<PAGE> 1
(conformed)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
____________ TO ____________
COMMISSION FILE NUMBER 0-25353
DEMEGEN, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-1065575
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1051 BRINTON ROAD, PITTSBURGH, PENNSYLVANIA 15221
(Address of principal executive offices) (Zip Code)
412-241-2150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___ No _X_
As of April 24, 2000, there were 32,227,903 shares of the registrant's common
stock outstanding.
<PAGE> 2
DEMEGEN, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes to Financial Statements
(a) Condensed Balance Sheets as of March 31, 2000 (unaudited) and September 30, 1999 3
(b) Statements of Operations for the Six Months Ended March 31, 2000 and 1999 and
Inception (December 6, 1991) to March 31, 2000 (unaudited) 4
(c) Statements of Operations for the Three Months Ended March 31, 2000 and
1999 (unaudited) 5
(d) Statements of Cash Flows for the Six Months Ended March 31, 2000 and 1999
and Inception (December 6, 1991) to March 31, 2000 (unaudited) 6
(e) Notes to Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
DEMEGEN, INC
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
2000 1999*
---- -----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 2,655,594 $ 583,585
Accounts receivable 106,651 22,546
Prepaid expenses and other current assets 273,994 2,057
------------ ------------
TOTAL CURRENT ASSETS 3,036,239 608,188
PROPERTY, PLANT AND EQUIPMENT 358,707 361,544
Less: accumulated depreciation (177,678) (151,219)
------------ ------------
181,029 210,325
INTANGIBLE ASSETS 493,436 493,436
Less: accumulated amortization (276,293) (227,444)
------------ ------------
217,143 265,992
------------ ------------
TOTAL ASSETS $ 3,434,411 $ 1,084,505
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Payable to employees and directors $ 76,823 $ 92,000
Accounts payable 323,733 354,988
Accrued liabilities and unearned revenue 77,661 154,351
------------ ------------
TOTAL CURRENT LIABILITIES 478,217 601,339
OTHER LONG-TERM LIABILITIES 465,400 270,254
------------ ------------
TOTAL LIABILITIES 943,617 871,593
Redeemable convertible preferred stock 1,900,467 1,768,846
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Common stock 31,928 26,362
Warrants 1,276,241 497,000
Additional paid-in capital 13,914,460 12,040,166
Deficit accumulated during the development stage (14,632,302) (14,119,462)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) 590,327 (1,555,934)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(CAPITAL DEFICIENCY) $ 3,434,411 $ 1,084,505
============ ============
</TABLE>
*Derived from audited financial statements.
See accompanying notes to financial statements.
3
<PAGE> 4
DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS INCEPTION
ENDED MARCH 31, (DECEMBER 6,
-------------------------- 1991) TO
2000 1999 MARCH 31,2000
---- ---- -------------
<S> <C> <C> <C>
INCOME $ 486,176 $ 881,397 $ 4,302,673
EXPENSES:
Research and development 418,271 635,189 5,911,156
General & administration 361,995 350,242 10,034,614
Interest 5,450 1,528 988,174
Depreciation and amortization 81,691 68,166 525,227
------------ ------------ ------------
TOTAL EXPENSES 867,407 1,055,125 17,459,171
------------ ------------ ------------
NET LOSS (381,231) (173,728) (13,156,498)
Preferred dividend and accretion amounts (131,609) (128,385) (1,475,804)
------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (512,840) $ (302,113) $(14,632,302)
============ ============ ============
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.02) $ (0.01)
============ ============
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 27,213,528 26,150,470
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 5
DEMEGEN, INC
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
INCOME $ 61,475 $ 238,997
EXPENSES:
Research and development 217,478 314,734
General & administration 192,796 177,690
Interest 4,439 655
Depreciation and amortization 40,314 36,236
----------- -----------
TOTAL EXPENSES 455,027 529,315
----------- -----------
NET LOSS (393,552) (290,318)
Preferred dividend and accretion amounts (66,007) (64,388)
----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK $ (459,559) $ (354,706)
=========== ===========
LOSS PER SHARE OF COMMON STOCK, BASIC AND DILUTED $ (0.02) $ (0.01)
=========== ===========
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 28,074,516 26,226,453
=========== ===========
</TABLE>
See accompanying notes to financial statements.
5
<PAGE> 6
DEMEGEN, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
INCEPTION
FOR THE SIX MONTHS (DECEMBER 6,
ENDED MARCH 31, 1991) TO
--------------------------------- MARCH
2000 1999 31, 2000
---- ---- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (381,231) $ (173,728) $(13,156,498)
Adjustments to Reconcile Net Loss
to Cash:
Depreciation and amortization 81,691 68,166 525,227
Stock issued for services -- -- 1,729,058
Issuance of stock options to employees and directors -- -- 1,777,440
Warrants issued for interest -- -- 286,434
Other 2,125 -- 84,667
Changes in Assets and Liabilities
Other than Cash:
Accounts receivable (54,105) 28,611 (76,651)
Prepaid expenses and current assets 10,065 6,990 8,008
Accounts payable and other liabilities (31,211) (53,834) 1,394,834
Unearned revenue (45,834) (45,833) 45,833
---------- ---------- ------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (418,500) (169,628) (7,381,648)
CASH FLOWS FROM INVESTING ACTIVITIES:
Intangible assets -- -- (238,324)
Purchase of property, plant and equipment (5,671) (134,672) (389,046)
---------- ---------- ------------
NET CASH USED BY INVESTING ACTIVITIES (5,671) (134,672) (627,370)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 150,000 -- 1,298,609
Principal payments on debt (4,286) -- (72,375)
(Decrease) increase in payable to employees and directors 3,355 38,248 2,676,767
Net proceeds from issuance of equity instruments 2,347,111 -- 6,656,611
Proceeds from exercise of stock options -- 12,500 105,000
---------- ---------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,496,180 50,748 10,664,612
---------- ---------- ------------
Net Increase (Decrease) in Cash and Equivalents 2,072,009 (253,552) 2,655,594
Cash and Cash Equivalents, Beginning of Period 583,585 1,686,658 0
---------- ---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,655,594 $1,433,106 $ 2,655,594
========== ========== ============
</TABLE>
See accompanying notes to financial statements.
6
<PAGE> 7
DEMEGEN, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying financial statements of Demegen, Inc. (the "Corporation") are
unaudited. However, in the opinion of management, they include all adjustments
necessary for a fair presentation of financial position, results of operations
and cash flows. All adjustments made during the three and six months ended March
31, 2000 were of a normal, recurring nature. The amounts presented for the six
months ended March 31, 2000 are not necessarily indicative of results of
operations for a full year. Additional information is contained in the Annual
Report on Form 10-KSB of the Corporation for the year ended September 30, 1999
dated December 21, 1999 and in the Quarterly Report on Form 10-QSB of the
Corporation for the quarter ended December 31, 1999 dated January 27, 2000,
which should be read in conjunction with this quarterly report.
NOTE 2 -- FEDERAL INCOME TAXES
No federal or state income tax has been provided for the six months ended March
31, 2000 and 1999 due to existence of unused net operating loss carryforwards.
The Corporation did not pay any income taxes during the six months ended March
31, 2000 and 1999.
NOTE 3 -- NOTE PAYABLE
In December 1999, the Corporation received $150,000 from a local foundation to
fund program related research. The loan matures on February 28, 2005 with a
balloon payment due at that time. The loan is at an interest rate of 5% with
interest due February 28 of each year. The loan contains call provisions which
could result in the loan becoming due before its planned maturity. The
Corporation does not foresee, at this time, the call provisions becoming
effective.
The Corporation paid interest costs totaling approximately $3,575 and $1,431
during the six months ended March 31, 2000 and 1999, respectively.
NOTE 4 -- NET EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Loss $ (381,231) $ (173,728)
Preferred stock dividends and accretion amounts (131,609) (128,385)
----------- -----------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (512,840) $ (302,113)
=========== ===========
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 27,213,528 26,150,470
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ (0.02) $ (0.01)
=========== ===========
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
2000 1999
---- ----
<S> <C> <C>
NUMERATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Net Loss $ (393,552) $ (290,318)
Preferred stock dividends and accretion amounts (66,007) (64,388)
----------- -----------
Numerator for basic and diluted earnings per share--income
available to common stockholders $ (459,559) $ (354,706)
=========== ===========
DENOMINATOR FOR BASIC AND DILUTED EARNINGS PER SHARE:
Denominator for basic and diluted earnings per share--
weighted average shares 28,074,516 26,226,453
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE $ (0.02) $ (0.01)
=========== ===========
</TABLE>
NOTE 5 -- PRIVATE PLACEMENT OF SECURITIES
During the second quarter of Fiscal 2000, the Corporation closed on a private
placement of its securities to institutional and other accredited investors
raising $2.78 million of which $0.38 million was in the form of prepaid services
with the remainder of $2.4 million in cash. The private placement resulted in
the sale of 5.56 million restricted shares of common stock and warrants to
purchase an additional 5.56 million shares of the Corporation's common stock.
The investors were offered one unit at $0.50 per unit. Each unit consisted of
one share of restricted common stock and a warrant to purchase one share of the
Corporation's common stock for $0.75 per share. The warrant expires the earlier
of March 31, 2005 or 60 days after a call by the Corporation. The Corporation
may call the warrants at any time after March 31, 2001, provided that the price
of the Corporation's common stock has been in excess of $1.50 per share for each
of the forty consecutive trading days immediately preceding the date of the
call. Upon receipt of the call, warrant holders shall have sixty days to elect
to exercise all or a portion of the warrants.
The Corporation has agreed to file a registration statement with the Securities
& Exchange Commission to register all common stock which comprise the unit and
the common stock issuable from the exercise of the warrant on or before March
31, 2001.
Pricing of the securities was determined based on several factors, including
reference to market price of the Corporation's common stock, the holding period
requirement of restricted stock, and the Corporation's need for additional
funding for development of pharmaceutical products.
Funds raised will be utilized to fund the Corporation's product development
efforts.
NOTE 6 -- SUBSEQUENT EVENT
Effective April 1, 2000 the Corporation hired a Chief Operating Officer --
Pharmaceutical Products. His employment agreement is for an initial term of
three years and provides for the issuance of 300,000 shares of restricted common
stock upon joining the Corporation and options to purchase up to 1,400,000
shares of the Corporation's common stock at exercise prices of $0.45 and $0.90
per share.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 2000 AND 1999
During the six months ended March 31, 2000 ("Fiscal 2000"), grants, license fees
and other income decreased to $0.49 million compared to $0.88 million in the six
months ended March 31, 1999 ("Fiscal 1999"). The decrease was due to the
Corporation receiving a $250,000 grant in the fiscal 1999 period with no similar
grants being received in the fiscal 2000 period. In the Fiscal 2000 period the
Corporation received a $150,000 program related loan from a local charity. Had
this been a grant, revenues would have been more comparable for the six-month
periods.
Total expenses decreased to $0.87 million from $1.06 million in the
corresponding prior fiscal six month period. The decrease was due to the timing
of preclinical development activities.
Research and development expenditures decreased to $0.42 million from $0.64
million in the prior fiscal six month period for the aforementioned reason.
General and administrative expenses remained relatively constant at $0.36
million and $0.35 million, respectively, for the two comparable six month
periods.
During the six months ended March 31, 2000 and 1999, the Corporation made no
provision for federal or state income taxes due to the existence of net
operating loss carryforwards.
The Corporation reported a loss of $0.38 million for the six months ended March
31, 2000 compared to a loss of $0.17 million for the six months ended March 31,
1999 as a direct result of the factors discussed above.
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
During the three months ended March 31, 2000 ("Fiscal 2000"), grants, license
fees and other income decreased to $0.06 million compared to $0.24 million in
the three months ended March 31, 1999 ("Fiscal 1999"). The decrease was due to
the Corporation receiving a $150,000 research support payment in the fiscal 1999
period with no similar payment being received in the fiscal 2000 period.
Total expenses decreased to $0.46 million from $0.53 million in the
corresponding prior fiscal quarter. The decrease was due to the timing of
preclinical development activities.
Research and development expenditures decreased to $0.21 million from $0.31
million in the prior fiscal quarter for the aforementioned reason. General and
administrative expenses remained relatively constant at $0.19 million and $0.18
million, respectively, for the two comparable quarters.
During the quarters ended March 31, 2000 and 1999, the Corporation made no
provision for federal or state income taxes due to the existence of net
operating loss carryforwards.
The Corporation reported a loss of $0.39 million for the three months ended
March 31, 2000 compared to a loss of $0.29 million for the three months ended
March 31, 1999 as a direct result of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended March 31, 2000, the Corporation's cash increased by
$2.07 million to $2.66 million. The cash increase was due to $2.5 million of
cash provided by financing activities partially offset by $0.42 million of cash
used by operating activities.
The $2.5 million of cash provided by financing activities consisted of $2.35
million net proceeds from the
9
<PAGE> 10
private placement of securities and $0.15 million received from a local
foundation. The loan matures on February 28, 2005 with interest at 5%. The loan
is to fund program related research.
Cash flows used by operating activities totaled $0.42 million in the six months
ended March 31, 2000. Cash outflows included the net loss of $0.38 million, a
$0.05 million increase in accounts receivables, a $0.03 million decrease in
accounts payable and other liabilities and a $0.05 million decrease in unearned
revenue. These cash outflows were partially offset by cash inflows which
principally included $0.08 million of depreciation and amortization.
During the six months ended March 31, 1999, the Corporation's cash decreased by
$0.26 million to $1.43 million. The decrease in cash and cash equivalents during
the first six months of fiscal 1999 is attributable to cash outflows from
operations of $0.17 million and cash outflows from investment activities of
$0.13 million for the purchase of property, plant and equipment. These cash
outflows were partially offset by $0.05 million of cash provided by financing
activities.
Cash flows used by operating activities totaled $0.17 million in the six months
ended March 31, 1999 Cash outflows included the net loss of $0.17 million, a
$0.05 million decrease in accounts payable and other liabilities and a $0.05
million decrease in unearned revenue. The cash outflows were partially offset by
$0.07 million of depreciation and amortization and a $0.03 million decrease in
accounts receivables.
Cash provided by financing activities consisted of $0.01 million from the
exercise of employee stock options and $0.04 million due to the increase in the
payable to employees and directors.
The $0.13 million expended for the purchase of property, plant and equipment
primarily related to furnishing the lab at the Corporation's new office.
The Company believes that the recent cash received from the placement of
securities (Note 5 to Financial Statements) in conjunction with the anticipated
receipts under the agreements with Dan Agro Sciences will be sufficient to meet
liquidity need for the foreseeable short-term period. In the long-term, the
Corporation will need to rely upon additional capital infusions until it
emerges from the development stage and commences to produce cash flow from
operations.
10
<PAGE> 11
PART II-- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 18, 2000 the Annual Meeting of the Stockholders of Demegen, Inc. was
held in Pittsburgh, PA. At the meeting all of management's nominees were elected
directors of the Corporation were elected and Ernst & Young, LLC was ratified as
the Corporation's auditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT INDEX
EXHIBIT NO. AND DESCRIPTION
PAGES OF SEQUENTIAL
NUMBERING SYSTEM
4. Supplemental Agreement Between Demegen, Inc. and CEO Venture Fund III
dated February 8, 2000 concerning Warrant No. 1 held by CEO Venture
Fund.
10. Employment Agreement of S. Robert Fatora dated March 6, 2000.
27. Financial data schedule
(b) Reports on Form 8-K
The registrant did not file any current reports on Form 8-K during the three
months ended March 31, 2000.
On April 7, 2000, the registrant filed a current report on Form 8-K announcing
the completion of a private placement of securities.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEMEGEN, INC.
By /s/ Richard D. Ekstrom
--------------------------------
Richard D. Ekstrom
Chairman and Chief Executive Officer
Date: May 8, 2000
12
<PAGE> 1
Exhibit 4
[DEMEGEN LOGO]
February 8, 2000
James Colker
CEO Venture Fund
2000 Technology Drive, Suite 160
Pittsburgh, PA 15219-3451
Re: Demegen Warrant No. 1 (the "Warrant") held by CEO Venture Fund (the "Fund")
Dear Jim:
This letter will confirm the agreement that has been reached between
Demegen, Inc. (the "Company") and the Fund concerning certain provisions of the
Warrant as follows (all capitalized terms not otherwise defined in this letter
will have the meaning given to them in the Warrant):
1. The Company will permit the warrant to be transferred without
an accompanying transfer of the Preferred Stock held by the
Fund;
2. In the event the Company shall exercise its rights under
Section 2.3 of the Warrant to call the Warrant and the Fund
shall subsequently exercise the Warrant in accordance with
Section 2.3(b) of the Warrant, the Company shall extend the
time that the Fund shall have to pay the Exercise Price for a
period of twenty-four (24) months;
3. The Company will file a Form SB-2 registration statement with
the Securities Exchange Commission seeking registration of the
4,965,556 shares of its Common Stock issuable upon the
exercise of the Warrant on or before March 31, 2001; and
4. In consideration of the Company's covenants set forth in items
1-3 above, the Fund has agreed to purchase Two Hundred
Thousand dollars ($200,000) of the Units offered for sale by
the Company in the upcoming offering to accredited investors.
If the foregoing accurately reflects the terms of the agreement we have
reached, please so indicate in the space provide below on the additional
enclosed copy of the letter and return it to me.
Very Truly Yours,
/s/ Richard D. Ekstrom
- ----------------------------
Richard D. Ekstrom
President
Acknowledged and Agreed:
CEO Venture Fund III
By /s/ James Colker
- ----------------------------
Title: Managing General Partner
Demegen, Inc. o 1051 Brinton Road, Pittsburgh, PA 15221
o 412-241-2150 o Fax 412-241-2161
<PAGE> 1
Exhibit 10
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is made this 6th day of
March, 2000, by and between Demegen Inc., a Colorado corporation
("Corporation"), and S. Robert Fatora, an individual residing at 1716 Garwood
Lane, Vineland, New Jersey 08361 ("Employee").
PREAMBLE
A. The Corporation is engaged in the business of research and development of
lytic peptides and related substances for agricultural, nutritional, medical and
other possible commercial applications (the "Corporation's Business"); and
B. The Corporation and the Employee desire to set forth in writing the terms
under which the Employee will be employed by the Corporation.
Now therefore, in consideration of the mutual covenants and agreements set forth
in this agreement and intending to be legally bound, the Parties to this
agreement agree as follows:
SECTION 1. EMPLOYMENT. The Corporation agrees to employ the Employee and the
Employee agrees to accept the employment in accordance with the terms and
conditions described in this Agreement.
SECTION 2. DUTIES. The Employee shall serve as Chief Operating Officer -
Pharmaceutical Products and shall be an officer of the Corporation and, in
addition to accepting such employment, agrees to perform such duties as may be
set from time to time by the President of the Corporation or his designee. The
Employee shall make available to the Corporation his best efforts, knowledge,
and experience. The Employee shall use his full time, best efforts, skills and
abilities to faithfully and diligently perform and manage the day to day
operations of the Corporation as directed by its President or his designee.
SECTION 3. EXTENT OF SERVICES. Except to the extent otherwise provided in this
Agreement, the Employee shall devote his full time, attention, and energies to
the performance of his duties and shall not be engaged in any other business
activity, whether or not pursued for gain, profit or other pecuniary advantage.
The Employee shall at all times faithfully and to the best of his ability
perform his duties under this Agreement. The duties shall be rendered at the
Corporation's offices in Pittsburgh, Pennsylvania, or at such other place or
places and at such times as the needs of the Corporation may from time-to-time
require.
SECTION 4. TERM. Unless earlier terminated in accordance with Section 6, the
initial term of this Agreement shall begin on April 1, 2000 ("Effective Date"),
and shall continue for a three (3) year period (the "Initial Term"). After the
Initial Term, this Agreement will automatically renew on such terms and
conditions as are in effect at the time of renewal or as may be agreed between
-1-
<PAGE> 2
the Parties unless either the Employee or the Corporation elects not to renew
this Agreement and notifies the other party in writing at least ninety (90) days
prior to the expiration date hereof.
SECTION 5. COMPENSATION.
5.1 Base Compensation. The Employee will receive a base salary of Two
Hundred and Five Thousand Dollars ($205,000.00) per year, payable in
accordance with the Corporation's standard payroll procedures and
Federal, State, and local employment tax regulations. The Employee's
Base Compensation will be increased to Two Hundred and Twenty-Five
Thousand Dollars per year beginning April 1, 2001. The Employee's Base
Compensation will be increased to Two Hundred and Fifty Thousand
Dollars per year beginning April 1, 2002. The Employee's performance
will be reviewed at least annually by the Corporation's Compensation
Committee of the Board of Directors and increases, if any, will be made
at the sole discretion of the Board of Directors.
5.2 Bonuses and Profit Sharing. The Employee shall be eligible for
performance-based bonuses, but there is no assurance that bonuses will
be paid. Bonuses will be paid, if at all, in the sole discretion of the
Corporation's Board of Directors. The Employee shall be eligible for
participation in any Stock Option Plans established from time to time
by the Corporation.
5.3 Grant of Stock. Upon joining the Corporation, the Employee's shall be
issued three hundred thousand (300,000) shares (the "Shares") of the
Corporation's common stock ("Common Stock"). The Shares shall be
"restricted" shares as defined in Rule 144 promulgated under the
Securities Act of 1933, as amended.
5.4 IND Bonus Options. As an incentive to further the commercial
applications of the Corporation's peptide technology, the Corporation
agrees that during the term of this Agreement and any renewals or
extensions thereof the Employee will receive for each initial new drug
application of the Corporation ("IND") approved by the Federal Food and
Drug Agency ("FDA"), or Investigator's IND filed on the direction of
the Corporation, up to a maximum of six (6) INDs, an IND Bonus in the
form of an incentive stock option ("ISO") which will entitle the
Employee to purchase one hundred thousand shares (100,000) of Common
Stock at an exercise price of forty-five cents ($.45) per share for the
first three INDs and an exercise price of ninety cents ($.90) for the
next three INDs. Each IND bonus option will expire on March 31, 2010
and will not be exercisable until (i) the effective date of the
applicable IND(s) or (ii) March 1, 2007, whichever occurs first.
5.5 Commercialization Bonus Option. In addition, the Employee will receive
three (3) commercialization bonuses in the form of an ISO which will
entitle the Employee to purchase one hundred thousand shares (100,000)
of Common Stock at an exercise price of forty-five cents ($.45) per
share for the first bonus and ninety cents ($.90) for the next
-2-
<PAGE> 3
two bonuses. The commercialization bonuses will expire on March 31,
2010 and will not be exercisable until (i) the receipt by the
Corporation of a payments to the Corporation totaling a minimum of One
Million ($1,000,000) Dollars for a license or sale to a third party of
a pharmaceutical application or (ii) March 1, 2007, whichever occurs
first.
5.6 Funding Bonus. In addition, the Employee will receive a funding bonus
in the form of an ISO which will entitle the Employee to purchase three
hundred thousand (300,000) shares of Common Stock at an exercise price
of forty-five cents ($.45) per share. The Funding Bonus will expire on
March 31, 2010 and will not be exercisable until (i) the receipt by the
Corporation of an equity infusion of at least eight million dollars
($8,000,000.00) or (ii) March 1, 2007, whichever occurs first.
Notwithstanding the foregoing in the event such an equity infusion
occur after December 31, 2001, the number of shares of Common Stock
subject to the option will be reduced to two hundred thousand (200,000)
shares.
5.7 Other Stock Option. In addition, the Employee will receive an ISO
entitling the Employee to purchase two hundred thousand (200,000)
shares of Common Stock at an exercise price of forty-five cents ($.45)
per, fifty percent (50%) of which shall be vested April 1, 2001, and
the remaining fifty percent (50%) shall be vested on April 1, 2002.
5.8 Benefits. The Employee shall receive four weeks of vacation a year, and
comparable sick leave, group medical insurance and other fringe
benefits as are made available to full-time employees of the
Corporation as may be from time to time established by the Board of
Directors of the Corporation.
5.9 Expenses. The Corporation shall reimburse the Employee for all
reasonable out-of-pocket expenses incurred by the Employee in
fulfilling his duties under this Agreement. The Employee shall provide
the Corporation with written evidence of such expenses as required for
compliance with the Internal Revenue Code (as amended), and the
Employee shall fully comply with the Corporation's policies regarding
pre-authorization of expenditures as may be defined from time to time
by its Board of Directors. The Employee agrees to reimburse the
Corporation immediately for any expense reimbursement to the Employee
that is disallowed by the Internal Revenue Service, which reimbursement
may not be waived by the Corporation.
5.10 Relocation Expenses. The Corporation will pay up to Twenty Thousand
($20,000) Dollars for expenses incurred by the Employee in relocating
to the Pittsburgh, Pennsylvania area including moving expenses, closing
costs, and two trips to Pittsburgh for his wife to look for housing.
The Employee will also be reimbursed up to Two Thousand ($2,000)
Dollars per month for six (6) months for temporary housing expense.
-3-
<PAGE> 4
SECTION 6. TERMINATION.
6.1 For Cause The Corporation may terminate the Employee's employment at
any time "for cause" with immediate effect upon delivering written
notice to the Employee. For purposes of this Agreement, "for cause"
shall include: (a) embezzlement, theft, larceny, material fraud, or
other acts of dishonesty; (b) gross neglect or intentional disregard of
Employee's duties under this Agreement or any other material violation
by the Employee of this Agreement which is not cured within thirty (30)
days after written warning from the Corporation; (c) conviction of or
entrance of a plea of guilty or nolo contendere to a felony; (d)
conviction of any crime involving moral turpitude; (e) gross
insubordination or repeated insubordination after written warning from
the Corporation; (f) unauthorized disclosure by the Employee of the
confidences of the Corporation; or (g) material and continuing failure
by the Employee to perform the duties described in Section 2 above in a
quality and professional manner for thirty (30) days after written
warning from the Corporation. Upon termination for cause, the
Corporation's sole and exclusive obligation will be to pay the Employee
his compensation for a period of one (1) months after the date of
termination and the amount of any unused vacation or sick leave
benefits earned through the date of termination.
6.2 Upon Death. In the event of the Employee's death during the Term of the
this Agreement, the Corporation's sole and exclusive obligation will be
to pay to the Employee's spouse, if living, or to his estate, if his
spouse is not then living, the Employee's compensation for a period of
(12) twelve months after the date of death if death occurs during the
Initial Term of this Agreement, or (6) six months if death occurs after
the Initial Term, and the amount of any unused vacation or sick leave
benefits earned through the date of death.
6.3 Upon Disability. The Corporation may terminate the Employee's
employment upon the Employee's total disability. The Employee shall be
deemed to be totally disabled if he is unable to perform his duties
under this Agreement by reason of mental or physical illness or
accident. Upon termination by reason of the Employee's disability, the
Corporation's sole and exclusive obligation will be to continue to pay
the Employee his salary for a period of six (6) months after the date
of termination, plus the amount of any unused vacation and sick leave
benefits earned through the date of termination.
6.4 Without Cause. During the Term of this Agreement and only by action of
its Board of Directors, the Corporation may terminate the Employee's
employment without cause upon thirty (30) days written notice and with
a continuation of payment to the Employee his salary after termination
for (12) twelve months if termination occurs during the Initial Term of
this Agreement, or (6) six months if termination occurs after the
Initial Term, plus the amount of any unused vacation or sick leave
benefits earned through the date of termination.
-4-
<PAGE> 5
6.5 By the Employee. The Employee may terminate this Agreement at any time
upon ninety (90) days written notice to the Corporation.
6.6 Termination by the Board of Directors. Any determination to terminate
the Employee's employment under this Section 6 shall be made only by
the Board of Directors of the Corporation.
SECTION 7. COVENANT NOT TO COMPETE.
7.1 Covenant. During the term of this Agreement the Employee will not
directly or indirectly:
7.1.1 Enter into or attempt to enter into the "Restricted Business" (as
defined below);
7.1.2 induce or attempt to persuade any former, current or future
employee, agent, manager, consultant, director, or other participant in
the Corporation's Business to terminate such employment or other
relationship in order to enter into any relationship with the Employee,
any business organization in which the Employee is a participant in any
capacity whatsoever, or any other business organization in competition
with the Corporation's Businesses; or
7.1.3 use contracts, proprietary information, trade secrets,
confidential information, customer lists, mailing lists, goodwill, or
other intangible property used or useful in connection with the
Corporation's Business.
7.1.4 or, for a period of one year after the termination of this
Agreement directly or indirectly violate this agreement by conduct of
any kind or in any way in violation the covenants contained in
paragraphs 7.1.1 or 7.1.2. or the Corporation's proprietary
information.
7.1.5 The violation of the terms of paragraph 7.1.4 at any time during
the term of this Agreement shall be grounds for dismissal for cause,
and at any time after termination hereof shall be a breach of the
Covenant Confidentiality Agreement
7.2 Indirect Activity The term "indirectly," as used in Section 7.1 above,
includes acting as a paid or unpaid director, officer, agent,
representative, employee of, or consultant to any enterprise, or acting
as a proprietor of an enterprise, or holding any direct or indirect
participation in any enterprise as an owner, partner, limited partner,
member, joint or co-venture participant, shareholder, or creditor.
7.3 Restricted Business. The term "Restricted Business" means any business
which is engaged in activities which are similar to the Corporation's
Business. Nevertheless, the Employee may own less than five percent of
the outstanding equity securities of a
-5-
<PAGE> 6
corporation that is engaged in the Restricted Business if the equity
securities of such corporation are listed for trading on a national
stock exchange or are registered under the Securities Exchange Act of
1934.
SECTION 8. SEVERABILITY. The covenants set forth in Section+7 above shall be
construed as a series of separate covenants, one for each county in
each of the states of the United States to which such restriction
applies. If, in any judicial proceeding, a court of competent
jurisdiction shall refuse to enforce any of the separate covenants
deemed included in this Agreement, or shall find that the term or
geographic scope of one or more of the separate covenants is
unreasonably broad, the Parties shall use their best good faith efforts
to attempt to agree on a valid provision which shall be a reasonable
substitute for the invalid provision. The reasonableness of the
substitute provision shall be considered in light of the purpose of the
covenants and the reasonable protectable interests of the Corporation
and the Employee. The substitute provision shall be incorporated into
this Agreement. If the Parties are unable to agree on a substitute
provision, then the invalid or unreasonably broad provision shall be
deemed deleted or modified to the minimum extent necessary to permit
enforcement.
SECTION 9. CONFIDENTIALITY. The Employee acknowledges that he will develop and
be exposed to information that is or will be confidential and
proprietary to the Corporation.
9.1 Information. The information includes but is not limited to research
techniques, funding sources, trade secrets and other patent worthy
information, marketing plans, pricing data, product plans, contracts,
customer lists, mailing lists, goodwill, miscellaneous confidential
information, or other intangible intellectual or otherwise proprietary
property used or useful in connection with the Corporation's Business
whether in written, photographic, digital, or in any other form of
storage or retention as may be used by the Corporation.
9.2 Authorized Use. All such information shall be deemed confidential to
the extent not publicly known. The Employee agrees to make use of such
information only in the performance of his duties under this Agreement,
to maintain such information in confidence and to disclose the
information only in connection with fully authorized activities
pursuant to this agreement or lawful order of a court, exchange or
other governmental authority of competent jurisdiction, and agrees that
he shall not use such information for his own personal benefit or for
the benefit of third parties in any fashion.
9.3 Return of Confidential Information. Upon termination of his employment
with the Corporation, all documents, records, notebooks, computer files
and similar repositories containing confidential information of the
Corporation, including copies thereof, then in the Employee's
possession, whether prepared by him or others, shall be promptly
returned to the Company within thirty (30) days. If at any time after
the termination of employment the Employee determines that he has any
confidential information in his
-6-
<PAGE> 7
possession or control, he shall immediately return to the Company all
such confidential information, including all copies and portions
thereof.
SECTION 10. INVENTIONS. If at any time or times during Employee's employment
with the Company, he shall (whether before or after the execution of this
Agreement and either alone or with others) make, discover or reduce to practice
any invention, modification, discovery, design, development, improvement,
process, software program, work of authorship, documentation, formula, data,
technique, know-how, secret or intellectual property right whatsoever or any
interest therein (whether or not patentable or registrable under copyright or
similar statutes or subject to analogous protection)(herein called
"Developments") that (a) relates to the then current business of the Company or
any of the products or services being developed, manufactured or sold by the
Company, (b) results from tasks assigned to him by the Company or (c) results
from the use of premises or personal property (whether tangible or intangible)
owned, leased, licensed or contracted for by the Company, or (d) relates in any
manner to the proprietary information of the Company, such Developments and the
benefits thereof shall immediately become the sole and absolute property of the
Company and its assigns, and he shall promptly disclose to the Company (or any
persons designated by it) each such Development and hereby assign any rights he
may have or acquire in the Developments and benefits and/or rights resulting
therefrom to the Company and its assigns without further compensation and shall
communicate, without costor delay, and without publishing the same, all
available information relating thereto (with all necessary plans and models) to
the Company. Upon disclosure of each Development to the Company, Employee shall,
during his employment and at any time thereafter, at the request and cost of the
Company, sign, execute, make and do all such deeds, documents, acts and things
as the Company and its duly authorized agents may reasonably require, including
but not limited to the following:
(i) to apply for, obtain and vest in the name of the Company alone
(unless the Company otherwise directs) letters patent, copyrights
or other analogous protection in any country throughout the world
and when so obtained or vested to renew and restore the same; and
(ii) to defend any opposition proceedings in respect of such
applications and any opposition proceedings or petitions or
applications for revocation of such letters patent, copyright or
other analogous protection; or
(ii) to, in any other manner requested by the Company, acknowledge
that such Developments are Proprietary Information of the
Company.
In the event the Company is unable, after all diligent effort, to secure
Employee's signature on any letters patent, copyright, acknowledgment or other
analogous protection relating to a Development, whether because of any physical
or mental incapacity or for any other reason
-7-
<PAGE> 8
whatsoever, Employee hereby irrevocably designate and appoint the Company
through its duly authorized officers as Employee's agent and attorney-in-fact,
to act for and in Employee's behalf to execute and file any such application or
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of letters patent, copyright or other analogous
intellectual property protection thereon with the same legal force and effect as
if executed by the Employee.
SECTION 11. REMEDIES. The Employee acknowledges that monetary damages would be
inadequate to compensate the Corporation for any breach by the Employee of the
covenants set forth in Sections 7, 9 and 10 above. The Employee acknowledges
that the claim for the payment of any damages for breach of the provisions
herein contained shall not preclude the Company from seeking injunctive or such
other forms of relief as may be obtained in a court of law or equity, but that
the Company, in lieu of or in addition to the remedy of damages, may seek
injunctive relief prohibiting the Employee from breaching the provisions of this
Section 7 & 9 of this Agreement.
SECTION 12. NOTICES. Any notice under this Agreement shall be in writing and
shall be effective when actually delivered in person or upon receipted delivery
via courier, insured parcel delivery service, Federal Express, registered or
certified U.S. mail, all postage prepaid and addressed to the Party at the
address stated in this Agreement or such other address as either Party may
designate by written notice to the other. Notice by facsimile shall be effective
as of the date and time transmitted provided the sending Party maintains written
evidence that the transmission was initiated and completed during normal
business hours, was successfully received by the addressee, and was in a legible
format.
SECTION 13. NO RELEASE. The terms of Sections 7 and 9 shall survive the
termination or the term of this Agreement shall not release either Party from
any obligations under Sections 7 and 9 or remedies pursuant to Section 10.
SECTION 14. WAIVER. The waiver by either party of the breach of any provision of
this Agreement by the other party shall not operate or be construed as a waiver
of any subsequent breach.
SECTION 15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
SECTION 16. ARBITRATION. If at any time during the term of this Agreement any
dispute, difference, or disagreement shall arise relating in any way to this
Agreement or the Employee's employment with the Corporation, including any
dispute as to the meaning and construction hereof, every such dispute,
difference, and disagreement shall be referred to a single arbiter agreed upon
by the Parties, or if no single arbiter can be agreed upon, an arbiter or
arbiters shall
-8-
<PAGE> 9
be selected in accordance with the rules of the American Arbitration Association
and such dispute, difference, or disagreement shall be settled by arbitration in
accordance with the then prevailing commercial rules of the American Arbitration
Association in Pittsburgh, Pennsylvania or any location of the Corporation's
headquarters at the time of the referral, and judgment upon the award rendered
by arbitration may be entered in any court having competent jurisdiction
thereof.
SECTION 17. AGREEMENT BINDING. This Agreement shall be binding upon the
respective heirs, executors, administrators, successors and assigns of the
Parties hereto.
SECTION 18. COUNTERPARTS. This Agreement may be executed in several counterparts
and all so executed shall constitute one Agreement, binding on all the Parties
hereto even though all the Parties are not signatories to the original or the
same counterpart.
IN WITNESS WHEREOF, the Parties to this Agreement have executed this Agreement
as of the date first written above.
ATTEST: Demegen, Inc.
/s/ Mary L. Silverberg By: /s/ Richard D. Ekstrom
- --------------------------- -----------------------
Title: Secretary Title: President
WITNESSED BY: EMPLOYEE
/s/ Donna Fatora /s/ S. Robert Fatora
- --------------------------- ------------------------------------
S. Robert Fatora
-9-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
MARCH 31, 2000 AND 1999 BALANCE SHEET AND RELATED STATEMENTS OF OPERATIONS FOR
THE SIXE MONTH PERIODS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,655,594
<SECURITIES> 0
<RECEIVABLES> 106,651
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,036,239
<PP&E> 358,707
<DEPRECIATION> 177,678
<TOTAL-ASSETS> 3,434,411
<CURRENT-LIABILITIES> 478,217
<BONDS> 314,500
1,900,467
0
<COMMON> 31,928
<OTHER-SE> 558,399
<TOTAL-LIABILITY-AND-EQUITY> 3,434,411
<SALES> 0
<TOTAL-REVENUES> 486,176
<CGS> 0
<TOTAL-COSTS> 861,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,450
<INCOME-PRETAX> (381,231)
<INCOME-TAX> 0
<INCOME-CONTINUING> (381,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (381,231)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
