<PAGE> 1
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
DEMEGEN, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
DEMEGEN, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:*
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
---------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE> 2
DEMEGEN, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Notice is hereby given that the Annual Meeting of Stockholders of Demegen, Inc.,
(the "Corporation") will be held at the Holiday Inn Parkway East, 915 Brinton
Road, Pittsburgh, Pennsylvania 15221, on Friday, February 18, 2000 at 3:00 p.m.
local time for the following purposes:
1. To elect seven directors to serve for a one year period.
2. To ratify the appointment by the Board of Directors of Ernst & Young
LLP as independent auditors for the fiscal year ending September 30,
2000.
3. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Required Vote: The presence, in person or by proxy, of the holders of a majority
of all Common and Preferred Stock is necessary for a quorum at the Annual
Meeting. In all matters other than the election of Directors, the affirmative
vote of the majority of shares present in person or represented by proxy shall
decide any question before such meeting. Directors will be elected by a
plurality of the votes cast, either in person or by proxy, at the Annual
Meeting.
YOUR VOTE IS IMPORTANT. If you are unable to attend the Annual Meeting, please
mark, date, sign and return the accompanying proxy in the enclosed return
envelope by February 10, 2000. A Stockholder executing and returning a proxy has
the power to revoke it at any time before it is voted (i) by giving written
notice of such revocation to the Corporation, (ii) by submission of another
proxy bearing a later date or (iii) by attending the meeting and requesting to
vote in person.
By Order of the Board of Directors
Richard D. Ekstrom
Chairman
1
<PAGE> 3
DEMEGEN, INC.
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
FEBRUARY 18, 2000
PROXIES
The Board of Directors is soliciting proxies from Stockholders to permit
Stockholders who are unable to attend the Annual Meeting to cast their vote.
A proxy form is included with this Proxy Statement. This proxy permits the
Stockholder to direct the proxy holders to vote in accordance with any
specification made thereon and, if no specification is made, will be voted for
the election as directors of the nominees named herein and in favor of ratifying
the appointment of Ernst & Young as independent auditors for the fiscal year
ending September 30, 2000.
A Stockholder executing and returning a proxy has the power to revoke it at any
time before it is voted (i) by giving written notice of such revocation to the
Secretary of the Company, or (ii) by submission of another proxy bearing a later
date or (iii) by attending the meeting and requesting to vote in person.
The enclosed proxy should be signed in the name of the Stockholder listed
thereon.
QUORUM AND VOTE REQUIRED FOR APPROVAL
The presence, in person or by proxy, of the holders of a majority of all Common
Stock is necessary for a quorum at the Annual Meeting. The favorable vote of a
majority of the votes represented at the meeting is required for the approval of
each proposal brought before the Meeting, except for the election of Directors,
which will be determined by a plurality of the votes cast.
IF YOU ARE UNABLE TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY
FORM AND RETURN IT IN THE ENCLOSED RETURN ENVELOPE BY FEBRUARY 10, 2000.
The Board of Directors
Demegen, Inc.
January 7, 2000
2
<PAGE> 4
GENERAL INFORMATION
This Proxy Statement is furnished beginning January 7, 2000 to all Stockholders
in connection with the solicitation on behalf of the Board of Directors of
Demegen, Inc. (the "Corporation") of proxies to be voted at the Annual Meeting
of the Stockholders of the Corporation on Friday, February 18, 2000.
The Record Date for determining those Stockholders entitled to notice of, and
those Stockholders entitled to vote at, the Annual Meeting is January 3, 2000
and any adjournment thereof. As of that date, 26,361,899 shares of the
Corporation common stock, par value $0.001 (Common Stock) and 4,444,444 shares
of its preferred stock, par value $0.001 (Preferred Stock) were issued and
outstanding. Each holder of shares of Common Stock and each holder shares of
Preferred Stock shall have one vote for each share held of record on each matter
which is being submitted for Stockholder approval except in connection with the
election of directors. In accordance with the provisions of the Corporation's
Articles of Incorporation, as amended, (i) four directors are to be elected
solely by the holders of Common Stock , (ii) two directors are to be elected
solely by the holders of Preferred Stock, and (iii) one director is to be
elected by all Stockholders.
ELECTION OF DIRECTORS
The size of the Board of Directors is currently seven members. At the Special
Meeting of Stockholders held on September 19, 1998, amendments to the
Corporation's Articles of Incorporation (the "Articles") were approved which
created a classified Board of Directors of six members, three of whom are to be
elected solely by the vote of holders of Common Stock. As permitted by the
Articles, at a meeting of the Board held on October 16, 1998, the Board passed a
resolution with the consent of the holders of Preferred Stock increasing the
size of the Board to seven members, with four member to be elected solely by the
vote of holders of Common Stock. Accordingly, holders of Common Stock are
entitled to vote their shares for five of the seven directors to be elected at
the Annual Meeting. With the vote at the Annual Meeting on February 18, 2000 the
Board of Directors will continue to consist of seven members.
The proxies given by holders of Common Stock will be voted for the election as
directors of five nominees to hold office for a period of one year or until
election of their successors. All nominees are current members of the Board.
Should any nominee become unable to accept election, the proxies will be voted
for the election of such person, if any, as shall be recommended by the Board of
Directors, or for holding a vacancy to be filled by the Board. The Board of
Directors has no reason to believe that the persons listed as nominees will be
unable to serve.
The following table lists, as of December 31, 1999 the following information
concerning each nominee for director: his principal occupation or employment;
age; the year in which he first became a director of the Corporation; and any
directorships in public companies.
<TABLE>
<CAPTION>
DIRECTOR
NAME, PRINCIPAL OCCUPATION, AND AGE SINCE
----------------------------------- --------
<S> <C>
NOMINEES TO BE ELECTED BY COMMON STOCKHOLDERS
RICHARD D. EKSTROM 1996
Richard D. Ekstrom has served as Chairman of the Board of
Directors and President of the Company since January 1996.
Mr. Ekstrom was Chief Financial Officer from December 1994
until August 1998. Mr. Ekstrom holds a B.A. from Cornell
University and an M.B.A. from Boston University. From 1990
through 1991, Mr. Ekstrom was President of Cost Containment
Corporation and from 1993 through 1994, he was Chief
Operating Officer of Preferred Solutions Inc., both of which
were start-up pharmacy benefit management companies. Mr.
Ekstrom is a member of the Board of Directors of Phytotech,
Inc., a biotechnology company. Age, 55.
JESSE JAYNES 1992
Jesse M. Jaynes, Ph.D. is a Co-Founder of the Company and
has served as Vice President of Research since 1992. He is
the Company's Chief Scientist and the inventor of the core
technologies. He holds A.S. in Biology from the College of
Eastern Utah, a B.S. in Zoology from Southern Utah State
University and earned his doctorate in BioChemistry at
Brigham Young University. He completed postdoctoral
fellowships in the Department of Plant Pathology at Montana
State University and the Plant Growth Laboratory at the
University of California, Davis before joining the faculty
of Louisiana State University in 1985. Age, 48.
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
DIRECTOR
NAME, PRINCIPAL OCCUPATION, AND AGE SINCE
----------------------------------- --------
<S> <C>
JOHN BRIDWELL 1999
John Bridwell has been President of Ditch Witch of Oklahoma
for the past 20 years. Presently, he is involved with an
Oklahoma health care company; Health Heaven, Shepard Mall
Partnership, Riva Finance Co. and the City of Edmond
Economic Development. He is also currently serves as
director of First Enterprise Bank of Oklahoma City. Age, 67
ROBERT E. HANNAN 1999
Robert E. Hannan is the Principal and Chief Executive
Officer of the Genesis Group a diversified business
consulting firm since 1981. Genesis Group has served the
health care and biotechnology industries since its
inception. Mr. Hannan is also Founder and Chief Executive
Officer of POV Incorporated, a strategic management
publishing firm and is Founder and Editorial Director of
four health care news releases under the brand name The
Genesis Report. Mr. Hannan is a member of the American
Association for the Advancement of Science and the New York
Academy of Science. Mr. Hannan is a member of the Board of
Directors of four privately held Healthcare and
Biotechnology companies. Age, 52
NOMINEE TO BE ELECTED BY ALL STOCKHOLDERS
JERRY B. HOOK 1999
Jerry B. Hook, Ph.D., until recently, was the Chairman of
the Board and CEO of Sparta Pharmaceuticals, Inc., which was
recently sold to Supergen, Inc. Dr. Hook was previously
President and CEO of Lexin Pharmaceutical, which was
acquired by Sparta in 1996. Prior to Lexin, he was Senior
Vice President and Director, Research and Development
SmithkKline Beecham Pharmaceuticals. Previously, Dr. Hook
was Professor of Pharmacology and Toxicology at Michigan
State University and Director, Center for Environmental
Toxicology. Age, 61.
NOMINEES TO BE ELECTED BY PREFERRED STOCKHOLDERS
KONRAD WEIS 1998
Konrad M. Weis, Ph.D., is the former President and Chief
Executive Officer of Bayer USA, the American subsidiary of
Bayer AG, a chemical, pharmaceutical and information
company. Dr. Weis is currently on the boards of PNC Equity
Management Corporation, Michael Baker Corporation, Titan
Pharmaceuticals and Visible Genetics, Inc. In addition, he
is a trustee of Carnegie Mellon University. Age, 71.
JAMES COLKER 1998
James Colker is the Managing General partner of the CEO
Venture Fund. He is also chairman of the Pittsburgh High
Technology Council, the Pittsburgh Biomedical Development
Corporation, the Pennsylvania Technology Council and trustee
of Penn Southwest Association, as well as a board member of
a number of small advanced technology companies. Previously,
Mr. Colker was Chairman and Chief Executive Officer of
Contraves Goerz Corporation. Age, 71.
</TABLE>
Messrs. Colker and Weis are affiliates of CEO Venture Fund, which purchased
4,444,444 shares of the Company's Preferred Stock in June of 1998 prior to their
election to the Board of Directors. None of the other nominees has been a party
to any transaction with the Company during the last 3 years except, with respect
to nominees who are also employees of the Company, various transactions related
solely to the terms of their employment.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF
EACH OF THE NOMINEES.
4
<PAGE> 6
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1999, the ownership of the
Company's Common Stock and Convertible Preferred Stock by (i) each director of
the Company, (ii) all executive officers and directors of the Company as a
group, and (iii) all persons known by the Company to own more that 5% of the
Company's Common and Convertible Preferred Stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
--------------------
TITLE OF NUMBER OF
NAME AND ADDRESS CLASS SHARES (1) % (1)
---------------- -------- ----------- ------
<S> <C> <C> <C>
Richard D. Ekstrom (2) Common 2,578,250 7.93%
1051 Brinton Road
Pittsburgh, PA 15221
Jesse M. Jaynes, Ph.D. (3) Common 1,996,626 6.16%
1051 Brinton Road
Pittsburgh, PA 15221
John Bridwell (5) Common 1,009,937 3.28%
1051 Brinton Road
Pittsburgh, PA 15221
Robert E. Hannan (4) Common 100,000 0.32%
1051 Brinton Road
Pittsburgh, PA 15221
Konrad Weis Ph.D. (5) Common 359,616 1.17%
1445 Bennington Avenue
Pittsburgh, PA 15217
James Colker (6) Common 9,435,000 26.38%
2000 Technology Drive
Suite 160
Pittsburgh, PA 15219
Jerry B. Hook Ph.D. (7) Common 100,000 0.32%
1051 Brinton Road
Pittsburgh, PA 15221
All Directors and Officers Common 15,579,429 39.60%
as a group (7 persons)
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities & Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to options
or warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of December 31, 1999, are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
beneficially owned.
(2) Includes 1,700,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
(3) Includes 1,600,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable and 15,000 shares of Common Stock
owned by Mr. Jaynes' minor child over which he claims beneficial ownership.
(4) Includes 100,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
(5) Includes 25,000 shares of Common Stock issuable upon the exercise of options
that are currently exercisable
(6) Mr. Colker is the Managing General Partner of the CEO Venture Fund III
("CEO") and, therefore, is considered to have beneficial ownership over the
Company's Convertible Preferred Stock and related Warrant held by the Fund.
The 4,444,444 shares of Convertible Preferred Stock are convertible into
4,444,444 shares of the Company's Common Stock. Additionally, CEO has a
Warrant to purchase 4,965,556 shares of the Company's Common Stock at an
exercise price of $0.45 per share. The Warrant expires on June 14, 2008.
5
<PAGE> 7
Additionally, Mr. Colker has assigned options that he received as a Director
of the Company, to purchase 25,000 shares of Common Stock to the CEO Venture
Fund III. The options are currently exercisable.
(7) Includes 100,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
During the fiscal year ended September 30, 1999, there were eight regular
meetings of the Board of Directors, and each of the incumbent directors attended
at least 75% of the total number of meetings of the Board of Directors. Each of
the incumbent directors attended at least 75% of the meetings of the committees
of the Board of Directors on which they served during the fiscal year.
The Board of Directors has several committees which perform various functions.
The Audit Committee reviews the work of the Corporation's independent auditors
and management to ensure that each is properly discharging its responsibilities
in the area of financial control and reporting. The committee presently consists
of Messrs. Colker, Weis, Bridwell, Hannan and Hook. The Audit Committee held one
meeting during the fiscal year ended September 30, 1999.
The Nominating Committee recommends prospective nominees for election to the
Board of Directors. The committee presently consists of Messrs. Colker, Weis,
Bridwell, Hook, Hannan and Ekstrom. The Nominating Committee held one meeting in
the fiscal year ended September 30, 1999. The Nominating Committee will consider
recommendations by stockholders in accordance with the Corporation's By-Laws.
Any such recommendations are to be submitted to the Secretary of the Corporation
in accordance with the By-Laws.
The Compensation Committee is responsible for administering the Corporation's
Stock Option Plan, designating employees eligible to participate in such plan,
the number of options to be granted and the terms and conditions of each option.
The Compensation Committee also reviews the performance of the Corporation's
management and makes recommendations with respect to the compensation of
management. The committee presently consists of Messrs. Colker, Weis, Bridwell,
Hook and Hannan. The Compensation Committee held one meeting in the fiscal year
ended September 30, 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Colker, Weis, Bridwell, Hook and
Hannan.
6
<PAGE> 8
EXECUTIVE OFFICERS; COMPENSATION
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Richard D. Ekstrom 55 Chairman and President
Jesse M. Jaynes 48 Vice President of Research
</TABLE>
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the named executives
concerning their respective annual and long term compensation for the last three
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Awards Payouts
------------------------------------ ---------------------------------
(b) (e) (f) (g) (h) (i)
(a) (c) (d) Other Annual Restricted Options/ LTIP All Other
Name and Salary Bonus Compensation Stock SARs Payouts Compensation
Principal Position Year ($)(A)(B) ($) ($) Awards($) (#)(D) ($) ($)(E)
------------------ ---- --------- ----- ---------------- ----------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard D. Ekstrom 1999 $120,000 -- -- -- -- -- --
President 1998 $120,000 -- -- -- 1,600,000 -- --
1997 $ 10,000 -- -- -- -- -- --
Jesse M. Jaynes 1999 $120,000 -- -- -- -- -- $1,648
Vice President 1998 $120,000 -- -- -- 1,600,000 -- $3,833
1997 $ 10,000 -- $17,000 -- -- -- --
James E. Thornton(C) 1999 $120,000 -- -- -- -- -- --
Vice President 1998 $120,000 -- -- -- 300,000 -- --
1997 $120,000 -- $18,000 -- 200,000 -- --
</TABLE>
- ---------------
(A) Represents fiscal years ended September 30.
(B) In 1999 and 1998 Mr. Thornton received $60,000 in the form of cash
compensation with the remaining $60,000 in the form of deferred
compensation. The deferred compensation shall accrue interest at 6% per
annum and shall be paid out in equal monthly installments of $3,500
beginning the next month after the final payment has been made by the
Company to Mr. Thornton under his employment agreement. In 1997 Mr. Thornton
agreed to accept $140,000 due him for services and expenses in the form of
deferred compensation, payable in accordance with the aforementioned
agreement.
(C) Mr. Thornton terminated his employment with the Company as of December 6,
1999. As part of that termination agreement and previous agreements Mr.
Thornton will receive the following:
- Two months of full salary ($10,000 per month) as severance
- Forty eight monthly payments of $3,500 from March 2000 until February
2004 under his Compensation Release Agreement
- Payment of $3,500 per month from March 2004 until August 2007 under
his Deferred Compensation Agreement
(D) All options are fully vested. The options issued in Fiscal 1998 are at an
exercise price of $0.05 per share and expire on March 5, 2008. The options
issued in Fiscal 1997 are at an exercise price of $0.875 per share and
expire on October 2, 2001. Mr. Ekstrom's option issued in Fiscal 1996 to
purchase up to 600,000 shares of Common Stock at an exercise price of $0.15
per share had their expiration date extended from October 31, 2000 to
October 31, 2010 at the September 17, 1999 meeting of the Compensation
Committee.
(E) Represents premiums on $1 million life insurance policy on the life of Dr.
Jaynes whose beneficiary is Dr. Jaynes' family.
7
<PAGE> 9
COMPENSATION OF DIRECTORS
The directors of the Company are reimbursed for expenses that they incur in
attending the Board of Directors' meeting.
During Fiscal 1999 and in the case of Mr. Hook, Fiscal 2000, the members of the
Company's Board of Directors received the following options to purchase shares
of the Company's Common Stock for $0.45 per share. The options expire February
18, 2004 except for Mr. Hannan's options which expire May 23, 2004 and Mr.
Hook's options which expire November 18, 2004.
<TABLE>
<CAPTION>
DIRECTOR OPTIONS TO PURCHASE
-------- -------------------
<S> <C>
John Bridwell 25,000 shares
Konrad Weis 25,000 shares
James Colker (A) 25,000 shares
Robert Hannan 100,000 shares
Jerry Hook 100,000 shares
</TABLE>
(A) Mr. Colker assigned his options to the CEO Venture Fund III of which he is
the Managing General Partner.
Effective September 30, 1999, Messrs. Guthrie and Lovo retired from the
Company's Board of Directors. In recognition of their years of service to the
Company, the Board of Directors at its September 17, 1999 meeting, awarded each
retiring director an option to purchase up to 35,000 shares of the Company's
Common Stock at $0.45 per share. The option expires September 17, 2004.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
AGREEMENTS WITH AFFILIATED PARTIES
None
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors of the Company, acting upon the recommendation of its
Audit Committee, has appointed Ernst & Young LLP, independent auditors, to
examine the financial statements of the Company for the fiscal year ending
September 30, 2000. Ernst & Young has conducted the annual audit of the
Company's financial statements since 1995. Although stockholder approval of this
appointment is not required by law or binding on the Board, the Board believes
that stockholders should be given this opportunity to express their views. If
the stockholders do not ratify the appointment of Ernest & Young as the
Company's independent auditors, the Board will consider this vote in determining
whether or not to continue the engagement of Ernst & Young.
A representative of Ernst & Young is expected to be present at the meeting with
an opportunity to make a statement if such representative desires to do so and
to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS RATIFICATION OF THE APPOINTMENT OF ERNST &
YOUNG.
OTHER BUSINESS
The Board of Directors is not aware of any other matter to be voted upon at the
meeting. However, Stockholders unable to attend the Annual Meeting of
Stockholders may permit the person or persons designated in the proxy form
submitted by them to vote their shares in their discretion upon any other
business which may properly come before the meeting.
8
<PAGE> 10
STOCKHOLDERS' PROPOSALS FOR 2001 ANNUAL MEETING
Pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), stockholders may present proper proposals for inclusion in
the Company's proxy statement and for consideration at the next Annual Meeting
of Stockholders by submitting such proposals to the Company in a timely manner.
In order to be so included for the 2001 Annual Meeting, stockholder proposals
must be received by the Company no later than November 1, 2000 and must
otherwise comply with the requirements of Rule 14a-8. Stockholder proposals
submitted outside the processes of Rule 14a-8 must be received by the Company no
later than December 1, 2000 and must otherwise comply with the requirements of
Rule 14a-4(c) under the Exchange Act; in accordance with Rule 14a-4(c), proxy
holders will have discretionary authority to vote in accordance with their
judgement upon any such proposal which is not timely received by the Company or
which does not otherwise comply with Rule 14a-4(c).
FINANCIAL INFORMATION
The following information comprises part of the Annual Report of the Company for
the fiscal year ended September 30, 1999:
ITEM 5 -- MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted on the Over-the-Counter Bulletin
Board since 1994 under the symbol "DBOT". The following table sets forth, based
upon information received from the National Quotation Bureau, the high and low
bid/ask prices for the Common Stock for the quarters indicated. The quotations
represent bid between dealers and do not include retail mark-up, mark-down or
commissions, and do not represent actual transactions.
<TABLE>
<CAPTION>
FISCAL DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
- ------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
1999
High................................................. $0.51 $0.51 $0.63 $0.44
Low.................................................. $0.21 $0.32 $0.29 $0.24
1998
High................................................. $0.88 $0.66 $0.75 $0.53
Low.................................................. $0.42 $0.32 $0.30 $0.24
</TABLE>
At December 2, 1999, there were 503 holders of record of 26,361,899 shares of
Common Stock, exclusive of holders which maintain their ownership in
"Street-Name" at brokerage houses, and one holder of record of 4,444,444 shares
of Preferred Stock. There are approximately 1,230 stockholders which hold their
ownership in street name.
9
<PAGE> 11
PART II
ITEM 6 -- SELECTED FINANCIAL DATA
The following table sets forth certain financial data for, and as of the end of,
the years ended September 30, 1999, 1998, 1997, 1996 and 1995 and for the period
December 6, 1991 (inception) to September 30, 1999:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995 1999
------------ ------------ ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Grant and Other Income....... $ 1,118,576 $ 1,376,918 $ 764,834 $ 271,777 $ 167,592 $ 3,816,497
Total Expenses............... 2,456,318 3,370,671 1,708,607 2,841,255 3,041,431 16,591,764
Net Loss..................... (1,337,742) (1,993,753) (943,773) (2,569,478) (2,873,839) (12,775,267)
Net Loss per Share
(dilutive)................. $ (0.06) $ (0.13) $ (0.05) $ (0.17) $ (0.35)
Dividends per Share.......... $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Average Number of
Common Shares
Outstanding................ 26,255,104 23,867,091 19,537,047 15,479,889 12,529,314
BALANCE SHEET DATA:
Cash & Cash Equivalents...... $ 583,585 $ 1,686,658 $ 310,252 $ 19,266 $ 1,004
Working Capital
(deficiency)............... 6,849 1,329,541 (1,498,477) (2,754,591) (3,382,190)
Total Assets................. 1,084,505 2,114,750 651,963 156,147 106,746
Long-term obligations........ -0- -0- -0- -0- 13,899
Deficit accumulated during
development stage.......... (14,119,462) (12,523,358) (9,443,772) (8,499,999) (5,930,521)
Redeemable convertible
preferred stock............ 1,768,846 1,510,484 -0- -0- -0-
Shareholders' Equity
(Deficit).................. (1,555,934) (122,130) (1,158,216) (2,642,523) (3,293,313)
</TABLE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION &
RESULTS OF OPERATIONS
GENERAL
Since commencement of operations in 1992, the Company has been engaged in
research and development activities, including conducting preclinical studies
and clinical trials, and recruiting its scientific and management personnel,
establishing laboratory facilities and raising capital. The Company has not
received any revenue from the direct sale of its products to the general public
but has received grant monies and license payments from other corporations from
the license of the Company's technology.
The Company is a "Development Stage Company" that designs synthetic
peptide/protein compounds and genes for pharmaceutical and agricultural
applications. Current development programs include a new treatment for prostate
cancer, severely burned patients, a vaginal microbicide, and pulmonary
infections, and two transgenic agricultural applications -- one to prevent plant
diseases, the other to increase the nutritional value of food and feed crops.
The Company has two licenses in place for its agricultural technology, disease
resistance and nutritional enhancement, to Dow Agro Sciences which has produced
historic revenue streams and will continue to produce revenue as Dow Agro
Sciences proceeds towards commercialization of these technologies. The Company
is focusing its pharmaceutical efforts upon the commercialization of its cancer
therapeutic which it expects to license to a large pharmaceutical producer.
RESULTS OF OPERATION:
SEPTEMBER 30, 1999 VS 1998
In the year ended September 30, 1999 (Fiscal 1999), grants, license fees and
other income was $1.1 million compared to $1.4 million in the year ended
September 30, 1998 (Fiscal 1998). The fiscal 1999 revenue was primarily due to a
$0.5 million licensing fee and research funding received from Dow Agro Sciences
LLC as part of the modification of its license agreement providing Dow Agro
Sciences with an additional license for the Company's agricultural nutrition
technologies. Additionally, a cancer charity made a grant of $0.375 million
during the Fiscal 1999 period as part of an ongoing program to fund the
10
<PAGE> 12
Company's development of cancer fighting drugs. During the Fiscal 1998 period,
revenue of $0.9 million was received from Dow Agro Sciences relative to the
initial license for the Company's agricultural disease resistance technologies.
Additionally a grant of $0.25 million was received from the aforementioned
cancer charity.
Total expenses increased in the current year exclusive of the $1.7 million
non-cash charge in the fiscal 1998 period for the issuance of stock options to
employees and directors. The increase was due to a higher employee headcount in
the current fiscal period and increased expenditures supporting the Company's
research activity.
Research and development expenditures increased to $1.5 million in fiscal 1999
from $0.9 million in fiscal 1998 due to increased funding relative to its cancer
drug research. The focus of this research was upon the method of action and
other areas in preparation for the submission of an IND to the FDA.
General and administrative expenses increased by $0.1 million to $0.78 million
in the current fiscal year as compared to the prior fiscal year when the $1.7
million non-cash charge for compensation expense is excluded from the prior
fiscal year. Depreciation and amortization increased to $0.15 million from $0.12
million in fiscal 1998 due to capitalization of additional patent costs and the
construction of a new laboratory at the Company's new Pittsburgh office.
The Company did not have a federal or state income tax provision in either
Fiscal 1999 or 1998 due to the loss recorded in each year. An allowance was
recognized to offset the tax benefit until such time that the Company generates
taxable income.
The amounts described above resulted in a net loss of $1.3 million in the Fiscal
1999 period as compared to a net loss of $2.0 million for the Fiscal 1998
period.
SEPTEMBER 30, 1998 VS 1997
In the year ended September 30, 1998 (Fiscal 1998) grants and other income
increased significantly to $1.4 million from $0.8 million in the year ended
September 30, 1997 (Fiscal 1997). This increase was due to a $0.9 million
licensing fee received from Dow Agro Sciences as part of the license entered
into during Fiscal 1998. Additionally, a cancer charity made a grant of $0.25
million during Fiscal 1998 as part of an ongoing program to fund the Company's
development of cancer fighting drugs. During Fiscal 1997, a grant of $0.5
million was received from this fund. Additionally, the Company recognized $0.1
million of revenue related to research expenses funded by Dow Agro Sciences and
received $0.04 million of interest on its cash balances.
Research and development expenses increased to $0.9 million in Fiscal 1998 from
$0.6 million in Fiscal 1997 due to the Company's increased funding relative to
its cancer and sexually transmitted disease drug research.
General and administrative expenses increased to $2.3 million in Fiscal 1998
from $0.9 million in Fiscal 1997. Included in general and administrative
expenses was a non-cash charge of $1.7 million for the issuance of below market
stock options issued to employees and directors during Fiscal 1998 that vested
during the year. Exclusive of the non-cash charge, general and administrative
expenses decreased by $0.25 million to $0.62 million due to decreased legal
costs and overall cost containment.
Interest expense decreased to $0.03 million in Fiscal 1998 from $0.17 million in
Fiscal 1997 due to the $1.6 million decrease in amounts payable to related
parties through the conversion of certain amounts to restricted stock and
forgiveness of certain amounts payable late in Fiscal 1997. The receipt of the
license fee from Mycogen in March 1998 put the Company in a cash positive
position and was used to eliminate the majority of interest bearing payables to
employees and directors. Additionally, the conversion and forgiveness of
employee debt in Fiscal 1997 eliminated a significant amount of liabilities
which were interest bearing.
Depreciation and amortization increased to $0.12 million in Fiscal 1998 from
$0.07 million in Fiscal 1997. The increase was primarily due to increased
amortization of the License Agreement with LSU which required an initial payment
of 700,000 shares (valued at $245,000) of the Company's common stock in May 1997
and the increase in amortization of capitalized patent costs associated with the
Company's product processes.
The Company did not have a federal or state income tax provision in either
Fiscal 1998 or 1997 due to the loss recorded in each period.
The amounts described above resulted in a net loss of $2 million for Fiscal
1998. The net loss would have been $0.3 million if the aforementioned non-cash
charge was excluded.
11
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 1999
During the year ended September 30, 1999, the Company's cash and cash
equivalents decreased by $1.1 million to $0.6 million. Net cash provided by
financing activities of $0.1 million was offset by $0.27 million of net cash
utilized by investing activities and net cash used by operating activities of
$0.93 million.
Specifically, cash inflows from financing activities included $0.02 million
realized from the exercise of stock options, $0.02 million from an equipment
financing and a $0.07 million increase in payables to related parties.
The $0.93 million of cash utilized by operating activities consisted of the net
loss of $1.3 million, and a decrease of $0.09 million in unearned revenue,
partially offset by $0.15 million of depreciation and amortization, a $0.04
million decrease in accounts receivable, and a $0.23 million increase in
accounts payable and other liabilities.
The $0.27 million of cash utilized by investing activities relates to $0.21
million for the purchase of property, plant and equipment and $0.06 million of
patent costs capitalized as intangible costs in the current year.
FISCAL 1998
During the year ended September 30, 1998, the Company's cash and cash
equivalents increased by $1.4 million to $1.7 million. Net cash provided by
financing of $1.6 million was partially offset by a $0.01 million of net cash
utilized by operating activities and $0.14 million of net cash utilized by
investing activities.
Specifically, cash inflows from financing activities included the $1.9 million
net proceeds from the issuance of preferred stock and warrant to the CEO Venture
fund in June 1998. Additionally, $0.09 million was realized from the exercise of
stock options. These sources of funds were partially offset by a $0.41 million
decrease in payables to related parties.
The $0.1 million of cash utilized by operating activities consisted of the net
loss of $2 million and a decrease of $0.21 million decrease in accounts payable
and other liabilities offset by the $1.7 million of non-cash compensation
related to the issuance of below market stock options issued to employees and
directors that vested during the year, $0.12 million of depreciation and
amortization, $0.09 million of stock issued for services and a $0.18 million
increase in unearned revenue relating to the $0.3 million three year
administration fee paid to the Company in October 1997 by Mycogen.
The $0.14 million of cash utilized by investing activities relates to
$0.05 million for the purchases of property, plant and equipment and $0.08
million of patent costs capitalized as intangible assets in the current year.
FISCAL 1997
During the year ended September 30, 1997, the Company's cash increased by $0.3
million. Net cash provided by financing activities of $0.9 million was partially
offset by a $0.6 million of net cash utilized by operating activities and $0.07
million of net cash utilized by investing activities.
Cash from financing activities was generated from $0.1 million net proceeds from
the issuance of the Company's Common Stock and $0.82 million increase in
payables to related parties due to services provided to the Company.
Cash utilized in operating activities was caused by the net loss of $0.94
million and a $0.5 million decrease in accounts payable and accrued expenses.
This was partially offset by $0.07 million of depreciation and amortization and
$0.48 million of stock issued for services rendered to the Company.
Cash utilized by investing activities was primarily due to a $0.08 million
increase in intangible assets due to the capitalization of patent related
expenses.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer program that
is not Year 2000 compliant and has date sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000.
12
<PAGE> 14
The Company processes its financial information on a commercially sold
accounting package. This package has been modified by the developer such that
they have represented to the Company that it is Year 2000 compliant. The
Company's payroll is processed by a third party processor who has notified the
Company that they are Year 2000 compliant. The remaining computer applications
at the Company are not date sensitive and are primarily of a word processing,
data base or scientific research nature.
The Company has not and does not expect to perform an assessment of the Year
2000 preparedness of all of its third party relationships. In making this
decision, the Company has considered that there are many vendors for the
products that they purchase should they have to change suppliers due to a Year
2000 problem. The Company has not selected an institution to perform its Phase I
clinical tests. The issue of Year 2000 preparedness will be part of the
selection process at the time that the institution to handle the clinical trials
is selected.
In the worst case, a Year 2000 failure at one of the Company's vendors could
result in a delay in the availability of an item on order. Except for the
purchase of peptides from vendors, of which the Company keeps a sufficient
inventory to manage short-term requirements, all other items purchased from
third party vendors are of the nature of office supplies and miscellaneous
items. The unavailability of any of the aforementioned would result in the
purchase of the affected items from another vendor as none of these items are
vendor specific.
PROSPECTIVE INFORMATION
The Company believes that it has adequate liquidity to fund its operations in
Fiscal 2000 if the expected milestone, research support, license and sub-license
payments are received from Dow Agro Sciences as expected. Should the expected
payments either be delayed or not forth coming the Company would scale back its
level of expenditures to maintain sufficient cash flow to fund basic operations.
On a long term basis, it will be necessary for the Company to access additional
funding so that it can continue to fund the Phase I and Phase II testing of its
therapeutic agents. This funding may be in the form of a private placement of
equity securities or a secondary issuance of securities into the market.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE MARKET RISK
None
13
<PAGE> 15
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Demegen, Inc.
We have audited the accompanying balance sheets of Demegen, Inc. (a development
stage company) as of September 30, 1999 and 1998, and the related statements of
operations, shareholders' deficit, and cash flows for the years ended September
30, 1999, 1998, and 1997, and for the period from December 6, 1991 (inception)
through September 30, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements for the
period from December 6, 1991 (inception) through September 30, 1994, were
audited by other auditors whose report dated November 10, 1994, expressed an
unqualified opinion on those statements and included an explanatory paragraph
regarding the entity's ability to continue as a going concern, that is not
included in our current report as the result of additional financing obtained by
the Company. The financial statements for the period December 6, 1991
(inception) through September 30, 1994, include total revenues and net loss of
$1,116,800 and $3,056,682, respectively. Our opinion on the statements of
operations, shareholders' deficit, and cash flows for the period December 6,
1991 (inception) through September 30, 1999, insofar as it relates to amounts
for prior periods through September 30, 1994, is based solely on the report of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Demegen, Inc. (a development stage company) at
September 30, 1999 and 1998, and the results of its operations and its cash
flows for the years ended September 30, 1999, 1998, and 1997, and for the period
from December 6, 1991 (inception) through September 30, 1999, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Pittsburgh, PA
November 12, 1999
14
<PAGE> 16
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 583,585 $ 1,686,658
Accounts receivable....................................... 22,546 59,929
Prepaid expenses and other current assets................. 2,057 11,859
------------ ------------
Total current assets................................... 608,188 1,758,446
Property and equipment:
Furniture and equipment................................... 195,786 38,440
Computer hardware and software............................ 165,758 113,416
------------ ------------
361,544 151,856
Less accumulated depreciation and amortization............ (151,219) (94,271)
------------ ------------
210,325 57,585
Intangible assets:
Licenses.................................................. 245,000 245,000
Patents................................................... 248,436 183,504
------------ ------------
493,436 428,504
Less accumulated amortization............................... (227,444) (129,785)
------------ ------------
265,992 298,719
------------ ------------
Total assets........................................... $ 1,084,505 $ 2,114,750
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Payable to employees and directors........................ $ 92,000 $ 110,933
Accounts payable.......................................... 354,988 178,232
Unearned revenue.......................................... 91,667 91,668
Other liabilities......................................... 62,684 48,072
------------ ------------
Total current liabilities.............................. 601,339 428,905
Payable to employees and directors.......................... 203,147 178,400
Unearned revenue............................................ -- 91,665
Other....................................................... 67,107 27,426
------------ ------------
Total liabilities...................................... 871,593 726,396
Commitments and contingency
Redeemable convertible preferred stock, $.001 par
value--40,000,000 shares authorized; 4,444,444 shares
issued and outstanding.................................... 1,768,846 1,510,484
Shareholders' deficit:
Common stock, $.001 par value--100,000,000 shares
authorized; 26,361,899 and 25,866,899 shares issued and
outstanding at September 30, 1999 and September 30,
1998, respectively..................................... 26,362 25,867
Warrants.................................................. 497,000 497,000
Additional paid-in capital................................ 12,040,166 11,878,361
Deficit accumulated during the development stage.......... (14,119,462) (12,523,358)
------------ ------------
Total shareholders' deficit............................ (1,555,934) (122,130)
------------ ------------
Total liabilities and shareholders' deficit............ $ 1,084,505 $ 2,114,750
============ ============
</TABLE>
See accompanying notes.
15
<PAGE> 17
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 6, 1991
(INCEPTION) TO
1999 1998 1997 SEPTEMBER 30, 1999
----------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Income:
License................................... $ 350,000 $ 906,651 $ 100,000 $ 1,356,651
Grant and other........................... 708,475 425,398 664,834 2,354,876
Interest.................................. 60,101 44,869 -- 104,970
----------- ----------- ----------- ------------
Total income........................... 1,118,576 1,376,918 764,834 3,816,497
Expenses:
Research and development.................. 1,513,680 880,965 596,772 5,492,885
General and administrative................ 784,891 2,338,817 866,910 9,672,619
Interest.................................. 3,140 28,295 172,356 982,724
Depreciation and amortization............. 154,607 122,594 72,569 443,536
----------- ----------- ----------- ------------
Total expenses......................... 2,456,318 3,370,671 1,708,607 16,591,764
----------- ----------- ----------- ------------
Net loss.................................... (1,337,742) (1,993,753) (943,773) (12,775,267)
Preferred dividend and accretion amounts.... (258,362) (1,085,833) -- (1,344,195)
----------- ----------- ----------- ------------
Net loss applicable to common stock......... $(1,596,104) $(3,079,586) $ (943,773) $(14,119,462)
=========== =========== =========== ============
Net loss per common share, basic and
diluted................................... $ (0.06) $ (0.13) $ (0.05)
=========== =========== ===========
Weighted average common stock outstanding... 26,255,104 23,867,091 19,537,047
=========== =========== ===========
</TABLE>
See accompanying notes.
16
<PAGE> 18
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
AVERAGE COMMON STOCK ADDITIONAL DURING THE
PRICE -------------------- PAID-IN RECEIVABLE DEVELOPMENT
PER SHARE SHARES AMOUNT WARRANTS CAPITAL FROM OFFICER STAGE TOTAL
--------- ---------- ------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Acquired in merger with
Excelsion Capital
Corporation............... 10,743,571 $10,744 $ -- $ 312,681 $ -- $ -- $ 323,425
Loss from inception
(December 6, 1991) to
September 30, 1992.... -- -- -- -- (244,100) (244,100)
Capital contributed by a
shareholder........... -- -- -- 123,700 -- -- 123,700
Proceeds from the sale
of unrestricted shares
contributed by
shareholders in
exchange for
restricted shares..... $ .62 439,045 439 -- 272,461 -- -- 272,900
Payment of debt with
stock warrants........ -- -- -- 33,333 -- -- 33,333
Payment of interest with
stock warrants........ -- -- -- 17,774 -- -- 17,774
Issuance of receivable
from officer.......... -- -- -- -- (65,117) -- (65,117)
Net loss for the year... -- -- -- -- -- (1,044,154) (1,044,154)
----- ---------- ------- -------- ----------- -------- ------------ -----------
Balance at September 30,
1993.................... 11,182,616 11,183 -- 759,949 (65,117) (1,288,254) (582,239)
Proceeds from the sale
of unrestricted shares
by shareholders in
exchange for
restricted shares..... .75 691,738 692 -- 517,708 -- -- 518,400
Issuance of stock for
consulting services... 1.54 58,336 58 -- 89,942 -- -- 90,000
Issuance of stock
subscriptions for loan
origination fee....... 1.14 131,250 131 -- 149,869 -- -- 150,000
Payment of interest with
stock warrants........ -- -- -- 56,164 -- -- 56,164
Net loss for the year... -- -- -- -- -- (1,768,428) (1,768,428)
----- ---------- ------- -------- ----------- -------- ------------ -----------
Balance at September 30,
1994.................... 12,063,940 12,064 -- 1,573,632 (65,117) (3,056,682) (1,536,103)
Proceeds from the sale
of restricted common
shares................ 1.06 193,133 193 -- 204,807 -- -- 205,000
Issuance of restricted
shares in exchange for
unrestricted shares
contributed by
shareholders.......... 171,694 172 -- (172) -- -- --
Proceeds from the sale
of unrestricted shares
contributed by
shareholders in
exchange for
restricted shares..... 2.18 -- -- -- 349,304 65,117 -- 414,421
Issuance of restricted
shares for payment of
services/compensation... .89 402,251 402 -- 357,681 -- -- 358,083
Issuance of warrants.... -- -- -- 11,625 -- -- 11,625
Payment of interest with
stock warrants........ -- -- -- 127,500 -- -- 127,500
Net loss for the year... -- -- -- -- -- (2,873,839) (2,873,839)
----- ---------- ------- -------- ----------- -------- ------------ -----------
Balance September 30,
1995.................... 12,831,018 12,831 -- 2,624,377 -- (5,930,521) (3,293,313)
Proceeds from the sale
of common shares...... .70 683,250 683 -- 479,817 -- -- 480,500
Issuance of shares for
payment of
services/compensation... .60 890,868 891 -- 536,359 -- -- 537,250
Issuance of shares in
settlement of
outstanding debt and
other obligations..... .47 4,468,285 4,468 -- 2,113,054 -- -- 2,117,522
Payment of interest with
warrants.............. -- -- -- 84,996 -- -- 84,996
Net loss for the year... -- -- -- -- -- (2,569,478) (2,569,478)
----- ---------- ------- -------- ----------- -------- ------------ -----------
</TABLE>
17
<PAGE> 19
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' DEFICIT (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
AVERAGE COMMON STOCK ADDITIONAL DURING THE
PRICE -------------------- PAID-IN RECEIVABLE DEVELOPMENT
PER SHARE SHARES AMOUNT WARRANTS CAPITAL FROM OFFICER STAGE TOTAL
--------- ---------- ------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996...................... 18,873,421 18,873 -- 5,838,603 -- (8,499,999) (2,642,523)
Proceeds from the sale
of restricted and
unrestricted common
shares................ .36 340,000 340 -- 104,660 -- -- 105,000
Issuance of shares for
payment of
services/compensation... .41 1,178,258 1,178 -- 477,629 -- -- 478,807
Issuance of shares in
exchange for patent
and technology
license............... .35 700,000 700 -- 244,300 -- -- 245,000
Issuance of restricted
shares in exchange for
unrestricted shares
contributed by
shareholders.......... 162,720 163 -- (163) -- -- --
Exchange of amounts due
to related parties for
restricted shares..... .33 450,000 450 -- 149,550 -- -- 150,000
Exchange of redemption
right of related party
for additional
restricted shares..... .33 145,000 145 -- (145) -- -- --
Settlement of amounts
due to related parties
through debt
forgiveness and
issuance of shares.... -- -- -- 1,449,273 -- -- 1,449,273
Net loss for the year... -- -- -- -- -- (943,773) (943,773)
----- ---------- ------- -------- ----------- -------- ------------ -----------
Balance at September 30,
1997.................... 21,849,399 21,849 -- 8,263,707 -- (9,443,772) (1,158,216)
Proceeds from exercise
of stock options...... $ .05 1,750,000 1,750 -- 85,750 -- -- 87,500
Compensation expense
from Stock option
activity.............. -- -- -- 1,699,440 -- -- 1,699,440
Issuance of warrants.... -- -- 497,000 -- -- -- 497,000
Allocation of conversion
feature of redeemable
convertible preferred
stock................. -- -- 1,022,222 -- -- 1,022,222
Accretion of conversion
feature of redeemable
convertible preferred
stock................. -- -- -- -- (1,022,222) (1,022,222)
Dividends on redeemable
convertible preferred
stock................. -- -- -- -- (40,000) (40,000)
Accretion of redeemable
convertible preferred
stock................. -- -- -- -- -- (23,611) (23,611)
Issuance of shares for
payment of
collaborators......... $ .47 20,000 20 -- 9,360 -- -- 9,380
Settlement of employee
litigation............ $ .36 1,975,000 1,975 -- 710,217 -- -- 712,192
Issuance of shares for
services.............. $ .47 187,500 188 -- 87,750 -- -- 87,938
Issuance of additional
shares to venture
capital funds and
individual
investors............. 85,000 85 -- (85) -- -- --
Net loss for the year... -- -- -- -- -- (1,993,753) (1,993,753)
----- ---------- ------- -------- ----------- -------- ------------ -----------
Balance at September 30,
1998.................... 25,866,899 25,867 497,000 11,878,361 -- (12,523,358) (122,130)
Dividends on redeemable
convertible preferred
stock................. -- -- -- -- -- (160,000) (160,000)
Accretion of redeemable
convertible preferred
stock................. -- -- -- -- -- (98,362) (98,362)
Proceeds from exercise
of Stock options...... $ .05 350,000 350 -- 17,150 -- -- 17,500
Issuance of shares for
services.............. $0.46 145,000 145 66,655 -- -- 66,800
Extension of expiration
date of stock
option................ -- -- -- 78,000 -- -- 78,000
Net loss for the year... -- -- -- -- -- (1,337,742) (1,337,742)
----- ---------- ------- -------- ----------- -------- ------------ -----------
Balance at September 30,
1999.................... 26,361,899 $26,362 $497,000 $12,040,166 $ -- $(14,119,462) $(1,555,934)
===== ========== ======= ======== =========== ======== ============ ===========
</TABLE>
See accompanying notes.
18
<PAGE> 20
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED SEPTEMBER 30 DECEMBER 6, 1991
------------------------------------- (INCEPTION) TO
1999 1998 1997 SEPTEMBER 30, 1999
----------- ----------- --------- ------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................... $(1,337,742) $(1,993,753) $(943,773) $(12,775,267)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization....................... 154,607 122,594 72,569 443,536
Stock issued for services........................... -- 97,318 478,807 1,729,058
Loss on disposals of equipment...................... -- -- 17,722 17,722
Issuance of stock options to employees and
directors......................................... 78,000 1,699,440 -- 1,777,440
Warrants issued for interest........................ -- -- -- 286,434
Notes payable issued for services................... -- -- -- 58,194
Write-off of intangible assets...................... -- -- -- 6,626
Changes in operating assets and liabilities:
Accounts receivable................................. 37,383 (59,929) -- (22,546)
Prepaid expenses and other current assets........... 9,802 (10,409) 23,363 (2,057)
Unearned revenue.................................... (91,666) 183,333 -- 91,667
Accounts payable and other liabilities.............. 217,335 (141,186) (206,861) 1,426,045
----------- ----------- --------- ------------
Net cash used in operating activities............... (932,281) (102,592) (558,173) (6,963,148)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment.................. (210,157) (54,027) (3,595) (383,375)
Cash received on equipment disposals................ -- -- 9,643 9,643
Intangible assets................................... (64,463) (84,610) (79,532) (247,967)
----------- ----------- --------- ------------
Net cash used in investing activities............... (274,620) (138,637) (73,484) (621,699)
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from issuance of equity instruments.... -- 1,943,873 105,000 4,309,500
Proceeds from exercise of stock options............. 17,500 87,500 -- 105,000
Proceeds from notes payable......................... 21,109 -- -- 1,148,609
(Decrease) increase in payable to employees and
directors......................................... 72,614 (413,738) 817,643 2,673,412
Payments on notes payable........................... (7,395) -- -- (68,089)
----------- ----------- --------- ------------
Net cash provided by financing activities........... 103,828 1,617,635 922,643 8,168,432
----------- ----------- --------- ------------
Net increase (decrease) in cash and cash
equivalents....................................... (1,103,073) 1,376,406 290,986 583,585
Cash and cash equivalents at beginning of period.... 1,686,658 310,252 19,266 --
----------- ----------- --------- ------------
Cash and cash equivalents at end of period.......... $ 583,585 $ 1,686,658 $ 310,252 $ 583,585
=========== =========== ========= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.............................. $ 3,140 $ 14,080 $ -- $ 21,642
=========== =========== ========= ============
NONCASH ACTIVITIES
Common stock issued in satisfaction of related party
payable........................................... $ 66,800 $ 712,192 $ -- $ 778,992
=========== =========== ========= ============
Dividends on redeemable convertible preferred
stock............................................. $ 160,000 $ 40,000 $ -- $ 160,000
=========== =========== ========= ============
Accretion of redeemable convertible preferred
stock............................................. $ 98,362 $ 1,045,833 $ -- $ 1,144,195
=========== =========== ========= ============
</TABLE>
See accompanying notes.
19
<PAGE> 21
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. HISTORY AND NATURE OF THE BUSINESS
Demeter BioTechnologies, Ltd. was formed after the July 27, 1992 acquisition of
the assets of The Demeter Corporation by Excelsior Capital Corporation
("Excelsior"). Excelsior was incorporated in Colorado on September 16, 1987.
Excelsior acquired all the assets of The Demeter Corporation in exchange for
6,625,821 shares of Excelsior's $.001 par value common stock. The Demeter
Corporation's assets consisted of intangible assets related to various
biotechnology applications in the fields of human and animal health care,
agriculture, and commercial chemicals.
For accounting purposes, the acquisition was treated as a reverse acquisition
whereby The Demeter Corporation acquired Excelsior Capital Corporation. The
historical financial statements prior to the acquisition are those of The
Demeter Corporation utilizing the capital structure of Excelsior. However, The
Demeter Corporation had no operating activities from the date of inception,
December 6, 1991 through July 27, 1992. Likewise, Excelsior had no operating
activities prior to December 6, 1991.
On September 18, 1998, the Board of Directors of the Company ratified the
shareholder vote changing the Company's name from Demeter BioTechnologies, Ltd.
to Demegen, Inc. (the "Company").
The Company designs unique molecules which have antimicrobial characteristics,
but with low toxicity and benign environmental impact. The Company's products,
are peptides (small proteins) or peptide-like molecules. Their primary feature
is their ability to destroy a wide range of bacteria, viruses, fungi, protozoa,
and cancer cells at low concentrations without harming healthy cells. The
Company also designs genes which, when incorporated into a plant, have the
ability to confer disease resistance or improve nutritional value. The Company
uses university, corporate, and governmental strategic alliance partners to
determine efficacy in treating a specific pathogen and then licenses the use of
the compounds for that application. If successful, the Company's primary source
of revenues will be from supplying the compounds to licensees and receiving
related license fees, royalties, and research grants. The Company has licensed
substantially all of its plant agricultural technologies to Dow Agro Sciences
LLC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists principally of currency on hand, demand
deposits at commercial banks, and liquid investment funds having a maturity of
three months or less at the time of purchase.
PREOPERATING COSTS
Costs incurred during the developmental stage, such as expenses associated with
research and development, raising capital, establishing markets, and developing
sources of supply, are expensed as incurred.
COMMON STOCK ISSUED FOR OTHER THAN CASH
Services purchased and other transactions settled in the Company's common stock
are recorded at the estimated fair value of the stock issued if that value is
more readily determinable than the fair value of the consideration received.
20
<PAGE> 22
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives (generally three to five
years) of the individual assets. Depreciation expense amounted to $56,948,
$30,824, and $34,554 during 1999, 1998, and 1997, respectively. Accelerated
depreciation methods are used for income tax purposes.
INTANGIBLE ASSETS
Intangible assets include patent costs and purchased license agreements and are
stated at cost, net of accumulated amortization. Amortization is calculated
using the straight-line method over estimated useful lives ranging from 3 to 17
years. The Company assesses on an ongoing basis the recoverability of the cost
of its patents and licenses by determining its ability to generate future cash
flows sufficient to recover the recorded amounts over the remaining useful lives
of the assets. This process necessarily involves significant management
judgment. The Company currently anticipates fully recovering the recorded cost
of these assets and, accordingly, no valuation adjustment has been recognized to
date. Because of the development stage nature of the Company, significant
uncertainty exists as to whether revenue expectations will be met. Should the
Company determine in the future that permanent diminution in value of the
intangibles has occurred, a charge against operating results would be recorded.
GRANT AND OTHER INCOME
Grant income is not recognized until received.
During fiscal years 1999, 1998 and 1997, the Company received grant proceeds of
$375,000, $250,000 and $500,000, respectively, from the Pacific West Cancer Fund
in support of the Company's cancer research efforts. The funds were recognized
as revenue upon receipt as the contracts did not contain any penalties,
successful outcomes clauses or refunding provisions.
The Company received approximately $91,808, $79,000 and $85,000 in fiscal 1999,
1998 and 1997 under research agreements with the National Institute of Health
and the National Science Foundation. Revenue was recognized as the research
funds were expended.
LICENSE AND SUPPORT
License fees are recognized at the time that the agreement is entered into as
the earning process is complete and the Company has no future performance
obligations. Support fees are recognized ratably over the contract period as the
related costs are incurred.
Milestone payments will be recognized upon the achievement of the related
criteria by the respective license subject to a reasonable assurance that the
milestone payment will be forthcoming.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No.
123"). SFAS No. 123 permits the Company to continue accounting for stock-based
compensation as set forth in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB Opinion No. 25"), provided the
Company discloses the pro forma effect on net income and earnings per share of
adopting the full provisions of SFAS No. 123. Accordingly, the Company continues
to account for stock-based compensation under APB Opinion No. 25 and has
provided the required pro forma disclosures.
21
<PAGE> 23
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities.
Significant components of the Company's deferred tax asset at September 30, 1999
and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Compensation expense on unexercised stock options........... 481,690 $ 454,000
NOL carryforwards........................................... 2,683,828 2,251,000
Excess book amortization.................................... 59,998 35,000
----------- -----------
Total deferred tax asset............................... 3,225,516 2,740,000
Valuation allowance......................................... (3,225,516) (2,740,000)
----------- -----------
Net deferred tax assets..................................... $ 0 $ 0
=========== ===========
</TABLE>
Net operating losses totaling approximately $7,100,000 are currently available
and begin to expire in 2007. Deferred tax liabilities relate to differences in
the financial and tax carrying amounts of fixed assets.
A valuation allowance has been provided for the entire deferred tax asset amount
until such time that the Company demonstrates the ability to produce taxable
income.
4. RELATED PARTY TRANSACTIONS
During 1997, the Company reached agreements with certain current and former
employees related to amounts payable to these individuals for primarily wages.
The amounts payable to these individuals at August 31, 1997 of approximately
$2,200,000 were reduced to approximately $646,000 at September 30, 1997
primarily through the exchange of amounts accrued and payable for shares of the
Company's common stock. The Company has recorded the issuance of shares as a
contribution of capital from certain of its officers, management, and key
employees at the value per share as negotiated in the agreements. Accordingly,
common stock and additional paid-in capital increased by approximately
$1,600,000 related to the agreement. The agreements also provide for either the
payment of bonuses totaling $185,000 or the issuance of 185,000 shares of the
Company's common stock at $1.00 per share to the employees in future years
should target levels of license and/or royalty revenues be achieved.
During 1996, the Company converted the majority of its notes payable to
shareholders through the issuance of common stock. Pursuant to the terms of
these settlements, notes payable of $1,091,667, accrued interest of $361,094,
and outstanding warrants covering 1,832,194 shares of common stock, valued at
$319,767 were satisfied through the issuance of 3,755,285 shares of the
Company's restricted common stock. The value assigned to the common stock issued
was based upon the amounts contained in the respective debt agreements relative
to the forgone debt and related accrued interest and the value of the warrants
were based upon debt and interest payments exchanged for warrants in prior
years.
In December 1996, a former employee filed a claim against the Company for
payment of back compensation, payment of outstanding promissory notes, and for
termination provisions of his employment contract. The Company filed for
arbitration, as called for in the employment contract. In October 1997, the
Court stayed the litigation and ordered the parties to proceed with arbitration.
In January 1998, the matter was settled with the issuance of 1,975,000 shares of
the Company's common stock and a cash payment of $30,000. The expenses related
to this settlement were recorded in fiscal 1997 and prior years.
5. COMMON STOCK
Included in the common stock account balance at September 30, 1998 is 425,000
restricted shares for which the Company has received consideration, either in
cash or services provided, but has not yet issued the restricted share
certificates to the shareholders.
22
<PAGE> 24
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1998, the Company issued 4,444,444 shares of redeemable convertible
preferred stock ("preferred stock") and warrants for net proceeds of $1,943,873
(net of $56,127 of expenses incurred in connection with the issuance). Of the
total proceeds $497,000 was allocated to warrants as the estimated fair value
and $1,022,222 was allocated to the conversion feature associated with the
preferred stock and classified as additional paid-in capital. In June 1998, the
entire discount was immediately accreted back to the preferred stock and treated
as a dividend as the preferred shares are immediately convertible into common
stock at the option of the preferred shareholder.
The holders of the preferred stock are entitled to receive, when, as and if
declared by the Board of Directors, out of funds legally available therefore,
dividends at the rate of $0.036 per share, semiannually, on each outstanding
share of convertible preferred stock. Such dividends have a priority over any
dividends paid on the common stock. Dividends on the preferred stock are
cumulative and the right to such dividends shall accrue to holders of
convertible preferred stock until declared by the Board of Directors. The
Company has accounted for the cumulative semiannual dividends through periodic
accretion to the preferred stock.
In the event of any liquidation, dissolution, or winding up of the Company, the
holders of preferred stock shall be entitled to receive the greater of $0.45 per
share, plus all unpaid and accrued dividends thereon, or the amount the holder
of the shares of the preferred stock would otherwise be entitled to receive had
each such share been converted into common stock immediately prior to such
liquidation, dissolution or wind-up.
Each share of preferred stock is convertible at any time, at the option of the
holder thereof, into an equal number of fully paid and nonassessable shares of
common stock. In addition, if at any time the Company shall effect a firm
commitment underwritten public offering of shares of common stock in which the
aggregate price paid for such shares by the public shall be at least $8,000,000,
then effective immediately before the closing of the sale of such shares by the
Company pursuant to such public offering, all outstanding shares of preferred
stock shall automatically convert to common stock.
The shares of preferred stock shall be redeemable at the election of the holder
upon at least ninety days notice to the Company. The Company shall redeem from
the holder on or at any time after May 31, 2003, 2004, and 2005, up to one-third
of the shares of preferred stock held by the holder, with the intent that,
should the holder elect, at any time after May 31, 2005, the total number of
shares held by the holder would be subject to redemption. The preferred stock to
be redeemed shall be paid for in cash at an amount equal to the greater of (i)
$0.45 per share plus, in the case of each share, an amount equal to all accruing
unpaid dividends (whether or not declared), or (ii) such amount per share as
would have been payable had each such share been converted to common stock
immediately prior to the actual date of redemption.
The shares of preferred stock vote on matters on an as-converted basis; i.e.,
each share of preferred stock has one vote, as do each owner of a share of
common stock.
The holder of the preferred stock has a warrant to purchase 4,965,556 shares of
common stock of the Company at $0.45 per share. The warrant shall be
exercisable, in whole or in part, through June 14, 2008. The Company may call
the warrant at any time after December 31, 1998, provided the Company's common
stock has been in excess of $1.50 per share for each of the forty consecutive
trading days immediately preceding the date of the call.
Upon receipt of the call, the call holder shall have sixty days to elect to
exercise all or a portion of this warrant. Upon such exercise, in addition to
receiving the number of shares of common stock to which the holder shall be
entitled, the holder of the warrant also shall receive a new warrant
("replacement warrant"). The replacement warrant shall be exercisable for one
share of common stock for every two shares of common stock purchased in response
to the aforementioned call. The exercise price of the replacement warrant is
$1.50 per share, and the term of the replacement warrant shall be the longer of
two years from the date of the issuance or the balance of the original term of
the warrant.
23
<PAGE> 25
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND WARRANTS
The Company granted stock options to certain employees and directors during the
year ended September 30, 1998 at a $0.05 per share exercise price, which was
below the fair value based upon management's estimate of the fair value of the
stock issued at the date of grant. The shares were fully vested at September 30,
1998, and a $1,699,440 noncash charge was recognized to reflect the compensation
value of the options issued. All of these options expire in 2008.
The Company granted stock options to certain employees and directors during the
years ended September 30, 1999 and 1997 at exercise prices which approximated
fair value at the date of grant. Options granted to an officer in 1996 vested
200,000 shares each at the date of issuance and November 1, 1996, with the
remaining options vesting on November 1, 1997. Options granted during the years
ended September 30, 1998 and 1997 vested immediately.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE
SHARES EXERCISE PRICE FAIR VALUE
---------- -------------- ----------
<S> <C> <C> <C>
Balance at September 30, 1996............................ 600,000 $0.15 $0.03
Options granted during year.............................. 425,000 $0.77 $0.17
---------- ----- -----
Balance at September 30, 1997............................ 1,025,000 $0.41 $0.09
Options granted during year.............................. 5,820,000 $0.05 $0.27
Options exercised for common stock during year........... (1,750,000) $0.05 $0.27
---------- ----- -----
Balance at September 30, 1998............................ 5,095,000 $0.12 $0.23
---------- ----- -----
Granted.................................................. 380,000 $0.45 $0.41
Options exercised for common stock....................... (350,000) $0.05 $0.37
---------- ----- -----
Balance at September 30, 1999............................ 5,125,000 $0.15 $0.46
========== ===== =====
</TABLE>
As of September 30, 1999 and 1998, 5,055,000 and 5,095,000, respectively, of the
options were vested and exercisable.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions for fiscal
1999, 1998 and 1997: risk-free interest rate of 6%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
1.41, 0.97 and 1.24, respectively and a weighted average expected option life of
five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Changes in the subjective input assumptions can materially affect the fair value
estimate, and therefore, the existing models do not necessarily provide a
reliable single measure of the fair value of employee stock options. Had the
compensation cost of the Company's stock option plans been determined based on
the fair value at the date of grant for awards in 1999, 1998, and
24
<PAGE> 26
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
1997 consistent with the provisions of SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net loss available to common stock:
As reported......................................... $(1,596,104) $(3,079,586) $ (943,773)
Pro forma........................................... $(1,746,117) $(4,615,720) $(1,370,617)
Basic and diluted earnings per share:
As reported......................................... $ (0.06) $ (0.13) $ (0.05)
Pro forma........................................... $ (0.07) $ (0.19) $ (0.07)
</TABLE>
The maturity date of an option held by an officer of the Company to purchase up
to 600,000 shares of common stock at an exercise price of $0.15 per share was
extended from October 31, 2000 to October 31, 2010 at the September 17, 1999
meeting of the Compensation Committee. The Company recorded a $78,000 non-cash
charge in fiscal 1999 to reflect the aforementioned extension.
At September 30, 1999, there were outstanding warrants to purchase 4,000 shares
of the Company's common stock at an exercise price of $2.50 per warrant. The
warrants expire December 31, 1999. Additionally, the holder of the preferred
stock holds a warrant to purchase common stock (refer to Note 6 for additional
information).
8. COMMITMENTS
The Company leases its office and laboratory facilities under a three-year lease
expiring September 30, 2001 at a monthly rental of $3,948. During 1999, 1998,
and 1997, the Company incurred rent expense totaling $45,830, $34,105, and
$45,100, respectively.
During 1997, the Company entered into a license agreement with a university to
obtain certain patent rights. In exchange for the license of the patents, the
Company issued common stock. The value assigned to the patents was based upon
management's estimate of the fair value of the stock issued. In addition, the
Company is obligated to pay certain royalties under the terms of the agreement
for each licensed product. The agreement requires minimum royalty payments to
maintain the license of the patents. The Company paid $45,000 in royalty
payments pursuant to this agreement in 1998.
9. MARKETING
In December 1997, the Company entered into a license agreement with Mycogen
Corporation, which was subsequently acquired by Dow Agro Science whereby the
Company licensed substantially all rights for disease prevention and treatment
for agricultural applications. The Company received a license issue fee of
$950,000, consisting of $700,000 for the rights to licensed patents and the
Company's technology in the field of activity, $200,000 for the rights to the
Company's patents and technology for use in formulated licensed products and
$50,000 for the right of first refusal through September 30, 1998 to obtain an
exclusive license to the Company's Nutrition Patents and Technology. These
payments were recognized as revenue in fiscal 1998, as the earnings process was
complete according to the terms of the contract.
The agreement also provided that the Company receive $300,000 to provide Dow
Agro Science with support services of personnel for a joint research effort for
a three year period. This was classified as unearned revenue on the balance
sheet and is being amortized into revenue, on a straight-line basis, over the
three year life of the support services commitment.
The agreement also provides for milestone payments (amounts based upon Dow Agro
Science's attainment of certain contract defined outputs measures) to be made to
the Company by Dow Agro Science upon 1) regulatory approval or first sale of any
type of product by Dow Agro Science, 2) additional payment for first commercial
sale of certain crops by Dow Agro
25
<PAGE> 27
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MARKETING (CONTINUED)
Science and 3) additional payment for first commercial sale of any other crop
within the field of activity by Dow Agro Science. The Company will also receive
royalties on all sales by Dow Agro Science and all sublicenses entered into by
Dow Agro Science. Minimum annual royalties are due beginning January 1, 2003
through 2014 and are recoupable against the aforementioned royalties due from
Dow Agro Science.
Dow Agro Science will undertake management of future development, regulatory
approvals, seed production and marketing. The companies will also undertake a
joint agricultural research effort, as discussed above, to identify new
molecular designs. Dow Agro Science may unilaterally terminate this agreement
without cause.
The Dow Agro Science Agreement was amended on October 11, 1998 to provide Dow
Agro Science with an additional license for the Company's agricultural nutrition
technologies. The Company received a minimum annual royalty of $200,000 at the
execution of the contract. Additionally, in 1999, the Company received an
initial payment of $150,000 and an additional $150,000 which was due six months
after the contract execution. The research funding is to increase by $50,000
annually over the remaining four years of the funding term. These payments were
currently recognized as revenue as the earnings process was complete according
to the terms of the contract and the payments are not subject to recoupment by
Dow Agro Science.
The agreement also provides for milestone payments (amounts based upon Dow Agro
Science's attainment of certain contract defined output measures) to be made to
the Company by Dow Agro Science upon 1) technical feasibility benchmark payments
for certain products developed by Dow Agro Science, 2) animal feeding benchmark
in certain animal studies by Dow Agro Science 3) additional payment for first
commercial sale of certain crops by Dow Agro Science, 4) additional payment for
first commercial sale of any other crop within a contractually defined field of
activity by Dow Agro Science and 5) additional payments for achievement of
cumulative gross margin benchmark for sale of certain crops by Dow Agro Science.
The Company will also receive royalties on all sales by Dow Agro Science and all
sublicenses entered into by Dow Agro Science. Minimum annual royalties cease
upon the achievement of certain of the aforementioned benchmarks.
In addition, Dow Agro Sciences will be responsible for all development and
commercialization costs. Dow Agro Sciences is now owned by the Dow Chemical
Company.
10. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net loss............................................ $(1,337,742) $(1,993,753) $ (943,773)
Preferred stock dividends and accretion amounts..... (258,362) (1,085,833) --
----------- ----------- -----------
Numerator for basic earnings per share--income
available to common stockholders................. (1,596,104) (3,079,586) (943,773)
Denominator:
Denominator for basic and earnings per
share--weighted average shares................... 26,255,104 23,867,091 19,537,047
----------- ----------- -----------
Basic and diluted loss per share...................... $ (0.06) $ (0.13) $ (0.05)
=========== =========== ===========
</TABLE>
At September 30, 1999, the Company had 5,125,000 options outstanding for the
purchase of the Company's Common Stock at exercise prices ranging from $0.05 per
share to $0.875 per share. Additionally, the 4,444,444 shares of Redeemable
Convertible Preferred Stock are convertible into the Company's Common Stock on a
1 for 1 basis. Furthermore, the holder of the Redeemable Convertible Preferred
Stock holds a warrant for 4,965,556 shares of the Company's Common Stock at an
26
<PAGE> 28
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. NET LOSS PER COMMON SHARE (CONTINUED)
exercise price of $0.45 per share. These potentially dilutive securities were
not included in the calculation of dilutive earnings per share because the
effect would be anti-dilutive.
11. LIQUIDITY
The Company believes that it has adequate liquidity to fund its operations in
Fiscal 2000 if the expected milestone, research support, license and sub-license
payments are received from Dow Agro Science as expected. Should the expected
payments either be delayed or not forthcoming, the Company would scale back its
level of expenditures to maintain sufficient cash flow to fund basic operations.
27
<PAGE> 29
DEMEGEN, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Richard D. Ekstrom and Mary
Silverberg, each of them, with full power to act as proxy, with the
power to appoint his substitute, and hereby authorizes each of them to
represent and vote, as designated below, the shares of Common Stock of
Demegen, Inc. held of record by the undersigned at the Annual Meeting
of Stockholders to be held on February 18, 2000 and any adjournments
thereof.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
A. Ratification of Ernst & Young LLP as independent auditors. [ ] FOR [ ] AGAINST [ ] ABSTAIN
B. Nominees for Director
Richard D. Ekstrom [ ] FOR [ ] AGAINST [ ] ABSTAIN
Jesse M. Jaynes [ ] FOR [ ] AGAINST [ ] ABSTAIN
John Bridwell [ ] FOR [ ] AGAINST [ ] ABSTAIN
Robert E. Hannan [ ] FOR [ ] AGAINST [ ] ABSTAIN
Jerry B. Hook [ ] FOR [ ] AGAINST [ ] ABSTAIN
</TABLE>
THIS PROXY WILL BE VOTED IN THE MANNER SPECIFIED ABOVE. IF NO SPECIFICATION
IS MADE, THE PROXY SHALL BE VOTED "FOR" EACH OF THE PROPOSALS LISTED
ABOVE AND "FOR" EACH OF THE NOMINEES. SUBMITTING THIS PROXY IN
ADVANCE OF THE MEETING WILL NOT PREVENT YOU FROM VOTING
YOUR SHARES IN PERSON IF YOU DO ATTEND THE MEETING.
(Continued and to be signed on the other side)
As to any other matter, said attorneys shall vote in accordance with
the recommendation of the Board of Directors.
Please mark: I do [ ] do not [ ] plan to attend the meeting.
DATED:
-------------------------
-------------------------------
(Signature of Stockholder)
-------------------------------
(Signature if held jointly)
IMPORTANT: PLEASE DATE AND SIGN
EXACTLY AS NAME APPEARS HEREON.
IF SHARES ARE HELD JOINTLY,
EACH STOCKHOLDER NAMED SHOULD
SIGN. EXECUTORS, ADMINISTRATORS,
TRUSTEES, ETC. SHOULD SO INDICATE
WHEN SIGNING. IF THE SIGNER IS A
CORPORATION, PLEASE SIGN FULL
CORPORATE NAME BY DULY
AUTHORIZE OFFICER.
