI EUROPE, b.v. (formerly Brocades Pharma, b.v.) - In
November 1991 the Company entered into a licensing agreement with Yamanouchi
Europe, b.v. of the Netherlands ("Yamanouchi") for clinical development,
manufacturing, marketing and distribution of n-docosanol 10% cream (LIDAKOL(R)),
as a topical anti-herpes compound in certain European and other countries. Under
terms of the agreement, Yamanouchi will be responsible for obtaining the
necessary regulatory approvals and for the subsequent manufacturing, marketing
and distribution of LIDAKOL in certain European and other countries. Under the
agreement, the Company may receive payments based on the attainment of certain
milestones and will receive royalties on sales in the subject territories after
market introduction.
CTS - In July 1993, the Company entered into a 5 year license/supply
and distribution agreement with CTS Chemical Industries, Ltd. ("CTS"), for the
manufacturing, marketing and distribution of LIDAKOL as a topical anti-herpes
compound in Israel. Under the terms of the agreement, CTS will be responsible
for obtaining the necessary regulatory approvals and for the subsequent
manufacturing, marketing and distribution of LIDAKOL in Israel. The agreement
includes a supply provision under which CTS will purchase its entire requirement
of active ingredients for use in the manufacture of topical LIDAKOL from the
Company or the Company's designee.
BORYUNG - In July 1994, the Company entered into a 12 year exclusive
license and supply agreement with Boryung Pharmaceuticals Company Ltd.
("Boryung"), for the manufacture and sale of LIDAKOL in the Republic of Korea.
Under the terms of the agreement, Boryung will be responsible for obtaining the
necessary regulatory approvals and for the subsequent manufacturing, marketing
and distribution of LIDAKOL in Korea. The agreement includes a supply provision
under which Boryung will purchase its entire requirement of active ingredient
for use in the manufacture of topical LIDAKOL from the Company or the Company's
designee, and after market introduction the Company will receive royalties on
sales in the subject territory. The Company may terminate the agreement if
market introduction in Korea does not occur by December 31, 1998.
GRELAN - In October 1994 the Company entered into an exclusive
license agreement with Grelan Pharmaceutical Co., Ltd. ("Grelan") for the
manufacturing, marketing and distribution of LIDAKOL in Japan. Under the terms
of the agreement, Grelan will be responsible for obtaining the necessary
regulatory approvals and for the subsequent manufacturing, marketing and
distribution of LIDAKOL in Japan. Under the agreement, the Company may receive
payments on the attainment of certain milestones, and will receive royalties on
sales in the subject territory after market introduction.
BRISTOL-MYERS SQUIBB -In February 1996, the Company entered into an
exclusive license agreement with Bristol-Myers Squibb Company ("BMS") for the
manufacture, marketing and distribution of LIDAKOL as a topical treatment for
oral herpes in the U.S. and Canada and all remaining major territories
throughout the world which are not currently licensed to other parties,
including Mexico, China, South and Central America, Australia and India, and
portions of the Far East. In connection with this agreement, the Company
received an initial license fee with a portion recorded as revenue in the year
ended September 30, 1996 and the remainder recorded as deferred revenue at
September 30, 1996. Recognition of the deferred revenue is subject to the
completion of certain Phase 3 clinical trials of LIDAKOL and to BMS' continued
participation in a joint development program. Under the agreement, the Company
may receive additional license fees based on the attainment of certain
milestones and will receive royalties on sales in subject territories.
In November 1996, the Company reacquired from BMS the rights to
market LIDAKOL in all territories covered in the license agreement, except the
United States, Canada and Mexico.
F-20
75
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets were as follows:
September 30,
1995 1996
----------- ------------
Net operating loss carryforwards 9,392,873 11,894,762
Capitalized license fees 1,200,039 1,136,879
Research credit carryforwards 1,302,745 1,359,517
Capitalized research and development costs 590,000 663,639
Other (72,482) (138,077)
----------- -----------
Net deferred tax assets 12,413,175 14,916,720
Valuation allowance for net deferred
tax assets (12,413,175) (14,916,720)
----------- -----------
- -
=========== ===========
The Company has provided a valuation allowance against the net
deferred tax assets recorded as of September 30, 1995 and 1996 due to
uncertainties as to their ultimate realization. The net operating loss and
research credit carryforwards expire through 2010. In the event of certain
ownership changes, the Tax Reform Act of 1986 imposes certain restrictions on
the amount of net operating loss carryforwards which may be used in any year by
the Company. As of September 30, 1996, the Company had $33,062,561 and
$10,646,641 of federal and California net operating loss carryforwards,
respectively.
9. RELATED PARTY TRANSACTIONS
Private Placement - In July 1991 the Company's President and Chief
Executive Officer purchased nine preferred stock units in a private placement
offering (see Note 5).
MBI - The President and Chief Executive Officer of the Company is
also an officer of MBI, a non-profit research organization. The Company has
agreements with MBI for the licensing of technology (see Note 2) and for the
leasing of facilities (see Note 10). In addition, the Company has incurred
charges relating to certain administrative and research services and facilities
provided by MBI and the use of certain of MBI's facilities and equipment. Such
charges to the Company are based on the usage of personnel and facilities and
totaled $206,241, $216,439 and $218,867 and $1,390,465 for the years ended
September 30, 1994, 1995 and 1996 and for the period from inception to September
30, 1996, respectively.
H.C. Wainwright - In October 1995, the Company engaged H.C.
Wainwright Asset Management to provide cash management services of the Company's
investment portfolio. One of the Company's directors, is a Vice President at
Wainwright and will receive a portion of the fee earned by Wainwright for such
cash management services.
10. COMMITMENTS
OPERATING LEASES - The Company leases its facilities from MBI under
a non-cancelable operating lease which expires January 31, 1997. The Company
also leases certain equipment under non-cancelable operating leases. Lease
expense for the years ended September 30, 1994, 1995 and 1996 and the period
from inception to September 30, 1996 was $266,012, $372,201, and $410,391
F-21
76
and $1,976,545, respectively. Future minimum payments under non-cancelable
operating leases for the year ending September 30, 1997 are $147,496.
CLINICAL RESEARCH AGREEMENT - In August 1996, the Company entered
into a clinical research services agreement with a third party related to Phase
3 clinical trials of LIDAKOL in the United States. During fiscal 1997, the
Company anticipates making payments of approximately $2.0 million under this
agreement.
11. EMPLOYEE SAVINGS PLAN
The Company has an employee savings plan established pursuant to Section 401(k)
of the Internal Revenue Code. The plan allows participating employees to deposit
into tax deferred investment accounts 2% to 15% of their salary, subject to
annual limits. The Company is not required to make matching contributions. The
Company did not make any such contributions in fiscal years 1994, 1995, and
1996.
12. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year ended September 30, 1995:
First Second Third Fourth
- -----------------------------------------------------------------------------------------------
REVENUES:
Interest and other $ 212,958 $ 210,173 $ 300,580 $ 160,878
-----------------------------------------------------------
Total revenues 212,958 210,173 300,580 160,878
-----------------------------------------------------------
EXPENSES:
Research and development 1,092,288 1,875,163 2,223,857 2,524,499
General and administrative 872,081 983,823 835,126 650,753
-----------------------------------------------------------
Total expenses 1,964,369 2,858,986 3,058,983 3,175,252
-----------------------------------------------------------
NET LOSS $(1,751,411) $(2,648,813) $(2,758,403) $(3,014,374)
===========================================================
NET LOSS PER SHARE $ (0.06) $ (0.09) $ (0.09) $ (0.11)
Year ended September 30, 1996:
First (1) Second (1) Third (1) Fourth
- --------------------------------------------------------------------------------------------------
REVENUES:
License fees/Contract research $ 3,000,000 $ 16,800
Federal SBIR grants $ 6,500 11,332 $ 25,168 15,000
Interest and other 190,035 279,336 306,050 307,817
----------------------------------------------------------
Total revenues 196,535 3,290,668 331,218 339,617
----------------------------------------------------------
EXPENSES:
Research and development 1,441,423 1,115,346 920,336 1,099,321
General and administrative 650,143 901,709 636,654 556,660
Interest (1) 175,374 1,214,630 1,115,124 461,559
----------------------------------------------------------
Total expenses 2,266,940 3,231,685 2,672,114 2,117,540
----------------------------------------------------------
NET INCOME (LOSS) (1) $(2,070,405) $ 58,983 $(2,340,896) $(1,777,923)
==========================================================
NET INCOME (LOSS) PER SHARE (1) $ (0.07) $ 0.00 $ (0.07) $ (0.05)
(1) Interest expense, net income (loss) and net income (loss) per share for the
first, second, and third quarters of the year ended September 30, 1996 have
been restated from amounts previously disclosed by the Company in its
quarterly reports on Form 10-Q to reflect the impact on those amounts of a
fourth quarter adjustment recorded by the Company to properly recognize
non-cash interest expense associated with the Convertible Notes (see Note
6). The effect of this adjustment on amounts previously disclosed was to
increase interest expense and net loss for the first quarter by $175,374
(.01 per share), increase interest expense and reduce net income for the
second quarter by $1,214,630 (.04 per share), and increase interest expense
and net loss for the third quarter by $1,083,340 (.03 per share).
* * * * * *
F-22
77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses of this Offering all of which are to be paid by
the Registrant in connection with the issuance and distribution of the
securities being registered are as follows:
SEC Registration Fee $ 3,920(1)
Accounting Fees and Expenses 33,500(2)
Legal Fees and Expenses 106,000(3)
Blue Sky Fees and Expenses 8,000
Transfer Agent's Fees and Expenses 3,000(4)
Miscellaneous Expenses 20,580(5)
--------
Total $175,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 204(a)(10) and (11), 204.5 and 317 of the California General
Corporation Law which covers the indemnification of directors, officers,
employees and agents of a corporation is hereby incorporated herein by
reference. Reference is made to Article 6 of Registrant's Restated Articles of
Incorporation and Section 3.15 of Registrant's By-Laws which provide for
indemnification by the Registrant in the manner and to the full extent permitted
by California law.
Beginning August 10, 1992, the Company has maintained directors' and
officers' liability insurance with policy limits of $5,000,000. The policy
covers 100 percent of losses arising from, among other things, claims of breach
of duty, neglect, error, alleged misstatement, misleading statement or omission
by the directors and officers in their capacity as such. Payment for loss would
be made to or on behalf of the Company where the Company is required or
permitted to indemnify directors or officers for covered losses pursuant to
statutory or common law, the Articles of Incorporation or Bylaws of the Company
or by agreement. The policy provides for retention of $5,000 per director or
officer, subject to a maximum of $10,000 for each loss, except in the case of
payment for loss to or on behalf of the Company, in which case the retention is
$100,000.
- --------
(1) Registration Fee paid upon the initial filing of this Registration
Statement.
(2) Includes $3,500 incurred from this Post-Effective Amendment.
(3) Includes $11,000 incurred from this Post-Effective Amendment.
(4) Includes $500 incurred from this Post-Effective Amendment.
(5) Includes $5,000 incurred from this Post-Effective Amendment.
II - 1
78
Articles of Incorporation or Bylaws of the Company or by agreement. The policy
provides for retention of $5,000 per director or officer, subject to a maximum
of $10,000 for each loss, except in the case of payment for loss to or on behalf
of the Company, in which case the retention is $100,000.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In September 1994 the Company entered into a stock purchase agreement
with Grelan Pharmaceutical Co. Ltd. of Japan ("Grelan"). Pursuant to the
agreement, Grelan purchase 522,449 shares of the Company's Class A Common Stock
for $2,000,000.
In November 1995, December 1995 and January 1996 the Company sold the
Convertible Notes due 1997 and 1998 (the "Notes") described under "Description
of Securities," above plus an additional 481,651 shares of Class A Common Stock
to a total of four investors. Such shares of stock and the Class A Common Stock
underlying the Notes were registered for resale to the public through a
Registration No. 33-64983 which was declared effective in January 1996.
All sales were made in reliance on Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"). No general advertisement or
solicitation of offerees was made and all offerees signed and delivered to the
Registrant agreements wherein they represented, among other things, that the
shares would be held for their own account for investment only and not with the
intent to engage in a distribution of such shares. The certificates representing
such shares bear legends restricting transferability in transactions not
registered under the Securities Act, and the share registers of the Registrant
bear stop transfer legends.
II - 2
79
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
1.1 - Underwriting Agreement(1)
3.1 - Restated Articles of Incorporation of the Registrant(6)
3.2 - Bylaws of the Registrant(4)
3.3 - First and Second Amendment to Bylaws of the Registrant(6)
4.1 - Forms of Class A and Class B Common Stock Certificates(3)
4.2 - Form of Unit Purchase Option issued to D.H. Blair & Co., Inc.
and its designees(1)
4.3 - Form of Unit Purchase Option issued to D.H. Blair & Co., Inc.
and its designees regarding Series B Preferred Stock and
Class D Warrants (4)
4.4 - Class D Warrant Agreement (including form of Class D Warrant
Certificate)(4)
4.5 - Warrant Agreement (including form of Class E Warrant
Certificate)(4)
4.6 - Warrant Agreement (including form of Class F Warrant
Certificate)(4)
4.7 - Registration Rights Agreement(4)
4.9 - Convertible Note issued to GFL Advantage Fund Limited (8)
4.10 - Convertible Note Issued to Capital Ventures International (9)
10.1 - 1989 Stock Option Plan(3)
10.2 - License Agreement with Medical Biology Institute(3)
10.3 - Amendment to License Agreement with Medical Biology Institute
dated July 1993 (5)
10.4 - Employment Agreement with David H. Katz, as amended(3)
10.5 - Amendment to Employment Agreement with David H. Katz dated
April 1993 (5)
10.6 - Sublease Agreement with Medical Biology Institute(3)
10.7 - First, Second and Third Amendments to Sublease Agreement with
Medical Biology Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Agreement with
Medical Biology Institute (7)
10.9 - License Agreement dated November 7, 1991 by and between the
Registrant and Yamanouchi Europe, b.v.(2)
10.10 - 1994 Stock Option Plan (7)
10.11 - Supplemental Agreement with Yamanouchi Europe b.v.(7)
10.12 - Licensing Agreement with Grelan Pharmaceutical Company Limited
(7)
10.13 - Sixth Amendment to the Sublease Agreement with Medical Biology
Institute (8)
10.14 - Subscription Agreement (8)
10.15 - Note Purchase Agreement issued to GFL Advantage Fund Limited
(8)
10.16 - Registration Rights Agreement with GFL Advantage Fund Limited
(8)
10.17 - License and Development Agreement with Bristol-Myers Squibb
Company (9)
10.18 - Registration Rights Agreement issued to Capital Ventures
International (9)
10.19 - Note Purchase Agreement issued to Capital Ventures
International (9)
10.20 - Seventh Amendment to the Sublease Agreement With Medical Biology
Institute (9)
11.1 - Statement Re Computation of Net Loss Per Share
23.1 - Independent Auditors' Consent included on Page II-7
24.1 - Power of Attorney (5)
- ---------------------------
(1) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-37166, declared effective by the Commission on November 9,
1990.
II - 3
80
(2) Incorporated by reference to Exhibit 28.1 included with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1991, filed January 11, 1992.
(3) Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-32742, declared
effective by the Commission on May 8, 1990.
(4) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-49082, declared
effective by the Commission on October 26, 1992.
(5) Incorporated by reference to the similarly described exhibits included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1993, filed December 29, 1993.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Amendment No. 4 to the Registration
Statement on Form S-1, File No. 33- 32742, declared effective by the
Commission on April 13, 1994.
(7) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1994, filed December 29, 1994.
(8) Incorporated by reference to the similarly described exhibit included
with the Registrant's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995, filed December 13, 1995.
(9) Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the Quarter
ended March 31,1996, filed May 15, 1996.
All other schedules are omitted for the reason that the information is
included in the financial statements or the notes thereto or that they are not
required or are not applicable.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
ii. To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; and
iii. To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II - 4
81
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Restated Articles of Incorporation
and By-Laws of the Registrant, the California General Corporation Law or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the issuer of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II - 5
82
INDEPENDENT AUDITORS' CONSENT
LIDAK Pharmaceuticals:
We consent to the use in this Post-Effective Amendment No. 5 to Registration
Statement No. 33-49082 of LIDAK Pharmaceuticals (a development stage
enterprise) on Form S-1 of our report dated November 6, 1996 (December 20, 1996
as to Note 6), which report contains an explanatory paragraph referring to the
status of the Company as a development stage enterprise, appearing in the
Prospectus, which is part of such Registration Statement, and to the reference
to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Diego, California
January 17, 1997
II - 6
83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in La Jolla, California,
on January 17, 1997.
LIDAK PHARMACEUTICALS
By /s/ DAVID H. KATZ
________________________________________
David H. Katz, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on January 17, 1997.
Signature Title
--------- -----
/s/ DAVID H. KATZ President, Chief Executive Officer,
- ------------------------------------------ Acting Chief Financial Officer
David H. Katz, M.D. (Principal Financial and Accounting
Officer), Secretary and Director
/*/ Director
__________________________________________
Helmer P.K. Agersborg, Jr.
/*/ Director
__________________________________________
William N. Jenkins
/*/
__________________________________________ Director
Kenneth E. Olson
84
Signature Title
--------- -----
/*/ Director
__________________________________________
Daniel J. Paracka
/*/ Director
__________________________________________
Stuart A. Samuels
/*/ Director
__________________________________________
Sidney N. Towle, Jr.
*By: /s/ DAVID H. KATZ
______________________________________
David H. Katz,
Attorney-in-Fact
85
INDEX TO EXHIBITS
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- ---------- ------------------------------------------------ ---------------
1.1 - Underwriting Agreement(1) Incorporated by
reference(1)
3.1 - Restated Articles of Incorporation of the Incorporated by
Registrant(6) reference(6)
3.2 - Bylaws of the Registrant(4) Incorporated by
reference(4)
3.3 - First and Second Amendment to Bylaws of Incorporated by
the Registrant(6) reference(6)
4.1 - Forms of Class A and Class B Common Stock Incorporated by
Certificates(3) reference(3)
4.2 - Form of Unit Purchase Option issued to D.H. Incorporated by
Blair & Co., Inc. and its designees(1) reference(1)
4.3 - Form of Unit Purchase Option issued to D.H. Incorporated by
Blair & Co., Inc. and its designees regarding reference(4)
Series B Preferred Stock and Class D
Warrants(4)
4.4 - Class D Warrant Agreement (including form Incorporated by
of Class D Warrant Certificate)(4) reference(4)
4.5 - Warrant Agreement (including form of Class Incorporated by
E Warrant Certificate)(4) reference(4)
4.6 - Warrant Agreement (including form of Class Incorporated by
F Warrant Certificate)(4) reference(4)
4.7 - Registration Rights Agreement(4) Incorporated by
reference(4)
4.9 - Convertible Note issued to GFL Advantage Incorporated by
Fund Limited(8) reference(8)
10.1 - 1989 Stock Option Plan(3) Incorporated by
reference(3)
10.2 - License Agreement with Medical Biology Incorporated by
Institute(3) reference(3)
10.3 - Amendment to License Agreement with Incorporated by
Medical Biology Institute dated July 1993(5) reference(5)
10.4 - Employment Agreement with David H. Katz, Incorporated by
as amended(3) reference(3)
86
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- ---------- ------------------------------------------------ ---------------
10.5 - Amendment to Employment Agreement with Incorporated by
David H. Katz dated April 1993(5) reference(5)
10.6 - Sublease Agreement with Medical Biology Incorporated by
Institute(3) reference(3)
10.7 - First, Second and Third Amendments to Incorporated by
Sublease Agreement with Medical Biology reference(4)
Institute(4)
10.8 - Fourth and Fifth Amendments to the Sublease Incorporated by
Agreement with Medical Biology Institute(7) reference(7)
10.9 - License Agreement dated November 7, 1991 Incorporated by
by and between the Registrant and reference(2)
Yamanouchi Europe b.v.(2)
10.1 - 1994 Stock Option Plan(7) Incorporated by
reference(7)
10.11 - Supplemental Agreement with Yamanouchi Incorporated by
Europe b.v.(7) reference(7)
10.12 - Licensing Agreement with Grelan Incorporated by
Pharmaceutical Company Limited(7) reference(7)
10.13 - Sixth Amendment to the Sublease Agreement Incorporated by
with Medical Biology Institute(8) reference(8)
10.14 - Subscription Agreement(8) Incorporated by
reference(8)
10.15 - Note Purchase Agreement issued to GFL Incorporated by
Advantage Fund Limited(8) reference(8)
10.16 - Registration Rights Agreement with GFL Incorporated by
Advantage Fund Limited(8) reference(8)
10.17 - License and Development Agreement with Incorporated by
Bristol-Myers Squibb Company (9) reference(9)
10.18 - Registration Rights Agreement issued to Incorporated by
Capital Ventures International (9) reference(9)
10.19 - Note Purchase Agreement issued to Capital Incorporated by
Ventures International (9) reference(9)
10.20 - Seventh Amendment to the Sublease Incorporated by
Agreement With Medical Biology Institute (9) reference(9)
87
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGES
- ---------- ------------------------------------------------ ---------------
11.1 - Statement Re Computation of Net Loss Per
Share
23.1 - Independent Auditors' Consent included on
Page II-7 of the Registration Statement
24.1 - Power of Attorney(5) Incorporated by
reference(5)
- ---------------------------
(1) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-37166, declared
effective by the Commission on November 9, 1990.
(2) Incorporated by reference to Exhibit 28.1 included with the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1991, filed January 11, 1992.
(3) Incorporated by reference to the exhibit with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-32742, declared
effective by the Commission on May 8, 1990.
(4) Incorporated by reference to the exhibits with the same number filed in
connection with the Registrant's Registration Statement on Form S-1,
File No. 33-49082, declared
effective by the Commission on October 26, 1992.
(5) Incorporated by reference to exhibit with same number filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993, filed December 29, 1993.
(6) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Amendment #4 to the Registration
Statement on Form S-1, File No. 33- 32742, declared effective by the
Commission on April 13, 1994.
(7) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1994, filed December 29, 1994.
(8) Incorporated by reference to the similarly described exhibit filed in
connection with the Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1995, filed December 13, 1995.
(9) Incorporated by reference to the similarly described exhibit included
with the Registrant's Quarterly Report on Form 10-Q for the Quarter
ended March 31,1996, filed May 15, 1996.