1
Registration No. 333-56254
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
Amendment No. 1
REGISTRATION STATEMENT
UNDER THE
THE SECURITIES ACT OF 1933
DEMEGEN, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
COLORADO 2834 84-1065575
(State or Other Jurisdiction of (Primary Standard (IRS Employer
Incorporation or Organization) Industrial Classification Identification No.)
Code Number)
1051 Brinton Road,
Pittsburgh, PA 15221
(412) 241-2150
(Address of Principal Place of Business)
Richard D. Ekstrom
President & Chief Executive Officer
Demegen, Inc.
1051 Brinton Road,
Pittsburgh, PA 15221
(412) 241-2150
(Address of Principal Executive Officer)
Copy to:
Mary Silverberg, Esquire
Buchanan Ingersoll
1 Oxford Centre, 301 Grant Street
Pittsburgh, PA 15219-1410
412-227-5897
- --------------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering ( )
If this form is a post-effective amendment filed pursuant to Rule 462 ( c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ( )
If this form is a post-effective amendment filed pursuant to Rule 462 (d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ( )
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box ( )
CALCULATION OF REGISTRATION FEE
================================================================================
Title of Each Amount of Proposed Proposed Amount of
Class of Securities Maximum Maximum Registration
Securities To Be Offering Price Aggregate Offering Fee *
To Be Registered Registered Per Unit Price
================================================================================
Common Stock 16,251,314 $0.75 $6,466,644 $3,819.06
================================================================================
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 THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 (a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8 (a), MAY DETERMINE.
================================================================================
*Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457 of the Securities Act of 1933 and is based upon the average of
the bid and asked price of the Common Stock on the Over the Counter (OTC)
Bulletin Board on February 22, 2001.
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================================================================================
Neither the SEC nor any State securities commission has made any determination
regarding the truthfulness or completeness of this prospectus or approved or
disapproved of anyone's investment in these securities. Any representation to
the contrary is a criminal offense.
================================================================================
SUBJECT TO COMPLETION, DATED MARCH 16, 2001
PROSPECTUS
16,251,314 SHARES OF COMMON STOCK
DEMEGEN, INC.
We are registering 16,251,314 shares of Common Stock, par value $0.001 per
share. The Common Shares that we are registering are held or would be held by
current shareholders of Demegen. (See Selling Shareholders section of this
Prospectus for a listing of shareholders who's shares are being registered). We
will not receive any proceeds from the sale of these shares by the Selling
Shareholders.
The 16,251,314 Common Shares that we are registering are held as follows:
o In March 2000 we had a private placement of securities where we sold
5,642,879 Common Shares. These Common Shares are being registered.
o The shareholders in the March 2000 private placement also received warrants
to purchase 5,642,879 Common Shares. The exercise price for the Warrant is
$0.75 per share. These Common Shares are being registered.
o In June 1998 we received funding from CEO Venture Fund III. As part of that
funding, we issued to CEO a warrant to purchase 4,965,556 shares of Common
Stock. The exercise price for the Warrant is $0.45 per share. These Common
Shares are being registered.
Our Common Stock is traded on the OTC Bulletin Board under the symbol "DBOT". On
March 6, 2001, the last reported sale price for our Common Stock on the OTC
Bulletin Board was $0.85 per share.
SEE RISK FACTORS BEGINNING ON PAGE 8 TO READ ABOUT CERTAIN RISKS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
Price to
Public
------
Per Share $0.45 to $0.75
Total (1) $6,466,659
================================================================================
(1) Before deducting expenses of the Offering payable by the Company, estimated
at approximately $13,000.
3
TABLE OF CONTENTS
Page
----
Special Note of Caution Regarding Forward-Looking Statements 3
Prospectus Summary 3
Risk Factors 8
We have had significant losses which will continue into the future. 8
We need additional financing. 8
Our products are in the early stage of development. 8
Clinical trials can result in negative results. 8
We depend upon a few key employees. 9
The price of our Common Stock is very volatile. 9
Purchasers of our Common Stock will experience dilution of their ownership. 9
The holder of our preferred stock has significant dividend and liquidation rights. 10
We have never paid and do not expect to pay cash dividends on our Common Stock. 10
We have a license agreement with a purchase option with Periodontix, Inc. 10
The clinical trial process that we are entering is lengthy and has an uncertain outcome. 10
We are dependent upon collaborative partners and licensees. 11
Our business is very competitive and subject to technological obsolescence. 11
We do not have manufacturing or marketing capacity. 11
We may be sued by persons participating in our clinical trials or by persons purchasing our products. 12
There are many uncertainties associated with health care reimbursements. 12
We depend upon our patents and other proprietary rights. 12
How we intend to use the proceeds from this offering 13
Selling Shareholders 14
Price Range of Our Common Stock 16
Dividend Policy 17
Capitalization 17
Selected Historical Financial Data 17
Management's Discussion and Analysis of Financial Condition & Results of Operations 18
Description of Business 23
Legal Proceedings 46
Recent Developments 46
Executive Officers & Compensation 47
Directors 51
Security Ownership of Certain Beneficial Owners and Management 54
Interest of Named Experts and Counsel 56
Description of Securities 56
Disclosure of Commission Position Indemnification for Securities Act Liabilities 59
Financial Statements 61
SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this prospectus and the documents incorporated
by reference into this prospectus may constitute "forward-looking statements"
within the meaning of the federal securities laws. Forward-looking statements
are based on our management's beliefs, assumptions and expectations of our
future economic performance, taking into account the information currently
available to them. These statements are not statements or historical fact.
Forward-looking statements involve risks and uncertainties that may cause our
actual results, performance or financial condition to be materially different
from the expectations of future results, performance or financial condition we
express or imply in any forward-looking statements. Some of the important
factors that could cause our actual results, performance or financial condition
to differ materially from our expectations are discussed under "Risk Factors".
When used in our documents, the words "anticipate", "estimate", "expects",
"objective", "projection", "forecast", "goal", or similar words are intended to
identify forward-looking statements.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our Company and the Common Stock being offered pursuant to
this registration of Common Stock and our financial statements and notes to
those statements appearing elsewhere in this prospectus.
DEMEGEN, INC.
We discover, design and develop novel peptides, proteins and genes for the
treatment of solid tumors, cystic fibrosis, multi-drug resistant bacteria and
fungi. Applications also include genetically enhanced agricultural products. We
expect human clinical trials for a number of pharmaceutical applications in
calendar 2001.
Our offices are at 1051 Brinton Road, Pittsburgh, PA 15221, and our telephone
number at that address is (412) 241-2150.
4
RECENT DEVELOPMENTS
In January 2001 the Company entered into a License Agreement form Avigenics,
Inc. and is in the process of reviewing the terms in preparation for executing
the agreement. The license provides for an exclusive worldwide license for the
use of the Company's peptides for the control of certain avian enteric diseases,
including coccidiosis and salmonella, and for use in the production of
transgenic avians, including poultry. The License provides for no payment at
signing of the License but for a royalty upon the sale of licenses product by
Avigenics.
Effective January 1, 2001 the Company entered into a definitive license
agreement with an
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option to purchase with Periodontix, Inc for all of their technologies and
rights in related clinical trials, except for Periodontix' photodynamic
technology. The transaction is structured under a short-term license agreement
to permit the Company a period of time to evaluate Periodontix's technology and
obtain the necessary funds to support the additional research, prior to
exercising the purchase option.
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OFFERING
We are registering 16,251,314 shares of Common Stock, par value $0.001 per
share. The Common Shares that we are registering are held or would be held by
current shareholders of Demegen. (See Selling Shareholders section of this
Prospectus for a listing of shareholders who's shares are being registered). We
will not receive any proceeds from the sale of these shares by the Selling
Shareholders.
The 16,251,314 Common Shares that we are registering are held as follows:
o In March 2000 we had a private placement of securities where we sold
5,642,879 Common Shares. These Common Shares are being registered.
o The shareholders in the March 2000 private placement also received warrants
to purchase 5,642,879 Common Shares. The exercise price for the Warrant is
$0.75 per share. These Common Shares are being registered.
o In June 1998 we received funding from CEO Venture Fund III. As part of that
funding, we issued to CEO a warrant to purchase 4,965,556 shares of Common
Stock. The exercise price for the Warrant is $0.45 per share. These Common
Shares are being registered.
Our Common Stock is traded on the OTC Bulletin Board under the symbol "DBOT". On
March 6, 2001, the last reported sale price for our Common Stock on the OTC
Bulletin Board was $0.85 per share.
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SUMMARY FINANCIAL DATA
SELECTED FINANCIAL DATA
The following table sets forth certain financial data for, and as of the
quarters ended December 31, 2000 and 1999 (unaudited) and the years ended
September 30, 2000, 1999, 1998, 1997, and 1996 and for the period December
6, 1991 (inception) to December 31, 2000:
Quarter Quarter Year Ended September 30,
Ended Ended ----------------------------------------------------------------------
December 31, December 31, 2000 1999 1998 1997 1996
2000 1999 ---- ---- ---- ---- ----
---- ----
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Grant, license fees and
Other Income $ 186,451 $ 424,701 $ 763,765 $ 1,118,576 $ 1,376,918 $ 764,834 $ 271,777
Total Expenses 798,549 412,380 2,419,247 2,456,318 3,370,671 1,708,607 2,841,255
Net Income (Loss) (612,098) 12,321 (1,655,482) (1,337,742) (1,993,753) (943,773) (2,569,478)
Net Loss per Share
(dilutive) $ (0.02) $ 0.00 $ (0.06) $ (0.06) $ (0.13) $ (0.05) $ (0.17)
Dividends per Share $ (0.02) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Average Number
of Common Shares
Outstanding 32,310,213 26,361,899 29,759,153 26,255,104 23,867,091 19,537,047 15,479,889
BALANCE SHEET DATA:
Cash & Cash Equivalents $ 1,509,994 $ 700,432 $ 1,825,352 $ 583,585 $ 1,686,658 $ 310,252 $ 19,266
Working Capital
(deficiency) 858,298 238,704 1,413,408 6,849 1,329,541 (1,498,477) (2,754,591)
Total Assets 2,050,779 1,181,019 2,311,592 1,084,505 2,114,750 651,963 156,147
Long-term obligations 364,859 373,619 360,180 203,147 -0- -0- -0-
Deficit accumulated during
development stage (16,719,291) (14,172,737) (16,039,877) (14,119,462) (12,523,358) (9,443,772) (8,499,999)
Redeemable convertible
preferred Stock 2,101,101 1,834,448 2,033,787 1,768,846 1,510,484 -0- -0-
Shareholders' (Deficit) (1,187,823) (1,609,209) (633,989) (1,555,934) (122,130) (1,158,216) (2,642,523)
December 6,
1991 (Inception)
to December 31,
2000
----
STATEMENT OF OPERATIONS DATA:
Grant, license fees and Other Income $ 4,766,713
Total Expenses 19,809,560
Net Income (Loss) (15,042,847)
8
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our Common Stock.
Investing in our Common Stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.
We have had significant losses which will continue into the future.
We have been involved in research and development activities since our
inception. From inception through December 31, 2000 we have an accumulated
deficit of $16,719,000 and expect significant losses to continue into the future
as we conduct research, development and clinical trials. Our ability to achieve
profitability in the future will depend on many events most of which are outside
of our control. Therefore, there can be no assurance that we will be able to
achieve profitability.
We need additional financing.
We have been dependent on the issuance of equity securities to finance our
operation. We have incurred negative cash flows since inception and have
expended, and expect to continue to expend, substantial funds to continue our
research and development programs. We expect to seek additional financing on
both a short-term and long-term basis. There is no assurance that sufficient
funding will be forthcoming or that the funding will be at terms acceptable to
us.
Our products are in the early stage of development.
Our proposed products and research programs are in the developmental stage and
require significant time-consuming and costly research and development, testing
and regulatory clearances. Therefore, we do not expect any of our product
candidates to be commercially available for several years, if ever. If we are
unable to develop our products your investment may be jeopardized.
Clinical trials can result in negative results.
We have limited experience in conducting clinical trials. Also, the results from
preclinical studies and early clinical trials may not be predictive of results
that will be obtained in large-scale testing, and there can be no assurance that
the clinical trials conducted by us or our partners will demonstrate sufficient
safety and efficacy to obtain the required regulatory approvals or will result
in marketable products.
9
Delays or negative results in the clinical trial process may have a material
adverse effect upon us and your investment.
We depend upon a few key employees.
We are dependent on certain executive officers and scientific personnel,
including Richard D. Ekstrom, our Chairman, President and Chief Executive
Officer, S. Robert Fatora, Chief Operating Officer - Pharmaceutical Products,
and Jesse M. Jaynes, Ph.D., our Vice President and Co-Founder. If we lost the
services of any of these people, replacing them would be very difficult as
competition for qualified employees among pharmaceutical and biotechnology
companies is intense.
The loss of these key employees could significantly delay our development and
clinical trial programs.
The price of our Common Stock is very volatile.
Our Common Stock is thinly traded, and the we are in an industry that has not
generated the stock price performance experienced by other high technology
industries. As a result, the market price of our common stock may not reflect
the inherent value of the Company's technology. The price of our common stock
has been and may continue to be subject to wide fluctuations in response to any
of the following events:
o Quarterly variations in results of operations;
o Announcement of new innovations or products by us or by its
competitors;
o The stock price performance of other companies that investors may
deem to be comparable to our stock price;
o News related to trends in the marketplace.
These wide fluctuations in our price could result in purchasers of our Common
stock losing some or all of their investment.
Purchasers of our Common Stock will experience dilution of their ownership.
We have outstanding options and warrants to purchase 18,103,414 shares of Common
Stock, exclusive of those issued or issuable under the Periodontix agreement.
Holders of such options and warrants are likely to exercise them when, in all
likelihood, we could obtain additional capital on terms more favorable than
those provided by the options and warrants. In addition, the exercise of such
options and warrants will result in dilution to the interests of our
stockholders to the extent that the exercise price is less than the fair market
value of the Common Stock.
Additionally, the holder of the redeemable convertible preferred stock can
convert its shares into 4,444,444 shares of common stock.
10
Dilution will be increased to the extent that holders of outstanding options and
warrants purchase Common Stock at prices below current market value and to the
extend the holder of the redeemable convertible preferred stock converts their
holdings into common stock.
The holder of our preferred stock has significant dividend and liquidation
rights.
The owner of our redeemable convertible preferred stock is entitled to receive,
when and if declared by the Board of Directors, dividends at a rate of $0.036
per share ($160,000 annually). Such dividends have priority over any dividends
paid on common stock. Dividends on the preferred stock are cumulative and the
right to the dividends accrue until declared by the Board of Directors.
In the event of our liquidation, preferred stockholders have liquidation rights
in priority to common stockholders. The rights the preferred shareholder has
dilutes the value of your investment in our Common Stock and could result in you
not receiving any funds should we liquidate.
We have never paid and do not expect to pay cash dividends on our Common Stock.
We have never paid any cash dividends on our Common Stock and do not intend to
pay cash dividends in the foreseeable future. We currently intends to retain all
earnings, if any, for the development of its business. Therefore, all return on
your investment in our Common Stock must come from appreciation in the value of
our Common Stock.
We have a license agreement with a purchase option with Periodontix, Inc.
We entered into a license with an option to acquire selected technologies of
Periodontix, Inc. on February 8, 2001. Assuming we exercise the purchase option,
the integration of Periodontix into us may adversely impact the timeline for
achieving results from either company's clinical trials.
The 9 million shares of Common Stock and the Warrant to purchase up to 9 million
shares of our Common Stock that may be issued to exercise the option to purchase
the technologies from Periodontix represents a significant portion of our
outstanding shares and may result in significant dilution to you if the value
expected in the transaction does not materialize.
Should we not exercise its option, a portion of the Common Stock and Warrants
issued will not be recoverable by us. Additionally, all of our funds expended on
Periodontix up to that point will not be recoverable. This is viewed by
management as the cost to validate Periodontix's technology.
The clinical trial process that we are entering is lengthy and has an uncertain
outcome.
11
Our research, development, preclinical and clinical trials, manufacturing and
marketing of most of our product candidates are subject to an extensive
regulatory approval process by the United States Food and Drug Administration
(the "FDA") and other regulatory agencies in the United States and abroad.
We or our collaborators may encounter significant delays or excessive costs in
their efforts to secure necessary approvals or licenses. Even if regulatory
clearance is obtained, a marketed product is subject to continual review, and
later discovery of previously unknown defects.
Problems or delay in the clinical trial process could result in purchasers of
our Common stock losing some or all of the value of their investment.
We are dependent upon collaborative partners and licensees.
We do not intend to conduct late-stage clinical trials, or manufacture or market
any of our product candidates in the foreseeable future, exclusive of
technologies which would be acquired in the Periodontix transaction. We have
granted Dow AgroSciences the right to conduct development, manufacturing,
commercialization and marketing activities relating to certain of our
technologies for plant agricultural applications.
We intend to enter into corporate alliances for later stage clinical testing,
development and commercialization of its pharmaceutical applications and any
other related technologies that may be acquired or developed by us.
Reliance upon these third-parties could adversely affect our operation and the
value of your investment.
Our business is very competitive and subject to technological obsolescence.
The pharmaceutical, biotechnology and bio- pharmaceutical industries are
intensely competitive and competition from other companies and other research
and academic institutions is expected to increase. Many of these companies have
substantially greater financial and other resources and research and development
capabilities than us and have substantially greater experience in undertaking
preclinical and clinical testing of products, obtaining regulatory approvals and
manufacturing and marketing pharmaceutical products.
The pharmaceutical, biotechnology and biopharmaceutical industries are rapidly
evolving fields in which developments are expected to continue at a rapid pace.
These issues could adversely affect our operation and the value of your
investment.
We do not have manufacturing or marketing capacity.
We do not generally expect to engage directly in manufacturing or marketing of
products in the near term, but may elect to do so in certain cases. We do not
currently have the capacity to manufacture or market products or any experience
in such activities. This could adversely affect our operation and the value of
your investment.
12
We may be sued by persons participating in our clinical trials or by persons
purchasing our products.
The use of our potential products in clinical trials and the marketing of any
pharmaceutical products may expose us to product liability claims. While we plan
to purchase insurance coverage, it may not be sufficient to cover all claims or
costs in excess of what we are able to pay. A significant claim in excess of our
coverage limits could have a material adverse effect on us and result in the
decrease or loss in value of your investment.
There are many uncertainties associated with health care reimbursements.
Our success may depend, in part, on the extent to which reimbursement for the
costs of therapeutic products and related treatments will be available from
third-party payors such as government health administration authorities, private
health insurers, managed care programs and other organizations. Changes in
health care reimbursements are beyond our control and could have a material
adverse effect on us and result in the decrease or loss in value of your
investment.
We depend upon our patents and other proprietary rights.
Our success will depend in part on our ability to obtain patent protection for
our products, both in the United States and abroad. The patent position of
biotechnology and pharmaceutical companies in general is highly uncertain and
involves complex legal and factual questions. Loss of patent or other
proprietary rights could have a material adverse effect on us and on the value
of your investment in us.
13
HOW WE INTEND TO USE THE PROCEEDS FROM THIS OFFERING
We will not receive any proceeds from the sale of Common Shares by the Selling
Shareholders. Our net proceeds will solely come from the exercise of all
warrants related to the Common Stock being registered are estimated to be
approximately $6,434,000, after deducting the estimated offering expenses.
14
We expect to use the net proceeds from the exercise of the warrants for working
capital and other general corporate purposes. Principally, we expect that
expenditures will be focused upon advancing our molecules towards
commercialization by successfully advancing through the Food & Drug
Administration's ("FDA") clinical trial process.
Pending use of the net proceeds, we intend to invest the net proceeds in
interest bearing money market accounts and/or investment grade securities. We
have other expected sources of funds should the exercise of the aforementioned
warrants not occur in the near term.
SELLING SECURITY HOLDERS
The table below lists the selling shareholders and other information regarding
the beneficial ownership of the Common Stock by each of the selling
shareholders. The second column lists, for each selling shareholder, the number
of shares of common stock, including ownership of Common Stock that would have
been issuable to the selling shareholders on February 22, 2001 assuming exercise
of all the warrants held by such selling shareholders on that date. The third
column lists each selling shareholder's pro rata portion of the
16,251,314 shares of common stock being offered by this prospectus. The selling
shareholders may sell all, some or none of their shares in this offering.
Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
----------------- --------------
Number of Shares
Selling Number of Being
Security Holder Shares Percent Offered Hereby Shares Percent
- --------------- ------ ------- -------------- ------ -------
CEO Venture Fund III (A) 10,285,000 23.27% 5,765,556 4,519,444 10.23%
Robert Aul 60,000 * 60,000 0 0.00%
George Beck 40,000 * 40,000 0 0.00%
Ben T. Benedum 60,000 * 60,000 0 0.00%
Tilden Bennett 80,000 * 80,000 0 0.00%
Carl Berke 51,250 * 51,250 0 0.00%
James Berquist & Esther Dormer 48,000 * 48,000 0 0.00%
Helen Billak 60,000 * 60,000 0 0.00%
Lawrence Breck 40,000 * 40,000 0 0.00%
Howell Breedlove 200,000 * 200,000 0 0.00%
Bloomberg Family Enterprise 200,000 * 200,000 0 0.00%
David Burstin 40,000 * 40,000 0 0.00%
Thomas Canfield 300,000 * 300,000 0 0.00%
Kathleen Cabraja 13,336 * 13,336 0 0.00%
Ronald Cassie 102,500 * 102,500 0 0.00%
Jarvis Cecil 80,000 * 80,000 0 0.00%
William Chaiken 315,000 * 100,000 215,000 *
David Cohen 100,000 * 100,000 0 0.00%
Randall Colton 400,000 1.02% 400,000 0 0.00%
Colton Investments, LLC 100,000 * 100,000 0 0.00%
Allen Cousin 80,000 * 80,000 0 0.00%
Walter DeForest 312,000 * 160,000 152,000 *
John P. Edgar 20,000 * 20,000 0 0.00%
Harry Erikson 40,000 * 40,000 0 0.00%
Chester Fisher 300,000 * 300,000 0 0.00%
William Grant 100,000 * 100,000 0 0.00%
Thomas Hilliard Trust 200,000 * 200,000 0
0.00%
Robert Huemmrich 112,000 * 112,000 0 0.00%
Joseph Houghton III 40,000 * 40,000 0 0.00%
Jimhar Associates 80,000 * 80,000 0 0.00%
JW Associates 400,000 1.02% 400,000 0 0.00%
Ajay Kalra 40,000 * 40,000 0 0.00%
Ivan Kaplan 100,000 * 100,000 0 0.00%
Peter Kaplan 200,000 * 200,000 0 0.00%
Robert Kaplan 100,000 * 100,000 0 0.00%
Jacqueline Koscelnik 78,000 * 40,000 38,000 *
Richard Kronz 100,000 * 100,000 0 0.00%
LM&E Company Advisors, LLC 120,000 * 120,000 0 0.00%
Hans Lange 80,000 * 80,000 0 0.00%
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Beneficial Ownership Beneficial Ownership
Prior to Offering After Offering
----------------- --------------
Number of Shares
Selling Number of Being
Security Holder Shares Percent Offered Hereby Shares Percent
- --------------- ------ ------- -------------- ------ -------
Harry Lentchner 40,000 * 40,000 0 0.00%
Covato Lipsitz Benefit Plans 80,000 * 80,000 0 0.00%
William Long 40,000 * 40,000 0 0.00%
Milai Marcu 40,000 * 40,000 0 0.00%
Robert Marcus 80,000 * 80,000 0 0.00%
Chris Martin 100,000 * 100,000 0 0.00%
Jackie McBride 120,000 * 120,000 0 0.00%
Richard Means 200,000 * 200,000 0 0.00%
Dirk Meyer 40,000 * 40,000 0 0.00%
Fred Miller 40,000 * 40,000 0 0.00%
Paul Miller 40,000 * 40,000 0 0.00%
Frank Molinero 40,000 * 40,000 0 0.00%
Fred & Ellen Musser Trust 80,000 * 80,000 0 0.00%
National Cancer Coalition (D) 315,000 * 200,000 115,000 *
Thomas Neer 40,000 * 40,000 0 0.00%
Thomas Nimick Jr. Trust 200,000 * 200,000 0 0.00%
Larry Norris 430,000 1.10% 400,000 30,000 *
R.M. O'Connor 20,000 * 20,000 0 0.00%
Oakpark Development Co. 40,000 * 40,000 0 0.00%
George Patton 40,000 * 40,000 0 0.00%
Pacific West Cancer Fund (D) 500,000 1.27% 500,000 0 0.00%
Penn Growth Fund 40,000 * 40,000 0 0.00%
Jeff Pepper 80,000 * 80,000 0 0.00%
PMN, Inc. 260,000 * 260,000 0 0.00%
Issac Pilossoph 40,000 * 40,000 0 0.00%
Frank Brooks Robinson 80,000 * 80,000 0 0.00%
Roemer Family, LP 100,000 * 100,000 0 0.00%
W.F. Rooney 80,000 * 80,000 0 0.00%
SJH & Company, Inc. 160,000 * 160,000 0 0.00%
Philip Samson 200,000 * 200,000 0 0.00%
Schofield Family Ltd. Ptsp 80,000 * 80,000 0 0.00%
John Shively 120,000 * 120,000 0 0.00%
Mary Silverberg (B) 137,336 * 21,336 116,000 *
Alexander Simakas 120,000 * 120,000 0 0.00%
Arthur Spagnol 80,000 * 80,000 0 0.00%
Theodore Stern 200,000 * 200,000 0 0.00%
Douglas Summers 40,000 * 40,000 0 0.00%
Harold Summers 40,000 * 40,000 0 0.00%
Martin Supowitz 80,000 * 80,000 0 0.00%
Robert Unetich 40,000 * 40,000 0 0.00%
Wall Street Consultants, Inc. 600,000 * 600,000 0 0.00%
Lawrence Walsh 64,000 * 64,000 0 0.00%
Konrad Weis (C) 1,009,616 2.57% 600,000 409,616 1.04%
S. John Whitehill 240,000 * 240,000 0 0.00%
Richard Williams 120,000 * 120,000 0 0.00%
Mary Wright 13,336 * 13,336 0 0.00%
John Wolf 160,000 * 160,000 0 0.00%
Paul Zorner 60,000 * 60,000 0 0.00%
- -------------------
* Less than 1%
(A) CEO Venture Fund III is the sole holder of the Redeemable Convertible
Preferred Stock and its Managing General Partner is a member of the
Company's Board of Directors
(B) Mary Silverberg is the Secretary of the Company and a member of Buchanan
Ingersoll Professional Corporation which provides legal services to the
Company
(C) Konrad Weis is a member of the Company's Board of Directors and is the
Managing partner of Weis Capital Fund LP and, therefore, beneficially owns
the 200,000 shares controlled by the Fund
(D) The National Cancer Coalition and the Pacific West Cancer Fund have
provided grants to the Company to support ongoing cancer research
16
PRICE RANGE OF OUR COMMON STOCK
Our Common Stock has been quoted on the Over-the-Counter Bulletin Board since
1994 under the symbol "DBOT". The following table sets forth, based upon
information received from the National Quotation Bureau, the high and low bid
prices for our Common Stock for the quarters indicated. The quotations represent
bid between dealers and do not include retail mark-up, mark-down or commissions,
and do not represent actual transactions.
Fiscal December 31 March 31 June 30 September 30
- ------ ----------- -------- ------- ------------
2001
High $1.01
Low $0.42
2000
High $0.33 $1.53 $1.00 $0.65
Low $0.19 $0.29 $0.53 $0.46
1999
High $0.51 $0.51 $0.63 $0.44
Low $0.21 $0.32 $0.29 $0.24
At February 16, 2001, there were 503 holders of record of 34,779,778 shares of
Common Stock, exclusive of holders which maintain their ownership in
"Street-Name" at brokerage houses, and one holder of record of 4,444,444 shares
of Preferred Stock. There are approximately 1,526 stockholders which hold their
ownership in street name.
On March 6, 2001 the last reported sale price of our Common Stock on the OTC
Bulletin Board was $0.85 per share.
17
DIVIDEND POLICY
We have has not paid and does not anticipate paying any cash dividends on our
Common Stock in the foreseeable future.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2000. The
capitalization information set forth in the table below is quantified by the
more detailed Financial Statements and Notes thereto beginning on page F-1 of
this prospectus. This table should be read in conjunction with the Financial
Statement and Notes.
Current portion of long-term debt $ 44,425
------------
Long-term debt, less current portion $ 364,859
Redeemable convertible preferred stock 2,101,101
Common Stock, $0.001 par value-100,000,000 shares
Authorized; 32,304,778 shares issued and outstanding 32,430
Warrants 1,343,004
Deferred Compensation (322,498)
Subscription Receivable (146,682)
Additional paid-in capital 14,625,214
Deficit accumulated during development stage (16,719,291)
------------
Total shareholders' deficit (1,187,823)
------------
Total capitalization $ 1,322,562
------------
SELECTED HISTORICAL FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and Notes beginning on page F-1 of this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 19 of this prospectus. The statements of
operations data for each of the three fiscal years ending September 30, 2000,
1999 and 1998 and the balance sheet data as of September 30, 2000 and 1999 are
derived from financial statements of the Company which have been audited by
Ernst & Young LLP, independent auditors, and are included elsewhere in the
prospectus.
Quarter Quarter Year Ended September 30,
Ended Ended ----------------------------------------------------------------------
December 31, December 31, 2000 1999 1998 1997 1996
2000 1999 ---- ---- ---- ---- ----
---- ----
(unaudited) (unaudited)
STATEMENT OF OPERATIONS DATA:
Grant, license fees and
Other Income $ 186,451 $ 424,701 $ 763,765 $ 1,118,576 $ 1,376,918 $ 764,834 $ 271,777
Total Expenses 798,549 412,380 2,419,247 2,456,318 3,370,671 1,708,607 2,841,255
Net Income (Loss) (612,098) 12,321 (1,655,482) (1,337,742) (1,993,753) (943,773) (2,569,478)
Net Loss per Share
(dilutive) $ (0.02) $ 0.00 $ (0.06) $ (0.06) $ (0.13) $ (0.05) $ (0.17)
Dividends per Share $ (0.02) $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Average Number
of Common Shares
Outstanding 32,310,213 26,361,899 29,759,153 26,255,104 23,867,091 19,537,047 15,479,889
BALANCE SHEET DATA:
Cash & Cash Equivalents $ 1,509,994 $ 700,432 $ 1,825,352 $ 583,585 $ 1,686,658 $ 310,252 $ 19,266
Working Capital
(deficiency) 858,298 238,704 1,413,408 6,849 1,329,541 (1,498,477) (2,754,591)
Total Assets 2,050,779 1,181,019 2,311,592 1,084,505 2,114,750 651,963 156,147
Long-term obligations 364,859 373,619 360,180 203,147 -0- -0- -0-
Deficit accumulated during
development stage (16,719,291) (14,172,737) (16,039,877) (14,119,462) (12,523,358) (9,443,772) (8,499,999)
Redeemable convertible
preferred Stock 2,101,101 1,834,448 2,033,787 1,768,846 1,510,484 -0- -0-
Shareholders' (Deficit) (1,187,823) (1,609,209) (633,989) (1,555,934) (122,130) (1,158,216) (2,642,523)
December 6,
1991 (Inception)
to December 31,
2000
----
STATEMENT OF OPERATIONS DATA:
Grant, license fees and Other Income $ 4,766,713
Total Expenses 19,809,560
Net Income (Loss) (15,042,847)
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS
GENERAL
Since commencement of operations in 1992, the Company has been engaged in
research and development activities, including conducting preclinical studies
and clinical trials, and recruiting its scientific and management personnel,
establishing laboratory facilities and raising capital. The Company has not
received any revenue from the direct sale of its products to the general public
but has received grant monies and license payments from other corporations from
the license of the Company's technology.
The Company is a "Development Stage Company" that designs synthetic
peptide/protein compounds and genes for pharmaceutical and agricultural
applications. Current development programs include a new treatment for prostate
cancer, severely burned patients, a vaginal microbicide, and pulmonary
infections, and two transgenic agricultural applications - one to prevent plant
diseases, the other to increase the nutritional value of food and feed crops.
The Company, effective January 1, 2001, entered into a license agreement with
Periodontix, Inc. with an option to purchase all of their technologies and
rights to related clinical trials except for the Periodontix photodynamics
technology. (See "Recent Developments" on page 6 of the prospectus for
additional detail concerning this transaction).
The Company has two licenses in place for its agricultural technology, disease
resistance and nutritional enhancement, to Dow Agro Sciences which has produced
historic revenue streams and will continue to produce revenue as Dow Agro
Sciences proceeds towards commercialization of these technologies.
RESULTS OF OPERATION
THREE MONTHS ENDED DECEMBER 31, 2000
During the three months ended December 31, 2000 ("Fiscal 2001"), grants, license
fees and other income decreased to $0.19 million compared to $0.42 million in
the three months ended December 31, 1999 ("Fiscal 2000").
Total expenses increased to $0.8 million from $0.41 million in the corresponding
prior fiscal quarter. The increase was due additional preclinical development
activities in the current fiscal quarter.
Research and development expenditures increased to $0.5 million from $0.2
million in the corresponding prior fiscal quarter. The increase was due
additional preclinical development activities in the current fiscal quarter.
General and administrative expenses increased to $0.25 million from $0.17
million in the prior quarter due to the retention of additional research and
development staff in the current fiscal quarter
During the quarters ended December 31, 2000 and 1999, the Corporation made no
provision for federal or state income taxes due to the existence of net
operating loss carryforwards.
The Corporation reported a loss of $0.61 million for the three months ended
December 31, 2000 compared net income of $0.01 million for the three months
ended December 31, 1999 as a direct result of the factors discussed above.
SEPTEMBER 30, 2000 VS 1999
In the year ended September 30, 2000 (Fiscal 2000), grants and other income
decreased to $0.8 million from $1.1 million in the year ended September 30, 1999
(Fiscal 1999). This decrease was due to the absence in the current year of
grants as compared to the prior year. In Fiscal 2000, the Company received a
$150,000 program related loan from a local charity. Had this been a grant,
revenues between the two years would have been more
19
comparable. The Fiscal 2000 revenue was from licensing fee and research funding
received from Dow AgroSciences as part of a license entered into during Fiscal
1998.
Total expenses decreased by $0.35 million in the current year, exclusive of the
$0.31 million non-cash charge in the Fiscal 2000 period for the compensation
package to retain the new Chief Operating Officer - Pharmaceutical Products.
Research and development expenses decreased by $0.26 million, excluding the
aforementioned non-cash charge, as the Company pursued starting Phase I clinical
trials early in Fiscal 2001 for its infected burn and infected wound
therapeutic.
General and administrative expenses decreased slightly to $0.7 million in Fiscal
2000 from $0.8 million in Fiscal 1999. Depreciation and amortization remained
relatively constant in the two fiscal years as both periods included the costs
associated with the new laboratory at the Company's new Pittsburgh office.
The Company did not have a federal or state income tax provision in either
Fiscal 2000 or 1999 due to the loss recorded in each period. An allowance was
recognized to offset the tax benefit until such time that the Company generates
taxable income.
The amounts described above resulted in a net loss of $1.66 million for Fiscal
2000. The net loss would have been $1.25 million if the aforementioned non-cash
charge was excluded. The net loss for Fiscal 1999 was $1.34 million.
SEPTEMBER 30, 1999 VS 1998
In the year ended September 30, 1999 (Fiscal 1999), grants, license fees and
other income was $1.1 million compared to $1.4 million in the year ended
September 30, 1998 (Fiscal 1998). The Fiscal 1999 revenue was primarily due to a
$0.5 million licensing fee and research funding received from Dow AgroSciences
as part of the modification of its license agreement providing Dow AgroSciences
with an additional license for the Company's agricultural nutrition
technologies. Additionally, a cancer charity made a grant of $0.375 million
during the Fiscal 1999 period as part of an ongoing program to fund the
Company's development of cancer fighting drugs. During the Fiscal 1998 period,
revenue of $0.9 million was received from Dow AgroSciences relative to the
initial license for the Company's agricultural disease resistance technologies.
Additionally a grant of $0.25 million was received from the aforementioned
cancer charity.
Total expenses increased in the current year exclusive of the $1.7 million
non-cash charge in the Fiscal 1998 period for the issuance of stock options to
employees and directors. The increase was due to a higher employee headcount in
the current fiscal period and increased expenditures supporting the Company's
research activity.
Research and development expenditures increased to $1.5 million in Fiscal 1999
from $0.9 million in Fiscal 1998 due to increased funding relative to its cancer
drug research. The focus of this research was upon the method of action and
other areas in preparation for the
20
submission of an IND to the FDA.
General and administrative expenses increased by $0.1 million to $0.78 million
in the current fiscal year as compared to the prior fiscal year when the $1.7
million non-cash charge for compensation expense is excluded from the prior
fiscal year. Depreciation and amortization increased to $0.15 million from $0.12
million in Fiscal 1998 due to capitalization of additional patent costs and the
construction of a new laboratory at the Company's new Pittsburgh office.
The Company did not have a federal or state income tax provision in either
Fiscal 1999 or 1998 due to the loss recorded in each year. An allowance was
recognized to offset the tax benefit until such time that the Company generates
taxable income.
The amounts described above resulted in a net loss of $1.3 million in the Fiscal
1999 period as compared to a net loss of $2.0 million for the Fiscal 1998
period.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED DECEMBER 31, 2000
During the three months ended December 31, 2000, the Corporation's cash
decreased by $0.32 million to $1.51 million. The cash decrease was due $0.24
million of cash used by operating activities and $0.07 million of cash used by
investing activities.
Cash flows used by operating activities totaled $0.24 million in the three
months ended December 31, 2000. Cash outflows included the net loss of $0.61
million and a $0.05 million decrease in accounts payable and other liabilities.
These cash outflows were partially offset by cash inflows which principally
included a $0.02 million decrease in accounts receivables, a $0.28 million
increase in unearned revenue, $0.09 million for stock issued for services and
stock based compensation and $0.05 million of depreciation and amortization.
Cash flows used by investing activities totaled $0.07 million in the three
months ended December 31, 2000 and included $0.05 million deposit relative to
the Periodontix license and $0.02 million for the purchase of equipment and
patent related activities.
The $0.003 million of cash utilized by financing activities consisted of $0.02
principal payments on notes partially offset by $0.01 million of proceeds from
an equipment loan and $0.01 million from the exercise of stock options.
FISCAL 2000
During the year ended September 30, 2000, the Company's cash increased by $1.2
million. Net cash provided by financing activities of $2.5 million was partially
offset by a
21
$1.1 million of net cash utilized by operating activities and $0.1 million of
net cash utilized by investing activities.
Cash from financing activities was generated from $2.4 million of net proceeds
from the private placement of securities and $0.15 million received from a local
foundation in the form of a note payable. The loan matures on February 28, 2005
with interest at 5%. The loan is to fund program related research.
Cash utilized in operating activities was caused by the net loss of $1.66
million and a $0.09 million decrease in unearned revenue. This was partially
offset by $0.13 million of depreciation and amortization, $0.16 million of stock
issued for services, $0.04 million for the amortization of the deferred
compensation component of shareholders' equity, the $0.26 million non-cash
charge for the compensation package to retain the new Chief Operating Officer -
Pharmaceutical Products and a $0.04 million of stock issued for compensation.
Cash utilized by investing activities was primarily due to a $0.11 million
increase in intangible assets due to the capitalization of patent related
expenses.
FISCAL 1999
During the year ended September 30, 1999, the Company's cash and cash
equivalents decreased by $1.1 million to $0.6 million. Net cash provided by
financing activities of $0.1 million was offset by $0.27 million of net cash
utilized by investing activities and net cash used by operating activities of
$0.93 million.
Specifically, cash inflows from financing activities included $0.02 million
realized from the exercise of stock options, $0.02 million from an equipment
financing and a $0.07 million increase in payables to related parties.
The $0.93 million of cash utilized by operating activities consisted of the net
loss of $1.3 million, and a decrease of $0.09 million in unearned revenue,
partially offset by $0.15 million of depreciation and amortization, a $0.04
million decrease in accounts receivable, and a $0.23 million increase in
accounts payable and other liabilities.
The $0.27 million of cash utilized by investing activities relates to $0.21
million for the purchase of property, plant and equipment and $0.06 million of
patent costs capitalized as intangible costs in the current year.
FISCAL 1998
During the year ended September 30, 1998, the Company's cash and cash
equivalents increased by $1.4 million to $1.7 million. Net cash provided by
financing activities of $1.6 million was partially offset by a $0.01 million of
net cash utilized by operating activities and $0.14 million of net cash utilized
by investing activities.
Specifically, cash inflows from financing activities included the $1.9 million
net proceeds
22
from the issuance of preferred stock and warrant to the CEO Venture fund in June
1998. Additionally, $0.09 million was realized from the exercise of stock
options. These sources of funds were partially offset by a $0.41 million
decrease in payables to related parties.
The $0.1 million of cash utilized by operating activities consisted of the net
loss of $2.0 million and a decrease of $0.21 million in accounts payable and
other liabilities offset by the $1.7 million of non-cash compensation related to
the issuance of below market stock options issued to employees and directors
that vested during the year, $0.12 million of depreciation and amortization,
$0.09 million of stock issued for services and a $0.18 million increase in
unearned revenue relating to the $0.3 million three year administration fee paid
to the Company in October 1997 by Mycogen.
The $0.14 million of cash utilized by investing activities relates to $0.05
million for the purchases of property, plant and equipment and $0.08 million of
patent costs capitalized as intangible assets in the current year.
Prospective Information
The Company believes that it has adequate liquidity to fund its operations in
Fiscal 2001 if the expected milestones, research support, license, sub-license
and equity financing payments are received as expected. Should the expected
payments either be delayed or not forth coming, the Company would take the
necessary actions to scale back its level of expenditures, primarily research
expenditures associated with new projects, (including the non-exercise of the
Periodontix purchase options) to maintain sufficient cash flow to fund basic
operations. On a long term basis, it will be necessary for the Company to access
additional funding so that it can continue to fund the Phase I and Phase II
testing of its therapeutic agents. This funding may be in the form of a private
placement of equity securities or a secondary issuance of securities into the
market.
The Company intends to pursue the acquisition/merger of biotechnology companies
with similar technologies to increase the range of potential product offerings
that the Company will have to push through the clinical trial pipeline and to
broaden its exposure to potential partners.
23
DESCRIPTION OF BUSINESS
THE COMPANY
OPERATIONS
The Company discovers, designs and develops novel peptides, proteins and genes
for the treatment of solid tumors, cystic fibrosis, multi-drug resistant
bacteria and fungi. Applications also include genetically enhanced agricultural
products. The Company
24
expects human clinical trials for a number of pharmaceutical applications in
calendar 2001.
The Company has assembled a skilled and experienced management team, backed up
by a knowledgeable and active board of directors and scientific collaborators.
Within the past two years, the Company has significantly restructured and added
to its people resources. Five outside directors with significant industry
expertise have been elected to the Board. Six employees have been hired in the
past two years, four of which enhance the Company's research capabilities or
drug development. The Company's business strategy is structured to efficiently
leverage in-house core strengths with in-depth disease and product knowledge of
its scientific and commercial partners. This strategy permits simultaneous
development of multiple products, thereby reducing risk and expanding
opportunities.
The Company has nine issued United States patents and has in-licensed three
additional related U.S. patents. Additional U.S. patents are pending along with
comparable international filings. These technologies are a platform for a number
of product applications. Dr. Jaynes, the Company's Vice President of Research,
has been at the forefront of research into the use of anti-microbial peptides
for the treatment of diseases for over fifteen years and many of the patents
carry very early filing dates and provide broad coverage.
In 1999, peptide drugs accounted for worldwide sales of some $3.4 billion, which
represents only about 4% of the overall pharmaceutical market, and are estimated
to be growing at the rate of 10-15% per year. Examples include Copaxone,
Zoladex, Vancomycin, and Bacitracin. Over three hundred naturally occurring
peptides have been identified. Demegen peptides, however, are all novel products
not found in nature, and include a variety of structural forms. Simply stating
that the peptide form is a-helical, B-sheet or cyclic, however, does not reflect
some of the unique design characteristics used by Dr. Jaynes. The development
and expansion of proteomic and genomic tools will expand the market
opportunities for new peptide and protein products.
Although peptides compose only a small portion of the therapeutic drug market,
there are considerable efforts underway by numerous companies. It is estimated
that over $3 billion has been invested in those companies thus far. The Company
believes this is an indication of the strong belief in the potential for new
peptide therapeutics. The Company has compared its compounds to a number of
other peptide compounds in development by others and believes its technology is
soundly positioned to produce successful products.
The market opportunities for each of the Company's target products are
substantial and in most cases address unmet medical needs. The emergence of
multi-drug resistant bacteria is a major problem, especially for hospitalized
patients. Sexually transmitted infections - HIV, Chlamydia, and Gonorrhea - also
continue to be major public heath problems. B. cepacia is, too often, a deadly
problem for Cystic Fibrosis patients. And, despite a forty-year war on cancer,
much still needs to be done. The Company's pipeline of molecules contains
potential solutions for each of these problems. The Company's technologies can
be delivered by a variety of routes of administration depending on the disease
target, including topical, injection, inhalation, and genetic.
25
The Company has licensed two agricultural applications to Dow AgroSciences,
formerly Mycogen Corporation which was acquired by Dow AgroSciences. The first
application is for genetically enhanced plants with increased bacterial and
fungal resistance. The second is for genetically enhanced crops with improved
nutrition. Genetically enhanced plants have achieved significant market
penetration in the United States, and, except for Europe, the international
markets are growing rapidly. Most of the new traits to date are insect
resistance and herbicide tolerance. The Company's two licenses are for new
traits that address two additional major markets. The Company has, thus far,
received over two million dollars in payments from Dow AgroSciences.
The Company expects to market and sell products that address niche markets and
license applications that require extensive Phase III clinical trials and
commercialization capabilities. Large pharmaceutical companies look to
biotechnology companies as sources of new products. The biotechnology companies
are usually able to discover and complete early clinical trials much more
efficiently than the large pharmaceutical companies. For a small biotech beyond
the discovery phase, two elements are critical for success. One is having the
right people skills to solve technical issues and the second is having
sufficient technology diversity to overcome application failures that may occur
and to discontinue low probability opportunities. To address these issues, the
Company believes that technology acquisitions or mergers are an important and
inevitable component of long term success. Consequently, the Company will
actively seek strategic alliances with other biotechnology companies where there
are opportunities to enhance shareholder value, reduce risks and expand its
technology platforms. The Company has already entered into research
collaborations with two other biotechnology companies.
In June 1998, the Company received a $2 million equity investment from the CEO
Venture Fund of Pittsburgh, PA. Another round with private investors raised $2.8
million in March 2000. Since 1992, the Company has raised over $14 million in
equity.
OVERVIEW - TECHNOLOGY, APPLICATIONS, PARTNERS & STATUS
Core Discovery, Design and Development of Novel
Technology: Peptides, Proteins and Genes
Mechanisms: Membrane Disruption Host Modulation
Applications: Dermal Respiratory Diseases, Solid Tumors Enhanced
Infections Cystic Fibrosis Agricultural
Products
Strategic S. IL Univ, Univ of NC Pitts Cancer Inst, Dow AgroSciences,
Partners: NIH Duke Univ Avigenics
Molecules: D2A21 12A21, D21-10N D4E1, D5C, ASP1,
D2A21 D1A21
Status: Phase I In vivo In vivo In planta
26
Operations
The Company's headquarters and laboratory are located in Pittsburgh,
Pennsylvania and it comprises approximately 2,400 square feet with about
one-third devoted to laboratory space. For development of pharmaceutical
products, the Company has developed close working relationships with several
universities. This strategy has enabled the Company to accomplish more with
less. Significant major laboratory infrastructure has been avoided and
development programs can be easily accelerated or slowed to adjust for
scientific or technical challenges that inevitably arise during drug
development, but without the inefficiencies that may occur when all research,
clerical, investigation and new drug development activities are performed
in-house. During the course of a typical year, some 20 researchers, experts in
their disease field, are working on the development of the Company's products at
academic and other research institutions.
The majority of the Company's agricultural technologies are licensed to the
Company's agricultural partner, Dow AgroSciences. Dow AgroSciences is
responsible for all of the development, patent and regulatory costs for the
individual crops, and is also responsible for developing sublicense relationship
for crops that it is not developing on its own. As part of the Company's
agreement with Dow AgroSciences, Dow AgroSciences is funding research at the
Company to expand and broaden the intellectual property estate. The Company
believes its research into gene function, combined with Dr. Jaynes' design
methodologies, will produce additional agricultural license opportunities.
It is worth noting that since the Company's inception, many millions of dollars,
in addition to the use of sophisticated laboratories, have been expended by
universities, government agencies, and private foundations developing products
using the Company's technologies, but with the Company maintaining commercial
rights and control. These expenditures (not reflected in the Company's financial
statements), as well as the number of different organizations participating,
confirm the broad acceptability and confidence in the Company's technology.
PHARMACEUTICAL PRODUCTS
BACTERIA
A major problem, which strongly encourages the development of a new class of
antibiotics agents, is that many common pathogens are becoming resistant to the
therapeutics that have treated patients for the last forty years. Each year in
the United States, about two million cases of infection are contracted by people
while they are in the hospital. Infection remains the principal cause of death
of hospitalized patients in the United States, and one of the leading causes of
all deaths throughout the world. Treatment of infection is a rapidly increasing
concern because of the exponential rate of emergence of antibiotic-resistant
bacteria, compounded by the lack of new antibiotic options effective against
these organisms. The total worldwide anti-infective market is estimated to be
over $25 billion. The topical anti-infective market is estimated to be $2
billion worldwide.
The Company currently has four anti-bacterial applications in pre-clinical
development.
27
Three would be topically delivered and the fourth would be inhaled.
The lead compound for the topical applications is D2A21. It has demonstrated
antimicrobial activity against a broad spectrum of bacterial pathogens. D2A21
has potent in vitro activity against pathogens from species of: Staphylococcus,
Pseudomonas, Enterococcus, Streptococcus, E. coli, Gonococcus, and Chlamydia, as
well as against numerous strains of methicillin-resistant Staphylococcus aureus
("MRSA") and vancomycin-resistant Enterococcus ("VRE"). D2A21 in vivo results
have been demonstrated against Trichomonas, Burkholderia Cepacia and
Porphyromonas gingivalis. The Company has demonstrated that its compounds are
effective in increasing survival when injected sub-eschar into a Pseudomonas
infected mouse model. In summary, D2A21 and other of the Company's compounds
have demonstrated both broad and selective effects against a wide range of
bacterial pathogens, thereby indicating the potential for a number of product
applications.
INFECTED BURNS AND INFECTED WOUNDS: The application in development is for
prevention and treatment of severely burned or surgical patients at risk for
bacterial infections. The use of topical antimicrobial agents has been an
important adjunct to the prevention and treatment of wound infections, yet burn
wound sepsis remains the most common and serious complication of major burn
injury, accounting for over 60% of deaths in burn patients. Also, there are
several disadvantages associated with the use of the most common agents, silver
sulfadiazine and mafenide acetate, including their substantial ability to
inhibit wound healing at clinically effective antimicrobial dosages. Many
topical antimicrobial agents used following burn injury are toxic to
keratinocytes and fibroblasts. The Company's compounds, however, do not retard
cellular growth and wound healing. Furthermore, the development of multi-drug
resistant organisms has become an increasingly important problem in the
management of major surgical infections, in addition to those involving burn
wounds.
The Company's research has been conducted with scientists at the University of
North Carolina, Loyola University and Southern Illinois University. A Phase I
clinical trial for infected burns and a second Phase I for infected wounds is
expected to begin in the next few months. Upon successful completion of the
Phase I trials, Phase II clinical trials will begin later in 2001. The Company's
initial market will be hospitalized burn patients. This hospital burn market is
about 50,000 patients and is a $50 million opportunity. It is the Company's plan
to market this product through a contract sales force. The market for infected
surgical wounds is some 2 million patients and is a $200 million opportunity.
The Company plans to license this opportunity.
DEMEGEN'S VAGINAL MICROBICIDE: Another application is an intravaginal gel that
prevents the transmission of Chlamydia and other sexually transmitted infections
("STIs"). Speaking about the need for a vaginal microbicide, Penelope Hitchcock,
director of the Sexually Transmitted Diseases Branch at the National Institute
of Allergy and Infectious Diseases stated "The real urgency here is that the
epidemic of HIV, the epidemic of STIs, is upon us, and we need this product
right now." According to a report by Family Health International, approximately
333 million new cases of the five most common curable STIs occurred
28
globally in 1995 in women and men of reproductive age, and heterosexual
transmission accounts for about 75% of all HIV-1 infections. Further, according
to survey results 12.6 million women in the United States are worried about
getting HIV or an STI and are interested in using a microbicide. The Company
plans to license this application. In the U.S., ten million sexually active
women would be the primary market. A similar market exists in other developed
countries. In the developing world, one hundred million women need this kind of
product. It is anticipated there will be substantial government subsidies for
the developing world market.
Prevention of sexually transmitted infections is currently an unmet medical need
and represents an additional $1 Billion market in developed countries. In 1999
over two million women were newly infected with HIV. Chlamydia, caused by the
bacteria Chlamydia trachomatis, is the most common sexually transmitted disease
in the United States. It affects 2-4% of the sexually active population, but up
to 75% of those who have it do not notice symptoms and may carry the disease for
many years. If untreated, the result could be chronic infection or scarring of
the reproductive system with increased risk of infertility and tubal
pregnancies. A survey conducted by the Alan Guttmacher Institute found that some
eight million women in the United States would be very interested in using a
microbicidal product, even at a cost roughly twice that of a male condom. Other
studies have found similar strong interest in Brazil, Egypt, France, India and
other countries.
The Company's efforts to develop this application are being supported by the
Sexually Transmitted Diseases Branch at the National Institutes of Health
("NIH"), the Division of AIDS at the NIH, in addition to scientists at
Magee-Womens Research Institute at the University of Pittsburgh and the
University of Washington. The Company is using its D2A21 compound for this
application also, but with a slightly different formulation, thereby taking
advantage of common toxicology and pharmacology data requirements. Primate
efficacy experiments are underway. With successful results, Phase I clinical
trials for this application could begin in 2001, with the majority of funding
from NIH.
CYSTIC FIBROSIS/PULMONARY INFECTIONS: The Company anticipates that a second
synthetic protein product to be developed will be an inhaled drug to treat
Burkholderia cepacia. This bacteria can de deadly to Cystic Fibrosis patients
and there is currently no effective treatment. Approximately 35% of B. cepacia
infected patients contract accelerated pulmonary deterioration or fulminant,
necrotizing pneumonia with rapidly fatal bacteremia. B. cepacia is also a
causative agent for endocarditis, catheter-associated urinary tract infections,
and wound infections. B. cepacia is rarely found in non-CF patients, but
transmission can occur between CF and non-CF patients and can result in serious
illness and death. It is believed that B. cepacia is underreported because
normally only specimens from CF patients are analyzed for this disease. The
product is also effective against Pseudomonas aeruginosa. The Company plans to
seek Orphan Drug status for this indication and expects to begin clinical trials
in 2001. The lead molecule for this product is 12A21. A companion protein
modulates host response, such that in Cystic Fibrosis patients there would be
reduced lung fibrosis. A clinical trial for this indication may begin in late
2001. The Cystic Fibrosis patient population is about 70,000 worldwide, sadly
because most patients die at a young age. The product under development would be
a maintenance medication and would extend lives, and thereby create an expanding
market.
29
It is likely this product would also function against other respiratory
diseases.
In an animal model, the Company's compound has demonstrated the ability to
control the diseases and the fibrotic growth. This application is being
developed in conjunction with researchers at the University of North Carolina.
Thus far, the Company has received a $100,000 SBIR grant from the NIH for this
pulmonary infection pre-clinical program.
CANCER
Evaluations by the National Cancer Institute (NCI) and private laboratories
indicate that the Company's compounds may have broad applicability against many
solid tumors including prostate, lung, breast, head and neck, ovarian, bladder,
and melanoma. Most of the Company's initial in vivo experiments were against
prostate cancer. While compelling animal results were achieved, the data
indicated that a multi-functional activity was occurring, different than the
traditional cell lysis theory ascribed to anti-microbial peptides. Based on
subsequent analysis, the Company believes the most probable target applications
for this compound are solid tumors such as head and neck, brain glioblastoma,
and prostate.
Within the next 12 months, over 100,000 people in the U.S. will be diagnosed
with a primary or metastatic brain tumor. Glioblastomas represent 23% of all
primary brain tumors. Brain tumors are the second leading cause of cancer death
in children under age 15 and in young adults up to age 34. Brain tumors are the
second fastest growing cause of cancer death among those over age 65, and unlike
the first and third fastest growing causes (lung cancer and melanoma), no
behavioral change has been shown to reduce the risk. Approximately 44 percent of
all primary brain tumors are benign. Unlike most benign tumors found elsewhere
in the body, benign brain tumors may recur and may result in death. Because of
their location at the control center for thought, emotion and physical function,
brain tumors are difficult to treat. The cure rate for most brain tumors is
significantly lower than that for most other types of cancer. Children who are
cured of leukemia are shown to be at greater risk of developing a brain tumor.
Brain tumor research is underfunded and the public, in general, is unaware of
the magnitude of the problem.
Prostate cancer, the second leading cause of cancer deaths in men in the United
States, affects 9.7 million Americans. Over 200,000 new cases are diagnosed each
year and more than 40,000 American men die of this disease annually. Carcinoma
of the prostate is the most commonly diagnosed cancer in men and the second most
common cause of cancer death in western civilization. It is predominantly a
tumor of older men, which frequently responds to treatment when widespread and
may be cured when localized.
Current therapeutic options include surgery, radiation therapy, hormonal therapy
and chemotherapy. The approach to treatment is influenced by stage of disease,
age, and coexisting medical conditions. Surgery (radical prostatectomy) and
radiation are options for early stage cancer that has not spread outside the
prostate. Hormone therapy and chemotherapy are considered for metastatic or
recurring disease.
A significant number of patients, especially when diagnosed at a more advanced
stage,
30
relapse and develop incurable disseminated metastatic disease. None of the
treatments for advanced disease provide significant benefit to survival.
Effective treatment modalities for patients with residual or non-localized
disease are clearly needed. According to IMS (a market research firm), the U.S.
market for cancer therapeutics in 1996 was almost $3 billion dollars. These IMS
figures do not include drugs like Neupogen, a billion dollar drug, which is only
a cancer adjunct. The prostate cancer drugs Lupron, Zoladex, Eulexin, and
Casodex have worldwide sales of $1.7 billion, and are only palliative for
metastatic prostate disease.
EFFICACY IN ANIMAL MODELS: Evaluation of the Company compounds have occurred in
several animal models for cancer, with the objective of optimizing dose and
schedule. Significant findings to date include:
- - Significant anti-cancer activity against prostate, lung, ovarian,
breast, CNS and melanoma tumor cell lines
- - Selective cytotoxicity for tumor tissue vs. normal tissue
- - Cytotoxicity for prostate cancer cell lines, 4-8 fold greater than
conventional chemotherapy agents
- - Low dose (< 1mg/kg) anti-cancer activity in an aggressive model of
prostate cancer in vivo. Data indicate a benefit to survival, growth
retardation and/or regression of primary tumor and reduction in
metastases
- - Equivalent activity when given by intratumoral, intraperitoneal,
intravenous or subcutaneous route of administration
Rats treated with D2A21 achieved a 60% reduction in the growth of primary tumors
and a significant reduction in the number of lung metastases. D2A21 was
administered intravenously at a low dose, (just 0.179 mg. per injection), that
was effective without causing toxicity to the animals. Importantly, the survival
rate increased from 25% for controls to 75% for D2A21 treated animals.
An important outcome of these studies was the evidence of the multi-function
activity of the D2A21 molecule. Additional animal studies are continuing to
confirm the mechanism of action and to determine the correct dosage amount and
form. Considerable toxicology and pharmacology tests have already been
satisfactorily completed. Assuming continued progress, the Company anticipates
initiating a Phase I clinical trial by the end of 2001.
SUPPORT FOR THE DEMEGEN CANCER PROGRAM: The Company has received considerable
outside support for its cancer program. Researchers and clinicians at the
University of Pittsburgh Cancer Institute, Duke University Medical Center, and
the National Cancer Institute have given time, research, and counsel to help the
Company develop this cancer therapeutic. Also, the Company has received over
$1.5 million dollars in research grants from non-profit cancer foundations and
institutes.
OTHER RESEARCH PROGRAMS
The bulk of the Company's research and development activities, as described
above, are focused on products for topical infections, respiratory diseases, and
solid cancer. Other
31
research accomplishments indicate there are a number of logical extensions to
these applications that will join the product pipeline. For example, another of
the Company's compounds had demonstrated significant anti-fungal properties.
This would be a natural extension of the topical gel product. Currently, there
is an unmet medical need for neo-natal conjunctivitis which is caused by
Chlamydia infections passed on by the mother. With a different formulation, this
product application could be available for clinical trials by 2002. The
respiratory results achieved thus far also indicate the Chronic Obstructive
Pulmonary Disease (COPD), a $1 billion market, is a potential extension.
PHARMACEUTICAL DEVELOPMENT SCHEDULE
Human clinical trials are typically conducted in three sequential phases which
may overlap. Phase I involves the initial introduction of the drug into human
subjects or patients where the product is tested for safety, dosage, tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) identify possible adverse effects and safety
risks, (ii) determine the efficiency of the product for specific, targeted
indications, and (iii) determine dosage tolerance and optimal dosage. When Phase
II evaluation demonstrates that the product may be effective and has an
acceptable safety profile, Phase III trials are undertaken to further evaluate
dosage and clinical efficacy and to further test for safety in an expanded
patient population at multiple clinical study sites. A pivotal Phase III trial
is an adequate and well-controlled study which provides the primary basis for
determining whether there is "substantial evidence" to support the claims of
effectiveness for new drugs and forms the basis for a New Drug Application
("NDA"). The regulatory authority or the sponsor may suspend clinical trials at
any point in this process if either entity concludes that clinical subjects are
being exposed to an unacceptable health risk, that the trials are not being
conducted in compliance with applicable regulatory requirements, or for other
reasons.
AGRICULTURAL PRODUCTS
The application of biotechnology to agricultural crops is directed to the
creation of differentiated, value-added plants and products that improve
production, extend shelf life, prevent pathogenic disease, enhance nutritional
value, and reduce the negative environmental impact of potentially hazardous
chemicals. Genetically engineering crops accelerates the traditional, time
consuming process of cross breeding of crops. In addition to speed, genetic
engineering enables the designer to introduce characteristics that would most
likely not be feasible with traditional techniques.
Perhaps the most fundamental driving force for these new crops is the basic
recognition that the world's population is growing by over 50,000,000 people per
year. At the same time, as economies improve in developing countries, the demand
for food increases faster than the population, or its ability to produce it. The
president of a large agricultural biotechnology company has stated that the
output per acre will need to double in the next 30 years, just to maintain the
current levels of hunger and malnutrition.
DISEASE RESISTANT CROPS
32
In November 1997, the Company concluded its first licensing agreement with Dow
AgroSciences to utilize the Company's antimicrobial plant genes in developing
disease resistant agricultural crops. The Company and Dow AgroSciences will also
seek third party licensees in order to expand the use of the technology into a
broad range of crops and geographic regions. The Company will receive royalty
and milestone payments as well as sublicense fees.
The importance of the Company's technology is illustrated in the examples that
follow. For many fungal diseases, chemical fungicides are the only treatment
alternative and can add five to ten percent to the cost of the crop and pose
serious environmental concerns. For other diseases, there are no treatments
available and genetic engineering may be the only alternative.
One example is the recent outbreak of citrus canker in South Florida. Citrus
canker is a highly contagious disease caused by the bacterium Xanthomonas
axonopodis pathovar citri. It can destroy entire orchards; however, the disease
poses no health risk to humans or animals. Canker manifests itself on the fruit
as raised, brown, corky lesions, surrounded by yellow rings. Hundreds of
thousands of citrus trees in South Florida have already been removed to stop the
spread of canker. The state of Florida offers $100 to homeowners to help offset
the cost of planting new trees. Producing trees that are genetically resistant
to canker would take some time, but the long term benefits could be enormous.
Another example is Pierce's disease caused by Xylella fastidiosa. This bacterium
kills grapevines by blocking their water transport system. An infected vine
produces no crop and usually dies within two years. The disease ranges from
North America through Central America and parts of South America. Pierce's
disease has cost the California wine and grape industries millions of dollars in
lost revenues (up to $20,000 per acre) since it began destroying grapevines in
Napa and Sonoma counties several years ago. During severe outbreaks, losses to
this disease may require major replanting. If it remains unchecked, the disease
could also spread to citrus, almonds and ornamentals. In Florida and other
southeastern states, the disease is considered to be the single most formidable
obstacle to the growing of European grape varieties. Other strains of Xylella
fastidiosa have been discovered, and almost all of these can cause leaf
scorching of woody perennials such as American elm, maple, mulberry, or plum. In
other plants, such as peach and alfalfa, the bacterium stunts the plant's
growth.
An important fungal disease in the U.S. is late blight of potatoes caused by the
fungus, Phytophthora infestans. The U.S. strain is a virulent "cousin" of the
fungus that caused the Irish potato famine. It was first reported in the U.S. in
the late 1980's and has spread up the East Coast from Florida to Maine, and as
far west as Idaho and Oregon. The disease causes discoloration of the leaves
accompanied by a secondary disease, downy mildew. The tubers may also be
infected in the field or in storage, causing discoloration of the skin and a
reddish brown dry rot extending into the tuber. Later, a slimy, foul smelling
rot may destroy the tuber. The US-8 strain is now the most widely distributed
form of late blight in the U.S. It is also the most problematic because of its
resistance to metalaxyl, a fungicide commonly used to combat the fungus. Two
additional factors compound the problem posed by the fungus. First, it is
difficult to detect low levels of late blight in the field and
33
unless it is detected early, the fungus does not respond to antifungal
treatments. The second problem involves the lifecycle of the fungus. The late
blight disease cycle of penetration, colonization, sporulation and dispersal can
occur in less than five days.
One example of the effectiveness of the Company's technology was demonstrated by
the USDA against Erwinia carotvora, commonly known as potato "soft rot". Soft
rot affects tubers while in storage or in the soil prior to harvest and can
decay the seed tubers or seed pieces after planting. Soft rots also cause the
decay of numerous other fleshy fruits and vegetables, such as cucumbers, onions,
tomatoes, and lettuce, and some ornamental plants, such as iris. Soft rot can
cause extensive damage to potatoes in storage within a few hours.
The USDA's Agricultural Research Service in Albany, CA, conducted the field
tests in the Ranger Russet potato using one of the Company's disease resistant
plant genes. (The Company and the USDA have had five Cooperative Research and
Development Agreements (CRADA), under which a number of projects have been
conducted.)
The experiments conducted to test efficacy of soft rot protection indicated that
those tubers which contain and express the Company genes almost totally resist
rotting. After a five day incubation period, compared to the control, the amount
of soft rot reduction ranged from 85% to 96%. This is a highly significant
result that has not been achieved before in potatoes. Losses caused by soft rot
diseases are estimated at 10% in the United States or about $300 million, and
often much higher in other countries.
Most transgenic development for crop protection is targeted at replacing
insecticides or increasing herbicide resistance. The Company's gene products
primarily target bactericides and fungicides. The Company believes its success
and patent position in controlling bacterial and fungal diseases is unique.
Fungicide expenditures in the United States and the world are $550 million and
$4.1 billion respectively. United States farmers purchase about $4 billion of
seeds each year.
NUTRITION ENHANCED CROPS
Developing new engineered crops is a lengthy process. Development schedules are
limited by their natural cycle time to produce crops. This can range from 4-6
months for vegetables to several years for tree crops. While one gene may work
in many crops, the transformation process has to be done species by species,
and, as with pharmaceuticals, a number of regulatory hurtles need to be
satisfied.
While Dow AgroSciences is developing specific crops, it is expected that
numerous partners for other crops will need to be engaged in order to realize
the full potential of this technology. Efforts to date have focused on
identification and selection of the most promising gene candidates. Some in
plant successes have been reported by collaborators in such crops as apple,
pear, potato and ornamentals.
The Company expects income from this technology will be derived from license
fees and royalties, but material payments are not expected for several years.
34
In addition to disease resistance traits, the Company has invented "storage
protein" or nutrition genes, which contain all the essential amino acids for
healthy animal or human growth. The first field proof of concept was in sweet
potatoes, under the direction of Dr. C.S. Prakash, Professor and Director of the
Center for Plant Biotechnology at Tuskegee University. Sweet potatoes grown with
the Company's nutrition genes produce all of the essential amino acids required
for daily consumption. Remarkably, the overall protein levels in the sweet
potatoes averaged over three times the normal levels.
One of the crops which historically valued additional protein is wheat for food
uses. Standard wheat flour contains about 11% protein. Commercial users of flour
often add wheat gluten to achieve a higher protein content. Wheat with a higher
protein content, in the 14% to 17% range, can command premiums ranging from $.20
to $1.25 per bushel. Accordingly, a higher protein wheat offers a market
opportunity of several hundred million dollars annually. The Company hopes to
capitalize on this market opportuity.
The Company's nutrition technology will also be very important for U.S. and
world animal feed producers. In the future, animal feed producers may be able to
obtain the essential amino acids they require, in constructing their feed
rations for poultry and swine, directly from corn, sorghum or even soybeans. The
savings on their feed bill could be substantial, in addition to avoiding some of
the problems that occur occasionally from the use of animal-based ingredients in
feed rations.
Plants are generally deficient in the essential amino acids that all animals,
including humans, need to grow and sustain health. Of the twenty essential amino
acids humans need, our bodies can only synthesize about twelve. The other eight
must be ingested regularly to sustain health. Infants and young children whose
diets largely consist of plant-based foods, such as in many developing
countries, are particularly at risk. Millions of young people die or suffer
permanent mental and physical damage yearly as a result of insufficient
essential amino acid intake. In developed countries, such crops could have
considerable appeal to vegetarians.
Worldwide, the market for the Company's nutrition genes could easily be $1
billion in ten years. This technology, another example of Dr. Jaynes' design
methodology, is also supported with an allowed United States patent and a number
of additional filings.
The nutrition technology faces similar technological and regulatory hurtles as
the disease resistance technology. In addition, the number of candidate crops in
which the nutrition technology would apply is much smaller than that for disease
resistance. On the other hand, higher protein crops should capture value later
in the value chain, and, therefore, success in just a few crops offers
significant potential.
The Company's main efforts, in conjunction with Dow AgroSciences, is focused on
the identification and selection of lead genes, developing of analytical
methods, and evaluation of regulatory factors. In 2000, the Company received
$570,000 from Dow AgroSciences for research support and fees. In 2001, the
Company expects to receive $640,000 for research support and fees. Significant
milestone payments or royalties are not expected for several years.
35
GOVERNMENT REGULATION
DRUG APPROVAL PROCESS
Regulation by governmental authorities in the United States and other countries
is a significant factor in the development, production and marketing of the
Company's proposed products. All of the Company's products will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures in the United States by the FDA
and similar health authorities in foreign countries. Various federal statutes
and regulations also govern or influence the testing, manufacturing, quality
control, safety, labeling, storage, record-keeping and marketing of such
products. The process of obtaining these approvals and the subsequent compliance
with appropriate federal and foreign statutes and regulations require the
expenditure of substantial resources. Any failure by the Company or its
collaborators or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of any of the Company's products
and its ability to receive revenues therefrom. The Company has neither applied
for nor received regulatory approval to market any products.
The steps required before a pharmaceutical agent may be marketed in the United
States include (i) preclinical laboratory, in vivo and formulation studies, (ii)
the submission to the FDA of an IND, which must become effective before human
clinical trials may commence, (iii) adequate and well controlled human clinical
trials to establish safety and efficiency of the proposed drug in its intended
indication, (iv) the submission of a New Drug Application ("NDA") to the FDA,
and (v) the FDA approval of the NDA.
In order to clinically test, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company must
file an IND and receive clearance from the FDA. The IND is a summary of the
preclinical studies which were carried out to characterize the drug, including
toxicity and safety studies, as well as an in-depth discussion of the human
clinical studies which are being proposed. Approval of a local institution
review board ("IRB") and informed consent of trial subjects is also required.
Human clinical trials are typically conducted in three sequential phases which
may overlap. Phase I involves the initial introduction of the drug into human
subjects or patients where the product is tested for safety, dosage, tolerance,
absorption, metabolism, distribution and excretion. Phase II involves studies in
a limited patient population to (i) identify possible adverse effects and safety
risks, (ii) determine the efficiency of the product for specific, targeted
indications, and (iii) determine dosage tolerance and optimal dosage. When Phase
II evaluation demonstrates that the product may be effective and has an
acceptable safety profile, Phase III trials are undertaken to further evaluate
dosage and clinical efficacy and to further test for safety in an expanded
patient population at multiple clinical
36
study sites. A pivotal Phase III trial is an adequate and well-controlled study
which provides the primary basis for determining whether there is "substantial
evidence" to support the claims of effectiveness for new drugs and forms the
basis for an NDA. The regulatory authority or the sponsor may suspend clinical
trials at any point in this process if either entity concludes that clinical
subjects are being exposed to an unacceptable health risk, that the trials are
not being conducted in compliance with applicable regulatory requirements, or
for other reasons.
The results of product development, preclinical studies and clinical studies are
submitted to the FDA as part of an NDA for approval of the marketing and
commercial shipment of the product. The FDA may deny approval of an NDA if
applicable regulatory criteria are not satisfied, or may require additional
data. Even if such data is submitted, the FDA may ultimately decide that the NDA
does not satisfy its criteria for approval. Once issued, a product approval may
be withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect of approved
products which have been commercialized, and it has the power to prevent or
limit further marketing of a product based upon the results of these
post-marketing programs.
Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and novelty
of the drug product. The effect of government regulation may be to delay or to
prevent marketing of potential products for a considerable period of time and to
impose costly procedures upon the Company's activities. There can be no
assurance that the FDA or any other regulatory agency will grant approval for
any products being developed by the Company on a timely basis, or at all.
Success in preclinical or early stage clinical trials does not assure success in
later stage clinical trials. Data obtained from preclinical and clinical
activities are susceptible to varying interpretations which could delay, limit
or prevent regulatory approval. If regulatory approval of a product is granted,
such approval may impose limitations on the indicated uses for which a product
may be marketed. Further, even if regulatory approval is obtained, later
discovery of previously unknown problems with a product may result in
restrictions on the product, including withdrawal of the product from the
market. Delay in obtaining or failure to obtain regulatory approvals would have
a material adverse affect on the Company's business. Marketing the Company's
products abroad will require similar regulatory approvals and is subject to
similar risks. In addition, the Company is unable to predict the extent of
adverse government regulation that might arise from future United States or
foreign governmental action.
Before the Company's products can be marketed outside of the United States, they
are subject to regulatory approval similar to that required in the United
States, although the requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country. No action can be taken to market any product in a country until an
appropriate application has been approved by the regulatory authorities in that
country. The current approval process varies from country to country, and the
time spent in gaining approval varies from that required for FDA approval. In
certain countries, the sales price of a product must also be approved. The
pricing review
37
period often begins after market approval is granted. No assurance can be given
that, even if a product is approved by a regulatory authority, satisfactory
prices will be approved for the Company's products.
No assurance can be provided that the Company's INDs or NDAs will be
successfully reviewed by the FDA, or that similar applications will be
successfully reviewed by foreign regulatory authorities. Further, the FDA and
foreign authorities may at any time take legal or regulatory action against a
product or the Company if it concludes that a product has not complied with
applicable laws and regulations or that earlier evaluations of a product's
safety or effectiveness may not have been adequate or appropriate. Such action
may include, but is not limited to, restrictions on manufacture and shipment of
products, seizure of products, injunctions and civil and criminal penalties. The
FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the United States and in foreign markets could result in new
government regulations which could have a material adverse effect on the
Company's business. The Company is unable to predict the likelihood of adverse
governmental regulation which might arise from future legislative or
administrative action, either in the United States or abroad.
New genetically enhanced crops are subject to extensive regulatory approval
process that could include the FDA, the USDA, and the EPA and similar
governmental agencies in other countries, not dissimilar to that faced by the
pharmaceutical process.
There has been an increased resistance in Europe to genetically modified
organisms ("GMO"). Some foreign governments have or are expected to mandate the
disclosure on consumer products of the inclusion of GMOs. This has resulted in
certain food processors requesting that their suppliers only provide them with
non-genetically modified agricultural products. While there is an awareness of
GMOs in the United States, it has not progressed to the point of other
countries. In November 1999, a Bipartisan bill was introduced in Congress that
would require labels identifying whether fresh produce or any ingredient in
packaged foods was grown from genetically modified seed. Additionally, the FDA
has signaled it is considering changes in genetically modified crops.
In 1999, there were some forty million hectares globally planted with transgenic
crops, 43% more than in 1998. 72% of those crops were planted in the United
States, with 84% of the total made up of soybean and corn. Despite this wide
acceptance of these products, there is much negative emotion, especially in
Europe. However, offsetting this emotion, the developing countries are starting
to speak in favor of such crops because they see such crops as absolutely
necessary methods to produce enough food to feed their people. Further, the
Company believes that when crops that directly benefit people are demonstrated,
such as the Company's high nutrition sweet potato, there will be more acceptance
compared to crops that permit greater use of chemical herbicides. None the less,
there is no assurance that the Company, its licensee, or any other partners will
be successful in achieving regulatory approval.
38
ENVIRONMENTAL REGULATION
The Company does not incur significant costs in complying with federal or state
environmental regulations due to the nature of its activities.
TECHNOLOGY BASE
The Company's technology was designed by Jesse M. Jaynes, Ph.D. Dr. Jaynes has
over 15 years of peptide design experience and is a biochemist by training. Dr.
Jaynes was the first to demonstrate and publish results showing that
antimicrobial peptides had antifungal, anticancer and antiprotozoal activity and
could also be used for enhanced plant disease resistance and enhanced animal
disease resistance.
Dr. Jaynes is a Co-Founder of the Company and serves as Vice President of
Research. The Company believes having a molecular architect as part of the
management team distinguishes the Company from its peptide biotech competitors
which have typically in-licensed their lead molecules. As a result, the Company
has a structure and process in place for creating a pipeline of new molecular
product applications.
Peptides with lytic properties occur in nature and are part of the natural
immune systems of many animals, insects and plants. Over 300 natural peptides
have been identified. The Company's core science is the ability to design
molecules which are many times more powerful than those occurring in nature,
with minimal toxicity. The Company's compounds range in length from 17 to 40
amino acids and they have no sequence homology to the peptides found in nature.
In its discovery process, the Company has identified a number of
characteristics, which, when incorporated into the design of a molecule, create
compounds with unique properties. These design "rules" include parameters for
charge density, length, amphipathy, hydrophobicity and spatial orientation. When
optimized, these characteristics permit the ability to design molecules with
increased specificity and activity, which means some are more effective against
cancer than bacteria, for example.
Understanding the rules for creating the desired properties is an important
aspect of the Company's core technology. The Company has identified several
thousand different molecules which comprise several classes of molecules. This
relatively small number represents the spectrum of molecules with the most
desirable features and benefits compared to the hundreds of millions of
potential combinations and permutations that could theoretically be created. The
Company has created a large library of molecules from which new lead compounds
can be selected as potential new drug candidates.
MECHANISM OF ACTION
In general, these kind of compounds are believed to act by disrupting the
membrane or cell wall, thereby allowing fluids to enter the cell and cause the
cell to be destroyed or lysed. Because healthy human cells have a more complex
cytoskeletal structure, which a pathogenic cell does not possess, the healthy
cell has the ability to repair any damage. In the case of bacteria, this method
of action effectively precludes bacteria from mutating to avoid destruction,
thereby giving the Company's compounds a competitive advantage over
39
most other antibiotics where drug resistance is becoming a major problem. The
Company's compounds are also effective directly against cancer cells. Cancer
cells are, in effect, unhealthy cells, and therefore have weakened cytoskeletal
structures.
ENGINEERED CROPS
The Company has designed plant genes that destroy many agricultural fungal and
bacterial pathogens once inserted transgenically into the genome of crops. The
crops then take on the disease resistant trait and are able to express the
peptide into future generations of the plant. The Company has constructed an
inventory of genes which are being used to incorporate disease resistance into
plants, securing good yields while reducing the use and cost of environmentally
undesirable chemicals.
Genetically engineering crops accelerates the traditional, time consuming cross
breeding of crops. In addition to speed, genetic engineering enables the
designer to introduce characteristics, in particular, pest and disease
resistance, which would most likely not be feasible with traditional techniques.
Although plant genetic engineering still faces regulatory hurdles, there have
been significant recent breakthroughs in acceptability of biologically enhanced
crops. Bt genes, which protect plants from harmful insects (Monsanto, Dow
AgroSciences and others), highlight the major efforts underway to genetically
modify plants.
The Company has also designed another type of plant gene, a custom designed
storage protein which has significant potential for improving animal feeds as
well as human nutrition, by improving the amino acid profile of various food and
feed crops. Recent independent results indicate that the total protein content,
not just the deficient amino acids, could be increased four fold.
The principal goal in plant protein design has historically been to increase one
or two individual amino acids. These approaches have generally not been
successful because they were unable to stabilize sufficient quantities of the
target proteins. Dr. Jaynes took a broader approach and built upon the
structural requisites he used to design proteins with anti-bacterial traits.
Dr. Jaynes designed a protein molecule which, when produced by the plant, would
produce the eight most essential amino acids needed by humans, and offsetting
those in which the crops, on average, were most deficient. A key step was to
create a molecular structure that mimics a natural plant storage protein's
ability to form stable aggregates and accumulate within the plant cell. This
design concept, ASP ("Artificial Storage Protein") achieved the goal of a
qualitative improvement in protein content. The structural arrangement also
facilitates the bioavailability of the essential amino acids by setting up
targets for the main digestive enzymes of the mammalian gut, and thereby
breaking down the protein into its constituent amino acids.
The design concept developed by Dr. Jaynes also accomplished a quantitative
increase in total protein content. Normally a plant produces a variety of
proteins. Many of these are broken down to accomplish various plant tasks and
the plant produces new proteins. The
40
ASP gene reduces this "turnover" (loss of protein) of the natural proteins
within the plant, thereby allowing for greatly increased protein content. The
reasons for the turnover reduction are not yet understood, but the result of
inserting an ASP gene yields significant qualitative and quantitative
improvement in protein content without degradation of other important
characteristics.
Building on the ASP success, Dr. Jaynes has established a design methodology for
optimizing a given crop for a given application, e.g. corn that satisfies the
specific feeding requirements of hogs.
In 1999, there were some forty million hectares globally planted with transgenic
crops, 43% more than in 1998. 72% of those crops were planted in the United
States, with 84% of the total made up of soybean and corn. Despite this wide
acceptance of these products, there is much negative emotion, especially in
Europe. However, offsetting this emotion, the developing countries are starting
to speak in favor of such crops because they see such crops as absolutely
necessary methods to produce enough food to feed their people. An article
headline in the October 2000 New York Times illustrates this point: "China
Rushes to Adopt Genetically Modified Crops". China has approved the release of
more than 100 genetically engineered crops, double the number released in the
United States. Further, the Company believes that when crops that directly
benefit people are demonstrated, such as the Company's high nutrition sweet
potato, there will be more acceptance compared to crops that permit greater use
of chemical herbicides.
PRODUCTION
One of the impediments for peptide therapeutics has been cost of goods. One
estimate for synthesizing 20kg was $350 per gram, with the expectation of
achieving $250 per gram. A recent article by one producer predicted $40-$120 per
gram. For some diseases, such as for treating cancer, these levels may be
satisfactory. Other products may require much lower cost. Because of the
increased interest in protein therapeutics, the number of alternate production
methods has exploded. The production systems include bacterial, fungal, yeast,
milk, eggs, algae, and plants. Although the Company has not selected a
production method yet, discussions with some of the providers of alternate
methods indicate that costs could eventually be less than $10 per gram.
Compared to many peptides, D2A21, the Company's lead compound is relatively easy
to make. Because it is active at very low concentrations, the Company believes
it would be competitive in the marketplace for treating cancers and severe
infections. For an application that would require larger quantities, such as a
vaginal gel, the cost would need to be substantially even lower. The Company
expects to enter into a relationship with a company that has the capability to
produce the Company's compounds at very low cost.
The peptides for preclinical and initial clinical development activities have
been manufactured by Multiple Peptide Systems ("MPS") of San Diego, California,
using a manufacturing method based on currently available solid phase peptide
synthesis technology. The development of specifications and establishment of
analytical methods is being carried out jointly by MPS and the Company. The
Company is currently negotiating
41
with a contract manufacturer to produce the Company's clinical supplies.
PATENTS
The Company has been awarded twelve (12) United States patents. The Company has
also filed a number of United States patent applications, as well as
corresponding applications in the PCT and foreign countries. The Company's
patent strategy is to strive for broad coverage for a class of molecules for a
wide range of diseases in humans, animals, and plants.
For its agricultural applications, the Company has acquired the right to three
(3) U.S. and three (3) international patents from Louisiana State University
("LSU"). These patents include broad claims for conferring bacterial and fungal
resistance in plants. Dr. Jesse M. Jaynes, the Company's Vice President of
Research, was the principal inventor on these patents when he was a professor
and researcher at LSU. These patents also carry early filing dates, thereby
giving the Company a very strong patent position in the disease resistant plant
area. One of the patents also licensed to the Company provides broad coverage
for nutrition enhancement technology issued in September 1998. The Company has
also been assigned Dr. Jaynes' rights to patents related to earlier work at LSU.
42
DEMEGEN PATENTS
- --------------------- ----------------- -----------------------------------------------------------------------
PATENT NO. ISSUE DATE PATENT TITLE
- --------------------- ----------------- -----------------------------------------------------------------------
US 6,084,156 7-4-00 Plants Producing Lytic Peptides (expires June 17, 2011)
- --------------------- ----------------- -----------------------------------------------------------------------
US 6,018,102 1-25-00 Ubiquitin-Lytic Peptide Fusion Gene Constructs, Protein Products
Deriving Therefrom, and Methods of Making and Using Same (expires
October 8, 2013)
- --------------------- ----------------- -----------------------------------------------------------------------
US 6,001,805 12-14-99 Method of Enhancing Wound Healing by Stimulating Fibroblast and
Keratinocyte Growth in Vivo Utilizing Amphipathic Peptides (expires
March 17, 2015)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,968,904 10-19-99 Modified Arginine containing Lytic Peptides and Method of Making the
Same by Glycoxylation (expires November 8, 2013)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,955,573 9-21-99 Ubiquitin-Lytic Peptide Fusion Gene Constructs, Protein Products
Deriving Therefrom, and Methods of Making and Using Same (expires
July 22, 2014)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,811,654* 9-22-98 Plants Genetically Enhanced for Nutritional Quality (expires July 25,
2006)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,773,413 6-30-98 Method of combating Mammalian Neoplasias, and Lytic Peptides Therefor
(expires February 10, 2015)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,744,445 4-28-98 Method of Treating Pulmonary Disease States with Non-Naturally
Occurring Amphipathic Peptides (expires April 28, 2015)
- --------------------- ----------------- -----------------------------------------------------------------------
43
DEMEGEN PATENTS
- --------------------- ----------------- -----------------------------------------------------------------------
PATENT NO. ISSUE DATE PATENT TITLE
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,717,064 2-10-98 Methylated Lysine-Rich Lytic Peptides and Method of Making Same by
Reductive Alkylation (expires February 10, 2015)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,597,946* 1-28-97 Method for Introduction of Disease and Pest Resistance Into Plants
and Novel Genes Incorporated Into Plants Which Code Therefor (expires
January 28, 2014)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,597,945* 1-28-97 Plants Genetically Enhanced for Disease Resistance (expires January
28, 2014)
- --------------------- ----------------- -----------------------------------------------------------------------
US 5,561,107 10-1-96 Method of Enhancing Wound Healing by Stimulating Fibroblast and
Keratinocyte Growth in Vivo Utilizing Amphipathic Peptides (expires
October 1, 2013)
- --------------------- ----------------- -----------------------------------------------------------------------
* Patents in-licensed from Louisiana State University
COMPETITION
There are at least forty other biotechnology companies who are developing
peptide compounds for antimicrobial or anti-cancer applications. Through the
Internet, the Company regularly monitors patents, press announcement, and
publications in order to be informed about the Company's fields of technology
and the actions of competitors. These companies include: Applied Microbiology,
Cubist Pharmaceuticals, Intrabiotics, Magainin Pharmaceuticals, Micrologix
Biotech, Microcide Pharmaceutical, Inc., Periodontix and Xoma Corporation. The
market capitalization of these companies ranges from $30 million to $1.4
billion. While not every competitor has been evaluated, based on the reviews
that have been conducted thus far, the Company believes it has a solid position
and a number of unique characteristics, and has achieved its current level of
accomplishment with relatively modest spending. In comparing the Company to
other peptide companies, the following are general observations:
There are two broad classes of competitors - other companies using a peptide
technology platform, and companies using other technology platforms to address
the same diseases. To our knowledge, there are at least 40 peptide companies
focused on at least some twenty disease indications. For each disease
indication, there can be dozens of non-peptide companies with other
technologies.
Defining peptide competitors is not obvious. The types of peptides in the
Company's portfolio are often referred to as lytic or antimicrobial peptides
("AMP"). Many peptide companies have their own name for compounds that
purportedly perform similar functions to the Company's. Heretofore, there have
not yet been any approved AMP peptide products. Other companies do not consider
their peptides in this class at all, yet a review of their documents show
examples of pore-forming mechanisms that are typically ascribed to AMPs. The
Company's recent work indicates that at least some of these molecules or their
fragments perform in a way that is very different than is viewed as typical of
AMPs. (This suggests that the Company's next generation of molecules may be more
related to a different set of peptide competitors than has been traditionally
thought.)
Among the peptide companies, several are working on a number of different
disease
44
areas, making summarization difficult, but in general the efforts are directed
as follows:
Cancers 26%
Bacteria 18%
Viral 14%
Autoimmune 11%
Wound care 8%
Cardiovascular 8%
Inflammation 8%
Diabetics 8%
In general, most peptide companies, unlike the Company, have in licensed their
initial lead compounds and few have in-house capability to generate new leads.
EMPLOYEES
The Company currently has fifteen employees but also supports, directly or
indirectly, some twenty researchers at academic and other research institutions.
These academic and other research institutions are the recipients of SBIR grants
requested by the Company, are performing pre-clinical research and/or assisting
the Company with its study of its peptides.
COMPANY HISTORY AND GENERAL INFORMATION
The Company was formed after the July 27, 1992 acquisition of the assets of The
Demeter Corporation by Excelsior Capital Corporation ("Excelsior"). Excelsior
was incorporated in Colorado on September 16, 1987. Excelsior acquired all of
the assets of The Demeter Corporation in exchange for 6,625,821 shares of
Excelsior's $0.001 par value common stock. The Demeter Corporation's assets
consisted of intangible assets related to various biotechnology applications in
the fields of human and animal health care, agricultural and commercial
chemicals. Subsequent to the acquisition, Excelsior changed its name to Demeter
BioTechnologies, Ltd. On September 18, 1998, the shareholders approved the
recommendation of the Company's Board of Directors to change the Company's name
to Demegen, Inc.
The Company is a "Development Stage Company" that designs synthetic
peptide/protein compounds and genes for pharmaceutical and agricultural
applications. Current development programs include a new treatment for prostate
cancer and sexually transmitted diseases, and two transgenic agricultural
applications - one to prevent plant diseases, the other to increase the
nutritional value of food and feed crops.
The Company has two licenses in place for its agricultural technology, disease
resistance and nutritional enhancement, to Mycogen which has produced historic
revenue streams and will continue to produce revenue as Mycogen proceeds towards
commercialization of these technologies. The Company is focusing its
pharmaceutical efforts upon therapies to prevent or treat bacterial diseases and
cancer which it expects to license to a major pharmaceutical firm, when the
therapeutic will be either in Phase II or entering Phase III clinical trials.
The Company does not have any formal agreements with pharmaceutical firms at
this time.
45
DESCRIPTION OF PROPERTY
The Company's office and laboratory are located at 1051 Brinton Road,
Pittsburgh, PA 15221. The Company occupies 3,000 square feet of leased space.
The lease is for a three year term, expiring September 2001 at a gross monthly
rental, including utilities, of $3,948. Prior to the Company's move to
Pittsburgh in September 1998, the Company was located in Durham, North Carolina.
The Company fully utilizes its office space and laboratory.
The majority of the Company's application research is conducted by independent
labs, academic and research institutions and commercial partners. The Company's
laboratory focuses primarily on research related to the Company's core
technologies in assisting Dow AgroSciences in an ancillary capacity with the
development and commercialization of the agricultural technologies.
The Company believes that these facilities are adequate for its current needs.
46
LEGAL PROCEEDINGS
None
RECENT DEVELOPMENTS
In January 2001 the Company entered into a License Agreement form Avigenics,
Inc. and is in the process of reviewing the terms in preparation for executing
the agreement. The license provides for an exclusive worldwide license for the
use of the Company's peptides for the control of certain avian enteric diseases,
including coccidiosis and salmonella, and for use in the production of
transgenic avians, including poultry. The License provides for no payment at
signing of the License but for a royalty upon the sale of licenses product by
Avigenics.
Effective January 1, 2001 the Company entered into a definitive license
agreement with an option to purchase with Periodontix, Inc for all of their
technologies and rights in related clinical trials, except for Periodontix'
photodynamic technology. The transaction is structured under a short-term
license agreement to permit the Company a period of time to evaluate
Periodontix's technology and obtain the necessary funds to support the
additional research, prior to exercising the purchase option. The terms or the
agreement are as follows:
- - On December 15, 2000 the Company made a $50,000 good faith
non-refundable payment to Periodontix
- - At the inception of the license agreement, the Company issued
Periodontix 2.3 million restricted common shares of the Company's
Common Stock and warrants to purchase up to 2.3 million Common Shares
of the Company's Common Stock at an exercise price of $1.25 per share.
The Warrants have a five year term and are callable by the Company if
the price of the Company's common Stock trades above $2.50 per shares
for twenty consecutive trading days.
- - Periodontix will receive a second issuance under the license agreement
by April 2, 2001 of 2 million restricted common shares of the Company's
Common Stock and warrants to purchase up to 2 million Common Shares of
the Company's Common Stock at an exercise price of $1.25 per share. The
Warrants have a five year term and is callable by the Company if the
price of the Company's common Stock trades above $2.50 per shares for
twenty consecutive trading days. If the Company does not make this
second issuance of shares and warrants because there is a material
adverse event related to the Periodontix technology or because the
Company does not secure sufficient new capital, the option will expire
and the license will be returned to Periodontix. If the license is
returned, Periodontix will return 80% of the common shares and warrants
previously issued.
- - Under the license agreement, the Company will have an option to
purchase the aforementioned technologies, free and clear of all liens
and to terminate the license by July 31, 2001 with the issuance of 4.7
million restricted common shares of the Company's Common Stock and
warrants to purchase up to 4.7 million Common Shares of the Company's
Common Stock at an exercise price of $1.25 per share. The Warrants have
a five year term and is callable by the Company if the price of the
Company's common Stock trades above $2.50 per shares for twenty
consecutive trading days. The option date may be extended by the
Company until January 31, 2002 with the payment of 1 million restricted
Common Shares of the Company by July 31, 2001. If the option is
exercised after July 31, 2001, the number of Common Shares and Warrants
required to purchase the technologies will be 7 million each.
- - Periodontix has agreed not to sell the technologies while the Company's
option is in force.
- - Should any license or sublicense agreements be negotiated by Demegen
with a customer for the licensed Periodontix technologies prior to the
exercise of the option to purchase by the Company, the Company will
receive the first $350,000 of any upfront license fees. The remaining
balance of any upfront license fees will be paid to Periodontix in the
Company's restricted Common Stock valued at the closing price for the
preceding twenty trading days.
- - On January 1, 2001 the Company hired selected Periodontix employees to
facilitate the clinical trials and other tasks related to the combined
operation.
47
- - Beginning January 1, 2001 the Company agreed to pay Periodontix for
rent and utilities at their office and other operating expenses.
- - As part of the license fee the Company agreed to pay $175,000 to
Periodontix on April 2, 2001 providing the Company makes the April 2,
2001 share and warrant issuance. If the aforementioned issuance occurs,
the Company will make a second $175,000 payment to Periodontix on
December 1, 2001.
EXECUTIVE OFFICERS; COMPENSATION
- --------------------------------
EXECUTIVE OFFICERS
NAME AGE POSITION HELD
- ---- --- -------------
Richard D. Ekstrom 56 Chairman and President
S. Robert Fatora 56 Chief Operating Officer -
Pharmaceutical Products
Jesse M. Jaynes 49 Vice President of Research
Mary L. Silverberg 56 Secretary
48
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the named executives
concerning their respective annual and long term compensation for the last three
years.
SUMMARY COMPENSATION TABLE
Annual Compensation Awards Payouts
------------------- ----------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other All
and Annual Restricted LTIP Other
Principal Compen- Stock Options/ Pay- Compen-
Position Year Salary Bonus sation Awards SARS outs sation
($)(a) ($) ($) ($)(b) (#)(c) ($) ($)(d)
Richard D. 2000 $140,000 $25,000 - - 600,000 - -
Ekstrom 1999 $120,000 - - - - - -
President 1998 $120,000 - - - 1,600,000 - -
S. Robert 2000 $102,500 - - $264,000 1,400,000 - -
Fatora 1999 $ - - - - - - -
COO 1998 $ - - - - - - -
Jesse M. 2000 $120,000 $10,000 - - - - $2,048
Jaynes 1999 $120,000 - - - - - $1,648
Vice President 1998 $120,000 - - - 1,600,000 - $3,833
a. Represents fiscal years ended September 30.
b. Dr. Fatora received 300,000 restricted Common Shares upon his employment
with the Company. They were valued at the share price he commenced his
employment with the company (April 1, 2000).
c. Dr. Fatora received options to purchase up to 1,200,000 shares of the
Corporation's common stock at exercise prices of $0.45 and $0.90 per share.
The options vest the earlier of seven years from issue or the achievement
of certain performance objectives. The options expire in Fiscal 2010. He
also received options for 200,000 shares which vest ratably on April 1,
2001 and 2002 at an exercise price of $0.45 per share and expire in fiscal
2010.
The 1,600 000 option grants to Messrs. Ekstrom and Jaynes are fully
vested. The options issued in Fiscal 1998 are at an exercise price of
$0.05 per share and expire on March 5, 2008.. Mr. Ekstrom's option
issued in Fiscal 1996 to purchase up to 600,000 shares of Common Stock
at an exercise price of $0.15 per share had their expiration date
extended from October 31, 2000 to October 31, 2010 at the September
17, 1999 meeting of the Compensation Committee..
The 600,000 option grant to Mr. Ekstrom in Fiscal 2000 has 150,000
shares vested with the remaining shares vesting ratably on May 1,
2001, 2002 and 2003. The exercise price of these options is $0.75 per
share and the options expire in Fiscal 2010.
d. Represents premiums on $1 million life insurance policy on the life of Dr.
Jaynes whose beneficiary is Dr. Jaynes' family.
49
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
--------------------------------------------
% of Total
Number of Options
Securities Granted to Market
Underlying Employees Exercise Price
Options in Fiscal Price Expiration At Date
Name Granted Year (%) ($/Sh) Date Grant
- ---- ------- --------- ----- ---------- -------
Richard D.
Ekstrom 600,000 26.4% 0.75 10/31/10 N/A
S. Robert
Fatora 900,000 61.5% 0.45 03/05/08 0.88
600,000 0.90 03/05/08 N/A
(A) The 600,000 option grant to Mr. Ekstrom in Fiscal 2000 has 150,000 shares
vested with the remaining shares vesting ratably on May 1, 2001, 2002 and
2003. The exercise price of these options is $0.75 per share and the
options expire in Fiscal 2010.
(B) Dr. Fatora received options to purchase up to 1,200,000 shares of the
Corporation's common stock at exercise prices of $0.45 and $0.90 per share.
The options vest the earlier of seven years from issue or the achievement
of certain performance objectives. The options expire in Fiscal 2010. He
also received options for 200,000 shares which vest ratably on April 1,
2001 and 2002 at an exercise price of $0.45 per share and expire in fiscal
2010.
50
COMPENSATION OF DIRECTORS
The directors of the Company are reimbursed for expenses that they incur in
performing Board duties
During Fiscal 2000, the members of the Company's Board of Directors received the
following options to purchase shares of the Company's Common Stock. All of these
options expire in Fiscal 2005.
Director Options to Purchase Exercise Price
- -------- ------------------- --------------
John Bridwell 25,000 shares $0.50
Konrad Weis 25,000 shares $0.50
James Colker (A) 25,000 shares $0.50
Robert Hannan 25,000 shares $0.50
Jerry Hook (B) 100,000 shares $0.45
Jerry Hook 25,000 shares $0.50
(A) Mr. Colker assigned his options to the CEO Venture Fund III of which he is
the Managing General Partner.
(B) Mr. Hook received 100,000 options upon his appointment to the Board of
Directors and 25,000 options upon his reelection to the Board of Directors.
51
DIRECTORS
The following table lists, as of December 31, 2000 the following information
concerning each director: his principal occupation or employment; age; the year
in which he first became a director of the Corporation; and any directorships in
public companies.
DIRECTOR
NAME, PRINCIPAL OCCUPATION, AND AGE SINCE
NOMINEES ELECTED BY COMMON STOCKHOLDERS
RICHARD D. EKSTROM 1996
Richard D. Ekstrom has served as Chairman of the Board of Directors and
President of the Company since January 1996. Mr. Ekstrom was Chief Financial
Officer from December 1994 until August 1998. Mr. Ekstrom holds a B.A. from
Cornell University and an M.B.A. from Boston University. From 1990 through 1991,
Mr. Ekstrom was President of Cost Containment Corporation and from 1993 through
1994, he was Chief Operating Officer of Preferred Solutions Inc., both of which
were start-up pharmacy benefit management companies. Mr. Ekstrom is a member of
the Board of Directors of Access Health Alternative, Inc., a nutritional health
care company. Age, 56.
JESSE M. JAYNES 1992
Jesse M. Jaynes, Ph.D. is a Co-Founder of the Company and has served as Vice
President of Research since 1992. He is the Company's Chief Scientist and the
inventor of the core technologies. He holds A.S. in Biology from the College of
Eastern Utah, a B.S. in Zoology from Southern Utah State University and earned
his doctorate in BioChemistry at Brigham Young University. He completed
postdoctoral fellowships in the Department of Plant Pathology at Montana State
University and the Plant Growth Laboratory at the University of California,
Davis before joining the faculty of Louisiana State University in 1985. Age, 49.
52
JOHN BRIDWELL 1999
John Bridwell has been President of Ditch Witch of Oklahoma for the past 20
years. Presently, he is involved with an Oklahoma health care company; Health
Heaven, Shepard Mall Partnership, Riva Finance Co. and the City of Edmond
Economic Development. He also currently serves as director of First Enterprise
Bank of Oklahoma City. Age, 68.
ROBERT E. HANNAN 1999
Robert E. Hannan is the Principal and Chief Executive Officer of the Genesis
Group, a diversified business consulting firm since 1981. Genesis Group has
served the health care and biotechnology industries since its inception. Mr.
Hannan is also Founder and Chief Executive Officer of POV Incorporated, a
strategic management publishing firm and is Founder and Editorial Director of
four health care news releases under the brand name The Genesis Report. Mr.
Hannan is a member of the American Association for the Advancement of Science
and the New York Academy of Science. Mr. Hannan is a member of the Board of
Directors of four privately held Healthcare and Biotechnology companies. Age,
53.
NOMINEE ELECTED BY ALL STOCKHOLDERS
JERRY B. HOOK 1999
Jerry B. Hook, Ph.D., is the former Chairman of the Board and CEO of Sparta
Pharmaceuticals, Inc., which was recently sold to Supergen, Inc. Dr. Hook was
previously President and CEO of Lexin Pharmaceutical, which was acquired by
Sparta in 1996. Prior to Lexin, he was Senior Vice President and Director,
Research and Development SmithKline Beecham Pharmaceuticals. Dr. Hook sits on
the Board of Directors of two privately held biotechnology firms. Dr. Hook was
Professor of Pharmacology and Toxicology at Michigan State University and
Director, Center for Environmental Toxicology. Age, 62.
NOMINEES ELECTED BY PREFERRED STOCKHOLDERS
53
KONRAD WEIS 1998
Konrad M. Weis, Ph.D., is the former President and Chief Executive Officer of
Bayer USA, the American subsidiary of Bayer AG, a chemical, pharmaceutical and
information company. Dr. Weis is currently on the boards of PNC Equity
Management Corporation, Titan Pharmaceuticals and Visible Genetics, Inc. In
addition, he is a trustee of Carnegie Mellon University and the Heinz
Endowments. Age, 72.
JAMES COLKER 1998
James Colker is the Managing General partner of the CEO Venture Fund. He is also
a director of the Pittsburgh Technology Council, the Pennsylvania Technology
Council and trustee of Penn Southwest Association, as well as a board member of
a number of small advanced technology companies. Previously, Mr. Colker was
Chairman and Chief Executive Officer of Contraves Goerz Corporation. Age, 72.
Messrs. Colker and Weis are affiliates of CEO Venture Fund, which purchased
4,444,444 shares of the Company's Preferred Stock in June of 1998 prior to their
election to the Board of Directors. None of the other nominees has been a party
to any transaction with the Company during the last 3 years except, with respect
to nominees who are also employees of the Company, various transactions related
solely to the terms of their employment.
All of the aforementioned Directors were re-elected at the Company's annual
meeting of stockholders on February 16, 2001.
54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 16, 2001, the ownership of the
Company's Common Stock and Convertible Preferred Stock by (i) each director of
the Company, (ii) all executive officers and directors of the Company as a
group, and (iii) all persons known by the Company to own more that 5% of the
Company's Common and Convertible Preferred Stock.
Beneficial Ownership
--------------------
Title of Number of
Name and Address Class Shares (1) % (1)
- ------------------ --------- ------------ -----
Richard D. Ekstrom (2) Common 2,728,250 6.64%
1051 Brinton Road
Pittsburgh, PA 15221
Jesse M. Jaynes, Ph.D. (3) Common 1,996,626 4.89%
1051 Brinton Road
Pittsburgh, PA 15221
John Bridwell (5) Common 1,059,937 2.70%
1051 Brinton Road
Pittsburgh, PA 15221
Robert E. Hannan (4) Common 160,000 0.41%
1051 Brinton Road
Pittsburgh, PA 15221
Konrad Weis Ph.D. (8) Common 1,009,616 2.57%
1051 Brinton Road
Pittsburgh, PA 15221
James Colker (6) Common 10,285,000 23.27%
2000 Technology Drive
Suite 160
Pittsburgh, PA 15219
Jerry B. Hook Ph.D. (4) Common 160,000 0.41%
1051 Brinton Road
Pittsburgh, PA 15221
S. Robert Fatora Ph.D. (9) Common 300,000 0.76%
1051 Brinton Road
Pittsburgh, PA 15221
Mary L. Silverberg (7) Common 137,336 0.35%
1051 Brinton Road
Pittsburgh, PA 15221
All Directors and Officers Common 17,836,765 36.43%
as a group (9 persons)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities &
55
Exchange Commission and generally includes voting or investment power with
respect to securities. Shares of Common Stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible within 60
days of February 16, 2001, are deemed outstanding for computing the percentage
of the person holding such option or warrant but are not deemed outstanding for
computing the percentage of any other person. Except as indicated in the
footnotes to this table and pursuant to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of Common Stock beneficially owned.
(2) Includes 1,850,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
(3) Includes 1,600,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable and 15,000 shares of Common Stock owned
by Mr. Jaynes' minor child over which he claims beneficial ownership.
(4) Includes 160,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
(5) Includes 75,000 shares of Common Stock issuable upon the exercise of options
that are currently exercisable
(6) Mr. Colker is the Managing General Partner of the CEO Venture Fund III
("CEO") and, therefore, has beneficial ownership over the Company's 400,000
shares of the Company's Common Stock, Convertible Preferred Stock and related
Warrants held by CEO. The 4,444,444 shares of Convertible Preferred Stock are
convertible into 4,444,444 shares of the Company's Common Stock. Additionally,
CEO has a Warrant to purchase 4,965,556 shares of the Company's Common Stock at
an exercise price of $0.45 per share. The Warrant expires on June 14, 2008.
Additionally CEO has a warrant to purchase 400,000 shares of the Company's
Common Stock at an exercise price of $0.75 per share. This Warrant expires on
March 31, 2005
Additionally, Mr. Colker has assigned options that he received as a Director of
the Company, to purchase 75,000 shares of Common Stock to the CEO Venture Fund
III. The options are currently exercisable.
(7) Includes 60,000 shares of Common Stock issuable upon the exercise of options
that are currently exercisable. Additionally, she has a warrant to purchase
10,668 shares of the Company's Common Stock at an exercise price of $0.75 per
share. The Warrant expires on March 31, 2005.
(8) Includes 75,000 shares of Common Stock issuable upon the exercise of options
that are currently exercisable. Additionally he has a warrant to purchase
200,000 shares of the Company's Common Stock at an exercise price of $0.75 per
share. The Warrant expires on March 31, 2005. Mr. Weis is the managing partner
of Weis Capital Fund LP ("Fund") and, therefore, has beneficial ownership over
the Fund's 100,000 shares of the Company's Common Stock and 100,000 Warrants
held by the Fund. The Warrant is at an exercise
56
price of $0.75 per share. The Warrant expires on March 31, 2005
(9) Does not include 1,400,000 shares of Common Stock issuable upon the exercise
of options that are not vested and are therefore currently unexercisable. The
majority of these options vest and become exercisable upon the achievement of
certain contractually determined benchmarks.
INTEREST OF NAMED EXPERTS AND COUNSEL
LEGAL MATTERS
The validity of the securities offered by this prospectus have been passed
upon for the registrant by Buchanan Ingersoll Professional Corporation,
Pittsburgh, PA.
EXPERTS
The financial statements of Demegen, Inc at September 30, 2000 and 1999, and for
the years ended September 30, 2000, 1999 and 1998, appearing in this
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere in this
prospectus, and are included in reliance upon such report given on the authority
of such firm as experts in accounting and auditing.
DESCRIPTION OF SECURITIES
The Company has authorized for issuance 140,000,000 share of capital stock, of
which 40,000,000 share are designated as preferred stock, $0.001 par value and
100,000,000 share are designated as common stock, $0.001 par value. The
following is a brief description of the Preferred and Common Stock.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders except for the
election of two directors. Additionally, all holders of Preferred Stock are
entitled to vote their shares on a one share for one share basis on all matters
submitted for the approval of the Common Shareholders. In all matters other than
the election of Directors, when a quorum is present at any stockholders'
meeting, the affirmative vote of the majority of shares present in person or
represented by proxy shall decide any question before such meeting. Directors
are elected by a plurality of the votes of the shares present in person or
represented by proxy at a stockholders' meeting. The Board of Directors of the
Company currently consists of eight members but effective with the Annual
Meeting on January 22, 1999 it will be reduced to six members. The Board of
Directors is divided into three classes of Directors serving one-year terms and
until their successors are elected and qualified. The holders of Preferred Stock
have the right to elect two of the members of the Board of Directors, the Common
Shareholders and Preferred Stockholders elect one member of the Board of
Directors; and
57
the Common Shareholders elect three members of the Board of Directors. At the
October 16, 1998 meeting of the Board of Directors the Board of Directors was
expanded to seven members for one year with the Common Stockholders electing
this additional member of the Board of Directors.
The holders of Common Stock are not entitled to cumulative voting rights with
respect to the election of Directors, and, as a consequence, minority
stockholders will not be able to elect Directors on the basis of their votes
alone. Subject to preferences that are applicable to the outstanding shares of
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.
In the event of a liquidation, dissolution or winding up of the Company, holders
of the Common Stock would be entitled to share ratably in all assets remaining
after payment of liabilities and the satisfaction of any liquidation preference
of any then outstanding series of Preferred Stock, including the Convertible
Preferred Stock. Holders of Common Stock have no preemptive rights and no right
to convert their Common Stock into any other securities. There are no redemption
or sinking fund provisions applicable to the Common Stock.. All outstanding
shares of Common Stock are fully paid and nonassessable.
As of February 16, 2001, there were 34,779,778 shares of Common Stock
outstanding (excluding 4,444,444 shares of Common Stock issuable upon the
conversion of 4,444,444 shares of Convertible Preferred Stock) held of record
by 503 stockholders. Options to purchase 7,735,000 shares of Common stock were
outstanding (5,401,667 vested) and 13,108,414 shares of Common Stock issuable
upon the exercise of Stock Warrants including 4,965,556 shares of Common Stock
issuable upon the exercise of the Stock Warrant held by the holder of the of
Convertible Preferred Stock.
TRANSFER AGENT
The Transfer Agent and Registrar for the Company's Common Stock is American
Securities Transfer and Trust Company
PREFERRED STOCK
The Company has 4,444,444 shares of Convertible Preferred Stock outstanding. The
Convertible Preferred Stock is convertible into 4,444,444 shares of Common
Stock. The following description of the preferences, limitations and relative
rights of the Convertible Preferred Stock is qualified in its entity by
reference to the Restated Articles of Incorporation of the Company which is
filed as an exhibit to this Registration Statement.
DIVIDENDS The holders of the Convertible Preferred Stock are entitled to
receive, when, as and if declared by the Board of Directors, out of funds
legally available therefor, dividends at the rate of $0.036 per share,
semi-annually, on each outstanding share of
58
Convertible Preferred Stock, Such dividends have a priority over any dividends
paid on the Common Stock. Dividends on the Convertible Preferred Stock are
cumulative and the right to such dividends shall accrue to holders of
Convertible Preferred Stock until declared by the Board of Directors. The
Company does not anticipate declaring any cash dividends in the foreseeable
future.
LIQUIDATION PREFERENCE In the event of any liquidation, dissolution or winding
up of the Company, the holders of Convertible Preferred Stock shall be entitled
receive the greater of $0.45 per share of Convertible Preferred Stock, plus all
unpaid and accrued dividends thereon, computed to the date payment thereof is
made available or the amount the holders of such shares of Convertible Preferred
Stock would otherwise be entitled had each such share of Convertible Preferred
Stock been converted into Common Stock, as discussed in the following paragraph,
immediately prior to such liquidation, dissolution or winding up.
CONVERSION Each share of Convertible Preferred Stock is convertible at any time,
at the option of the holder thereof, into such number of fully paid and
nonassessable shares of Common Stock as shall be determined by multiplying the
number of shares of Convertible Preferred Stock so to be converted by $0.45 and
dividing the result by the conversion price of $0.45 per share. In addition, if
at any time the Company shall effect a firm commitment underwritten public
offering of shares of Common Stock in which the aggregate price paid for such
shares by the public shall be at least $8,000,000, then effective immediately
before the closing of the sale of such shares by the Company pursuant to such
public offering, all outstanding shares of Convertible Preferred Stock shall
automatically convert to share of Common Stock.
REDEMPTION The shares of Convertible Preferred Stock shall be redeemable on a
voluntary basis at the election of any holder of shares of Convertible Preferred
Stock upon atleast 90 days notice to the Company, the Company shall redeem from
such holder on or at any time after May 31, 2003, 2004 and 2005 up to one-third
of the shares of Convertible Preferred Stock held by such holder, with the
intent that, should any holder so elect, at any time after May 31, 2005, the
total number of shares held by such holder would be subject to redemption. The
Convertible Preferred Stock to be redeemed shall be paid for in cash at an
amount equal to the greater of (I) $0.45 per share plus, in the case of each
share, an amount equal to all accruing dividends unpaid thereon (whether or not
declared), or (ii) such amount per share as would have been payable has each
such share been converted to Common Stock immediately prior to the actual date
of redemption.
VOTING RIGHTS The holders of shares of Convertible Preferred Stock vote on
matters on an as converted basis, ie. each share of Preferred Stock has one vote
as does each owner of a share of Common Stock.
WARRANTS The holder of the Convertible Preferred Stock has a warrant to purchase
4,965,556 shares of Common Stock of the Company at $0.45 per share of Common
Stock. The Warrant is exercisable, in whole or in part, through June 14, 2008.
The Company may call the Warrant at any time after December 31, 1998 provided
the Company's Common Stock has been in excess of $1.50 per share for each of the
forty
59
consecutive trading days immediately preceding the date of the call.
Upon receipt of the call, the Warrant holder shall have sixty days to elect to
exercise all or a portion of this Warrant. Upon such exercise, in addition to
receiving the number of shares of Common Stock to which the holder shall be
entitled, the holder of the Warrant also shall receive a new Warrant
("Replacement Warrant"). The Replacement Warrant shall be exercisable for one
share of Common Stock for every two shares of Common Stock purchased in response
to the aforementioned call. The exercise price of the Replacement Warrant is
$1.50 per share and the term of the Replacement Warrant shall be the longer of
two years from the date of the issuance or the balance of the original term of
the Warrant.
WARRANTS
Exclusive of the aforementioned Warrant, held by the owner of the Preferred
Stock, to purchase 4,965,556 shares of Common Stock the Company issued Warrants
to purchase up to 5,642,879 shares of Common Stock to investors that
participated in the Company's fund raising in March 2000. The investors were
offered one unit at $0.50 per unit. Each unit consisted of one share of
restricted common stock and a warrant to purchase one share of the Company's
Common Stock for $0.75 per share. The warrant expires the earlier of March 31,
2005 or 60 days after a call by the Company. The Company may call the warrants
at any time after March 31, 2001, provided that the price of the Company's
common stock has been in excess of $1.50 per share for each of the forty
consecutive trading days immediately preceding the date of the call. Upon
receipt of the call, warrant holders shall have sixty days to elect to exercise
all or a portion of the warrants.
The Company has agreed to file a registration statement with the Securities &
Exchange Commission to register all common stock which comprise the unit and the
common stock issuable from the exercise of the warrant on or before March 31,
2001.
Additionally, the Company issued a warrant in October 2000 to an investment
banker to purchase up to 200,000 shares of Common Stock at an exercise price of
$1.00 per share. This Warrant expires on August 16, 2003. The Common Shares
underlying this warrant are not being registered as part of this Registration
Statement.
At the inception of the license agreement in the second quarter of Fiscal 2001,
the Company issued to Periodontix warrants to purchase up to 2,300,000 Common
Shares of the Company's Common Stock at an exercise price of $1.25 per share.
The warrants have a five year term and are callable by the Company if the price
of the Company's common Stock trades above $2.50 per shares for twenty
consecutive trading days. The Common Shares underlying this warrant are not
being registered as part of this Registration Statement.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
60
In accordance with the Colorado Business Corporation Act (the "Act"), the
Company's Articles of Incorporation (the "Articles") contain provisions which
provide indemnification rights to officers, directors, employees and agents of
the Company ("Potential Indemnitees"), subject to certain limitations set forth
in the Act and in the Articles. A Potential Indemnitee has a right of mandatory
indemnification by the Company if he is successful on the merits in defense of
any proceeding brought against him for actions taken on behalf of the Company.
Under the Articles, the Corporation may indemnify a Potential Indemnitee if the
Board of Directors shall determine that Potential Indemnitee acted in good faith
and in a manner he reasonably believed to be in the best interests of the
Company, and with respect to any criminal action or proceeding had no reasonable
cause to believe his conduct was unlawful. The Company may advance a Potential
Indemnitee the expense incurred in defense of any action upon receipt of an
agreement of the Potential Indemnitee to repay the expenses unless it is
determined that he is entitled to indemnification under the Articles. In
addition, the Articles also provide that the directors of the Company shall not
be liable to the Company or its stockholders to the fullest extent permitted by
the Act.
61
WHERE YOU CAN OBTAIN MORE INFORMATION
Demegen files annual, quarterly and current reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy,
upon payment of a fee set by the SEC, any document that we file with the SEC at
its public reference rooms in Washington, D.C. at 450 Fifth Street, N.W. 20549,
New York, New York at Seven World Trade Center, 13th Floor, Suite 1300, 10048,
and Chicago, Illinois at Citicorp Center, 500 West Madison Street, 14th Floor,
Suite 1400, 60601. You may also call the SEC at 1-800-432-0330 for more
information on the public reference rooms. Our filings are also available to the
public on the internet, through the SEC's EDGAR database. You may access the
EDGAR data base at the SEC's web site at HTTP://WWW.SEC.GOV.
This prospectus is part of a registration statement on Form SB-2 we have filed
with the SEC relating to our common stock registered under this Prospectus. As
permitted by SEC rules, this Prospectus does not contain all of the information
contained in the registration statement and accompanying exhibits and schedules
we file with the SEC. You may refer to the registration statement, the exhibits
and schedules for more information about us and our common stock. The
registration statement, exhibits and schedules are also available at the SEC's
public reference rooms or through its EDGAR database on the internet.
You may obtain a copy of these filing at no cost by writing to us at Demegen,
Inc., 1051 Brinton Road, Pittsburgh, PA 15221 or by telephoning us at
412-241-2150.
FINANCIAL STATEMENTS
Each of the following items are contained in the Company's financial statements
and are set forth herein beginning on page F-1.
62
(i) Report of Ernst & Young LLP, Independent Auditors
(ii) Balance Sheets as of September 30, 2000 and 1999, and December
31, 2000 (unaudited)
(iii) Statements of Operations for the Years Ended September 30,
2000, 1999 and 1998 and for the period December 6, 1991
(inception) to September 30, 2000
(iv) Statements of Operations for the Quarters Ended December 31,
2000 and 1999 and for the period December 6, 1991 (inception)
to December 31, 2000 (unaudited)
(v) Statements of Stockholders' Deficit for the Years Ended
September 30, 2000, 1999 and 1998 and for the period December
6, 1991 (inception) to December 31, 2000, and for the three
months ended December 31, 2000 (unaudited)
(vi) Statements of Cash Flows for the Years Ended September 30,
2000, 1999 and 1998 and for the period December 6, 1991
(inception) to September 30, 2000
(vii) Statements of Cash Flows for the Quarters Ended December 31,
2000 and 1999 and for the period December 6, 1991 (inception)
to December 31, 2000
(viii) Notes to Financial Statements
63
[ERNST & YOUNG LLP LETTERHEAD]
Report of Independent Auditors
Board of Directors
Demegen, Inc.
We have audited the accompanying balance sheets of Demegen, Inc. (a development
stage company) as of September 30, 2000 and 1999, and the related statements of
operations, shareholders' deficit, and cash flows for the years ended September
30, 2000, 1999 and 1998 and for the period from December 6, 1991 (inception)
through September 30, 2000. 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. The financial statements for the
period from December 6, 1991 (inception) through September 30, 1994, were
audited by other auditors whose report dated November 10, 1994, expressed an
unqualified opinion on those statements and included an explanatory paragraph
regarding the entity's ability to continue as a going concern, that is not
included in our current report as the result of additional financing obtained by
the Company. The financial statements for the period December 6, 1991
(inception) through September 30, 1994, include total revenues and net loss of
$1,116,800 and $3,056,682, respectively. Our opinion on the statements of
operations, shareholders' deficit, and cash flows for the period December 6,
1991 (inception) through September 30, 2000, insofar as it relates to amounts
for prior periods through September 30, 1994, is based solely on the report of
other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Demegen, Inc. (a development stage company) at
September 30, 2000 and 1999, and the results of its operations and its cash
flows for the years ended September 30, 2000, 1999, and 1998, and for the period
from December 6, 1991 (inception) through September 30, 2000, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Pittsburgh, PA
November 17, 2000
F-1
64
Demegen, Inc.
(A Development Stage Company)
Balance Sheets
DECEMBER 31 SEPTEMBER 30
2000 2000 1999
------------------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $1,509,994 $1,825,352 $ 583,585
Accounts receivable - 22,409 22,546
Prepaid expenses and other current assets - -- 2,057
------------------------------------------------------
Total current assets 1,509,994 1,847,761 608,188
Property and equipment:
Furniture and equipment 209,933 201,389 195,786
Computer hardware and software 164,412 164,412 165,758
-------------------------------------------------------
374,345 365,801 361,544
Less accumulated depreciation and amortization (224,427) (208,971) (151,219)
-------------------------------------------------------
149,918 156,830 210,325
Intangible assets:
Licenses 245,000 245,000 245,000
Patents 367,784 359,837 248,436
------------------------------------------------------
612,784 604,837 493,436
Less accumulated amortization (297,836) (297,836) (227,444)
------------------------------------------------------
296,948 307,001 265,992
Other Assets 93,919 - -
-------------------------------------------------------
Total assets $2,050,779 $2,311,592 $1,084,505
=======================================================
DECEMBER 31 SEPTEMBER 30
2000 2000 1999
------------------------------------------------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts Payable $247,412 $ 263,303 $354,988
Accrued payroll 57,261 97,261 28,442
Unearned revenue 280,000 -- 91,667
Current portion of notes payable 44,425 42,000 63,558
Other liabilities 22,598 31,789 62,684
------------------------------------------------------
Total current liabilities 651,696 434,353 601,339
Notes payable 364,859 360,180 203,147
Other 120,946 117,261 67,107
------------------------------------------------------
Total liabilities 1,137,501 911,794 871,593
Commitments and contingency
Redeemable convertible preferred stock, $.001 par value--
40,000,000 shares authorized; 4,444,444 shares issued
and outstanding 2,101,101 2,033,787 1,768,846
Shareholders' deficit:
Common stock, $.001 par value--100,000,000 shares
authorized; 32,429,778, 32,304,778 and 26,361,899
shares issued and outstanding at December 31, 2000,
September 30, 2000 and 1999, respectively 32,430 32,305 26,362
Warrants 1,343,004 1,287,004 497,000
Deferred Compensation (322,498) (343,999) --
Subscription receivable (146,682) (188,511) --
Additional paid-in capital 14,625,214 14,619,089 12,040,166
Deficit accumulated during the development stage (16,719,291) (16,039,877) (14,119,462)
------------------------------------------------------
Total shareholders' deficit (1,187,823) (633,989) (1,555,934)
------------------------------------------------------
Total liabilities and shareholders' deficit $ 2,050,779 $ 2,311,592 $ 1,084,505
======================================================
See accompanying notes.
65
Demegen, Inc.
(A Development Stage Company)
Statements of Operations
PERIOD FROM
DECEMBER 6, 1991
(INCEPTION) TO
YEAR ENDED SEPTEMBER 30 SEPTEMBER 30,
2000 1999 1998 2000
----------------------------------------------------------------------------
Income:
License $ 220,000 $ 350,000 $ 906,651 $ 1,576,651
Grant and other 472,432 708,475 425,398 2,827,308
Interest 71,333 60,101 44,869 176,303
----------------------------------------------------------------------------
Total income 763,765 1,118,576 1,376,918 4,580,262
Expenses:
Research and development 1,560,981 1,513,680 880,965 7,053,866
General and administrative 709,533 784,891 2,338,817 10,382,152
Interest 14,207 3,140 28,295 996,931
Depreciation and amortization 134,526 154,607 122,594 578,062
----------------------------------------------------------------------------
Total expenses 2,419,247 2,456,318 3,370,671 19,011,011
----------------------------------------------------------------------------
Net loss (1,655,482) (1,337,742) (1,993,753) (14,430,749)
Preferred dividend and accretion
amounts (264,933) (258,362) (1,085,833) (1,609,128)
----------------------------------------------------------------------------
Net loss applicable to common stock $(1,920,415) $(1,596,104) $(3,079,586) $(16,039,877)
============================================================================
Net loss per common share, basic and
diluted $ ($0.06) $ (0.06) $ (0.13)
============================================================================
Weighted average common stock
outstanding 29.759,153 26,255,104 23,867,091
============================================================================
See accompanying notes.
F-2
66
DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS INCEPTION
ENDED DECEMBER 31, (DECEMBER 6, 1991)
TO
2000 1999 DECEMBER 31, 2000
------------ ----------- -----------------
INCOME $ 186,451 $ 424,701 $ 4,766,713
EXPENSES:
Research and development 495,931 200,793 7,549,797
General & administration 250,700 169,199 10,632,852
Interest 4,462 1,011 1,001,393
Depreciation and amortization 47,456 41,377 625,518
------------- ------------ --------------
TOTAL EXPENSES 798,549 412,380 19,809,560
------------- ------------ --------------
NET INCOME (LOSS) (612,098) 12,321 (15,042,847)
Preferred dividend and accretion amounts (67,316) (65,602) (1,676,444)
-------------- ------------- ---------------
NET LOSS APPLICABLE TO COMMON STOCK $ (679,414) $ (53,281) $ (16,719,291)
============== ============= ===============
INCOME (LOSS) PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.02) $ 0.00
============= ============
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 32,310,213 26,361,899
============= ============
See accompanying notes.
F-3
67
Demegen, Inc.
(A Development Stage Company)
Statements of Shareholders' Deficit
COMMON STOCK
AVERAGE ---------------------------------
PRICE DEFERRED
PER SHARE SHARES AMOUNT WARRANTS COMPENSATION
------------ -------------- ------------ ---------- ------------
Acquired in merger with Excelsior Capital Corporation 10,743,571 $10,744 $ -- $ --
Loss from inception (December 6, 1991) to September 30, 1992 -- -- -- --
Capital contributed by a shareholder -- -- -- --
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares $.62 439,045 439 -- --
Payment of debt with stock warrants -- -- -- --
Payment of interest with stock warrants -- -- -- --
Issuance of receivable from officer -- -- -- --
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance at September 30, 1993 11,182,616 11,183 -- --
Proceeds from the sale of unrestricted shares by shareholders
in exchange for restricted shares .75 691,738 692 -- --
Issuance of stock for consulting services 1.54 58,336 58 -- --
Issuance of stock subscriptions for loan origination fee 1.14 131,250 131 -- --
Payment of interest with stock warrants -- -- -- --
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance at September 30, 1994 12,063,940 12,064 -- --
Proceeds from the sale of restricted common shares 1.06 193,133 193 -- --
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders 171,694 172 -- --
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares 2.18 -- -- -- --
Issuance of restricted shares for payment of
services/compensation .89 402,251 402 -- --
Issuance of warrants -- -- -- --
Payment of interest with stock warrants -- -- -- --
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance September 30, 1995 12,831,018 12,831 -- --
Proceeds from the sale of common shares .70 683,250 683 -- --
Issuance of shares for payment of services/compensation .60 890,868 891 -- --
Issuance of shares in settlement of outstanding debt
and other obligations .47 4,468,285 4,468 -- --
Payment of interest with warrants -- -- -- --
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance at September 30, 1996 18,873,421 18,873 -- --
Proceeds from the sale of restricted and unrestricted common shares .36 340,000 340 -- --
Issuance of shares for payment of services/compensation .41 1,178,258 1,178 -- --
Issuance of shares in exchange for patent and technology license .35 700,000 700 -- --
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders 162,720 163 -- --
Exchange of amounts due to related parties for restricted shares .33 450,000 450 -- --
Exchange of redemption right of related party for additional
restricted shares .33 145,000 145 -- --
Settlement of amounts due to related parties through debt
forgiveness and issuance of shares -- -- -- --
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance at September 30, 1997 21,849,399 21,849 -- --
Proceeds from exercise of stock options $.05 1,750,000 1,750 -- --
Compensation expense from Stock option activity -- -- -- --
Issuance of warrants -- -- 497,000 --
Allocation of conversion feature of redeemable convertible
preferred stock -- -- -- --
Accretion of conversion feature of redeemable convertible
preferred stock -- -- -- --
Dividends on redeemable convertible preferred stock -- -- -- --
Accretion of redeemable convertible preferred stock -- -- -- --
Issuance of shares for payment of collaborators $.47 20,000 20 -- --
Settlement of employee litigation $.36 1,975,000 1,975 -- --
Issuance of shares for services $.47 187,500 188 -- --
Issuance of additional shares to venture capital
funds and individual investors 85,000 85 -- --
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance at September 30, 1998 25,866,899 25,867 497,000
Dividends on redeemable convertible preferred stock -- -- -- --
Accretion of redeemable convertible preferred stock -- -- -- --
Proceeds from exercise of Stock options $.05 350,000 350 -- --
Issuance of shares for services $0.46 145,000 145
Extension of expiration date of stock option -- -- -- --
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance at September 30, 1999 26,361,899 26,362 497,000
Dividends on redeemable convertible preferred stock -- -- -- --
Accretion of redeemable convertible preferred stock -- -- -- --
Proceeds from sale of common stock and warrants, net of
Issuance costs of $126,783 $0.50 5,566,004 5,566 779,241 --
Issuance of shares and options for services/compensation $0.88 376,875 377 10,763 (387,000)
Amortization of stock based compensation -- -- -- 43,001
Net loss for the year -- -- -- --
------------- ------------- --------- -----------
Balance at September 30, 2000 32,304,778 32,305 1,287,004 (343,999)
Dividends on redeemable convertible preferred stock (unaudited) -- -- -- --
Accretion of redeemable convertible preferred stock (unaudited) -- -- -- --
Proceeds from exercise of stock options (unaudited) $0.05 125,000 125 -- --
Amortization of stock based compensation (unaudited) -- -- -- 21,501
Issuance of warrant for common stock (unaudited) -- -- 56,000 --
Net loss for the quarter (unaudited) -- -- -- --
------------- ----------- --------- ----------
Balance at December 31, 2000 (unaudited) 32,429,778 $32,430 $1,343,004 $(322,498)
============= =========== ========== ==========
See accompanying notes
F-4
68
DEFICIT
ACCUMULATED
ADDITIONAL RECEIVABLE DURING THE
PAID-IN FROM DEVELOPMENT
CAPITAL SHAREHOLDERS STAGE TOTAL
--------------------------------------------------------------
Acquired in merger with Excelsior Capital Corporation $ 312,681 $ -- $ -- $ 323,425
Loss from inception (December 6, 1991) to September 30, 1992 -- -- (244,100) (244,100)
Capital contributed by a shareholder 123,700 -- -- 123,700
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares 272,461 -- -- 272,900
Payment of debt with stock warrants 33,333 -- -- 33,333
Payment of interest with stock warrants 17,774 -- -- 17,774
Issuance of receivable from officer -- (65,117) -- (65,117)
Net loss for the year -- -- (1,044,154) (1,044,154)
--------------------------------------------------------------
Balance at September 30, 1993 759,949 (65,117) (1,288,254) (582,239)
Proceeds from the sale of unrestricted shares by shareholders
in exchange for restricted shares 517,708 -- -- 518,400
Issuance of stock for consulting services 89,942 -- -- 90,000
Issuance of stock subscriptions for loan origination fee 149,869 -- -- 150,000
Payment of interest with stock warrants 56,164 -- -- 56,164
Net loss for the year -- -- (1,768,428) (1,768,428)
--------------------------------------------------------------
Balance at September 30, 1994 1,573,632 (65,117) (3,056,682) (1,536,103)
Proceeds from the sale of restricted common shares 204,807 -- -- 205,000
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders (172) -- -- --
Proceeds from the sale of unrestricted shares contributed by
shareholders in exchange for restricted shares 349,304 65,117 -- 414,421
Issuance of restricted shares for payment of services/compensation 357,681 -- -- 358,083
Issuance of warrants 11,625 -- -- 11,625
Payment of interest with stock warrants 127,500 -- -- 127,500
Net loss for the year -- -- (2,873,839) (2,873,839)
--------------------------------------------------------------
Balance September 30, 1995 2,624,377 -- (5,930,521) (3,293,313)
Proceeds from the sale of common shares 479,817 -- -- 480,500
Issuance of shares for payment of services/compensation 536,359 -- -- 537,250
Issuance of shares in settlement of outstanding debt
and other obligations 2,113,054 -- -- 2,117,522
Payment of interest with warrants 84,996 -- -- 84,996
Net loss for the year -- -- (2,569,478) (2,569,478)
--------------------------------------------------------------
Balance at September 30, 1996 5,838,603 -- (8,499,999) (2,642,523)
Proceeds from the sale of restricted and unrestricted common shares 104,660 -- -- 105,000
Issuance of shares for payment of services/compensation 477,629 -- -- 478,807
Issuance of shares in exchange for patent and technology license 244,300 -- -- 245,000
Issuance of restricted shares in exchange for unrestricted
shares contributed by shareholders (163) -- -- --
Exchange of amounts due to related parties for restricted shares 149,550 -- -- 150,000
Exchange of redemption right of related party for additional
restricted shares (145) -- -- --
Settlement of amounts due to related parties through debt
forgiveness and issuance of shares 1,449,273 -- -- 1,449,273
Net loss for the year -- -- (943,773) (943,773)
--------------------------------------------------------------
Balance at September 30, 1997 8,263,707 -- (9,443,772) (1,158,216)
Proceeds from exercise of stock options 85,750 -- -- 87,500
Compensation expense from stock option activity 1,699,440 -- -- 1,699,440
Issuance of warrants -- -- -- 497,000
Allocation of conversion feature of redeemable
convertible preferred stock 1,022,222 -- -- 1,022,222
Accretion of conversion feature of redeemable
convertible preferred stock -- -- (1,022,222) (1,022,222)
Dividends on redeemable convertible preferred stock -- -- (40,000) (40,000)
Accretion of redeemable convertible preferred stock -- -- (23,611) (23,611)
Issuance of shares for payment of collaborators 9,360 -- -- 9,380
Settlement of employee litigation 710,217 -- -- 712,192
Issuance of shares for services 87,750 -- -- 87,938
Issuance of additional shares to venture capital funds and
individual investors (85) -- -- --
Net loss for the year -- -- (1,993,753) (1,993,753)
--------------------------------------------------------------
Balance at September 30, 1998 11,878,361 -- (12,523,358) (122,130)
Dividends on redeemable convertible preferred stock -- -- (160,000) (160,000)
Accretion of redeemable convertible preferred stock -- -- (98,362) (98,362)
Proceeds from exercise of Stock options 17,150 -- -- 17,500
Issuance of shares for services 66,655 -- -- 66,800
Extension of expiration date of stock option 78,000 -- -- 78,000
Net loss for the year -- -- (1,337,742) (1,337,742)
--------------------------------------------------------------
Balance at September 30, 1999 12,040,166 -- (14,119,462) (1,555,934)
Dividends on redeemable convertible preferred stock -- -- (160,000) (160,000)
Accretion of redeemable convertible preferred stock -- -- (104,933) (104,933)
Proceeds from sale of common stock and warrants 1,871,412 (282,002) -- 2,374,217
Issuance of shares and options for services/compensation 707,511 93,491 -- 425,142
Amortization of stock based compensation -- -- -- 43,001
Net loss for the year -- -- (1,655,482) (1,655,482)
--------------------------------------------------------------
Balance at September 30, 2000 14,619,089 (188,511) (16,039,877) (633,989)
Dividends on redeemable convertible preferred stock (unaudited) -- -- (40,000) (40,000)
Accretion of redeemable convertible preferred stock (unaudited) -- -- (27,316) (27,316)
Proceeds from exercise of stock options (unaudited) 6,125 -- -- 6,250
Amortization of stock based compensation (unaudited) -- 41,829 -- (63,330)
Issuance of warrant for common stock (unaudited) -- -- -- 56,000
Net loss for the quarter (unaudited) -- -- (612,098) (612,098)
--------------------------------------------------------------
Balance at December 31, 2000 (unaudited) $14,625,214 $(146,682) $(16,719,291) $(1,187,823)
==============================================================
F-5
69
Demegen, Inc.
(A Development Stage Company)
Statements of Cash Flows
PERIOD FROM
DECEMBER 6, 1991
(INCEPTION)
YEAR ENDED SEPTEMBER 30 TO SEPTEMBER 30
2000 1999 1998 2000
-----------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(1,655,482) $(1,337,742) $(1,993,753) $(14,430,749)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 134,526 154,607 122,594 578,062
Stock issued for services 161,142 -- 97,318 1,890,200
Stock based compensation 43,001 -- -- 43,001
Issuance of stock options to employees and
directors 264,000 78,000 1,699,440 2,041,440
Warrants issued for interest -- -- -- 286,434
Notes payable issued for services -- -- -- 58,194
Other 2,134 -- -- 26,482
Changes in operating assets and liabilities:
Accounts receivable 137 37,383 (59,929) (22,409)
Prepaid expenses and other current assets 2,057 9,802 (10,409) --
Unearned revenue (91,667) (91,666) 183,333 --
Accounts payable and other liabilities (3,607) 217,335 (141,186) 1,422,438
-----------------------------------------------------------------------------
Net cash used in operating activities (1,143,759) (932,281) (102,592) (8,106,907)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (12,765) (210,157) (54,027) (396,140)
Cash received on equipment disposals -- -- -- 9,643
Intangible assets (111,401) (64,463) (84,610) (359,368)
-----------------------------------------------------------------------------
Net cash used in investing activities (124,166) (274,620) (138,637) (745,865)
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from issuance of equity
Instruments, net of transaction costs 2,374,217 -- 1,943,873 6,683,717
Proceeds from exercise of stock options -- 17,500 87,500 105,000
Proceeds from notes payable 150,000 21,109 -- 1,298,609
(Decrease) increase in payable to employees
and directors 14,550 72,614 (413,738) 2,687,962
Payments on notes payable (29,075) (7,395) -- (97,164)
-----------------------------------------------------------------------------
Net cash provided by financing activities 2,509,692 103,828 1,617,635 10,678,124
-----------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 1,241,767 (1,103,073) 1,376,406 1,825,352
Cash and cash equivalents at beginning of
period 583,585 1,686,658 310,252 --
-----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,825,352 $ 583,585 $ 1,686,658 $ 1,825,352
=============================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 8,582 $ 3,140 $ 14,080 $ 30,224
=============================================================================
NONCASH ACTIVITIES
Common stock issued in satisfaction of related
party payable $ -- $ 66,800 $ 712,192 $ 778,992
=============================================================================
Dividends on redeemable convertible preferred
stock $ 160,000 $ 160,000 $ 40,000 $ 360,000
=============================================================================
Accretion of redeemable convertible preferred
stock $ 104,947 $ 98,362 $ 1,045,833 $ 1,249,142
=============================================================================
Receivable due from stockholders $ 282,002 $ -- $ -- $ 282,002
=============================================================================
Common stock issued for issuance costs $ 100,000 $ -- $ -- $ 100,000
=============================================================================
See accompanying notes.
F-6
70
DEMEGEN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS INCEPTION
ENDED DECEMBER 31, (DECEMBER 6, 1991)
--------------------------------- TO
2000 1999 DECEMBER 31, 2000
--------------------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (612,098) $ 12,321 $ (15,042,847)
Adjustments to Reconcile Net Loss to Cash:
Depreciation and amortization 47,456 41,377 625,518
Stock issued for services 41,829 - 1,932,029
Stock based compensation 21,501 - 64,502
Issuance of stock and options to employees and directors - - 2,041,440
Warrants issued for interest - - 286,434
Other (2) - 84,674
Changes in Assets and Liabilities
Other than Cash:
Accounts receivable 22,409 (18,815) -
Prepaid expenses and current assets - (500) -
Accounts payable and other liabilities (45,233) (46,052) 1,377,205
Unearned revenue 280,000 (22,917) 280,000
-------------- ------------- --------------
NET CASH USED BY OPERATING ACTIVITIES (244,138) (34,586) (8,351,045)
CASH FLOWS FROM INVESTING ACTIVITIES:
Intangible assets (9,866) - (369,234)
Deposit on license agreement (50,000) - (50,000)
Purchase of property, plant and equipment (8,544) (1,729) (395,041)
--------------- ------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (68,410) (1,729) (814,275)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 8,544 150,000 1,307,153
Principal payments on debt (17,604) (2,133) (114,768)
(Decrease) increase in payable to employees and directors - 5,295 2,687,962
Net proceeds from issuance of equity instruments - - 6,683,717
Proceeds from exercise of stock options 6,250 - 111,250
-------------- ------------ --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,810) 153,162 10,675,314
--------------- ------------ --------------
Net Increase (Decrease) in Cash and Equivalents (315,358) 116,847 1,509,994
Cash and Cash Equivalents, Beginning of Period 1,825,352 583,585 0
-------------- ------------ --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,509,994 $ 700,432 $ 1,509,994
============== ============ ==============
INTEREST PAID DURING PERIOD $ 2,587 $ 1,001
============== ============
See accompanying notes.
F-7
71
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements
(Information for three months ended December 31, 2000 and 1999 is unaudited)
1. HISTORY AND NATURE OF THE BUSINESS
Demeter BioTechnologies, Ltd. was formed after the July 27, 1992 acquisition of
the assets of The Demeter Corporation by Excelsior Capital Corporation
("Excelsior"). Excelsior was incorporated in Colorado on September 16, 1987.
Excelsior acquired all the assets of The Demeter Corporation in exchange for
6,625,821 shares of Excelsior's $.001 par value common stock. The Demeter
Corporation's assets consisted of intangible assets related to various
biotechnology applications in the fields of human and animal health care,
agriculture, and commercial chemicals.
For accounting purposes, the acquisition was treated as a reverse acquisition
whereby The Demeter Corporation acquired Excelsior Capital Corporation. The
historical financial statements prior to the acquisition are those of The
Demeter Corporation utilizing the capital structure of Excelsior. However, The
Demeter Corporation had no operating activities from the date of inception,
December 6, 1991 through July 27, 1992. Likewise, Excelsior had no operating
activities prior to December 6, 1991.
On September 18, 1998, the Board of Directors of the Company ratified the
shareholder vote changing the Company's name from Demeter BioTechnologies, Ltd.
to Demegen, Inc. (the "Company").
The Company designs unique molecules which have antimicrobial characteristics,
but with low toxicity and benign environmental impact. The Company's products,
are peptides (small proteins) or peptide-like molecules. Their primary feature
is their ability to destroy a wide range of bacteria, viruses, fungi, protozoa,
and cancer cells at low concentrations without harming healthy cells. The
Company also designs genes which, when incorporated into a plant, have the
ability to confer disease resistance or improve nutritional value. The Company
uses university, corporate, and governmental strategic alliance partners to
determine efficacy in treating a specific pathogen and then licenses the use of
the compounds for that application. If successful, the Company's primary source
of revenues will be from supplying the compounds to licensees and receiving
related license fees, royalties, and research grants. The Company has licensed
substantially all of its plant agricultural technologies to Dow AgroSciences
LLC.
The amounts relating to December 31, 2000 and 1999 are unaudited. However, in
the opinion of management, they include all adjustments necessary for a fair
presentation of financial position, results of operations and cash flows. All
adjustments made during the three months ended December 31, 2000 were of a
normal, recurring nature. The amounts presented for the three months ended
December 31, 2000 are not necessarily indicative of results of operations for
a full year.
2. SUMMARY OF SIGNIFICANT 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 accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists principally of currency on hand, demand
deposits at commercial banks, and liquid investment funds having a maturity of
three months or less at the time of purchase.
PREOPERATING COSTS
Costs incurred during the developmental stage, such as expenses associated with
research and development, raising capital, establishing markets, and developing
sources of supply, are expensed as incurred.
F-8
72
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMMON STOCK ISSUED FOR OTHER THAN CASH
Services purchased and other transactions settled in the Company's common stock
are recorded at the estimated fair value of the stock issued if that value is
more readily determinable than the fair value of the consideration received.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives (generally three to five
years) of the individual assets. Depreciation expense amounted to $64,134,
$56,948 and $30,824, during 2000, 1999 and 1998, respectively and $15,456 and
$16,952 during the three months ended December 31, 2000 and 1999, resprecively.
INTANGIBLE ASSETS
Intangible assets include patent costs and purchased license agreements and are
stated at cost, net of accumulated amortization. Amortization is calculated
using the straight-line method over estimated useful lives ranging from 3 to 17
years. The Company assesses on an ongoing basis the recoverability of the cost
of its patents and licenses by determining its ability to generate future cash
flows sufficient to recover the recorded amounts over the remaining useful lives
of the assets. This process necessarily involves significant management
judgment. The Company currently anticipates fully recovering the recorded cost
of these assets and, accordingly, no valuation adjustment has been recognized to
date. Because of the development stage nature of the Company, significant
uncertainty exists as to whether revenue expectations will be met. Should the
Company determine in the future that permanent diminution in value of the
intangibles has occurred, a charge against operating results would be recorded.
GRANT AND OTHER INCOME
During the fourth quarter of 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial
Statements", which clarifies the accounting rules for revenue recognition in
financial statements. The implementation date is no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Corporation
adopted SAS 101 in the first quarter of Fiscal 2001. Implementation of SAB 101
resulted in the deferral of $280,000 of revenue received from Dow AgroSciences
during the first quarter of Fiscal 2001 in the form of a minimum annual royalty
and a semi-annual research support fee. These revenues are being amortized into
income over the twelve month and six month period of the royalty and fee and
will be fully recognized by September 30, 2001.
Grant income is not recognized until received.
During fiscal years 1999 and 1998, the Company received grant proceeds of
$375,000 and $250,000, respectively, from the Pacific West Cancer Fund in
support of the Company's cancer research efforts. The funds were recognized as
revenue upon receipt as the contracts did not contain any penalties, successful
outcomes clauses or refunding provisions.
The Company received $27,882, $91,808 and $79,000 in fiscal 2000, 1999 and 1998,
respectively, under research agreements with the National Institute of Health
and the National Science Foundation. Revenue was recognized as the research
funds were expended.
LICENSE AND SUPPORT
License fees are recognized at the time that the agreement is entered into as
the earning process is complete and the Company has no future performance
obligations. Support fees are recognized ratably over the contract period as the
related costs are incurred.
Milestone payments will be recognized upon the achievement of the related
criteria by the respective license subject to a reasonable assurance that the
milestone payment will be forthcoming.
F-9
73
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). SFAS No. 123 permits the Company to continue accounting for stock-based
compensation as set forth in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB Opinion No. 25"), provided the
Company discloses the pro forma effect on net income and earnings per share of
adopting the full provisions of SFAS No. 123. Accordingly, the Company continues
to account for stock-based compensation under APB Opinion No. 25 and has
provided the required pro forma disclosures.
3. INCOME TAXES
The Company accounts for income taxes using the liability method.
Significant components of the Company's deferred tax asset at September 30, 2000
and 1999, are as follows:
2000 1999
----------- -----------
* Compensation expense on unexercised
stock options $ 498,030 $ 481,690
* NOL carryforwards 4,268,605 2,683,828
* Excess book amortization 71,894 59,998
* Other (7,387) --
----------- -----------
Total deferred tax asset 4,831,142 3,225,516
Valuation allowance (4,831,142) (3,225,516)
----------- -----------
Net deferred tax assets $ 0 $ 0
=========== ===========
Net operating losses totaling approximately $11,233,000 are currently available
and begin to expire in 2007.
A valuation allowance has been provided for the entire deferred tax asset amount
until such time that the Company demonstrates the ability to produce taxable
income.
4. PRIVATE PLACEMENT OF SECURITIES
During the second quarter of Fiscal 2000, the Company closed on a private
placement of its securities to institutional and other accredited investors
raising $2.65 million of which $0.28 million was in the form of prepaid
services, which are presented in equity as "Subscription Receivable" and are
being amortized over the life of the respective agreements, with the remainder
of $2.4 million in cash. The private placement resulted in the sale of 5.56
million restricted shares of common stock and warrants to purchase an additional
5.56 million shares of the Company's common stock.
F-10
74
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. PRIVATE PLACEMENT OF SECURITIES(CONTINUED)
The investors were offered one unit at $0.50 per unit. Each unit consisted of
one share of restricted common stock and a warrant to purchase one share of the
Company's common stock for $0.75 per share. The warrant expires the earlier of
March 31, 2005 or 60 days after a call by the Company. The Company may call the
warrants at any time after March 31, 2001, provided that the price of the
Company's common stock has been in excess of $1.50 per share for each of the
forty consecutive trading days immediately preceding the date of the call. Upon
receipt of the call, warrant holders shall have sixty days to elect to exercise
all or a portion of the warrants.
The Company has agreed to file a registration statement with the Securities &
Exchange Commission to register all common stock which comprise the unit and the
common stock issuable from the exercise of the warrant on or before March 31,
2001.
Pricing of the securities was determined based on several factors, including
reference to market price of the Company's common stock, the holding period
requirement of restricted stock, and the Company's need for additional funding
for development of pharmaceutical products.
Funds raised will be utilized to fund the Company's product development efforts.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1998, the Company issued 4,444,444 shares of redeemable convertible
preferred stock ("preferred stock") and warrants for net proceeds of $1,943,873
(net of $56,127 of expenses incurred in connection with the issuance). Of the
total proceeds $497,000 was allocated to warrants as the estimated fair value
and $1,022,222 was allocated to the conversion feature associated with the
preferred stock and classified as additional paid-in capital. In June 1998, the
entire discount was immediately accreted back to the preferred stock and treated
as a dividend as the preferred shares are immediately convertible into common
stock at the option of the preferred shareholder.
The holders of the preferred stock are entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefore,
dividends at the rate of $0.036 per share, semiannually, on each outstanding
share of convertible preferred stock. Such dividends have a priority over any
dividends paid on the common stock. Dividends on the preferred stock are
cumulative and the right to such dividends shall accrue to holders of
convertible preferred stock until declared by the Board of Directors. The
Company has accounted for the cumulative semiannual dividends through periodic
accretion to the preferred stock.
In the event of any liquidation, dissolution, or winding up of the Company, the
holders of preferred stock shall be entitled to receive the greater of $0.45 per
share, plus all unpaid and accrued dividends thereon, or the amount the holder
of the shares of the preferred stock would otherwise be entitled to receive had
each such share been converted into common stock immediately prior to such
liquidation, dissolution or wind-up.
Each share of preferred stock is convertible at any time, at the option of the
holder thereof, into an equal number of fully paid and nonassessable shares of
common stock. In addition, if at any time the Company shall effect a firm
commitment underwritten public offering of shares of common stock in which the
aggregate price paid for such shares by the public shall be at least $8,000,000,
then effective
F-11
75
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
immediately before the closing of the sale of such shares by the Company
pursuant to such public offering, all outstanding shares of preferred stock
shall automatically convert to common stock.
The shares of preferred stock shall be redeemable at the election of the holder
upon at least ninety days notice to the Company. The Company shall redeem from
the holder on or at any time after May 31, 2003, 2004, and 2005, up to one-third
of the shares of preferred stock held by the holder, with the intent that,
should the holder elect, at any time after May 31, 2005, the total number of
shares held by the holder would be subject to redemption. The preferred stock to
be redeemed shall be paid for in cash at an amount equal to the greater of (i)
$0.45 per share plus, in the case of each share, an amount equal to all accruing
unpaid dividends (whether or not declared), or (ii) such amount per share as
would have been payable had each such share been converted to common stock
immediately prior to the actual date of redemption.
The shares of preferred stock vote on matters on an as-converted basis; i.e.,
each share of preferred stock has one vote, as do each owner of a share of
common stock.
The holder of the preferred stock has a warrant to purchase 4,965,556 shares of
common stock of the Company at $0.45 per share. The warrant shall be
exercisable, in whole or in part, through June 14, 2008. The Company may call
the warrant at any time after December 31, 1998, provided the Company's common
stock has been in excess of $1.50 per share for each of the forty consecutive
trading days immediately preceding the date of the call.
Upon receipt of the call, the call holder shall have sixty days to elect to
exercise all or a portion of this warrant and up to two years to pay for such
shares. Upon such exercise, in addition to receiving the number of shares of
common stock to which the holder shall be entitled, the holder of the warrant
also shall receive a new warrant ("replacement warrant"). The replacement
warrant shall be exercisable for one share of common stock for every two shares
of common stock purchased in response to the aforementioned call. The exercise
price of the replacement warrant is $1.50 per share, and the term of the
replacement warrant shall be the longer of two years from the date of the
issuance or the balance of the original term of the warrant.
6. STOCK OPTIONS AND WARRANTS
The Company granted stock options to certain employees and directors during the
years ended September 30, 2000 and 1999 at exercise prices which approximated or
exceeded fair value at the date of grant. The majority of the stock options
issued in the year ended September 30, 2000 were issued in connection with the
retention of the Chief Operating Officer-Pharmaceutical Products (See Note 11
for further discussion of this employment agreement). Exclusive of the
aforementioned stock options, the majority of the stock options issued in the
year ending September 30, 2000 vest over time (up to 3 years). All of the
options issued in the year ending September 30, 1999 vested immediately.
The Company granted stock options to certain employees and directors during the
year ended September 30, 1998 at a $0.05 per share exercise price, which was
below the fair value based upon management's estimate of the fair value of the
stock issued at the date of grant. The shares were fully vested at September 30,
1998, and a $1,699,440 noncash charge was recognized to reflect the compensation
value of the options issued. All of these options expire in 2008.
F-12
76
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
A summary of the Company's stock option activity is as follows:
OPTIONS OUTSTANDING
----------------------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE FAIR VALUE
----------------------------------------------------------------
Balance at September 30, 1997 1,025,000 $0.41 $0.09
Options granted during year 5,820,000 $0.05 $0.27
Options exercised for common stock during year
(1,750,000) $0.05 $0.27
----------------------------------------------------------------
Balance at September 30, 1998 5,095,000 $0.12 $0.23
================================================================
Granted 380,000 $0.45 $0.41
Options exercised for common stock (350,000) $0.05 $0.37
----------------------------------------------------------------
Balance at September 30, 1999 5,125,000 $0.15 $0.46
================================================================
Options granted during year 2,275,000 $0.63 $0.79
----------------------------------------------------------------
Balance at September 30, 2000 7,400,000 $0.30 $0.56
================================================================
Granted (unaudited) 20,000 $0.50 $0.50
Options exercised for common stock (unaudited) (125,000) $0.05 $0.50
----------------------------------------------------------------
Balance at December 31, 2000 (unaudited) 7,295,000 $0.31 $0.56
================================================================
As of December 31, 2000, September 30, 2000 and 1999, 5,378,333, 5,503,333 and
5,055,000, respectively, of the options were vested and exercisable.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions for fiscal
2000, 1999 and 1998: risk-free interest rate of 6%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
1.49, 1.41 and 0.97, respectively, and a weighted average expected option life
of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Changes in the subjective input assumptions can materially affect the fair value
estimate, and therefore, the existing models do not necessarily provide a
reliable single measure of the fair value of employee stock options. Had the
compensation cost of the Company's stock option plans been determined based on
the fair value at the date of grant for awards in 2000, 1999 and 1998 consistent
with the provisions of SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
F-13
77
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
YEAR ENDED SEPTEMBER 30
2000 1999 1998
--------------------------------------------------
Net loss available to common stock:
As reported $(1,920,415) $(1,596,104) $(3,079,586)
Pro forma $(2,058,313) $(1,746,117) $(4,615,720)
Basic and diluted earnings per share:
As reported $(0.06) $(0.06) $(0.13)
Pro forma $(0.07) $(0.07) $(0.19)
The maturity date of an option held by an officer of the Company to purchase up
to 600,000 shares of common stock at an exercise price of $0.15 per share was
extended from October 31, 2000 to October 31, 2010 at the September 17, 1999
meeting of the Compensation Committee. The Company recorded a $78,000 non-cash
charge in fiscal 1999 to reflect the aforementioned extension.
At September 30, 2000, there were outstanding warrants to purchase 5,642,879
shares of the Company's common stock at an exercise price of $0.75 per warrant
(refer to Note 4 for additional information). Those warrants which were sold
with the common shares were valued at $790,004 ($0.14 per warrant).
Additionally, the holder of the preferred stock holds a warrant to purchase
common stock (refer to Note 5 for additional information).
7. NOTE PAYABLE
In December 1999, the Company received $150,000 from a local foundation to fund
program related research. The loan matures on February 28, 2005 with a balloon
payment due at that time. The loan is at an interest rate of 5% with interest
due February 28 of each year. The loan contains call provisions which could
result in the loan becoming due before its planned maturity. The Company does
not foresee, at this time, the call provisions becoming effective.
The Company has a note payable totaling $252,180 as of September 30, 2000 which
is payable at $3,500 monthly at an interest rate of 6%. Payments under this
agreement began in March 2000 and will extend until August 2007.
8. COMMITMENTS
The Company leases its office and laboratory facilities under a three-year lease
expiring September 30, 2001 at a monthly rental of $3,948. During 2000, 1999 and
1998, the Company incurred rent expense totaling $56,830, $45,830 and $34,105,
respectively. During the three months ended December 31, 2000 and 1999 rent
expense totaled $13,241 and $13,902, respectively.
During 1997, the Company entered into a license agreement with a university to
obtain certain patent rights. In exchange for the license of the patents, the
Company issued common stock. The value assigned to the patents was based upon
management's estimate of the fair value of the stock issued. In addition, the
Company is obligated to pay certain royalties under the terms of the agreement
for each licensed product. The agreement requires minimum royalty payments to
maintain the license of the patents. The Company paid $45,000 in royalty
payments pursuant to this agreement in 1998.
9. MARKETING
In December 1997, the Company entered into a license agreement with Mycogen
Corporation, which was subsequently acquired by Dow AgroSciences whereby the
Company licensed substantially all rights for disease prevention and treatment
for
F-14
78
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
9. MARKETING (CONTINUED)
agricultural applications. The Company received a license issue fee of $950,000,
consisting of $700,000 for the rights to licensed patents and the Company's
technology in the field of activity, $200,000 for the rights to the Company's
patents and technology for use in formulated licensed products and $50,000 for
the right of first refusal through September 30, 1998 to obtain an exclusive
license to the Company's Nutrition Patents and Technology. These payments were
recognized as revenue in fiscal 1998, as the earnings process was complete
according to the terms of the contract.
The agreement also provided that the Company receive $300,000 to provide Dow
AgroSciences with support services of personnel for a joint research effort for
a three year period. This was classified as unearned revenue on the balance
sheet and is being amortized into revenue, on a straight-line basis, over the
three year life of the support services commitment.
The agreement also provides for milestone payments (amounts based upon Dow
AgroSciences' attainment of certain contract defined outputs measures) to be
made to the Company by Dow AgroSciences upon 1) regulatory approval or first
sale of any type of product by Dow AgroSciences, 2) additional payment for first
commercial sale of certain crops by Dow AgroSciences and 3) additional payment
for first commercial sale of any other crop within the field of activity by Dow
AgroSciences. The Company will also receive royalties on all sales by Dow Agro
Science and all sublicenses entered into by Dow AgroSciences. Minimum annual
royalties are due beginning January 1, 2003 through 2014 and are recoupable
against the aforementioned royalties due from Dow AgroSciences.
Dow AgroSciences will undertake management of future development, regulatory
approvals, seed production and marketing. The companies will also undertake a
joint agricultural research effort, as discussed above, to identify new
molecular designs. Dow AgroSciences may unilaterally terminate this agreement
without cause.
The Dow Agro Science Agreement was amended on October 11, 1998 to provide Dow
Agro Science with an additional license for the Company's agricultural nutrition
technologies. The Company received a minimum annual royalty of $200,000 at the
execution of the contract. Additionally, in 1999, the Company received an
initial payment of $150,000 and an additional $150,000 which was due six months
after the contract execution. The research funding is to increase by $50,000
annually over the remaining four years of the funding term. These payments were
currently recognized as revenue as the earnings process was complete according
to the terms of the contract and the payments are not subject to recoupment by
Dow AgroSciences.
The agreement also provides for milestone payments (amounts based upon Dow Agro
Science's attainment of certain contract defined output measures) to be made to
the Company by Dow AgroSciences upon 1) technical feasibility benchmark payments
for certain products developed by Dow AgroSciences, 2) animal feeding benchmark
in certain animal studies by Dow AgroSciences 3) additional payment for first
commercial sale of certain crops by Dow AgroSciences, 4) additional payment for
first commercial sale of any other crop within a contractually defined field of
activity by Dow AgroSciences and 5) additional payments for achievement of
cumulative gross margin benchmark for sale of certain crops by Dow AgroSciences.
The Company will also receive royalties on all sales by Dow Agro ciences and all
sublicenses entered into by Dow AgroSciences. Minimum annual royalties cease
upon the achievement of certain of the aforementioned benchmarks.
In addition, Dow Agro Sciences will be responsible for all development and
commercialization costs. Dow AgroSciences is now owned by the Dow Chemical
Company.
F-15
79
Demegen, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
10. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
YEAR ENDED SEPTEMBER 30
2000 1999 1998
-------------------------------------------------
Numerator:
Net loss $(1,655,482) $(1,337,742) $(1,993,753)
Preferred stock dividends and accretion
amounts (264,933) (258,362) (1,085,833)
-------------------------------------------------
Numerator for basic loss per
share--income available to common
stockholders (1,920,415) (1,596,104) (3,079,586)
Denominator:
Denominator for basic and loss per
share--weighted average shares 29,759,153 26,255,104 23,867,091
-------------------------------------------------
Basic and diluted loss per share $ (0.06) $ (0.06) $ (0.13)
=================================================
FOR THE THREE MONTHS
ENDED DECEMBER 31,
2000 1999
(UNAUDITED) (UNAUDITED)
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Income (Loss) $ (612,098) $ 12,321
Preferred stock dividends and accretion amounts (67,316) (65,602)
-------------- --------------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (679,414) $ (53,281)
============== ==============
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 32,310,213 26,361,899
---========== ==========
BASIC AND DILUTED EARNINGS PER SHARE $ (0.02) $ 0.00
============= =============
At December 31, 2000 and September 30, 2000, the Company had 5,378,333 and
5,503,333 vested options, respectively, (7,285,000 and 7,400,000 outstanding,
respectively) for the purchase of the Company's Common Stock at exercise prices
ranging from $0.05 per share to $0.875 per share. Additionally, the 4,444,444
shares of Redeemable Convertible Preferred Stock are convertible into the
Company's Common Stock on a 1 for 1 basis. Furthermore, the holder of the
Redeemable Convertible Preferred Stock holds a warrant for 4,965,556 shares of
the Company's Common Stock at an exercise price of $0.45 per share. The
purchasers of Common Stock in the March 2000 Private Placement received warrants
for 5,566,004 shares of the Company's common Stock at an exercise price of $0.75
per share. In October 2000 a warrant for the purchase of 200,000 shares of
common stock with an exercise price of $1.00 per share was issued. These
potentially dilutive securities were not included in the calculation of dilutive
earnings per share because the effect would be anti-dilutive.
11. EMPLOYMENT AGREEMENT
Effective April 1, 2000, the Company hired a Chief Operating Officer -
Pharmaceutical Products. His employment agreement is for an initial term of
three years and provides for the issuance of 300,000 shares of restricted common
stock upon joining the Company and options to purchase, subject to achievement
of certain funding, investigative new drug ("IND") approval and
commercialization objectives, up to 1,400,000 shares of the Company's common
stock at exercise prices of $0.45 and $0.90 per share. The valuation of the
restricted stock and stock options resulted in a non-cash charge of $264,000 in
the quarter ending June 30, 2000 which was included in research and development
expense. The related Deferred Compensation component of Stockholders' Equity
($387,000) will be amortized against income over the terms of the various option
agreements. At September 30, 2000, the balance in the Deferred Compensation
account was $343,999 with $43,001 charged against operations in the year ending
September 30, 2000.
F-16
80
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
Demegen, Inc.
Date: March 14, 2001
By: /S/ Richard D. Ekstrom
---------------------------------
Richard D. Ekstrom
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the followings persons in the
capacities and on the dates stated.
Date: March 14, 2001 By: /s/ Richard D. Ekstrom
-----------------------
Richard D. Ekstrom
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 14, 2001 By: /s/ Jesse M. Jaynes, Ph.d.
---------------------------
Jesse M. Jaynes, Ph.d.
Vice President and Director
Date: March 14, 2001 By: /s/ James Colker
-----------------
James Colker
Director
Date: March 14, 2001 By: /s/ Robert E. Hannan
---------------------
Robert E. Hannan
Director
Date: March 14, 2001 By: /s/ John Bridwell
------------------
John Bridwell
Director
Date: March 14, 2001 By: /s/ Jerry B. Hook, Ph.d.
-------------------------
Jerry B. Hook, Ph.d.
81
Director
Date: March 14, 2001 By: /s/ Konrad M. Weis, Ph.d.
--------------------------
Konrad M. Weis. Ph.d.
Director
82
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
ITEM 24 - INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Colorado Corporate code permits a corporation to grant indemnification to
directors, officers and other agents in terms sufficiently broad to permit
indemnification under certain circumstances for liabilities, including expenses,
arising in connection with federal securities laws, including but not limited to
the Securities Act of 1933, as amended. Pursuant to the Article of
Incorporation, as amended, and the Bylaws of the Company, the Company is
authorized to indemnify its directors, officers and other agents to the full
extent permitted by law and has indemnified its directors for monetary damages
to the full extent permitted by law.
ITEM 25 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Company in connection with the securities being
registered (other than underwriting discounts and commissions, of which there
are none) are estimated as follows:
SEC Registration Fee $ 3,819
Accounting Fees and Expenses 4,500
Printing and Photocopying 300
Counsel Fees and Expenses 3,500
Miscellaneous Expenses 200
--------
Total Expenses $ 12,319
--------
ITEM 26 - RECENT SALES OF UNREGISTERED SECURITIES
FISCAL 2001
COMMON SHARES
In February 2001, a former employee of Periodontix, Inc., who became an employee
of the Company as part of the transaction, received 50,000 shares of the
Company's restricted common stock. This transaction was valued at $37,500.
Effective January 1, 2001, the Company issued to Periodontix 2.3 million
restricted
83
common shares of the Company's Common Stock and a Warrants to purchase up to 2.3
million Common Shares of the Company's Common Stock at an exercise price of
$1.25 per share. The Warrants have a five year term and is callable by the
Company if the price of the Company's common Stock trades above $2.50 per shares
for twenty consecutive trading days. Based upon the closing price of the
Company's common stock on January 2, 2001 ($0.75 per share), this transaction
was valued at $2,718,000
During the quarter ended December 31, 2000, the Company received $6,250 from the
exercise of stock options for 125,000 shares (exercise price of $0.05 per share)
held by individual.
FISCAL 2000
COMMON SHARES
In March 2000 the Company completed a private placement of securities, at $0.50
per unit, to accredited investors issuing 5,566,004 shares for $2,374,217, net
of issuance costs of $126,783 and $282,002 of prepaid professional services.
Additionally, the Company issued warrants to purchase 5,566,004 shares of the
Company's Common Stock at an exercise price of $0.75. The warrants expire March
31, 2005 and are callable after March 31, 2001 provided that the Company's
common stock has been in excess of $1.50 per shares for forty consecutive
trading days. The offering was exempt from registration under Regulation D, with
a Form 5 filed on April 5, 2000.
On April 1, 2000, 300,000 of restricted shares were issued as part of a
compensation package for the retention of a Chief Operating Officer -
Pharmaceutical Products.
In April 2000, 76,875 shares were issued to the firm which placed the
aforementioned Chief Operating Officer - Pharmaceutical Products with the
Company. Additionally, the firm received warrants to acquire 76,875 shares of
the Company's Common Stock at the terms discussed in the second preceding
paragraph.
FISCAL 1999
COMMON SHARES
During the year ended September 30, 1999, the Company received $17,500 from the
exercise of stock options for 350,000 shares (exercise price of $0.05 per share)
held by two employees.
The company issued 145,000 shares (valued at $0.46 per share) for $66,800 of
services provided by an employee.
FISCAL 1998
COMMON SHARES
84
During the Fiscal Year ending September 30, 1998, the Company received $87,500
from the exercise of stock options (exercise price of $0.05 per share) held by
officers, employees and directors. The exercises occurred from April to
September 1998 and consisted of 500,000 shares by Richard Ekstrom, 250,000
shares by Thomas Roane, 550,000 shares by Bruce Guthrie, 300,000 shares by James
Thornton, 150,000 shares by George Keeney. Additionally, 1,975,000 shares were
issued (at a current market price of $0.36 per share) in January 1998 to settle
the claims of a former employee, 85,000 shares were issued to two purchasers of
the Company's Common Stock in Fiscal 1997 to compensate them for a subsequent
equity sale at a price below their purchase price and 207,500 shares as
compensation for services rendered (average current market price of $0.33 per
share).
PREFERRED SHARES
In June 1998, the Company issued 4,444,444 shares of Preferred Stock to the CEO
Venture Fund III for net proceeds of $1,943,873 (net of $56,127 of expenses
incurred in connection with the issuance). The Preferred Shares are convertible
into 4,444,444 shares of Common Stock. The proceeds were utilized by the Company
to fund current operations.
ITEM 27 - EXHIBITS
3.1 Articles of Incorporation of the Company, as amended filed as Exhibit
to the registrant's Form 10, is incorporated herein by reference
3.2 Amended and Restated By-laws of the Company filed as Exhibit
to the registrant's Form 10, is incorporated herein by reference
4.1 Specimen of Common Stock Certificate filed as Exhibit
to the registrant's Form 10, is incorporated herein by reference
4.2 Stock Purchase Agreement, dated June 15, 1998, between the Registrant
and the Principal Shareholders of the Registrant and the CEO Venture
Fund III filed as Exhibit to the registrant's Form 10, is incorporated
herein by reference
4.2.1 Terms of Convertible Preferred Stock filed as Exhibit to the
registrant's Form 10, is incorporated herein by reference
4.3 Warrant to Purchase Common Stock, dated June 15, 1998, between the
Registrant and the Registrant and the CEO Venture Fund III filed as
Exhibit to the registrant's Form 10, is incorporated herein by
reference
4.4 Shareholders' Agreement, dated June 15, 1998, by and among the Company,
85
Richard Ekstrom, Jesse Jaynes and the CEO Venture Fund III filed as
Exhibit to the registrant's Form 10, is incorporated herein by
Reference
4.5 Supplemental Agreement between Demegen, Inc. and CEO Venture Fund III,
dated February 8, 2000 concerning Warrant No. 1 held by CEO Venture
Fund, filed as Exhibit 4 to the registrant's Quarterly Report on Form
10-QSB, for the quarter ended March 31, 2000 is incorporated herein by
reference
4.6 Supplemental Agreement to Purchase Units of Demegen, Inc. filed as
Exhibit 4 a. to the registrant's Current Report on Form 8-K, dated
April 5, 2000,, is incorporated herein by reference
4.7 Supplemental Agreement to Purchase Common Shares of Demegen, Inc. filed
as Exhibit 4 b. to the registrant's Current Report on Form 8-K, dated
April 5, 2000,, is incorporated herein by reference
5.1 Opinion of Buchanan Ingersoll
10.1 License and Royalty Agreement, effective May 1, 1997, between the
Registrant and Louisiana State University filed as Exhibit to the
registrant's Form 10, is incorporated herein by reference*
10.2 Restated Demeter-Mycogen License and Royalty Agreement, effective
September 23, 1997, between the Registrant and Mycogen Corporation
filed as Exhibit to the registrant's Form 10, is incorporated herein by
reference*
10.3 Addendum to Restated Demeter-Mycogen License and Royalty Agreement,
effective November 13, 1998, between the Registrant and Mycogen
Corporation filed as Exhibit to the registrant's Form 10, is
incorporated herein by reference*
10.4 Employment Agreement, dated June 15, 1998, between the Registrant and
Richard D. Ekstrom filed as Exhibit to the registrant's Form 10, is
incorporated herein by reference
10.4-1 Employment Agreement, dated November 1, 1995, between the Registrant
and Richard D. Ekstrom filed as Exhibit to the registrant's Form 10, is
incorporated herein by reference
10.5 Employment Agreement, dated June 15, 1998, between the Registrant and
Jesse M. Jaynes filed as Exhibit to the registrant's Form 10, is
incorporated herein by reference
10.6 Employment Agreement, dated June 15, 1998, between the Registrant and
James E. Thornton filed as Exhibit to the registrant's Form 10, is
86
incorporated herein by reference
10.7 Compensation Release Agreements dated September 19, 1997 filed as
Exhibit to the registrant's Form 10, is incorporated herein by
reference:
a) Richard D. Ekstrom
b) Bruce A. Guthrie
c) Donald A. Guthrie
d) Jesse M. Jaynes
e) D. Thomas Roane
f) A. Lee Caldwell
g) James E. Thornton
10.8 Consulting Agreement between the Company and Progressive Media Group,
Inc., dated February 12, 1998 filed as Exhibit to the registrant's
Form 10, is incorporated herein by reference
10.9 Settlement Agreement between the Company and Philip Sears dated
January, 1998 filed as Exhibit to the registrant's Form 10, is
incorporated herein by reference
10.10 Settlement Agreement dated September 11, 1996, among the Company and
Gordon Julian and Sirius Enterprises, Inc. filed as Exhibit to the
registrant's Form 10, is incorporated herein by reference
10.11 Technology Transfer, Support and Royalty Assignment Agreement dated
February 19, 1992, between the Company and Dr. Jesse M. Jaynes filed
as Exhibit to the registrant's Form 10, is incorporated herein by
reference
10.12 Letter of Understanding dated November 13, 1996 between the Company and
Pacific West Cancer Fund filed as Exhibit to the registrant's Form 10,
is incorporated herein by reference
10.13 Stock Option Agreements dated March 6, 1998 filed as Exhibit to the
registrant's Form 10, is incorporated herein by reference
a) Richard D. Ekstrom
b) Bruce A. Guthrie
c) Donald A. Guthrie
d) Jesse M. Jaynes
e) D. Thomas Roane
f) A. Lee Caldwell
g) Alfonso Lovo-Cordero
h) Antonio Maggioni
i) George N. Keeney
87
j) James E. Thornton
k) Ute Schweb
10.14 Stock Option Agreements dated November 2, 1996 filed as Exhibit to the
registrant's Form 10, is incorporated herein by reference
a) Bruce A. Guthrie
b) Thomas Roane
c) Alfonso Lovo-Cordero
d) Antonio Maggioni
e) George N. Keeney
f) James E. Thornton
10.15 Stock Option Agreements dated September 1, 1997 filed as Exhibit to the
registrant's Form 10, is incorporated herein by reference
a) Donald A. Guthrie
b) Alfonso Lovo-Cordero
c) Antonio Maggioni
d) George N. Keeney
10.16 Stock Option Agreements dated September 18, 1998 filed as Exhibit to
the registrant's Form 10, is incorporated herein by reference
a) Roger A. Laine, Ph.D.
b) Wayne F. Topkins, Ph.D.
c) Paul L. Kornblith, M.D.
10.17 Settlement Agreement dated, September 25, 1996 between the Company and
The Peregrine Group filed as Exhibit to the registrant's Form 10, is
incorporated herein by reference
10.18 Compensation Release Agreement dated September 19, 1997 between the
Company and Richard D. Ekstrom relative to the cancellation of the
Share Repurchase Agreement and the issuance of 145,000 shares of the
Company's Restricted Stock filed as Exhibit to the registrant's Form
10, is incorporated herein by reference
10.19 Settlement Agreement and Mutual Release between the Company and James
Ladd dated December 31, 1996 with subsequent Letter Agreement of
December 31, 1997 between the Company and James Ladd filed as Exhibit
to the registrant's Form 10, is incorporated herein by reference
10.20 1998 Stock Option Plan filed as Exhibit to the registrant's Form 10,
is incorporated herein by reference
10.21 Sample Employee Nondisclosure, Noncompete and Developments Agreement
88
filed as Exhibit to the registrant's Form 10, is incorporated by
reference
10.22 Settlement Agreement, dated September 17, 1996, between the Company and
John Bridwell filed as Exhibit to the registrant's Form 10, is
incorporated herein by reference
10.23 Stock Option Agreement dated February 19, 1999 filed as Exhibit to the
registrant's Form 10, is incorporated herein by reference
a) Konrad M. Weis, Ph.D.
b) John Bridwell
c) James Colker
10.24 Assignment of Option dated May 1, 1999 by and among James Colker, CEO
Venture Fund III and Demegen, Inc. filed as Exhibit to the registrant's
Form 10, is incorporated herein by reference
10.25 Stock Option Agreement dated May 24, 1999 with Robert E. Hannan filed
as Exhibit to the registrant's Form 10-KSB for the year ended September
30, 1999, is incorporated herein by reference
10.26 James E. Thornton Termination Agreement dated August 23, 1999 filed as
Exhibit to the registrant's Form 10-KSB for the year ended September
30, 1999, is incorporated herein by reference
10.27 Stock Option Agreement dated November 19, 1999 with Jerry B. Hook filed
as Exhibit to the registrant's Form 10-KSB for the year ended September
30, 1999, is incorporated herein by reference
10.28 Employment Agreement, dated March 6, 2000, between the Registrant and
S. Robert Fatora filed as Exhibit to the registrant's Quarterly Report
on Form 10-QSB, for the quarter ended March 31, 2000 is incorporated
herein by reference
23.1 Consent of Ernst & Young LLC
23.2 Consent of Buchanan Ingersoll (included in opinion filed as Exhibit
5.1)
24 Power of Attorney
99.1 Option Agreement between Demegen, Inc. and Periodontix, Inc., dated
February 16, 2001, filed as Exhibit to the registrant's Current Report
on Form 8-K dated February 20, 2001 is incorporated herein by reference
99.2 License Agreement between Demegen, Inc. and Periodontix, Inc., dated
February 8,
89
2001, filed as Exhibit to the registrant's Current Report on Form 8-K
dated February 20, 2001 is incorporated herein by reference
99.3 Form of Asset Purchase Agreement between Demegen, Inc. and Periodontix,
Inc., filed as Exhibit to the registrant's Current Report on Form 8-K
dated February 20, 2001 is incorporated herein by reference
99.4 Form of Demegen Warrant, filed as Exhibit to the registrant's Current
Report on Form 8-K dated February 20, 2001 is incorporated herein by
reference
99.5 Escrow Agreement between Demegen, Inc. and Periodontix, Inc., dated
February 16, 2001, filed as Exhibit to the registrant's Current Report
on Form 8-K dated February 20, 2001 is incorporated herein by reference
* Certain portions of this exhibit have been omitted based upon a request for
Confidential Treatment. The non-public information has been filed with the
Commission.
ITEM 28 - UNDERTAKINGS
The undersigned Company hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13 (a) or section 15 (d) of the Securities Exchange
Act of 1934 that is incorporated by reference in the Registration Statement
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.
The undersigned Company hereby undertakes to file, during any period in which
offers or sales are being made, a post-effective amendment to this Registrant
Statement: (i) to include any prospectus required by section 10 (a) (3) of the
Securities Act of 1933; (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 in such information in the Registration
Statement.
Provided, however, that the undertaking set forth in the above paragraph under
clauses (i) and (ii) thereof shall not apply if the information required to be
included in a post-effective amendment by those clauses is contained in periodic
reports filed by the Company pursuant to Section 13 or Section 15 (d) of the
Securities Act of 1934.
The undersigned Company hereby undertakes that, for the purposes of determining
any liability under the Securities Act of 1933, 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
90
offering thereof.
The undersigned Company hereby undertakes to remove from registration by means
of a post-effective amendment any of the securities being registered which
remains unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Company
pursuant to the provisions set forth under Item 15 hereof, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company 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 Company 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 Act and will be governed by the final adjudication of
such issue.
The undersigned Company hereby undertakes to deliver or cause to be delivered
with the prospectus, to each person to whom the prospectus is sent or given, the
latest annual report to security holders that is incorporated by reference in
the prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 and Rule 14c-3 under Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Registration S-X
are not set forth in the prospectus, to deliver, or cause to be delivered to
each person to whom the prospectus is sent or given, the latest quarterly report
that is specifically incorporated by reference in the prospectus to provide such
interim financial information.