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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ______________ TO ______________
Commission File Number: 0-24274
LA JOLLA PHARMACEUTICAL COMPANY
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0361285
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6455 NANCY RIDGE DRIVE 92121
SAN DIEGO, CA (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (858) 452-6600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares of the Registrant's common stock, $.01 par value,
outstanding at September 30, 1999 was 20,159,559.
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LA JOLLA PHARMACEUTICAL COMPANY
FORM 10-Q
REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
COVER PAGE.................................................................................1
INDEX .....................................................................................2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Balance Sheets as of September 30, 1999 (Unaudited) and December 31, 1998............3
Statements of Operations (Unaudited) for the three months and nine months ended
September 30, 1999 and 1998..........................................................4
Statements of Cash Flows (Unaudited) for the nine months ended September 30, 1999
and 1998.............................................................................5
Notes to Financial Statements (Unaudited)............................................6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................7
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.................11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K....................................... ...11
SIGNATURE......................................................................... .......12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LA JOLLA PHARMACEUTICAL COMPANY
BALANCE SHEETS
(in thousands)
September 30, December 31,
1999 1998
------------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 6,311 $ 11,176
Short-term investments 7,841 12,174
Other current assets 282 517
-------- --------
Total current assets 14,434 23,867
Property and equipment, net 734 659
Patent costs and other assets, net 1,508 1,289
-------- --------
Total assets $ 16,676 $ 25,815
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 51 $ 1,254
Accrued expenses 425 575
Accrued payroll and related expenses 682 355
Deferred revenue - related party -- 1,769
Current portion of obligations under capital leases 196 3
-------- --------
Total current liabilities 1,354 3,956
Noncurrent portion of obligations under capital leases 97 --
Commitments
Stockholders' equity:
Common stock 201 201
Additional paid-in capital 84,320 84,276
Accumulated deficit (69,296) (62,618)
-------- --------
Total stockholders' equity 15,225 21,859
-------- --------
Total liabilities and stockholders' equity $ 16,676 $ 25,815
======== ========
Note: The balance sheet at December 31, 1998 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue from collaborative agreement -
related party $ 1,576 $ 1,839 $ 4,690 $ 6,005
Expenses:
Research and development 3,170 3,344 9,577 10,589
General and administrative 717 711 2,420 2,363
-------- -------- -------- --------
Total expenses 3,887 4,055 11,997 12,952
-------- -------- -------- --------
Loss from operations (2,311) (2,216) (7,307) (6,947)
Interest expense (3) (1) (16) (6)
Interest income 197 292 645 943
-------- -------- -------- --------
Net loss and comprehensive net loss $ (2,117) $ (1,925) $ (6,678) $ (6,010)
======== ======== ======== ========
Basic and diluted net loss per share $ (.11) $ (.10) $ (.33) $ (.33)
======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share 20,160 18,523 20,127 18,290
======== ======== ======== ========
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
-----------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Net loss $ (6,678) $ (6,010)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 266 286
Loss on disposal of property and equipment 23 --
Deferred compensation amortization -- 22
Changes in operating assets and liabilities:
Other current assets 235 206
Accounts payable and accrued expenses (1,353) (1,427)
Accrued payroll and related expenses 327 44
Deferred revenue - related party (1,769) 993
-------- --------
Net cash used for operating activities (8,949) (5,886)
INVESTING ACTIVITIES
Proceeds from maturity of short-term investments 4,333 8,077
Proceeds from the sale of property and equipment 20 --
Deletions to property and equipment 55 86
Increase in patent costs and other assets (254) (186)
-------- --------
Net cash provided by investing activities 4,154 7,977
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 44 130
Payments on obligations under capital leases (114) (121)
-------- --------
Net cash (used for) provided by financing activities (70) 9
Net (decrease) increase in cash and cash equivalents (4,865) 2,100
Cash and cash equivalents at beginning of period 11,176 11,999
-------- --------
Cash and cash equivalents at end of period $ 6,311 $ 14,099
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 16 $ 6
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital lease obligations incurred for property and
equipment $ 404 $ --
======== ========
Adjustment to deferred compensation for terminations $ -- $ 8
======== ========
See accompanying notes.
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LA JOLLA PHARMACEUTICAL COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
SEPTEMBER 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of La Jolla Pharmaceutical
Company (the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for other quarters or the year ended December
31, 1999. For more complete financial information, these financial statements,
and the notes thereto, should be read in conjunction with the audited financial
statements for the year ended December 31, 1998 included in the Company's Form
10-K filed with the Securities and Exchange Commission.
2. ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. Actual results could differ
from those estimates.
3. COLLABORATIVE AGREEMENTS
In September 1999, Abbott Laboratories terminated its license and development
agreement for the experimental lupus drug, LJP 394, and returned all rights to
the compound to the Company.
4. RESTRUCTURE CHARGES
As a result of the termination of the collaborative agreement with Abbott in
September 1999, the Company restructured its operations in order to reduce
expenses and to focus its resources to accelerate the development of an
experimental drug for the treatment of antibody-mediated thrombosis and to
partner its xenotransplantation drug candidate. The Company reduced its
workforce from approximately 95 to 54 full-time employees and recorded
restructuring charges of approximately $742,000, primarily composed of severance
and benefit payments.
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LA JOLLA PHARMACEUTICAL COMPANY
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including without
limitation, those dealing with the analysis of the data from the clinical
trials, as well as the Company's drug candidates and drug development plans and
other matters described in terms of the Company's plans and expectations. The
forward-looking statements involve risks and uncertainties and a number of
factors, both foreseen and unforeseen, could cause actual results to differ
materially from those anticipated. The analysis of the data from the Company's
Phase II/III clinical trial of LJP 394 may have negative or inconclusive
results. If clinical trials of LJP 394 continue, they may have negative or
inconclusive results. Further, delays in continued testing of LJP 394, the
Company's lead product candidate, and/or termination of development would result
in delays or an inability to market the compound. Tolerance, or the specific
inactivation of pathogenic B cells, is a new technology that has not been
proven, and the development of LJP 394 involves many risks and uncertainties,
including, without limitation, whether LJP 394 can provide a meaningful clinical
benefit. Any positive results observed to date may not be indicative of future
results. The Company's other potential drug candidates, none of which has
advanced to clinical testing, are at earlier stages of development and involve
comparable risks.
Additional risk factors include the uncertainty of obtaining required
regulatory approvals, successfully marketing products, receiving future revenue
from product sales or other sources such as collaborative relationships, future
profitability, the need for additional financing, the Company's dependence on
patents and other proprietary rights, the Company's limited manufacturing
capabilities and the Company's lack of marketing experience. Readers are
cautioned not to place undue reliance upon forward-looking statements, which
speak only as of the date hereof, and the Company undertakes no obligation to
update forward-looking statements to reflect events or circumstances occurring
after the date hereof. Interested parties are urged to review the risks
described below and in other reports and registration statements of the Company
filed with the Securities and Exchange Commission from time to time.
RECENT DEVELOPMENTS
As announced on May 12, 1999, Abbott Laboratories ("Abbott") and the
Company, in discussion with the Food and Drug Administration, elected to stop
the enrollment and treatment of the more than 200 patients enrolled in the
jointly conducted Phase II/III clinical trial of LJP 394, the Company's lupus
drug candidate, until the data could be validated and analyzed. This
announcement was made subsequent to a planned interim analysis of the Phase
II/III clinical trial, wherein the independent Data Monitoring Committee
reported efficacy as defined by the primary chosen endpoint, time to renal
flare, was less than expected. No major safety concerns were observed, and
patients receiving the experimental drug appeared to have a reduction in
circulating antibodies to double-stranded DNA that are associated with lupus
nephritis.
The Company is continuing to analyze the results of this clinical
program and is expecting to be completed with this analysis by the end of the
first quarter of 2000. A Phase II dose-ranging study of LJP 394 involving 75
lupus patients was recently completed, and the data from this study is also
currently being analyzed. The Company is committed to understanding the effects
of LJP 394 on endpoints from these studies before deciding on how to proceed
with any further development.
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LA JOLLA PHARMACEUTICAL COMPANY
In September 1999, Abbott terminated its license and development
agreement for the experimental lupus drug, LJP 394, and returned all rights to
the compound to the Company. Thus, while continuing to analyze the results of
the clinical program, the Company has restructured its operations in order to
reduce expenses and to focus its resources to accelerate the development of an
experimental drug for the treatment of antibody-mediated thrombosis and to
partner its xenotransplantation drug candidate. During September, the Company
reduced its workforce from approximately 95 to 54 full-time employees and
incurred expenses for these restructuring charges of approximately $742,000.
While the Company believes its cost cutting measures are appropriate, there can
be no assurance that such measures will be sufficient.
During the third quarter 1999, the Company announced that treatment with
a Toleragen(R) appeared to reduce the relative production of specific antibodies
in a mouse model of antibody-mediated thrombosis. In this autoimmune disorder,
certain antibodies exacerbate inappropriate clot formation, resulting in stroke,
myocardial infarction, and deep vein thrombosis. Antibody-mediated thrombosis,
also known as antiphospholipid syndrome, is a clotting disorder that afflicts
more than 500,000 patients in the U.S. and Europe.
On August 10, 1999, the closing bid price for the Company's common stock
had been below $1.00 per share for 30 consecutive days. On this date, the
Company received notice from The Nasdaq Stock Market, Inc. that its common stock
will be delisted from the Nasdaq National Market unless the Company can comply
with the Nasdaq requirement that its common stock maintain a minimum bid price
greater than or equal to $1.00 per share. In response to this notice, the
Company's Board proposed a reverse split of the Company's common stock and the
Company announced that it expected to distribute proxy materials on
approximately October 8, 1999. The Company has subsequently extended the date
that it expects to distribute proxy materials pending a hearing before the
Nasdaq Listing Qualification Panel, and while it continues to review any
available alternative causes of action.
RESULTS OF OPERATIONS
The Company earned $1.6 and $4.7 million in revenue from its
collaborative agreement with Abbott in the three and nine months ended September
30, 1999, respectively, and earned $1.8 million and $6.0 million in revenue for
the same periods in 1998. Payments received in advance under the collaborative
agreement with Abbott were recorded as deferred revenue until earned. Total cash
payments of approximately $2.9 million were received in advance under the
collaborative agreement with Abbott during the first six months of 1999. As of
September 30, 1999, the Company earned all of the revenue received to date
from Abbott. The receipt of payments and the recognition of revenue from the
collaborative agreement with Abbott have historically varied significantly from
quarter to quarter and from year to year depending on the level of research
effort expended. In September 1999, Abbott terminated its license and
development agreement for LJP 394, including any further development funding,
and has returned all rights to the compound to La Jolla Pharmaceutical. There
can be no assurance that the Company will realize any further revenue from any
other collaborative arrangement.
Research and development expenses decreased to $3.2 million for the
third quarter of 1999 from $3.3 million for the same period in 1998. For the
nine months ended September 30, 1999, research and development expense decreased
to $9.6 million from $10.6 million for the same period in 1998. The decrease in
the third quarter in 1999 from the third quarter in 1998 was primarily due to
the decrease in expenses as a result of stopping the Company's Phase II/III
clinical trial for LJP 394. Depending on the results of the data analysis from
the clinical trial of LJP 394, the Company's research and development expenses
may increase significantly in the future as efforts to develop additional drug
candidates are intensified, products potentially progress into and through
clinical trials, and manufacturing scale-up activities are possibly increased.
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LA JOLLA PHARMACEUTICAL COMPANY
General and administrative expenses of $717,000 for the third quarter of
1999 increased slightly from $711,000 for the same period in 1998. For the nine
months ended September 30, 1999 and 1998, general and administrative expense was
$2.4 million. The Company's general and administrative expenses may increase in
the future in order to support increased research and development and, possibly,
manufacturing scale-up activities.
Interest income decreased to $197,000 for the third quarter of 1999 from
$292,000 for the same period in 1998. For the nine months ended September 30,
1999, interest income decreased to $645,000 from $943,000 for the same period in
1998. The decrease was due to lower investment balances. For the third quarter
of 1999, interest expense increased slightly to $3,000 from $1,000 for the same
period in 1998. For the nine months ended September 30, 1999, interest expense
increased to $16,000 from $6,000 for the same period in 1998. The increase was
the result of increases in the Company's capital lease obligations as compared
to the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had incurred a cumulative net loss
since inception of approximately $69.3 million, and had financed its operations
through private and public offerings of its securities, payments under
collaborative agreements, capital and operating lease transactions, and interest
income on its invested cash balances. As of September 30, 1999, the Company had
raised approximately $83.7 million in net proceeds since inception from sales of
equity securities.
At September 30, 1999, the Company had $14.2 million in cash, cash
equivalents and short-term investments, as compared to $23.4 million at December
31, 1998. The Company's working capital at September 30, 1999 was $13.1 million,
as compared to $19.9 million at December 31, 1998. The decrease in cash, cash
equivalents and short-term investments resulted from the continued use of the
Company's cash toward operating activities, restructuring charges, patent
expenditures and the purchase of property and equipment. The decrease in working
capital is primarily due to the use of cash for net operating expenses,
restructuring charges and the addition of property and equipment under capital
leases in the first nine months of 1999. The Company invests its cash in
corporate and United States government-backed debt instruments.
As of September 30, 1999, the Company had acquired an aggregate of $4.4
million in property and equipment, of which approximately $293,000 of total
property and equipment costs remains financed under capital lease obligations.
In addition, the Company leases its office and laboratory facilities and certain
property and equipment under operating leases. The Company has no material
commitments for the acquisition of property and equipment but anticipates
increasing investment in property and equipment in connection with the
enhancement of its research and development and manufacturing facilities and
capabilities.
The Company intends to use its financial resources to fund its research
and development efforts, to fund its possible manufacturing scale-up activities
and for working capital and other general corporate purposes. The amounts
actually expended for each purpose may vary significantly depending upon
numerous factors, including the results of clinical trials, the analysis of the
Phase II/III clinical trial data, the timing of any regulatory applications and
approvals, and technological developments. Expenditures will also depend upon
the establishment and progression of collaborative arrangements and contract
research as well as the availability of other financings. There can be no
assurance that these funds will be available on acceptable terms, if at all.
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LA JOLLA PHARMACEUTICAL COMPANY
The Company anticipates that its existing capital and interest earned
thereon will be sufficient to fund the Company's operations as currently planned
through 2000. The Company's future capital requirements will depend on many
factors, including continued scientific progress in its research and development
programs, the size and complexity of these programs, the scope and results of
clinical trials, the analysis of data from the Phase II/III clinical trial, the
time and costs involved in applying for any regulatory approvals, the costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, competing technological and market developments, the ability of the
Company to establish and maintain collaborative relationships, and the cost of
possible manufacturing scale-up and effective commercialization activities and
arrangements. The Company expects to incur significant net operating losses each
year for at least the next several years as it continues its research and
development efforts and incurs general and administrative expenses to support
its research and development programs. It is possible that the Company's cash
requirements will exceed current projections and that the Company will therefore
need additional financing sooner than currently expected.
The Company has no current means of generating cash flow from
operations. Unless the Company's lead drug candidate, LJP 394, has been proven
safe and effective, has received regulatory approval and has been successfully
commercialized, it will not generate revenues. This process, if completed, could
likely take several years. The Company's other drug candidates are much less
developed than LJP 394. There can be no assurance that the Company's product
development efforts with respect to any drug candidate will be successfully
completed, that required regulatory approvals will be obtained, or that any
product, if introduced, will be successfully marketed or achieve commercial
acceptance. Accordingly, the Company must continue to rely upon outside sources
of financing to meet its capital needs for the foreseeable future.
The Company anticipates increasing expenditures on the development of
other drug candidates and, over time, the Company's consumption of cash will
necessitate additional sources of financing. Furthermore, the Company has no
internal sources of liquidity, and termination of the Abbott arrangement has had
an adverse effect on the Company's ability to generate sufficient cash to meet
its needs.
The Company will continue to seek capital through any appropriate means,
including issuance of its securities and establishment of additional
collaborative arrangements. However, there can be no assurance that additional
financing will be available on acceptable terms and the Company's negotiating
position in its capital-raising efforts may worsen as it continues to use its
existing resources. There is no assurance that the Company will be able to enter
into further collaborative relationships.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of computer programs written using
two digits rather than four to define the applicable year. As a result, these
computer programs may be unable to distinguish 21st century dates from 20th
century dates. This problem may cause systems to fail or miscalculate, causing
disruptions of operations, including a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, the Company believes that it has an
effective program in place to resolve the Year 2000 Issue in a timely manner and
that its total internal Year 2000 Issue costs for information technology and
non-information technology systems will be less than $100,000 of which
approximately $85,000 has been incurred to date in 1999. The Company's year 2000
conversion requirements are expected to be achieved through routine upgrades to
its hardware and software programs and these upgrades are expected to be
completed in the fourth quarter of 1999. These costs and the expected
completion date are based on management's best estimates; therefore, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those anticipated.
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LA JOLLA PHARMACEUTICAL COMPANY
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing and implementation. To date, the
Company has completed the assessment phase for 100% of the systems that could be
significantly affected by the Year 2000 Issue and has determined that the
majority of the systems assessed do not require remediation to be year 2000
compliant. Approximately 90% of the systems requiring remediation are now year
2000 compliant. In addition, the Company has communicated with its significant
suppliers and has found that most of these suppliers have indicated that their
systems are year 2000 compliant. There can be no assurance that the systems of
other companies on which the Company's systems rely will be timely converted and
will not have an adverse effect on the Company's systems.
The Company currently has a contingency plan in place in the event it
does not complete all phases of the year 2000 program including back-up
emergency generators for selected critical systems, back-up tapes of computer
data and powering off all equipment, if applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests its excess cash in interest-bearing investment-grade
securities that it holds for the duration of the term of the respective
instrument. The Company does not utilize derivative financial instruments,
derivative commodity instruments or other market-risk-sensitive instruments,
positions or transactions in any material fashion. Accordingly, the Company
believes that, while the investment-grade securities it holds are subject to
changes in the financial standing of the issuer of such securities, the Company
is not subject to any material risks arising from changes in interest rates,
foreign currency exchange rates, commodity prices or other market changes that
affect market-risk-sensitive instruments.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
================================================================================
Exhibit
Number Description
- --------------------------------------------------------------------------------
3.1 Intentionally omitted
3.2 Amended and Restated Bylaws of the Company (1)
3.3 Amended and Restated Certificate of Incorporation of the Company (1)
27 Financial Data Schedule (1)
================================================================================
- -----------------------
(1) Filed herein.
(b) REPORTS ON FORM 8-K
During the quarter ended September 30, 1999, the Company filed a Current
Report on Form 8-K dated September 14, 1999 reporting the following: that the
Company had regained the rights to its experimental lupus drug, LJP 394,
following termination by Abbott of a license and development agreement between
the Company and Abbott; that it is restructuring operations while it is
evaluating the results of a clinical trial of its experimental lupus drug, LJP
394, and that its Board of Directors had set a special meeting of stockholders,
the primary purpose of which is to put forth to the stockholders a proposed
one-for-five reverse split of the Company's Common Stock.
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LA JOLLA PHARMACEUTICAL COMPANY
SIGNATURE
SEPTEMBER 30, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
La Jolla Pharmaceutical Company
Date: November 12, 1999 By: /s/ Steven B. Engle
---------------------------------------
Steven B. Engle
Chairman and
Chief Executive Officer
Signed on behalf of the Registrant
By: /s/ Gail A. Sloan
----------------------------------------
Gail A. Sloan
Signed as Principal Accounting Officer
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LA JOLLA PHARMACEUTICAL COMPANY
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- -------
3.2 Amended and Restated Bylaws of the Company
3.3 Amended and Restated Certificate of Incorporation of the Company
27 Financial Data Schedule
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