<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:
---------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule O-11:*
---------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------
5) Total fee paid:
---------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule O-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:
---------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------
3) Filing Party:
---------------------------------------------------------------------
4) Date Filed:
---------------------------------------------------------------------
<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 16, 2001 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, 2001.
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 9, 2001. 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 16, 2001
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, 2001.
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 9, 2001.
The Board of Directors
Demegen, Inc.
January 8, 2001
2
<PAGE> 4
GENERAL INFORMATION
This Proxy Statement is furnished beginning January 8, 2001 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 16, 2001.
The Record Date for determining those Stockholders entitled to notice of, and
those Stockholders entitled to vote at, the Annual Meeting is January 2, 2001
and any adjournment thereof. As of that date, 32,304,778 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 of 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 and November 19,
1999, 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 16, 2001 the Board of Directors remain with 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, 2000 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 Access
Health Alternative, Inc., a nutritional health care company.
Age, 56.
JESSE M. JAYNES 1992
Jesse M. Jaynes, Ph.D. is a Co-Founder of the Company and
has served as Vice President of Research since 1992. He is
the Company's Chief Scientist and the inventor of the core
technologies. He holds A.S. in Biology from the College of
Eastern Utah, a B.S. in Zoology from Southern Utah State
University and earned his doctorate in BioChemistry at
Brigham Young University. He completed postdoctoral
fellowships in the Department of Plant Pathology at Montana
State University and the Plant Growth Laboratory at the
University of California, Davis before joining the faculty
of Louisiana State University in 1985. Age, 49.
</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 also currently serves as director
of First Enterprise Bank of Oklahoma City. Age, 68.
ROBERT E. HANNAN 1999
Robert E. Hannan is the Principal and Chief Executive
Officer of the Genesis Group, a diversified business
consulting firm since 1981. Genesis Group has served the
health care and biotechnology industries since its
inception. Mr. Hannan is also Founder and Chief Executive
Officer of POV Incorporated, a strategic management
publishing firm and is Founder and Editorial Director of
four health care news releases under the brand name The
Genesis Report. Mr. Hannan is a member of the American
Association for the Advancement of Science and the New York
Academy of Science. Mr. Hannan is a member of the Board of
Directors of four privately held Healthcare and
Biotechnology companies. Age, 53.
NOMINEE TO BE ELECTED BY ALL STOCKHOLDERS
JERRY B. HOOK 1999
Jerry B. Hook, Ph.D., is the former Chairman of the Board
and CEO of Sparta Pharmaceuticals, Inc., which was recently
sold to Supergen, Inc. Dr. Hook was previously President and
CEO of Lexin Pharmaceutical, which was acquired by Sparta in
1996. Prior to Lexin, he was Senior Vice President and
Director, Research and Development SmithKline Beecham
Pharmaceuticals. Previously, Dr. Hook sits on the Board of
Directors of two privately held biotechnology firms. Dr.
Hook was Professor of Pharmacology and Toxicology at
Michigan State University and Director, Center for
Environmental Toxicology. Age, 62.
NOMINEES 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, Titan Pharmaceuticals and Visible
Genetics, Inc. In addition, he is a trustee of Carnegie
Mellon University and the Heinz Endowments. Age, 72.
JAMES COLKER 1998
James Colker is the Managing General partner of the CEO
Venture Fund. He is also a director of the Pittsburgh
Technology Council, the Pennsylvania Technology Council and
trustee of Penn Southwest Association, as well as a board
member of a number of small advanced technology companies.
Previously, Mr. Colker was Chairman and Chief Executive
Officer of Contraves Goerz Corporation. Age, 72.
</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 November 30, 2000, 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 2,728,250 7.07%
1051 Brinton Road
Pittsburgh, PA 15221
Jesse M. Jaynes, Ph.D. (3) Common 1,996,626 5.21%
1051 Brinton Road
Pittsburgh, PA 15221
John Bridwell (5) Common 1,034,937 2.81%
1051 Brinton Road
Pittsburgh, PA 15221
Robert E. Hannan (4) Common 125,000 0.34%
1051 Brinton Road
Pittsburgh, PA 15221
Konrad Weis Ph.D. (8) Common 984,616 2.68%
1051 Brinton Road
Pittsburgh, PA 15221
James Colker (6) Common 10,260,000 24.60%
2000 Technology Drive
Suite 160
Pittsburgh, PA 15219
Jerry B. Hook Ph.D. (4) Common 125,000 0.34%
1051 Brinton Road
Pittsburgh, PA 15221
S. Robert Fatora Ph.D. (9) Common 300,000 0.82%
1051 Brinton Road
Pittsburgh, PA 15221
Mary L. Silverberg (7) Common 112,336 0.31%
1051 Brinton Road
Pittsburgh, PA 15221
All Directors and Officers Common 17,666,765 38.15%
as a group (9 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 November 30, 2000, are deemed outstanding for
computing the percentage of the person holding such option or warrant but
are not deemed outstanding for computing the percentage of any other person.
Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
beneficially owned.
(2) Includes 1,850,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
(3) Includes 1,600,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable and 15,000 shares of Common Stock
owned by Mr. Jaynes' minor child over which he claims beneficial ownership.
(4) Includes 125,000 shares of Common Stock issuable upon the exercise of
options that are currently exercisable.
5
<PAGE> 7
(5) Includes 50,000 shares of Common Stock issuable upon the exercise of options
that are currently exercisable
(6) Mr. Colker is the Managing General Partner of the CEO Venture Fund III
("CEO") and, therefore, has beneficial ownership over the Company's 400,000
shares of the Company's Common Stock, Convertible Preferred Stock and
related Warrants held by CEO. The 4,444,444 shares of Convertible Preferred
Stock are convertible into 4,444,444 shares of the Company's Common Stock.
Additionally, CEO has a Warrant to purchase 4,965,556 shares of the
Company's Common Stock at an exercise price of $0.45 per share. The Warrant
expires on June 14, 2008. Additionally, CEO has a warrant to purchase
400,000 shares of the Company's Common Stock at an exercise price of $0.75
per share. This Warrant expires on March 31, 2005
Additionally, Mr. Colker has assigned options that he received as a Director
of the Company, to purchase 50,000 shares of Common Stock to the CEO Venture
Fund III. The options are currently exercisable.
(7) Includes 35,000 shares of Common Stock issuable upon the exercise of options
that are currently exercisable. Additionally, she has a warrant to purchase
10,668 shares of the Company's Common Stock at an exercise price of $0.75
per share. The Warrant expires on March 31, 2005.
(8) Includes 50,000 shares of Common Stock issuable upon the exercise of options
that are currently exercisable. Additionally he has a warrant to purchase
200,000 shares of the Company's Common Stock at an exercise price of $0.75
per share. The Warrant expires on March 31, 2005. Mr. Weis is the managing
partner of Weis Capital Fund LP ("Fund") and, therefore, has beneficial
ownership over the Fund's 100,000 shares of the Company's Common Stock and
100,000 Warrants held by the Fund. The Warrant is at an exercise price of
$0.75 per share. The Warrant expires on March 31, 2005
(9) Does not include 1,400,000 shares of Common Stock issuable upon the exercise
of options that are not vested and are therefore currently unexercisable.
The majority of these options vest and become exercisable upon the
achievement of certain contractually determined benchmarks.
During the fiscal year ended September 30, 2000, 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 in the fiscal year ended September 30, 2000, however telephonic
discussions were held on a quarterly basis with the independent auditors.
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, 2000. 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 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, 2000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Colker, Weis, Bridwell, Hook and
Hannon.
6
<PAGE> 8
EXECUTIVE OFFICERS; COMPENSATION
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- --- -------------
<S> <C> <C>
Richard D. Ekstrom 56 Chairman and President
S. Robert Fatora 56 Chief Operating Officer -- Pharmaceutical Products
Jesse M. Jaynes 49 Vice President of Research
Mary L. Silverberg 56 Secretary
</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) ($) ($) AWARDS($)(B) (#)(C) ($) ($)(D)
------------------ ---- --------- ------- ---------------- -------------- -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard D. Ekstrom 2000 $140,000 $25,000 -- -- 600,000 -- --
President 1999 $120,000 -- -- -- -- -- --
1998 $120,000 -- -- -- 1,600,000 -- --
S. Robert Fatora 2000 $102,500 -- -- $264,000 1,400,000 -- --
COO 1999 $ -- -- -- -- -- -- --
1998 $ -- -- -- -- -- -- --
Jesse M. Jaynes 2000 $120,000 $10,000 -- -- -- -- $2,048
Vice President 1999 $120,000 -- -- -- -- -- $1,648
1998 $120,000 -- -- -- 1,600,000 -- $3,833
</TABLE>
---------------
(A) Represents fiscal years ended September 30.
(B) Dr. Fatora received 300,000 restricted Common Shares upon his employment
with the Company. They were valued at the share price he commenced his
employment with the company (April 1, 2000).
(C) Dr. Fatora received options to purchase, up to 1,200,000 shares of the
Corporation's common stock at exercise prices of $0.45 and $0.90 per share.
The options vest the earlier of seven years from issue or the achievement of
certain performance objectives. The options expire in Fiscal 2010. He also
received options for 200,000 shares which vest ratably on April 1, 2001 and
2002 at an exercise price of $0.45 per share and expire in fiscal 2010.
The 1,600,000 option grants to Messrs. Ekstrom and Jaynes are fully vested.
The options issued in Fiscal 1998 are at an exercise price of $0.05 per
share and expire on March 5, 2008. Mr. Ekstrom's option issued in Fiscal
1996 to purchase up to 600,000 shares of Common Stock at an exercise price
of $0.15 per share had their expiration date extended from October 31, 2000
to October 31, 2010 at the September 17, 1999 meeting of the Compensation
Committee.
The 600,000 option grant to Mr. Ekstrom in Fiscal 2000 has 150,000 shares
vested with the remaining shares vesting ratably on May 1, 2001, 2002 and
2003. The exercise price of these options is $0.75 per share and the options
expire in Fiscal 2010.
(D) Represents premiums on $1 million life insurance policy on the life of Dr.
Jaynes whose beneficiary is Dr. Jaynes' family.
7
<PAGE> 9
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO MARKET
UNDERLYING EMPLOYEES EXERCISE PRICE
OPTIONS IN FISCAL PRICE EXPIRATION AT DATE
NAME GRANTED YEAR (%) ($/SH) DATE GRANT
---- ---------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Richard D Ekstrom (A) 600,000 26.4% 0.75 10/31/10 N/A
S. Robert Fatora (B) 900,000 61.5% 0.45 03/05/08 0.88
600,000 0.90 03/05/08 N/A
</TABLE>
---------------
(A) The 600,000 option grant to Mr. Ekstrom in Fiscal 2000 has 150,000 shares
vested with the remaining shares vesting ratably on May 1, 2001, 2002 and
2003. The exercise price of these options is $0.75 per share and the options
expire in Fiscal 2010.
(B) Mr. Fatora received options to purchase, up to 1,200,000 shares of the
Corporation's common stock at exercise prices of $0.45 and $0.90 per share.
The options vest the earlier of seven years from issue or the achievement of
certain performance objectives. The options expire in Fiscal 2010. He also
received options for 200,000 shares which vest ratably on April 1, 2001 and
2002 at an exercise price of $0.45 per share and expire in fiscal 2010.
COMPENSATION OF DIRECTORS
The directors of the Company are reimbursed for expenses that they incur in
performing Board duties.
During Fiscal 2000, the members of the Company's Board of Directors received the
following options to purchase shares of the Company's Common Stock. All of these
options expire in Fiscal 2005.
<TABLE>
<CAPTION>
DIRECTOR OPTIONS TO PURCHASE EXERCISE PRICE
-------- ------------------- --------------
<S> <C> <C>
John Bridwell 25,000 shares $0.50
Konrad Weis 25,000 shares $0.50
James Colker (A) 25,000 shares $0.50
Robert Hannan 25,000 shares $0.50
Jerry Hook (B) 100,000 shares $0.45
Jerry Hook 25,000 shares $0.50
</TABLE>
---------------
(A) Mr. Colker assigned his options to the CEO Venture Fund III of which he is
the Managing General Partner.
(B) Mr. Hook received 100,000 options upon his appointment to the Board of
Directors and 25,000 options upon his reelection to the Board of Directors.
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, 2001. 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
8
<PAGE> 10
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.
AUDIT COMMITTEE MATTERS
Securities & Exchange Commission rules now require that every three years a
company's audit committee charter be included in the Company's Proxy and that
the report of the Audit Committee be included annually.
DEMEGEN, INC.
AUDIT COMMITTEE CHARTER
ORGANIZATION
This charter governs the operation of the Audit Committee. The Audit Committee
shall review and reassess the charter at least annually and obtain the approval
of the Board of Directors. The committee shall be appointed by the Board of
Directors and shall comprise at least two directors. Members of the committee
shall be considered independent if they have no relationship that may interfere
with the exercise of their independence from management and the Company
STATEMENT OF POLICY
The Audit Committee shall provide assistance to the Board of Directors in
fulfilling their oversight responsibility to the shareholders, potential
shareholders, the investment community, and others relating to the Company's
financial statements and the financial reporting process, the systems of
internal accounting and financial controls, the annual independent audit of the
Company's financial statements, and the legal compliance and ethics programs as
established by management and the Board of Directors. In doing so, it is the
responsibility of the Audit Committee to maintain free and open communication
between the Audit Committee, independent auditors and management of the Company.
In discharging its oversight role, the Audit Committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities, and personnel of the Company and the power to retain
outside counsel, or other experts for this purpose.
RESPONSIBILITIES AND PROCESSES
The primary responsibility of the Audit Committee is to oversee the Company's
financial reporting process on behalf of the Board of Directors and report the
results of their activities to the Board of Directors. Management is responsible
for preparing the Company's financial statements, and the independent auditors
are responsible for auditing those financial statements. The Audit Committee in
carrying out its responsibilities believes its policies and procedures should
remain flexible, in order to best react to changing conditions and
circumstances. The Audit Committee should take the appropriate actions to set
the overall corporate "tone" for quality financial reporting, sound business
risk practices, and ethical behavior.
The following shall be the principal recurring processes of the Audit Committee
in carrying out its oversight responsibilities. The processes are set forth as a
guide with the understanding that the Audit Committee may supplement them as
appropriate.
- The Audit Committee shall have a clear understanding with management and
the independent auditors that the independent auditors are ultimately
accountable to the Board of Directors and the Audit Committee, as
representatives of the Company's shareholder's. The Audit Committee shall
have the ultimate authority and responsibility to evaluate and, where
appropriate, replace the independent auditors. The Audit Committee shall
discuss with the auditors their independence from management and the
Company and the matters included in the written disclosures required by
the
9
<PAGE> 11
Independence Standards Board. Annually, the Audit Committee shall review
and recommend to the Board of Directors the selection of the Company's
independent auditors, subject to shareholder's approval.
- The Audit Committee shall discuss with the independent auditors the
overall scope and plans for the audit including the adequacy of staffing.
Also, the Audit Committee shall discuss with management and the
independent auditors, the adequacy and effectiveness of the accounting
and financial controls, including the Company's system to monitor and
manage business risk, and legal and ethical compliance programs. Further,
the Audit Committee shall meet with the independent auditors, with and
without management present, to discuss the results of their examination.
- The Audit Committee shall review the interim financial statements with
management and the independent auditors prior to filing of the Company's
Quarterly Report on Form 10-QSB. Also, the Audit Committee shall discuss
the results of the quarterly review and any other matters required to be
communicated to the Audit Committee by the independent auditors under
generally accepted auditing standards. The chair of the Audit Committee
may represent the entire Audit Committee for the purposes of this review.
- The Audit Committee shall review with management and the independent
auditors the financial statements to be included in the Company's Annual
Report of Form 10-K, including their judgement about the quality, not
just acceptability, of accounting principles, the reasonableness of
significant judgements, and the clarity of the disclosures in the
financial statements. Also, the Audit Committee shall discuss the results
of the annual audit and any other matters required to be communicated to
the Audit Committee by the independent auditors under generally accepted
auditing standards.
DEMEGEN, INC.
REPORT OF AUDIT COMMITTEE
The Audit Committee oversees the Company's financial reporting process on behalf
of the Board of Directors. Management has the primary responsibility for the
financial statements and the reporting process including the systems of internal
controls. In fulfilling its oversight responsibilities, the Audit Committee
reviewed the audited financial statements of the Annual Report on Form 10-KSB
with management including a discussion of the quality, not just the
acceptability, of the accounting principles, the reasonableness of significant
judgements, and clarity of disclosures of the financial statements.
The Audit Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those financial statements with
generally accepted accounting principles, their judgements as to the quality,
not just the acceptability, of the Company's accounting principles and such
other matters as are required to be discussed with the Audit Committee under
generally accepted auditing standards. In addition, the Audit Committee has
discussed with the independent auditors, the auditors' independence from
management and the Company including the matters in the written disclosures
required by the Independence Standards Board.
The Audit Committee discussed with the Company's independent auditors the
overall scope and plans for their audit. The Audit Committee meets with the
independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting. The
Audit Committee held two meetings during Fiscal 2000.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors, and the Board of Directors
approved, that the audited financial statements be included in the Annual Report
on Form 10-KSB for the year ended September 30, 2000 for filing with the
Securities and Exchange Commission. The Audit Committee and the Board of
Directors have also recommended, subject to shareholder ratification, the
selection of the Company's independent auditors.
Respectfully submitted,
James Colker, Chairman
John Bridwell
Robert E. Hannan
Jerry B. Hook, Ph.D.
Konrad M. Weis, Ph.D.
10
<PAGE> 12
STOCKHOLDERS' PROPOSALS FOR 2002 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 2002 Annual Meeting, stockholder proposals
must be received by the Company no later than November 1, 2001 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, 2001 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, 2000:
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>
2000
High................................................ $0.33 $1.53 $1.00 $0.65
Low................................................. $0.19 $0.29 $0.53 $0.46
1999
High................................................ $0.51 $0.51 $0.63 $0.44
Low................................................. $0.21 $0.32 $0.29 $0.24
</TABLE>
At December 2, 2000, there were 503 holders of record of 32,304,778 shares of
Common Stock, exclusive of holders which maintain their ownership in
"Street-Name" at brokerage houses, and one holder of record of 4,444,444 shares
of Preferred Stock. There are approximately 1,526 stockholders which hold their
ownership in street name.
11
<PAGE> 13
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, 2000, 1999, 1998, 1997, and 1996 and for the
period December 6, 1991 (inception) to September 30, 2000:
<TABLE>
<CAPTION>
DECEMBER 6,
1991
(INCEPTION)
YEAR ENDED SEPTEMBER 30, TO
---------------------------------------------------------------------- SEPTEMBER 30,
2000 1999 1998 1997 1996 2000
------------ ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Grant and Other Income..... $ 763,765 $ 1,118,576 $ 1,376,918 $ 764,834 $ 271,777 $ 4,580,262
Total Expenses............. 2,419,247 2,456,318 3,370,671 1,708,607 2,841,255 19,011,011
Net Loss................... (1,655,482) (1,337,742) (1,993,753) (943,773) (2,569,478) (14,430,749)
Net Loss per Share
(dilutive)............... $ (0.06) $ (0.06) $ (0.13) $ (0.05) $ (0.17)
Dividends per Share........ $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Weighted Average Number of
Common Shares
Outstanding.............. 29,759,153 26,255,104 23,867,091 19,537,047 15,479,889
BALANCE SHEET DATA:
Cash & Cash Equivalents.... $ 1,825,352 $ 583,585 $ 1,686,658 $ 310,252 $ 19,266
Working Capital
(deficiency)............. 1,413,408 6,849 1,329,541 (1,498,477) (2,754,591)
Total Assets............... 2,311,592 1,084,505 2,114,750 651,963 156,147
Long-term obligations...... 360,180 203,147 -0- -0- -0-
Deficit accumulated during
development stage........ (16,039,877) (14,119,462) (12,523,358) (9,443,772) (8,499,999)
Redeemable convertible
preferred Stock.......... 2,033,787 1,768,846 1,510,484 -0- -0-
Shareholders' Equity
(Deficit)................ (633,989) (1,555,934) (122,130) (1,158,216) (2,642,523)
</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.
12
<PAGE> 14
RESULTS OF OPERATION
SEPTEMBER 30, 2000 VS 1999
In the year ended September 30, 2000 (Fiscal 2000), grants and other income
decreased to $0.8 million from $1.1 million in the year ended September 30, 1999
(Fiscal 1999). This decrease was due to the absence in the current year of
grants as compared to the prior year. In Fiscal 2000, the Company received a
$150,000 program related loan from a local charity. Had this been a grant,
revenues between the two years would have been more comparable. The Fiscal 2000
revenue was from licensing fee and research funding received from Dow Agro
Sciences as part of a license entered into during Fiscal 1998.
Total expenses decreased by $0.35 million in the current year, exclusive of the
$0.31 million non-cash charge in the Fiscal 2000 period for the compensation
package to retain the new Chief Operating Officer -- Pharmaceutical Products.
Research and development expenses decreased by $0.26 million, excluding the
aforementioned non-cash charge, as the Company pursued starting Phase I clinical
trials early in Fiscal 2001 for its infected burn and infected wound
therapeutic.
General and administrative expenses decreased slightly to $0.7 million in Fiscal
2000 from $0.8 million in Fiscal 1999. Depreciation and amortization remained
relatively constant in the two fiscal years as both periods included the costs
associated with the new laboratory at the Company's new Pittsburgh office.
The Company did not have a federal or state income tax provision in either
Fiscal 2000 or 1999 due to the loss recorded in each period.
The amounts described above resulted in a net loss of $1.66 million for Fiscal
2000. The net loss would have been $1.25 million if the aforementioned non-cash
charge was excluded. The net loss for Fiscal 1999 was $1.34 million.
SEPTEMBER 30, 1999 VS 1998
In the year ended September 30, 1999 (Fiscal 1999), grants, license fees and
other income was $1.1 million compared to $1.4 million in the year ended
September 30, 1998 (Fiscal 1998). The Fiscal 1999 revenue was primarily due to a
$0.5 million licensing fee and research funding received from Dow AgroSciences
as part of the modification of its license agreement providing Dow 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
Company's development of cancer fighting drugs. During the Fiscal 1998 period,
revenue of $0.9 million was received from Dow AgroSciences relative to the
initial license for the Company's agricultural disease resistance technologies.
Additionally a grant of $0.25 million was received from the aforementioned
cancer charity.
Total expenses increased in the current year exclusive of the $1.7 million
non-cash charge in the Fiscal 1998 period for the issuance of stock options to
employees and directors. The increase was due to a higher employee headcount in
the current fiscal period and increased expenditures supporting the Company's
research activity.
Research and development expenditures increased to $1.5 million in Fiscal 1999
from $0.9 million in Fiscal 1998 due to increased funding relative to its cancer
drug research. The focus of this research was upon the method of action and
other areas in preparation for the 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.
13
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
FISCAL 2000
During the year ended September 30, 2000, the Company's cash increased by $1.2
million. Net cash provided by financing activities of $2.5 million was partially
offset by a $1.1 million of net cash utilized by operating activities and $0.1
million of net cash utilized by investing activities.
Cash from financing activities was generated from $2.4 million of net proceeds
from the private placement of securities and $0.15 million received from a local
foundation in the form of a note payable. The loan matures on February 28, 2005
with interest at 5%. The loan is to fund program related research.
Cash utilized in operating activities was caused by the net loss of $1.66
million and a $0.09 million decrease in unearned revenue. This was partially
offset by $0.13 million of depreciation and amortization, $0.16 million of stock
issued for services, $0.04 million for the amortization of the deferred
compensation component of shareholders' equity, the $0.26 million non-cash
charge for the compensation package to retain the new Chief Operating
Officer -- Pharmaceutical Products and a $0.04 million of stock issued for
compensation.
Cash utilized by investing activities was primarily due to a $0.11 million
increase in intangible assets due to the capitalization of patent related
expenses.
FISCAL 1999
During the year ended September 30, 1999, the Company's cash and cash
equivalents decreased by $1.1 million to $0.6 million. Net cash provided by
financing activities of $0.1 million was offset by $0.27 million of net cash
utilized by investing activities and net cash used by operating activities of
$0.93 million.
Specifically, cash inflows from financing activities included $0.02 million
realized from the exercise of stock options, $0.02 million from an equipment
financing and a $0.07 million increase in payables to related parties.
The $0.93 million of cash utilized by operating activities consisted of the net
loss of $1.3 million, and a decrease of $0.09 million in unearned revenue,
partially offset by $0.15 million of depreciation and amortization, a $0.04
million decrease in accounts receivable, and a $0.23 million increase in
accounts payable and other liabilities.
The $0.27 million of cash utilized by investing activities relates to $0.21
million for the purchase of property, plant and equipment and $0.06 million of
patent costs capitalized as intangible costs in the current year.
FISCAL 1998
During the year ended September 30, 1998, the Company's cash and cash
equivalents increased by $1.4 million to $1.7 million. Net cash provided by
financing activities of $1.6 million was partially offset by a $0.01 million of
net cash utilized by operating activities and $0.14 million of net cash utilized
by investing activities.
Specifically, cash inflows from financing activities included the $1.9 million
net proceeds from the issuance of preferred stock and warrant to the CEO Venture
fund in June 1998. Additionally, $0.09 million was realized from the exercise of
stock options. These sources of funds were partially offset by a $0.41 million
decrease in payables to related parties.
The $0.1 million of cash utilized by operating activities consisted of the net
loss of $2.0 million and a decrease of $0.21 million in accounts payable and
other liabilities offset by the $1.7 million of non-cash compensation related to
the issuance of below market stock options issued to employees and directors
that vested during the year, $0.12 million of depreciation and amortization,
$0.09 million of stock issued for services and a $0.18 million increase in
unearned revenue relating to the $0.3 million three year administration fee paid
to the Company in October 1997 by Mycogen.
The $0.14 million of cash utilized by investing activities relates to $0.05
million for the purchases of property, plant and equipment and $0.08 million of
patent costs capitalized as intangible assets in the current year.
PROSPECTIVE INFORMATION
The Company believes that it has adequate liquidity to fund its operations in
Fiscal 2001 if the expected milestones, research support, license, sub-license
and equity financing payments are received as expected. Should the expected
payments either be
14
<PAGE> 16
delayed or not forth coming, the Company would take the necessary actions to
scale back its level of expenditures, primarily research expenditures associated
with new projects, to maintain sufficient cash flow to fund basic operations. On
a long term basis, it will be necessary for the Company to access additional
funding so that it can continue to fund the Phase I and Phase II testing of its
therapeutic agents. This funding may be in the form of a private placement of
equity securities or a secondary issuance of securities into the market.
The Company intends to pursue the acquisition/merger of biotechnology companies
with similar technologies to increase the range of potential product offerings
that the Company will have to push through the clinical trial pipeline and to
broaden its exposure to potential partners.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE MARKET RISK
None
15
<PAGE> 17
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Demegen, Inc.
We have audited the accompanying balance sheets of Demegen, Inc. (a development
stage company) as of September 30, 2000 and 1999, and the related statements of
operations, shareholders' deficit, and cash flows for the years ended September
30, 2000, 1999 and 1998 and for the period from December 6, 1991 (inception)
through September 30, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements for the
period from December 6, 1991 (inception) through September 30, 1994, were
audited by other auditors whose report dated November 10, 1994, expressed an
unqualified opinion on those statements and included an explanatory paragraph
regarding the entity's ability to continue as a going concern, that is not
included in our current report as the result of additional financing obtained by
the Company. The financial statements for the period December 6, 1991
(inception) through September 30, 1994, include total revenues and net loss of
$1,116,800 and $3,056,682, respectively. Our opinion on the statements of
operations, shareholders' deficit, and cash flows for the period December 6,
1991 (inception) through September 30, 2000, insofar as it relates to amounts
for prior periods through September 30, 1994, is based solely on the report of
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Demegen, Inc. (a development stage company) at
September 30, 2000 and 1999, and the results of its operations and its cash
flows for the years ended September 30, 2000, 1999, and 1998, and for the period
from December 6, 1991 (inception) through September 30, 2000, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Pittsburgh, PA
November 17, 2000
16
<PAGE> 18
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,825,352 $ 583,585
Accounts receivable....................................... 22,409 22,546
Prepaid expenses and other current assets................. -- 2,057
----------- -----------
Total current assets.................................... 1,847,761 608,188
Property and equipment:
Furniture and equipment................................... 201,389 195,786
Computer hardware and software............................ 164,412 165,758
----------- -----------
365,801 361,544
Less accumulated depreciation and amortization............ (208,971) (151,219)
----------- -----------
156,830 210,325
Intangible assets:
Licenses.................................................. 245,000 245,000
Patents................................................... 359,837 248,436
----------- -----------
604,837 493,436
Less accumulated amortization............................... (297,836) (227,444)
----------- -----------
307,001 265,992
----------- -----------
Total assets............................................ $ 2,311,592 $ 1,084,505
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts Payable.......................................... $ 263,303 $ 354,988
Accrued payroll........................................... 97,261 28,442
Unearned revenue.......................................... -- 91,667
Current portion of notes payable.......................... 42,000 63,558
Other liabilities......................................... 31,789 62,684
----------- -----------
Total current liabilities............................... 434,353 601,339
Notes payable............................................... 360,180 203,147
Other....................................................... 117,261 67,107
----------- -----------
Total liabilities....................................... 911,794 871,593
Commitments and contingency
Redeemable convertible preferred stock, $.001 par value --
40,000,000 shares authorized; 4,444,444 shares issued and
outstanding............................................. 2,033,787 1,768,846
Shareholders' deficit:
Common stock, $.001 par value -- 100,000,000 shares
authorized; 32,304,778 and 26,361,899 shares issued and
outstanding at September 30, 2000 and September 30,
1999, respectively...................................... 32,305 26,362
Warrants.................................................. 1,287,004 497,000
Deferred Compensation..................................... (343,999) --
Subscription receivable................................... (188,511) --
Additional paid-in capital................................ 14,619,089 12,040,166
Deficit accumulated during the development stage.......... (16,039,877) (14,119,462)
----------- -----------
Total shareholders' deficit............................. (633,989) (1,555,934)
----------- -----------
Total liabilities and shareholders' deficit............. $ 2,311,592 $ 1,084,505
=========== ===========
</TABLE>
See accompanying notes.
17
<PAGE> 19
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 6, 1991
YEAR ENDED SEPTEMBER 30, (INCEPTION) TO
----------------------------------------- SEPTEMBER 30,
2000 1999 1998 2000
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Income:
License..................................... $ 220,000 $ 350,000 $ 906,651 $ 1,576,651
Grant and other............................. 472,432 708,475 425,398 2,827,308
Interest.................................... 71,333 60,101 44,869 176,303
----------- ----------- ----------- ------------
Total income............................. 763,765 1,118,576 1,376,918 4,580,262
Expenses:
Research and development.................... 1,560,981 1,513,680 880,965 7,053,866
General and administrative.................. 709,533 784,891 2,338,817 10,382,152
Interest.................................... 14,207 3,140 28,295 996,931
Depreciation and amortization............... 134,526 154,607 122,594 578,062
----------- ----------- ----------- ------------
Total expenses........................... 2,419,247 2,456,318 3,370,671 19,011,011
----------- ----------- ----------- ------------
Net loss...................................... (1,655,482) (1,337,742) (1,993,753) (14,430,749)
Preferred dividend and accretion amounts...... (264,933) (258,362) (1,085,833) (1,609,128)
----------- ----------- ----------- ------------
Net loss applicable to common stock........... $(1,920,415) $(1,596,104) $(3,079,586) $(16,039,877)
=========== =========== =========== ============
Net loss per common share, basic and
diluted..................................... $ ($0.06) $ (0.06) $ (0.13)
=========== =========== ===========
Weighted average common stock outstanding..... 29.759,153 26,255,104 23,867,091
=========== =========== ===========
</TABLE>
See accompanying notes.
18
<PAGE> 20
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
AVERAGE COMMON STOCK ADDITIONAL RECEIVABLE
PRICE -------------------- DEFERRED PAID-IN FROM
PER SHARE SHARES AMOUNT WARRANTS COMPENSATION CAPITAL SHAREHOLDERS
--------- ---------- ------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Acquired in merger with Excelsior
Capital Corporation............... 10,743,571 $10,744 $ -- $ -- $ 312,681 $ --
Loss from inception (December 6,
1991) to September 30, 1992....... -- -- -- -- -- --
Capital contributed by a
shareholder....................... -- -- -- -- 123,700 --
Proceeds from the sale of
unrestricted shares contributed by
shareholders in exchange for
restricted shares................. $ .62 439,045 439 -- -- 272,461 --
Payment of debt with stock
warrants.......................... -- -- -- -- 33,333 --
Payment of interest with stock
warrants.......................... -- -- -- -- 17,774 --
Issuance of receivable from
officer........................... -- -- -- -- -- (65,117)
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
Balance at September 30, 1993........ 11,182,616 11,183 -- -- 759,949 (65,117)
Proceeds from the sale of
unrestricted shares by
shareholders in exchange for
restricted shares................. .75 691,738 692 -- -- 517,708 --
Issuance of stock for consulting
services.......................... 1.54 58,336 58 -- -- 89,942 --
Issuance of stock subscriptions for
loan origination fee.............. 1.14 131,250 131 -- -- 149,869 --
Payment of interest with stock
warrants.......................... -- -- -- -- 56,164 --
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
Balance at September 30, 1994........ 12,063,940 12,064 -- -- 1,573,632.. (65,117)
Proceeds from the sale of restricted
common shares..................... 1.06 193,133 193 -- -- 204,807 --
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
Issuance of restricted shares for
payment of
services/compensation............. .89 402,251 402 -- -- 357,681 --
Issuance of warrants................ -- -- -- -- 11,625 --
Payment of interest with stock
warrants.......................... -- -- -- -- 127,500 --
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
Balance September 30, 1995........... 12,831,018 12,831 -- -- 2,624,377 --
Proceeds from the sale of common
shares............................ .70 683,250 683 -- -- 479,817 --
Issuance of shares for payment of
services/compensation............. .60 890,868 891 -- -- 536,359 --
Issuance of shares in settlement of
outstanding debt and other
obligations....................... .47 4,468,285 4,468 -- -- 2,113,054 --
Payment of interest with warrants... -- -- -- -- 84,996 --
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
Balance at September 30, 1996........ 18,873,421 18,873 -- -- 5,838,603 --
Proceeds from the sale of restricted
and unrestricted common shares.... .36 340,000 340 -- -- 104,660 --
Issuance of shares for payment of
services/compensation............. .41 1,178,258 1,178 -- -- 477,629 --
Issuance of shares in exchange for
patent and technology license..... .35 700,000 700 -- -- 244,300 --
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 --
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 --
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------ -----------
<S> <C> <C>
Acquired in merger with Excelsior
Capital Corporation............... $ -- $ 323,425
Loss from inception (December 6,
1991) to September 30, 1992....... (244,100) (244,100)
Capital contributed by a
shareholder....................... -- 123,700
Proceeds from the sale of
unrestricted shares contributed by
shareholders in exchange for
restricted shares................. -- 272,900
Payment of debt with stock
warrants.......................... -- 33,333
Payment of interest with stock
warrants.......................... -- 17,774
Issuance of receivable from
officer........................... -- (65,117)
Net loss for the year............... (1,044,154) (1,044,154)
------------ -----------
Balance at September 30, 1993........ (1,288,254) (582,239)
Proceeds from the sale of
unrestricted shares by
shareholders in exchange for
restricted shares................. -- 518,400
Issuance of stock for consulting
services.......................... -- 90,000
Issuance of stock subscriptions for
loan origination fee.............. -- 150,000
Payment of interest with stock
warrants.......................... -- 56,164
Net loss for the year............... (1,768,428) (1,768,428)
------------ -----------
Balance at September 30, 1994........ (3,056,682) (1,536,103)
Proceeds from the sale of restricted
common shares..................... -- 205,000
Issuance of restricted shares in
exchange for unrestricted shares
contributed by shareholders....... -- --
Proceeds from the sale of
unrestricted shares contributed by
shareholders in exchange for
restricted shares................. -- 414,421
Issuance of restricted shares for
payment of
services/compensation............. -- 358,083
Issuance of warrants................ -- 11,625
Payment of interest with stock
warrants.......................... -- 127,500
Net loss for the year............... (2,873,839) (2,873,839)
------------ -----------
Balance September 30, 1995........... (5,930,521) (3,293,313)
Proceeds from the sale of common
shares............................ -- 480,500
Issuance of shares for payment of
services/compensation............. -- 537,250
Issuance of shares in settlement of
outstanding debt and other
obligations....................... -- 2,117,522
Payment of interest with warrants... -- 84,996
Net loss for the year............... (2,569,478) (2,569,478)
------------ -----------
Balance at September 30, 1996........ (8,499,999) (2,642,523)
Proceeds from the sale of restricted
and unrestricted common shares.... -- 105,000
Issuance of shares for payment of
services/compensation............. -- 478,807
Issuance of shares in exchange for
patent and technology license..... -- 245,000
Issuance of restricted shares in
exchange for unrestricted shares
contributed by shareholders....... -- --
Exchange of amounts due to related
parties for restricted shares..... -- 150,000
Exchange of redemption right of
related party for additional
restricted shares................. -- --
Settlement of amounts due to related
parties through debt forgiveness
and issuance of shares............ -- 1,449,273
Net loss for the year............... (943,773) (943,773)
------------ -----------
</TABLE>
19
<PAGE> 21
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' DEFICIT (CONTINUED)
<TABLE>
<CAPTION>
AVERAGE COMMON STOCK ADDITIONAL RECEIVABLE
PRICE -------------------- DEFERRED PAID-IN FROM
PER SHARE SHARES AMOUNT WARRANTS COMPENSATION CAPITAL SHAREHOLDERS
--------- ---------- ------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997........ 21,849,399 $21,849 $ -- $ -- 8,263,707 --
Proceeds from exercise of stock
options........................... $ .05 1,750,000 1,750 -- -- 85,750 --
Compensation expense from Stock
option activity................... -- -- -- -- 1,699,440 --
Issuance of warrants................ -- -- 497,000 -- -- --
Allocation of conversion feature of
redeemable convertible preferred
stock............................. -- -- -- -- 1,022,222 --
Accretion of conversion feature of
redeemable convertible preferred
stock............................. -- -- -- -- -- --
Dividends on redeemable convertible
preferred stock................... -- -- -- -- -- --
Accretion of redeemable convertible
preferred stock................... -- -- -- -- -- --
Issuance of shares for payment of
collaborators..................... .47 20,000 20 -- -- 9,360 --
Settlement of employee litigation... .36 1,975,000 1,975 -- -- 710,217 --
Issuance of shares for services..... .47 187,500 188 -- -- 87,750 --
Issuance of additional shares to
venture capital funds and
individual investors.............. 85,000 85 -- -- (85) --
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
Balance at September 30, 1998........ 25,866,899 25,867 497,000 -- 11,878,361 --
Dividends on redeemable convertible
preferred stock................... -- -- -- -- -- --
Accretion of redeemable convertible
preferred stock................... -- -- -- -- -- --
Proceeds from exercise of Stock
options........................... .05 350,000 350 -- -- 17,150 --
Issuance of shares for services..... 0.46 145,000 145 -- -- 66,655 --
Extension of expiration date of
stock option...................... -- -- -- -- 78,000 --
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
Balance at September 30, 1999........ 26,361,899 26,362 497,000 -- 12,040,166 --
Dividends on redeemable convertible
preferred stock................... -- -- -- -- -- --
Accretion of redeemable convertible
preferred stock................... -- -- -- -- -- --
Proceeds from sale of common stock
and warrants, net of Issuance
costs of $126,783................. 0.50 5,566,004 5,566 779,241 -- 1,871,412 (282,002)
Issuance of shares and options for
services/compensation............. 0.88 376,875 377 10,763 (387,000) 707,511 93,491
Amortization of stock based
compensation...................... -- -- -- 43,001 -- --
Net loss for the year............... -- -- -- -- -- --
---------- ------- ---------- --------- ----------- ---------
Balance at September 30, 2000........ 32,304,778 $32,305 $1,287,004 $(343,999) $14,619,089 $(188,511)
========== ======= ========== ========= =========== =========
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------ -----------
<S> <C> <C>
Balance at September 30, 1997........ (9,443,772) (1,158,216)
Proceeds from exercise of stock
options........................... -- 87,500
Compensation expense from Stock
option activity................... -- 1,699,440
Issuance of warrants................ -- 497,000
Allocation of conversion feature of
redeemable convertible preferred
stock............................. -- 1,022,222
Accretion of conversion feature of
redeemable convertible preferred
stock............................. (1,022,222) (1,022,222)
Dividends on redeemable convertible
preferred stock................... (40,000) (40,000)
Accretion of redeemable convertible
preferred stock................... (23,611) (23,611)
Issuance of shares for payment of
collaborators..................... -- 9,380
Settlement of employee litigation... -- 712,192
Issuance of shares for services..... -- 87,938
Issuance of additional shares to
venture capital funds and
individual investors.............. -- --
Net loss for the year............... (1,993,753) (1,993,753)
------------ -----------
Balance at September 30, 1998........ (12,523,358) (122,130)
Dividends on redeemable convertible
preferred stock................... (160,000) (160,000)
Accretion of redeemable convertible
preferred stock................... (98,362) (98,362)
Proceeds from exercise of Stock
options........................... -- 17,500
Issuance of shares for services..... -- 66,800
Extension of expiration date of
stock option...................... -- 78,000
Net loss for the year............... (1,337,742) (1,337,742)
------------ -----------
Balance at September 30, 1999........ (14,119,462) (1,555,934)
Dividends on redeemable convertible
preferred stock................... (160,000) (160,000)
Accretion of redeemable convertible
preferred stock................... (104,933) (104,933)
Proceeds from sale of common stock
and warrants, net of Issuance
costs of $126,783................. -- 2,374,217
Issuance of shares and options for
services/compensation............. -- 425,142
Amortization of stock based
compensation...................... -- 43,001
Net loss for the year............... (1,655,482) (1,655,482)
------------ -----------
Balance at September 30, 2000........ $(16,039,877) $ (633,989)
============ ===========
</TABLE>
See accompanying notes
20
<PAGE> 22
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 6, 1991
YEAR ENDED SEPTEMBER 30, (INCEPTION)
----------------------------------------- TO SEPTEMBER 30,
2000 1999 1998 2000
----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss)................................ $(1,655,482) $(1,337,742) $(1,993,753) $(14,430,749)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................... 134,526 154,607 122,594 578,062
Stock issued for services........................ 161,142 -- 97,318 1,890,200
Stock based compensation......................... 43,001 -- -- 43,001
Issuance of stock options to employees and
directors...................................... 264,000 78,000 1,699,440 2,041,440
Warrants issued for interest..................... -- -- -- 286,434
Notes payable issued for services................ -- -- -- 58,194
Other............................................ 2,134 -- -- 26,482
Changes in operating assets and liabilities:
Accounts receivable.............................. 137 37,383 (59,929) (22,409)
Prepaid expenses and other current assets........ 2,057 9,802 (10,409) --
Unearned revenue................................. (91,667) (91,666) 183,333 --
Accounts payable and other liabilities........... (3,607) 217,335 (141,186) 1,422,438
----------- ----------- ----------- ------------
Net cash used in operating activities............ (1,143,759) (932,281) (102,592) (8,106,907)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment............... (12,765) (210,157) (54,027) (396,140)
Cash received on equipment disposals............. -- -- -- 9,643
Intangible assets................................ (111,401) (64,463) (84,610) (359,368)
----------- ----------- ----------- ------------
Net cash used in investing activities............ (124,166) (274,620) (138,637) (745,865)
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from issuance of equity instruments,
net of transaction costs....................... 2,374,217 -- 1,943,873 6,683,717
Proceeds from exercise of stock options.......... -- 17,500 87,500 105,000
Proceeds from notes payable...................... 150,000 21,109 -- 1,298,609
(Decrease) increase in payable to employees and
directors...................................... 14,550 72,614 (413,738) 2,687,962
Payments on notes payable........................ (29,075) (7,395) -- (97,164)
----------- ----------- ----------- ------------
Net cash provided by financing activities........ 2,509,692 103,828 1,617,635 10,678,124
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents.................................... 1,241,767 (1,103,073) 1,376,406 1,825,352
Cash and cash equivalents at beginning of
period......................................... 583,585 1,686,658 310,252 --
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period....... $ 1,825,352 $ 583,585 $ 1,686,658 $ 1,825,352
=========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest........................... $ 8,582 $ 3,140 $ 14,080 $ 30,224
=========== =========== =========== ============
NONCASH ACTIVITIES
Common stock issued in satisfaction of related
party payable.................................. $ -- $ 66,800 $ 712,192 $ 778,992
=========== =========== =========== ============
Dividends on redeemable convertible preferred
stock.......................................... $ 160,000 $ 160,000 $ 40,000 $ 360,000
=========== =========== =========== ============
Accretion of redeemable convertible preferred
stock.......................................... $ 104,947 $ 98,362 $ 1,045,833 $ 1,249,142
=========== =========== =========== ============
Receivable due from stockholders................. $ 282,002 $ -- $ -- $ 282,002
=========== =========== =========== ============
Common stock issued for issuance costs........... $ 100,000 $ -- $ -- $ 100,000
=========== =========== =========== ============
</TABLE>
See accompanying notes.
21
<PAGE> 23
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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.
22
<PAGE> 24
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 $64,134,
$56,948 and $30,824, during 2000, 1999 and 1998, respectively.
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 and 1998, the Company received grant proceeds of
$375,000 and $250,000, respectively, from the Pacific West Cancer Fund in
support of the Company's cancer research efforts. The funds were recognized as
revenue upon receipt as the contracts did not contain any penalties, successful
outcomes clauses or refunding provisions.
The Company received $27,882, $91,808 and $79,000 in fiscal 2000, 1999 and 1998,
respectively, under research agreements with the National Institute of Health
and the National Science Foundation. Revenue was recognized as the research
funds were expended.
LICENSE AND SUPPORT
License fees are recognized at the time that the agreement is entered into as
the earning process is complete and the Company has no future performance
obligations. Support fees are recognized ratably over the contract period as the
related costs are incurred.
Milestone payments will be recognized upon the achievement of the related
criteria by the respective license subject to a reasonable assurance that the
milestone payment will be forthcoming.
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.
23
<PAGE> 25
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES
The Company accounts for income taxes using the liability method.
Significant components of the Company's deferred tax asset at September 30, 2000
and 1999, are as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
* Compensation expense on unexercised stock options......... 498,030 $ 481,690
* NOL carryforwards......................................... 4,268,605 2,683,828
* Excess book amortization.................................. 71,894 59,998
* Other..................................................... (7,387) --
----------- -----------
Total deferred tax asset............................... 4,831,142 3,225,516
Valuation allowance....................................... (4,831,142) (3,225,516)
----------- -----------
Net deferred tax assets................................... $ 0 $ 0
=========== ===========
</TABLE>
Net operating losses totaling approximately $11,233,000 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. PRIVATE PLACEMENT OF SECURITIES
During the second quarter of Fiscal 2000, the Company closed on a private
placement of its securities to institutional and other accredited investors
raising $2.65 million of which $0.28 million was in the form of prepaid
services, which are presented in equity as "Subscription Receivable" and are
being amortized over the life of the respective agreements, with the remainder
of $2.4 million in cash. The private placement resulted in the sale of 5.56
million restricted shares of common stock and warrants to purchase an additional
5.56 million shares of the Company's common stock.
The investors were offered one unit at $0.50 per unit. Each unit consisted of
one share of restricted common stock and a warrant to purchase one share of the
Company's common stock for $0.75 per share. The warrant expires the earlier of
March 31, 2005 or 60 days after a call by the Company. The Company may call the
warrants at any time after March 31, 2001, provided that the price of the
Company's common stock has been in excess of $1.50 per share for each of the
forty consecutive trading days immediately preceding the date of the call. Upon
receipt of the call, warrant holders shall have sixty days to elect to exercise
all or a portion of the warrants.
The Company has agreed to file a registration statement with the Securities &
Exchange Commission to register all common stock which comprise the unit and the
common stock issuable from the exercise of the warrant on or before March 31,
2001.
Pricing of the securities was determined based on several factors, including
reference to market price of the Company's common stock, the holding period
requirement of restricted stock, and the Company's need for additional funding
for development of pharmaceutical products.
Funds raised will be utilized to fund the Company's product development efforts.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In June 1998, the Company issued 4,444,444 shares of redeemable convertible
preferred stock ("preferred stock") and warrants for net proceeds of $1,943,873
(net of $56,127 of expenses incurred in connection with the issuance). Of the
total proceeds $497,000 was allocated to warrants as the estimated fair value
and $1,022,222 was allocated to the conversion feature associated with the
preferred stock and classified as additional paid-in capital. In June 1998, the
entire discount was
24
<PAGE> 26
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 and up to two years to pay for such
shares. Upon such exercise, in addition to receiving the number of shares of
common stock to which the holder shall be entitled, the holder of the warrant
also shall receive a new warrant ("replacement warrant"). The replacement
warrant shall be exercisable for one share of common stock for every two shares
of common stock purchased in response to the aforementioned call. The exercise
price of the replacement warrant is $1.50 per share, and the term of the
replacement warrant shall be the longer of two years from the date of the
issuance or the balance of the original term of the warrant.
6. STOCK OPTIONS AND WARRANTS
The Company granted stock options to certain employees and directors during the
years ended September 30, 2000 and 1999 at exercise prices which approximated or
exceeded fair value at the date of grant. The majority of the stock options
issued in the year ended September 30, 2000 were issued in connection with the
retention of the Chief Operating Officer-Pharmaceutical Products (See Note 11
for further discussion of this employment agreement). Exclusive of the aforemen-
25
<PAGE> 27
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
tioned stock options, the majority of the stock options issued in the year
ending September 30, 2000 vest over time (up to 3 years). All of the options
issued in the year ending September 30, 1999 vested immediately.
The Company granted stock options to certain employees and directors during the
year ended September 30, 1998 at a $0.05 per share exercise price, which was
below the fair value based upon management's estimate of the fair value of the
stock issued at the date of grant. The shares were fully vested at September 30,
1998, and a $1,699,440 noncash charge was recognized to reflect the compensation
value of the options issued. All of these options expire in 2008.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE FAIR VALUE
---------- -------------- ----------
<S> <C> <C> <C>
Balance at September 30, 1997.......................... 1,025,000 $0.41 $0.09
Options granted during year............................ 5,820,000 $0.05 $0.27
Options exercised for common stock during year......... (1,750,000) $0.05 $0.27
---------- ----- -----
Balance at September 30, 1998.......................... 5,095,000 $0.12 $0.23
========== ===== =====
Granted................................................ 380,000 $0.45 $0.41
Options exercised for common stock..................... (350,000) $0.05 $0.37
---------- ----- -----
Balance at September 30, 1999.......................... 5,125,000 $0.15 $0.46
========== ===== =====
Options granted during year............................ 2,275,000 $0.63 $0.79
---------- ----- -----
Balance at September 30, 2000.......................... 7,400,000 $0.30 $0.56
========== ===== =====
</TABLE>
As of September 30, 2000 and 1999, 5,503,333 and 5,055,000, respectively, of the
options were vested and exercisable.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions for fiscal
2000, 1999 and 1998: risk-free interest rate of 6%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
1.49, 1.41 and 0.97, respectively, and a weighted average expected option life
of five years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Changes in the subjective input assumptions can materially affect the fair value
estimate, and therefore, the existing models do not necessarily provide a
reliable single measure of the fair value of employee stock options. Had the
compensation cost of the Company's stock option plans been determined based on
the fair value at the date of grant for awards in 2000, 1999 and
26
<PAGE> 28
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK OPTIONS AND WARRANTS (CONTINUED)
1998 consistent with the provisions of SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net loss available to common stock:
As reported......................................... $(1,920,415) $(1,596,104) $(3,079,586)
Pro forma........................................... $(2,058,313) $(1,746,117) $(4,615,720)
Basic and diluted earnings per share:
As reported......................................... $ (0.06) $ (0.06) $ (0.13)
Pro forma........................................... $ (0.07) $ (0.07) $ (0.19)
</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, 2000, there were outstanding warrants to purchase 5,642,879
shares of the Company's common stock at an exercise price of $0.75 per warrant
(refer to Note 4 for additional information). Those warrants which were sold
with the common shares were valued at $790,004 ($0.14 per warrant).
Additionally, the holder of the preferred stock holds a warrant to purchase
common stock (refer to Note 5 for additional information).
7. NOTE PAYABLE
In December 1999, the Company received $150,000 from a local foundation to fund
program related research. The loan matures on February 28, 2005 with a balloon
payment due at that time. The loan is at an interest rate of 5% with interest
due February 28 of each year. The loan contains call provisions which could
result in the loan becoming due before its planned maturity. The Company does
not foresee, at this time, the call provisions becoming effective.
The Company has a note payable totaling $252,180 as of September 30, 2000 which
is payable at $3,500 monthly at an interest rate of 6%. Payments under this
agreement began in March 2000 and will extend until August 2007.
8. COMMITMENTS
The Company leases its office and laboratory facilities under a three-year lease
expiring September 30, 2001 at a monthly rental of $3,948. During 2000, 1999 and
1998, the Company incurred rent expense totaling $56,830, $45,830 and $34,105,
respectively.
During 1997, the Company entered into a license agreement with a university to
obtain certain patent rights. In exchange for the license of the patents, the
Company issued common stock. The value assigned to the patents was based upon
management's estimate of the fair value of the stock issued. In addition, the
Company is obligated to pay certain royalties under the terms of the agreement
for each licensed product. The agreement requires minimum royalty payments to
maintain the license of the patents. The Company paid $45,000 in royalty
payments pursuant to this agreement in 1998.
9. MARKETING
In December 1997, the Company entered into a license agreement with Mycogen
Corporation, which was subsequently acquired by Dow AgroSciences whereby the
Company licensed substantially all rights for disease prevention and treatment
for 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
27
<PAGE> 29
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. MARKETING (CONTINUED)
technology for use in formulated licensed products and $50,000 for the right of
first refusal through September 30, 1998 to obtain an exclusive license to the
Company's Nutrition Patents and Technology. These payments were recognized as
revenue in fiscal 1998, as the earnings process was complete
according to the terms of the contract.
The agreement also provided that the Company receive $300,000 to provide Dow
AgroSciences with support services of personnel for a joint research effort for
a three year period. This was classified as unearned revenue on the balance
sheet and is being amortized into revenue, on a straight-line basis, over the
three year life of the support services commitment.
The agreement also provides for milestone payments (amounts based upon Dow
AgroSciences' attainment of certain contract defined outputs measures) to be
made to the Company by Dow AgroSciences upon 1) regulatory approval or first
sale of any type of product by Dow AgroSciences, 2) additional payment for first
commercial sale of certain crops by Dow AgroSciences and 3) additional payment
for first commercial sale of any other crop within the field of activity by Dow
AgroSciences. The Company will also receive royalties on all sales by Dow
AgroSciences and all sublicenses entered into by Dow AgroSciences. Minimum
annual royalties are due beginning January 1, 2003 through 2014 and are
recoupable against the aforementioned royalties due from Dow AgroSciences.
Dow AgroSciences will undertake management of future development, regulatory
approvals, seed production and marketing. The companies will also undertake a
joint agricultural research effort, as discussed above, to identify new
molecular designs. Dow AgroSciences may unilaterally terminate this agreement
without cause.
The Dow AgroSciences Agreement was amended on October 11, 1998 to provide Dow
Agro Science with an additional license for the Company's agricultural nutrition
technologies. The Company received a minimum annual royalty of $200,000 at the
execution of the contract. Additionally, in 1999, the Company received an
initial payment of $150,000 and an additional $150,000 which was due six months
after the contract execution. The research funding is to increase by $50,000
annually over the remaining four years of the funding term. These payments were
currently recognized as revenue as the earnings process was complete according
to the terms of the contract and the payments are not subject to recoupment by
Dow AgroSciences.
The agreement also provides for milestone payments (amounts based upon Dow
AgroSciences' 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 AgroSciences, 2) animal feeding
benchmark in certain animal studies by Dow AgroSciences 3) additional payment
for first commercial sale of certain crops by Dow AgroSciences, 4) additional
payment for first commercial sale of any other crop within a contractually
defined field of activity by Dow AgroSciences and 5) additional payments for
achievement of cumulative gross margin benchmark for sale of certain crops by
Dow AgroSciences. The Company will also receive royalties on all sales by Dow
AgroSciences and all sublicenses entered into by Dow AgroSciences. Minimum
annual royalties cease upon the achievement of certain of the aforementioned
benchmarks.
In addition, Dow AgroSciences will be responsible for all development and
commercialization costs. Dow AgroSciences is now owned by the Dow Chemical
Company.
28
<PAGE> 30
DEMEGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. NET LOSS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net loss............................................ $(1,655,482) $(1,337,742) $(1,993,753)
Preferred stock dividends and accretion amounts..... (264,933) (258,362) (1,085,833)
----------- ----------- -----------
Numerator for basic loss per share--income available
to common stockholders........................... (1,920,415) (1,596,104) (3,079,586)
Denominator:
Denominator for basic and loss per share--weighted
average shares................................... 29,759,153 26,255,104 23,867,091
----------- ----------- -----------
Basic and diluted loss per share...................... $ (0.06) $ (0.06) $ (0.13)
=========== =========== ===========
</TABLE>
At September 30, 2000, the Company had 5,503,333 vested options (7,400,000
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 exercise price of $0.45 per share. The
purchasers of Common Stock in the March 2000 Private Placement received warrants
for 5,566,004 shares of the Company's common Stock at an exercise price of $0.75
per share. These potentially dilutive securities were not included in the
calculation of dilutive earnings per share because the effect would be
anti-dilutive.
11. EMPLOYMENT AGREEMENT
Effective April 1, 2000, the Company hired a Chief Operating Officer
-Pharmaceutical Products. His employment agreement is for an initial term of
three years and provides for the issuance of 300,000 shares of restricted common
stock upon joining the Company and options to purchase, subject to achievement
of certain funding, investigative new drug ("IND") approval and
commercialization objectives, up to 1,400,000 shares of the Company's common
stock at exercise prices of $0.45 and $0.90 per share. The valuation of the
restricted stock and stock options resulted in a non-cash charge of $264,000 in
the quarter ending June 30, 2000 which was included in research and development
expense. The related Deferred Compensation component of Stockholders' Equity
($387,000) will be amortized against income over the terms of the various option
agreements. At September 30, 2000, the balance in the Deferred Compensation
account was $343,999 with $43,001 charged against operations in the year ending
September 30, 2000.
29
<PAGE> 31
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 16, 2001 and any adjournments thereof.
<TABLE>
<S> <C> <C> <C>
A. Ratification of Ernst & Young LLP as independent [ ] FOR [ ] AGAINST [ ] ABSTAIN
auditors.
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.
