UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 1999 Commission File Number: 000-23413
INTERLEUKIN GENETICS, INC.
(Name of Small Business Issuer in its Charter)
TEXAS 94-3123681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 N.E. LOOP 410, SUITE 820
SAN ANTONIO, TEXAS 78216
(Address of principal executive offices)(Zip Code)
Issuer's Telephone Number: (210) 349-6400
Securities registered under Section 12(b) of the Exchange Act:
(Title of each class) (Name of each exchange on which registered)
COMMON STOCK, NO PAR VALUE BOSTON STOCK EXCHANGE
Securities registered under Section 12(g) of the Exchange Act:
(Title of each class)
COMMON STOCK, NO PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 31, 2000, the aggregate market value of the Registrant's Common
Stock held by non-affiliates, based upon the average bid and asked price as of
such date, was $149,306,685. There were 17,988,686 shares of the Registrant's
Common Stock issued and outstanding as of March 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2000
Annual Meeting of Shareholders to be held on June 5, 2000, are incorporated by
reference in Part III hereof.
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ITEM 1. DESCRIPTION OF BUSINESS
CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-K ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE SECTION 27A OF THE SECURITIES ACT OF 1933,
AS AMENDED AND SECTION 21E OF THE EXCHANGE ACT OF 1934, AS AMENDED.
SPECIFICALLY, ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED
IN THIS FORM 10-K REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY
AND PLANS AND OBJECTIVES OF MANAGEMENT OF THE COMPANY FOR FUTURE OPERATIONS ARE
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE
BELIEFS OF THE COMPANY'S MANAGEMENT, AS WELL AS ASSUMPTIONS MADE BY AND
INFORMATION CURRENTLY AVAILABLE TO THE COMPANY'S MANAGEMENT. WHEN USED IN THIS
REPORT, THE WORDS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT" AND "INTEND" AND
WORDS OR PHRASES OF SIMILAR IMPORT, AS THEY RELATE TO THE COMPANY OR ITS
SUBSIDIARIES OR COMPANY MANAGEMENT, ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS REFLECT THE CURRENT VIEW OF THE COMPANY WITH RESPECT
TO FUTURE EVENTS AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS
RELATED TO CERTAIN FACTORS INCLUDING, WITHOUT LIMITATION, COMPETITIVE FACTORS,
GENERAL ECONOMIC CONDITIONS, CUSTOMER RELATIONS, RELATIONSHIPS WITH VENDORS, THE
INTEREST RATE ENVIRONMENT, GOVERNMENTAL REGULATION AND SUPERVISION, PRODUCT
INTRODUCTIONS AND ACCEPTANCE, TECHNOLOGICAL CHANGE, CHANGES IN INDUSTRY
PRACTICES, ONETIME EVENTS AND OTHER FACTORS DESCRIBED HEREIN AND IN THE
COMPANY'S REGISTRATION STATEMENT ON FORM S-3, AS AMENDED (FILE NO. 333-83631),
AND IN THE COMPANY'S ANNUAL, QUARTERLY AND OTHER REPORTS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY, "CAUTIONARY STATEMENTS").
ALTHOUGH THE COMPANY BELIEVES THAT ITS EXPECTATIONS ARE REASONABLE, IT CAN GIVE
NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. BASED UPON
CHANGING CONDITIONS, SHOULD ANY ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD ANY UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY VARY MATERIALLY FROM THOSE DESCRIBED HEREIN AS ANTICIPATED,
BELIEVED, ESTIMATED, EXPECTED, OR INTENDED. ALL SUBSEQUENT WRITTEN AND ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE APPLICABLE CAUTIONARY
STATEMENTS. THE COMPANY DOES NOT INTEND TO UPDATE THESE FORWARD-LOOKING
STATEMENTS. PROSPECTIVE INVESTORS ARE ADVISED NOT TO RELY UPON FORWARD-LOOKING
STATEMENTS, BUT RATHER BASE THEIR INVESTMENT DECISION ON THE COMPANY'S ACTUAL
RESULTS TO DATE.
THE COMPANY
OVERVIEW
Interleukin Genetics, Inc., a Texas corporation ("ILGN" or the "Company"),
develops and commercializes genetic diagnostic tests and medical research tools.
The Company's efforts are focused on genetic factors that affect the rate of
progression of clinical disease through their influence on common host systems.
The Company's first genetic test, PST(R), a test predictive of risk for
periodontal disease, is currently marketed in the United States, Europe and
Israel. Products under development include tests predictive of risk for
osteoporosis, coronary artery disease, diabetic retinopathy, asthma, pulmonary
fibrosis and meningitis/sepsis. The Company believes by combining genetic risk
assessment with specific therapeutic strategies, improved clinical outcomes and
more cost-effective management of these common diseases may be achieved. ILGN
also develops and licenses its medical research tools, including BioFusion(R),
to pharmaceutical companies. BioFusion, a proprietary enabling system for
diagnostic and drug discovery and development, is a computer modeling system
that integrates genetic and other sub-cellular behavior, system functions, and
clinical symptoms to simulate complex diseases. This system allows useful
information to be derived from rapidly increasing databases of gene expression
being generated in companies and academic centers worldwide.
ILGN's executive offices are located at 100 N.E. Loop 410, Suite 820, San
Antonio, Texas 78216, and its telephone number is 210/349-6400. ILGN was
incorporated in Texas in 1986. ILGN maintains a website at www.ilgenetics.com.
In November 1997 ILGN completed an initial public offering of 1,800,000 shares
of common stock, no par value ("Common Stock"). In August 1999, the shareholders
of the Company approved the name change of the Company from Medical Science
Systems, Inc. to Interleukin Genetics, Inc.
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Management believes the new name reflects the Company's focus on the interleukin
area of the human genome. On March 31, 2000, the closing bid price of the Common
Stock on the NASDAQ SmallCap Market was $10.06 per share.
CURRENT FINANCIAL CONDITION
Since its inception, the Company has incurred cumulative net losses of
approximately $21 million, including losses of approximately $6.1 million, $9.5
million and $4.5 million during 1999, 1998 and 1997, respectively. For the years
ended December 31, 1999, 1998, and 1997 the Company had negative cash flows from
operating activities of approximately $4.4 million, $8.5 million, and $3.4
million, respectively. As a result of these losses, available cash resources are
limited and will be depleted in September 2001 absent additional debt, equity
funding and/or growth in revenue.
In January 2000, the Company sold 832,667 shares of Common Stock in a
private placement. The Company received net proceeds of approximately $4.7
million from this private placement.
In June 1999, the Company completed a private placement of 2,200,000
shares of Series A Preferred Stock, no par value ("Series A Preferred"). The
Company received net proceeds of approximately $4.7 million from this private
placement. Following approval of this private placement by the Company's
shareholders on August 20, 1999, all of the issued and outstanding shares of
Series A Preferred converted into 11,000,000 shares of Common Stock.
STRATEGY
ILGN's objective is to be a leading genetics research and development
company focused on the discovery and development of diagnostic tests and medical
research tools. ILGN's strategy is to develop products for research and clinical
use that are commercialized through strategic collaborations. These products
include tests that are predictive of disease risk and tools for use in drug
development. The Company believes that it will, in the near term, generate
testing revenues, licensing fees, research and development funding, and
fee-for-service or participatory revenues pursuant to contracts with its
collaborative partners. In the long term, the Company believes it will generate
royalty payments from its corporate partners for new genetic tests and
therapeutic products. The Company believes that this strategy allows the Company
to generate near-term revenues and diversify risk, while building a proprietary
product portfolio with significant long-term potential. One of the Company's
core strengths is its ability to identify genetic variations or markers which
correlate with an individual's predisposition to a wide range of common chronic
diseases.
DEVELOPMENT SYSTEM AND APPROACH
Many factors, both environmental and genetic, contribute to most common
diseases. Importantly, some genetic factors are sufficiently strong that they
influence the onset and progression of a disease despite many other variables.
These genetic factors control aspects of the biology that have high leverage on
the disease. The Company has focused its research and product development
efforts on genetic factors that significantly influence the clinical course of
common, chronic diseases.
The Company's development program uses a proprietary enabling system
called BioFusion. BioFusion is a computer modeling system that integrates
genetic and other biological information to identify specific molecules or
biochemical pathways that have large magnitude effects on the progression of
disease and clinical outcomes. The Company then conducts clinical and basic
biological studies to test hypotheses generated by the modeling system.
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Using this approach, the Company has demonstrated that certain genetic
factors are significant determinants of the clinical expression of multiple
common diseases. These factors affect the severity and the rate of progression
of clinical disease through their influence on host systems that are common to
several disease processes. A person who possesses the genetic marker (referred
to as a "genotype-positive individual) translates a disease challenge into a
higher clinical disease trajectory (more rapid progression of the disease) than
a genotype-negative individual with a comparable disease challenge.
PRODUCT PIPELINE AND PROPRIETARY POSITION
The Company has completed clinical trials and patent applications have
been filed or patents have been issued on the role of genetic factors in the
following diseases:
o Periodontitis (patent issued)
o Osteoporosis (patent issued)
o Coronary artery disease (patent pending)
o Diabetic retinopathy (patent pending)
o Meningitis/Sepsis (patent pending)
o Asthma (patent pending)
o Pulmonary Fibrosis (patent pending)
o Low Birth Weight (patent pending)
Based on these discoveries, the Company is developing a pipeline of tests
that are predictive of disease risk. Under development are tests predictive of
the disease risk for osteoporosis, coronary artery disease, diabetic retinopathy
(blindness associated with diabetes), asthma, pulmonary fibrosis and
meningitis/sepsis. PST, a test predictive of disease risk for periodontitis (gum
disease), was introduced commercially in the U.S. in the fourth quarter of 1997.
The Company considers several factors in determining whether to pursue new
genetic testing programs, including projected commercial potential,
effectiveness of current therapies and the status of competitive programs,
likelihood of attracting collaborators, and anticipated development costs.
In each clinical disease field, the Company's development program is
focused on understanding how genetic risk factors relate to overall risk for the
disease and establishing clear links to treatment. By combining genetic risk
assessment with specific therapeutic strategies, the Company believes improved
clinical outcomes and more cost-effective management of these common diseases
can be achieved. These genetic factors are also of value in both identifying
response patterns during clinical trials for the enhancement of existing
therapeutic agents and for developing new therapeutics directed at specific
immuno-inflammatory components of several common diseases.
CLINICAL UTILITY
The Company believes in the advantages a genetic approach to medicine
offers in the prevention, management and treatment of disease. The Company
believes its predictive tests and research tools are of value to:
o Pharmaceutical companies, who may use them to speed new drug development,
to improve the efficacy of their drugs, and to develop new therapeutics.
o Payors and organizations who provide health care services, who may use
them to stratify patients by risk and more effectively allocate resources
for the greatest benefit.
o Physicians and other healthcare professionals, who may use this
information to assess the risk involved for their patients and adopt
appropriate treatments or preventive strategies.
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o Patients committed to staying healthy, who may use this information to
make better choices and set priorities based on personal knowledge of
their individual risk for common diseases.
TEST PREDICTIVE OF DISEASE RISK FOR PERIODONTAL DISEASE.
The Company's first genetic susceptibility test, PST, detects a genetic
susceptibility to severe gum disease (periodontitis). Periodontitis is a
bacterially-induced chronic inflammation that destroys the collagen fibers and
bone that surround and support the teeth. Untreated, periodontitis will
eventually result in tooth loss. Individuals who test positive for this genotype
will normally be placed on a more frequent recall program with their dental
provider, and would be candidates for more aggressive treatment.
The PST is the result of a scientific breakthrough in which an association
was discovered between a specific IL-1 genotype and severe periodontal disease.
IL-1 is a cytokine or protein that is known to play a role in inflammation and
the expression of periodontal disease. Patients with this specific genotype have
been found to progress more rapidly towards severe periodontal disease. It has
also been determined that cells with this genotype produce as much as four times
more IL-1 in response to the same bacterial challenge. Prevention or therapeutic
intervention aimed at reducing the bacterial challenge should decrease the
stimulus for IL-1 production and thereby protect the patient against the
potentially destructive effects of this genotype. It is estimated that
approximately 30% of the population will test positive for this genotype.
The Company has developed PST pursuant to a project agreement between the
Company and Sheffield University. In November, 1997, a patent related to the
detection of genetic predisposition to periodontal disease was issued to the
Company. The Company initiated commercial sales of PST in October 1997. In
December 1998, the Company entered into an agreement with Washington Dental
Service, a member of Delta Dental Plans Association, for the purchase of 1,200
PST tests to be used in a study sponsored by Washington Dental Service, in
collaboration with the University of Washington School of Dentistry and ILGN.
The study is designed to quantify the relationship between PST genotype status
and the utilization of dental services by patients in a dental plan.
The study, which began in early 1999, will provide scientific and
financial information about PST in a reimbursement system. If patients who are
at increased risk for periodontal disease can be identified early using PST,
services can be provided which should minimize the progression of disease and
the cost and complications of its consequences. The most costly dental
procedures are usually those associated with tooth loss due to advanced disease
(i.e., bridges, partial dentures, implants, etc.). Therefore, early
identification and intervention of high-risk patients is in the patients' and
payer's best interest. The Company believes that the results of this study will
provide important scientific and financial data regarding the use of PST as a
treatment- planning tool to assess risk before actual damage occurs. The data
from the study may be available for analysis in early 2001.
In September 1999, the Company introduced a saliva-based PST test which
replaces the Company's blood-based PST test.
The Company has entered into agreements for PST to be marketed in North
America, Europe and Israel.
TEST PREDICTIVE OF DISEASE RISK FOR OSTEOPOROSIS.
Osteoporosis, the most common bone disease, results in a decrease in the
amount of normal bone which leaves the affected individual more susceptible to
fractures. The Company has identified a genetic marker that in clinical trials
was associated with a more rapid loss of bone in women after menopause.
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The clinical utility of the Company's osteoporosis susceptibility test
lies in its ability to predict a patient's future bone density trend. A genotype
positive test result is a significant risk factor for accelerated bone loss
after menopause. A positive patient is more likely to exhibit low bone mineral
density and experience severe fractures compared to a genotype negative patient.
Early patient identification and appropriate intervention can alter the rate of
the disease.
The Company's test provides data that will allow practitioners to practice
preventive medicine. Results of this test will assist women who are approaching
menopause in deciding whether to start treatment. This will enable counseling at
a sufficiently early stage in the process that significant bone loss can be
avoided through lifestyle modification and/or drug/hormone therapy.
During 1999, the Company completed a large scale clinical trial on its
osteoporosis test. The data from this trial confirms that the Company's genetic
factors are associated with an increase in risk of osteoporosis in
genotype-positive persons compared to genotype negative persons.
TEST PREDICTIVE OF DISEASE RISK FOR CORONARY ARTERY DISEASE (Patent Pending).
The Company's coronary artery disease test (the "CAD test") is a genetic
test capable of detecting those individuals with a significantly higher level of
susceptibility to coronary artery disease. This genetic marker can be combined
with other risk factors to identify individuals at high risk for developing a
more rapidly progressive and severe form of coronary artery disease.
The availability of the Company's CAD test will provide practitioners with
a means of truly practicing preventive medicine with respect to coronary artery
disease. The CAD test can be given to all individuals early in life because
genetic risk factors do not change over time. Individuals who test positive for
the genotype can be treated with more aggressive approaches to risk factor
reduction. As these individuals age, they can be provided with more regular: (i)
monitoring of cholesterol levels; (ii) blood pressure testing; and (iii) early
intervention to alter the level of blood lipids (I.E., fats). Such an approach
allows for truly preventive medicine through early risk factor reduction and
appropriate monitoring for early detection of any problems.
During 1999, the Company completed two large-scale clinical trials. The
data from these trials confirms that individuals with the IL-1 genetic marker
have an increased risk for heart disease even if such individuals do not have
high cholesterol. These findings are significant as over half of the first heart
attacks occur in individuals who cannot be identified using traditional risk
factors, such as smoking, high cholesterol, and diabetes. Genetic factors that
are independent of cholesterol may be of importance in identifying new
populations at increased risk for early heart disease. Once identified, these
individuals may reduce that risk by lowering cholesterol levels, even when the
cholesterol levels would not be considered "high" by currently accepted norms.
These factors may also provide new approaches to prevention and therapy.
TEST PREDICTIVE OF DISEASE RISK FOR RETINOPATHY IN DIABETICS (Patent Pending).
Another genetic susceptibility test, which is currently being developed by
the Company, is a test to determine the susceptibility to sight-threatening
retinopathy in diabetics. This susceptibility involves a continued and increased
risk of losing vision when an individual has been diagnosed with diabetes.
The Company has identified a genetic marker that is correlated with an
increased risk of developing diabetic retinopathy in patients who have diabetes.
This correlation seems to indicate an earlier onset of retinopathy in patients
who have diabetes thus putting such individuals at risk of losing their sight at
an earlier age. The availability of such a test would allow practitioners to
assess a patient's risk of losing his or her sight due to diabetes at the time
that he or she is diagnosed with the disease. Preventive treatment would allow
doctors to practice truly preventive medicine, providing a means of identifying
susceptible patients early in
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the disease process. Enhanced assessment and monitoring can then be initiated
from the start, allowing early detection of problems and preemptive treatment
that will ultimately reduce the incidence of diabetes related vision loss. This
would translate into improvements in patient quality of life and cost savings.
To date, the Company has completed an initial study involving 500 patients who
demonstrated a strong association between specific genetic markers and
susceptibility to diabetic retinopathy.
TESTING PROCEDURE
Each of the Company's genetic susceptibility tests requires, or will
require, that a single procedure be utilized. To conduct a genetic
susceptibility test, the doctor draws a blood or saliva sample and submits it to
the Company's customer service department. The customer service department then
logs in the sample and submits sample batches to the ILGN laboratory or
reference lab for testing. The laboratory then performs the test following the
Company's specific protocol and informs the Company of the results. The Company,
in turn, advises the doctor of the results, who informs the patient and
determines the appropriate course of action. At the time results are provided to
the doctor, the Company's billing service will invoice the patient directly for
the test. The doctor will then invoice the patient for his or her professional
services related to administration of the test.
The Company will continue to use one or more sophisticated, certified, and
fully validated laboratories capable of providing consistent and high quality
analysis. Customer service is handled via the Company's toll free "888" numbers
by the Company's own staff who are knowledgeable about its genetic
susceptibility tests, the procedural requirements of the testing system and the
related diseases.
In the future, the Company may license the right to market and perform the
testing services to collaborative partners in exchange for a royalty or other
payments.
PRE-MARKETING TRIALS/STATUS OF PREDICTIVE TESTS
As an internal procedural standard, the Company conducts three categories
of clinical trials in conjunction with its genetic susceptibility tests. The
first trial is called a proof of principle trial, used to prove a laboratory
finding. The results of this trial are utilized to support the initial patent
application and therefore need to be completed before the patent application can
be filed. The second trial is a confirmatory trial. The purpose of the
confirmatory trial is to independently confirm the results of the proof of
principle trial. The third category of trial relates to clinical utility. The
clinical utility trial is conducted to learn what is the most effective
utilization of the test in actual clinical practice.
Following confirmatory studies, additional trials are completed on larger
populations to help develop broad scientific evidence supporting the clinical
utility of each of the Company's tests. Such additional trials not only
strengthen the support for each tests' known use (I.E., detecting genetic
susceptibility) but also lead to additional practical uses of the susceptibility
tests (E.G., use of the susceptibility tests to determine a patient's
responsiveness to a given drug).
PRODUCT DEVELOPMENT
The Company has ongoing research to continue to identify other genetic
factors that appear to be associated with other diseases. The Company plans on
filing additional patent applications to cover these discoveries. It is the
Company's intent to bring these discoveries to market in the form of tests
predictive of disease risk or medical research tools. The Company has also come
upon certain genetic factors that might be likely candidates to serve as
therapeutic targets, those susceptible to influence by drug agents. The Company
is considering certain collaborative long term relationships with pharmaceutical
companies as a
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method to provide for either the licensing of its discoveries or to assist in
the research and development of future products.
STRATEGIC ALLIANCES AND COLLABORATIONS
The Company's strategy is to develop products for research and clinical
use and commercialize such products through strategic alliances. The Company has
followed a strategy of working with strategic partners at the fundamental
discovery stage. This strategy has given the Company access to discoveries while
reducing up-front research expenses.
SHEFFIELD UNIVERSITY
Since 1994, the Company has had a strategic alliance with the Department
of Molecular and Genetic Medicine at Sheffield University in the United Kingdom
("Sheffield"). Sheffield is a world leader in the genetic aspects of common
diseases with an inflammatory component. Under this alliance, Sheffield has
provided to the Company the fundamental discovery and genetic analysis from
Sheffield's research laboratories and the Company has focused on product
development, including clinical trials, and the commercialization of these
discoveries. See "Factors Affecting Future Performance - Reliance on
Collaborative Partners."
In October 1999 the Company entered into a new arrangement with Sheffield
and its investigators replacing the research and development agreement that had
been in place with Sheffield since 1996. Pursuant to this new arrangement, the
Company issued an aggregate of 475,000 shares of its Common Stock to Sheffield
and certain of its investigators in exchange for the relinquishment by Sheffield
of its net proceeds interests under certain agreements with the Company.
GLAXO WELLCOME
The Company has entered into a development and license agreement with
Glaxo Wellcome to develop a computer model in support of new compound screening.
ILGN's BioFusion proprietary technology provides a means of developing
computer-based simulation models of large, complex biological systems, which can
assist in the interpretation of gene expression and molecular screening
databases. The computer models can be used for a number of purposes, including
identifying new biologic targets for drug or diagnostic discovery, understanding
how genetic discoveries influence disease, and clinical trial design. The
Company has utilized this technology to support the development and
commercialization of its genetic tests and in support of drug development
efforts for large pharmaceutical companies.
DELTA DENTAL
The Company signed an agreement with Washington Dental Service, a member
of the Delta Dental Plans Association, for the purchase of 1,200 PST tests. PST
is the Company's test predictive of disease risk for periodontal disease (gum
disease). The tests will be used in a study, sponsored by Washington Dental
Service, in collaboration with the University of Washington School of Dentistry
and Medical Science Systems. The study is designed to quantify the relationship
between PST genotype status and the utilization of dental services by patients
in a dental plan.
The study, began in March 1999, is expected to provide scientific and
financial information about PST in a reimbursement system. This study is also
expected to provide scientific and financial data regarding the use of PST as a
treatment-planning tool to assess risk. The study is expected to be completed by
the end of 2000. See "Factors Affecting Future Performance - Reliance on
Collaborative Partners."
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PST COMMERCIAL PARTNERSHIPS
In December 1997, the Company entered into an agreement with Medicadent, a
French corporation ("Medicadent"), to market and sell PST in France. In August
1998, the Company entered into an agreement with H.A. Systems, Ltd. to market
and sell PST in Israel. Medicadent commenced offering PST in France in June
1998, and H.A. Systems commenced offering PST in Israel in early 1999. In March
1999, the Company entered into an agreement with the Straumann Company to market
and sell PST in the United States and Puerto Rico. Straumann launched its PST
promotional activities in April 1999. In April 1999, the Company entered into an
agreement with Dumex, a subsidiary of AlPharma, a pharmaceutical manufacturer,
to market and sell PST in ten European countries (Austria, Denmark, Portugal,
Finland, Germany, Ireland, Norway, Sweden, Switzerland and the U.K.). Dumex is
well known in Europe as a manufacturer of oral health care products used by
periodontists. No assurances can be made regarding the commercial acceptance of
PST.
INTELLECTUAL PROPERTY
The Company's commercial success will be dependent in part on its ability
to obtain patent protection on genes, genetic sequences and/or their
relationship to common diseases, as well as diagnostic and therapeutic products
and methods based on the association between particular genes and diseases,
discovered by the Company and Sheffield University. The Company has a total of
four issued U.S. patents and 16 pending U.S. patent applications. Of the four
issued patents, two relate to the Company's genetic tests and two relate to
BioFusion, the Company's biologic modeling software. The U.S. Patent and
Trademark Office issued patents for the Company's periodontal and osteoporosis
tests in November and December, 1997, respectively.
The Company has been granted a number of corresponding foreign patents and
has filed foreign counterparts of its U.S. applications within the appropriate
time frames. Where the Company has originally filed in another country, it has
filed and plans to continue to file U.S. and other foreign counterparts within
the appropriate time frame. These applications seek to protect these gene
markers and corresponding use of gene markers, and products derived therefrom
and uses therefor.
The Company is continuing to identify and develop applications related to
additional genetic markers. The Company has also applied for trademark
protection for the name of its periodontal susceptibility test. The Company's
proprietary technology is subject to numerous risks. See "Factors Affecting
Future Performance."
COMPETITION
Competition in the Company's potential markets is intense. Although
testing for major genetic defects, such as Down's Syndrome, has been available
for years, genetic susceptibility testing for multi- factorial diseases is a
newly emerging growth segment. Despite this segment's relatively young age,
other companies do exist which have research programs seeking disease related
genes for therapeutic and susceptibility testing purposes, including some that
involve treatable/ preventable disease. The technologies for discovering genes
which predispose individuals to major diseases and approaches for
commercializing those discoveries are new and rapidly evolving. Rapid
technological developments could result in the Company's potential services,
products, or processes becoming obsolete before the Company recovers a
significant portion of its related research and development costs and capital
expenditures associated therewith.
Competitors of the Company in the United States and abroad are numerous
and include, among others, major pharmaceutical and diagnostic companies,
specialized biotechnology firms, universities and other research institutions,
including those receiving funding from the Human Genome Project. Other companies
with research programs include Myriad Genetics, Inc. ("Myriad") and Genome
Therapeutics Corp. ("GTC"). GTC has announced that it has research programs
focusing on osteoporosis. Myriad has a test for breast cancer
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and has announced research programs for osteoporosis and coronary artery
disease. Many of the Company's other potential competitors have considerably
greater financial, technical, marketing and other resources than the Company,
which may allow these competitors to discover important genes in advance of the
Company. If the Company does not discover disease-predisposing genes,
characterize their functions, develop genetic tests and related information
services based on such discoveries, obtain regulatory and other approvals, and
launch such services or products before competitors, the Company could be
adversely affected.
Additionally, some of the Company's competitors receive data and funding
from the Human Genome Project. The Human Genome Program is a federally funded
program focused on sequencing the human DNA and enriching the sequence data with
information about its biological function. To the extent the Company's
competitors receive data and funding from the Human Genome Project at no cost to
them, they may have a competitive advantage over the Company.
In the case of newly introduced products requiring "change of behavior,"
(such as genetic susceptibility tests) multiple competitors may accelerate
market acceptance and penetration through increasing awareness. Moreover, two
different genetic susceptibility tests for the same disease may in fact test or
measure different components, and thus actually be complementary when given in
parallel as an overall assessment of risk, rather than being competitive with
each other.
Furthermore, the primary focus of each of the above-referenced companies
is performing gene- identifying research for pharmaceutical companies for
therapeutic purposes, with genetic susceptibility testing being a secondary
goal. On the other hand, the Company's primary business focus is developing and
commercializing genetic susceptibility tests for common diseases, with only an
ancillary drug discovery program.
GOVERNMENT REGULATION
The sampling of blood, saliva or cheek scrapings from patients and
subsequent analysis in a clinical laboratory does not, at the present time,
require Federal Drug Administration ("FDA") or regulatory authority approval
inside the U.S. for either the sampling procedure or the analysis itself. The
samples are taken in the healthcare provider's office, using standard materials
previously approved as medical devices, such as sterile lancets and swabs. The
testing procedure itself is performed in one or more registered, certified
clinical laboratories under the auspices of the Clinical Laboratory Improvement
Act of 1988 ("CLIA"), administered by the Health Care Financing Administration.
The federal regulations governing approval of the laboratory facilities and
applicable state and local regulations governing the operation of clinical
laboratories would also apply to the laboratories performing tests for the
Company. Changes in such regulatory schemes could require advance regulatory
approval of genetic susceptibility tests sometime in the future and could have a
material adverse effect on the Company's business. In addition, certain billing
practices of the Company required it, or a subsidiary, to be licensed and
regulated under CLIA.
In addition, while the Company's main focus is on genetic susceptibility
testing, the Company may, in the future, endeavor to partner with pharmaceutical
companies in the area of drug development. Any drug products developed by the
Company or the Company's future collaborative partners, prior to marketing in
the United States, would be required to undergo an extensive regulatory approval
process by the FDA. The regulatory process, which includes preclinical testing
and clinical trials of each therapeutic product in order to establish its safety
and efficacy, can take many years and requires the expenditure of substantial
resources. Data obtained from preclinical and clinical activities are
susceptible to varying interpretations which could delay, limit or prevent
regulatory agency approval. In addition, delays or rejections may be encountered
during the period of therapeutic development, including delays during the period
of review of any application. Delays in obtaining regulatory approvals could
adversely affect the marketing of any therapeutics developed by the Company or
its collaborative partners, impose costly procedures upon the Company and its
collaborative
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partners' activities, diminish any competitive advantages that the Company or
its collaborative partners may attain and adversely affect its ability to
receive royalties. Once regulatory approval of a product is granted, such
approval may impose limitations on the indicated uses for which it may be
marketed. Further, even if such regulatory approval is obtained, a marketed
product and its manufacturer are subject to continuing review. The discovery of
previously unknown problems with a product or manufacturer may result in
restrictions on such product or manufacturer. Such restriction could include
withdrawal of the product from the market.
EMPLOYEES
As of March 31, 2000, the Company had 13 full-time employees. Of the
Company's employees, 77% are engaged directly in the development and
commercialization of tests and 23% are engaged in administrative or managerial
activities.
The Company's employees are not covered by a collective bargaining
agreement, and the Company considers its relations with its employees to be
good.
FACTORS AFFECTING FUTURE PERFORMANCE
NO ASSURANCE OF ADDITIONAL NECESSARY CAPITAL
The Company anticipates that its current financial resources will be
adequate to maintain its current and planned operations through September 2001.
THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO RAISE ANY ADDITIONAL
NECESSARY CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE RAISED, THE COMPANY WOULD
SUFFER MATERIAL ADVERSE CONSEQUENCES TO ITS BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO SEEK PROTECTION UNDER THE
UNITED STATES BANKRUPTCY LAWS.
The Company's future capital requirements will depend on many factors,
including successful expansion of sales of PST(R), the Company's genetic test
for periodontal disease, and continued scientific progress with its research and
development programs. The continuation of the Company's research and development
activities may require substantial additional capital from private or public
sources. There is no assurance that such capital will be available to the
Company on acceptable terms. Furthermore, the market for publicly-traded stocks
of biotechnology companies has historically been volatile, and the competition
for equity capital from public and private sources is intense among the over
1,000 biotechnology companies in the United States that are dependent on
infusions of capital to fund their operations. The Company is also engaged from
time to time in discussions with several companies concerning the licensing of
certain of the Company's proprietary technologies or forming strategic
alliances, which could provide additional sources of funding to the Company as
well as a possible source of equity capital. The Company is unable to predict
the likelihood of completing any such arrangements. There can be no assurance
that the Company will be successful in obtaining additional capital in amounts
sufficient to continue to fund its operations and product development.
INABILITY TO FULLY USE NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1999, and 1998 the Company had net operating loss
carryforwards and a research tax credit of approximately $18,750,000 and
$187,000, respectively, for federal income tax purposes, expiring in varying
amounts through the year 2019. The Company's ability to use its NOL and credit
carryforwards to reduce future taxes is subject to Section 382 of the Internal
Revenue Code of 1986 (the "Code"). These restrictions provide for limitations on
the Company's utilization of its NOL and credit carryforwards following a
greater than 50% ownership change during the prescribed testing period. As of
December 31, 1999, the Company had incurred such a change. As a result,
approximately $15,619,000 of the Company's NOL
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carryforwards are limited in utilization to approximately $825,000 annually. The
annual limitation may result in the expiration of the carryforwards prior to
utilization.
UNCERTAINTY OF MARKET ACCEPTANCE FOR GENETIC SUSCEPTIBILITY TESTS
The commercial success of the Company's genetic susceptibility tests and
those that it may develop will depend upon their acceptance as medically useful
and cost-effective by patients, physicians, dentists, other members of the
medical and dental community and insurers. Broad market acceptance can be
achieved only with substantial education about the benefits and limitations of
such tests. It is uncertain whether current genetic susceptibility tests or
others that the Company may develop will gain market acceptance on a timely
basis. If patients, dentists and physicians do not accept the Company's tests,
or take a longer time to accept than the Company anticipates, then the Company's
revenues and profit margins may be reduced and may result in losses.
DIFFICULTY OF DEVELOPING GENETIC SUSCEPTIBILITY TESTS
It is uncertain whether the Company will be successful in developing and
bringing to market its current portfolio or future tests based on the genetic
discoveries made by the Company and its collaborators. Even when the Company
discovers a genetic marker (I.E., a genetic variation or polymorphism associated
with increased disease incidence or severity), additional clinical trials need
to be conducted to confirm the initial scientific discovery and to support the
scientific discovery's clinical utility in the marketplace. The results of a
clinical trial could delay, reduce the test's acceptance or cause the Company to
cancel a program. Such delays, reduced acceptance or cancellations would reduce
revenues and may result in losses.
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company incurred a net operating loss of $6,138,603 in 1999,
$9,508,275 in 1998 and $4,494,062 in fiscal year 1997. As of December 31, 1999,
our accumulated deficit was $21,012,188. The losses have resulted principally
from expenses incurred in research and development and from selling, general and
administrative expenses. These expenses have exceeded revenues. The Company has
yet to generate any significant revenues from the sale of genetic susceptibility
testing services and there can be no assurance that it will be able to generate
significant revenues in the future. The Company expects operating losses to
continue for the near future as research and development, sales and marketing
activities and operations continue. The ability to achieve profitability depends
on the ability to develop a sales and marketing capacity and to successfully
market and sell products and services. It is uncertain when the Company will
become profitable.
UNCERTAINTY OF INSURANCE REIMBURSEMENT
The Company's ability to successfully commercialize existing genetic
susceptibility tests and others that the Company may develop depends in part on
obtaining adequate reimbursement for such testing services and related
treatments from government and private health care insurers (including health
maintenance organizations) and other third-party payors. Physicians' and
dentists' decisions to recommend genetic susceptibility tests, as well as
patients' elections to pursue testing, are likely to be heavily influenced by
the scope and extent of reimbursement for such tests by third-party payors.
Government and private third-party payors are increasingly attempting to contain
health care costs by limiting both the extent of coverage and the reimbursement
rate for new testing and treatment products and services. In particular,
services which are determined to be investigational in nature or which are not
considered "reasonable and necessary" for diagnosis or treatment may be denied
reimbursement coverage. To date, few insurers or third-party payors have agreed
to reimburse patients for genetic susceptibility tests. As a result, the Company
initially expects to bill patients directly for the genetic susceptibility
tests.
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It remains uncertain whether insurers or third-party payors will elect to
provide full reimbursement coverage for the genetic susceptibility tests in the
near future. If adequate reimbursement coverage is not available from insurers
or third-party payors, it is uncertain whether individuals will elect to
directly pay for the test. If both insurers or third-party payors and
individuals are unwilling to pay for the test, then the number of tests
performed will be significantly decreased. Such a scenario would result in
reduced revenues and possible losses.
RELIANCE ON COLLABORATIVE PARTNERS
In October 1999, the Company entered into a new contractual arrangement
with the University of Sheffield ("Sheffield") replacing the research and
development agreement that had been in place since 1996. Under this new
arrangement, the Company will undertake the development and commercialization of
certain discoveries resulting from Sheffield's research. This agreement with
Sheffield has a five-year term with an automatic yearly renewal. Pursuant to
this new arrangement, the Company issued an aggregate of 475,000 shares of its
Common Stock to Sheffield and its investigators in exchange for the transfer of
certain patent rights and the relinquishment of proceeds interests held by
Sheffield and its investigators under all project agreements. The Company also
entered into a research and development services agreement with Sheffield which
automatically renews in one-year increments. In connection with this new
arrangement, the Company entered into a five-year consulting agreement with
Sheffield's key collaborator. The Company anticipates entering into additional
collaborative arrangements with Sheffield and other parties in the future.
In the future the Company may, in order to facilitate the sale of testing
services and/or products, enter into collaborative selling arrangements with one
or more other persons. It is uncertain whether the Company will be able to
negotiate acceptable collaborative arrangements in the future or that such
collaborative arrangements will be successful. If the Company is unable to
identify collaborative partners to sell certain of our services and/or products,
it may be forced to develop an internal sales force to market and sell its
services and/or products in markets where it is not intending on developing a
direct selling presence. Such a process would take more time and potentially
cost more. As a result, revenues and earnings would be reduced. If the Company
enters into collaborative selling arrangements, its success will depend upon the
efforts of others and may be beyond its control. Failure of any collaborative
selling arrangement could result in reduced revenues and possible losses.
UNCERTAIN ABILITY TO PROTECT PROPRIETARY TECHNOLOGY
The Company's success will partly depend on its ability to obtain patent
protection, both in the United States and in other countries, for its products
and services. In addition, the Company's success will also depend upon its
ability to preserve its trade secrets and to operate without infringing the
proprietary rights of third parties.
The Company has sixteen (16) patent applications pending, including
applications covering certain of its anticipated genetic susceptibility tests.
There can be no assurance that the Company's patent applications will ever be
issued as patents or that the claims of any issued patents will afford
meaningful protection for the Company's technology or products. Further, others
may develop similar products which test for susceptibility related to some
diseases yet avoid infringing upon, or conflicting with, the Company's
anticipated patents. In addition, there can be no assurance that any patents
issued to the Company will not be challenged, and subsequently narrowed,
invalidated or circumvented.
The Company's testing services and/or products may also conflict with
patents which have been or may be granted to others. As the biotechnology
industry expands and more patents are filed and issued, the risk increases that
the Company's products may give rise to a declaration of interference by the
Patent and Trademark Office, or to claims of patent infringement by other
companies, institutions or individuals. Such
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entities or persons could bring legal proceedings against the Company seeking
damages or seeking to enjoin the Company from testing, manufacturing or
marketing its products. Patent litigation is costly, and even if the Company
prevails, the cost of such litigation could have an adverse effect on the
Company. If the other parties in any such actions are successful, in addition to
any liability for damages, the Company could be required to cease the infringing
activity or obtain a license. It is uncertain whether any license required would
be available to the Company on acceptable terms, if at all. Failure by the
Company to obtain a license to any technology that it may require to
commercialize its products could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flows. In
addition, there is considerable pressure on academic institutions and other
entities to publish discoveries in the genetic field. Such a publication by an
academic institution or other entity, prior to the Company's filing of a patent
application on such discovery, may compromise the Company's ability to obtain
U.S. and foreign patent protection for the discovery.
The Company also relies upon unpatented proprietary technologies. The
Company relies on confidentiality agreements with its employees, consultants and
collaborative partners to protect such proprietary technology. There can be no
assurance that the Company can adequately protect its rights in such unpatented
proprietary technologies, that others will not independently develop
substantially equivalent proprietary information or techniques, or otherwise
gain access to the Company's proprietary technologies or disclose such
technologies.
The United States Patent and Trademark Office issued new Utility
Guidelines in July 1995 that address the requirements for demonstrating utility,
particularly in inventions relating to human therapeutics. While the guidelines
do not require clinical efficacy data for issuance of patents for human
therapeutics, there can be no assurance that the Patent and Trademark Office's
interpretations of such guidelines, and any changes to such interpretations will
not delay or adversely affect the Company's or the Company's collaborators'
ability to obtain patent protection. The biotechnology patent situation outside
the United States is even more uncertain and is currently undergoing review and
revision in many countries.
TECHNOLOGICAL CHANGES RESULTING IN PRODUCT OBSOLESCENCE
Market acceptance and sales of the Company's testing services could also
be adversely affected by technological change. It is uncertain whether the
Company's competitors will succeed in developing genetic susceptibility tests
that circumvent or are more effective than the Company's technologies or
services. Further, it is uncertain whether such developments would render the
Company's or the Company's collaborators' technology or services less
competitive or obsolete. Further, the Company's testing services could be
rendered obsolete as a result of future innovations in the treatment of gum
disease, osteoporosis, coronary artery disease or diabetes retinopathy, which
could have a significant negative impact on the Company's ability to market its
services effectively.
POSSIBLE NASDAQ DELISTING; LIMITED PUBLIC MARKET FOR COMMON STOCK;
POSSIBLE VOLATILITY OF SECURITIES PRICES
Our Common Stock is currently listed on The NASDAQ SmallCap Market and the
Boston Stock Exchange. If the Company fails to maintain the qualification for
its Common Stock to trade on the NASDAQ SmallCap Market or the Boston Stock
Exchange, its Common Stock could be subject to delisting. The NASDAQ Stock
Market, Inc. ("NASDAQ") announced increases in the quantitative standards, which
became effective in February 1998, for maintenance of any of (x) $2,000,000 of
net tangible assets, (y) $35,000,000 of market capitalization or (z) $500,000 of
net income for two of the last three years and a minimum bid price per share of
$1.00. On February 3, 1999, we received notice from NASDAQ that we were in
violation of NASDAQ's minimum bid price requirement and that if our Common Stock
does not have a closing bid price of at least $1.00 for ten consecutive trading
days during the 90 day period ended May 3, 1999, our Common Stock will be
subject to delisting on May 3, 1999. The Company believes it has satisfied this
requirement by
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having a closing bid price of at least $1.00 for each trading day since May 7,
1999; however the Company has not received notice from NASDAQ that such
requirement was satisfied. Furthermore, there can be no assurance that our stock
price will maintain such $1.00 minimum bid price. If the market price for our
Common Stock does fall below the $1.00 bid price, our Common Stock could be
subject to delisting from The NASDAQ SmallCap Market.
On April 19, 1999, the Company received notice from the NASDAQ SmallCap
Market that the Company was in violation of NASDAQ's $2,000,000 minimum net
tangible asset requirement. As a result of the private placement completed in
June 1999, management believes that the Company is in compliance with NASDAQ's
minimum net tangible asset requirement; however, the Company has not received
notice from NASDAQ that such requirement was satisfied. The Company filed a
Current Report on Form 8-K dated June 25, 1999, containing the Company's pro
forma balance sheet at May 31, 1999, adjusted to reflect the results of the June
private placement. Such balance sheet reflects net tangible assets in excess of
$2,000,000. If the Company is unable to maintain compliance with NASDAQ's
minimum net tangible asset requirement, or maintain a $35,000,000 market
capitalization, the Company would likely be delisted from the NASDAQ SmallCap
Market and may also suffer material adverse consequences to its business,
financial condition and results of operations.
On August 3, 1999, the Company received a notice from NASDAQ questioning
whether the Company had violated the shareholder approval provisions of the
NASDAQ Marketplace Rules due to an alleged change- in-control resulting from the
private placement of Series A Preferred Stock completed by the Company in June
1999. As a result, NASDAQ is reviewing the Company's eligibility for continued
listing on the NASDAQ SmallCap Market. The Company does not believe that a
change-of-control occurred and is engaged in discussions with NASDAQ to resolve
this matter; however, as of March 1, 2000, the Company had not received
notification of NASDAQ's decision regarding this matter. At the Annual Meeting
held August 20, 1999, our shareholders ratified the private placement of Series
A Preferred Stock. There can be no assurance that the Company will be able to
address this issue in a manner satisfactory to NASDAQ, or that the Company's
Common Stock will not be delisted from the NASDAQ SmallCap Market.
If our shares are not listed as intended, trading, if any, would be
conducted in the over-the-counter market in the so-called "pink sheets" or the
OTC Bulletin Board, which was established for securities that do not meet the
NASDAQ SmallCap Markets listing requirements. Consequently, selling our shares
would be more difficult because smaller quantities of shares could be bought and
sold, transactions could be delayed, and security analysts' and news media's
coverage of our company may be reduced. These factors could result in lower
prices and larger spreads in the bid and ask prices for our share.
If our shares are not listed on the NASDAQ SmallCap Market and/or the
Boston Stock Exchange, they may become subject to Rule 15g-9 under the Exchange
Act. That rule imposes additional sales practice requirements on broker-dealers
that sell low-priced securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
our shares and affect the ability of holders to sell our shares in the secondary
market.
The SEC's regulations define a "penny stock" to be any equity security
that has a market price less than $5.00 per share or with an exercise price of
less than $5.00 per share, subject to certain exceptions. The penny stock
restrictions will not apply to our shares if they are listed on the NASDAQ
SmallCap Market or the Boston Stock Exchange and we provide certain price and
volume information on a current and continuing basis, or meet required minimum
net tangible assets or average revenue criteria. We cannot assure you that our
shares will qualify for exemption from these restrictions. If our shares were
subject to the penny stock rules, the market liquidity for the shares could be
adversely affected.
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Historically, the Common Stock has experienced low trading volumes. The
market price of the Common Stock also has been highly volatile and it may
continue to be highly volatile as has been the case with the securities of other
public biotechnology companies. Factors such as announcements by the Company or
its competitors concerning technological innovations, new commercial products or
procedures, proposed government regulations and developments or disputes
relating to patents or proprietary rights may substantially affect the market
price of the Company's securities. Changes in the market price of the Common
Stock may bear no relation to the Company's actual operational or financial
results.
LIMITED MARKETING OR SALES EXPERIENCE
Our business strategy is to provide genetic susceptibility testing
services aimed at common diseases that are treatable and preventable. The
commercial introduction of the periodontal susceptibility test at the beginning
of October 1997 represented our first such effort. From its commercial inception
through 1999, our periodontal susceptibility test has generated revenues of
$866,726. With respect to the periodontal susceptibility test, we have devoted
substantial human and financial resources to the establishment and staffing of a
customer service support facility and the building of a sales and marketing
infrastructure. However, we have limited experience in developing and
commercially marketing susceptibility testing services. It is uncertain whether
our customer service support facilities and sales and marketing program will
achieve efficient, effective or successful operations. Failure to successfully
market such tests could reduce our revenues and may result in losses.
PRODUCT LIABILITY EXPOSURE
Our business exposes us to potential liability risks inherent in the
testing and marketing of medical and dental related services or products. It is
uncertain whether liability claims will be asserted against us. We have product
and professional liability insurance which we believe provides coverage for the
testing and commercial introduction of our genetic susceptibility tests. It is
uncertain whether we will be able to maintain such insurance on acceptable
terms. Any insurance obtained may not provide adequate coverage against
potential liabilities. A liability claim, even one without merit, could result
in significant legal defense costs thereby increasing our expenses, lowering our
earnings and even resulting in losses.
ETHICAL, LEGAL AND SOCIAL IMPLICATIONS OF GENETIC TESTING
The prospect of broadly available genetic testing has raised issues which
are currently being widely discussed by the medical and scientific communities,
as well as other interested groups and organizations, regarding the appropriate
utilization and the confidentiality of information provided by such testing. The
recent movement towards discovery and commercialization of susceptibility tests
for assessing a person's likelihood of developing a chronic disease has also
focused public and legislative attention on the need to protect the privacy of
genetic assessment medical information. With the progression towards more
comprehensive record keeping by health insurers and managed care firms, this
need has led to a number of legal initiatives. The recently enacted federal
health insurance reform law (Health Insurance Portability Act of 1996)
recognizes the comparability of information obtained by genetic means to other
types of personal medical information. The law prohibits insurance companies
from refusing health insurance coverage to individuals on the basis of their
medical history, including "genetic information." This legislation also
prohibits employees from discrimination in hiring practices on the same basis.
This legislation indicates a trend to protect the privacy of patients while
allowing them to be screened for conditions which, can be prevented, reduced in
severity or cured. In the most extreme scenario, governmental authorities could,
for social or other purposes, limit the use of genetic testing or prohibit
testing for genetic susceptibility to certain conditions. For these reasons, we
could experience a delay or reduction in test acceptance. Such a delay or
reduction could reduce our revenues or result in losses.
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We are taking a proactive stance in the ethical arena. Our Chief Executive
Officer, Dr. Philip Reilly, is both an M.D. (certified specialist in clinical
genetics) and an attorney and is knowledgeable in the area of genetic testing
and its ethical, legal and clinical utility ramifications. Additionally, we are
currently advising doctors who administer our genetic susceptibility tests to
take special efforts to maintain the confidentiality of the test results. Our
intent is to avoid information about test results being disclosed to insurers
until issues regarding insurability have been fully analyzed and acted upon by
the appropriate legislative bodies.
DEPENDENCE ON KEY PERSONNEL AND CONSULTANTS
Because of the specialized scientific nature of our business, we are
highly dependent upon our ability to attract and retain qualified management,
scientific and technical personnel. Our company will also be dependent upon the
ability to hire qualified marketing and sales personnel. Competition for
scientific, marketing and sales personnel is intense. Loss of the services of
Drs. Kornman or Reilly or Gordon Duff, a key researcher with the University of
Sheffield, could adversely affect our research and development programs and
susceptibility testing service business and could impede the achievement of our
business objectives. We maintain key man life insurance on Drs. Kornman and
Duff.
ABSENCE OF DIVIDENDS
We have never paid dividends and do not intend to pay any dividends in the
foreseeable future.
SHARES ELIGIBLE FOR FUTURE SALE
Substantially all of the outstanding Common Stock is available for sale in
the public marketplace. There are also outstanding stock options and warrants to
purchase an aggregate of 3,258,675 shares of Common Stock at various exercise
prices per share. No prediction can be made as to the effect, if any, that sales
of shares of Common Stock or the availability of such shares for sale will have
on the market prices prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock, and could impair
the Company's ability to raise capital through the sale of its equity
securities.
EFFECT OF PREFERRED STOCK AND DIRECTOR REMOVAL PROVISIONS
Our Board of Directors is authorized to issue up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences and privileges
of those shares without any further vote or action by our shareholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any shares of Preferred Stock that may
be issued in the future. While we have no present intention to issue shares of
Preferred Stock, such issuance, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock. In addition, such Preferred Stock may have
other rights, including economic rights, senior to the Common Stock. As a
result, the issuance of Preferred Stock could decrease the market value of the
Common Stock.
Our Articles of Incorporation provide that members of the Board of
Directors may be removed only for cause upon the affirmative vote of holders of
at least a majority of the shares of our outstanding capital stock entitled to
vote. Certain other provisions of our Articles of Incorporation could also have
the effect of delaying or preventing changes of control or in management. Such a
delay or preventive effect could adversely affect the price of our Common Stock.
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ITEM 2. PROPERTIES
The Company has two offices in the following locations: Flagstaff, Arizona
and San Antonio, Texas. Flagstaff, Arizona is the site of the Company's global
commercial operations, including its marketing, sales and customer service
organization. The San Antonio Research Center is the principal site of its
research and development and employs teams of top medical, dental and computer
scientists. San Antonio is the site of its corporate headquarters.
The Company's commercial operations office located at 3100 N. West Street,
Bldg. A, Flagstaff, Arizona, contains 6,000 square feet and is held under a five
year lease which expires in September 2002. The Company's corporate headquarters
and research and development offices, located at 100 N.E. Loop 410, Suite 820,
San Antonio, Texas, contain 8,131 usable square feet held under a lease expiring
May 31, 2003. The Company's former corporate headquarters, located at 4400
MacArthur Boulevard, Suite 980, Newport Beach, California, contains 1,798 usable
square feet and has been subleased by the Company until the expiration of the
Company's original lease in April 2001.
ITEM 3. LEGAL PROCEEDINGS
On March 2, 1999, Entelos, Inc. filed an action against the Company in
United States District Court for the Northern District of California, alleging
that two of Entelos' principals, Samuel Holtzman and Thomas Paterson, are
co-inventors of the inventions claimed in two of the Company's patents - U.S.
Pat. Nos. 5,657,255 and 5,808,918, both of which relate to the Company's
BioFusion products. In the suit, Entelos seeks a declaratory judgment that
Entelos is the co-owner of all rights under the foregoing patents, an order
correcting the inventorship of the patents to list Holtzman and Paterson as
co-inventors, and restitution to Entelos of its share of the profits obtained
from the patents. The complaint also asserted an unfair competition claim. In
June 1999 the Company entered into a settlement agreement with Entelos, that,
among other things, granted Entelos a non-exclusive, fully paid-up, royalty-free
world-wide license to make, have made, use, import, offer to sell and sell
products and practice any systems, methods or other inventions covered by the
patents. Pursuant to a stipulation and order of dismissal issued by the United
States District Court for the Northern District of California, all claims and
counterclaims in the above-described action were dismissed with prejudice. The
Company did not pay any money to Entelos as part of the agreement, and
management does not believe that the settlement will have a material adverse
effect on future business activities of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock began trading on The NASDAQ SmallCap Market on
November 26, 1997 under the symbol "MSSI" and on the Boston Stock Exchange under
the symbol "MSI." In August 1999, the Company's Common Stock symbol changed to
"ILGN" on the NASDAQ SmallCap Market and "ILG" on the Boston Stock Exchange.
Prior to November 1997, there was no established trading market for the Common
Stock. The following table sets forth, for the periods indicated, the high and
low bid prices for the Common Stock, as reported by the NASDAQ SmallCap Market,
since the Common Stock commenced public
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trading. The quotations represent prices in the over-the-counter market between
dealers and securities, and do not include retail markup, markdown or
commissions and may not necessarily represent actual transactions.
1999: HIGH LOW
---- ---
First Quarter.......................... $1.313 $0.406
Second Quarter ........................ $3.500 $0.781
Third Quarter.......................... $3.313 $1.500
Fourth Quarter......................... $9.000 $1.875
1998: HIGH LOW
---- ---
First Quarter.......................... $6.063 $2.938
Second Quarter ........................ $5.00 $3.50
Third Quarter.......................... $4.25 $1.313
Fourth Quarter......................... $2.125 $0.469
1997: HIGH LOW
---- ---
November 26 - December 31, 1997 ....... $9.00 $3.875
NUMBER OF SHAREHOLDERS
As of March 1, 2000, there were approximately 162 record holders of the
Company's Common Stock.
DIVIDENDS
The Company has not declared any dividends to date and does not plan to
declare any dividends in the foreseeable future.
SALE OF UNREGISTERED SECURITIES
Previously reported.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth financial data with respect to the Company
as of and for each of the five years ended December 31, 1999. The selected
financial data as of and for each of the five years ended December 31, 1999 have
been derived from the financial statements of the Company. The financial
statements and the reports thereon as of December 31, 1999, and 1998 and for the
years ended December 31, 1999, 1998 and 1997 are included elsewhere in this
Annual Report on Form 10-K. The information below should be read in conjunction
with the financial statements (and notes thereon) and Management's Discussion
and Analysis of Financial Condition and Results of Operations included in Item
7.
-18-
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues ...................................... $ 477,497 $ 412,942 $ 195,928 $ 1,918,879 $ 1,872,932
Gross Profit .................................. 276,315 196,658 29,486 1,371,113 1,505,412
Expenses:
Research and Development ................... 3,570,845 2,799,220 1,223,468 958,249 582,595
Selling, general and administrative ........ 2,904,210 7,220,444 2,868,057 1,162,768 755,785
Operating income (loss) ....................... (6,198,740) (9,803,006) (4,062,039) (749,904) 167,032
Other income (expense):
Interest Income ............................ 107,446 379,054 53,889 8,561 35
Interest expense ........................... (59,189) (94,597) (485,062) (34,229) (14,300)
Other income (expense) ..................... 11,880 11,124 -- (6,934) --
Net income (loss) ............................. (6,138,603) (9,508,275) (4,494,062) (788,546) 150,012
Net income (loss)applicable to common
stock ....................................... (11,138,603) (9,508,275) (4,494,062) (788,546) 150,012
Basic and diluted loss per common share ....... (1.15) (1.72) (1.19) (.18) .03
Weighted-average common shares
outstanding ................................. 9,720,621 5,540,895 3,773,474 4,288,436 4,288,436
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Cash, cash equivalents and marketable
securities .................................. $ 2,656,116 $ 2,432,271 $ 12,012,772 55,966 73,000
Working Capital (deficit) ..................... 1,967,943 1,462,748 11,186,863 (735,986) 242,000
Total Assets .................................. 3,176,159 3,672,890 12,823,376 311,962 458,000
Long-term debt and capital lease
obligations, less current portion ........... 99,246 604,507 580,739 200,834 --
Shareholders equity ........................... $ 2,153,178 $ 1,846,348 11,286,889 (699,748) 299,000
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL OVERVIEW
Interleukin Genetics, Inc., a Texas corporation ("ILGN" or the "Company")
develops and commercializes genetic diagnostic tests and medical research tools.
The Company's efforts are focused on genetic factors that affect the rate of
progression of clinical disease through their influence on common host systems.
The Company's first genetic test, PST(R), a test predictive of risk for
periodontal disease, is currently marketed in the United States, Europe and
Israel. Products under development include tests predictive of risk for
osteoporosis, coronary artery disease, diabetic retinopathy, asthma, pulmonary
fibrosis and meningitis/sepsis. The Company believes by combining genetic risk
assessment with specific therapeutic strategies, improved clinical outcomes and
more cost-effective management of these common diseases are achieved. ILGN also
develops and licenses its medical research tools, including BioFusion(R), to
pharmaceutical companies. BioFusion, a proprietary enabling system for
diagnostic and drug discovery and development, is a computer modeling system
that integrates genetic and other sub-cellular behavior, system functions, and
clinical symptoms to simulate complex diseases. This system allows for the
utilization of the
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<PAGE>
rapidly increasing databases of gene expression, cell biology, prognostic,
pharmacogenomic and predictive medicine databases being generated in companies
and academic centers worldwide.
The Company has followed a strategy of working with strategic partners at
the fundamental discovery stage. This strategy has given the Company access to
discoveries while reducing up-front research expenses. Since 1994, the Company
has had a strategic alliance with the Department of Molecular and Genetic
Medicine at Sheffield University in the United Kingdom ("Sheffield"). Under this
alliance, Sheffield has provided to the Company the fundamental discovery and
genetic analysis from Sheffield's research laboratories and the Company has
focused on product development, including clinical trials, and the
commercialization of these discoveries. In October 1999, the Company entered
into a new arrangement (the "Agreement") with Sheffield replacing the research
and development agreement that had been in place with Sheffield since 1996.
Under the Agreement, the Company will undertake the development and
commercialization of certain discoveries resulting from Sheffield's research.
The Agreement with Sheffield is a five-year agreement with an automatic yearly
renewal. Pursuant to this new arrangement, the Company issued an aggregate of
475,000 shares of its Common Stock to Sheffield and its investigators in
exchange for the transfer of certain patent rights and the relinquishment of
proceeds interests held by Sheffield and its investigators under all project
agreements. The Company also entered into a research and development services
agreement with Sheffield which automatically renews in one-year increments. In
connection with this new arrangement, the Company entered into a five- year
consulting agreement with Sheffield's key collaborator. The Company anticipates
entering into additional collaborative arrangements with Sheffield and other
parties in the future.
In December 1997, the Company entered into an agreement with Medicadent, a
French corporation ("Medicadent"), to market and sell PST in France. In August
1998, the Company entered into an agreement with H.A. Systems, Ltd. to market
and sell PST in Israel. Medicadent commenced offering PST in France in June
1998, and the Company H.A. Systems commenced offering PST in Israel in early
1999. In March 1999, the Company entered into an agreement with the Straumann
Company to market and sell PST in the United States and Puerto Rico. Straumann
launched its PST promotional activities in April 1999. In April 1999, the
Company entered into an agreement with Dumex, a subsidiary of AlPharma, a
pharmaceutical manufacturer, to market and sell PST in nine European countries
(Austria, Denmark, Finland, Germany, Ireland, Norway, Sweden, Switzerland and
the U.K.). Dumex is well known in Europe as a manufacturer of oral health care
products used by periodontists. No assurances can be made regarding the
commercial acceptance of PST. The Company anticipates additional international
agreements for the distribution of PST in 2000, but no assurances can be made
that such agreements will be entered into by the Company.
The Company has been awarded four U.S. patents, and has sixteen U.S.
patent applications pending. The U.S. Patent & Trademark Office awarded patents
to the Company for its osteoporosis and periodontal disease susceptibility tests
and two patent awards for its biologic modeling technology called BioFusion(R),
which is used by the Company in the discovery, development and commercialization
process.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998
Revenue for the year ended December 31, 1999 was $477,497 as compared to
$412,942 for the year ended December 31, 1998, representing an increase of
$64,555 or 16%. The increase in revenue is primarily attributable to higher
average selling price per PST test. Cost of revenues was $201,182 for the year
ended December 31, 1999 as compared to $216,284 for the same year period in
1998, representing a decrease of $15,102 or 7%. This decrease is primarily
attributable to lower laboratory costs for processing PST tests.
For the year ended December 31, 1999, the Company had research and
development expenses of $3,570,845 as compared to $2,799,220 for 1998, an
increase of $771,625 or 28%. This increase was primarily
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<PAGE>
due to $1,128,125 of non-cash expense associated with issuance of 475,000 shares
of common stock to the University of Sheffield and its investigators in
conjunction with the new arrangement with Sheffield and its investigators
entered into in October 1999.
Selling, general and administrative expenses decreased for 1999 to
$2,904,210 from $7,200,444 in 1998, a decrease of $4,296,234 or 60%. The
decrease reflects the reduction in personnel costs as the Company shifted from
an internal sales staff to the use of outside distributors to sell its PST
tests.
Interest income decreased to $107,446 in 1999 from $379,054 in 1998. This
decrease is attributable to the reduction in the unused net proceeds of the
initial public offering and subsequent private placements as the proceeds are
used for ongoing Company operations and a $585,992 reduction in the Company's
debt obligations. The reduction in the Company's debt obligations is also the
primary reason for the interest expense decreasing from $94,597 in 1998 to
$59,189 in 1999, a decrease of $35,408 or 37%.
Net losses decreased to $6,138,603 in for the year ended December 31,
1999, as compared to $9,508,275 in 1998, a decrease of $3,369,672 or 35%. Such
decreased loss is a result of the decreased expenses set forth above.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31,
1997.
Revenue for the year ended December 31, 1998 was $412,942 as compared to
$195,928 for the year ended December 31, 1997, representing an increase of
$217,014 or 111%. The increase in revenue is primarily attributable to sales of
PST, the Company's first genetic test which was made commercially available in
the fourth quarter of 1997. Cost of revenues was $216,284 for the year ended
December 31, 1998 as compared to $166,442 for the same period in 1997,
representing an increase of 30%. This increase is a result of the increase in
sales, offset by the Company's ability to take advantage of volume processing
discounts provided to it by its outside laboratory vendors.
For the year ended December 31, 1998, the Company had research and
development expenses of $2,799,220 as compared to $1,223,468 for 1997, an
increase of $1,575,752 or 129%. This increase was due to our continued
investment in genetic research projects. In addition to the full time employment
of key scientists for our coronary artery disease and osteoporosis genetic
susceptibility tests, and for new clinical trials which have commenced and are
continuing to run for the same two tests, the Company continues to perform
science enhancement studies for our PST product, as well as invest in our
previously disclosed research projects related to diabetic retinopathy and
asthma.
One additional factor in the increase of research and development
expenses, as discussed above, is the write-down of capitalized patent expenses.
The resulting charge, taken in the fourth quarter of 1998, was $886,534, or 32%,
of research and development expenses for the year. Management believes it is
appropriate to expense these costs after consideration of their current
development strategy and available capital.
Selling, general and administrative expenses increased for 1998 to
$7,200,444 from $2,868,057 for 1997, an increase of $4,332,387 or 151%. This
increase is primarily attributable to building the infrastructure required to
support commercial operations and the increased marketing and sales efforts
required to support the Company's genetic susceptibility testing business.
Additionally, general and administrative expenses increased to support the
research and development efforts of the Company, and due to increased legal and
accounting expenses related to complying with SEC reporting obligations.
During the second quarter of 1998, the Company consolidated its corporate
headquarters from Newport Beach, California into the Company's San Antonio
Research Facility. As a result of this relocation, the Company amended its
existing lease in San Antonio to extend the term and expand its premises. The
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<PAGE>
amended lease expires on May 31, 2003 and extends its square footage from
approximately 1,961 square feet to 8,131 square feet. Also, as a result of the
move from California, the Company has subleased its leased office space in
Newport Beach. The sublease expires on the same date of the Company's lease,
April 30, 2001.
Interest income for the year ended December 31, 1998 increased to $379,054
from $53,889 for 1997. Such increase is attributable entirely to the interest
income generated by the unused net proceeds of the initial public offering.
Interest expense of $94,597 was incurred during the year ended December 31,
1998, a decrease of 81% from $485,062 over the same period in 1997. Such
decrease is attributable to a decrease in the amount of the Company's debt
obligations, which were substantially reduced with the net proceeds of the
Company's initial public offering.
Net losses increased to $9,508,275 for the year ended December 31, 1998,
as compared to $4,494,062 for the same period in 1997, an increase of $5,014,213
or 112%. Such increased loss is a result of the increased expenses set forth
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that its cash and cash equivalents are the most
significant indicators of the Company's liquidity position. As of December 31,
1999, the Company had cash and cash equivalents of $2,656,116. The cash and cash
equivalents position generated interest income of $28,166 in the fourth quarter
of 1999, and $107,446 for the year.
Net cash used in operating activities was $4,420,167 during the year ended
December 31, 1999 as compared to $8,454,858 used during 1998. Marketable
securities increased from zero in 1998 to $1,987,500 at December 31, 1999 as the
Company purchased U.S. Treasury notes with the unused proceeds from the private
placement of $5,000,000 of convertible preferred stock in June 1999. Accounts
payable decreased from $278,773 in 1998 to $134,968 in 1999. This decrease was
primarily due to the decreased level of operating expenses in late 1999.
Additionally, the Company entered into an agreement with a distributor whereby
the distributor paid in advance for licensing fees, resulting in Prepaid
distributor fees increasing from zero in 1998 to $65,000 in 1999. The current
portion of long-term debt decreased from $81,432 in 1998 to zero in 1999 due to
the Company's retirement of all outstanding debt in 1999.
The Company's investing activities used cash of $1,752,116 in the year ended
December 31, 1999 and provided cash of $5,036,678 in 1998. During the year ended
December 31, 1999, the Company shifted excess cash from Cash and cash
equivalents into Marketable securities to earn a preferred interest rate.
Additionally, during 1998, the Company received proceeds from the maturity of
investments of $6,226,795 as a result of the maturity of U.S. Treasury bills
previously invested in, partially offset by reinvestment in a certificate of
deposit. Investing activities were comprised primarily from the maturing of
investments and a certificate of deposit and the purchase of investments.
Financing activities provided $4,408,628 in 1999 and used $154,608 in 1998.
During 1999, the Company received $4,706,927 in net proceeds for the issuance of
convertible preferred stock and $380,545 in proceeds for the issuance of common
stock, as compared to $5,734 for common stock issued in 1998. In 1999, the
Company received proceeds from long term borrowings of $10,688 as compared to
$617,813 in 1998.
In January of 2000, the Company received $ 4,733,084 in net proceeds from a
private placement of 832,667 shares of common stock.
The Company currently does not have any commitments for material capital
expenditures. The Company's obligation at December 31, 1999 for capitalized
lease obligations totaled $163,123, of which $99,246 is classified as long-term
and $63,877 is classified as current.
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<PAGE>
The Company anticipates that its existing cash and cash equivalents,
together with anticipated interest income and revenue, will be sufficient to
conduct its operations as planned until September 2001. However, the Company's
future capital requirements are anticipated to be substantial, and the Company
does not have commitments for additional capital at this time. Such capital
requirements are expected to arise from the commercial launch of additional
genetic tests, continued marketing and sales efforts for PST, continued research
and development efforts, the protection of the Company's intellectual property
rights (including preparing and filing of patent applications), as well as
operational, administrative, legal and accounting expenses. The Company plans to
raise capital through equity and/or debt issuance when, and if, such capital is
available to it. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO
RAISE ANY ADDITIONAL NECESSARY CAPITAL. IF ADDITIONAL AMOUNTS CANNOT BE RAISED,
THE COMPANY WOULD SUFFER MATERIAL ADVERSE CONSEQUENCES TO ITS BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND WOULD LIKELY BE REQUIRED TO
SEEK PROTECTION UNDER THE UNITED STATES BANKRUPTCY LAWS.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company maintains an investment portfolio consisting of securities of
U.S Treasury Notes. The securities held in the Company's investment portfolio
are subject to interest rate risk. Changes in interest rates affect the fair
market value of these securities. After a review of the Company's marketable
securities as of December 31, 1999, the Company has determined that in the event
of a hypothetical ten percent increase in interest rates, the resulting decrease
in fair market value of the Company's marketable investment securities would be
insignificant to the financial statements as a whole.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, together with the
Independent Auditors Report thereon of each of Arthur Andersen LLP and Singer
Lewak Greenbaum & Goldstein LLP, appears on pages F-2 through F-23 of this
report. See the "Index to Financial Statements" on page F-1 of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported.
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<PAGE>
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information required under this Item will be contained in the Company's
Proxy Statement for its 2000 Annual Meeting, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's
Proxy Statement for its 2000 Annual Meeting, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Company's
Proxy Statement for its 2000 Annual Meeting, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's
Proxy Statement for its 2000 Annual Meeting, which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF REPORT
1. Financial Statements:
The Consolidated Financial Statements of the Company and the related
report of the Company's independent public accountants thereon have been
filed under Item 8 hereof.
2. Financial Statement Schedules:
The information required by this item is not applicable.
3. Exhibits:
The exhibits listed below are filed as part of or incorporated by
reference in this report. Where such filing is incorporated by reference
to a previously filed document, such document is identified in
parentheses. See the Index of Exhibits included with the Exhibits filed as
a part of this report.
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
3.1 Articles of Incorporation of the Company, as amended (incorporated
herein by reference to the Company's Quarterly Report on Form 10-QSB
filed November 15, 1999).
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<PAGE>
3.2 Amended and Restated Bylaws of the Company, as amended (incorporated
herein by reference to Exhibits 3.3 and 3.4 of the Company's
Registration Statement No. 333-37441 on Form SB-2 filed October 8,
1997).
4.1 Form of Stock Certificate representing Common Stock, no par value,
of the Company (incorporated herein by reference to Exhibit 4.1 of
the Company's Registration Statement No. 333-37441 on Amendment No.
1 to Form SB-2 filed October 29, 1997).
4.2 Form of Representative's Warrant (incorporated herein by reference
to Exhibit 4.2 of the Company's Registration Statement No. 333-37441
on Form SB-2 filed October 8, 1997).
4.3 Form of Security Agreement (incorporated herein by reference to
Exhibit 4.4 of the Company's Registration Statement No. 333-37441 on
Form SB-2 filed October 8, 1997).
4.4 Form of Warrant Agreement (incorporated herein by reference to
Exhibit 4.5 of the Company's Registration Statement No. 333-37441 on
Form SB-2 filed October 8, 1997).
4.5 Form of Warrant Certificate (incorporated herein by reference to
Exhibit 4.6 of the Company's Registration Statement No. 333-37441 on
Form SB-2 filed October 8, 1997).
4.6 Warrant dated June 15, 1999, granted to Fine Equities, Inc.
(incorporated herein by reference to Exhibit 4.2 of the company's
Quarterly Report on Form 10-QSB field August 16, 1999).
10.1 Loan Agreement dated June 27, 1997, between the Company and Bank of
America (incorporated herein by reference to Exhibit 4.7 of the
Company's Registration Statement No. 333-37441 on Form SB-2 filed
October 8, 1997).
10.2+ Research Support Agreement and Amendments to Various Existing
Project Agreements dated April 1, 1998, between the Company and The
University of Sheffield (incorporated herein by reference to Exhibit
10.2 of the Company's Registration Statement No. 333-37441 on Form
SB-2 filed October 8, 1997).
10.3+ Laboratory Services Agreement dated December 7, 1996, between the
Company and Baylor College of Medicine (incorporated herein by
reference to Exhibit 10.13 of the Company's Registration Statement
No. 333-37441 on Form SB-2 filed October 8, 1997).
10.4 Lease Agreement dated March 21, 1996, between the Company and Koll
Center Newport Number 9 (incorporated herein by reference to Exhibit
10.14 of the Company's Registration Statement No. 333-37441 on Form
SB-2 filed October 8, 1997).
10.5 Lease Agreement dated October 23, 1997, between the Company and
Diamond Shamrock Leasing, Inc. (incorporated herein by reference to
Exhibit 10.16 of the Company's Registration Statement No. 333-37441
on Form SB-2 filed October 8, 1997).
10.6 Interleukin Genetics, Inc. 1996 Equity Incentive Plan (incorporated
herein by reference to Exhibit 10.17 of the Company's Registration
Statement No. 333-37441 on Form SB-2 filed October 8, 1997).
10.7 Amendment to the Interleukin Genetics, Inc. 1996 Equity Incentive
Plan (incorporated herein by reference to Exhibit 10.18 of the
Company's Registration Statement No. 333- 37441 on Form SB-2 filed
October 8, 1997).
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<PAGE>
10.8 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.19 of the Company's Registration Statement No. 333-37441
on Form SB-2 filed October 8, 1997).
10.9 Stock Option Exercise Agreement (incorporated herein by reference to
Exhibit 10.20 of the Company's Registration Statement No. 333-37441
on Form SB-2 filed October 8, 1997).
10.10+ Exclusive Independent Representative Agreement dated December 1,
1997, between the Company and Medicadent, a French corporation
(incorporated herein by reference to Exhibit 10.21 of the Company's
Annual Report on Form 10-KSB filed March 31, 1998).
10.11 Consulting and Severance Agreement dated October 28, 1998, between
the Company and Michael G. Newman (incorporated herein by reference
to Exhibit 10.22 of the Company's Annual Report on Form 10-KSB filed
March 31, 1999).
10.12 Amendment to Employment Agreement dated to be effective as of
November 17, 1998, between the Company an Paul J. White
(incorporated herein by reference to Exhibit 10.23 of the Company's
Annual Report on Form 10-KSB filed March 31, 1999).
10.13 Amendment to Employment Agreement dated to be effective as of
November 17, 1998, between the Company an Kenneth S. Kornman
(incorporated herein by reference to Exhibit 10.24 of the Company's
Annual Report on Form 10-KSB filed March 31, 1999).
10.14 Letter Agreement dated January 6, 1997, between the Company and U.
Spencer Allen, as amended effective December 1, 1998 (incorporated
herein by reference to Exhibit 10.25 of the Company's Annual Report
on Form 10-KSB filed March 31, 1999).
10.15 Business Loan Agreement between the Company and Bank of America
dated June 5, 1998 (incorporated herein by reference to Exhibit 10.1
of the Company's Quarterly Report on Form 10-QSB filed May 17,
1999).
10.16+ Distribution Agreement between the Company and The Straumann Company
dated March 25, 1999 (incorporated herein by reference to Exhibit
10.2 of the company's Quarterly Report on Form 10-QSB filed May 17,
1999).
10.17 Consulting Services Agreement dated June 1, 1999, between the
Company and Philip R. Reilly (incorporated herein by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form 10-QSB filed
August 16, 1999).
10.18 Non-Qualified Stock Option Agreement dated June 1, 1999, between the
Company and Philip R. Reilly (incorporated herein by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB filed
August 16, 1999).
10.19 Form of Subscription Agreement (incorporated herein by reference to
Exhibit 10.3 of the Company's Quarterly Report on Form 10-QSB filed
August 16, 1999).
10.20 Agency Agreement dated June 15, 1999, between the Company and Fine
Equities, Inc. (incorporated herein by reference to Exhibit 10.4 of
the Company's Quarterly Report on Form 10-QSB filed August 16,
1999).
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<PAGE>
10.21+ Research and Technology Transfer Agreement dated effective July 1,
1999, between the Company and the University of Sheffield
(incorporated herein by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-QSB filed November 15, 1999).
10.22+ Research Support Agreement dated effective July 1, 1999, between the
Company and the University of Sheffield (incorporated herein by
reference to Exhibit 10.2 of the Company's Quarterly Report on Form
10-QSB filed November 15, 1999).
10.23+ Consulting Agreement dated effective July 1, 1999, between the
Company and Gordon Duff, PhD, FRCP (incorporated herein by reference
to Exhibit 10.3 of the Company's Quarterly Report on Form 10-QSB
filed November 15, 1999).
10.24 Non-Qualified Stock Option Agreement dated November 30, 1999 between
the Company and Philip R. Reilly (incorporated herein by reference
to Exhibit 4.5 to the Company's Registration Statement No. 333-32538
on Form S-8 filed March 15, 2000).
10.25* Employment Agreement dated December 1, 1999 between the Company and
Kenneth S. Kornman.
10.26* Employment Agreement dated April 1, 2000 between the Company and
Philip R. Reilly.
10.27* Severance Agreement dated September 20, 1999 between the Company and
Paul White.
16.1 Letter from Singer Lewak Greenbaum & Goldstein LLP dated October 26,
1998, to the Securities and Exchange Commission pursuant to Item
304(a)(3) of Regulation S-K (incorporated herein by reference to
Exhibit 16 of the Company's current report on Form 8-K filed
November 2, 1998).
21.1 Subsidiaries of the Company
<TABLE>
<CAPTION>
NAMES UNDER WHICH
NAME INCORPORATED SUBSIDIARY DOES BUSINESS
- ----------------------------------------------------- ---------------------------- ------------------------
<S> <C> <C>
Medical Science Systems France E.U. France N/A
Interleukin Genetics Laboratory Services, Inc. Delaware N/A
Interleukin Genetics, Inc. Delaware N/A
</TABLE>
23.1* Consent of Arthur Andersen LLP
23.2* Consent of Singer Lewak Greenbaum & Goldstein LLP
27.* Financial Data Schedule.
- -----------------
* Filed herewith.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
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<PAGE>
The Company filed a report on Form 8-K October 8, 1999 to report a new
contractual arrangement with the University of Sheffield.
The Company filed a report on Form 8-K December 17, 1999 to report the
deadline for shareholder proposals for the annual meeting.
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<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this amended report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INTERLEUKIN GENETICS, INC.
Date: April 12, 2000 By: U. SPENCER ALLEN
U. Spencer Allen
Chief Financial Officer, Secretary and Treasurer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE SIGNED
---------- ----- -----------
<S> <C> <C>
/s/ PHILIP R. REILLY Chairman of the Board of Directors April 12, 2000
Philip R. Reilly and Chief Executive Officer
/s/ KENNETH S. KORNMAN President and Director April 12, 2000
Kenneth S. Kornman
/s/ U. SPENCER ALLEN Chief Financial Officer, Secretary and Treasurer April 12, 2000
U. Spencer Allen (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
/s/ THOMAS A. MOORE Director April 12, 2000
Thomas A. Moore
/s/ EDWARD M. BLAIR, JR. Director April 12, 2000
Edward M. Blair, Jr.
/s/ GARY L. CROCKER Director April 12, 2000
Gary L. Crocker
</TABLE>
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<PAGE>
INTERLEUKIN GENETICS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
INTERLEUKIN GENETICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets - December 31, 1999 and 1998 F-4
Consolidated Statements of Operations - For the Years Ended
December 31, 1999, 1998 and 1997 F-6
Consolidated Statements of Shareholders' Equity - For the Years Ended
December 31, 1999, 1998 and 1997 F-7
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1999, 1998 and 1997 F-8
Notes to Consolidated Financial Statements F-10
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interleukin Genetics, Inc.:
We have audited the accompanying consolidated balance sheets of Interleukin
Genetics, Inc. (a Texas corporation), as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for the years then ended. 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 audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interleukin Genetics, Inc., as
of December 31, 1999 and 1998, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
March 29, 2000
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Medical Science Systems, Inc.
We have audited the consolidated statements of operations, shareholders' equity,
and cash flows of Medical Science Systems, Inc. and subsidiary as of December
31, 1997. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of Medical Science Systems, Inc.
and subsidiary's operations and their consolidated cash flows for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 13, 1998
F-3
<PAGE>
INTERLEUKIN GENETICS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS
1999 1998
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents ..................... $ 668,616 $2,432,271
Marketable securities ......................... 1,987,500 --
Accounts receivable, net of allowance for
doubtful accounts of $55,300 in 1999 and
$20,959 in 1998 ............................. 103,002 125,086
Prepaid expenses .............................. 132,560 127,426
---------- ----------
Total current assets ............. 2,891,678 2,684,783
FURNITURE AND EQUIPMENT, net ..................... 284,481 458,107
OTHER ASSETS ..................................... -- 530,000
---------- ----------
TOTAL ASSETS ..................... $3,176,159 $3,672,890
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
INTERLEUKIN GENETICS, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
------------ ------------
CURRENT LIABILITIES:
Accounts payable ............................. $ 134,968 $ 278,773
Accrued expenses ............................. 400,281 433,859
Notes payable ................................ 1,797 47,813
Deferred revenue ............................. 322,812 275,321
Current portion of long-term debt ............ -- 81,432
Current portion of capitalized lease
obligations ................................ 63,877 104,837
------------ ------------
Total current liabilities ................. 923,735 1,222,035
LONG-TERM DEBT, less current portion ............ -- 447,856
CAPITALIZED LEASE OBLIGATIONS, less current
portion ....................................... 99,246 156,651
------------ ------------
Total liabilities ......................... 1,022,981 1,826,542
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value 5,000,000 shares
authorized none issued and outstanding .... -- --
Common stock, no par value 50,000,000 shares
authorized in 1999 and 10,000,000 shares
authorized in 1998, 17,223,302 and
5,548,470 shares issued and outstanding in
1999 and 1998, respectively ............... 23,177,865 16,719,933
Accumulated deficit .......................... (21,012,188) (14,873,585)
Other comprehensive loss ..................... (12,499) --
------------ ------------
Total shareholders' equity ................ 2,153,178 1,846,348
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,176,159 $ 3,672,890
============ ============
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
INTERLEUKIN GENETICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE .................................. $ 477,497 $ 412,942 $ 195,928
COST OF REVENUE .......................... 201,182 216,284 166,442
------------ ------------ ------------
GROSS PROFIT ............................. 276,315 196,658 29,486
------------ ------------ ------------
EXPENSES:
Research and development .............. 3,570,845 2,799,220 1,223,468
Selling, general, and administrative .. 2,904,210 7,200,444 2,868,057
------------ ------------ ------------
Total expenses ..................... 6,475,055 9,999,664 4,091,525
------------ ------------ ------------
LOSS FROM OPERATIONS ..................... (6,198,740) (9,803,006) (4,062,039)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ....................... 107,446 379,054 53,889
Interest expense ...................... (59,189) (94,597) (485,062)
Other income .......................... 11,880 11,124 --
------------ ------------ ------------
Total other income (expense) ....... 60,137 295,581 (431,173)
------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES ... (6,138,603) (9,507,425) (4,493,212)
PROVISION FOR INCOME TAXES ............... -- 850 850
------------ ------------ ------------
NET LOSS ................................. $ (6,138,603) $ (9,508,275) $ (4,494,062)
============ ============ ============
RECONCILIATION OF NET LOSS TO NET LOSS
APPLICABLE TO COMMON STOCK:
Net loss .............................. $ (6,138,603) $ (9,508,275) $ (4,494,062)
Amortization of the value of the
beneficial conversion feature of the
preferred stock ..................... 5,000,000 -- --
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK ...... $(11,138,603) $ (9,508,275) $ (4,494,062)
============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE .. $ (1.15) $ (1.72) $ (1.19)
============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING 9,720,621 5,540,895 3,773,474
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
<PAGE>
INTERLEUKIN GENETICS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 .......... 3,295,539 $ 171,500 -- $ --
Net loss ............................ -- -- -- --
Common stock issued:
Private placements .............. 442,468 2,019,100 -- --
Initial public offering ......... 1,800,000 16,200,000 -- --
Offering costs ...................... -- (2,540,078) -- --
Stock options issued for reduction in
salary .......................... -- 445,132 -- --
Issuance of warrants resulting in
additional interest
expense ..................... -- 356,545 -- --
Exercise of stock options ........... 8,939 42,356 -- --
Repurchase of common stock .......... (6,051) (42,356) -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 .......... 5,540,895 16,652,199 -- --
Net loss ............................ -- -- -- --
Common stock issued:
Employee stock
purchase plan ............... 7,575 5,734 -- --
Stock options issued:
For services rendered ........... -- 62,000 -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 .......... 5,548,470 16,719,933 -- --
Net loss ............................ -- -- -- --
Unrealized loss on securities ....... -- -- -- --
Comprehensive Loss .................. -- -- -- --
Preferred stock issued:
Private placement ............... -- -- 2,200,000 4,706,927
Common stock issued:
Preferred stock conversion ...... 11,000,000 4,706,927 (2,200,000) (4,706,927)
For services rendered ........... 475,000 1,128,125 -- --
Exercise of stock options ....... 199,314 379,945 -- --
Employee stock
purchase plan ............... 518 600 -- --
Stock options issued:
For services rendered ........... -- 242,335 -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 .......... 17,223,302 $ 23,177,865 -- $ --
============ ============ ============ ============
<CAPTION>
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT LOSS TOTAL
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 .......... $ (871,248) $ -- $ (699,748)
Net loss ............................ (4,494,062) -- (4,494,062)
Common stock issued:
Private placements .............. -- -- 2,019,100
Initial public offering ......... -- -- 16,200,000
Offering costs ...................... -- -- (2,540,078)
Stock options issued for reduction in
salary .......................... -- -- 445,132
Issuance of warrants resulting in
additional interest
expense ..................... -- -- 356,545
Exercise of stock options ........... -- -- 42,356
Repurchase of common stock .......... -- -- (42,356)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 .......... (5,365,310) -- 11,286,889
Net loss ............................ (9,508,275) -- (9,508,275)
Common stock issued:
Employee stock
purchase plan ............... -- -- 5,734
Stock options issued:
For services rendered ........... -- -- 62,000
------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 .......... (14,873,585) -- 1,846,348
Net loss ............................ (6,138,603) -- (6,138,603)
Unrealized loss on securities ....... -- (12,499) (12,499)
------------
Comprehensive Loss .................. -- -- (6,151,102)
Preferred stock issued:
Private placement ............... -- -- 4,706,927
Common stock issued:
Preferred stock conversion ...... -- -- --
For services rendered ........... -- -- 1,128,125
Exercise of stock options ....... -- -- 379,945
Employee stock
purchase plan ............... -- -- 600
Stock options issued:
For services rendered ........... -- -- 242,335
------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 .......... $(21,012,188) $ (12,499) $ 2,153,178
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE>
INTERLEUKIN GENETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $(6,138,603) $(9,508,275) $(4,494,062)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................. 194,611 178,283 74,368
Amortization (accretion) of investment
premium and discount ....................... 24,375 (219,082) (7,102)
Issuance of stock options for reduction
of salary .................................. -- -- 445,132
Issuance of stock options for services
rendered ................................... 242,335 62,000 --
Issuance of stock for services rendered ........ 1,128,125 -- --
Issuance of warrants resulting in
additional interest expense ................ -- -- 356,545
Write down of patents .......................... 241,932 886,534 --
Other noncash expenses ......................... -- 31,272 --
(Increase) decrease in:
Accounts receivable, net ................... 22,084 (87,971) (24,756)
Inventories ................................ -- 50,212 (50,212)
Prepaid expenses ........................... (5,134) (84,914) (42,512)
Due from shareholder ....................... -- -- 6,565
Increase (decrease) in:
Accounts payable ........................... (143,805) (271,414) 330,518
Accrued expenses ........................... (33,578) 306,177 70,595
Accrued officer compensation ............... -- -- (127,500)
Deferred revenue ........................... 47,491 202,320 73,001
----------- ----------- -----------
Net cash used in operating activities ............. (4,420,167) (8,454,858) (3,389,420)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment .............. (15,810) (216,597) (60,504)
Increase in patents .............................. (241,932) (443,520) (307,710)
Purchase of investments .......................... (4,024,374) -- (6,000,611)
Proceeds from maturity of investments ............ 2,000,000 6,226,795 --
Proceeds from (investment in) certificate
of deposit ..................................... 530,000 (530,000) --
----------- ----------- -----------
Net cash provided by (used in) investing activities (1,752,116) 5,036,678 (6,368,825)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-8
<PAGE>
INTERLEUKIN GENETICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock ................ $ 380,545 $ 5,734 $ 18,219,100
Proceeds from sale of convertible preferred stock . 5,000,000 -- --
Payment of offering costs ......................... (293,073) -- (2,540,078)
Proceeds from note payable and long-term debt ..... 10,688 617,813 --
Principal payments on notes payable
and long-term debt ............................... (585,992) (673,012) (85,987)
Borrowings on line of credit, net ................. -- -- 146,277
Principal payments on capital lease obligations ... (103,540) (105,143) (31,974)
Proceeds from promissory notes .................... -- -- 1,780,000
Principal payments on promissory notes ............ -- -- (1,780,000)
------------ ------------ ------------
Net cash provided by (used in) financing activities 4,408,628 (154,608) 15,707,338
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ...................................... (1,763,655) (3,572,788) 5,949,093
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...... 2,432,271 6,005,059 55,966
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............ $ 668,616 $ 2,432,271 $ 6,005,059
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid .................................... $ 59,189 $ 94,597 $ 126,149
============ ============ ============
Income taxes paid ................................ $ -- $ 1,660 $ 800
============ ============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the years ended December 31, 1999, 1998 and 1997, the Company acquired
furniture and equipment of $5,175, $182,042 and $149,847, respectively, under
capitalized lease obligations.
During the year ended December 31, 1997, the Company converted its line of
credit for $500,000 into a note payable for $500,000. In addition, in a noncash
exchange, a shareholder exchanged 6,051 shares of the Company's common stock as
consideration for the exercise price of 8,939 stock options, which resulted in a
net issuance of 2,888 shares of common stock to this shareholder.
During the year ended December 31, 1999, the Company had other comprehensive
loss of $12,499, which represents an unrealized loss on marketable securities.
The accompanying notes are an integral part of
these consolidated financial statements.
F-9
<PAGE>
INTERLEUKIN GENETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - COMPANY BACKGROUND AND UNCERTAINTIES
ORGANIZATION AND LINE OF BUSINESS
In August 1999, Medical Science Systems, Inc, was renamed Interleukin
Genetics, Inc. (the Company).
The Company is currently developing genetic diagnostic tests and medical
research tools. As of December 31, 1999, the Company has commercially
introduced one such product and is in various stages of development for
several others. Additionally, the Company provides research services under
contract to pharmaceutical companies. Such research services contributed
less than 10% of net revenue to the Company in 1999, 1998 and 1997.
The accompanying financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. Since
its inception, the Company has incurred cumulative net losses of
approximately $21.0 million, including losses of approximately $6.1
million during 1999, $9.5 million during 1998 and $4.5 million during
1997. For the years ended December 31, 1999, 1998 and 1997, the Company
reported negative cash flows from operating activities of approximately
$4.4 million, $8.5 million and $3.4 million, respectively. As a result of
these losses, available cash resources have been limited. While the
Company continues to pursue sources of capital, there can be no assurance
that they will be successful in these efforts.
During 1999, the Company raised approximately $5.1 million from a
preferred stock offering and shareholder stock option exercises.
Additionally, in January 2000, the Company completed a common stock
private placement which raised net proceeds of approximately $4.7 million.
(See Notes 7 and 12.) The Company believes that their current cash
resources are more than adequate to fund operations throughout the year
2000, however, absent additional equity or debt financings, they also
believe that those resources will be depleted in September 2001. To
address these future capital resources requirements, management of the
Company is currently in discussions with several potential strategic
partners regarding the up-front funding of certain of the Company's
research and development programs.
Commercial success of genetic susceptibility tests will depend upon their
acceptance as medically useful and cost-effective by patients, physicians,
dentists, other members of the medical and dental community, and
third-party payers. It is uncertain whether current genetic susceptibility
tests or others that the Company may develop will gain commercial
acceptance on a timely basis.
F-10
<PAGE>
Research in the field of disease predisposing genes and genetic markers is
intense and highly competitive. The Company has many competitors in the
United States and abroad which have considerably greater financial,
technical, marketing, and other resources available. If the Company does
not discover disease predisposing genes or genetic markers and develop
susceptibility tests and launch such services or products before their
competitors, then revenues may be reduced or eliminated.
The Company's ability to successfully commercialize genetic susceptibility
tests depends on obtaining adequate reimbursement for such products and
related treatment from government and private health care insurers and
other third-party payers. Doctors' decisions to recommend genetic
susceptibility tests will be influenced by the scope and reimbursement for
such tests by third-party payers. If both third-party payers and
individuals are unwilling to pay for the test, then the number of tests
performed will significantly decrease, therefore resulting in a reduction
of revenues.
In July 1999, the Company entered into an agreement with Sheffield
University, whereby the Company will undertake the development and
commercialization of certain discoveries resulting from Sheffield
University's research. The agreement is non cancelable for discoveries on
which the parties have reached a specific agreement, but may be terminated
with or without cause by either party upon six-months notice with respect
to new discoveries on which the parties have not yet reached agreement. If
Sheffield University terminated the agreement, such termination could make
the discovery and commercial introduction of new products more difficult
or unlikely.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments including cash and cash equivalents,
accounts receivable, accounts payable, and accrued expenses, the carrying
amounts approximate fair value due to their short maturities. The amounts
shown for long-term debt, notes payable and capital lease obligations also
approximate fair value because current interest rates and terms offered to
the Company for similar debt and lease agreements are substantially the
same.
F-11
<PAGE>
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with original maturities of three
months or less to be cash equivalents. The Company maintains cash deposits
at primarily one bank. Deposits at this bank are insured by the Federal
Deposit Insurance Corporation up to $100,000. As of December 31, 1999,
uninsured portions of balances held at this financial institution totaled
$522,765. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
MARKETABLE SECURITIES
Marketable securities are classified as available for sale and recorded at
current market value. Unrealized losses on such securities are reflected
as other comprehensive loss in shareholders' equity.
FURNITURE AND EQUIPMENT
Furniture and equipment, including equipment under capital leases, are
stated at cost, less accumulated depreciation and amortization.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of three to five years. Leasehold
improvements are amortized over the life of the lease or the life of the
improvement, whichever is shorter. (See Note 4.)
Betterments, renewals, and extraordinary repairs that extend the life of
the asset are capitalized; other repairs and maintenance charges are
expensed as incurred. The cost and related accumulated depreciation
applicable to assets retired are removed from the accounts, and the gain
or loss on disposition is recognized in the statement of operations.
In 1999, the Company wrote-off $25,893 of leasehold improvements related
to a lease for office space. A portion of this office space was subleased
in 1999.
PATENTS
The Company expensed $241,932 in 1999 and $886,534 in 1998 of patent costs
incurred for existing products or those which may be developed in the
future. Management believes it is appropriate to expense these costs after
consideration of their current development strategy and available capital.
DISTRIBUTOR FEES
The Company has entered into multiple agreements for the distribution of
genetic susceptibility tests, both domestically and internationally.
Distributor fees are received based on the terms of each agreement and are
recognized ratably over the applicable agreement period. Distributor fees
received in advance totaled $65,000 at December 31, 1999, and are included
in deferred revenue in the accompanying consolidated balance sheets.
F-12
<PAGE>
REVENUE RECOGNITION
Revenue from genetic susceptibility tests is recognized when the tests
have been completed and the results reported to the doctors. To the extent
test kits have been purchased but not yet submitted for test results, the
Company defers recognition of revenue. This amount is presented as
deferred revenue in the accompanying balance sheets. Contract revenues are
recognized ratably as services are provided based on a fixed contract
price or on negotiated hourly rates. Provision for anticipated losses on
fixed-price contracts is made in the period such losses are identified.
RESEARCH AND DEVELOPMENT
Research and development costs related to the development of new products
are expensed as incurred.
INCOME TAXES
The Company files a consolidated U.S. Federal income tax return which
includes all of its U.S. subsidiaries and a separate French federal income
tax return for the French subsidiary. Deferred income taxes are provided
when certain revenues and expenses are reported in periods which are
different for financial reporting purposes than for income tax reporting
purposes.
Deferred tax liabilities and assets are recorded based on the enacted
income tax rates which are expected to be in effect in the periods in
which the deferred tax liability or asset is expected to be settled or
realized. A change in the tax laws or rates results in adjustments to the
deferred tax liabilities and assets. The effect of such adjustments is
included in income in the period in which the tax laws or rates are
changed. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
NET LOSS PER SHARE
The Company applies Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), in calculating basic and diluted loss
per share. Basic loss per share is determined by dividing net loss by the
weighted average number of shares of common stock outstanding during the
period. Diluted loss per share is determined by dividing net loss by the
weighted average number of shares of common stock and potential common
stock outstanding during the period. Stock options with an exercise price
below fair market value for any of the periods presented are considered
potential common stock.
Various stock options granted to vendors and employees in connection with
the Company's stock compensation plans were outstanding during the years
ended December 31, 1999 and 1998, but were not included in the computation
of diluted loss per share for such periods because the effect would have
been antidilutive. Options to purchase approximately 1.7 million shares of
common stock were outstanding at December 31, 1999.
F-13
<PAGE>
NOTE 3 - ACCOUNTS RECEIVABLE
The changes in the allowance for doubtful accounts consisted of the
following:
DECEMBER 31
------------------------
1999 1998
-------- --------
Beginning of year .............................. $ 20,959 $ 1,000
Provision charged to expense ................... 48,000 20,000
Accounts written off, net of recoveries ........ (13,659) (41)
-------- --------
End of year .................................... $ 55,300 $ 20,959
======== ========
NOTE 4 - FURNITURE AND EQUIPMENT
Furniture and equipment useful lives and balances at December 31, 1999 and
1998, consisted of the following:
1999 1998
-------------- ------------
Computer equipment 3 years $ 299,004 $ 289,772
Lab equipment 5 years 6,578 -
Furniture and fixtures 5 years 32,304 32,304
Office equipment 3 years 37,769 37,769
Leasehold improvements 5 years 60,310 60,310
Equipment under capitalized
leases 3 to 5 years 377,627 372,452
-------------- ------------
813,592 792,607
Less- Accumulated depreciation
and amortization 529,111 334,500
-------------- ------------
TOTAL $ 284,481 $ 458,107
============== ============
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
In May 1998, outstanding notes payable were combined into a single-term
loan which matured in June 2005. The Company had provided a $530,000
certificate of deposit as security for this note. The principal balance of
$570,000 was due in monthly installments of $6,786, plus interest. In June
1999, the Company used the proceeds from the certificate of deposit to
repay the remaining principal balance.
NOTE 6 - INCOME TAXES
As of December 31, 1999, the Company had net operating loss (NOL) and
research tax credit carryforwards of approximately $18,750,000 and
$187,000, respectively, for federal income tax purposes, expiring in
varying amounts through the year 2019. The Company's ability to use its
NOL and credit carryforwards to reduce future taxes is subject to the
restrictions provided by Section 382 of the Internal Revenue Code of 1986
(the "Code").
F-14
<PAGE>
These restrictions provide for limitations on the Company's utilization of
its NOL and credit carryforwards following a greater than 50% ownership
change during the prescribed testing period. As of December 31, 1999, the
Company had incurred such a change. As a result, approximately $15,619,000
of the Company's NOL carryforwards are limited in utilization to
approximately $825,000 annually. The annual limitation may result in the
expiration of the carryforwards prior to utilization.
As of December 31, 1999 and 1998, deferred tax assets (liabilities)
consisted of the following:
1999 1998
----------- -----------
Deferred tax assets:
Net operating loss carryforwards .......... $ 6,374,221 $ 4,432,995
Research tax credit carryforwards ......... 187,395 170,129
Accrual to cash adjustments ............... 211,650 242,924
Charitable contributions .................. -- 7,293
Stock options ............................. 90,092 --
Depreciation .............................. 22,496 --
Patents ................................... 60,856 83,265
----------- -----------
Total deferred tax assets ............. 6,946,710 4,936,606
Deferred tax liabilities:
Depreciation and amortization ............. -- (11,216)
----------- -----------
6,946,710 4,925,390
Valuation allowance for net deferred
tax assets ............................... 6,946,710 4,925,390
----------- -----------
NET DEFERRED TAX ASSETS ................... $ -- $ --
=========== ===========
As there is no assurance of future income, a 100% valuation reserve has
been established against the Company's deferred tax assets.
NOTE 7 - CAPITAL STOCK
PRIVATE PLACEMENT OF PREFERRED STOCK
Pursuant to a private placement which occurred in June 1999, the Company
issued 2,200,000 shares of its Series A Preferred Stock, no par value
(Series A Stock), for $5 million. In conjunction with this offering, the
placement agent received 200,000 shares of Series A Stock and a warrant to
purchase 1,000,000 shares of common stock at a price of $0.50 per share.
This warrant expires on June 16, 2004. Each share of the Series A Stock
was automatically converted into five shares of the Company's common stock
at a conversion price of $0.50 per share upon the approval of the private
placement by the Company's shareholders on August 20, 1999. The Company
filed a Registration Statement registering the resale of the shares of the
common stock underlying the Series A Stock on July 23, 1999, which was
declared effective by the SEC on September 14, 1999. On the closing date
of the private placement, the conversion price of the Series A Stock was
less than the market price of the common stock, which resulted in a
beneficial conversion of $5 million. The beneficial conversion was
recorded as common stock and was accreted to preferred stock ratably from
the closing date of the preferred stock to August 20, 1999.
F-15
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
Effective October 14, 1998, the Company's Board of Directors approved an
Employee Stock Purchase Plan for qualified employees of the Company. Under
the terms of the Employee Stock Purchase Plan, an employee may purchase up
to $25,000 per calendar year of the Company's stock at a price of 85% of
the fair market value of the stock (as quoted on the NASDAQ national
quotation system) on the date of the purchase. The purchase price is
determined based upon either the first or last day of a calendar quarter.
There have been 500,000 shares of the Company's stock set aside for
purchases to be made under the Employee Stock Purchase Plan. During the
years ended December 31, 1999 and 1998, 518 and 7,575 shares were
purchased under the Employee Stock Purchase Plan at a price of
approximately $1.159 and $0.757, respectively, per share.
NOTE 8 - EMPLOYEE BENEFIT PLAN
In 1988, the Company adopted a profit sharing plan covering substantially
all of its employees. Under the profit sharing plan, the Company may, at
the discretion of the Board of Directors, contribute a portion of the
Company's current or accumulated earnings. In September 1998, the Company
amended and restated the profit sharing plan to include provisions for
Section 401(k) of the Internal Revenue Code. Under the amended and
restated plan, the Company may, at the discretion of the Board of
Directors, "match" a portion of the participant contributions. Company
contributions, if any, are credited to the participant's account and vest
over a period of four years based on the participant's initial service
date with the Company. During the years ended December 31, 1999, 1998, and
1997, no contributions were made to the amended and restated profit
sharing plan or the original profit sharing plan, respectively.
NOTE 9 - STOCK OPTION PLAN
The Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which defines a fair value based method of
accounting for employee stock options or similar equity instruments and
encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. Under the fair value based
method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period of the award, which
is usually the vesting period. However, SFAS 123 also allows entities to
continue to measure compensation costs for employee stock compensation
plans using the intrinsic value method of accounting prescribed in APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The
Company has elected to remain with the accounting prescribed by APB 25.
The Company has made the required disclosures prescribed by SFAS 123.
In June 1996, the Company's shareholders approved the adoption of the
Medical Science Systems, Inc. 1996 Equity Incentive Plan (the "Plan"). The
Plan provides for the award of nonqualified and incentive stock options,
restricted stock, and stock bonuses to employees, directors, officers, and
consultants of the Company. A total of 1,300,000 shares of the Company's
common stock have been reserved for award under the amended Plan.
Nonqualified and incentive stock options with a life of ten years are
granted at exercise prices equal to the fair market value of the common
stock on the date of grant. Options granted before December 31, 1997, vest
as follows: one-sixth of the options are generally available for exercise
F-16
<PAGE>
at the end of six months and the remainder of the grant is exercisable
ratably over the next 30-month period provided the optionee remains in
service to the Company. Options granted after January 1, 1998, vest
ratably over four years after each anniversary date provided the optionee
remains in service to the Company. The Company may also award share
appreciation rights ("SARs") either in tandem with stock options or
independently. At December 31, 1999, 1998, and 1997, no SARs have been
awarded under the Plan.
On October 14, 1998, the Company's Board of Directors voted to reduce the
exercise price for all outstanding options granted under the 1996 Equity
Incentive Plan to one half of the previous price per share, but not to a
price below $1.85 per share. The close of the Company's common stock on
the previous day was $1.25 per share.
Had compensation cost for these options been determined consistent with
SFAS 123, the Company's net loss and net loss per share (EPS) would have
been changed to the following pro forma amounts at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss
applicable to
common stock ............. As Reported $ (11,138,603) $ (9,508,275) $ (4,494,062)
Pro Forma (12,024,156) (9,855,915) (4,796,791)
EPS ........................ As Reported $ (1.15) $ (1.72) $ (1.19)
Pro Forma (1.24) (1.78) (1.27)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using an option pricing model, which approximates the Black-Scholes option
pricing model, for a stock that does not pay dividends with the following
assumptions.
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
--------- --------- ---------
Risk free interest rate .............. 4.7%-6.2% 5.5% 6.4%
Expected life ........................ 7 years 7 years 7 years
Expected volatility .................. 156% 143% 61%
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-17
<PAGE>
A summary of the status of the Company's stock options, issued both under
the Plan and outside the Plan, at December 31, 1999, 1998 and 1997, and
changes during the years then ended is presented in the table and
narrative below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 1,174,383 $ 2.20 792,640 $ 4.37 142,500 $ 3.70
Granted ....... 1,061,781 $ 2.05 1,188,783 $ 2.31 659,079 $ 4.46
Exercised ..... (199,314) $ 1.98 -- -- (8,939) $ 4.74
Canceled ...... (314,720) $ 2.15 (807,040) $ 4.37 -- --
----------- ----------- -----------
Outstanding,
end of year ..... 1,722,130 $ 2.11 1,174,383 $ 2.20 792,640 $ 4.37
Options
exercisable, end
of year ......... 889,852 487,502 212,543
Weighted average
fair value of
options granted . $ 2.48 $ 1.39 $ 2.55
</TABLE>
The following table summarizes the information about options outstanding
at December 31, 1999:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
----------------------------------- -------------------------
WEIGHTED
AVERAGE NUMBER
REMAINING WEIGHTED EXERCISABLE WEIGHTED
CONTRACTUAL AVERAGE AT AVERAGE
RANGE OF NUMBER LIFE EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE 1999 PRICE
- --------------- ----------- ------- --------- ---------- ---------
$.50 - $.99 344,265 9.37 $ .58 132,568 $ .65
$1.00 - $1.49 64,350 8.92 1.25 64,350 1.25
$1.50 - $1.99 286,814 7.34 1.82 274,119 1.82
$2.00 - $2.49 182,800 8.69 2.25 136,767 2.28
$2.50 - $6.00 843,901 9.22 2.86 282,048 2.83
---------- ----------
1,722,130 $ 2.11 889,852 $1.99
========== ==========
The Plan also provides for the award of restricted stock to eligible
persons. Such awards may be at prices not less than 85% of the fair market
value of the Company's common stock as determined by the Board of
Directors. In addition, stock bonuses may be awarded to certain employees
or officers of the Company at the discretion of the Board of Directors. As
of December 31, 1999, the Company has not awarded any restricted stock or
stock bonuses.
F-18
<PAGE>
In May 1997, the Company offered to its employees the opportunity to
receive stock options to acquire shares of the Company's common stock at
$5.00 to $5.50 per share in an exchange for a reduction in salary. Certain
employees elected to reduce their salaries up to 100% for the period from
May 1997 to October 1997 in exchange for 600 stock options for each $1,000
of salary reduction. As a result, the Company issued 267,079 stock options
in exchange for salary reductions of $445,132. The Company recorded an
expense relating to the issuance of these stock options in the amount of
$74,189 per month for each of the six months from May 1997 to October
1997.
During 1998, the Company awarded nonqualified stock options to outside
consultants for services rendered. As a result, the Company recognized
$62,000 in selling, general and administrative expense for the issue of
these options. This amount represents the then fair market value of the
services rendered to the Company based on the consultants' usual and
customary charges for the services rendered.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases its office space under non cancelable operating leases
expiring through May 2003. In June 1998, the Company consolidated its
corporate offices into its San Antonio Research and Development facility.
As a result of this move, the Company subleased its leased space in
Newport Beach, CA. The sublease expires on the same date of the Company's
lease in April 2001. The sublease income is aggregated with the net rent
expense and included in other income and expense in the Consolidated
Statements of Operations.
The Company also leases certain office furniture and equipment under
capitalized lease obligations. Future minimum rental commitments, net of
sublease income, under lease agreements with initial or remaining terms of
one year or more at December 31, 1999, are as follows:
YEAR ENDING OPERATING CAPITAL
DECEMBER 31 LEASES LEASES
----------- ----------- ----------
2000 $ 80,132 $ 93,216
2001 76,151 63,961
2002 83,995 38,673
2003 35,003 11,174
----------- ----------
$ 275,281 207,024
===========
Less- Amount representing interest 43,901
----------
163,123
Less- Current portion 63,877
----------
Long-term portion $ 99,246
==========
Included in furniture and equipment is capitalized leased equipment of
$377,627 with accumulated depreciation of $225,137 at December 31, 1999.
Rent expense, net of sublease income, was $199,346, $220,587 and $102,815
for the years ended December 31, 1999, 1998 and 1997, respectively.
F-19
<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with certain key employees
of the Company which range from one to five years.
SHEFFIELD UNIVERSITY MASTER AGREEMENT
The Company has entered into an arrangement with Sheffield University (the
Agreement) whereby the Company will undertake the development and
commercialization of certain discoveries resulting from Sheffield
University's research. The Agreement with Sheffield University (the
University) is a five-year agreement with an automatic yearly renewal. In
accordance with the Agreement, the Company issued 275,000 shares of common
stock to the University for past research services, the value of which was
expensed in the third quarter of 1999. Additionally, each year beginning
July 1, 2000, the University will receive 25,000 stock options at the then
current market price, plus 10,000 options for each new patent application
filed in the previous 12 months. These options will be fully vested upon
the grant date and have a five-year exercise period. The Company signed
another agreement with the University for research and development
services which automatically renews in one-year increments. Both
agreements can be canceled if the key collaborator leaves the University.
In September 1999, a five-year Consulting Agreement was entered into with
the University's key collaborator. In accordance with the Consulting
Agreement, the key collaborator received 200,000 shares of common stock
for past research services, the value of which was expensed in the third
quarter. The key collaborator will also receive 1% of the first $4 million
of net sales under the PST Technology and 2% for sales above $4 million.
Payments are required 45 days after each quarter end. Beginning July 1,
2000, in consideration for future services, the key collaborator will
receive 25,000 stock options at the then current market price. These
options have a five-year exercise period from the date of grant.
NOTE 11 - SEGMENT INFORMATION
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes new
standards for reporting information about operating segments in annual and
interim financial statements, requiring that public business enterprises
report financial and descriptive information about its reportable segments
based on a management approach. SFAS No. 131 also establishes standards
for related disclosures about products and services, geographic areas and
major customers. In applying the requirements of this statement, each of
the Company's geographic areas described below were determined to be an
operating segment as defined by the statement, but have been aggregated as
allowed by the statement for reporting purposes. As a result, the Company
continues to have one reportable segment, which is the development of
genetic susceptibility tests and therapeutic targets for common diseases.
F-20
<PAGE>
The following table presents information about the Company by geographic
area:
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
Total Revenues:
United States ......... $ 281,239 $ 319,145 $ 171,358
France ................ 38,846 23,730 1,370
Other foreign ......... 157,412 70,067 23,200
----------- ----------- -----------
Total ......... $ 477,497 $ 412,942 $ 195,928
=========== =========== ===========
Operating Income:
United States ......... $(3,650,968) $(7,576,319) $(3,552,646)
France ................ (504,288) (563,337) (28,403)
Other foreign ......... (2,043,484) (1,663,350) (480,990)
----------- ----------- -----------
Total ......... $(6,198,740) $(9,803,006) $(4,062,039)
=========== =========== ===========
AS OF DECEMBER 31
------------------------------
1999 1998
---------- ----------
Assets:
United States ....................... $3,176,159 $3,672,890
France .............................. -- --
Other foreign ....................... -- --
---------- ----------
Total ................... $3,176,159 $3,672,890
========== ==========
CONCENTRATIONS OF RISK
The Company sells products and provides contract services for customers
primarily in the United States and France and extends credit based on an
evaluation of the customer's financial condition, generally without
requiring collateral. The Company monitors its exposure for credit losses
and maintains allowances for anticipated losses.
During the year ended December 31, 1999, no one customer accounted for
more than 10% of total revenues. During the year ended December 31, 1999,
the Company obtained lab services for its genetic susceptibility tests
from two companies whose services comprised approximately 30% and 12% of
cost of sales, respectively.
NOTE 12 - SUBSEQUENT EVENTS
In January 2000, the Company sold 832,667 shares of common stock in a
private placement. The Company received net proceeds of approximately $4.7
million from this private placement.
F-21
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "AGREEMENT), is made and entered into as
of the 1st day of December, 1999 (the "EFFECTIVE DATE"), by and between
INTERLEUKIN GENETICS, INC., a Texas corporation ("EMPLOYER"), and KENNETH S.
KORNMAN, an individual ("EMPLOYEE").
R E C I T A L S
A. Employer desires to obtain the benefit of the services of Employee and
Employee desires to render such services to Employer.
B. The Board of Directors of Employer (the "BOARD") has determined that it
is in Employer's best interest to employ Employee and to provide certain
benefits to Employee.
C. Employer and Employee desire to set forth the terms and conditions of
Employee's employment with Employer on the terms and subject to the conditions
of this Agreement.
A G R E E M E N T
In consideration of the foregoing recitals and of the mutual covenants and
conditions contained herein, the parties, intending to be legally bound, agree
as follows:
1. TERM. Employer agrees to employ Employee, and Employee agrees to serve
Employer, in accordance with the terms of this Agreement, for a term (the
"TERM") beginning on the Effective Date and continuing for a period of three (3)
years thereafter unless earlier terminated in accordance with the provisions
hereof.
2. EMPLOYMENT OF EMPLOYEE.
(a) SPECIFIC POSITIONS. Employer and Employee hereby agree that,
subject to the provisions of this Agreement, Employer will employ Employee and
Employee will serve as an employee of Employer. Employee shall have the title
and perform the duties set forth on EXHIBIT A hereto and such other reasonable,
usual and customary duties of such office as may be delegated to Employee from
time to time by the Board, subject always to the policies as reasonably
determined from time to time by the Board.
(b) PROMOTION OF EMPLOYER'S BUSINESS. During the Term, Employee
shall not engage in any business competitive with Employer. Employee agrees to
devote his full business time, attention, knowledge, skill and energy to the
business, affairs and interests of Employer and matters related thereto, and
shall use his best efforts and abilities to promote Employer's
1
<PAGE>
interests; PROVIDED, HOWEVER, that Employee is not precluded from devoting
reasonable periods to time required: (i) for serving as a director or committee
member of any organization that does not compete with Employer or that does not
involve a conflict of interest with Employer; (ii) for managing his personal
investments; so long as in either case, such activities do not materially
interfere with the regular performance of his duties under this Agreement; or
(iii) for delivering scientific lectures in the area of Periodontal Disease and
Treatment and such other scientific areas as shall be approved by the President
of Employer.
3. SALARY. Employer shall pay to Employee during the term of this
Agreement a base salary ("BASE SALARY") of $200,000.00 per year, payable in
equal monthly installments. The Base Salary may be increased (but not decreased)
annually at the Employer's sole discretion throughout the Term on each
anniversary of the Effective Date in the discretion of Employer's Board. In
addition, at such time as a new President or Chief Executive Officer is
recruited and hired by the Employer, Employee's salary shall automatically be
adjusted to equal on a per month basis, at least eighty-five percent (85%) of
the guaranteed, non-discretionary compensation being paid such new President or
Chief Executive Officer.
4. BONUS. In addition to the Base Salary, Employee shall also receive a
bonus, if any, as determined annually by the Board of Directors of Employer in
its sole discretion.
5. BENEFITS.
(a) FRINGE BENEFITS. During Employee's employment by Employer under
this Agreement, Employee shall be eligible for participation in and shall be
covered by any and all such medical, disability, life and other insurance plans
and such other similar benefits available to other executive employees. Employer
will pay life insurance premiums annually in the amount of $2720.00 on a policy
for Employee; Employee shall have the right to designate ownership and
beneficiary of said policy. Employee will receive a monthly automobile allowance
of $600.00.
(b) REIMBURSEMENTS. During Employee's employment with Employer under
this Agreement, Employee shall be entitled to receive prompt reimbursement of
all reasonable expenses incurred by Employee in performing services hereunder,
including all expenses of travel at the request of, or in the service of,
Employer provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by Employer.
(c) VACATION. During Employee's employment with Employer hereunder,
Employee shall be entitled to an annual vacation leave of four (4) weeks at full
pay, which shall be adjusted in accordance with the vacation policy generally
applicable to employees of the Employer.
6. TERMINATION.
(a) TERMINATION FOR CAUSE. Employer shall have the right,
exercisable immediately upon written notice, to terminate Employee's employment
for "Cause."
2
<PAGE>
(i) DEFINITION OF CAUSE. As used herein, "CAUSE" means any of
the following: (A) habitual drunkenness under the influence of alcohol by
Employee or illegal use of narcotics; (B) Employee is convicted by a court of
competent jurisdiction, or pleads "no contest" to, a felony or any other conduct
of a criminal nature (other than minor traffic violations) by Employee; (C)
Employee engages in fraud, embezzlement, or any other illegal conduct; (D)
Employee imparts confidential information relating to Employer or its business
to competitors or to other third parties other than in the course of carrying
out Employee's duties; (E) Employee refuses to perform his duties hereunder or
otherwise breaches any covenant, warranty or representation of this Agreement or
Employee's Non-Disclosure and Confidentiality Agreement executed concurrently
herewith, and, except for any conduct described in clauses (A) through (D) of
this Section 6(a)(i), fails to cure such breach (if such breach is then capable
of being cured) within ten (10) business days following written notice thereof
specifying in reasonable detail the nature of such breach, or if such breach is
not capable of being cured in such time, a cure shall not have been diligently
initiated within such ten (10) business day period.
(ii) EFFECT OF TERMINATION. Upon termination in accordance
with this Section 6(a), Employee shall be entitled to no further compensation
hereunder other than the Base Salary and other benefits accrued hereunder
through, but not including, the effective date of such termination. Employer's
exercise of its right to terminate for Cause shall be without prejudice to any
other remedy to which it may be entitled at law, in equity or under this
Agreement.
(b) VOLUNTARY TERMINATION. Employee may terminate his employment at
any time by giving no less than thirty (30) days' written notice to Employer.
(i) NO REASON. Upon termination in accordance with this
Section 6(b), except as otherwise provided in Section 6(b)(ii), below, Employee
shall be entitled to no further compensation hereunder other than the Base
Salary and other benefits accrued hereunder through, but not including, the
effective date of such termination.
(ii) GOOD REASON. Notwithstanding anything to the contrary in
Section 6(b)(i) above, if Employee terminates his employment under this Section
6(b) for Good Reason (as defined below), Employee shall be entitled to receive
from Employer all of the compensation and benefits provided for in Section 6(e)
below. As used herein, "GOOD Reason" means any of the following: (A) the
assignment to Employee of duties materially inconsistent with those of other
employees of Employer in like positions where Employee provides written notice
to Employer within six (6) months of such assignment that such duties are
materially inconsistent with those duties of similarly situated employees and
Employer fails to release Employee from his obligation to perform such
inconsistent duties within twenty (20) business days after Employer's receipt of
such notice; or (B) a failure by Employer to comply with any other material
provision of Sections 3 through 5, inclusive, of this Agreement which has not
been cured within fifteen (15) business days after notice of such noncompliance
has been given by Employee to Employer, or if such failure is not capable of
being cured in such time, a cure shall not have been diligently initiated by
Employer within such fifteen (15) business day period.
3
<PAGE>
(c) TERMINATION DUE TO DEATH OR DISABILITY. This Agreement shall
automatically terminate upon the death of Employee. In addition, if Employee is
unable to perform the essential functions of his job with or without a
reasonable accommodation because of a physical or mental impairment for a period
of six (6) months, Employer may terminate Employee's employment upon written
notice to Employee. Upon termination in accordance with this Section 6(c),
Employee (or Employee's estate, as the case may be) shall be entitled to no
further compensation hereunder other than the Base Salary and other benefits
accrued hereunder through, but not including, the date of death or, in the case
of disability, the date of termination.
(d) TERMINATION UPON CESSATION OF BUSINESS. Employer shall have the
right to immediately terminate Employee's employment under this Agreement upon a
"Cessation of Business." For purposes of this Agreement, a "CESSATION OF
BUSINESS" shall mean Employer's ceasing to operate in the ordinary course of
business, whether by dissolution, liquidation, sale of assets, consolidation,
merger or otherwise, in connection with, pursuant to or arising out of a good
faith determination by the Board that the continuing operation of the business
in its ordinary course is reasonably likely to render Employer unable to meet
its liabilities as they mature. Upon termination in accordance with the Section
6(d), Employee shall be entitled to no further compensation hereunder other than
the Base Salary and other benefits accrued hereunder through, but not including,
the effective date of such termination. If Employee is so terminated by Employer
pursuant to this Section 6(d) during the Term, Employer shall (i) pay to
Employee the Base Salary, and (ii) provide the same health insurance benefits to
which Employee was entitled hereunder, in each case (i.e., the Base Salary and
health insurance benefits), until the earlier to occur of (A) the expiration of
the remaining portion of the Term, or (B) the expiration of the three (3) month
period commencing on the date Employee is terminated. Employer may make such
payments in accordance with its regular payroll schedule or in a single lump sum
payment in its sole discretion.
(e) TERMINATION WITHOUT CAUSE. Employer shall have the right,
exercisable upon 30 days' prior written notice, to terminate Employee's
employment under this Agreement for any reason other than set forth in Sections
6(a), (c) and (d) above, at any time during the Term. If Employee is so
terminated by Employer pursuant to this Section 6(e) during the Term, Employer
shall (i) pay to Employee the Base Salary, and (ii) provide the same health
insurance benefits to which Employee was entitled hereunder, in each case (i.e.,
the Base Salary and health insurance benefits), until the earlier to occur of
(A) the expiration of the remaining portion of the Term, or (B) the expiration
of the twelve (12) month period commencing on the date Employee is terminated.
Employer may make such payments in accordance with its regular payroll schedule
or in a single lump sum payment in its sole discretion.
7. PUBLICITY. During the term of this Agreement and for a period of one
(1) year thereafter, Employee shall not, directly or indirectly, originate or
participate in the origination of any publicity, news release or other public
announcements, written or oral, whether to the public
4
<PAGE>
press or otherwise, relating to this Agreement, to any amendment hereto, to
Employee's employment hereunder or to the Company, without the prior written
approval of the Company.
8. RESTRICTIVE COVENANTS.
(a) NON-COMPETITION. In consideration of the benefits of this
Agreement, including Employee's access to and limited use of proprietary and
confidential information of the Company, as well as training, education and
experience provided to Employee by the Company directly and/or as a result of
work projects assigned by the Company with respect thereto, Employee hereby
covenants and agrees that during the term of this Agreement and for a period of
twelve (12) months following termination of this Agreement, regardless of how
such termination may be brought about, Employee shall not, directly or
indirectly, as proprietor, partner, stockholder, director, officer, employee,
consultant, joint venturer, investor or in any other capacity, engage in, or
own, manage, operate or control, or participate in the ownership, management,
operation or control, of any entity which engages anywhere in the world in any
business activity which is competitive to current business activities in which
the Company participates during Employee's employment with the Company;
PROVIDED, HOWEVER, the foregoing shall not, in any event, prohibit Employee from
purchasing and holding as an investment not more than 1% of any class of
publicly traded securities of any entity which conducts a business in
competition with the business of the Company, so long as Employee does not
participate in any way in the management, operation or control of such entity.
It is further recognized and agreed that, even though an activity may not be
restricted under the foregoing provision, Employee shall not during the term of
this Agreement and for a period of twelve (12) months following termination of
this Agreement, regardless of how such termination may be brought about, provide
any services to any person or entity which may be used against, or in conflict
with the interests of, the Company or its customers or clients.
(b) JUDICIAL REFORMATION. Employee acknowledges that, given the
nature of the Company's business, the covenants contained in Section 8(a)
establish reasonable limitations as to time, geographic area and scope of
activity to be restrained and do not impose a greater restraint than is
reasonably necessary to protect and preserve the goodwill of the Company's
business and to protect its legitimate business interests. If, however, Section
8(a) is determined by any court of competent jurisdiction to be unenforceable by
reason of its extending for too long a period of time or over too large a
geographic area or by reason of it being too extensive in any other respect or
for any other reason, it will be interpreted to extend only over the longest
period of time for which it may be enforceable and/or over the largest
geographic area as to which it may be enforceable and/or to the maximum extent
in all other aspects as to which it may be enforceable, all as determined by
such court.
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(c) CUSTOMER LISTS; NON-SOLICITATION. In consideration of the
benefits of this Agreement, including Employee's access to and limited use of
proprietary and confidential information of the Company, as well as training,
education and experience provided to Employee by the Company directly and/or as
a result of work projects assigned by the Company with respect thereto, Employee
hereby further covenants and agrees that for a period of twelve (12) months
following the termination of this Agreement, regardless of how such termination
may be brought about, Employee shall not, directly or indirectly, (i) use or
make known to any person or entity the names or addresses of any clients or
customers of the Company or any other information pertaining to them, (ii) call
on for the purpose of competing, solicit, take away or attempt to call on,
solicit or take away any clients or customers of the Company on whom Employee
called or with whom he became acquainted during his employment with the Company,
nor (iii) recruit or attempt to recruit any employees of the Company.
(d) AFFILIATES. When used in this Section 8, the term "Company"
includes Interluekin Genetics, Inc. and all affiliates and subsidiaries of
Interluekin Genetics, Inc.
9. MISCELLANEOUS.
(a) WITHHOLDINGS. All payments to Employee hereunder shall be made
after reduction for all federal, state and local withholding and payroll taxes,
all as determined under applicable law and regulations, and Employer shall make
all reports and similar filings required by such law and regulations with
respect to such payments, withholdings and taxes.
(b) SUCCESSION. This Agreement shall inure to the benefit of and
shall be binding upon Employer, its successors and assigns. The obligations and
duties of Employee hereunder shall be personal and not assignable.
(c) NOTICES. Any and all notices, demands, requests or other
communications hereunder shall be in writing and shall be deemed duly given when
personally delivered to or transmitted overnight express delivery or by
facsimile to and received by the party to whom such notice is intended (provided
the original thereof is sent by mail, in the manner set forth below, on the next
business day after the facsimile transmission is sent), or in lieu of such
personal delivery or overnight express delivery or facsimile transmission, on
receipt when deposited in the United States mail, first-class, certified or
registered, postage prepaid, return receipt requested, addressed to the
applicable party at the address set forth below such party's signature to this
Agreement. The parties may change their respective addresses for the purpose of
this Section 9(c) by giving notice of such change to the other parties in the
manner which is provided in this Section 9(c).
(d) ENTIRE AGREEMENT. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof, and it replaces and
supersedes any prior agreements between the parties relating to said subject
matter.
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(e) HEADINGS. The headings of Sections herein are used for
convenience only and shall not affect the meaning of contents hereof.
(f) WAIVER; AMENDMENT. No provision hereof may be waived except by a
written agreement signed by the waiving party. The waiver of any term or of any
condition of this Agreement shall not be deemed to constitute the waiver of any
other term or condition. This Agreement may be amended only by a written
agreement signed by the parties hereto.
(g) SEVERABILITY. If any of the provisions of this Agreement shall
be held unenforceable by the final determination of a court of competent
jurisdiction and all appeals therefrom shall have failed or the time for such
appeals shall have expired, such provision or provisions shall be deemed
eliminated from this Agreement but the remaining provisions shall nevertheless
be given full effect. In the event this Agreement or any portion hereof is more
restrictive than permitted by the law of the jurisdiction in which enforcement
is sought, this Agreement or such portion shall be limited in that jurisdiction
only to the extent required by the law of that jurisdiction.
(h) GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
(i) ARBITRATION. Except for the provisions of Sections 7 and 8 with
regard to which the Company expressly reserves the right to petition a court
directly for injunctive or other relief, any dispute arising out of or relating
to this Agreement, or the breach, termination or the validity hereof, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules of
the American Arbitration Association. Judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. THE ARBITRATOR OR ARBITRATORS ARE NOT EMPOWERED TO AWARD DAMAGES IN
EXCESS OF COMPENSATORY DAMAGES (INCLUDING REASONABLE ATTORNEYS FEES AND EXPERT
WITNESS FEES) AND EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO RECOVER SUCH
DAMAGES (INCLUDING, WITHOUT LIMITATION, PUNITIVE DAMAGES) IN ANY FORUM. The
arbitrator or arbitrators may award equitable relief in those circumstances
where monetary damages would be inadequate. The arbitrator or arbitrators shall
be required to follow the applicable law as set forth in the governing law
section of this Agreement. The arbitrator or arbitrators shall award reasonable
attorneys fees and costs of arbitration to the prevailing party in such
arbitration.
(j) EQUITABLE RELIEF. In the event of a breach or a threatened
breach by Employee of any of the provisions contained in Sections 7 or 8 of this
Agreement, Employee acknowledges that the Company will suffer irreparable injury
not fully compensable by money damages and, therefore, will not have an adequate
remedy available at law. Accordingly, the Company shall be entitled to obtain
such injunctive relief or other equitable remedy from any court of competent
jurisdiction as may be necessary or appropriate to prevent or curtail any such
breach, threatened or actual, without having to post bond. The foregoing shall
be in addition to
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and without prejudice to any other rights that the Company may have under this
Agreement, at law or in equity, including, without limitation, the right to sue
for damages.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
"EMPLOYER": "EMPLOYEE":
INTERLEUKIN GENETICS, INC.
By: /s/ U. SPENCER ALLEN /s/ KENNETH S. KORNMAN
U. SPENCER ALLEN KENNETH S. KORNMAN
Address: Address:
100 NE Loop 410, Suite 820 3007 Orchard Hill
San Antonio, TX 78216 San Antonio, TX 78216
8
<PAGE>
EXHIBIT A
DESCRIPTION OF JOB
TITLE:
Chief Scientific Officer
DUTIES AND RESPONSIBILITIES:
1. Plan and oversee all research directed at discovering new technology to be
commercialized by Interleukin Genetics, Inc.
2. Plan and oversee product development.
3. Develop a research and development plan and budget to be approved by the
Board of Directors.
4. Have and supervise research and administrative staff as needed to perform
above duties.
5. Participate in the planning and guidance of ILGN corporate strategy.
6. Manage the Research and Development budgets.
7. Other activities as designated by the CEO and Board of Directors.
8. Participate in business development activities.
9. Participate in activities related to protection of intellectual property.
9
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "AGREEMENT), is made and entered into as
of the 1st day of April, 2000 (the "EFFECTIVE DATE"), by and between INTERLEUKIN
GENETICS, INC., a Texas corporation ("EMPLOYER"), and PHILIP R. REILLY, an
individual ("EMPLOYEE").
R E C I T A L S
A. Employer desires to obtain the benefit of the services of Employee and
Employee desires to render such services to Employer.
B. The Board of Directors of Employer (the "BOARD") has determined that it
is in Employer's best interest to employ Employee and to provide certain
benefits to Employee.
C. Employer and Employee desire to set forth the terms and
conditions of Employee's employment with Employer on the terms and subject to
the conditions of this Agreement
A G R E E M E N T
In consideration of the foregoing recitals and of the mutual covenants and
conditions contained herein, the parties, intending to be legally bound, agree
as follows:
1. TERM. Employer agrees to employ Employee, and Employee agrees to serve
Employer, in accordance with the terms of this Agreement, for a term (the
"TERM") beginning on the Effective Date and continuing for a period of three (3)
years thereafter unless earlier terminated in accordance with the provisions
hereof.
2. EMPLOYMENT OF EMPLOYEE.
(a) SPECIFIC POSITIONS. Employer and Employee hereby agree that,
subject to the provisions of this Agreement, Employer will employ Employee and
Employee will serve as an employee of Employer. Employee shall have the title
and perform the duties set forth on EXHIBIT A hereto and such other reasonable,
usual and customary duties of such office as may be delegated to Employee from
time to time by the Board, subject always to the policies as reasonably
determined from time to time by the Board. The place of employment will be
within a sixty mile radius of Boston, MA.
(b) PROMOTION OF EMPLOYER'S BUSINESS. During the Term, Employee
shall not engage in any business competitive with Employer. Employee agrees to
devote his full business time, attention, knowledge, skill and energy to the
business, affairs and interests of Employer and matters related thereto, and
shall use his best efforts and abilities to promote Employer's interests;
PROVIDED, HOWEVER, that Employee is not precluded from devoting reasonable
periods to time required: (i) for serving as a director or committee member of
any organization that does not compete with Employer or that does not involve a
conflict of interest with Employer; (ii) for
1
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managing his personal investments; so long as in either case, such activities do
not materially interfere with the regular performance of his duties under this
Agreement or (iii) for delivering lectures in the area of genetics and
bioethics. Employer acknowledges that Employee will maintain a consulting
relationship with Gene Sage Incorporated, based in San Francisco, California,
with the understanding that this relationship will not conflict with Employee's
duties with Employer.
3. SALARY. Employer shall pay to Employee during the term of this
Agreement a base salary ("BASE SALARY") of $325,000.00 per year, payable in
equal monthly installments. The Base Salary may be increased (but not decreased)
annually at the Employer's sole discretion throughout the Term on each
anniversary of the Effective Date in the discretion of Employer's Board of
Directors.
4. BONUS. In addition to the Base Salary, Employee shall also receive a
bonus, if any, as determined annually by the Board of Directors of Employer in
its sole discretion.
5. STOCK OPTIONS. In addition, Employee shall receive an award of 500,000
stock options, of which 148,606 are incentive stock options and 351,394 are
non-qualified stock options. This award was made effective December 1, 1999, the
Employee's hire date under previous agreement, and is at a strike price of
$2.875. This award will vest over 36 months in equal increments commencing
December 1, 1999m unless Employee's employment is terminated prior to expiration
of that 36 month period. These awards will be covered in detail by separate
Option Agreements.
6. BENEFITS.
(a) FRINGE BENEFITS. During Employee's employment by Employer under
this Agreement, Employee shall be eligible for participation in and shall be
covered by any and all such medical, disability, life and other insurance plans
and such other similar benefits available to other executive employees. Employer
will pay $2,720 to Employee each year on the annual anniversary date of this
agreement, as reimbursement for life insurance premiums. Employee shall receive
a monthly automobile allowance of $600.00.
(b) REIMBURSEMENTS. During Employee's employment with Employer under
this Agreement, Employee shall be entitled to receive prompt reimbursement of
all reasonable expenses incurred by Employee in performing services hereunder,
including all expenses of travel at the request of, or in the service of,
Employer provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by Employer.
(c) VACATION. During Employee's employment with Employer hereunder,
Employee shall be entitled to an annual vacation leave of four (4) weeks at full
pay, which shall be adjusted in accordance with the vacation policy generally
applicable to employees of the Employer and Holdings.
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<PAGE>
7. TERMINATION.
(a) TERMINATION FOR CAUSE. Employer shall have the right,
exercisable immediately upon written notice, to terminate Employee's employment
for "Cause."
(i) DEFINITION OF CAUSE. As used herein, "CAUSE" means any of
the following: (A) habitual drunkenness under the influence of alcohol by
Employee or illegal use of narcotics; (B) Employee is convicted by a court of
competent jurisdiction, or pleads "no contest" to, a felony or any other conduct
of a criminal nature (other than minor traffic violations) by Employee; (C)
Employee engages in fraud, embezzlement, or any other illegal conduct; (D)
Employee imparts confidential information relating to Employer or its business
to competitors or to other third parties other than in the course of carrying
out Employee's duties; (E) Employee refuses to perform his duties hereunder or
otherwise breaches any covenant, warranty or representation of this Agreement or
Employee's Non-Disclosure and Confidentiality Agreement executed concurrently
herewith, and, except for any conduct described in clauses (A) through (D) of
this Section 6(a)(i), fails to cure such breach (if such breach is then capable
of being cured) within ten (10) business days following written notice thereof
specifying in reasonable detail the nature of such breach, or if such breach is
not capable of being cured in such time, a cure shall not have been diligently
initiated within such ten (10) business day period.
(ii) EFFECT OF TERMINATION. Upon termination in accordance
with this Section 6(a), Employee shall be entitled to no further compensation
hereunder other than the Base Salary and other benefits accrued hereunder
through, but not including, the effective date of such termination. Employer's
exercise of its right to terminate for Cause shall be without prejudice to any
other remedy to which it may be entitled at law, in equity or under this
Agreement.
(b) VOLUNTARY TERMINATION. Employee may terminate his employment at
any time by giving no less than thirty (30) days' written notice to Employer.
(i) NO REASON. Upon termination in accordance with this
Section 6(b), except as otherwise provided in Section 6(b)(ii), below, Employee
shall be entitled to no further compensation hereunder other than the Base
Salary and other benefits accured hereunder through, but not including, the
effective date of such termination.
(ii) GOOD REASON. Notwithstanding anything to the contrary in
Section 6(b)(i), above, if Employee terminates his employment under this Section
6(b) for Good Reason (as defined below), Employee shall be entitled to receive
from Employer all of the compensation and benefits provided for in Section 6(e),
below. As used herein, "GOOD REASON" means any of the following: (A) the
assignment to Employee of duties materially inconsistent with those of other
employees of Employer in like positions where Employee provides written notice
to Employer within six (6) months of such assignment that such duties are
materially inconsistent with those duties of similarly situated employees and
Employer fails to release Employee from his obligation to perform such
inconsistent duties within twenty (20) business days after Employer's receipt of
such notice; or (B) a failure by Employer to comply with any other material
provision of Sections 3 through 5, inclusive, of this Agreement which has not
been
3
<PAGE>
cured within fifteen (15) business days after notice of such noncompliance has
been given by Employee to Employer, or if such failure is not capable of being
cured in such time, a cure shall not have been diligently initiated by Employer
within such fifteen (15) business day period.
(c) TERMINATION DUE TO DEATH OR DISABILITY. This Agreement shall
automatically terminate upon the death of Employee. In addition, if Employee is
unable to perform the essential functions of his job with or without a
reasonable accommodation because of a physical or mental impairment for a period
of six (6) months, Employer may terminate Employee's employment upon written
notice to Employee. Upon termination in accordance with this Section 6(c),
Employee (or Employee's estate, as the case may be) shall be entitled to no
further compensation hereunder other than the Base Salary and other benefits
accrued hereunder through, but not including, the date of death or, in the case
of disability, the date or termination.
(d) TERMINATION UPON CESSATION OF BUSINESS. Employer shall have the
right to immediately terminate Employee's employment under this Agreement upon a
"Cessation of Business." For purposes of this Agreement, a "CESSATION OF
BUSINESS" shall mean Employer's ceasing to operate in the ordinary course of
business, whether by dissolution, liquidation, sale of assets, consolidation,
merger or otherwise, in connection with, pursuant to or arising out of a good
faith determination by the Board that the continuing operation of the business
in its ordinary course is reasonably likely to render Employer unable to meet
its liabilities as they mature. Upon termination in accordance with the Section
6(d), Employee shall be entitled to no further compensation hereunder other than
the Base Salary and other benefits accrued hereunder through, but not including,
the effective date of such termination. If Employee is so terminated by Employer
pursuant to this Section 6(d) during the Term, Employer shall (i) pay to
Employee the Base Salary, and (ii) provide the same health insurance benefits to
which Employee was entitled hereunder, in each case (i.e., the Base Salary and
health insurance benefits), until the earlier to occur of (A) the expiration of
the remaining portion of the Term, or (B) the expiration of the three (3) month
period commencing on the date Employee is terminated. Employer may make such
payments in accordance with its regular payroll schedule or in a single lump sum
payment in its sole discretion.
(e) TERMINATION WITHOUT CAUSE. Employer shall have the right,
exercisable upon 30 days' prior written notice, to terminate Employee's
employment under this Agreement for any reason other than set forth in Sections
6(a), (c) and (d), above, at any time during the Term. If Employee is so
terminated by Employer pursuant to this Section 6(e) during the Term, Employer
shall (i) pay to Employee the Base Salary, and (ii) provide the same health
insurance benefits to which Employee was entitled hereunder, in each case (i.e.,
the Base Salary and health insurance benefits), until the earlier to occur of
(A) the expiration of the remaining portion of the Term, or (B) the expiration
of the twelve (12) month period commencing on the date Employee is terminated.
Employer may make such payments in accordance with its regular payroll schedule
or in a single lump sum payment in its sole discretion.
8. MISCELLANEOUS.
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(a) WITHHOLDINGS. All payments to Employee hereunder shall be made
after reduction for all federal, state and local withholding and payroll taxes,
all as determined under applicable law and regulations, and Employer shall make
all reports and similar filings required by such law and regulations with
respect to such payments, withholdings and taxes.
(b) SUCCESSION. This Agreement shall inure to the benefit of and
shall be binding upon Employer, its successors and assigns. The obligations and
duties of Employee hereunder shall be personal and not assignable.
(c) NOTICES. Any and all notices, demands, requests or other
communications hereunder shall be in writing and shall be deemed duly given when
personally delivered to or transmitted overnight express delivery or by
facsimile to and received by the party to whom such notice is intended (provided
the original thereof is sent by mail, in the manner set forth below, on the next
business day after the facsimile transmission is sent), or in lieu of such
personal delivery or overnight express delivery or facsimile transmission, on
receipt when deposited in the United States mail, first-class, certified or
registered, postage prepaid, return receipt requested, addressed to the
applicable party at the address set forth below such party's signature to this
Agreement. The parties may change their respective addresses for the purpose of
this Section 8(c) by giving notice of such change to the other parties in the
manner which is provided in this Section 8(c).
(d) ENTIRE AGREEMENT. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof, and it replaces and
supersedes any prior agreements between the parties relating to said subject
matter.
(e) HEADINGS. The headings of Sections herein are used for
convenience only and shall not affect the meaning of contents hereof.
(f) WAIVER; AMENDMENT. No provision hereof may be waived except by a
written agreement signed by the waiving party. The waiver of any term or of any
condition of this Agreement shall not be deemed to constitute the waiver of any
other term or condition. This Agreement may be amended only by a written
agreement signed by the parties hereto.
(g) SEVERABILITY. If any of the provisions of this Agreement shall
be held unenforceable by the final determination of a court of competent
jurisdiction and all appeals therefrom shall have failed or the time for such
appeals shall have expired, such provision or provisions shall be deemed
eliminated from this Agreement but the remaining provisions shall nevertheless
be given full effect. In the event this Agreement or any portion hereof is more
restrictive than permitted by the law of the jurisdiction in which enforcement
is sought, this Agreement or such portion shall be limited in that jurisdiction
only to the extent required by the law of that jurisdiction.
(h) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
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<PAGE>
(i) ARBITRATION. Any dispute arising out of or relating to this
Agreement, or the breach, termination or the validity hereof, shall be settled
by arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. Judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. THE ARBITRATOR OR ARBITRATORS ARE NOT EMPOWERED TO AWARD DAMAGES IN
EXCESS OF COMPENSATORY DAMAGES (INCLUDING REASONABLE ATTORNEYS FEES AND EXPERT
WITNESS FEES) AND EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO RECOVER SUCH
DAMAGES (INCLUDING, WITHOUT LIMITATION, PUNITIVE DAMAGES) IN ANY FORUM. The
arbitrator or arbitrators may award equitable relief in those circumstances
where monetary damages would be inadequate. The arbitrator or arbitrators shall
be required to follow the applicable law as set forth in the governing law
section of this Agreement. The arbitrator or arbitrators shall award reasonable
attorneys fees and costs of arbitration to the prevailing party in such
arbitration.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
"EMPLOYER": "EMPLOYEE":
INTERLEUKIN GENETICS, INC.
By:/s/ KENNETH S. KORNMAN /s/ PHILIP R. REILLY
KENNETH S. KORNMAN PHILIP R. REILLY
Address: Address:
100 N.E. Loop 410, Suite 820 145 Monument St.
San Antonio, TX 78216 Concord, MA 01742
6
<PAGE>
EXHIBIT A
DESCRIPTION OF JOB
TITLE:
Chairman of the Board and Chief Executive Officer
DUTIES AND RESPONSIBILITIES:
1. Plan and execute overall corporate strategy
2. Conduct Board of Directors meetings as required
3. Lead the Company's business development activities
4. Other activities as designated by the Board of Directors.
7
EXHIBIT 10.27
SEVERANCE AGREEMENT
This Severance Agreement is entered into this 20th day of September, 1999
by and between Paul J. White ("White") and Interleukin Genetics, Inc. ("ILGN").
W I T N E S S E T H:
- - - - - - - - - - -
WHEREAS, White is presently employed as the Senior Vice President and
General Counsel of ILGN pursuant to the Employment Agreement dated January 1,
1996, as amended, between ILGN and White (the "Employment Agreement").
WHEREAS, the Company and White wish to discontinue their employment
relationship and, in lieu thereof, enter into this Severance Agreement (the
"Agreement");
NOW, THEREFORE, in consideration of the premises, the agreements herein
contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and White agree as
follows:
1. This Agreement embodies the full and final settlement of all rights and
obligations of the Company and White under the Employment Agreement and the
Employment Agreement shall be terminated in all respects except for the terms
thereof that specifically survive as set forth in this Agreement. Each party
hereto acknowledges that the Employment Agreement is being terminated without
cause by mutual agreement of the parties hereto pursuant to Section 12.1.3 of
the Employment Agreement. ILGN and White acknowledge and agree that White is not
owed any amounts under the Employment Agreement resulting from this mutual
agreement to terminate, and that no compensation or payment of monies how so
ever characterized is due to White upon or subsequent to such termination of the
Employment Agreement or termination of his employment.
2. White acknowledges that, effective August 31, 1999, White's employment with
ILGN will be terminated. ILGN hereby acknowledges and agrees that White shall be
entitled to retain the laptop computer, facsimile machine, and printer that
White currently has in his possession. White also agrees that he will return his
corporate American Express card on September 30, 1999, and ILGN will continue to
pay for the telephone and fax lines to his home office until September 30, 1999.
ILGN acknowledges that the desk, credenza and coat rack being utilized in one of
the ILGN offices are the property of White, and White agrees that ILGN is
entitled to use such property until White asks for its return or until ILGN
wishes to return it to White, which ever occurs earlier.
3. In consideration for the release contained herein, ILGN agrees to pay White,
by ILGN check on the eighth day following White's execution of this Agreement
and provided White has not revoked this Agreement in the seven-day period
following his execution of this Agreement, a lump sum payment equal to
$104,673.99 (less standard legal deductions). White acknowledges that this lump
sum payment includes total payment due him for accrued vacation under the
Employment
(1) white severance agr 9-21-99.doc
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Agreement. White releases the Company from all liabilities under, and
all obligations to perform or observe any term or provision of, the Employment
Agreement.
4. In further consideration for the release contained herein, ILGN agrees to pay
each month for 18 months for the cost of White's COBRA health insurance for he
and his immediate family, provided that White completes the paperwork for
conversion of his current coverage to COBRA coverage within the prescribed
statutory timeframe. This reimbursement is for coverage for the time period
September 1, 1999 to February 28, 2001. White acknowledges that ILGN has
provided him with the paperwork for COBRA conversion.
5. ILGN also agrees to fully vest White's ILGN stock options. ILGN also agrees
to convert each of his four option grants from incentive stock options to
non-qualified stock options under the 1996 Equity Incentive Plan. White
acknowledges that ILGN has provided him with amendments to each of his four
stock option grants which provide for full vesting and conversion to
non-qualified stock options. The table below lists White's four stock option
agreements, each of which have been amended to reflect full vesting and
conversion to restricted stock options.
---------------------------------------
# OF STRIKE
DATE OF GRANT OPTIONS PRICE
---------------------------------------
1/1/97 10,000 $2.04
---------------------------------------
5/1/97 15,000 $2.75
---------------------------------------
12/1/98 5,312 $1.50
---------------------------------------
3/18/99 14,166 $0.75
---------------------------------------
6. ILGN shall pay White his full salary through August 31, 1999 and no other
compensation or benefits shall be paid to White under the Employment Agreement
or otherwise. Effective August 31, 1999, White shall not be entitled to any
benefits (including medical and other insurance) from ILGN and shall not be a
participant in ILGN's 401(k) Plan or the ILGN Profit Sharing Plan; provided,
however, nothing herein shall effect White's eligibility to elect the
continuation of health care coverage pursuant to Title X of the Consolidated
Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA").
7. Each of White and the Company releases, remises, acquits and discharges the
other party and their predecessors and affiliates, and their divisions,
officers, directors, agents, employees, consultants, independent contractors,
attorneys, advisers, successors and assigns, jointly and severally, from any and
all claims, known or unknown, which releasing party, their heirs, successors or
assigns have or may have against any of such parties and any and all liability
that any of such parties may have to the released party whether denominated
claims, demands, causes of action, obligations, damages or liabilities arising
from any and all bases, however denominated, including but not limited to claims
of discrimination under the Age Discrimination in Employment Act, as amended,
Title VII of the Civil Rights Act of 1964, as amended, the Civil Rights Act of
1991, the Americans with Disabilities Act, the Employee Retirement Income
Security Act of 1974, 42 U.S.C. ss. 1981, the Texas Commission on Human Rights
Act, or any other U.S. federal, state or local law or any other law, rule or
regulation or workers' compensation or disability claims under any such laws.
This release relates to claims arising from and during White's relationship with
ILGN and its predecessors and affiliates or as a result of the termination of
such relationship. This release is for any relief, no matter how denominated,
including but not limited to wages, back pay, front pay,
(1) white severance agr 9-21-99.doc
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repayment of moving expense reimbursement, compensatory damages or punitive
damages. Each party further agrees that they will not file or permit to be filed
on their behalf any such claim. This release shall not apply to (i) the
obligations set forth in this Agreement or those under the Confidentiality
Agreement (as defined hereafter), (ii) ILGN's obligation to defend, indemnify
and hold harmless White under its indemnification obligations to Officers and
Directors under its Bylaws, or (iii) any other claims based on acts or omissions
of any released party first occurring after the date on which he signs this
Agreement.
8. For a period of one year, beginning September 1, 1999 and ending August 31,
2000, White agrees that he will not, directly or indirectly, work for, provide
consulting services on his own behalf for, own an interest in (excluding a
passive investment in a public company where White owns less than 5% of the
stock of such company), operate, join, control, or participate in, or be
connected as an officer, employee, agent, independent contractor, partner,
shareholder, or principal of any corporation, partnership, proprietorship, firm,
or association which conducts research and/or develops genetic diagnostics in
clinical fields where ILGN currently is marketing or developing products,
without the prior written consent of ILGN. This clause shall not restrict White
from providing professional legal services to any Company.
9. This Agreement does not affect White's obligations or ILGN's rights under the
Confidentiality and Invention Assignment Agreement ("Confidentiality Agreement")
dated as of January 1, 1996, by and between ILGN and White; or any other
confidentiality, secrecy or proprietary information or intellectual property
agreement; or any laws governing such matters.
10. White acknowledges he received a copy of this Agreement on September 21,
1999. White shall have until and including October 12, 1999, to accept and
consider this Agreement, a period White acknowledges to be twenty-one (21) days
following receipt of this Agreement.
11. This Agreement shall not become effective and enforceable until seven (7)
days following its execution. White may revoke this Agreement in a writing
delivered to and received by U. Spencer Allen, CFO, Interleukin Genetics, Inc.,
100 N.E. Loop 410, #820, San Antonio, Texas 78216, within said seven (7) days.
12. This Agreement is personal to White and, without the prior written consent
of the Board of Directors of ILGN, shall not be assignable by White otherwise
than by will or the laws of descent and distribution. The terms of this
Agreement shall be binding and inure to the benefit of the parties hereto and
their affiliates and their respective successors and assigns. The terms of this
Agreement may be changed, modified or discharged only by an instrument in
writing signed by the parties hereto. This Agreement shall be construed,
enforced and interpreted in accordance with applicable federal law and the laws
of the State of California without reference to its principles of conflicts of
law. This Agreement may be executed in any number of counterparts, each of which
shall be deemed to be original.
13. The parties each agree that White is no longer an employee of ILGN. White
shall take no unilateral action or incur any expense, and has no express or
implied authority to do either, on behalf of ILGN, as an independent contractor,
a consultant or otherwise, unless he has received written instructions from
ILGN's President to so proceed. White further represents that he maintains a
(1) white severance agr 9-21-99.doc
<PAGE>
separate place of business, serves customers other than ILGN, has all necessary
permits and licenses to conduct the services under this Agreement, withholds and
pays all state and federal income, social security, disability and insurance
taxes and maintains adequate insurance. The parties further agree that nothing
contained in this Agreement shall be construed to place them in the relationship
of partners, principal and agent, employer/employee or joint venturers.
14. The failure of either party at any time to enforce any of the provisions of
this Agreement or to require performance by the other party of any provision
hereof shall not be construed to be a waiver of such provisions or to affect the
validity of this Agreement, or of any part hereof, or of the right of either
party thereafter to enforce each and every provision of this Agreement in
accordance with its terms.
15. Written notices required or furnished under this Agreement shall be sent to
the following addresses:
to ILGN: U. Spencer Allen
Interleukin Genetics, Inc.
100 N.E. Loop 410, #820
San Antonio, Texas 78216
to White: Paul J. White
134 East Hermosa
San Antonio, TX 78212
16. Notices shall be effective on the first business day following receipt
thereof. Notices sent by mail shall be deemed received on the date of delivery
shown on the return receipt.
17. This Agreement represents and contains the entire agreement between the
parties hereto with respect to the subject matter hereof, and the terms of this
Agreement are contractual and not a mere recital. Further, this Agreement
supersedes any and all prior oral and written agreements and understandings, and
no representation, warranty, condition, understanding, or agreement of any kind
with respect to the subject matter hereof shall be relied upon by the
undersigned unless incorporated herein.
18. Except for the provisions of Paragraph 7 regarding the Confidentiality
Agreement, with respect to which the Company expressly reserves the right to
petition a court directly for injunctive and other relief, any claim, dispute or
controversy of any nature whatsoever, including but not limited to tort claims
or contract disputes, between the parties to this Agreement or their respective
heirs, executors, administrators, legal representatives, successors and assigns,
as applicable, arising out of or relating to the terms or conditions of this
Agreement or the Employment Agreement hereby terminated, including the
implementation, applicability and interpretation thereof, shall be resolved
exclusively as follows: Upon the written request of one party served upon the
other, any such claim, dispute or controversy shall be submitted to and settled
by arbitration in accordance with the provisions of the Federal Arbitration Act,
9 U.S.C. ss.ss. 1-14, as amended. If arbitration is requested, each of the
parties to this Agreement shall
(1) white severance agr 9-21-99.doc
<PAGE>
appoint one person as an arbitrator to hear and determine any such disputes. The
two arbitrators shall then choose a third arbitrator from a panel made up of
experienced arbitrators selected pursuant to the procedures of the American
Arbitration Association (the "AAA"). The majority decision of the three
arbitrators shall be final, binding and conclusive upon the parties to this
Agreement. Each party shall be responsible for the fees and expenses of its
arbitrator and the fees and expenses of the third arbitrator shall be shared
equally by the parties; PROVIDED, HOWEVER, to the extent possible, the
arbitrators shall, as part of their decision, provide that the non-prevailing
party shall pay all costs incurred by the prevailing party (including fees and
costs of the arbitrators and the prevailing party's legal counsel). The terms of
the commercial arbitration rules of AAA shall apply except to the extent they
conflict with the provisions of this paragraph. Arbitration shall take place in
San Antonio, Texas. It is further agreed that any of the parties hereto may
petition the United States District Court for the State of Texas for a judgment
to be entered upon any award entered through such arbitration proceedings.
(a) The parties hereto acknowledge that their legal counsel has advised
them, and that they are familiar with, the provision of Section 1542 of the
California Civil Code, which provides as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
(b) Being aware of said Civil Code Section 1542, the parties hereto
expressly waive and relinquish any rights or benefits they may have thereunder,
as well as under any other state or federal statutes or common law principles of
similar effect.
IN WITNESS WHEREOF, ILGN has caused this Agreement to be executed by its
duly authorized officer, and White has executed this Agreement, in each case as
of the date first above written.
Interleukin Genetics, INC.
By: _______________
Name: U. Spencer Allen
Title: C.F.O.
(1) white severance agr 9-21-99.doc
<PAGE>
White acknowledges that he has read the foregoing Agreement and knows its
contents and fully understands it. White acknowledges that he has been advised
to consult with an attorney prior to executing this Agreement, has had such
opportunity, and he is executing the Agreement voluntarily, fully understanding
the significance and consequences of this Agreement.
WHITE
_____________
Paul J. White
(1) white severance agr 9-21-99.doc
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports, included in this Form 10-K, to the Company's previously filed
Registration Statements on Form S-3/A (No. 333-83631) and Form S-8
(Nos. 333-47343, 333-67147 and 333-32538).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
April 13, 2000
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation of our report, dated March 13, 1998,
included in this Form 10-K in the previously filed Registration Statements of
Interleukin Genetics, Inc. (formerly known as Medical Science Systems, Inc.) and
subsidiary on Form S-3/A (File No. 333-83631, effective September 25, 1997) and
on Form S-8 (File No. 333-47343, effective March 4, 1998, File No. 333-67147,
effective November 12, 1998 and File No. 333-32538, effective March 15, 2000).
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 13, 2000
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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<DEPRECIATION> 529,111
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<BONDS> 0
0
0
<COMMON> 23,177,865
<OTHER-SE> (21,012,189)
<TOTAL-LIABILITY-AND-EQUITY> 3,176,159
<SALES> 477,497
<TOTAL-REVENUES> 477,497
<CGS> 201,182
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<INTEREST-EXPENSE> 59,189
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<NET-INCOME> (6,138,603)
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