U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee required]
For the fiscal year ended May 31, 1997
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[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No fee required]
For the transition period from _____________ to____________
Commission file number 0-10035
LESCARDEN INC.
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(Exact name of small business issuer as specified in its charter)
New York 13-2538207
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
420 Lexington Avenue, New York Suite 2025 10170
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(Address of principle executive offices) (Zip Code)
Issuer's telephone number (212) 687-1050
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Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B contained in this form, and no
disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
[ ]
Issuers revenues for its most recent fiscal year were $ 44,759.
The aggregate market value of the registrant's Common Stock held by
nonaffiliates of the registrant on July 3, 1997 was approximately
$ 8,900,492.
The number of shares of registrant's Common Stock outstanding as of
July 3, 1997 was 15,882,218.
DOCUMENTS INCORPORATED BY REFERENCES: None
Transitional Small Business Disclosure Format (Check one): Yes
: No X
<PAGE>
PART I
ITEM 1. BUSINESS
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The Company's present liquidity position must be viewed
as critical. The successful conclusion of the Company's Chapter XI
proceeding contributed significantly to the continued improvement
of the Company's financial soundness (See Item 3. Legal
Proceedings). And, despite greatly reduced food supplement sales
during this fiscal year, the Company's remains hopeful that sales
of its food supplement materials may be sufficient to allow the
Company to continue to meet its obligations and sustain its
operations for the near term. Moreover, the Company may receive
certain license fees in the near term which would also alleviate
the situation somewhat.
During the fiscal year ended May 31, 1997, the Company
continued sales of its proprietary bovine cartilage material, BIO-
CARTILAGE<F1>, to food supplement distributors for sale through
nutritional food supplement stores in the U.S. In addition the
Company introduced a second food supplement product called POLY-
Nag<F2>. If these initial incursions into the nutritional food
supplement market are successful, it would further provide the much
needed revenue to finance continuing operations. (See Item 6.
Management's Discussion and Analysis or Plan for Operations).
Moreover, Lescarden Inc. continues to develop and seek
government approval to market and sell its proprietary Catrix<F1>
material, a cartilage derived therapeutic agent which the Company
believes has demonstrated promising results in the treatment of
metastatic renal cell cancer (as well as certain other diseases).
The therapeutic effects of Catrix<F1> were discovered by one of the
Company's founders in connection with the treatment of various
human malignancies, the healing of surgical wounds and the control
of tissue inflammation.
The Company has an Investigational New Drug ("IND")
exemption from the U.S. Food and Drug Administration ("FDA") and
the Canadian Health Protection Branch ("HPB") for the experimental
treatment of metastatic renal cell cancer in humans. Prior to
obtaining the IND, the Company completed all pre-clinical studies
and Phase I clinical trials relating to the safety of Catrix<F1> . It
is now conducting Phase II human clinical trials at two major
teaching hospitals, one in New York State and the other in Montreal
to establish the efficacy of Catrix<F1> in the treatment of metastatic
renal cell cancer.
<PAGE>
On completion of Phase II and subsequent Phase III
trials, the Company intends to submit a New Drug Application
("NDA") to the FDA and New Drug Submission ("NDS") to the HPB for
approval to market and commercially ship Catrix<F1> for the treatment
of metastatic renal cell cancer. The Company anticipates that the
NDA and NDS will be filed in approximately four to five years.
Approval by the FDA and HPA may require an additional one to three
years, although the FDA and HPB can accelerate the process.
As part of the FDA and HPB approval process, the Company
may be required to do additional laboratory research into the
molecular composition of the active fractions of Catrix<F1> . Results
of this research will assist the Company in developing standardized
manufacturing and production processes. In addition, chemically
modified versions of the isolated active fractions may prove to
have additional therapeutic effects.
In 1994, the Company licensed Orphan Medical Inc. to
seek FDA approval for the use of pure Catrix<F1> powder in treating
decubitus ulcers (the pressure sores experienced by some diabetics
and the chronically bed-ridden). Current treatment for these
lesions involves improved hygiene, nutrition and nursing care. The
Company believes that the ability to provide an active agent to
accelerate the healing process represents a clear business
opportunity in a significant market with a demonstrated need for a
more effective therapy. In early 1997, Orphan sought and was
granted expanded rights to use Catrix<F1> in all topical formulations
other than cosmetic products.
The Company intends to focus a significant portion of its
resources on obtaining approval for the use of Catrix<F1> in treating
metastatic renal cell cancer and decubitus ulcers, with an ultimate
goal of marketing the product, directly or through another
organization. This particular malignancy was chosen for
experimentation because of evidence of therapeutic efficacy,
likelihood of more expeditious regulatory approval, absence of non-
toxic or efficacious alternatives, and a large enough patient base
to support commercial development by the Company. Furthermore, the
Company believes that the observed effects of Catrix<F1> (including
acceleration of wound healing, tumor inhibition and reduction,
inhibition of excessive vascularization and modulation of immune
system functions) coupled with an absence of toxicity, present
additional promising avenues of investigation.
<PAGE>
Scientific Background.
Background of Catrix<F1> . In the early 1950's, one of the
Company's co-founders discovered that cartilage powder
significantly hastened the healing of surgical wounds in animals.
During early wound healing experiments, it was noted that the
margins of the surgical wounds treated with Catrix<F1> were less red
and swollen than those of the controls. This observation led the
discoverer to the application of Catrix<F1> to various inflammatory
diseases, systemic and topical. One inflammatory condition that
was successfully treated was psoriasis, a condition caused by an
over production of skin cells. In certain ways, psoriasis
resembles the uncontrolled growth of cancer cells. Based on the
aforementioned information as well as encouraging results from
animal cancer studies, the discoverer believed that Catrix<F1> could
be successfully applied in the treatment of human cancer.
The Company believes that Catrix<F1> acts as a biological
response modifier, regulating the activity of important components
of the immune system. Other observed effects of Catrix<F1> include:
-acceleration of wound healing;
-inhibition of excessive vascularization of certain
tissues;
-inhibition of proliferation of malignant cells; and
-(in vitro) moderation of excessive collagen synthesis by
fibroblast cells.
Metastatic Renal Cell Cancer. Metastatic renal cell
cancer (which is the spread of a primary kidney cancer to other
organs) is a particularly lethal form of cancer afflicting
approximately 10,000 individuals per year in the United States and
Canada. Only eight to twenty percent of the metastatic renal cell
cancer patients survive two years after diagnosis. The patient's
chance of overcoming the disease is dependent upon how advanced the
disease is at the time of diagnosis. The disease originates as a
tumor in the kidney. After a certain stage in tumor growth,
metastasis, or spread of cancerous cells to other body organs,
occurs. Conventional treatment generally involves removal of the
diseased kidney followed by radiation or chemotherapy to affect
reduction of the secondary tumors or metastases.
It has recently been recognized that renal cell cancers
may be responsive to treatment with some cytokines such as
interleukin-2. Cytokines are intimate components of the body's
immune system, the integrity of which system is important in
defending the body against many forms of cancer. Interleukin-2 is
somewhat effective in treating renal cell cancer but its usefulness
is limited by its significant toxicity. The Company believes that
Catrix<F1> , with its ability to modulate the body's immune system and
its non-toxic properties, is promising as a treatment for this
devastating disease.
<PAGE>
Healing Decubitus Wounds. Decubitus ulcers, or pressure
sores, are a scourge of the infirmed elderly, diabetic and
generally immobile, wheel chair limited patient. Current therapy
includes removal of the dead tissue around the ulcer, good hygiene,
and nutrition and nursing care. Given the ever increasing elderly
population in the United States and the costs of specialized
medical treatment, a product such as Catrix<F1>, which appears to
promote wound healing, will, the Company believes, be sought after
by the medical community.
In pursuit of this therapeutic application, the Company
granted a license in October 1994, to Orphan Medical Inc. of
Minnetonka, Minn. The license entitles Orphan to use Catrix<F1>
powder in clinical trials and assessing its efficacy in the
treatment of wounds. In August 1996 Orphan filed a 510(k) device
application with the FDA and the FDA approved the application in
December 1996. Orphan intends to conduct Phase II/III human wound
healing clinical trials 1997. Under the license agreement, Orphan
is required to pay Lescarden certain license fees, and upon
securing marketing approval from the FDA, to pay a royalty on all
sales and to purchase all Catrix<F1> powder from the Company.
Moreover, in early 1997, Orphan initiated talks with the Company
seeking expanded topical formulations rights for Catrix<F1> which
resulted in an amendment to the parties' 1994 license agreement.
Pre-Clinical Studies of Catrix<F1>.
During the 1970's, the Company conducted a wide range of
pre-clinical laboratory and animal studies to assess the potential
safety and efficacy of Catrix<F1> . These studies included the
following: Acute Oral Toxicity (rats); Acute Subcutaneous Toxicity
(mice): Acute Dermal Toxicity (rabbits): 18-Month Chronic Toxicity
and Carcinogenicity Study (mice); 2-Year Chronic Toxicity and
Carcinogenicity (rats); 14 week Chronic Toxicity Study (dogs); Per
cutaneous Toxicity (guinea pigs); Dental Wound Healing (rats);
Dental Wound Healing (dogs); and Irritation and Sensitization of
Human Skin by Catrix<F1> .
The results of these studies were submitted to the FDA
and HPB as part of the Company's application for an IND exemption,
approval of which is required prior to the commencement of human
clinical trials. In 1985, the FDA granted the Company's request
for an IND exemption for the application of Catrix<F1> in the
treatment of Scleroderma, a rare skin disease. Shortly thereafter,
the IND exemption was expanded to include the application of
Catrix<F1> for various forms of cancer, including metastatic renal
cell cancer.
<PAGE>
Human Clinical Trials Conducted with Catrix<F1> and Catrix<F1> -S
Since approval of the Company's IND, it has completed
Phase I clinical trials and is conducting Phase II clinical trials.
The Company's clinical trials involve the administration of
Catrix<F1> capsules to solid tumor cancer patients. (See, "Business-
Government Regulation").
Phase I Trials
The objective of the Company's Phase I trials (involving
the initial introduction of Catrix<F1> into human subjects) was to
test for safety, side effects, dosage tolerance, metabolism and
clinical pharmacology. Initial testing was conducted on patients
with advanced cancers that were unresponsive to other forms of
therapy. Regulatory authorities require that new cancer therapies
be administered in patients who have failed conventional therapy
and that some indication of efficacy be shown before the drug can
be used as the "drug of choice" in earlier stage patients (i.e., in
Phase II trials).
The Company's Phase I studies were conducted in the early
1980's at Pennsylvania State University's Milton S. Hershey Medical
Center in Hershey, Pennsylvania , and at the University of Medicine
and Dentistry of New Jersey in Newark, New Jersey. The FDA
required that both Phase I studies use Catrix<F1> -S, the injectable
dosage form of Catrix<F1> only. This was in spite of the Company's
experimental data indicating strongest response when both
injectable and oral forms of Catrix<F1> were administered
sequentially.
Phase II Trials.
The Company is currently engaged in two Phase II trials.
Phase II trials involve well controlled tests in a larger (but
still limited) patient population to determine the efficacy of the
drug for specific indications, to determine optimal dosage and to
identify possible side effects and safety risks. The Company's
Phase II trials are being conducted at the Montreal General
Hospital, McGill University, Montreal, Canada (the "Montreal
Study") and at the Westchester County Medical Center, New York
Medical College, in Valhalla, New York (the "Valhalla Study").
The Montreal Study. In the Montreal study initially,
twenty-four patients with metastatic renal cell cancer were started
on a protocol regimen of two weeks of Catrix<F1> -S followed by long
term treatment with Catrix<F1> capsules. More recent patient
admissions into this study have eliminated the Catrix<F1> -S
administration and patients are treated with Catrix<F1> capsules only.
All of the patients in this study were prior clinical failures
<PAGE>
under the original therapy (i.e. surgery, radiation and
chemotherapy) and were at various stages of serious disabilities
from their cancer. Initially, three of these patients experienced
remission (two partial and one complete) and continued to receive
Catrix<F1> . No adverse effects were noted. The other twenty one
patients did not respond to Catrix<F1> and have either died or are now
being treated by conventional therapy. There is currently only one
patient on study and the disease is considered relatively stable.
There has been no evidence of any toxic side effects of Catrix<F1> in
any patient.
The Valhalla Study. The Valhalla investigation has been
using the Canadian protocol for about 60 months. Of the thirty-five
patients enrolled, twenty-two patients, who had completed more than
three months of therapy, were considered evaluable for response by
the Medical Team overseeing the study. Results to date were
reported on, by the study team, at the thirtieth annual meeting of
the American Society of Clinical Oncology, in Dallas, Texas, May,
1994, and those results were stated to be as follows:
"Ten of the 22 valuable pts were not
previously treated with any systemic therapy;
all 3 responders (and 1 SD) occurred in the
subset of untreated pts. Lungs were the major
site of response with disappearance of lesions
(2) and >50% shrinkage (1); minor responses
noted in liver (1) and kidney (1). Duration
of response is 30+ months (mos), 12+ mos and
6+ mos in the 3 PRs. Toxicity was mild (Grade
I) and included dysgeusia (8), fatigue (3),
dyspepsia (2), nausea (2), fever (2),
dizziness (1), and scrotal edema (1). Our
results suggest that Catrix<F1> is very well
tolerated and may be active in previously
untreated pts with metastatic renal cell
carcinoma. Further accrual of patients is
warranted." [Initials mean: pts.= patients.
SD= stable disease; mos.= months; PR= partial
response].
The Valhalla study currently has six patients on the treatment
protocol and two of these patients (treated since 1992 and 1993
respectively) are showing responses to the drug. A third patient
reveals stable disease and three await evaluation.
<PAGE>
The Company intends to expand the Montreal and Valhalla
Studies to include approximately 100 patients each over the next 3
to 5 years, assuming that sufficient funding is available.
Phase III Trials
Upon completion of the Phase II trials the Company will
meet with the FDA and HPB for authorization to commence Phase III
trials to evaluate the overall risks and benefits of Catrix<F1> in
relation to the treated disease and in light of other available
therapies. Following this further evaluation of efficacy and
safety, the Company will file its NDA and NDS. (See,
"Government Regulation-Orphan Drug Status").
Trials Involving Decubitus Ulcers
Given the FDA's approval of Orphan's 510(k) application
for the use of Catrix<F1> in wound treatment the drug could be
marketed presently. However, Orphan has determined that a
relatively small human clinical trial should be conducted
potentially allowing for the making of expanded therapeutic claims.
Such a trial is underway at this writing.
Laboratory Studies
As part of the FDA and HPB approval process, the Company
may be required to do additional laboratory research into the
molecular composition of the active fractions of Catrix<F1> .
Significant progress has been made in this regard by consultants
working under contract with the company. Results of this research
will assist the Company in developing standardized manufacturing
and production processes. In addition, chemically modified
versions of the isolated active fractions may prove to have
additional therapeutic effects.
A large portion of the Company's laboratory related
resources were spent in the early 1980's on isolating pure
components in Catrix<F1> which have specific biological activities of
interest in the treatment of disease. Its fractionation programs in
the early 1980's at Case Western Reserve University, Batelle
Columbus Laboratories and North Texas State University have
identified several fractions the Company believes have notable
effects on the immune system and that have direct anti-mitotic
activity. The Company may resume tests on these fractions in its
model assay for metastatic renal cell cancer with the goal of
reducing its search to two or three specific Catrix<F1> fractions.
The work is crucial in two ways; first it should enable the
Company to establish a relevant quality control standard for its
products and aid in obtaining approval to market Catrix<F1> in Canada
and the United States; and, second, it would be highly desirable to
develop each effective isolated fraction as a drug, taking greatest
advantage of the Company's complex cartilage product.
<PAGE>
Many cancer investigators today believe that human
cancers escape early detection by the body's self/non-self
detection system (the immune system) and in some ways continue to
evade detection up to the time of death of the host. The Company
believes that Catrix<F1> exerts important beneficial effects on the
body's immune system. It may heighten the body's awareness of
cancer cells (through stimulation of the immune system) and allow
the body's own defenses to defeat the progression of the disease.
This effect on the immune system, combined with the direct anti-
mitotic effect of Catrix<F1> , forms the basis of the Company's
understanding of how Catrix<F1> may work in the treatment of human
cancers.
Several of the Company's specific laboratory research
projects conducted at Battelle Columbus Laboratories relating to
cancer conclude that there are low molecular weight components of
Catrix<F1> which are anti-mitotic, that is, relatively small
components in Catrix<F1> that prevent cell replication. Further
results indicate that certain higher molecular weight components of
Catrix<F1> have a significant effect on many segments of the body's
immune system. The results of these later investigations have been
published in the Journal of Biological Response Modifiers.
Another development involves the identification by
outside investigators of a pure protein found in human renal cell
cancer cells which is present in concentrations inversely
proportional to the intensity of the patient's disease. That is,
the protein diminishes as the severity of the disease increases.
This protein is found in Catrix<F1> and in abundance in many normal
cells in humans and animals, including, bovine tracheal cartilage.
The Company intends to assess the quantity of this protein in
Catrix<F1> .
Government Regulation.
The production and marketing of the Company's products
and its research and development activities are subject to
comprehensive regulation by various federal, state and local
authorities in the United States and governmental authorities of
other countries. Among others, the FDA and HPB exercise regulatory
authority over the development, testing, formulation, manufacture,
labeling, storage, record keeping, quality control, advertising and
promotion of the Company's products. The Company believes that the
regulations and procedures involving the above in Canada are
essentially the same as the United States. Accordingly, the
discussion set forth below is also applicable to the Company's
efforts to obtain regulatory approval in Canada.
<PAGE>
A New Drug may not be marketed in the United States until
it has satisfied rigorous testing procedures established and
approved by the FDA. The drug may then be marketed only for the
specific indications, uses, formulation, dosage, forms, and
strengths approved by the FDA. Similar requirements are imposed by
foreign regulators upon the marketing of a new drug in their
respective countries.
The steps required before a pharmaceutical agent may be
marketed in the United States include (a) pre-clinical laboratory
and animal tests, (b) the submission to the FDA of an application
for an IND, which must become effective before human clinical
trials may commence, (c) well controlled human clinical trials to
establish the safety and efficacy of the drug, (d) the submission
of a detailed NDA to the FDA, and (e) the FDA approval of the NDA
prior to any commercial sale or shipment of the drug. In addition
to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must comply with Good Manufacturing
Practices (GMP) and are subject to biennial inspections by the FDA.
Foreign manufacturing establishments also must comply with GMP'S
and are subject to periodic inspection by the FDA or by local
authorities under agreement with the FDA.
The results of the pre-clinical studies and clinical
trials are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment of the drug. The NDA
includes information pertaining to the chemistry, formulation,
activity and manufacture of the drug and each component of the
final product, as well as details relating to the sponsoring
company. Submission of an NDA does not assure FDA approval for
marketing. The application review process takes more than two
years on average to complete, although FDA reviews of cancer
therapies, and other life-threatening diseases may be accelerated
and average less than two years. However, the process may take
substantially longer if the FDA has questions or concerns about the
product.
In general, the FDA requires at least two adequate and
well controlled clinical studies demonstrating efficacy with
sufficient levels of statistical assurance. However, additional
support may be required. The FDA may also request additional
information, such as long term toxicity studies or other studies
relating to the product safety. Notwithstanding the submission of
such data, the FDA ultimately may decide that the application does
not satisfy its regulatory criteria for approval. Finally, the FDA
may require additional clinical tests following NDA approval to
confirm product safety and efficacy (Phase IV clinical tests).
<PAGE>
Among the requirements for product approval is the
requirement that prospective manufacturers conform to the FDA's
current GMP standards which thereafter must be followed at all
times. In complying with GMP standards, manufacturers must
continue to expend time, money and effort in production, record
keeping and quality control to ensure technical compliance.
Failure to so comply subjects the manufacturer to possible FDA
action such as the suspension of manufacturing or seizure of the
product. The FDA may also require a voluntary recall of a product.
All of the Company's contract manufacturing facilities
will be subject to periodic inspections by the FDA and comparable
agencies. If violations of applicable regulations are discovered
during these inspections, the Company may be restrained from
continued marketing of the manufactured products. Such facilities
are also subject to regulation regarding, among other things,
occupational safety, laboratory practices, the use and handling of
radio-isotopes and hazardous chemicals, prevention of illness and
injury, environmental protection and hazardous substance control.
The product testing and approval process is likely to
take a substantial number of years and involves the expenditure of
substantial resources. There can be no assurance that any approval
will be granted on a timely basis, or at all. The FDA also may
require post-marketing testing and surveillance to monitor the
record of the product and continued compliance with regulatory
requirements. Upon approval, a drug may be marketed only for the
approved indications in the approved dosage forms and at the
approved levels. Adverse experiences with the product must be
reported to the FDA. The FDA also may require the submission of
any lot of the product for inspection and may restrict the release
of any lot that does not comply with FDA standards, or otherwise
may order the suspension of manufacture, recall or seizure if non-
compliant product is delivered. Product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if
problems concerning safety or efficacy of the product are
discovered following approval.
The Company also will be subject to foreign regulatory
authorities with respect to clinical trials and pharmaceutical
sales. Whether or not the FDA approval has been obtained, approval
of a product by the comparable regulatory authorities of foreign
countries must be obtained prior to commencement of marketing of
the product in those countries. The approval process varies from
country to country and the time required may be longer or shorter
than that required for FDA approval.
<PAGE>
Orphan Drug Status
Pursuant to the Orphan Drug Act,(this discussion not to
be confused with the discussion on Orphan Medical Inc.) the FDA may
grant "orphan drug status" to certain drugs intended to treat a
"rare disease or condition", defined as a disease or condition
which effects fewer than 200,000 people in the United States, or,
which effects more than 200,000 people and for which the cost of
developing and making the drug available will not be recovered from
sales of the drug in the United States. Orphan Drug status may
provide certain benefits including exclusive marketing rights in
the United States for the drug, for the designated indication, for
seven years following marketing approval, and federal income tax
credits for certain clinical trial expenses.
The Company may receive marketing exclusivity under the
Orphan Drug Act, only if it is the sponsor of the first NDA
approved for the drug for an indication for which Orphan Drug
status was designated prior to the time such NDA was submitted.
Therefore, unlike patent protection, orphan drug status does not
prevent other manufactures from attempting to develop the drug for
the designated indication or from obtaining approval of a separate
NDA prior to the approval of the Company's NDA. If another
sponsor's NDA for the same drug and the same indication is approved
first, that sponsor is entitled to the exclusive marketing rights
if that sponsor has received orphan drug designation for the drug.
In that case, the FDA will refrain for seven years from approving
the Company's application to market the product. If another
sponsor's NDA for the same drug and the same indication is approved
first, but that company has not obtained orphan drug status, the
FDA would still be permitted to approve the Company's NDA.
However, the Company would not be able to receive the seven years'
exclusivity.
Orphan Drug status does not prevent the FDA from
approving the same drug for different indication. Furthermore,
doctors are not restricted by the FDA from prescribing an approved
drug for unapproved uses. Therefore, another company's approval of
a drug for different uses could adversely affect the marketing
potential of a Company drug for which Orphan Drug Act status has
been obtained for a different indication.
The Company believes that its products, if developed, may
qualify for Orphan Drug Status. There can be no assurance,
however, that such products will receive orphan drug status. The
<PAGE>
Company believes that it would be advantageous to obtain orphan
drug status for eligible products. However, possible amendment of
the Orphan Drug Act by the United States Congress and possible re-
interpretation by the FDA are the subject of frequent discussions.
Legislation to limit exclusivity, in some respects, was passed by
Congress, but vetoed by the President in 1991. Similar legislation
is expected to be introduced in future Congressional Sessions. The
FDA has proposed regulations embodying certain other limitations;
these regulations have not yet been adopted. Therefore, there is
no assurance as to the precise scope of protection that may be
afforded by orphan drug status in the future or that the current
level of exclusivity and tax credits will remain in effect.
Under the Drug Competition and Patent Term Restoration
Act of 1984, a product patent or method of treatment patent with a
17-year period of enforce ability covering a drug or biological
product may be extended for up to five years under certain
circumstances to compensate the patent holder for the time required
for FDA regulatory review of the product. The benefits are only
available to the first approved use of the active ingredient in a
drug or biological product and may only be applied to one patent
per drug per product. This law also establishes a period of time
following FDA approval of certain NDA's during which the FDA may
not accept or approve abbreviated applications for generic versions
of the drug from other sponsors. However, there can be no
assurance that the Company will be able to take advantage of either
the patent term extension of marketing exclusivity provisions of
this law.
Raw Materials and Manufacturing.
Catrix<F1> is manufactured for the Company by Intergen
Biomanufacturing Corporation, located in Toronto, Canada
("Intergen"). Intergen is an FDA-approved pharmaceutical
manufacturing facility. At the present time, the only FDA approved
manufacturer of the Company's drug is Intergen, although the
Company is investigating alternative sources to the point where
sample manufacturing has commenced. The Company's food supplement
cartilage material, BIO-CARTILAGE<F1> , and its POLY-Nag are
manufactured in the United States and an additional manufacturer is
being developed in the Western Pacific Area.
Raw Materials. Catrix<F1> is prepared from animal cartilage
tissue. The most accessible and easily processed source is bovine
tracheas collected from normal healthy beef cattle, subsequent to
slaughter. Tracheas are cleaned, flash frozen and delivered to
qualified pharmaceutical manufacturing facilities.
<PAGE>
Regulatory Review. All Catrix<F1> and production procedures
have been submitted in extensive detail to both the FDA and the
HPB, and accepted as part of the review of the Company's official
submissions with respect to studying Catrix<F1> in patients.
Patents and Proprietary Technology.
The Company was granted and owns, by assignment, several
United States patents some of which have expired, and has assigned
certain patents to Catrix<F1> Research Limited Partnership (see,
"Certain Relationships and Related Transactions"). The most recent
patent granted was for the use of cartilage-based agents as an
anti-tumor agent and method (U.S. Patent #4,827,607).
The Company also holds several patents in various foreign
countries. While the Company believes that these patents may be
valuable, there is no assurance that any such patent will afford
the Company any material protection. Furthermore, if any of its
patents should be infringed, there is no assurance that the Company
would be financially capable of protecting its interests.
Competition.
Competition in the anti-cancer pharmaceutical industry is
based primarily on: product performance, including efficacy,
safety, ease of use and adaptability to various modes of
administration; patient compliance; price; acceptance by
physicians; marketing; and distribution. The availability of
patent protection and orphan drug status, and the ability to obtain
government approval for testing, manufacturing and marketing are
also critical factors. See "Business-Government Regulation."
Most companies, including well-known pharmaceutical and
chemical companies, are marketing anti-cancer drugs and seeking to
develop new products and technologies for the treatment of cancer.
Many of these companies have substantially greater financial and
technical resources and production and marketing capabilities than
the Company. In addition, many such companies have had
significantly greater experience both in undertaking pre-clinical
testing and human clinical trials of new or improved pharmaceutical
products, and obtaining the approval of the FDA or other regulatory
authorities to market products for health care. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval
of such products before the Company obtains approval of
competitive products.
<PAGE>
Human Resources.
Employees and Consultants.
At August 1, 1997, the Company had one full time employee
and retains several consultants to assist in the administration of
the Company and coordinating its ongoing research and clinical
trials.
Scientific Advisory Board.
The Company benefits from consultations with prominent
scientists active in fields related to the Company's business. For
this purpose, the Company maintains a Scientific Advisory Board.
At the Company's request, these advisors review the feasibility of
product development programs under consideration, advise the
Company of research advances in areas related to the Company's
technology and aid in recruiting personnel. It is intended that
the Scientific Advisors meet individually and in small groups with
the Company's management and scientists. Because the scientific
advisors may have consulting or advisory positions with other
companies which may compete with the Company, the Company has
entered into confidentiality agreements with each member of the
Scientific Advisory Board.
The Company's Scientific Advisory Board consists of Dr.
William T. Sherman, Vice President for Science-Elect. , as Chair,
and the following persons:
Michael Bazinet M.D., co-director of the Company's Phase
II Montreal Study, is assistant Urologist, Attending Staff at The
Montreal General Hospital in Montreal, Quebec, Canada, and
Assistant Professor of Urology, McGill University. Dr. Bazinet has
completed residencies in surgery and urology at Sherbrooke
University and a residency in urology at the Royal Victoria
Hospital. He has served as a Research Fellow in Human Tumor
Immunology and as a Clinical Fellow in Urologic Oncology at
Memorial Sloan-Kettering Hospital in New York, NY. He has authored
or co-authored numerous papers and presentations.
Robert W. Gracy, Ph.D., principal advisor to the Company
for biochemistry, is professor of Chemistry and Associate Dean for
Basic Science and Research at The University of North Texas, Texas
College of Osteopathic Medicine in Fort Worth, Texas. Dr. Gracy
received his Ph.D. from the University of California, in Riverside,
and performed postdoctoral work in molecular biology at the Albert
Einstein College of Medicine, where he was a postdoctoral fellow.
He became an Associate Professor of Chemistry at North Texas State
University, and subsequently a visiting professor of physiological
chemistry at the University of Wurtzburg. Dr. Gracy has published
over 130 papers in peer-reviewed scientific journals and books.
<PAGE>
Carmelo Anthony Puccio, M.D., director of the Company's
Phase II Valhalla Study, is Assistant Professor of Medicine at New
York Medical College and an Attending Physician at Westchester
County Medical Center, both in Valhalla, New York. Dr. Puccio
received his medical degree from the Universidad Autonoma de
Guadalajara, graduating first in his class. He completed the Fifth
Pathway Program at the Albert Einstein College of Medicine in New
York City, and a residency in Internal Medicine at Maimonides
Medical Center. He was a Research Fellow at New York Medical
College prior to attaining his present position. Dr. Puccio's
papers have been published in several scientific journals.
Item 2. Properties
----------
The Company owns no real property. Its executive offices
in New York City, occupying approximately 1,500 square feet, are
leased for a term ending on March 31, 1998. Management considers
that its leased premises are well maintained and sufficient for its
present operations and that when its current lease expires it will
be able to lease office space on acceptable terms.
Item 3. Legal Proceedings
-----------------
In May of 1996 the Company's Board of Directors
determined that given the then pendancy of certain litigation which
had been reduced to judgment unfavorable to the Company, the
Company's survival required the filing of a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code. Such a filing was
made in May 1996. Upon completion of all necessary formalities, in
May 1997, the U.S. Bankruptcy Court for the Southern District of
New York approved the Company's Disclosure Statement and
incorporated Reorganization Plan thus concluding the bankruptcy
proceeding.
The essential nature of the reorganization plan consisted of
the exchange of all pre-petition unsecured debt for the Company's
common stock. As of this writing such exchange of debt for common
stock has been essentially completed and is fully reflected in the
financial reports which are an integral part of this annual report.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
The Common Stock of the Company is traded in the over-the
counter market under the symbol "LCAR". The following
table sets forth, for the periods indicated, the high and
low bid quotations for the Common Stock as reported by
the National Quotation Bureau.
Fiscal Year Ending May 31, 1997 High Low
Fourth Quarter .72 .58
Third Quarter .78 .30
Second Quarter 7/16 .20
First Quarter 3/8 3/16
Fiscal Year Ending May 31, 1996
Fourth Quarter 11/16 1/4
Third Quarter 5/8 1/8
Second Quarter 17/32 1/16
First Quarter 11/32 1/16
On July 3, 1997 the closing bid price per share of Common
Stock, as reported by the National Quotation Bureau, was $.80. As
of May 31, 1997 there were 567 holders of record of the Company's
Common stock.
Item 6. Management's Discussion and Analysis of Operations
--------------------------------------------------
Results of Operations
Overview
Since its inception, the Company has primarily devoted
its resources to fund research, drug discovery and development.
In addition, the Company licenses its technology for
commercialization by other companies and in the fiscal year ended
May 31, 1995, the Company began sales of its proprietary bovine
cartilage material, BIO-CARTILAGE<F1> , to a food supplement
distributor for sale through nutritional food supplement stores in
the U.S. The Company has been unprofitable to date and may
continue to incur operating losses in the foreseeable future. The
Company has sustained net losses of approximately $13.3 million
from inception to May 31, 1997. The Company has primarily financed
its research and development activities through a public offering
of Common Stock, private placements of debt and equity securities,
and in recent years, revenues from licensing fees and product
sales.
<PAGE>
On May 7, 1996 the Company filed a Chapter XI Petition for Re-
organization with the United States Bankruptcy court for the
Southern District of New York. This action was precipitated by a
decision of the New York State Supreme Court, New York County,
which confirmed an arbitration award against the Company for
monetary damages in excess of the Company's liquid assets. On May
14, 1997 the United States Bankruptcy Court for the Southern
District of New York signed an Order confirming the Company's Plan
of Reorganization, thus concluding the voluntary bankruptcy
proceeding on that date. See Item 3. - Legal Proceedings).
Fiscal year ended May 31, 1997 compared to May 31, 1996
The Company generates revenues primarily by selling BIO-
CARTILAGE<F1> and Catrix<F1> and from royalties and license fees.
The Company's revenues decreased in the year ended May
31, 1997 from the comparative prior fiscal year primarily due to
lower sales of BIO-CARTILAGE<F1> to food supplement distributors, for
sale through nutritional food supplement stores in the U.S. Total
costs and expenses during the year ended May 31, 1997 were 57%
lower than those of the comparative prior year. The decrease was
principally due to lower costs of product sales related to the
sales of BIO-CARTILAGE<F1> in the year ended May 31, 1997 and the
absence of interest expense on the Company's Notes payable in the
year ended May 31, 1997 in accordance with accounting rules for
Company's operating under Debtor-In-Possession.
Liquidity and Capital Resources.
Overview
The Company has had losses from operations in each of the
five years ended May 31, 1997. This trend may continue in the
foreseeable future. Working capital has been provided since the
Company's inception primarily from the sale of equity securities,
from borrowings (from its officers, directors, and shareholders and
from outside investors), and in recent years, from revenues from
licensing fees and product sales.
<PAGE>
Present Liquidity
The Company's present liquidity position is critical. As
of May 31, 1997 the Company's current assets exceed its current
liabilities by $10,026 and its total assets exceed its total
liabilities by $13,106. The company will require additional
product sales or funding during or, shortly after the end of the
fiscal quarter ending August 31, 1997, to sustain its operations.
As a result of the history of losses incurred by the
Company, the net loss during the year ended May 31, 1997 of
($345,518), and the limited amount of funds currently available to
finance the Company's operations, the report of the Company's
independent Certified Public Accountants on the Financial
Statements as of May 31, 1996 and 1997 contain an explanatory
paragraph indicating that the Company may be unable to continue in
existence.
Pursuant to the terms of the Company's Plan of
Reorganization under its Chapter XI proceeding the Company
converted $2,158,431 of debt into 2,989,208 shares of the Company's
common stock, as of May 31, 1997, thus substantially reducing the
Company's amount of debts.
The Company plans to continue to implement plans to sell
BIO-CARTILAGE<F1> in the over-the-counter food supplement market and
may also introduce a second product in the same marketplace in the
near future. If successful, the Company may increase cash flow in
order to allow the Company to continue to meet its obligations and
sustain its operations. The Company also plans to try to obtain a
short-term financing from the sales of unregistered shares of
common stock.
In addition, the Company's licensee, ORPHAN MEDICAL INC.
of Minnetonka, MN, continues to make progress developing the
Company's proprietary bovine cartilage material, Catrix<F1> , in powder
form only, for topical wound healing purposes.
The Company has no material commitments for capital
expenditures at May 31, 1997.
Item 7. Financial Statements and Supplementary Data
-------------------------------------------
See page F-1 for Lescarden Inc. Index to Financial
Statements.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
------------------------------------------------
None.
<PAGE>
Part III
Item 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance with Section 16(a) of the Exchange
Act.
---------------------------------------------------------
The executive officers and directors of the Company are as follows:
Name Position
Gerard A. Dupuis Chairman and
Chief executive
Officer, Director.
William T. Sherman, Ph.D. Vice President
Science Elect.
William H. Chisholm Vice Chairman
Director.
Frank E. Berglas Director.
George E. Ehrlich, M.D. Director.
Mr. Dupuis (age 59) is an attorney who practiced in New
York City for more than twenty five years. He became General
Counsel, Secretary and a Director of the Company in February 1986.
On June 19, 1990 Mr. Dupuis was elected President and Chief
Executive Officer of the Company and in 1992 was elected chairman.
Mr. Dupuis is a graduate of Syracuse University and received his
law degree from Columbus School of Law, of the Catholic University
of America in Washington, D.C.
Dr. Sherman (age 55) Executive Vice President for
Science-Elect of the Company, received his Bachelor of Science in
pharmacy from the Philadelphia College of Pharmacy and Science, and
a Ph.D. in pharmacology from Temple University. Since 1989 Dr.
Sherman has been an independent consultant to the pharmaceutical
industry. From 1987 to 1989 he served as Vice President of Martec
Pharmaceutical Company. Prior to that he was Vice President for
research and development for the Company. Dr. Sherman is a
registered pharmacist in Pennsylvania and New Jersey and has
published in several scientific journals.
<PAGE>
Mr. Chisholm (age 80) is a retired paper manufacturer and
served as a director of several publicly owned companies. He
became a Director of the Company in December 1987. Mr. Chisholm is
a graduate of Yale University.
Mr. Berglas (age 56) is President and Chief Executive
Officer of Great Lakes American Reinsurance Co., a position he has
held for more than the past five years. He became a Director of
the Company on December 1, 1993. Mr. Berglas is a graduate of City
College of New York.
Dr. Ehrlich (age 68) is the President of George E.
Ehrlich Associates, International Consultant Firm, a position he
has held for more than the past five years. He became a Director
of the Company on March 2, 1995. Dr. Ehrlich is a graduate of
Harvard University and received his medical degree from Chicago
Medical School.
Item 10. Executive Compensation
----------------------
Annual Compensation Long-Term
Compensation
Awards
- ------------------------------------------------------------------------
Name and Fiscal Year
Principal Ended
Position May 31, Salary $ Warrants (#)
- ------------------------------------------------------------------------
Gerard A. Dupuis 1997 $127,000 -
President and CEO 1996 $132,250 500,000
1995 $112,250 140,000
<PAGE>
Aggregated Option and Warrant Exercises in Last Fiscal Year and FY
End Option and Warrant Values.
- ----------------------------------------------------------------------
Shares Number of Value of
Acquired Unexercised Unexercised
on Value Options/ In-the-money
Exercise Realized Warrants Options
at FY End (#) Warrants
at FY End ($)
Name (#) ($) Exercisable Exercisable
- ----------------------------------------------------------------------
G.A. Dupuis Options Options
80,000 $ 8,800
Warrants Warrants
1,640,312 $876,388
Item 11. Security Ownership of Certain Beneficial Owners and
Management
----------------------------------------------------
The following table sets forth, as of May 31, 1997, the
ownership of the Company's Common Stock by (I) each person who is
known by the Company to own Shares of record or beneficially, more
that (5%) of the Company's Common Stock, (ii) each of the Company's
directors and executive officers and (iii) all directors and
executive officers as a group. Except as otherwise indicated, the
stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.
Name and Number of Shares
Title of Address of Beneficially Percent
Class Beneficial Owner Owned of Class (1)
- ---------------------------------------------------------------------------
Common Gerard A. Dupuis (2) 1,901,229 10.80%
Stock 2 Kittle Road
Chappaqua, NY
William H. Chisholm (2) 803,451 4.93%
280 Railroad Avenue
Greenwich, CT
Charles T. Maxwell (2) 2,585,183 15.32%
C.J. Lawrence, Inc.
1290 Avenue of the Americas
New York, NY
Frank E. Berglas (2) 275,000 1.71%
139 Brook Farm Road East
Bedford, New York
Peter B. Ruffin (2) 2,477,642 15.09%
753 Forest Hills Drive
Wilmington, NC
George E. Ehrlich (2) 100,000 0.63%
38 Holly Drive
Loveladies, NJ
<PAGE>
Directors and 3,079,680 16.85%
Officers as a group
(2) (4 persons)
(1) The percentages are calculated on the basis of
15,882,218 shares of Common Stock outstanding. For the purpose of
calculating the percentage of shares of the Company's Common Stock
owned by any person, the shares issuable upon the exercise of
rights to acquire, owned by such a person if exercisable within 60
days of May 31, 1997 are deemed outstanding, but such shares are
not deemed outstanding for the purpose of calculating the
percentage of Common Stock owned by any other person. All share
ownership is direct unless otherwise indicated.
(2) Includes 533,295, 1,720,312, 404,000, 175,000,
100,000 and 453,295 stock option grants and/or warrants to purchase
the Company's Common Stock held by Mr. Ruffin, Mr. Dupuis, Mr.
Chisholm, Mr. Berglas, Dr. Ehrlich and Mr. Maxwell, respectively.
As of May 31, 1997, Merrs. Dupuis, and Chisholm received
warrants of shares of the Company's common stock in exchange for
debts in connection with the Company's reorganization under Chapter
XI; they plan to file reports on Form 4 reporting their changes in
beneficial ownership of shares of the Company's common stock late,
by the end of August 1997 or shortly thereafter.
Item 12. Certain Relationships and Related Transactions.
-----------------------------------------------
With respect to the litigation between the Company and
its former Chairman, Dr. John F. Prudden, described in last year's
report, such litigation was automatically stayed by the Chapter 11
filing. Moreover, Dr. Prudden's claims in bankruptcy, consisting
of the claims in suit, were sold by him to several other parties
and they, in turn, had such claims liquidated pursuant to the
Reorganization Plan approved by the Court in May 1997.
<PAGE>
Pursuant to an agreement with Donald K. Lourie a former
employee of the Company, the Company is obligated to pay Mr. Lourie
an annual pension of $25,000 provided the company meets certain
income or net worth milestones.
In June 1982, Dr. Prudden and others formed Catrix<F1>
Research Limited Partnership ( the "Catrix<F1> Partnership"), of which
Dr. Prudden is general partner. The Company has entered into two
agreements with the "Catrix<F1> Partnership," a Research Agreement and
a Licensee Agreement. See note 4 to the Notes to Financial
Statements for description of these agreements.
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) (1) Exhibit
Exhibit Number
Description of Exhibit
2.1 Plan of Reorganization dtd. January 15, 1997 (and
Amended Disclosure Statement dtd. March 12,
1997).****
3.1 Certificate of Incorporation of Registrant, as
amended.*
3.2 By-Laws of Registrant, as amended.*
10.1 License Agreement between the Company and Donell,
Inc., dated October 2, 1989, with amendments dated
June 18, 1990 and March 16, 1992.*
10.2 Employment Agreement with John F. Prudden dated
November 15, 1985, as amended July 14, 1992.*
10.3 Letter agreements with Donald K. Lourie dated
November 15, 1985, February 11, 1988, and September
7, 1990.*
10.4 Lease for 6th floor office space at 790 Madison
Avenue, New York, NY dated August 19, 1986, as
amended on April 18, 1991.*
10.5 Licensee Agreement between Lescarden Inc. and
Catrix<F1> Research Ltd. Partnership dated June 4,
1982.*
<PAGE>
10.6 Research Agreement between Lescarden Inc. and
Catrix<F1> Research Ltd. Partnership dated June 4,
1983.*
10.7 Lease for office space at 420 Lexington Avenue, New
York, NY dated March 9, 1993.**
22.1 Subsidiaries of the Registrant.*
23. Notice of annual meeting of shareholders and Proxy
Statement for Annual Meeting of shareholders held
October 19, 1992.**
27. Financial Data Schedule
99.1 Award of the Arbitrator in the Matter of the
Arbitration between John F. Prudden, M.D. and the
Registrant dated September 6, 1995.***
* Incorporated by reference to Registrant's Form S-1
(Registration no. 33-50743) filed August 12, 1992.
** Incorporated by reference to Registrant's Form 10-
KSB for the fiscal year ended May 31, 1993.
*** Incorporated by reference to Registrant's Form 8K
dated September 6, 1995.
**** Filed herewith.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the
Company during the fourth Quarter at the year ended
May 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LESCARDEN INC.
By: S/Gerard A. Dupuis
Gerard A. Dupuis, President
August 20, 1997
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed by the following persons
on behalf of the registrant and in the capacities and on the dates
indicated.
By: S/Gerard A. Dupuis President, Principal Executive
Gerard A. Dupuis Officer, Principal Financial
August 20, 1997 Officer, Principal Accounting
Officer and Director
By: S/William H. Chisholm Vice Chairman, Director
William H. Chisholm
August 20, 1997
By: S/Frank E. Berglas Director
Frank E. Berglas
August 20, 1997
By: S/George E. Ehrlich Director
George E. Ehrlich
August 20, 1997
<PAGE>
LESCARDEN INC.
INDEX TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Independent Auditor's Report F-2
Balance Sheet as of May 31, 1997 F-3
Statement of Operations for the Years Ended May 31, 1997 and 1996 F-4
Statement of Stockholders' Equity
for the Years Ended May 31, 1997 and 1996 F-5
Statement of Cash Flows for the Years Ended May 31, 1997 and 1996 F-6
Notes to Financial Statements F-7 - F-13
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Lescarden Inc.
We have audited the accompanying balance sheet of Lescarden Inc. (the
"Company") as of May 31, 1997 and the related statements of operations,
stockholders' equity, and cash flows for each of the two years in the period
then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lescarden Inc. as of May
31, 1997, and the results of its operations and its cash flows for each of the
two years in the period then ended in conformity with generally accepted
accounting principles.
On May 14, 1997, the bankruptcy court confirmed the Company's Plan of
Reorganization. The plan is described in Note 1 of the notes to financial
statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
, and has recognized limited revenue which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
July 8, 1997
F-2
<PAGE>
LESCARDEN INC.
<TABLE>
BALANCE SHEET
(Note 1)
<CAPTION>
May 31, 1997
- ------------------------------------------------------------------------------
ASSETS
<S> <C>
Current Assets:
Cash $ 115,340
Inventory (Note 2) 9,488
- ------------------------------------------------------------------------------
Total current assets 124,828
Security Deposit 3,080
Deferred Income Tax Asset, net of valuation allowance
of $3,935,000 (Note 7) -
- ------------------------------------------------------------------------------
Total Assets $ 127,908
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities - accounts payable and accrued expenses $ 114,802
- ------------------------------------------------------------------------------
Total liabilities 114,802
- ------------------------------------------------------------------------------
Commitments and Contingencies (Notes 1, 3, 4 and 5)
Stockholders' Equity (Notes 1, 3, 4 and 6):
Convertible preferred stock - $.02 par value; $1.50 liquidation value
(aggregating $138,000); authorized 2,000,000 shares, issued and
outstanding 92,000 shares 1,840
Common stock - $.001 par value; authorized 200,000,000 shares,
issued and outstanding 15,882,218 shares 15,882
Additional paid-in capital 13,248,298
Accumulated deficit (13,252,914)
- ------------------------------------------------------------------------------
Stockholders' equity 13,106
- ------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 127,908
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
F-3
<PAGE>
LESCARDEN INC.
<TABLE>
STATEMENT OF OPERATIONS
(Note 1)
<CAPTION>
Year ended May 31, 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Product sales $ 15,185 $ 440,534
Royalties and other (Notes 2 and 5) 29,574 45,340
- ------------------------------------------------------------------------------
Total revenue 44,759 485,874
- ------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 5,341 151,224
Salaries:
Officer 134,672 96,000
Office 11,099 9,533
Professional fees and consulting (Note 5) 98,480 97,496
Research and development (Note 2) 12,696 31,553
Rent and office expenses (Note 5) 61,211 58,401
Travel and meetings 4,104 22,247
Taxes 816 2,596
Insurance 1,151 625
Interest - 61,850
Interest to related parties - 59,775
Provision for arbitration award (Note 5) - 313,612
Printing 3,430 -
Other administrative (income) expenses 17,824 (4,054)
- ------------------------------------------------------------------------------
Total costs and expenses 350,824 900,858
- ------------------------------------------------------------------------------
Loss before reorganization items (306,065) (414,984)
- ------------------------------------------------------------------------------
Reorganization items (Note 1):
Professional fees 36,235 4,410
Bankruptcy fees and miscellaneous 3,218 -
- ------------------------------------------------------------------------------
Total reorganization items 39,453 4,410
- ------------------------------------------------------------------------------
Net loss $ (345,518) $ (419,394)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Net loss per common share $ (.03) $ (.04)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Weighted average number of common shares
outstanding (Note 2) 12,249,165 11,838,677
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
F-4
<PAGE>
LESCARDEN INC.
<TABLE>
STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Stockholders'
Number of Par Value Number of Par Value Paid-in Accumulated (Deficiency)
Shares Amount Shares Amount Capital Deficit Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1995 92,000 $1,840 11,822,010 $11,822 $10,634,177 $(12,488,002) $(1,840,163)
Issuance of common stock
for cash - - 50,000 50 7,450 - 7,500
Issuance of common stock
warrants in settlement of
liability to former chairman
(Note 5) - - - - 146,000 - 146,000
Net loss - - - - - (419,394) (419,394)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1996 92,000 1,840 11,872,010 11,872 10,787,627 (12,907,396) (2,106,057)
Issuance of common stock in
bankruptcy settlement of claims - - 2,986,208 2,986 2,155,445 - 2,158,431
Issuance of common stock
upon exercise of common
stock warrants - - 624,000 624 145,626 - 146,250
Issuance of common stock for
cash - - 400,000 400 159,600 - 160,000
Net loss - - - - - (345,518) (345,518)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1997 92,000 $1,840 15,882,218 $15,882 $13,248,298 $(13,252,914) $ 13,106
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
F-5
<PAGE>
LESCARDEN INC.
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
Year ended May 31, 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (345,518) $(419,394)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Provision for arbitration award - 313,612
Changes in operating assets and liabilities:
Decrease in accounts receivable - 94,379
Decrease in inventory 4,368 3,490
(Increase) decrease in prepaid expenses 17,673 (17,673)
Increase in trade and other miscellaneous claims 78,632 18,000
Increase in trade and other miscellaneous
claims - related parties - 23,775
- ----------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (244,845) 16,189
- ----------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 306,250 7,500
Repayment of note payable - (10,000)
- ----------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 306,250 (2,500)
- ----------------------------------------------------------------------------------
Net increase in cash 61,405 13,689
Cash at beginning of year 53,935 40,246
- ----------------------------------------------------------------------------------
Cash at end of year $ 115,340 $ 53,935
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for professional fees rendered in
connection with Chapter 11 proceedings $ - $ 16,883
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Supplemental schedule of noncash financing activities:
Conversion of liabilities to common stock under the Plan of
Reorganization $2,158,431 $ -
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Issuance of common stock warrants in settlement of liability
to former chairman $ - $ 146,000
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes and independent auditor's report should be read in
conjunction with the financial statements.
F-6
<PAGE>
LESCARDEN INC.
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------
1. Reorganization and Emergence from Chapter 11:
On May 14, 1997, Lescarden Inc. (the "Company") emerged from Chapter 11 of
the federal bankruptcy laws ("Chapter 11") in the United States Bankruptcy
Court for the Southern District of New York. The Plan of Reorganization
("POR"), which was confirmed by the bankruptcy court on January 15, 1997,
resulted in a net reduction of approximately $2,100,000 in total indebtedness
and liabilities subject to compromise. The POR provides for, among other
things, the cancelation of certain indebtedness in exchange for new
equity securities and settlement of certain claims and mutual releases of
certain claims of the Company.
On May 14, 1997, in conjunction with the reorganization and in accordance
with the POR, the Company converted the claims to the Company's common stock
at an average market price of $.7228 per share, which was based on the high
and low quoted bid and ask prices of the Company's common stock as reported
by the National Quotation Market for the 10 business days prior to the
confirmation date. Additionally, 30% of the common stock issued was
unrestricted and 70% was restricted.
The Company's results of operations for the year ended May 31, 1996 primarily
include its operations before its Chapter 11 filing. The results of operations
for the year ended May 31, 1997 primarily include its operations during the
Chapter 11 filing.
While in Chapter 11 the Company incurred expenses relating to the
reorganization and restructuring of its business. These items are included in
reorganization items in the accompanying statement of operations.
2. Operations and Significant Accounting Policies:
The Company is engaged in the research, testing and development of medications
for the control and cure of various diseases and the licensing of its
technologies for commercialization by other companies. In its research and
testing to date, the Company has discovered and is primarily investigating
Catrix<F1>, a complex of mucopolysaccharides derived from bovine cartilage.
During the year ended May 31, 1996, the Company made sales of its proprietary
bovine cartilage material, BIO-CARTILAGE<F1>, to a food supplement distributor
who in turn sold the material to nutritional food supplement stores in the U.S.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the financial statements, the
Company has suffered recurring losses from operations, during the year ended
May 31, 1997 had limited revenue and, before its bankruptcy reorganization
(see Note 1) reflected a stockholders' deficit. These factors indicate that
the Company may be unable to continue as a going concern. In the past few
years, management has implemented plans to enter the food supplement business
and during the year ending May 31, 1998, additional activity is expected
regarding its licensed product for therapeutic applications and wound healing.
If successful, this may increase cash flow which would allow the Company to
meet its obligations and sustain operations. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
F-7
<PAGE>
Revenue from royalties and license fees is recorded when the funds are
received. Revenue from the product sales is recognized upon shipment of the
product.
Research and development costs, including patent costs, are charged to costs
and expenses in the year incurred.
Net loss per common share is based upon the weighted average number of common
shares outstanding during the year. Stock options, warrants and convertible
preferred stock are excluded from the computation of net loss per common share
since they would have an antidilutive effect.
Inventory, consisting principally of Catrix<F1> and BIO-CARTILAGE<F1> supplies
, is stated at the lower of cost, determined by the first-in, first-out
method, or market.
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-based Compensation. The Company has
elected to apply APB Opinion No. 25 and related interpretations in accounting
for its stock options issued to employees and has adopted the disclosure-only
provisions of SFAS No. 123.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. Management does not believe SFAS No. 128 or any other
recently issued, but not yet effective, accounting standards, if currently
adopted, would have a material effect on the accompanying financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates by management. Actual
results could differ from those estimates.
3. Notes Payable:
At May 31, 1996, the Company had notes payable totaling $1,013,000, with
interest at rates ranging between 10% and 13.5% per annum, of which $260,000
was past due and $753,000 was due on December 31, 1996.
Upon the Company's emergence from Chapter 11 and in accordance with the POR,
the notes payable were converted into common stock (see Note 1).
4. Stock Options and Warrants:
Pursuant to the Company's 1981 incentive and nonqualified stock option plans,
as amended, options have been granted to officers and key employees, and to
directors, officers, consultants and key employees, respectively, at exercise
prices not less than the fair market value at date of grant. Options are
generally exercisable at the grant date or at other determinate dates
subsequent to the grant date, and expire 5 or 10 years from the date of grant
(or from other subsequent dates on which they become exercisable). The two
stock option plans expired in November
F-8
<PAGE>
1991 without affecting any options then outstanding. Changes in incentive and
nonqualified stock options granted and outstanding are as follows:
May 31, 1997 1996
- ---------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
- ---------------------------------------------------------------------------
Outstanding at beginning
of year 175,000 $.61 730,000 $1.10
Canceled during year - - 555,000 1.25
- ---------------------------------------------------------------------------
Outstanding at
end of year 175,000 $.61 175,000 $ .61
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
The following table summarizes information about stock options
outstanding and exercisable at May 31, 1997:
Weighted-
Average Weighted-
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life Price
- ---------------------------------------------------------------------------
$.50 - $.75 175,000 9 years $.61
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
All of the above options are exercisable at May 31, 1997. No options have
been exercised under either plan.
In the year ended May 31, 1993, the Company approved the "1992 Employee
Incentive Stock Plan" (the "1992 Plan"). The 1992 Plan authorized the
issuance of stock options, restricted shares of stock and stock bonus awards
to eligible participants. The 1992 Plan provides for the reservation and
availability of 2,000,000 shares of common stock, subject to adjustment for
future stock splits, dividends, reorganizations and other similar events, at
exercise prices not less than the fair market value at the date of grant.
Options are exercisable from 12 months after the date of grant and expire 10
years from the date of grant. At May 31, 1997, no options were granted under
the 1992 Plan.
The Company has outstanding warrants permitting the holders to purchase shares
of its common stock at prices ranging from $.10 to $1.00 per share. The
warrants have varying expiration dates to May 15, 2005. Warrants to purchase
4,558,429 common shares were outstanding at May 31, 1997. In the year ended
May 31, 1997, warrants to purchase 245,000 common shares expired and warrants
to purchase 624,000 common shares were exercised at a price of $.25 per share.
Warrants are granted at exercise prices not less than the fair market value
at the date of grant. The warrants
F-9
<PAGE>
contain restrictions on transfer and require that the underlying shares be
acquired solely for investment.
At May 31, 1997, shares of common stock have been reserved as follows:
Number of
Shares
- ---------------------------------------------------------------------------
Stock option plans 175,000
Total warrants outstanding including those specifically
described in the notes to financial statements 4,558,429
- ---------------------------------------------------------------------------
5. Commitments, Contingencies and Related Party Transactions:
Rent expense charged to operations for the years ended May 31, 1997 and 1996
amounted to approximately $44,000 and $43,000, respectively.In March 1993,
the Company entered into an operating lease for its executive offices,
expiring March 31, 1998. The lease provides for minimum annual rental
payments, exclusive of real estate taxes and other operating costs, of
$37,000.
At May 31, 1997, the Company was not covered by product liability insurance.
On July 14, 1992, effective as of June 1, 1992, the Company amended a 1985
agreement with its former Chairman. As of such date, the Chairman became a
consultant to the Company and resigned as Chairman and as a Director of the
Company.
This agreement, which terminated in November 1996, provided for a minimum
annual compensation of $75,000 and certain additional forms of compensation,
including payments for life insurance premiums, and:
- the issuance of 100,000 shares of the Company's unregistered common stock;
and
- an annual pension of $25,000, commencing upon the termination of services
as provided under the agreement or upon death or permanent disability. Pension
payments shall be due only in years in which the Company's net worth is in
excess of $2,500,000 and pretax profits of $500,000 are achieved. The
Company's obligation shall not be satisfied until an aggregate of $500,000
has been paid.
On June 2, 1994, this former Chairman instituted an arbitration proceeding
against the Company, pursuant to the terms of his consultancy agreement,
asserting that the Company breached the agreement. On September 6, 1995,
the arbitrator ruled in favor of this former Chairman. The arbitrator awarded
$381,250 to this former Chairman. In addition, the arbitrator ruled that this
former Chairman should receive warrants to purchase 937,651 shares of common
stock at an exercise price of $.15625 per share, the market value at December
31, 1993. These warrants were awarded in settlement of approximately $146,000
that was owed to this former
F-10
<PAGE>
Chairman at December 31, 1993. While the Company was in Chapter 11, this
former Chairman's claim was purchased by a group, including certain of the
Company's other creditors for a negotiated amount of $85,000. This claim was
transferred and assigned, pro-rata, to each purchaser and converted to common
stock in accordance with the POR. At May 31, 1997, there are no further
obligations to this former stockholder.
A revised agreement with another former Chairman, which is for a period of 20
years, provides for a minimum annual consultancy fee/pension payment of
$25,000 to be paid in any year in which the Company's net worth is in excess
of $2,500,000 or pretax profits of $500,000 are achieved. In the event of the
death of this former Chairman, any amounts due under this agreement will be
payable to his estate.
Additionally, the agreement provides for the issuance of nonqualified stock
options to purchase 100,000 shares of the Company's common stock.
Under the agreement, pension costs cannot be reasonably estimated principally
because the conditions required to create a pension liability do not exist at
May 31, 1997 and are not anticipated in the foreseeable future.
In June 1982, individuals related to the Company formed the Catrix<F1>
Research Limited Partnership (the "Partnership").
The Company has entered into two agreements with the Partnership, as follows:
A. Research Agreement:
Under the Research Agreement, the Company received $200,000 from the
Partnership to perform or cause to be performed research in connection
with Catrix<F1> involving several technologies. No further payments to
the Company by the Partnership are contemplated under the Research
Agreement.
B. License Agreement:
Under the License Agreement, the Company assigned to the Partnership (for
additional consideration of $25,000) three of its United States patents
and one of its United States patent applications. In addition, the
Company assigned to the Partnership all foreign patents and patent
applications corresponding thereto, together with certain technical
information pertaining to Catrix<F1>. The Partnership granted the
Company exclusive worldwide licenses to make, use and sell products
developed therefrom, subject to the Company's obligation to pay the
Partnership three-fourths of 1% of the net sales price of any licensed
products manufactured and sold by the Company, plus percentages ranging
from 3.125% to 6.25% of any amounts received from any sublicensees of
the Company.
If the Partnership is terminated, dissolved or its assets are
liquidated, the Company will have the option to purchase for
F-11
<PAGE>
$25,000 all United States and foreign patents and patent applications
transferred by the Company to the Partnership.
At May 31, 1997, the principal asset of the Partnership consists of the
License Agreement described above.
During the year ended May 31, 1990, the Company entered into a license
agreement, which was amended, the last amendment occurring on March 16, 1992,
with Donell, Inc. ("Donell"). This license agreement gives Donell the right
to license, sublicense and sell the Company's Catrix<F1> material for all
topical uses in the United States and Canada. The license agreement provided
for license fee income of $500,000 through March 1, 1991, 6% royalty for
topical Catrix<F1> product sales and an additional 6% royalty on sales
commencing on January 1, 1991 until the Company receives additional royalties
of $1,000,000 and other royalty arrangements, as defined. In addition, the
Company will receive 15% of all consideration paid to Donell whether in the
form of a sublicense fee and/or royalties, as defined, for a period of two
years from the date when and if royalty payments to Donell actually begin.
Royalties and license fee revenue from this agreement amounted to $4,436 and
$34,750 for the years ended May 31, 1997 and 1996, respectively.
The term of the license agreement is 25 years with a renewal option for an
additional period of 25 years, with the payment of a renewal fee of $1,200,000
as adjusted for the Consumer Price Index.
Upon execution of the license agreement the Company received 300,000 shares
of Donell's capital stock representing a then 30% interest in Donell. This
stock was determined to have no value and, accordingly, no investment has been
recorded in the accompanying balance sheet. In addition, audited financial
information for Donell is currently not available since Donell does not
prepare audited financial statements.
On October 8, 1996, Donell agreed that it no longer wanted to operate under
the March 16, 1992 agreement. Donell agreed to liquidate its Catrix<F1>
inventory and use the Catrix<F1> name only until June 30, 1997. Also, Donell
would pay the Company the defaulted royalties for two quarters and royalties
from inventory liquidation amounting to approximately $25,000. Subsequent
payment of approximately $4,000 was received, leaving an outstanding balance
of $21,000. The Company is uncertain of the receipt of this amount and did
not record a receivable.
For the years ended May 31, 1997 and 1996 approximately 0% and 6%,
respectively, of the Company's product sales were to Donell.
During the year ended May 31, 1995, the Company entered into a worldwide,
15-year license agreement with Orphan Medical, Inc. ("Orphan"). This license
agreement, which was amended, the last amendment occurring on December 16,
1996, gives Orphan the right to develop Catrix<F1>, in all therapeutic
applications, for topical wound healing purposes. Orphan is required to
purchase the Catrix<F1> it may require, pursuant to the terms of the license
agreement from the Company. The license agreement provides for $50,000 to be
received by October 1999,
F-12
<PAGE>
provided a New Drug Application is obtained from the Food and Drug
Administration. Also, the Company will receive a royalty of 6% on all of
Orphan's net annual sales. In addition, as consideration for the additional
license rights, $35,000 will be due within 30 days of completing the clinical
trial, payment to be received no later than December 31, 1997; $25,000 will
be due within 30 days of initial marketing, no later than June 30, 1998; and
$90,000 will be due within 30 days of aggregate net sales of $1,500,000.
Lastly, there are minimum royalties due of $25,000 commencing in 1998,
$35,000 commencing in 1999 and $50,000 commencing in 2000 and for each
remaining year of the license agreement which are payable quarterly in each
year. During the years ended May 31, 1997 and 1996, the Company received
$25,000 and $7,500, respectively, which is included in royalties and other in
the accompanying statement of operations.
6. Stockholder's Equity:
The convertible preferred stock has a preference upon liquidation of $1.50
per share; is convertible, at the option of the holder, into one share of the
Company's common stock, for each share of preferred stock; and is callable,
at the option of the Company, at such time as its net worth exceeds
$3,000,000, for $1.50 per share. Additionally, holders of preferred stock
are entitled to vote for directors of the Company on a one-share/one-vote
basis.
7. Income Taxes:
The Company has net operating loss carryforwards of approximately $10,700,000
available to reduce future taxable income which expire in various years
through 2012.
In addition, the Company has a tax credit carryforward, from research
activities, of approximately $335,000, which expires in various years through
2000.
The utilization of net operating loss carryforwards may be limited as a result
of cumulative changes in the Company's stock ownership.Deferred income taxes
reflect the impact of net operating loss carryforwards and tax credits. In
recognition of the uncertainty regarding the ultimate amount of income tax
benefits to be derived from the Company's net operating loss and tax credit
carryforwards, the Company has recorded a valuation allowance for the entire
deferred tax asset. Estimated deferred tax assets are comprised of the
following at May 31, 1997:
Net operating loss carryforwards $ 3,600,000
Tax credits 335,000
- ---------------------------------------------------------------------------
Gross deferred tax assets 3,935,000
- ---------------------------------------------------------------------------
Valuation allowance (3,935,000)
Net deferred tax assets $ - 0 -
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
F-12
<F1>
A registered trademark of Lescarden Inc.
<F2>
A trademark of Lescarden Inc.
<PAGE>
<PAGE>
EXHIBIT 2.1
TODTMAN, YOUNG, NACHAMIE,
HENDLER & SPIZZ, P.C.
Attorneys for Lescarden, Inc.,
Debtor and Debtor-in-Possession
425 Park Avenue
New York, New York 10022
(212) 754-9400
Arthur Goldstein (AG-8735)
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - -X
In re:
Chapter 11
LESCARDEN, INC.,
Case No. 96 B 42485 (JLG)
Debtor.
- - - - - - - - - - - - - - - -X
AMENDED DISCLOSURE STATEMENT
----------------------------
TODTMAN, YOUNG, NACHAMIE,
HENDLER & SPIZZ, P.C.
Attorneys for Lescarden, Inc.,
Debtor and Debtor-in-Possession
425 Park Avenue
New York, New York 10022
(212) 754-9400
Arthur Goldstein (AG-8735)
<PAGE>
TABLE OF CONTENTS
-----------------
I.
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 2
II.
VOTING INSTRUCTIONS AND CONFIRMATION OF PLAN . . . . . . . . . 3
A. Manner of Voting On Plan. . . . . . . . . . . . . . . 3
B. Claim Holders Entitled To Vote. . . . . . . . . . . . 4
C. Classes Impaired Under The Plan . . . . . . . . . . . 4
D. Vote Required For Class Acceptance. . . . . . . . . . 4
III.
GENERAL OVERVIEW OF PLAN DISTRIBUTIONS . . . . . . . . . . . . 4
IV.
GENERAL BACKGROUND INFORMATION REGARDING LESCARDEN, INC. . . . 6
A. Events Leading to Chapter 11 Filing and History
of the Company. . . . . . . . . . . . . . . . . 6
1. Introduction. . . . . . . . . . . . . . . . . . 6
2. Scientific Background; Background of CATRIX<F1> 8
3. Metastatic Renal Cell Cancer. . . . . . . . . . 8
4. Healing Decubitus Wounds. . . . . . . . . . . . 9
5. Pre-Clinical Studies of CATRIX<F1> . . . . . . 9
6. Human Clinical Trials Conducted With CATRIX<F1>
and CATRIX<F1> -S . . . . . . . . . . . . . . . 9
7. Phase I Trials. . . . . . . . . . . . . . . . . 10
8. Phase II and Phase III Trials . . . . . . . . . 10
9. Trials Involving Decubitus Ulcers . . . . . . . 10
10. Patents and Proprietary Technology. . . . . . . 10
V.
THE POST-PETITION OPERATIONS . . . . . . . . . . . . . . . . . 11
VI.
POST-CONFIRMATION OPERATIONS . . . . . . . . . . . . . . . . . 11
VII.
THE CHAPTER 11 PROCESS . . . . . . . . . . . . . . . . . . . . 12
A. The Chapter 11 Case . . . . . . . . . . . . . . . . . 12
B. Appointment Of General Unsecured Creditors
Committee. . . . . . . . . . . . . . . . . . . . . . 12
VIII.
THE DEBTOR'S PLAN OF REORGANIZATION. . . . . . . . . . . . . . 12
A. Classification Of Claims And Interests. . . . . . . . 12
1. Class 1: Administration Expense Claims . . . . 13
2. Class 2: Priority Claims . . . . . . . . . . . 13
3. Class 3: Tax Claims. . . . . . . . . . . . . . 13
4. Class 4: Secured Claims. . . . . . . . . . . . 14
5. Class 5: Unsecured Claims. . . . . . . . . . . 14
6. Class 6: Equity Interests . . . . . . . . . . . 14
B. Treatment Of Claims And Interests Under The Plan
And Designation Of Impairment And Unimpaired
Classes. . . . . . . . . . . . . . . . . . . . . . 14
1. Definition of "Impairment". . . . . . . . . . . 14
2. Party Responsible For Distributions . . . . . . 14
3. Treatment of Administrative Expense Claims,
Allowed Priority Claims, Tax Claims and
Secured Claims. . . . . . . . . . . . . . . . . 14
4. Treatment of General Unsecured Claims . . . . . 14
5. Treatment of Equity Interests . . . . . . . . . 16
C. Certain Other Provisions Of The Plan. . . . . . . . . 16
1. Time and Manner of Distributions Under the
Plan. . . . . . . . . . . . . . . . . . . . . . 16
2. Executory Contracts and Unexpired Leases. . . . 16
3. Disputed Claims . . . . . . . . . . . . . . . . 16
4. Preferences . . . . . . . . . . . . . . . . . . 17
5. Retention of Jurisdiction . . . . . . . . . . . 17
6. Discharge . . . . . . . . . . . . . . . . . . . 18
7. Exculpations. . . . . . . . . . . . . . . . . . 19
8. Funding the Plan. . . . . . . . . . . . . . . . 19
IX.
"BEST INTEREST" OF UNSECURED CREDITORS . . . . . . . . . . . . 20
X.
FINANCIAL STATEMENT. . . . . . . . . . . . . . . . . . . . . . 21
A. Pro-Forma Post-Confirmation Statements. . . . . . . . 21
B. Post-Petition Operations. . . . . . . . . . . . . . . 21
XI.
ACCEPTANCE AND CONFIRMATION. . . . . . . . . . . . . . . . . . 21
A. Acceptance. . . . . . . . . . . . . . . . . . . . . . 22
B. Non-Acceptance "Cramdown" . . . . . . . . . . . . . . 22
C. Alternatives to the Plan. . . . . . . . . . . . . . . 23
XII.
FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . 24
A. Possible Tax Effect On Debtor . . . . . . . . . . . . 25
1. Non Recognition of Gain or Loss . . . . . . . . 25
B. Possible Tax Effects On The Creditors Of The Debtor. . 25
XIII.
MANAGEMENT OF THE COMPANY. . . . . . . . . . . . . . . . . . . 25
XIV.
VOTING INSTRUCTIONS. . . . . . . . . . . . . . . . . . . . . . 26
CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . 26
<PAGE>
TODTMAN, YOUNG, NACHAMIE,
HENDLER & SPIZZ, P.C.
Attorneys for Lescarden, Inc.,
Debtor and Debtor-in-Possession
425 Park Avenue
New York, New York 10022
(212) 754-9400
Arthur Goldstein (AG-8735)
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - -X
In re:
Chapter 11
LESCARDEN, INC.,
Case No. 96 B 42485 (JLG)
Debtor.
- - - - - - - - - - - - - - - -X
AMENDED DISCLOSURE STATEMENT
----------------------------
On May 7, 1996, Lescarden, Inc. ("Debtor"; "Lescarden"; or
"Company") filed a Petition under Chapter 11 of the Bankruptcy
Code. An Order for Relief under Chapter 11 of the Bankruptcy Code
was entered upon such filing. Subsequent to the entry of the Order
for Relief, Debtor has remained in possession of its assets and has
continued to own, operate and manage its business pending the
approval of a Plan of Reorganization in accordance with the
provisions of the Bankruptcy Code (11 U.S.C. Section 101 et. seq.) (the
"Code").
Pursuant to 1125 of the Code, the Debtor now files this
Amended Disclosure Statement dated March 12, 1997 (the "Disclosure
Statement") along with the proposed Plan of Reorganization dated
January 15, 1997 (the "Plan") previously filed to be submitted
following approval of the Disclosure Statement to holders of claims
or interests with respect to the Debtor and its assets.
<PAGE>
I.
INTRODUCTION
------------
Debtor provides this Disclosure Statement to all its known
creditors and other parties in interest in order to disclose
information deemed by the Debtor to be material, important and
necessary for its creditors to arrive at a reasonably informed
decision in exercising their rights to vote for acceptance of the
Plan previously on file with the United States Bankruptcy Court for
the Southern District of New York (the "Court"). A copy of the
Plan accompanies this Disclosure Statement as Exhibit "1"<F1>
By order of the Bankruptcy Court dated March 17, 1997, this
Disclosure Statement has been approved as containing "adequate
information" for creditors and stockholders of the Debtor in
accordance with Section 1125(b) of the Code. Pursuant to Section 1125(a)(1)
of the Code, "adequate information" is defined as:
". . . information of a kind, and in sufficient detail,
as far as is reasonably practical in light of the nature
and history of the debtor and the condition of the
debtor's books and records, that would enable a
hypothetical reasonable investor typical of holders of
claims or interests of the relevant class to make an
informed judgment about the plan, but adequate
information need not include such information about any
other possible or proposed plan;"
The Court approval, however, does not constitute a
recommendation by the Court either for or against the Plan. No
statements or information concerning the Plan and the transactions
contemplated thereby have been authorized, other than the
statements and information set forth in this Disclosure Statement.
All other statements regarding the Plan and the transactions
contemplated, whether written or oral, are unauthorized. Any
capitalized terms not otherwise defined herein shall have the
meanings ascribed to such terms under the Code or the Plan.
The Bankruptcy Court has scheduled a hearing to consider
confirmation of the Plan for April 30, 1997 at 11:00 A.M. at the
United States Bankruptcy Court located at One Bowling Green, New
York, NY 10004. This hearing may be adjourned from time to time
without further notice other than by announcement in Court on the
scheduled date of such hearing. At that hearing, the Court will
consider whether the Plan satisfies the various requirements of the
Code, including whether the Plan is feasible and whether it is in
the best interest of the creditors. The Court will then also
receive and consider a ballot report prepared by the Debtor
<PAGE>
concerning the votes for acceptance or rejection of the Plan by the
parties entitled to vote.
No representations concerning the Debtor, the estimated value
of the Debtor's property and/or the estimated assets to be
generated from the liquidation of Debtor's assets, are authorized
by the Debtor other than as set forth in this Disclosure Statement.
Any representations or inducements made to secure your acceptance
which are other than as contained in this Disclosure Statement,
should not be relied upon by you in casting your vote with respect
to the Debtor's proposed Plan.
The Debtor and the Committee believe that the Plan provides
the greatest and earliest possible recoveries to all creditors.
They believe that acceptance of the Plan is in the best interest of
all creditors and recommend that they vote to accept the Plan.
NO INDEPENDENT VERIFICATION OF THE CONTENTS OF THIS DISCLOSURE
STATEMENT AND THE EXHIBITS HERETO HAS BEEN MADE BY THE FIRM OF
TODTMAN, YOUNG, NACHAMIE, HENDLER & SPIZZ, P.C., BANKRUPTCY COUNSEL
FOR THE DEBTOR. ALL CREDITORS AND OTHER PARTIES AFFECTED BY THE
PLAN ARE URGED TO CONSULT THEIR OWN COUNSEL AS TO THE PROVISION AND
EFFECT OF THE PLAN.
The Disclosure Statement contains only a summary of the Plan
and it is recommended that all creditors and other parties in
interest review the full text of the Plan and exhibits and this
Disclosure Statement, in addition to the other documents and
information referenced herein, prior to determining whether to vote
to accept or reject the Plan.
II.
VOTING INSTRUCTIONS AND CONFIRMATION OF PLAN
--------------------------------------------
A. Manner of Voting On Plan.
------------------------
Before voting, this Disclosure Statement as well as the Plan
should be read in its entirety. You should use only the ballots
sent to you with this Disclosure Statement to cast your vote for or
against the Plan.
If you hold a Class 5 or 6 Claim, included in the package of
materials forwarded to you along with the Disclosure Statement and
Plan is a ballot in the form of Exhibit "2" attached hereto for
your acceptance or rejection of the Plan. You should complete,
date and sign your ballot and return it to Todtman, Young,
Nachamie, Hendler & Spizz, P.C., Attention: Arthur Goldstein, Esq.,
425 Park Avenue, New York, New York 10022, attorneys for Debtor.
All ballots must be received by 5:00 P.M. on April 21, 1997. Any
ballot which is properly executed but does not indicate acceptance
or rejection of the Plan shall be deemed to be an acceptance of the
Plan.
<PAGE>
B. Claim Holders Entitled To Vote.
------------------------------
Subject to the exceptions provided below, any claim holder
whose claim is impaired under the Plan is entitled to vote if
either (i) its claim has been scheduled by Debtor and such claim is
not scheduled as disputed, contingent or unliquidated, or (ii) such
claim holder has filed a proof of claim with respect to a disputed
claim.
A holder of a disputed claim is not entitled to vote on the
Plan unless the Bankruptcy Court, upon motion of the creditor whose
claim has been objected to, temporarily allows the claim in an
estimated amount which it deems proper for the purpose of voting to
accept or reject the Plan. Any such motion must be heard and
determined by the Bankruptcy Court prior to the date established by
the Bankruptcy Court as the final date to vote on the Plan. In
addition, a vote may be disregarded if the Bankruptcy Court
determines that the acceptance or rejection of the Plan by the
creditor is not solicited or procured in good faith or in
accordance with the provisions of the Code.
C. Classes Impaired Under The Plan.
-------------------------------
Claim holders identified as Class 5 and Class 6 are impaired
under the Plan and are eligible, subject to the limitations set
forth above, to vote to accept or reject the Plan.
Any controversy as to whether any claim holder or class of
claim holders is impaired under the Plan shall, after notice of any
hearing, be determined by the Bankruptcy Court.
D. Vote Required For Class Acceptance.
-----------------------------------
The Bankruptcy Code defines acceptance of a Plan of
Reorganization by (i) a class of claims, in Section 1126(c) as the
acceptance by holders of at least two-thirds (2/3) in amount and
more than one-half (1/2) in number of the allowed claims of such
class that has actually voted to accept or reject a proposed plan
of reorganization; and (ii) a class of interests in Section 1126(d) as
the acceptance by holders of at least two-thirds (2/3) in amount of
the allowed interests of such class that actually voted to accept
or reject a proposed plan of reorganization.
III.
GENERAL OVERVIEW OF PLAN DISTRIBUTIONS
--------------------------------------
Detailed elsewhere in this Disclosure Statement is a
description of the technical aspects of the classification of
claims and equity interests, the relative allocations of property
to holders of such claims and interests, the methodology as to how
such property is to be distributed, the risk inherent in the
proposed Plan, and the applicable bankruptcy and tax consequences
<PAGE>
of the proposed reorganization. However, the Debtor believes that
a broad overview of what creditors and stockholders are, in the
opinion of the Debtor, likely to receive under the Plan, will be
helpful for your consideration of whether you wish to accept or
reject the Plan.
While not exhaustive, the list below may help you identify
what class your claim or interest falls into.
TABLE 1:
QUICK REFERENCE GUIDE TO
CLASSIFICATION OF CLAIMS AND INTERESTS
Class General Description Examples
- ----- ------------------- --------
Class 1 Fees to professional persons Attorneys fees
Claims as allowed by the Court
Class 2 Secured or unsecured Claims for services
Claims obligation of the Debtor-in- rendered and goods
Possession arising subsequent sold or delivered to
to 5/7/96 Debtor-in-Possession
Class 3 Pre-petition tax liabilities Income tax
Claims
Class 4 Claims secured by valid Liens on assets
Claims security interests in
Debtor's property
Class 5 Unsecured Claims. Any pre- Goods sold and
Claims 5/7/96 general unsecured delivered or
claim against the Debtor or services rendered
claims arising out of prior to 5/7/96 and
rejection of pre-petition rejection of lease
contract or lease or contract claims
Class 6 Presently issued and
Claims outstanding shares of common
stock, warrants and options
of Lescarden, Inc.
In order to obtain some sense of what you are likely to
receive under the Plan with respect to your Claim, the Debtor has
prepared and has set forth below, what a hypothetical creditor
holding an Allowed Claim in each of the classes of claims is
likely to receive under the Plan, and what a hypothetical
shareholder holding an Allowed Equity Interest is likely to
receive under the Plan.
<PAGE>
TABLE 2
TOTAL PROJECTED DISTRIBUTIONS
UNDER PLAN OF REORGANIZATION
Projected Present
Value Distribution
Kind of Property As Percentage of
Class Distributed to Class<F2> Allowed Claim
- ----- -------------------- -------------
Class 1 Cash 100%
Class 2 Cash 100%
Class 3 Cash 100%
Class 4 Cash 100%
Class 5 Stock 100%
Class 6 None N/A
IV.
GENERAL BACKGROUND INFORMATION
REGARDING LESCARDEN, INC.
-------------------------
A. Events Leading to Chapter 11 Filing and History of the Company.
--------------------------------------------------------------
1. Introduction. Lescarden, Inc. is a publicly held
Company, whose Company stock is traded in the over-the-counter
market under the symbol "LCAR". Prior to the filing of its Chapter
11 Case, the number of holders of record of Lescarden's 11,822,010
shares of common stock outstanding was approximately 600. The
Debtor's corporate offices are located at 420 Lexington Avenue,
Suite 2025-28, New York, New York 10170.
Since Lescarden's conception, the Company has primarily
devoted its resources to fund research, drug discovery and
development. In addition, the Company licenses its technology for
commercialization by other companies and, in the fiscal year ended
May 31, 1995, the Company began sales of its proprietary bovine
cartilage material, "BIO-CARTILAGE<F3>", to a food supplement
distributor for sale through nutritional food supplement stores in
the United States.
Lescarden, Inc. continues to develop and seek government
approval to market and sell its proprietary CATRIX<F3> material, a
cartilage derived therapeutic agent which the Company believes has
demonstrated promising results in the treatment of metastatic
renal cell cancer (as well as certain other diseases). The
<PAGE>
therapeutic effects of CATRIX<F3> were discovered by one of the
Company's founders in connection with the treatment of various
human malignancies, the healing of surgical wounds and the control
of tissue inflammation.
The Company has an Investigational New Drug ("IND") exemption
from the U.S. Food and Drug Administration ("FDA") and the Canadian
Health Protection Branch ("HPB") for the experimental treatment of
metastatic renal cell cancer in humans. Prior to obtaining the
IND, the Company completed all pre-clinical studies and Phase I
clinical trials relating to the safety of CATRIX<F3> . It is now
conducting Phase II human clinical trials at two major teaching
hospitals, one in New York State and the other in Montreal to
establish the efficacy of CATRIX<F3> in the treatment of metastatic
renal cell cancer.
On completion of the Phase II and subsequent Phase III trials,
the Company intends to submit a New Drug Application ("NDA") to the
FDA and New Drug Submission ("NDS") to the HPB for approval to
market and commercially ship CATRIX<F3> for the treatment of
metastatic renal cell cancer. The Company anticipates that the NDA
and NDS will be filed in approximately four to five years.
Approval by the FDA and HPB may require an additional one to three
years, although the FDA and HPB can accelerate the process.
In October 1989, the Company granted an exclusive license to
Donell, Inc. ("Donell") to manufacture and sell topical products
formulated with CATRIX<F3> . Donell was marketing a CATRIX<F3> -based
topical cream product to relieve the skin redness and irritation
which frequently accompanies the use of Retin-A, a product and
registered trademark of Johnson & Johnson. Donell, Inc. was also
producing a lip balm containing CATRIX<F3> for use in preventing
chapped lips as well as preventing and healing cold sores. Donell
was required to pay a quarterly royalty fee to the Company on
sales of this product (and any other CATRIX<F3> containing products
which it sells) and to purchase its CATRIX<F3> supplies exclusively
from the Company. Subsequent to the Filing Date, the license
Agreement with Donell was terminated by mutual agreement due to
Donell's inability to meet its quarterly royalty obligations.
Donell has agreed to pay the Company past due royalty fees
aggregating $18,000 by June 30, 1997.
In October, 1994, the Company licensed Orphan Medical, Inc. to
seek FDA approval for the use of pure CATRIX<F3> powder in treating
decubitus ulcers (the pressure sores experienced by some diabetics
and the chronically bed-ridden). Current treatment for these
lesions involves improved hygiene, nutrition and nursing care. The
Company believes that the ability to provide an active agent to
accelerate the healing process represents a clear business
opportunity in a significant market with a demonstrated need for a
more effective therapy. On January 2, 1997, the Company amended
the License Agreement with Orphan Medical, Inc., wherein Orphan
<PAGE>
Medical, Inc. was granted the additional right to manufacture, sell
and otherwise market topical products using CATRIX<F3> material for
all topical human use (i.e., gels, ointments, salves, lotions and
the like), other than cosmetic products using CATRIX<F3> .
The Company has and shall continue to focus a significant
portion of its resources on obtaining approval for the use of
CATRIX<F3> in treating metastatic renal cell cancer and decubitus
ulcers, with an ultimate goal of marketing the product, directly or
through another organization. Moreover, the Company intends to
devote a portion of its future resources on the continuing
development of marketing plans for its food supplement products.
2. Scientific Background; Background of CATRIX<F3> . In the
early 1950's one of the Company's co-founders discovered that
cartilage powder significantly hastened the healing of surgical
wounds in animals. During early wound healing experiments, it was
noted that the margins of the surgical wounds treated with CATRIX<F3>
were less red and swollen than those of the controls. This
observation led the discoverer to the application of CATRIX<F3> to
various inflammatory diseases, systemic and topical. One
inflammatory condition that was successfully treated was psoriasis,
a condition caused by an overproduction of skin cells. In certain
ways, psoriasis resembles the uncontrolled growth of cancer cells.
Based on the aforementioned information as well as encouraging
results from animal cancer studies, the discoverer believed that
CATRIX<F3> could be successfully applied in the treatment of human
cancer.
The Company believes that CATRIX<F3> acts as a biological
response modifier, regulating the activity of important components
of the immune system. Other observed effects of CATRIX<F3> include:
-acceleration of wound healing;
-inhibition of excessive vascularization of certain
tissues;
- inhibition of proliferation of malignant cells; and
-(in vitro) moderation of excessive collagen synthesis by
fibroblast cells.
3. Metastatic Renal Cell Cancer. Metastatic renal cell
cancer (which is the spread of a primary kidney cancer to other
organs) is a particularly lethal form of cancer afflicting
approximately 10,000 individuals per year in the United States and
Canada. Only eight to twenty percent of the metastatic renal cell
cancer patients survive two years after diagnosis. The patient's
chance of overcoming the disease is dependent upon how advanced the
disease is at the time of diagnosis. The disease originates as a
tumor in the kidney. After a certain stage in tumor growth,
metastasis, or spread of cancerous cells to other body organs,
occurs. Conventional treatment generally involves removal of the
<PAGE>
diseased kidney followed by radiation or chemotherapy to affect
reduction of the secondary tumors or metastases.
It has recently been recognized that renal cell cancers may be
responsive to treatment with some cytokines such as interleukin-2.
Cytokines are intimate components of the body's immune system, the
integrity of which system is important in defending the body
against many forms of cancer. Interleukin-2 is somewhat effective
in treating renal cell cancer but its usefulness is limited by its
significant toxicity. The Company believes that CATRIX<F3> , with its
ability to modulate the body's immune system and its non-toxic
properties, is promising as a treatment for this devastating
disease.
4. Healing Decubitus Wounds. Decubitus ulcers, or pressure
sores, are a scourge of the infirmed elderly, diabetic and
generally immobile, wheel chair limited patient. Current therapy
includes removal of the dead tissue around the ulcer, good hygiene,
and nutrition and nursing care. Given the ever increasing elderly
population in the United States and the costs of specialized
medical treatment, a product such as CATRIX<F3> , which appears to
promote wound healing, will, the Company believes, be sought after
by the medical community.
In pursuit of this therapeutic application, the Company
granted a license in October 1994, to Orphan Medical Inc. of
Minnetonka, Minn. The license entitles Orphan to use CATRIX<F3>
powder in clinical trials and assessing its efficacy in the
treatment of wounds. In August 1996, Orphan filed a 510(k) device
application with the FDA and has since commenced Phase II/III human
clinical trials. On January 15, 1997, the FDA advised Orphan
Medical, Inc. that the 510(k) device application was approved.
Under the license agreement, Orphan is required to pay Lescarden
certain license fees, and upon securing marketing approval from the
FDA, to pay a royalty on all sales and to purchase all CATRIX<F3>
powder from the Company.
5. Pre-Clinical Studies of CATRIX<F3> . During the 1970's, the
Company conducted a wide range of pre-clinical laboratory and
animal studies to assess the potential safety and efficacy of
CATRIX<F3> . The results of these studies were submitted to the FDA
and HPB as part of the Company's application for the IND exemption,
approval of which is required prior to the commencement of human
clinical trials. In 1985, the FDA granted the Company's request
for an IND exemption for the application of CATRIX<F3> in the
treatment of scleroderma, a rare skin disease. Shortly thereafter,
the IND exemption was expanded to include the application of
CATRIX<F3> for various forms of cancer, including metastatic renal
cell cancer.
6. Human Clinical Trials Conducted With CATRIX<F3> and CATRIX<F3> -
S. Since approval of the Company's IND, it has completed Phase I
<PAGE>
clinical trials and is conducting Phase II clinical trials. The
Company's clinical trials involve the administration of CATRIX<F3>
capsules to solid tumor cancer patients.
7. Phase I Trials. The objective of the Company's Phase I
trials (involving the initial introduction of CATRIX<F3> into human
subjects) was to test for safety, side effects, dosage tolerance,
metabolism and clinical pharmacology. Initial testing was
conducted on patients with advanced cancers that were unresponsive
to other forms of therapy. Regulatory authorities require that new
cancer therapies be administered in patients who have failed
conventional therapy and that some indication of efficacy be shown
before the drug can be used as the "drug of choice" in earlier
stage patients (i.e., in Phase II trials).
8. Phase II and Phase III Trials. The Company is currently
engaged in two Phase II trials. Phase II trials involve well
controlled tests in a larger (but still limited) patient population
to determine the efficacy of the drug for specific indications, to
determine optimal dosage and to identify possible side effects and
safety risks.
Upon completion of the Phase II trials the Company will meet
with the FDA and the HPB for authorization to commence Phase III
trials to evaluate the overall risks and benefits of CATRIX<F3> in
relation to the treated disease and in light of other available
therapies. Following this further evaluation of efficacy and
safety, the Company will file its NDA and NDS.
9. Trials Involving Decubitus Ulcers. Given the safety and
efficacy shown in the Company's pre-clinical and clinical trials to
date, the Company believes that following preparations and
submissions of the appropriate application for use of CATRIX<F3> in
decubitus ulcer, Orphan Medical may receive approval from the FDA
to proceed directly to Phase III trials after a small pilot study
of 15 to 20 patients, which is scheduled to begin in January 1997.
Thereafter, Orphan Medical expects to conduct a study of
approximately 150 patients in at least two universal medical
centers to complete its Phase III clinical trials for this
application.
10. Patents and Proprietary Technology. The Company was
granted and owns, by assignment, several United States patents,
some of which have expired. The Company also holds several patents
in various foreign countries.
Since inception, the Company's working capital has been
provided primarily from the sale of equity securities, from
borrowings from its officers, directors, shareholders and from
outside investors and, in recent years, from revenues from
licensing fees and product sales. On June 2, 1994 Dr. John F.
Prudden, one of the Company's founders and former chairman,
<PAGE>
instituted an arbitration proceeding against the Company before the
American Arbitration Association. Dr. Prudden instituted this
arbitration proceeding, pursuant to the terms of a Consultancy
Agreement with the Company, asserting that "Lescarden [has]
breached the agreements [with him and he seeks] an award of damages
[for] consulting fees, life insurance payments, expense
reimbursement and pension payments." In September 1995, the
Arbitrator ruled in favor of Dr. Prudden on several of his claims.
The Arbitrator awarded Dr. Prudden monetary damages of $381,250
together with warrants to purchase 937,651 shares of common stock
at an exercise price of $.15625 per share the market value at
December 31, 1993. Thereafter the Company sought reconsideration
which the Arbitrator denied. In April 1996 New York State Supreme
Court, New York County confirmed the arbitration award. In
addition, the Company had notes payable totalling $1,013,000 with
interest at rates ranging between ten (10%) percent and thirteen
and one-half (13.5%) percent per annum, of which $260,000 was past
due and $753,000 due on December 31, 1996. As of the Filing Date,
the Company did not have the cash or the means to raise the cash
required to satisfy the arbitration award or the notes payable. As
a result, the Company was compelled to file its petition for
reorganization on May 7, 1996.
V.
THE POST-PETITION OPERATIONS
----------------------------
As indicated previously, the Debtor was compelled to file its
petition for reorganization as a result of (i) an arbitration award
confirmed by the New York State Supreme Court in the amount of
$381,250.00; and (ii) outstanding notes payable. Since its
inception, the Company has been unprofitable and has continued to
incur operating losses since the Filing Date. The Company has
sustained net losses of approximately $13,000,000 from its
inception to November 30, 1996. The Debtor expects that its
revenues will increase in the foreseeable future from the following
sources:
CATRIX<F3> sales
POLY-Nag sales
Royalties
Cosmetic preparations
License fees
VI.
POST-CONFIRMATION OPERATIONS
----------------------------
The Company expects that its revenues shall increase in the
next eighteen (18) months as a result of increased sales of its
proprietary products BIO-CARTILAGE<F3>, POLY-Nag<F5> and CATRIX<F3> ; and
corresponding increases in License Fees and Royalty income.
<PAGE>
VII.
THE CHAPTER 11 PROCESS
----------------------
A. The Chapter 11 Case.
-------------------
The Chapter 11 case is being administered by the Bankruptcy
Court, with the Debtor conducting its business as debtor-in-
possession subject to the approval of the Bankruptcy Court when
necessary. No trustee has been appointed in the Chapter 11 case.
Certain aspects of the Chapter 11 case is summarized below.
B. Appointment Of General Unsecured Creditors Committee.
----------------------------------------------------
An Official Committee of Unsecured Creditors (the "Committee")
for the Debtor was appointed by the United States Trustee pursuant
to Section 1102 of the Code. The Committee is currently comprised of:
Chairman:
- --------
Charles T. Maxwell
33 Oriole Avenue
Bronxville, NY 10708
c/o Deutsche Morgan
Grenfel/C.J. Lawrence, Inc.
31 West 52nd Street
New York, NY 10019
First Unitarian Church
50 Monroe Place
Brooklyn, NY 11201
c/o The Segal Company
Attn: James R. Gunning
One Park Avenue
New York, NY 10016-5898
William T. Sherman, Ph.D.
309 Maple Avenue
PO Box 456
Neshanic Station, NJ 08853
Peter B. Ruffin
755 Forest Hills Drive
Wilmington, NC 28403
Martin Rosenberg, Ph.D.
36 Oliver Street
Brooklyn, NY 11209
William F. Gerry
25 East 86th Street
New York, NY 10028
Representatives of the Debtor and the Committee have engaged
in extensive negotiations aimed at formulating a consensual plan
for the Debtor. The Plan is the result of an extensive negotiating
process between the Debtor and the Committee and is fully supported
by the Committee. THE COMMITTEE HAS AGREED TO THE DEBTOR'S
PROPOSED PLAN AND SUPPORTS ITS ACCEPTANCE BY THE DEBTOR'S IMPAIRED
CLASSES.
VIII.
THE DEBTOR'S PLAN OF REORGANIZATION
-----------------------------------
A. Classification Of Claims And Interests.
--------------------------------------
The Plan defines and classifies "Claims" and "Equity Interest"
separately in accordance with the Code and provides different
treatment for different classes of Claims or Equity Interests. The
treatment provided for Allowed Claims under the Plan is in full
<PAGE>
settlement, satisfaction and discharge of all such Claims. The
Plan, if confirmed, will be binding upon the Debtor, its creditors
and Equity Interests. Upon confirmation of the Plan the Debtor
will be discharged from all Claims that arose before confirmation
of the Plan, except for payments and distributions provided for in
the Plan or in the Confirmation Order. All creditors and interest
holders are urged to carefully read the Plan.
1. Class 1: Administration Expense Claims. Administration
Expense Claims are Claims against the Debtor for any costs or
expenses of the Chapter 11 case allowable under Section 502(f) or
503(b) of the Code, including all actual and necessary expenses for
the preservation of the Debtor's estate, operations of the Debtor's
business, compensation or reimbursement of expenses to the extent
allowed under the Bankruptcy Code, the unpaid quarterly fees due
the Office of the United States Trustee, and any other Claims
entitled to priority under Section 507(a) of the Code.
Administration Claims shall be paid in full, in cash, on the
Effective Date or, if any such claim becomes Allowed after the
Effective Date, as soon as practicable after such claim becomes
Allowed. Any fees due and owing to the United States Trustee shall
be paid on the Effective Date, or as soon thereafter as is
practicable. Each holder of an Allowed Administrative Expense
Claim, other than a Claim for compensation of Professional fees or
reimbursement of expenses, that has not been paid in full prior to
the Effective Date in the ordinary course of business will be paid
in full, in Cash, on the Effective Date, or such Claim may be
satisfied upon such other terms as may be agreed upon by the Debtor
and the holder of such Claim. The Debtor estimates that the
Administrative Expense Claims (including counsel and accountants
for the Debtor and the United States Trustee's Fees) will be
approximately $70,000 through the Confirmation Date.
2. Class 2: Priority Claims. Priority claims are any
claims against the Debtor entitled to priority in accordance with
Section 507(a) of the Bankruptcy Code (other than an Administrative
Expense Claim or a Tax Claim). On or before the Effective Date,
the Debtor shall pay to each holder of a Priority Claim, in cash,
the full amount of such Allowed Priority Claim. The Debtor does
not believe that there are any Allowed Priority Claims.
3. Class 3: Tax Claims. Tax Claims are any Claims against
the Debtor entitled to priority in accordance with Section
507(a)(7) of the Code, including unsecured claims of governmental
units for taxes. On or before the Effective Date, or as soon
thereafter as is practicable, the Debtor shall pay to each holder
of a Tax Claim which is an Allowed Claim, in Cash, the full amount
of such Tax Claim or, if any such Claim becomes Allowed after the
Effective Date, as soon as practicable after such Claim becomes
Allowed. The Debtor does not believe there are any Tax Claims.
<PAGE>
4. Class 4: Secured Claims. This Class consists of the
holders of all Secured Claims and includes equipment lessors.
These creditors are not impaired and will be paid in full or in
accordance with their lease agreement as the case may be. The
Debtor does not believe that there are any claims in this class.
5. Class 5: Unsecured Claims. Class 5 consists of the
holders of all unsecured claims against the Debtor. These claims
are a result of unsecured claims that existed against the Debtor at
the time of the filing of the petition as well as claims that have
resulted from the rejection of executory contracts including leases
which the Debtor may have rejected during this Chapter 11
proceeding. The Debtor estimates that the unsecured claims shall
total approximately $2,161,500.
6. Class 6: Equity Interests. Class 6 is comprised of the
Options and holders of all of the issued and outstanding shares of
common stock of the Debtor. On the Confirmation Date, as that term
is defined in the Plan, all shares of stock of the Debtor, common
or otherwise, outstanding as of the Confirmation Date, shall remain
outstanding, with the holders of record receiving no distribution,
dividend or other payment under the Plan.
B. Treatment Of Claims And Interests Under The Plan And
Designation Of Impairment And Unimpaired Classes.
----------------------------------------------------
1. Definition of "Impairment". A class of claims is not
impaired under the Plan if the holders of claims of such class
receive cash or other property equal to the allowed amount of their
claims as of the Effective Date of the Plan. A class of claims is
impaired under the Plan if the holders of such class do not receive
cash or other property equal to the "Allowed Amount" of their
claims as of the Effective Date of the Plan.
2. Party Responsible For Distributions. The Debtor shall be
responsible for making distributions to creditors under the Plan.
The Debtor estimates that the total amount of cash required on the
Effective Date to fund the Plan of Reorganization is approximately
$30,000.
3. Treatment of Administrative Expense Claims, Allowed
Priority Claims, Tax Claims and Secured Claims. The Plan provides
that holders of Classes 1, 2, 3 and 4 claims consisting of
Administrative Expense Claims, Priority Claims, Tax Claims and
Secured Claims will be paid the Allowed amount of their respective
Claims in full, in Cash, on the Effective Date or, if any such
Claim becomes Allowed after the Effective Date, as soon as
practicable after such Claim becomes Allowed. Consequently,
Classes 1, 2, 3 and 4 Claims are not impaired.
4. Treatment of General Unsecured Claims. Class 5 Claims
consist of those claims against the Debtor which are Unsecured
<PAGE>
Claims not entitled to priority status. The members of this Class
are impaired. These Claims are the result of the Claims which
arose prior to the filing of the Debtor's Chapter 11 proceeding or
as a result of the rejection by the Debtor of executory contracts
or leases during the Chapter 11 proceeding. The Plan provides that
holders of outstanding Allowed Class 5 Claims shall receive, on the
Confirmation Date, in full settlement, release and discharge of his
or its respective allowed claim against the Debtor, common stock of
the Company in an amount equal to the Allowed Claim divided by the
value of the common stock as set forth below. For purposes of
determining the number of shares of common stock to be issued to
the holders of Allowed Class 5 Claims, the value of the common
stock to be issued shall be the greater of: (i) $.40 per share; or
(ii) the average between the highest and lowest quoted bid and
asked prices of the common stock in the over-the-counter market, as
reported by the National Quotation Market for the ten (10) business
days concluding ten (10) days prior to the Confirmation Date. The
Company expects that the value of the common stock to be issued to
the holders of Class 5 Claims shall be greater than $.40 per share.
However, in the event the common stock is valued at less than $.40
per share, the holders of Allowed Class 5 Claims shall be receiving
common stock of the Company of a value that is less than the full
amount of their Allowed Claim<F4>. With respect to the shares of
common stock to be issued to the holders of Allowed Class 5 Claims,
thirty (30%) percent of such shares shall be freely tradeable
immediately upon issuance and seventy (70%) percent of such shares
of which shall be restricted and not tradeable or assignable except
by operation of law for a period of two (2) years and pursuant to
the requirements of Rule 144 of the Securities and Exchange
Commission, after which such shares shall be freely tradeable
without restriction.
With respect to the Company's common stock:
(a) Upon issuance of the common stock, the recipients
thereof shall have all the rights and privileges of
the Company's shareholders under the Company's
charter and bylaws, including the right to vote on
the basis of one (1) vote for each share owned.
(b) The Company cannot provide any assurances that
additional shares of common stock may not be issued
in the future. In the event additional shares are
issued, the present shareholder's equity interest
may be further diluted.
<PAGE>
(c) The Company has never issued dividends to
shareholders and does not anticipate that dividends
shall be issued in the future.
5. Treatment of Equity Interests. Class 6 Claims consist of
the holders of Options and of the common stock in the Company.
Claimants in this class are impaired. In accordance with the Plan,
the Debtor shall be issuing to unsecured creditors, common stock
which, assuming a valuation of $0.40 per share when issued, shall
constitute approximately thirty-one (31%) of all issued and
outstanding shares of common stock of Lescarden, Inc.
C. Certain Other Provisions Of The Plan.
-------------------------------------
The Plan contains other provisions consistent with the
requirements of Chapter 11 of the Code, including provisions for
the resolution of Disputed Claims, the collection and disposition
of assets of the Debtor's estate and the prosecution of claims on
behalf of the Debtor's estate.
1. Time and Manner of Distributions Under the Plan.
Payments to be made by the Debtor pursuant to the Plan shall be
made by check drawn on a domestic bank within ten (10) days
following the date on which such payment is required to be made.
2. Executory Contracts and Unexpired Leases. The Debtor is
a party to various executory contracts and unexpired leases
(including equipment leases). The Plan provides that any executory
contracts or unexpired leases not assumed or rejected by the Debtor
with the approval of the Bankruptcy Court prior to the Confirmation
date, or which are not the subject of a motion to assume or reject
pending as of the Confirmation Date, shall be assumed by the Debtor
upon the Confirmation Date in accordance with Section 365 of the
Code. The Debtor previously filed with the Bankruptcy Court
"Statements of Executory Contracts and Unexpired Leases". In the
event that any such executory contracts or unexpired leases are
rejected by the Debtor, holders of claims for rejection damages, if
any, will be required to file proof of claims within thirty (30)
days after the Confirmation Date, unless an earlier date has been
set by Order of the Bankruptcy Court, in which event, the rejection
claim must be filed by the date set forth in the Order. Annexed
hereto as Exhibit "4" is a list of executory contracts and
unexpired leases the Debtor shall be assuming upon the Confirmation
Date together with the amounts required to be paid to cure arrears,
if any.
3. Disputed Claims. The Debtor is continuing to analyze the
proofs of claims filed by Creditors in the Debtor's Chapter 11 case
and to determine the validity of such proofs of claims. The Debtor
expects to interpose objections to those claims as to which there
is a dispute in respect of the validity or amount of the Claim and
is in the process of communicating with many of such creditors to
<PAGE>
determine whether such objections may be resolved amicably, without
the need for Bankruptcy Court intervention.
4. Preferences. After investigation, the Debtor does not
believe that there are any causes of action pursuant to Section 547
of the Code, including preference and fraudulent conveyance claims.
Effective upon the Confirmation Date, the Debtor waives, releases
and relinquishes any and all of its claims and rights, if any,
relating to any transfers of the Debtor's property to or for the
benefit of any creditor which could be avoided, recovered or
subordinated pursuant to the provisions of Section 547 of the Code
except for any such claims filed prior to the Confirmation Date.
Each creditor of the Debtor, by and upon confirmation of the Plan,
is hereby deemed to have waived, released and relinquished any and
all of its claims and rights, if any, against the Debtor arising
out of, or relating to its determination not to pursue, or
recommend the pursuit of any action, suit or proceeding based upon
potential claims and rights, if any, relating to the matter set
forth in this paragraph.
5. Retention of Jurisdiction. The Plan provides that, from
and after the Confirmation Date, the Bankruptcy Court shall retain
and have exclusive jurisdiction over the Debtor's Chapter 11 case
for the purpose of determining all disputes and other issues
presented by or arising under the Plan, including, without
limitation, exclusive jurisdiction to:
(a) To hear and determine any dispute relating to this Plan
or any property described in the Plan and to enforce its
provisions.
(b) To hear and determine all issues arising out of any
motions, applications, adversary proceedings or contested
or litigated matters in the Chapter 11 Case pending at
the Confirmation Date or commenced thereafter.
(c) To order recovery of any assets of the Debtor, whether
title is presently held in the name of the Debtor or a
third party.
(d) To hear and determine motions to approve the sale of
assets of the Debtor under Section 363 of the Bankruptcy
Code and/or the rejection or affirmance of executory
contracts under Section 365 of the Bankruptcy Code.
(e) To hear and determine all issues relating to any
purchases, sales or contracts made or undertaken by the
Debtor during the pendency of the Chapter 11 Case.
(f) To hear and determine all Claims arising from the
rejection of executory contracts or unexpired leases.
<PAGE>
(g) To hear and determine all objections to Claims filed by
any party in interest, and all controversies concerning
classification, allowance, valuation, liquidation,
estimation, or satisfaction of Claims.
(h) To make orders allowing amendment of the schedules filed
in the Chapter 11 Case for any purpose including, without
limitation, to perfect objections to Claims not
previously listed as disputed, contingent or
unliquidated.
(i) To hear and determine all applications for compensation
of professional and similar fees and reimbursement of
expenses arising out of or relating to the case or any
Claims.
(j) To hear and determine any and all motions to abandon
property of the Debtor's estate.
(k) To make such other orders or give such directions as
permitted by Section 1142 of the Bankruptcy Code.
(l) To consider and order any modifications or amendments
requested to this Plan.
(m) To remedy any defect or omission or reconcile any
inconsistency in this Plan or the order confirming the
Plan in such manner as may be necessary or desirable to
carry out the purposes and intent of the Plan.
(n) To make all orders necessary or appropriate to carry out
the provisions of the Plan.
(o) To enforce all orders previously made by the Bankruptcy
Court.
(p) To determine such other matters as may be provided for in
the Confirmation Order or as may be authorized under the
Bankruptcy Code.
6. Discharge. Pursuant to Section 14.1 of the Plan, except
as otherwise expressly provided in the Plan or the Confirmation
Order, Confirmation will operate as a discharge, as of the date the
Plan is confirmed, of any and all debts of or Claims against the
Debtor that arose at any time before the date the Plan is
confirmed, including, but not limited to, all principal and
interest, whether accrued before, on or after the commencement of
the Chapter 11 Case. Pursuant to the Bankruptcy Code, the
discharge of the Debtor will be effective as to each Claim,
regardless of whether a proof of claim was filed therefor, whether
the Claim is an Allowed Claim or whether the holder thereof votes
to accept the Plan. On the date the Plan is confirmed, as to every
<PAGE>
discharged debt and Claim, the creditor that held the debt or Claim
will permanently be precluded from asserting against the Debtor or
any of its assets any other or further Claim based upon any
document, instrument, act, omission, transaction or other activity
of any kind or nature that occurred prior to the date the Plan is
confirmed. Without limiting the generality of the foregoing, on
the date the Plan is confirmed, the Debtor will be discharged from
any debt that arose before the date the Plan is confirmed and any
debt of a kind specified in Sections 502(g), 502(h) or 502(i) of
the Bankruptcy Code, to the full extent permitted by Section
1141(d)(1)(A) of the Bankruptcy Code. Except as provided in the
Plan or in the Confirmation Order, at Confirmation, all the assets
of the Debtor will vest in the Debtor, free and clear of all Claims
and all liens arising prior to Confirmation, except to the extent
provided in the Plan.
7. Exculpations. Pursuant to Section 15.4 of the Plan,
except as otherwise expressly provided in the Plan or the
Confirmation Order, neither the Debtor or the Committee nor any of
their respective officers, directors, employees, agents, attorneys
or accountants shall have or incur any liability to any Creditor,
holder of an Equity Interest or other person for any act or
omission in connection with, or arising out of the negotiation,
preparation or formation of the Plan, the pursuit of Confirmation
of the Plan, the consummation of the Plan or other administration
of the Plan or the property to be distributed under the Plan except
for willful misconduct or gross negligence, and in all respects,
shall be entitled to rely upon the advice of counsel with respect
to the duties and responsibilities under the Plan. The foregoing
shall not, however, release the Debtor or Reorganized Debtor from,
or exculpate the Debtor or Reorganized Debtor with respect to their
obligations arising pursuant to the Plan.
8. Funding the Plan. The funds required by the Debtor to
fund its Plan of Reorganization will come primarily from three
sources. One source will be derived from the Debtor's current and
future operations. In addition, the Debtor contemplates raising
$200,000 in the aggregate from investors, who shall receive in
consideration of their investment, common stock of the Company in
the same ratio of common stock to be distributed to the unsecured
creditors. Any other funds required to fund the Plan of
Reorganization will come from money received from the exercise of
outstanding warrants to purchase common stock.
The foregoing is a brief summary of the Plan and should not be
relied on for voting purposes. Creditors are urged to read the
Plan in full. Creditors are further urged to consult counsel, or
with each other, in order to fully understand the Plan. A Plan is
complex as much as it represents a proposed legally binding
agreement by the Debtor. An intelligent judgment concerning such
Plan cannot be made without understanding it.
<PAGE>
IX.
"BEST INTEREST" OF UNSECURED CREDITORS
--------------------------------------
Notwithstanding acceptance of the Plan by Creditors, in order
to confirm the Plan the Bankruptcy Court must independently
determine that the Plan is in the best interest of all classes of
creditors and interest holders. The "best interest" test requires
the Bankruptcy Court to find if the Plan provides to each member of
each impaired class of Claims and interests a recovery which has a
present value at least equal to the present value of the
distribution which each person would receive from the Debtor if the
Debtor was instead liquidated under Chapter 7 of the Code.
The Debtor and the Committee believe that the Plan is in the
best interest of all creditors, and passes the above test.
To calculate what members of each impaired class of unsecured
claims and interest would receive if the Debtor was liquidated, the
Bankruptcy Court must first determine a dollar amount that would be
generated from the liquidation of the Debtor ("Liquidation Fund").
The Liquidation Fund of the Debtor will consist of the proceeds of
the disposition of the assets of the Debtor, augmented by the cash
held by the Debtor and recoveries on actions against third parties.
The Liquidation Fund would then be reduced by the cost of the
liquidation. The cost of liquidation under Chapter 7 would likely
include the fees of a trustee, as well as those of counsel and
other professionals that might be retained by the Debtor's trustee.
Also, selling expenses, unpaid expenses incurred by the Debtor
during its Chapter 11 proceeding (such as fees for attorneys and
accountants) which are allowed in the Chapter 7 proceeding and
claims arising by reason of the trustee's rejection of obligations
incurred by the Debtor during the pendency of the Chapter 11
proceeding. These claims, and such other claims as might arise in
liquidation or result from the current Debtor's Chapter 11
proceeding, would be paid in full out of the Liquidation Fund
before the balance of the Liquidation Fund would be made available
to pay unsecured claims. The present value of the distributions
out of the Liquidation Fund (after subtracting the amounts
described above) are then compared with the present value of the
property offered to each of the classes of unsecured claims and
interests under the Plan, to determine if the Plan is in the best
interests of each Creditor.
The Debtor has concluded that liquidation of the Debtor will
result in no distribution to the Debtor's general unsecured
creditors and no distribution to equity security holders. A
liquidation analysis of the Debtor is attached hereto as Exhibit
"5".
The Debtor and the Committee believe that the Plan provides
the greatest and earliest possible recovery to the Debtor's
creditors. The Debtor and the Committee therefore believe that
<PAGE>
acceptance of the Plan is in the best interests of all of the
Debtor's creditors and recommend that you vote to accept the Plan.
X.
FINANCIAL STATEMENT
-------------------
A. Pro-Forma Post-Confirmation Statements.
---------------------------------------
The Bankruptcy Code requires the Bankruptcy Court to find as
a condition of confirmation that confirmation is not likely to be
followed by the liquidation of the Debtor or the need for further
financial reorganization. Annexed hereto as Exhibit "6" is a two
(2) year (1998-1999) pro-forma cash flow statement; profit and loss
statement; and year end balance sheet for each of the two (2)
years.
The Forecasted Statement of Operations projects the Debtor's
operations for the next two (2) years. The forecasted balance
sheet projects the financial position at the end of each of the
respective years. The forecasted Cash Flow Schedule provides a
projection of cash which will become available through the Debtor's
operations. Subject to the discussions set forth herein and
therein, these documents indicate that confirmation of the Plan is
not likely to be followed by the liquidation of the Debtor or the
need for further financial reorganization following the
consummation of the Plan. Thus, the Debtor believes that the Plan
complies with the financial feasibility standard required for
confirmation.
B. Post-Petition Operations.
------------------------
Annexed hereto as Exhibit "7" is a summary of the Debtor's
post-petition operations from May 8, 1996 through January 31, 1997
on an accrual basis.
XI.
ACCEPTANCE AND CONFIRMATION
---------------------------
In order to confirm the Plan, the Code requires that the
Bankruptcy Court make a series of determinations concerning the
Plan, including: (i) that the Plan has classified Creditors and
Equity Interests in a permissible manner; (ii) that the contents of
the Plan comply with the technical requirements of the Code (see
discussion herein below); (iii) that the Plan has been proposed in
good faith; and (iv) that the disclosures concerning the Plan are
adequate and include information concerning all payments made or
promised in connection with the Plan and the Chapter 11 proceeding.
The Debtor believes that all these conditions have been or will
have been met.
The Code also requires, as a condition precedent to
confirmation, that the Plan be accepted by the requisite votes of
<PAGE>
each Class of Creditors and Equity Holders as a separate class and
hence the Bankruptcy Court must find, in order to confirm the Plan,
that the Plan has been duly accepted. In addition, as stated in
greater detail above, the Bankruptcy Court must find that the Plan
is feasible and is in the "best interests" of all Creditors and the
Equity Holders. Thus, even if the Creditors and the Equity Holders
of the Debtor accept the Plan by the requisite votes, the
Bankruptcy Court must make independent findings respecting the
Plan's feasibility and whether it is in the best interests of the
Debtor, Creditors and Equity Holders before it can confirm the
Plan.
A. Acceptance.
----------
Acceptance of the Plan requires that each impaired class of
claims or interest accepts the Plan. A Class of claims and
interests that are not impaired under the Plan are deemed to have
accepted the Plan. Acceptances of the Plan are being solicited
only from those persons who hold claims of an impaired class.
The Code defines acceptance of a Plan (i) by a Class of Claims
as acceptance by the holders of two-thirds in dollar amount and a
majority in number of claims of that class; and (ii) by a Class of
Equity Interests as acceptance by the holders of two-thirds in
amount of the allowed interests of that Class. For purposes of
ascertaining the above, only the holders of claims or interests who
actually vote to accept or reject the Plan, are counted. Put
another way, the Claims of Creditors and Equity Interests who fail
to vote on the Plan are not counted in the determination of whether
the Plan has been accepted or rejected.
B. Non-Acceptance "Cramdown".
-------------------------
The Code contains provisions for confirmation of the Plan even
if the Plan is not accepted by all Impaired Classes, as long as at
least one impaired Class of Claims has accepted the Plan. These
"cramdown" provisions for confirmation of a Plan, despite the non-
acceptance of one or more impaired classes of claims or interests
are set forth in Section 1129(b) of the Code.
A Plan may be confirmed under the cramdown provisions if, in
addition to satisfying the other requirements contained in Section
1129(a) of the Bankruptcy Code, it (i) "does not discriminate
unfairly" and (ii) is "fair and equitable" with respect to each
class of claims or interest that is impaired by, but has not
accepted, the Plan. As used by the Bankruptcy Code, the phrase
"discriminate unfairly" and "fair and equitable" have narrow and
specific meanings unique to Bankruptcy Law.
The requirement that a Plan not "discriminate unfairly" means
that a dissenting class must be treated equal with respect to other
classes of the same rank. The "fair and equitable" standard also
<PAGE>
known as the "absolute priority rule" requires that a dissenting
class receives full compensation for its allowed claims or interest
before any junior class receives or retains any property. Under
the Debtor's Plan, there are only two classes that are impaired and
entitled to vote. Those classes are Class 5 general unsecured
claims and Class 6 Interests comprised of the outstanding shares of
Common Stock and Options of the Debtor. As a result of the
"absolute priority rule" the Debtor would not be able to cram-down
on Class 5 claims since Class 5 is not receiving full compensation
for their Allowed Claims and the junior Class 6 Interest are
retaining property under the Plan. Therefore, if Class 5 Claims do
not accept the Debtor's Plan of Reorganization, it cannot be
confirmed.
The Plan may, however, be confirmed notwithstanding rejection
by Class 6 Interests under the cram-down provision of the
Bankruptcy Code since the Plan provides that each holder of an
interest in Class 6 will receive or retain on account of such
interest, property of a value, as of the Effective Date of the
Plan, equal to the greatest of the allowed amount of any fixed
liquidation preference to which such holder is entitled, any fixed
redemption price to which such holder is entitled, or the value of
such interest.
If Class 6 Interests reject this Plan, the Debtor intends to
move for Confirmation of the Plan under the cram-down provisions
set forth above. If Class 5 claims reject the Debtor's Plan, the
Plan will not be confirmed and the alternatives to Confirmation as
discussed in paragraph C below will apply.
C. Alternatives to the Plan.
-------------------------
Notwithstanding the fact that Class 6 Equity Interest will be
retaining their equity in the Debtor, the Debtor believes that the
Plan provides Creditors with the earliest and greatest possible
value that can be realized on their Claims. The principal
alternative to confirmation of the Plan is liquidation of the
Company under Chapter 7 of the Code.
If the Plan is not accepted, other parties in interest may
have an opportunity to file a plan. As previously discussed, a
Plan could be confirmed even though not accepted by Class 6 so long
as it meets the Bankruptcy Code's "cramdown" criteria. The Debtor
believes that this alternative would only result in costly and time
consuming litigation detrimental to all Classes of Creditors.
The Debtor believes, based upon the liquidation analysis
annexed hereto and marked as Exhibit "5", that a liquidation of the
Debtor would be disastrous and would provide the holders of Class
5 Allowed Claims with no distribution. Class 6 equity interest
would be completely cancelled and receive nothing on liquidation.
<PAGE>
Finally, the confirmation of the Plan is preferable to the
alternatives described above because the Plan maximizes the amounts
available for distribution to all Classes of Creditors based upon
the Debtor continuing in business.
In Article III of the Disclosure Statement, the Debtor states
that upon Confirmation it will be able to obtain monies from
various investors to partially fund its operations post-
confirmation. One of the major reasons for this is that the
Debtor's net worth, subsequent to Confirmation of the Plan is
substantially greater than the liquidation value available to
creditors if the Plan is not accepted. This is due to several
factors. The first factor is that the value of the Company post-
confirmation is computed on a going concern basis according to
generally accepted accounting principals as opposed to liquidation
values. Another factor as to why the post-confirmation net worth
of the Debtor is substantially greater than the liquidation value
is due to the fact that the post-confirmation net worth assumes the
infusion of new equity from investors. These investors would not
be willing to invest funds in the Debtor unless this Plan of
Reorganization is accepted. A third and perhaps the most important
factor as to why the post-confirmation net worth is greater than
the liquidation value of the debt is based upon the fact that under
the Debtor's Plan, all of its debt is being exchanged for common
stock. This will have the result of effectively eliminating all of
the debt on the Debtor's post-confirmation balance sheet thereby
increasing the Debtor's post-confirmation net worth.
The Debtor therefore believes that the only realistic
alternative to acceptance of this Plan by Class 5 is a liquidation
under Chapter 7 of the Code. It is the opinion of the Debtor that
upon liquidation, general unsecured creditors will receive no
distribution whatsoever and upon confirmation of this Debtor's
Plan, the Class 5 creditor shall receive one hundred (100%) percent
distribution in the form of common stock (assuming the value of the
common stock per share as of the Confirmation Date is $.40 or
greater), which clearly is in the best interest of creditors.
XII.
FEDERAL INCOME TAX CONSEQUENCES
-------------------------------
This section is intended only to highlight certain Federal
Income Tax aspects of the Plan involving the Debtor and does not
purport to be an analysis of or advice regarding tax matters
relevant to a decision to accept the Plan.
IN VIEW OF THE COMPLEXITIES OF THIS TRANSACTION AND THE FACT
THAT NEITHER RULINGS FROM THE INTERNAL REVENUE SERVICE NOR OPINIONS
OF COUNSEL HAVE BEEN REQUESTED OR OBTAINED WITH RESPECT TO ANY OF
THE TAX ASPECTS OF THE PLAN, THERE CAN BE NO ASSURANCES THAT THE
TAX CONSEQUENCES SET FORTH HEREIN WILL RESULT.
<PAGE>
A. Possible Tax Effect On Debtor.
------------------------------
1. Non Recognition of Gain or Loss. The Debtor expects that
the Plan will not result in any recognition of Federal income tax
due to any income, gain or loss that may be realized by it under
the Plan upon the exchange of common stock for the claims of
Unsecured Creditors.
B. Possible Tax Effects On The Creditors Of The Debtor.
----------------------------------------------------
Since the tax consequences for each Creditor will depend to a
considerable extent upon its particular situation, the Debtor
suggests that each creditor review the entire Plan and this
Disclosure Statement to best determine the effect of the Plan on
it.
XIII.
MANAGEMENT OF THE COMPANY
-------------------------
The following individuals will be the principal officers
and/or directors of the Company subsequent to Confirmation of the
Plan:
Annualized Salary
Current
and
Post-
Name Position(s) with At Confir-
Age the Company Filing mation
--- ----------- ------ ------
Gerard A. Dupuis 58 Chairman of the $96,000 $96,000
Board; Chief
Executive
Officer and
Director
William T. Sherman, Ph.D 54 Vice President
Science Elect
William H. Chisholm 79 Vice Chairman;
Director
Frank E. Berglas 55 Director
George E. Ehrlich, M.D. 67 Director
<PAGE>
XIV.
VOTING INSTRUCTIONS
-------------------
Creditors and Equity Holders should complete and sign the enclosed
appropriate ballot and return it to Todtman, Young, Nachamie, Hendler &
Spizz, P.C., 425 Park Avenue, New York, New York 10022, Attorneys for
the Debtor, Attention: Arthur Goldstein, Esq.
A ballot is enclosed with each copy of this Disclosure Statement
being sent to all holders of Impaired Claims that filed proof of claims
or were scheduled by the Debtor. Ballots must be received on or before
5:00 p.m. Eastern Standard Time on April 21, 1997.
If a ballot is damaged or lost, or if you have any questions
concerning any voting procedures, you may contact Todtman, Young,
Nachamie, Hendler & Spizz, P.C., attorneys for the Debtor, 425 Park
Avenue, New York, New York 10022, (212) 754-9400, Attention: Arthur
Goldstein, Esq.
CONCLUSION
----------
The Debtor submits that the Plan complies in all respects with
Chapter 11 of the Code and recommends that holders of Claims and Equity
Interests who are entitled to vote on the Plan vote to accept the Plan.
Dated: New York, New York
March 12, 1997
LESCARDEN, INC.
By:___________________________
Gerard A. Dupuis, President
TODTMAN, YOUNG, NACHAMIE,
HENDLER & SPIZZ, P.C.
Attorneys for Lescarden, Inc.,
Debtor and Debtor-in-Possession
By:
Arthur Goldstein (AG/8735)
A Member of the Firm
425 Park Avenue
New York, New York 10022
(212) 754-9400
<PAGE>
TODTMAN, YOUNG, NACHAMIE,
HENDLER & SPIZZ, P.C.
Attorneys for Lescarden, Inc.,
Debtor and Debtor-in-Possession
425 Park Avenue
New York, New York 10022
(212) 754-9400
Arthur Goldstein (AG-8735)
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - - X
In re:
Chapter 11
LESCARDEN, INC.,
Case No. 96 B 42485 (JLG)
Debtor.
- - - - - - - - - - - - - - - - - X
PLAN OF REORGANIZATION
----------------------
LESCARDEN, INC., as debtor and debtor-in-possession
(the "Debtor"), for its Plan of Reorganization (the "Plan"),
submitted pursuant to Section 1121 of Title 11 of the United
States Code (the "Bankruptcy Code"), sets forth as follows:
ARTICLE I
DEFINITIONS
-----------
For the purposes of this Plan and to the extent not
otherwise provided herein, the following terms shall have the
meanings hereinafter set forth. Unless otherwise indicated, the
singular shall include the plural and capitalized terms shall at
all times refer to the terms defined in this Article. A term
used but not defined in this Plan that is used in the Bankruptcy
Code shall have the meaning assigned to it in the Bankruptcy
Code.
Section 1.1. Administrative Expense Claim shall mean
any Claim for any cost or expense of administration of the
Chapter 11 Case allowed under Sections 502(f) or 503(b) of the
Bankruptcy Code, including, without limitation, any actual and
necessary expenses of operating the business of the Debtor, all
compensation and reimbursement of expenses of professionals
allowed by the Bankruptcy Court under Sections 330 and 331 of the
Bankruptcy Code, the unpaid quarterly fees due the Office of the
United States Trustee
<PAGE>
, and any other Claims entitled to priority under Section 507(a) of
the Bankruptcy Code.
Section 1.2. Allowed Administrative Expense Claim
shall mean an Administrative Expense Claim which is or has become
an Allowed Claim.
Section 1.3. Allowed Claim shall mean a Claim against
the Debtor (including Equity Interest) which is not a Disputed
Claim and (a) proof of which was filed with the Bankruptcy Court
on or before the Bar Date or (b) which was scheduled by the
Debtor in accordance with Rule 1007 of the Rules of Bankruptcy
Procedure and not listed as disputed. Unless otherwise
specified, Allowed Claims shall not include interest on the
amount of any Claim.
Section 1.4. Allowed Priority Claim shall mean that
portion of an Allowed Claim for which the holder asserts and is
determined to be entitled to priority under Section 507(a)(3)
through (a)(6) of the Bankruptcy Code.
Section 1.5. Allowed Secured Claim shall mean that
portion of an Allowed Claim which is a Secured Claim. That
portion of such Allowed Claim exceeding the value of security
held therefor shall be an Allowed Unsecured Claim.
Section 1.6. Allowed Unsecured Claim shall mean an
Unsecured Claim which is or has become an Allowed Claim.
Section 1.7. Bankruptcy Code shall mean the United
States Bankruptcy Code, being title 11 of the United States Code
as enacted in the Bankruptcy Reform Act of 1978 as thereafter
amended.
Section 1.8. Bankruptcy Court shall mean the United
States Bankruptcy Court for the Southern District of New York or
such other Court as may hereafter be granted jurisdiction over
the Chapter 11 Case.
Section 1.9. Bar Date shall mean August 16, 1996,
which was the deadline to file proofs of claim in the Chapter 11
Case as provided by order of the Bankruptcy Court.
Section 1.10. Business Day shall mean any day other
than a Saturday, Sunday, or day which shall be a legal holiday or
a day on which banking institutions are authorized or required by
law to close.
Section 1.11. Cash shall mean Cash and Cash
equivalents, certificates of deposit, and other forms of
investment as set forth in Section 345 of the Bankruptcy Code.
<PAGE>
Section 1.12. Chapter 11 Case shall mean the
bankruptcy case entitled "Lescarden, Inc.", Case No. 96 B 42485
(JLG), Chapter 11, now pending in the Bankruptcy Court.
Section 1.13. Claim shall have the meaning set forth
at Section 101(5) of the Bankruptcy Code.
Section 1.14. Claimant shall mean a Person holding a
Claim against the Debtor.
Section 1.15. Class shall mean a group of Claims or
Equity Interests consisting of claims or interests which are
substantially similar to each other as classified pursuant to the
Plan.
Section 1.16. Committee shall mean the Official
Committee of Unsecured Creditors in the Chapter 11 Case.
Section 1.17. Common Stock shall mean all authorized,
issued and outstanding shares of common stock of Lescarden, Inc.
Section 1.18. Confirmation shall mean entry of an
order of the Bankruptcy Court confirming this Plan in accordance
with the provisions of the Bankruptcy Code.
Section 1.19. Confirmation Date shall mean the date
upon which the Confirmation Order is entered in the Bankruptcy
Court.
Section 1.20. Confirmation Order shall mean the order
of the Bankruptcy Court confirming this Plan pursuant to Section
1129 of the Bankruptcy Code.
Section 1.21. Consummation Date shall mean the
thirtieth (30th) day following the Confirmation Date provided
that no order staying consummation of the Plan has been entered
prior thereto.
Section 1.22. Creditor shall mean any entity holding
an Allowed Unsecured, Secured, Priority or Administrative Claim
against Lescarden, Inc.
Section 1.23. Creditors' Committee shall mean the
Official Committee of Unsecured Creditors appointed in the
Bankruptcy Case by the United States Trustee for the Southern
District of New York and the membership of such committee is,
from time to time, constituted.
Section 1.24. Debtor shall mean Lescarden, Inc.
Section 1.25. Disallowed Claim shall mean any Claim or
portion thereof which has been disallowed by a Final Order.
<PAGE>
Section 1.26. Disbursing Agent. The Debtor shall act
as its own disbursing agent.
Section 1.27. Disputed Claim shall mean any Claim (i)
scheduled by the Debtor as disputed, contingent, undetermined,
unliquidated or unknown or (ii) as to which an objection to the
allowance thereof has been interposed and which objection has not
been determined by a Final Order.
Section 1.28. Effective Date shall mean the
Consummation Date.
Section 1.29. Equity Interest shall mean interests
comprised of holdings of the Debtor's Common Stock and Options as
at the Petition Date.
Section 1.30. Executory Contracts shall mean all
contracts or unexpired leases to which Debtor is a party and
which are executory within the meaning of Section 365 of the
Bankruptcy Code.
Section 1.31. Final Order shall mean an order of the
Bankruptcy Court which, not having been reversed, modified,
amended, or stayed and the time for seeking review of which by
way of appeal or other review having expired, and as to which no
appeal or other review is pending, has become conclusive of all
matters adjudicated thereby and is in full force and effect.
Section 1.32. Governmental Unit shall have the meaning
set forth at Section 101(27) of the Bankruptcy Code.
Section 1.33. Insider shall have the meaning set forth
at Section 101(31) of the Bankruptcy Code.
Section 1.34. Lien shall mean any charge against, or
interest in, property to secure payment of a debt or performance
of an obligation and includes, without limitation, any judicial
lien, security interest, mortgage, deed of trust or statutory
lien.
Section 1.35. Local Bankruptcy Rules shall mean Local
Bankruptcy Rules, as amended, promulgated by the Southern
District of New York.
Section 1.36. Options shall mean all issued and
outstanding options, warrants and other rights, if any, to
acquire Common Stock which have not yet expired as at the
Petition Date.
Section 1.37. Person shall have the meaning ascribed
to such term in Section 101(41) of the Bankruptcy Code.
Section 1.38. Petition Date shall mean May 7, 1996.
<PAGE>
Section 1.39. Plan shall mean this Plan of Reorganization,
including any modifications, attachments, exhibits, amendments or
corrections hereto.
Section 1.40. Priority Claim shall mean any Claim
other than an Administrative Expense Claim or a Tax Claim to the
extent such Claim is entitled to priority pursuant to Section
507(a) of the Bankruptcy Code.
Section 1.41. Professionals shall mean all attorneys,
accountants, consultants or other Professionals retained under an
order of the Court on behalf of the Debtor or the Committee.
Section 1.42. Proponent shall mean the Debtor.
Section 1.43. Reorganized Debtor shall mean the
Debtor, or any successor thereto by merger, consolidation or
otherwise, from and after the Effective Date.
Section 1.44. Schedules shall mean the Debtor's
Schedules of Assets and Liabilities.
Section 1.45. Secured Claim shall mean that portion of
a Claim arising on or before May 7, 1996, either (a) secured by a
valid Lien on the property of the Debtor, or (b) for which the
holder asserts a setoff under Section 553 of the Bankruptcy Code.
A Secured Claim is only secured to the extent of the value (which
is either agreed to by the Debtor pursuant to this Plan, or in
the absence of an agreement, has been determined in accordance
with Section 506(a) or 1111(b) of the Bankruptcy Code) of the
interest of the holder in the Debtor's property. To the extent
that the amount claimed by the holder of a Secured Claim exceeds
the value of such property, the holder of such Secured Claim has
an Unsecured Claim equal to the amount of the excess.
Section 1.46. Tax Claim shall mean any Allowed
Unsecured Claims of Governmental Units entitled to a priority in
distribution under Section 507(a)(7) of the Bankruptcy Code.
Section 1.47. Unsecured Claim shall mean any Claim
against the Debtor other than an Administrative Expense Claim,
Priority Claim or Secured Claim.
ARTICLE II
CLASSIFICATION OF CLAIMS AND INTERESTS
--------------------------------------
Section 2.1. Claims and Equity Interest of the Debtor
are classified as follows:
(a) Class 1: All Allowed Administrative Expense
Claims.
<PAGE>
(b) Class 2: All Allowed Priority Claims.
(c) Class 3: All Allowed Tax Claims.
(d) Class 4: All Allowed Secured Claims.
(e) Class 5: All Allowed Unsecured Claims.
(f) Class 6: All Equity Interests.
Section 2.2. Any holder of a Claim or Equity Interest
in Classes 1 through 6 who fails to object, in writing, to the
classification provided in this Plan, filed with the Bankruptcy
Court and served upon the Debtor's counsel at least forty-eight
(48) hours prior to the hearing on Confirmation of the Plan,
shall be deemed to have accepted such classifications and to be
bound thereby. Any ballot which is executed by the holder of an
Allowed Claim but which does not indicate acceptance or rejection
of the Plan, shall be deemed to be an acceptance of the Plan.
ARTICLE III
CLAIMS AND EQUITY INTERESTS IMPAIRED UNDER THIS PLAN
----------------------------------------------------
Section 3.1. Holders of Claims in Class 1, Class 2,
Class 3 and Class 4 are not impaired under this Plan, and therefore
are not entitled to vote to accept or reject the Plan. Holders of
claims in Class 5 and Class 6 are impaired under this Plan, and
therefore are entitled to vote to accept or reject the Plan.
ARTICLE IV
TREATMENT OF CLASSES NOT IMPAIRED UNDER THE PLAN
------------------------------------------------
Section 4.1. Class 1 - Administrative Expense Claims.
All Claims for Administrative Expenses (including, without
limitation, attorneys, accounting, printing, and U.S. Trustee's
fees, if any), and claims entitled to priority in accordance with
Section 507(a) of the Bankruptcy Code as scheduled or filed and
allowed, except Tax Claims, shall be paid in full, in Cash, upon
the Effective Date, upon entry of an order by the Bankruptcy Court
allowing such Claim, whichever shall be later, or as soon as
practical thereafter or in accordance with such terms as may be
agreed upon by the Debtor and each holder of an Administrative
Expense Claim. All trade and service debts and obligations
incurred in the normal course of business by the Debtor during a
reorganization case shall be paid when due in the ordinary course
of business or in accordance with such terms as may be agreed upon
by the Debtor and each holder of an Allowed Administrative Claim.
Section 4.2. Class 2 - Priority Claims. Each holder of
an Allowed Priority Claim shall be paid (i) the full amount of such
Allowed Claim, without interest, in Cash, on or as soon as
practical after the Effective Date; or (ii) upon such other less
<PAGE>
favorable terms as may be agreed to by the holder of such Allowed
Claim.
Section 4.3. Class 3 - Tax Claims. Holders of
outstanding Allowed Class 3 Claims shall be paid, in full, in Cash,
on or as soon as practical after the later of (1) the Effective
Date; or (ii) the date of a Final Order allowing any such Claim in
Class 3, of a value, as of the Effective Date, equal to the amount
of such Claim.
Section 4.4. Class 4 - Secured Claims. The Debtor shall
pay the holders of Allowed Secured Claims in Class 5 in accordance
with the terms of the agreements securing their Claim without
acceleration and pursuant to the provisions thereof, as existing
before the commencement of the Debtor's Chapter 11 Case or as may
be agreed upon in writing by and between the holder of such claim
and the Debtor, and defaults, if any, existing thereunder as at the
Confirmation Date, shall be cured by the Consummation Date..
ARTICLE V
TREATMENT OF CLASSES IMPAIRED UNDER THE PLAN
--------------------------------------------
Section 5.1. Class 5 - Unsecured Claims. Holders of
outstanding Allowed Class 5 Claims shall receive, on the
Confirmation Date, in full settlement, release and discharge of his
or its respective Allowed Claim against the Debtor, Common Stock of
the Company in an amount equal to the Allowed Claim divided by the
value of the Common Stock as set forth below. For purposes of
determining the number of shares of Common Stock to be issued to
the holders of Allowed Class 5 Claims, the value of the Common
Stock to be issued shall be the greater of: (i) $.40 per share; or
(ii) the average between the highest and lowest quoted bid and
asked prices of the Common Stock in the over-the-counter market, as
reported by the National Quotation Market for the ten (10) business
days concluding ten (10) days prior to the Confirmation Date. With
respect to the shares of Common Stock to be issued to the holders
of Allowed Class 5 Claims, thirty (30%) percent of such shares
shall be freely tradeable immediately upon issuance and seventy
(70%) percent of which shall be restricted and not tradeable or
assignable except by operation of law for a period of two (2)
years, after which such shares shall be freely tradeable without
restriction.
Section 5.2. Class 6 - Equity Interests. Claimants in
this Class are impaired. The Plan provides for distribution to the
holders of Class 5 Claims, Common Stock upon the Distribution Date.
In addition, in order to fund the Debtor's Plan, the Debtor will be
required to secure funds from third parties and related investors.
These investors shall also be entitled to convert their investment
to equity based upon the same ratio provided to the unsecured
creditors as set forth in Section 5.1 above. The issuance of
Common Stock to the holders of Class 5 Claims and investors will
<PAGE>
have the effect of diluting the percent of ownership of the
Debtor's Common Stock of Claimants in this Class that existed as of
the date of the filing of the Petition. As an example, the holders
of the issued and outstanding shares of Common Stock of Lescarden,
Inc. as of the time of the filing of the Petition represented one
hundred (100%) percent of the issued and outstanding stock. Once
the additional shares have been issued to the holders of Class 5
Claims, and assuming a valuation of $.40 per share, the Debtor
estimates that the claims in this Class (excluding issuance of
Common Stock to investors) will hold approximately $5,402,328,
thirty-one (31%) percent of the issued and outstanding stock of the
Debtor post-confirmation.
ARTICLE VI
MEANS FOR CONFIRMATION OF PLAN
------------------------------
Section 6.1. Source of Payments. The Plan shall be
effectuated by the Debtor primarily through three (3) sources of
funding. The first source shall be from the income of operations
of the Debtor generated during the course of the Chapter 11 Case.
In addition, the Debtor will be receiving funding from third-party
and related investors. Any other funds required will come from the
exercise of outstanding warrants to purchase common stock.
Section 6.2. Objections to Claims; Prosecution of
Claims. The Debtor shall object to the allowance of Claims filed
with the Bankruptcy Court with respect to which the Debtor shall
dispute liabilities in whole or in part. All objections shall be
litigated to Final Order provided, however, that the Reorganized
Debtor, as the case may be, may compromise and settle any
objections to Claims subject to the approval of the Bankruptcy
Court. Unless ordered by the Bankruptcy Court, the Debtor shall
serve and file all objections to claims as soon as practical, but
in no event later than thirty (30) days after the Confirmation Date
as approved by the Bankruptcy Court.
Section 6.3. Payment on Contested Claims. Payment on
disputed Claims which subsequently become Allowed shall be made in
accordance with the provisions of the Plan with respect to the
Class of Creditors to which the respective holder of the then
Allowed Claim belongs.
Section 6.4. Unclaimed Property. If any distribution of
Common Stock remains unclaimed for a period of six (6) months after
it has been delivered in accordance with the Plan to the holder
entitled thereof, such unclaimed Common Stock shall be forfeited by
such holder, whereupon all right, title and interest in and to such
unclaimed property shall immediately and irrevocably vest in the
Reorganized Debtor.
Section 6.5. No Fractional Shares. Any other provision
of the Plan to the contrary notwithstanding, no fractional amount
<PAGE>
of a share of Common Stock shall be issued or distributed.
Fractional shares will be rounded to the next greater or next lower
whole number of shares as follows: (a) fractions of 0.5 or greater
shall be rounded to the next greater whole number; and (b)
fractions of less than 0.5 shall be rounded to the next lesser
whole number.
ARTICLE VII
EXECUTORY CONTRACTS
-------------------
Section 7.1. Upon the Confirmation Date, Debtor shall
be deemed to have assumed all Executory Contracts unless subject to
a pending application to reject same made by the Debtor prior to
the Confirmation Date or unless specifically rejected pursuant to
an order of the Bankruptcy Court or operation of law prior to the
Confirmation Date. All Claims arising from the rejection of
Executory Contracts by virtue of this Plan must be filed within
thirty (30) days after the Confirmation Date unless an earlier date
has been set by order of the Bankruptcy Court, in which event the
Claim arising from such rejection of contracts or leases must be
filed by the date set forth in the order; otherwise the holders of
such Claims shall not be entitled to any distribution pursuant to
this Plan. The Debtor shall have thirty (30) days after the filing
of such a Claim to object to such Claim, otherwise, if timely
filed, it shall become an Allowed Claim.
ARTICLE VIII
WAIVER AND RELEASE
------------------
Section 8.1. After investigation, the Debtor does not
believe that there are any causes of action pursuant to Section 547
of the Code. Effective upon the Confirmation Date, the Debtor
waives, releases and relinquishes any and all of its claims and
rights, if any, relating to any transfers of the Debtor's property
to or for the benefit of any creditor which could be avoided,
recovered or subordinated pursuant to the provisions of Section 547
of the Code except for any such Claims filed prior to the
Confirmation Date.
Section 8.2. Waiver of Claims. Except as otherwise
provided in the Plan, on and after the Effective Date, for good and
valuable consideration including, without limitation, the benefits
of the Plan, the promises and obligations of the proponents and the
Reorganized Debtor under this Plan and to facilitate the
expeditious and effective reorganization of the Debtor, all persons
who have held, hold or may hold claims against the Debtor shall be
deemed by virtue of their receipt of distribution under the Plan to
have forever covenanted with the Debtor and with each of their
present and former respective officers, directors, agents,
employees, representatives, financial advisors, accountants and
attorneys and the Reorganized Debtor not to sue, assert any claim
against or otherwise seek any recovery from, the Debtor or any of
<PAGE>
their respective present and former officers, directors, agents,
employees, representatives, financial advisors, attorneys for
accountants or the Reorganized Debtor, whether for tort, fraud,
contract, violations of the Federal or State Security Laws, or
otherwise, based upon any act or occurrence or failure to act taken
in good faith before the Effective Date arising out of the business
or affairs of the Debtor or any subsidiaries thereof.
ARTICLE IX
GENERAL PROVISIONS
------------------
Section 9.1. Distribution of Common Stock to be made by
Debtor pursuant to the Plan shall be made on the Consummation Date
or as otherwise provided or herein or as may be ordered by the
Bankruptcy Court.
Section 9.2. The Debtor shall act as its own disbursing
agent for the purpose of making any distribution required under the
Plan.
Section 9.3. The rights afforded in the Plan shall be
in exchange for and in complete satisfaction, discharge and release
of all existing Claims of any nature whatsoever against the Debtor
or Debtor-in-Possession or any of its assets or property. Except
or as otherwise provided for herein, all existing Claims against
the Debtor or Debtor-in-Possession shall be satisfied, discharged
and released in full except as herein provided, and entities shall
be precluded from asserting any claim against the Debtor, its
assets or properties.
Section 9.4. The Board of Directors of the Debtor
immediately following the Consummation Date shall consist of those
individuals referred to in the Disclosure Statement filed with the
Plan.
Section 9.5. On the Confirmation Date, the officers of
the Debtor shall be those individuals referred to in the Disclosure
Statement filed with the Plan.
ARTICLE X
IDENTIFICATION OF CLASSES NOT IMPAIRED BY THE PLAN
--------------------------------------------------
Section 10.1. Unimpaired Class. Administrative
Expenses (Class 1); Priority Claims (Class 2); Tax Claims (Class
3); and Secured Claims (Class 4) are not impaired under the Plan.
Section 10.2. Impaired Classes. Holders of Unsecured
Claims (Class 5); and Equity Interests (Class 6) are impaired by
the Plan and are entitled to accept or reject this Plan unless
otherwise ordered by the Bankruptcy Court.
<PAGE>
Section 10.3. Controversy Concerning Impairment. In
the event of a controversy as to whether any creditors or holders
of Equity Interests or class of creditors or class of holders of
Equity Interests are impaired under the Plan, the Bankruptcy Court
shall, after notice and a hearing, determine such controversy.
ARTICLE XI
DEBTOR'S REQUEST PURSUANT TO SECTION 1129(b)(1)
-----------------------------------------------
Section 11.1. Notwithstanding the provisions of Section
510(a) of the Bankruptcy Code, if all of the applicable
requirements of subsection (a) of Section 1129 of the Bankruptcy
Code, other than paragraph (8) thereof, are met with respect to the
Plan, the Debtor hereby requests of the Bankruptcy Court that it
confirm the Plan notwithstanding the requirement of said paragraph
(8) of Section 1129(a) of the Bankruptcy Code since the Plan does
not discriminate unfairly and is fair and equitable with respect to
each Class of Claims or Equity Interests that is impaired under,
and has not accepted, the Plan.
ARTICLE XII
NOTICES
-------
Section 12.1. Except as otherwise herein provided, all
notices required to be made in or under the Plan shall be in
writing and shall be mailed by registered or certified mail, return
receipt requested:
(a) If to the Debtor:
Mr. Gerard A. Dupuis
Lescarden, Inc.
420 Lexington Avenue
Suite 2025-28
New York, New York 10170
With a copy to:
Arthur Goldstein, Esq.
Todtman, Young, Nachamie,
Hendler & Spizz, P.C.
Attorneys for Lescarden, Inc.
425 Park Avenue
New York, New York 10022
<PAGE>
And a copy to:
Charles T. Maxwell
Chairman of the Official Committee of
Unsecured Creditors of Lescarden, Inc.
c/o Deutsche Morgan Grenfel/C.J. Lawrence, Inc.
31 West 52nd Street
New York, New York 10019
(b) If to a Creditor, at the address set forth on
the Debtor's Schedules or on such Creditor's Claim.
Section 12.2. Any person may change the address at
which he is to receive notices for purposes of this Plan by sending
written notice pursuant to this provision to the Debtor.
Furthermore, notice shall be given to all of the above and their
successors.
ARTICLE XIII
RETENTION OF JURISDICTION
-------------------------
Section 13.1. From and after the Confirmation Date and
until such time as all payments and distributions required to be
made under this Plan have been made by the Debtor, the Bankruptcy
Court shall retain jurisdiction over the Chapter 11 Case after the
Confirmation Date for all purposes permitted under the Bankruptcy
Code including the following, without limitation:
(a) To hear and determine any dispute relating to
this Plan or any property described in the
Plan and to enforce its provisions.
(b) To hear and determine all issues arising out
of any motions, applications, adversary
proceedings or contested or litigated matters
in the Chapter 11 Case pending at the
Confirmation Date or commenced thereafter.
(c) To order recovery of any assets of the Debtor,
whether title is presently held in the name of
the Debtor or a third party.
(d) To hear and determine motions to approve the
sale of assets of the Debtor under Section 363
of the Bankruptcy Code and/or the rejection or
affirmance of executory contracts under
Section 365 of the Bankruptcy Code.
(e) To hear and determine all issues relating to
any purchases, sales or contracts made or
undertaken by the Debtor during the pendency
of the Chapter 11 Case.
<PAGE>
(f) To hear and determine all Claims arising from
the rejection of executory contracts or
unexpired leases.
(g) To hear and determine all objections to Claims
filed by any party in interest, and all
controversies concerning classification,
allowance, valuation, liquidation, estimation,
or satisfaction of Claims.
(h) To make orders allowing amendment of the
schedules filed in the Chapter 11 Case for any
purpose including, without limitation, to
perfect objections to Claims not previously
listed as disputed, contingent or
unliquidated.
(i) To hear and determine all applications for
compensation of professional and similar fees
and reimbursement of expenses arising out of
or relating to the case or any Claims.
(j) To hear and determine any and all motions to
abandon property of the Debtor's estate.
(k) To make such other orders or give such
directions as permitted by Section 1142 of the
Bankruptcy Code.
(l) To consider and order any modifications or
amendments requested to this Plan.
(m) To remedy any defect or omission or reconcile
any inconsistency in this Plan or the order
confirming the Plan in such manner as may be
necessary or desirable to carry out the
purposes and intent of the Plan.
(n) To make all orders necessary or appropriate to
carry out the provisions of the Plan.
(o) To enforce all orders previously made by the
Bankruptcy Court.
(p) To determine such other matters as may be
provided for in the Confirmation Order or as
may be authorized under the Bankruptcy Code.
<PAGE>
ARTICLE XIV
EFFECTS OF PLAN CONFIRMATION
----------------------------
Section 14.1. Discharge. Except as otherwise expressly
provided in the Plan, upon the occurrence of the Effective Date,
the Plan shall discharge the Debtor effective immediately from any
claim and any "debt" as that term is defined in Section 101(12) of
the Bankruptcy Code, and the Debtor's liability in respect thereof
is extinguished completely, whether reduced to judgment or not,
liquidated or unliquidated, contingent or non-contingent, asserted
or unasserted, fixed or not, matured or unmatured, disputed or
undisputed, legal or equitable, known or unknown that arose from
any agreement of the Debtor entered into or obligation of the
Debtor incurred before the Confirmation Date, or from any conduct
of the Debtor prior to the Confirmation Date, or that otherwise
arose before the Confirmation Date including, without limitation,
all interest, if any, on any such debts, whether such interest
accrued before or after the petition date, and including, without
limitation, any liability of any kind specified in Sections 502(g),
502(h) and 502(i) of the Bankruptcy Code, whether or not a proof of
claim is filed or deemed filed under Section 502 of the Bankruptcy
Code, such claims allowed under Section 502 of the Bankruptcy Code
or the holder of such claim has accepted the Plan.
Section 14.2. Revesting. Except as otherwise expressly
provided in the Plan, on the Confirmation Date, the Debtor will be
vested with all the property of the estate (including, without
limitation, any monies held in escrow or separate, segregated
accounts during the pendency of the bankruptcy case) free and clear
of all claims, liens, encumbrances, charges and other interest of
creditors and equity security holders, and may operate its business
free of any restriction imposed by the Bankruptcy Code or by the
Court; provided however, that the Debtor shall continue as Debtor-
in-Possession under the Bankruptcy Code until the Effective Date
and thereafter the Debtor may operate its business free of any
restrictions imposed by the Bankruptcy Code or the Court.
ARTICLE XV
MISCELLANEOUS PROVISIONS
------------------------
Section 15.1. Headings. Headings are utilized in this
Plan for convenience of reference only, and shall not constitute a
part of this Plan for any purpose.
Section 15.2. Applicable Law. Except to the extent that
the Bankruptcy Code or other federal law is applicable, the rights
and obligations arising under this Plan are governed under New York
Law.
Section 15.3. Unenforceability of Particular Provisions.
Should any provision in this Plan be determined to be unenforceable
in whole or in part, such determination shall in no way limit or
<PAGE>
affect the enforceability and operative effect of the remainder of
this Plan, including any of its provisions to the extent not
determined to be unenforceable.
Section 15.4. Exculpation. Neither the Debtor or the
Committee nor any of their respective officers, directors,
employees, agents, attorneys or accountants shall have or incur any
liability to any Creditor, holder of an Equity Interest or other
Person for any act or omission in connection with, or arising out
of the negotiation, preparation, or formation of the Plan, the
pursuit of Confirmation of the Plan, the consummation of the Plan
or other administration of the Plan or the property to be
distributed under the Plan, except for willful misconduct or gross
negligence, and in all respects, such parties shall be entitled to
rely upon the advice of counsel with respect to the duties and
responsibilities under the Plan.
Section 15.5. Revocation and Withdrawal Prior to
Confirmation. The Debtor reserves the right to revoke and withdraw
this Plan prior to the Confirmation Date. If the Debtor revokes or
withdraws this Plan, or if the Confirmation Date or the Effective
Date does not occur, then this Plan shall be deemed null and void,
and in such event nothing contained herein shall be deemed to
constitute a waiver or release of any claim by or against the
Debtor or any other entity or to prejudice in any manner the rights
of the Debtor or any entity in any further proceedings involving
the Debtor.
Section 15.6. Amendment and Modification. The Debtor
may propose amendments to, or modification of, this Plan at any
time at or before Conformation. After Confirmation of the Plan,
the Proponent may, with the approval of the Bankruptcy Code and so
long as it does not materially adversely affect the treatment of
any claim or Equity Interest, amend the Plan to remedy any defect
or omission or reconsider any inconsistencies in the Plan or in the
order of Confirmation as necessary or desirable to carry out the
purpose and effect of the Plan.
Section 15.7. Successors and Assigns. The rights,
duties and obligations of any Person named or referred to in this
Plan shall be binding upon, and shall inure to the benefit of, the
successors and assigns of such Person.
Section 15.8. Binding Effect of Plan. Upon the
Confirmation Date, all of the provisions of the Plan shall be
binding on the Debtor, on all Creditors, on all Equity Interest
<PAGE>
Holders, and on all other entities who are affected (or whose
interests are affected) in any manner by this Plan.
Dated: New York, New York
January 15, 1997
LESCARDEN, INC.
By:___________________________
Gerard A. Dupuis, President
TODTMAN, YOUNG, NACHAMIE,
HENDLER & SPIZZ, P.C.
Attorneys for Lescarden, Inc.,
Debtor and Debtor-in-Possession
By:____________________________
Arthur Goldstein (AG-8735)
A Member of the Firm
425 Park Avenue
New York, New York 10022
(212) 754-9400
<PAGE>
<F1>
Capitalized terms in this Disclosure Statement are defined in the Plan
attached as Exhibit "1".
<F2>
See Article VIII for detailed description.
<F3>
A registered trademark of Lescarden Inc.
<F4>
Annexed hereto as Exhibit "3" is a table setting forth, for the periods
indicated, the high and low quotations for the Company's common stock as
reported by the National Quotation Bureau.
<F5>
A trademark of Lescarden Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LESCARDEN
INC'S MAY 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-END> MAY-31-1997
<CASH> 115,340
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 9,488
<CURRENT-ASSETS> 124,828
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,908
<CURRENT-LIABILITIES> 114,802
<BONDS> 0
0
1,840
<COMMON> 15,882
<OTHER-SE> (4,616)
<TOTAL-LIABILITY-AND-EQUITY> 127,908
<SALES> 44,759
<TOTAL-REVENUES> 44,759
<CGS> 5,341
<TOTAL-COSTS> 370,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (345,518)
<INCOME-TAX> 0
<INCOME-CONTINUING> (345,518)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (345,518)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
